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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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AMENDMENT NO. 2 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)
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)
(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 15
Item 3. Description of Property 20
Item 4. Security Ownership of Certain Beneficial Owners and Management 20
Item 5. Directors, Executive Officers, Promoters and Control Persons 21
Item 6. Executive Compensation 24
Item 7. Certain Relationships and Related Transactions 30
Item 8. Description of Securities 30
PART II 34
Item 1. Market Price of and Dividends on the Company's Common Equity and Other Shareholder Matters 34
Item 2. Legal Proceedings 35
Item 3. Changes in and Disagreements with Accountants 35
Item 4. Recent Sales of Unregistered Securities 36
Item 5. Indemnification of Directors and Officers 38
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
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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.
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:
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.
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."
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"): 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.
INDUSTRY BACKGROUND
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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 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.
THE RICEX SOLUTION
The RiceX Process uses proprietary innovations in food extrusion technology
to create a combination of
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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
8,250 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.
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%
Calories 3.2 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
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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.
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
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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
- 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 bran 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 bran 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 bran 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 bran 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 bran to their ingredients include cereals, snack foods and breads. The
Company is marketing RiceX bran 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.
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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 bran 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.
PERFORMANCE FEED SUPPLEMENTS
The Company also markets RiceX bran as a food supplement for animals.
RiceX bran 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 bran. In
February 1998 the Company formed a strategic alliance with DuCoa, L.P.
("DuCoa") to introduce RiceX bran 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
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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 2,700 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 103 tons of
RiceX Ricelin and 131 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.
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
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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 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 June 30, 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 three 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 June 30, 1998, and the years ended
December 31, 1997, 1996, and 1995 totaled $565,434, $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 33 employees, 30 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 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
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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 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
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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 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
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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 $5,452,121 through June 30, 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 June 30, 1998 was $113,848 and the
Company's use of cash in operations was $694,951 for the six 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 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 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.
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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.
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 slling 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.
YEAR 2000
Many currently installed computer systems and software products are coded
to accept only two digit entries in the
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date code field. Beginning in the year 2000, these date code fields will need
to accept four digit entries in order to distinguish 21st century dates. As a
result, in less than two years, computer systems and/or software used by many
companies will need to be upgraded to comply with "Year 2000" requirements. The
Company is presently evaluating the impact of the Year 2000 issue as it affects
its business operations and interfaces with customers and vendors. To date, the
Company is unaware of any situation of noncompliance that would materially
adversely effect its operations or financial condition. There can be no
assurance, however, that instances of noncompliance which could have a material
adverse effect on the Company's operations or financial condition have not been
identified. Additionally, there can be no assurance that the systems of other
companies with which the Company transacts business will be corrected on a
timely basis, or that failure by such third party entities to correct a Year
2000 problem, or a correction which is incompatible with the Company's
information systems, would not have a material adverse effect on the Company's
operations or financial condition.
THIN MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
The Company's Common Stock has been traded on the OTC Bulletin Board since
December 1995 under the symbol "RICX". 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 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 20,760,500
shares outstanding as of August 15, 1998, (i) approximately 9,310,000 shares
issued and outstanding as of August 15, 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 11,540,000 shares will be eligible for immediate sale in the
public market as unrestricted shares or pursuant to Rule 144(k) of the 1933 Act.
In addition, approximately 1,735,000 shares subject to options and warrants (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. As of August 15, 1998, the Company had outstanding warrants to
purchase up to 600,000 shares of common stock. 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 7,335,000 shares of
common stock, issued and outstanding as of August 15, 1998, have rights under
certain circumstances to require the Company to register their shares for future
sales. This number includes 2,000,000 shares issued upon exercise of a stock
option which the Company and the officer have agreed to rescind concurrent with
an equity financing. See "Description of Capital Stock - Registration Rights."
ANTI-TAKEOVER EFFECT OF CERTIFICATE OF INCORPORATION, 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
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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 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 Bylaws."
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 was effective upon
completion of the merger of the Nevada corporation with the Delaware corporation
on August 4, 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
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Six Months Ended June 30, 1998 and 1997
Revenue for the six months ended June 30, 1998 was $1,537,568, an 11%
decline from the year earlier period when sales totaled $1,729,530. The
decrease from the year earlier period when sales totaled $1,729,530. The
decrease is primarily attributable to a decline in sales to the Company's
largest customer for its Ricelin product. This customer placed a substantial
order at the end of 1997 that has been sufficient to satisfy its requirements
through the first half of 1998. This decline was partially offset by a 7%
increase in sales to the Company's largest customers for equine use and other
increases in sales to existing and new customers.
The gross margin on sale of products was 31% for the six months ended June
30, 1998 compared to 37% for 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 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 $285,515 for the six
months ended June 30, 1997 to $565, 434 for the current six-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 $1,419,666 for the six
months ended June 30, 1998 and $845,785 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 development of foreign
market opportunities.
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 ranges from two to three years, except for the directors'
grants, which vest immediately.
Professional fees declined to $195,096 for the six months ended June 30,
1998 from $541,525 for the six months ended June 30, 1997. 1997's amounts
include expenditures for litigation that was successfully concluded in the third
quarter of 1997.
The increase in interest income to $168,432 in the six months ended June
30, 1998 from $68,929 in the year earlier period relates to interest income on
the $4,000,000 note receivable from an employee/shareholder. There was a
corresponding increase in compensation expense to reflect the Company's
reimbursement of the interest expense plus additional compensation expense for
the income tax impact of the reimbursement in accordance with the
employee/shareholder's employment agreement. Interest expense declined to
$218,173 in 1998 from $315,609 for first six months of 1997. The 1997 amount
includes the write-off of costs associated with the restructuring of a note.
The 1997 period also included 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 six months ended June 30, 1998 totaled
$2,301,874, or $.11 per share, compared to $3,424,704, or $.18 per share a year
ago. As discussed above, the 1998 period was impacted by the costs associated
with expanding the Company's infrastructure to accelerate research and product
development efforts and expansion into new markets. In the first half of 1997,
these efforts were just commencing. The 1997 period was also 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.
16
<PAGE>
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 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
17
<PAGE>
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
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 an offering of the Company's equity
securities with proceeds to the Company of no less than $15 million. Terms and
conditions of the conversion are subject to negotiation. Had Monsanto exercised
its conversion right prior to June 30, 1998, long-term liabilities shown on the
Company's June 30, 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."
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.
18
<PAGE>
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. The Company and the officer
issuing the promissory note have agreed to rescind this transaction. The option
to purchase 2,000,000 shares will remain outstanding. 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 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 June 30, 1998, the Company's cash reserves totaled $113,848 and total
current assets were $1,216,563. 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 June 30, 1998 was $7,867,967. 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 $2,867,967.
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.
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<PAGE>
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. 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 an offering of equity securities with proceeds to
the Company of no less than $15 million, 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.
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 August 15, 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
20,760,500 shares of common stock outstanding.
<TABLE>
<CAPTION>
NAME AND ADDRESS AMOUNT AND NATURE PERCENT OF CLASS
OF BENEFICIAL OWNER(1) OF BENEFICIAL OWNER(2) ----------------
---------------------- ----------------------
<S> <C> <C>
Daniel L. McPeak, Chairman of the Board of Directors 3,877,829(3)(4) 18.28%
and Patricia McPeak, President and Director
Allen J. Simon, 2,050,000(5) 9.66%
Chief Executive Officer and Director
Kirit S. Kamdar, Director 1,751,250 8.26%
Steven W. Saunders, Director 807,500 --
Dennis C. Riddle, Vice President of Marketing 175,000(4) --
Karen D. Berriman, Vice President and Chief Financial Officer 66,667(4) --
</TABLE>
20
<PAGE>
<TABLE>
<S> <C> <C>
Dr. Gary A. Miller, Vice President of Science and Technology 66,667(4) --
Ike E. Lynch, 60,000 -
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, 8,954,912 (4) 42.21%
as a group (10 persons)
</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 95762.
(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 1,908,225 shares in Mr. McPeak's name and 1,924,604 shares in
Ms. Peak's name. Includes vested options for Ms. McPeak for the purchase of
common stock for 45,000 shares.
(4) Includes vested options for the purchase of common stock as follows:
Patricia McPeak, 45,000; Dennis C. Riddle, 175,000; Karen D. Berriman,
66,667; Dr. Gary A. Miller, 66,667; Dr. Michael J. Goldblatt, 50,000;
Dr. Jerry A. Weisbach, 50,000.
(5) Includes 30,000 shares of Common Stock owned by family members.
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(1)(2) 64 Class I Director
Dr. Michael J. Goldblatt(1)(2) 45 Class I Director
Kirit S. Kamdar 56 Class I Director
Steven W. Saunders 43 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 Science and Technology
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>
(1) Member of the Audit Committee
21
<PAGE>
(2) Member of the Compensation Committee
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. ("Shaklee U.S."), 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 Bernard Technologies, Biotechnologies Research
Development Corporation and Gray Star. Mr. Goldblatt received his Ph.D. in
Nutrition from University of California, Davis.
KIRIT S. KAMDAR. Mr. Kamdar has served as Director of the Company since
August 1998. Mr. Kamdar has tendered his resignation to be effective upon the
appointment of a director to fill the vacancy by (i) Monsanto upon conversion
of the Monsanto Note or (ii) appointment of a director by a majority of
investors, if required by the terms of any future offering of equity
securities of the Company. From January 1990 to September 1992, Mr. Kamdar
also served as Director of the Company, and from January 1990 to April 1994
as the Company's Executive Vice President. Since July 1974, Mr. Kamdar has
also served as Chairman of the Board and Chief Executive Officer of Kamflex
Corporation, an Illinois manufacturing corporation. Mr. Kamdar received his
B.A. degree in Mechanical Engineering from the University of Bombay and his
Master's Degree in Industrial Engineering and Management from Oklahoma State
University.
STEVEN W. SAUNDERS. Mr. Saunders has served as a Director of the Company
since August 1998. Mr. Saunders has tendered his resignation to be effective
upon the appointment of a director to fill the vacancy by (i) Monsanto upon
conversion of the Monsanto Note or (ii) appointment of a director by a
majority of investors, if required by the terms of any future offering of
equity securities of the Company. Mr. Saunders has held the position of
President of Saunders Construction, Inc., a commercial construction firm
since February 7, 1991 and President of Warwick Corporation, a business
consulting firm since October 1991.
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 LLP. 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
22
<PAGE>
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 Science and
Technology 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 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.
BOARD COMMITTEES
The Board of Directors has established an Audit Committee and Compensation
Committee. The Audit Committee, consisting of Drs. Goldblatt and Weisbach,
reviews the adequacy of internal controls and results and scope of the audit and
other services provided by the Company's independent auditors. The Audit
Committee will meet periodically with management and the independent auditors.
The Compensation Committee, consisting of Dr.'s Goldblatt and Weisbach,
establishes salaries, incentives and other forms of compensation for officers
and other employees of the Company and administers the incentive
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compensation and benefit plans of the Company.
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 $100,000 on an annualized basis (collectively, the "Named
Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
NAME AND PRINCIPAL POSITION YEAR SALARY($) OTHER ANNUAL UNDERLYING OPTIONS (#)
--------------------------- ---- --------- COMPENSATION ----------------------
------------
ANNUAL COMPENSATION NUMBER OF
------------------- SECURITIES
LONG-TERM
COMPENSATION
AWARDS
------
<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.
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<PAGE>
(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 $2,986.
OPTION GRANTS IN 1997 TO EXECUTIVES
The following table sets forth for each of the Named Executive Officers
certain information concerning stock options granted during 1997.
<TABLE>
<CAPTION>
NAME NUMBER OF PERCENT OF TOTAL EXERCISE FAIR MARKET EXPIRATION
---- SECURITIES OPTIONS GRANTED PRICE ($/sh.) VALUE ON DATE DATE
UNDERLYING TO EMPLOYEES IN ------------- OF GRANT ----
OPTIONS 1997 ($/sh.)
GRANTED (#) ---- -------
-----------
INDIVIDUAL GRANTS
-----------------
<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>
NAME SHARES VALUE EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ACQUIRED ON REALIZED ----------- ------------- ----------- -------------
EXERCISE (#) --------
------------ NUMBER OF UNEXERCISED OPTIONS AT VALUE OF UNEXERCISED
DECEMBER 31, 1997 IN-THE-MONEY OPTIONS AT
----------------- DECEMBER 31, 1997
-----------------
<S> <C> <C> <C> <C> <C> <C>
Daniel L. McPeak 100,000 $275,000
Allen J. Simon 2,000,000(1) $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
</TABLE>
25
<PAGE>
<TABLE>
<S> <C> <C>
Dennis C. Riddle 350,000 $0
</TABLE>
(1) Mr. Simon and the Company have agreed to rescind this purchase of two
million shares of Common Stock by Mr. Simon concurrent with the successful
completion of an equity financing. Two million shares will reaming under option
to Mr. Simon.
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
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.
Mr. Simon and the Company have agreed to rescind the loan transaction and the
associated purchase of two million shares of Common Stock by Mr. Simon
concurrent with the successful completion of an equity financing. Two million
shares will remain under option to Mr. Simon.
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
26
<PAGE>
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
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
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,
27
<PAGE>
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 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
28
<PAGE>
$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
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.
29
<PAGE>
STOCK OPTION PLANS
1997 STOCK OPTION PLAN. The Board of Directors adopted the 1997 Stock Option
Plan (the "1997 Plan") in November 1997 and the shareholders approved the 1997
Plan in May 1998. 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
Mr. Kirit Kamdar has been a Director of the Company since August 5, 1998
and was a Director of the Company from January 1990 to September 1992. From
January 1990 to April 1994, Mr. Kamdar served as the Company's Executive Vice
President. Mr. Kamdar currently owns 1,751,250 shares of the Company's common
stock or 8.26%. Since July 1974, Mr. Kamdar has been Chairman of the Board 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. Mr. Simon and the Company have
agreed to rescind the loan transaction and the associated purchase of two
million shares of Common Stock by Mr. Simon concurrent with the successful
closing of an equity financing. The two million shares will remain under option
to Mr. Simon.
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
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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 August 15, 1998, there were 20,760,500 shares of
common stock outstanding and 175 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, 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
BYLAWS
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CERTIFICATE OF INCORPORATION AND BYLAWS
Certain provisions of the Company's Certificate of Incorporation and 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 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 by the interested stockholder, or (v) the receipt by the
interested stockholder of the
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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.
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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
First Quarter (through March 31, 1998) $5.797 $3.297
Second Quarter (through June 30, 1998) $6.25 $3.00
Third Quarter (through August 15, 1998) $3.625 $1.875
1997
First Quarter (through March 31, 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 31, 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 31, 1996) $5.50 $2.875
</TABLE>
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There are approximately 175 holders of record of the Company's common stock as
of August 15, 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 20,760,500
shares outstanding as of August 15, 1998, (i) approximately 9,310,000 shares
issued and outstanding as of August 15, 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 11,540,000 shares will be eligible for immediate sale in the
public market as unrestricted shares or pursuant to Rule 144(k) of the 1933 Act.
In addition, approximately 1,735,000 shares subject to options and warrants (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. As of August 15, 1998, the Company had outstanding warrants to purchase up
to 600,000 shares of common stock. 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 7,335,000 shares of common stock, issued and outstanding as
of August 15, 1998, have rights under certain circumstances to require the
Company to register their shares for future sales. This number includes
2,000,000 shares issued upon exercise of a stock option which the Company and
the officer have agreed to rescind concurrent with an equity financing. See
"Description of Capital Stock-Registration Rights."
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,
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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 August 1998, the Company issued 30,000 shares of common stock to Ike
Lynch, Vice President of Operations on the exercise of previously granted stock
options at an exercise price of $1.00 per share. The trading value of the
shares was $2.00 on the date of exercise. The shares were issued without
registration in reliance on the exemption provided by 4(2) of the Securities
Act.
In July and August 1998, the Company issued 100,000 shares of common stock
to Daniel McPeak, the Company's Chairman of the Board and 100,000 shares of
common stock to Patricia McPeak, the Company's President on the exercise of
previously-granted stock options at an exercise price of $1.00 per share. The
trading value of the shares ranged from $2.00 to $3.25 on the dates of exercise.
The shares were issued without registration in reliance on the exemption from
registration provided by 4(2) of the Securities Act.
In July 1998, the Company issued 50,00 shares of common stock to Allen
Simon, the Company's Chief Executive Officer, and his assignees on the exercise
of previously-granted stock options at an exercise price of $1.00 per share. The
trading value of the shares was $2.875 on the date of exercise. The shares were
issued without registration in reliance on the exemption from registration
provided by 4(2) of the Securities Act.
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 had a value of $215,000
when originally issued in 1995. 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 trading value of the shares
was $4.00 per share on the date of exercise. The shares were issued without
registration in reliance on the exemption from registration provided by 4(2) of
the Securities Act.
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
value of the shares on the date of issuance was $200,000. 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 value of the shares on the date of
issuance was $104,297. 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
trading value of the shares was $3.50 per share on the date of exercise. The
shares were issued without
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<PAGE>
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 trading value of the shares was $2.875 per share on the effective
date of exercise. 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. Mr. Simon and the Company have agreed to rescind
this purchase of two million shares of Common Stock by Mr. Simon concurrent with
the successful completion of an equity financing. Two million shares will
reaming under option to Mr. Simon.
Effective May 1997, the Company issued 29,715 shares of common stock to Mel
Shulman, a consultant to the Company in connection with services rendered. The
value of the shares on the date of issuance was $85,430. 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 trading value of the shares was $2.00 per share on
the date of exercise. 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 with a put
value of $5.00 per share. The put may be exercised for a period of 30 days
beginning November 1, 1998. 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 value of the shares on the date of issuance was $410,380. 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.
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 value of
the shares on the date of issuance was $12,500. 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 value of the shares on the date of issuance was $12,500. The
shares were issued without registration in reliance on the exemption from
registration provided by Section 4(2) of the
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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 value of the
shares on the date of issuance was $5,000. 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 value of the shares on the date
of issuance to Daniel McPeak and Patricia McPeak was $30,000 each. 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 value of the shares on the date
of issuance was $495,510. 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 value of the shares on the date of issuance was $53,513.
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
value of the shares on the date of issuance was $999,501. 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 value of the shares on the date of issuance was $155,000. 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 Bylaws provide for expanded
indemnification of directors and officers of the Company and limits the
liability of directors of the Company. The 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 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 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 i 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
38
<PAGE>
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 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.
39
<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 F-3
1997 and June 30, 1998 (unaudited)
Consolidated Statements of Operations for the years ended December 31, F-4
1995, 1996 and 1997 and for the six months ended June 30, 1997 and
1998 (unaudited)
Consolidated Statements of Shareholders' Equity (Deficit) for the F-5
years ended December 31, 1995, 1996 and 1997 and for the six months
ended June 30, 1998 (unaudited)
Consolidated Statements of Cash Flow for the years ended December 31, F-6
1995, 1996 and 1997 and for the six months ended June 30, 1997 and
1998 (unaudited)
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,
------------
1996 1997 JUNE 30, 1998
---- ---- -------------
(unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $1,988,300 $863,127 $113,848
Trade accounts receivable 204,527 578,613 336,576
Inventories 149,468 526,977 610,802
Deposits and other current assets 93,008 11,652 155,337
------------- ------------- -------------
Total current assets 2,435,303 1,980,369 1,216,563
Property and equipment, net 1,841,529 4,449,813 4,145,809
Note receivable - 245,908 191,204
Deferred debt issuance costs 348,710 135,909 80,186
Patents and trademarks - 45,665 45,665
------------- ------------- -------------
$4,625,542 $6,857,664 $5,679,427
------------- ------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt $154,571 $1,252,570 $1,268,879
Accounts payable and accrued liabilities 475,508 1,206,165 1,713,581
------------- ------------- -------------
Total current liabilities 630,079 2,458,735 2,982,460
Long-term debt, net of current portion 3,943,051 6,552,818 6,599,088
------------- ------------- -------------
Total liabilities 4,573,130 9,011,553 9,581,548
------------- ------------- -------------
Redeemable common stock par value $.001 per share, 310,000 - 1,550,000 1,550,000
shares outstanding redeemable at $5.00 per share in
November 1998
------------- ------------- -------------
Shareholders' equity (deficit):
Common stock, par value $.001 per share, 50,000,000 18,001 20,215 20,215
shares authorized, 18,000,750, 20,215,215 and
20,215,500 shares issued and outstanding at
December 31, 1996 and 1997 and June 30, 1998
Additional paid-in capital 7,738,236 17,713,049 17,713,049
Accumulated deficit (7,700,775) (15,469,373) (17,771,247)
Unearned stock option compensation - (1,967,780) (1,414,138)
Notes receivable from shareholders (3,050) (4,000,000) (4,000,000)
------------- ------------- -------------
Total shareholders' equity (deficit) 52,412 (3,703,889) (5,452,121)
Commitments
------------- ------------- -------------
$4,625,542 $6,857,664 $5,679,427
------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-3
<PAGE>
THE RICEX COMPANY
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
----------------------- ------------------------
1995 1996 1997 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
(unaudited)
Revenue:
Sales $25,400 $784,306 $3,291,315 $1,705,245 $1,517,229
Royalties 74,220 123,496 41,302 24,285 20,339
--------------- --------------- --------------- --------------- ---------------
99,620 907,802 3,332,617 1,729,530 1,537,568
Cost of sales 32,046 512,059 2,364,383 1,085,785 1,055,463
--------------- --------------- --------------- --------------- ---------------
67,574 395,743 968,234 643,745 482,105
Research and development expenses 425,207 632,975 790,095 285,515 565,434
Selling, general and administrative 81,100 1,033,009 2,423,103 845,785 1,419,666
expenses.
Stock option compensation to - - 2,031,570 823,544 553,642
employees (Note 9)
Professional fees 38,518 919,784 1,907,399 541,525 195,096
--------------- --------------- --------------- --------------- ---------------
Loss from operations (477,251) (2,190,025) (6,183,933) (1,852,624) (2,251,733)
Other income (expense):
Interest and other income - 35,653 275,037 68,929 168,432
Interest expense (72,813) (182,151) (533,902) (315,609) (218,173)
Beneficial conversion feature and - (2,687,000) (1,325,000) (1,325,000) -
option issued in connection with
debt
--------------- --------------- --------------- --------------- ---------------
Loss before provision for income (550,064) (5,023,523) (7,767,798) (3,424,304) (2,301,474)
taxes and extraordinary item
Provision for income taxes (800) (800) (800) (400) (400)
Extraordinary gain on restructuring 110,371 - - - -
and extinguishment of debt
--------------- --------------- --------------- --------------- ---------------
Net loss $(440,493) $(5,024,323) $(7,768,598) $(3,424,704) $(2,301,874)
--------------- --------------- --------------- --------------- ---------------
Basic earnings per share:
Net loss per share before $(.05) $(.28) $(.40) $(.18) $(.11)
extraordinary item
--------------- --------------- --------------- --------------- ---------------
$(.04) $(.28) $(.40) $(.18) $(.11)
Net loss per share
--------------- --------------- --------------- --------------- ---------------
Weighted-average shares
outstanding 11,146,500 17,762,917 19,499,049 18,548,690 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>
SHARES AMOUNT ADDITIONAL ACCUMULATED UNEARNED NOTES TOTAL
------ ------ PAID-IN DEFICIT STOCK RECEIVABLE SHAREHOLDERS'
CAPITAL ------- OPTION FROM EQUITY
------- COMPENSATION SHAREHOLDERS (DEFICIT)
COMMON STOCK ------------ ------------ ---------
------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 10,700,000 $10,700 $598,320 $(2,235,959) - - $(1,626,939)
1994, as restated
(Note 3)
Conversion of debt to 2,562,750 2,563 1,700,961 - - - 1,703,524
common stock
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 135,000 135 77,365 - - - 77,500
to employees
Conversion of debt to 337,500 337 223,476 - - - 223,813
common stock
Issuance of common stock 2,287,500 2,288 1,042,712 - - $(3,050) 1,041,950
for services, net of
reorganization and
stock offering costs
of $480,000
Issuance of common stock 1,400,000 1,400 998,600 - - - 1,000,000
in private placement
Issuance of common stock 578,000 578 409,802 - - - 410,380
with debt financing
Issuance of stock options - - 2,687,000 - - - 2,687,000
for services
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 2,126,000 2,126 4,048,874 - - (3,996,950) 54,050
pursuant to exercise
of stock options
Issuance of common stock 88,465 88 389,639 - - - 389,727
for services
Issuance of stock - - 211,950 - - - 211,950
warrants for services
Issuance of stock options - - 3,999,350 - $(3,999,350) - -
to employees
Vesting of stock options - - - - 2,031,570 - 2,031,570
to employees
Beneficial conversion - 1,325,000 - - - 1,325,000
feature on long-term
debt
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 285 - - - - - -
for services
Vesting of stock options - - - 553,642 - 553,642
to employees
Net loss - - - (2,301,874) - - (2,301,874)
----------- -------- ---------- ------------ ------------ ------------ ------------
Balance at June 30, 1998 20,215,500 $20,215 $17,713,049 $(17,771,247) $(1,414,138) $(4,000,000) $(5,452,121)
(unaudited) ----------- -------- ---------- ------------ ------------ ------------ ------------
</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>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
---------------------- ------------------------
1995 1996 1997 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $(440,493) $(5,024,323) $(7,768,598) $(3,424,704) $(2,301,874)
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 21,785 216,457 735,216 260,250 357,433
Shares, warrants and options issued - 3,401,909 2,633,247 823,544 553,642
for compensation and services
Accretion of debt discounts - 96,149 241,526 107,870 118,182
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) (252,265) 242,037
Inventories - (149,468) (377,509) (224,017) (83,825)
Deposits and other current assets 18,907 (84,893) 81,356 57,659 (143,685)
Deferred debt issuance costs - - 141,892 177,346 55,723
Accounts payable and accrued
liabilities 367,868 52,225 730,657 155,873 507,416
---------- ----------- ----------- ----------- ------------
Net cash used in operating
activities (108,267) (1,691,160) (2,631,299) (993,444) (694,951)
---------- ----------- ----------- ----------- ------------
Cash flows from investing activities:
Purchases of property and equipment, net (200,174) (1,278,687) (611,432) (395,007) (53,429)
Payments for trademarks and patents - - (345,665) (300,000) -
Collection on note receivable - - 54,092 26,000 54,704
---------- ----------- ----------- ----------- ------------
Net cash used for investing
activities (200,174) (1,278,687) (903,005) (669,007) 1,275
---------- ----------- ----------- ----------- ------------
Cash flows from financing activities:
Proceeds from issuance of common stock - 1,190,380 54,050 50,000 -
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 2,000,000 -
Principal payments on long-term debt - (16,917) (56,919) (18,090) (25,551)
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) (30,052)
---------- ----------- ----------- ----------- ------------
Net cash (used in) provided by
financing activities 418,227 4,813,860 2,409,131 2,008,910 (55,603)
---------- ----------- ----------- ----------- ------------
Net increase (decrease) in cash and cash
equivalents 109,786 1,844,013 (1,125,173) 346,459 (749,279)
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 $2,334,759 $113,848
---------- ----------- ----------- ----------- ------------
</TABLE>
The accompanying 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 June 30, 1998 and for the six
months ended June 30, 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.
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.
F-7
<PAGE>
INVENTORIES
Inventories are stated at the lower of cost or market determined on a
first-in, first-out (FIFO) basis. At June 30, 1998, inventories consisted of
$458,007 in finished goods and $152,795 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.
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.
F-8
<PAGE>
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.
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>
F-9
<PAGE>
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>
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, JUNE 30,
------------------- --------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
(UNAUDITED)
Land and building $- $367,961 $367,961
Equipment 1,291,820 4,204,118 4,251,836
Leasehold improvements 382,664 381,642 382,985
Furniture and fixtures 189,341 221,145 225,508
----------- ----------- -----------
1,863,825 5,174,866 5,228,290
Less accumulated depreciation and amortization (265,796) (926,953) (1,284,381)
----------- ----------- -----------
1,598,029 4,247,913 3,943,909
Equipment not placed in service 201,900 201,900 201,900
Construction in progress 41,600 - -
----------- ----------- -----------
$1,841,529 $4,449,813 $4,145,809
----------- ----------- -----------
</TABLE>
6. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------------- --------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
(UNAUDITED)
Trade accounts payable and other accruals $394,189 $668,610 $1,045,435
Accrued interest 81,319 155,822 199,213
Amounts due shareholders - 381,733 468,933
----------- ----------- -----------
$475,508 $1,206,165 $1,713,581
----------- ----------- -----------
</TABLE>
F-10
<PAGE>
7. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------------- --------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
(UNAUDITED)
Notes payable to related parties:
Note payable to shareholder, face amount of $1,750,000 $1,421,591 $1,534,187 $1,590,485
secured by certain equipment, stated interest rate of 5%,
imputed interest rate of 13%, due November 1999
Notes payable to shareholders, unsecured, non-interest 118,086 30,086 --
bearing, to be repaid at discretion of the Company
Notes payable_other:
Note payable secured by six rice extruders, non-interest 2,500,000 5,000,000 5,000,000
bearing, due October 1999
Notes payable, secured by equipment at FoodEx, Montana, - 1,186,008 1,247,892
non-interest bearing, imputed interest rate of 13%,
due November 1998
Other notes payable 57,945 55,107 29,590
----------- ----------- -----------
4,097,622 7,805,388 7,867,967
Less current portion 154,571 1,252,570 1,268,879
----------- ----------- -----------
$3,943,051 $6,552,818 $6,599,088
----------- ----------- -----------
</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>
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-11
<PAGE>
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.
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 extraordinary gain. On
January 1, 1996, the Company also issued 337,500 shares of common stock at $0.71
for cancellation of certain liabilities resulting in no gain or loss.
F-12
<PAGE>
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-13
<PAGE>
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 June 30, 1998 (unaudited) 1,564,000 $2.84 $4.33
----------- ----------- -----------
480,667 $1.81 $2.80
Options exercisable at December 31, 1997
----------- ----------- -----------
570,667 $1.68 $2.80
Options exercisable at June 30, 1998 (unaudited)
----------- ----------- -----------
</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
(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.
F-14
<PAGE>
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. 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.
F-15
<PAGE>
12. RELATED-PARTY TRANSACTIONS
Related party transactions, other than those disclosed elsewhere in the
consolidated financial statements, are as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------- --------
1995 1996 1997 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
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 - - 171,733 - 318,933
interest income due
Accrued consulting fee to shareholder - - 210,000 - 150,000
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.
13. SUPPLEMENTAL CASH FLOW INFORMATION AND NONCASH INVESTING AND FINANCING
ACTIVITIES
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------ --------------------
1995 1996 1997 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for income taxes - $800 $800 - $2,500
Cash paid for interest expense - 80,650 - $641 877
NONCASH INVESTING AND FINANCING ACTIVITIES:
Issuance of common stock for note receivable - - 4,000,000 4,000,000 -
Issuance of common stock for asset and - - 2,637,964 2,637,964 -
assumptions of certain liabilities, net
Sale of trademark for note receivable - - 300,000 300,000 -
Assets acquired under capital leases and notes 50,000 41,203 23,195 23,195 -
payable
Conversion of notes and compensation payable to 1,773,809 223,813 - - -
common stock and cancellation of notes
receivable from shareholders, net
Issuance of debt to repay shareholder and related 100,000 - - - -
party notes in conjunction with debt
restructuring
Issuance of common stock for financing cost in - 480,000 - - -
connection with private placement of stock and
reverse acquisition
Conversion of advances payable to Core - 220,000 - - -
Iris., Inc. common stock
Issuance of common stock to shareholder employees - 77,500 - - -
for compensation
Issuance of common stock to shareholders for - 1,041,950 - - -
services rendered, net of reorganization and
stock offering costs of $480,000
</TABLE>
F-16
<PAGE>
PART III.
ITEM 1. INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION OF EXHIBIT
NO ----------------------
--
<S> <C>
2.1 Certificate of Incorporation of the Registrant.(1)
2.2 Form of Bylaws of the Registrant.
3.1 Form of Common Stock Certificate.
3.2 Option Agreement between the Registrant and David B. Lockton dated
August 1, 1996.(1)
3.3 Restricted Stock Purchase Agreement between the Registrant and
Allen J. Simon dated April 18, 1997 and amended on May 29, 1997.(1)
3.4 Amendment No. 1 to Restricted Stock Purchase Agreement between the
Registrant and Allen J. Simon dated May 29, 1997.(1)
3.5 Security Agreement between Allen J. Simon and the Registrant dated
May 29, 1997.(1)
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.(1)
3.7 Security Agreement between Allen J. Simon and the Registrant dated
May 29, 1997.(1)
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.(1)
3.9 Security Agreement between Allen J. Simon and the Registrant dated
May 29, 1997.(1)
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.(1)
3.11 Form of Rescission of Loan Agreement between the Registrant and
Allen J. Simon dated _________, 1998.
3.12 Security Agreement between Food Extrusion, Inc. and Monsanto Company
dated November 1, 1996.(1)
3.13 Promissory Note of the Registrant in favor of Monsanto Company in
the amount of $5,000,000 dated November 1, 1996.(1)
3.14 Subscription Agreement between the Registrant and the Dorchester
Group dated January 1, 1996.(1)
3.15 Subscription Agreement between the Registrant and Matison EuroInvest
dated January 1, 1996.(1)
3.16 Subscription Agreement between the Registrant and Cambro Investment
Group dated January 1, 1996.(1)
3.17 Stock Option Agreement between the Registrant and Allen J. Simon
dated April 18, 1997.(1)
3.18 Amendment No. 1 to Stock Option Agreement by and among the
Registrant and Allen J. Simon dated May 29, 1997.(1)
3.19 Registration Rights Agreement by and between the Registrant and
Allen J. Simon dated April 18, 1997.(1)
3.20 Registration Rights Agreement by and among the Registrant and
Monsanto Company dated February 5, 1997.(1)
3.21 Form of Registration Rights Agreement between the Registrant and
certain officers and directors.(1)
3.22 Form of Warrant Agreement between the Registrant and certain
investors dated February 9, 1996.(1)
3.23 Stock Purchase Agreement between the Registrant and Marilyn
Roosevelt dated July 16, 1997.(1)
3.24 Shareholders Agreement between CF Corporation (formerly Centennial
Foods, Inc.) and the Registrant dated March 19, 1997.(1)
3.25 1997 Stock Option Plan with (i) Form of Incentive Stock Option
Agreement and (ii) Form of Nonstatutory Stock Option Agreement.(1)
3.26 Form of Directors Stock Option Agreement.(1)
3.27 Directors Stock Option Agreement between the Registrant and Allen J.
Simon dated July 9, 1997.(1)
3.28 Form of Nonstatutory Stock Option Agreement not issued under the
1997 Stock Option Plan, governing options granted to employees by
the Registrant.(1)
3.29 Note Agreement between Monsanto Company and the Registrant dated
October 31, 1996.(1)
3.30 Addendum No. 1 to Note Agreement dated October 31, 1996 between
Monsanto Company and the Registrant dated February 6 ,1997.(1)
3.31 Creditor Agreement between Centennial Foods, Inc., the Registrant
and Ike Lynch dated October 14, 1996.(1)
3.32 Creditor Agreement between Centennial Foods, Inc., the Registrant
and Montana Department of Environmental Quality dated October 18,
1996.(1)
3.33 Agreement between Harrington Company, Centennial Foods, Inc. and
Montana Department of Natural Resources and Conservation dated
1990.(1)
3.34 Amendment to Agreement between Harrington Company, Centennial Foods,
Inc. and Montana Department of Natural Resources and Conservation
dated 1990.(1)
3.35 Promissory Note in favor of Seafirst Bank in the amount of
$1,184,000 dated November 9, 1990.(1)
(i)
<PAGE>
3.36 Letter Agreement between Centennial Foods, Inc. and Seafirst Bank
dated March 22, 1993.(1)
3.37 Business Loan and Credit Agreement between Centennial Foods, Inc.
and Seattle-First National Bank dated November 7, 1990.(1)
3.38 Commercial Security Agreement between Centennial Foods, Inc. and
Seattle-First National Bank dated November 11, 1990.(1)
3.39 Loan Modification Agreement between Centennial Foods, Inc. and
Seattle-First national Bank dated June 8, 1995.(1)
3.40 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.(1)
3.41 Assignment of Subordination Agreements and Negotiable Collateral
between Seattle-First National Bank and Company 19 General
Partnership dated March 4, 1996.(1)
3.42 Creditor Agreement between Centennial Foods, Inc. and Company 19
General partnership dated October 14, 1996.(1)
3.43 Form of Subordination Agreement between certain creditors of
Centennial Foods, Inc. in favor of Seafirst.(1)
3.44 Creditor's Agreement between Centennial Foods and Montana Department
of Commerce dated October 11, 1996.(1)
3.45 Security Agreement between the Centennial Foods, Inc. and State of
Montana Department of Commerce dated December 20, 1990.(1)
3.46 Loan Agreement dated October 9, 1990 between Centennial Foods, Inc.
and Beaverhead County.(1)
3.47 Amendment to Loan Agreement dated November 15, 1990 between
Centennial Foods, Inc. and Beaverhead County.(1)
3.48 Second Amendment to Loan Agreement dated December 20, 1990 between
Centennial Foods, Inc. and Beaverhead County.(1)
3.49 Promissory Note in favor of Beaverhead County in the amount of
$780,000 dated December 20, 1990.(1)
3.50 Indenture between Centennial Foods, Inc. and Beaverhead County dated
February 1992.(1)
3.51 Form of Non-interest Bearing Convertible Promissory Note dated
December 31, 1994 in favor of certain noteholders.(1)
3.52 Form of Creditor's Agreement between Centennial Foods, Inc. and
certain convertible noteholders.(1)
6.1 Employment Agreement between Allen J. Simon and the Registrant dated
April 18, 1997.(1)
6.2 Amendment to Employment Agreement between Allen J. Simon and the
Registrant dated May 29, 1997.(1)
6.3 Employment Agreement between the Registrant and Karen D. Berriman
dated September 15, 1997.(1)
6.4 Employment Agreement between the Registrant and Gary A. Miller dated
October 6, 1997.(1)
6.5 Employment Agreement between the Registrant and Cherukuri Venkata
Reddy Sastry dated April 14, 1996.(1)
6.6 Employment Agreement between the Registrant and Rukmini Cheruvanky
dated April 14, 1996.(1)
6.7 Employment Agreement between the Registrant and Dennis Riddle dated
September 19, 1997.(1)
6.8 Employment Agreement between the Registrant and Daniel McPeak dated
April 1, 1997.(1)
6.9 Employment Agreement between the Registrant and Patricia Mayhew
dated April 1, 1997.(1)
6.10 Employment Agreement between the Food Extrusion Montana, Inc. and
Ike E. Lynch dated March 19, 1997.(1)
6.11 Employment Agreement between Centennial Foods, Inc. and Ike Lynch
dated January 1, 1994.(1)
6.12 Consulting Agreement between the Registrant and Robert H. Hesse
dated September 30, 1997.(1)
6.13 Form of Indemnification Agreement by and among the Registrant and
certain officers and directors.(1)
6.14 Agreement between the Registrant and Wolcott Farms, Inc. dated
March 1, 1997.(1)*
6.15 Stabilized Rice Bran Processing, Sales and Marketing Agreement
between Farmer's Rice and the Registrant dated June 28, 1994.(1)*
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.(1)
6.17 Stabilized Rice Bran Processing, Sales and Marketing Agreement
between California Pacific Rice Milling, Ltd. and the Registrant
dated August, 1995.(1)*
6.18 Agreement between the Registrant and Dry Creek Trading, Inc. dated
February 1, 1997.(1)
6.19 International Distribution Agreement between the Registrant and
SunJoy Cereal-Tech Development Ltd. dated June 16, 1997.(1)*
6.20 Agreement between the Registrant and SunJoy Enterprises Corporation
dated June 16, 1997.(1)
6.21 Non-binding Letter of Intent between Nutrilite Division of Amway
Corporation and the Registrant dated April 8, 1998.(1)
6.22 Letter Agreement between DuCoa, L.P. and the Registrant dated
February 25, 1998.(1)*
(ii)
<PAGE>
6.23 Letter of Intent between Monsanto Company and Registrant dated
March 16, 1998.(1)*
6.24 First Amendment to Letter Agreement between Monsanto Company and
Registrant dated July 27, 1998.
6.25 Security Agreement between CF Corporation, Food Extrusion Montana,
Inc. and the Registrant dated March 19, 1997.(1)
6.26 Joint Development Agreement between Kellogg Company and the
Registrant dated May 15, 1998.(1)*
6.27 Promissory Note in favor of Dominion Resources, Inc. in the amount
of $1,750,000 dated July 30, 1996.(1)
6.28 Commercial Lease and Deposit Receipt between Roebbelen Land Company
and the Registrant dated December 23, 1991.(1)
6.29 First Amendment of Lease between Roebbelen Land Company and the
Registrant dated January 19, 1994.(1)
6.30 Second Amendment of Lease between Roebbelen Land Company and the
Registrant dated July 11, 1996.(1)
6.31 Third Amendment of Lease Agreement between Roebbelen Land Company
and the Registrant dated February 1, 1998.(1)
6.32 Lease Agreement between Roebbelen Land Company and the Registrant
dated July 11, 1996.(1)
6.33 First Amendment of Lease between Roebbelen Land Company and the
Registrant dated September 1996.(1)
6.34 Second Amendment of Lease Agreement between Roebbelen Land company
and the Registrant dated February 1, 1998.(1)
6.35 Rental Agreement, Month to Month, between James W. Cameron, Jr. and
the Registrant dated December 22, 1997.(1)
6.36 Plan and Agreement of Reorganization between Core Iris, Inc. and the
Registrant dated December 5, 1996.(1)
6.37 Asset Purchase Agreement between Centennial Foods, Inc., Food
Extrusion Montana, Inc. and the Registrant dated January 2, 1997.(1)
16 Letter from PriceWaterhouse Coopers, LLP (formerly Coopers & Lybrand
LLP) dated July 28, 1998
27 Financial Data Schedule
</TABLE>
- -----------
(1) Previously filed as an exhibit to the Company's Registration Statement
filed with the Commission on May 18, 1998.
* Confidential treatment granted as to certain portions.
(iii)
<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.
THE RICEX COMPANY
Date: August 26, 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
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Exhibit 2.2
BYLAWS
OF
THE RICEX COMPANY
A DELAWARE CORPORATION
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BYLAWS OF
THE RICEX COMPANY
A DELAWARE CORPORATION
TABLE OF CONTENTS
PAGE
ARTICLE 1 CORPORATE OFFICES. . . . . . . . . . . . . . . . . . . . . . . 1
1.1 REGISTERED OFFICE. . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 OTHER OFFICES. . . . . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE 2 MEETINGS OF STOCKHOLDERS . . . . . . . . . . . . . . . . . . . 1
2.1 PLACE OF MEETINGS. . . . . . . . . . . . . . . . . . . . . . . . 1
2.2 ANNUAL MEETINGS. . . . . . . . . . . . . . . . . . . . . . . . . 1
2.3 SPECIAL MEETINGS.. . . . . . . . . . . . . . . . . . . . . . . . 1
2.4 NOTICE OF STOCKHOLDERS' MEETINGS.. . . . . . . . . . . . . . . . 2
2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE.. . . . . . . . . . 2
2.6 QUORUM.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.7 ADJOURNED MEETING; NOTICE. . . . . . . . . . . . . . . . . . . . 3
2.8 CONDUCT OF BUSINESS. . . . . . . . . . . . . . . . . . . . . . . 3
2.9 VOTING.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.10 WAIVER OF NOTICE.. . . . . . . . . . . . . . . . . . . . . . . . 3
2.11 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING. . . . . 3
2.12 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS. . . 4
2.13 PROXIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.14 LIST OF STOCKHOLDERS ENTITLED TO VOTE. . . . . . . . . . . . . . 4
ARTICLE 3 DIRECTORS. . . . . . . . . . . . . . . . . . . . . . . . . . . 5
3.1 POWERS.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
3.2 NUMBER OF DIRECTORS. . . . . . . . . . . . . . . . . . . . . . . 5
3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS. . . . . 5
3.4 RESIGNATION AND VACANCIES. . . . . . . . . . . . . . . . . . . . 6
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE.. . . . . . . . . . . . 7
3.6 REGULAR MEETINGS.. . . . . . . . . . . . . . . . . . . . . . . . 7
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TABLE OF CONENTS
(continued)
PAGE
3.7 SPECIAL MEETINGS; NOTICE.. . . . . . . . . . . . . . . . . . . . 7
3.8 QUORUM.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
3.9 WAIVER OF NOTICE.. . . . . . . . . . . . . . . . . . . . . . . . 8
3.10 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING. . . . . . . . 8
3.11 FEES AND COMPENSATION OF DIRECTORS.. . . . . . . . . . . . . . . 8
3.12 APPROVAL OF LOANS TO OFFICERS. . . . . . . . . . . . . . . . . . 9
3.13 REMOVAL OF DIRECTORS.. . . . . . . . . . . . . . . . . . . . . . 9
3.14 NOMINATION OF DIRECTORS; STOCKHOLDER BUSINESS AT ANNUAL
MEETINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
ARTICLE 4 COMMITTEES . . . . . . . . . . . . . . . . . . . . . . . . . .13
4.1 COMMITTEES OF DIRECTORS. . . . . . . . . . . . . . . . . . . . .13
4.2 COMMITTEE MINUTES. . . . . . . . . . . . . . . . . . . . . . . .13
4.3 MEETINGS AND ACTION OF COMMITTEES. . . . . . . . . . . . . . . .13
ARTICLE 5 OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . .14
5.1 OFFICERS.. . . . . . . . . . . . . . . . . . . . . . . . . . . .14
5.2 APPOINTMENT OF OFFICERS. . . . . . . . . . . . . . . . . . . . .14
5.3 SUBORDINATE OFFICERS.. . . . . . . . . . . . . . . . . . . . . .14
5.4 REMOVAL AND RESIGNATION OF OFFICERS. . . . . . . . . . . . . . .14
5.5 VACANCIES IN OFFICES.. . . . . . . . . . . . . . . . . . . . . .15
5.6 CHAIRMAN OF THE BOARD. . . . . . . . . . . . . . . . . . . . . .15
5.7 PRESIDENT. . . . . . . . . . . . . . . . . . . . . . . . . . . .15
5.8 VICE PRESIDENTS. . . . . . . . . . . . . . . . . . . . . . . . .15
5.9 SECRETARY. . . . . . . . . . . . . . . . . . . . . . . . . . . .15
5.10 CHIEF FINANCIAL OFFICER. . . . . . . . . . . . . . . . . . . . .16
5.11 ASSISTANT SECRETARY. . . . . . . . . . . . . . . . . . . . . . .16
5.12 ASSISTANT TREASURER. . . . . . . . . . . . . . . . . . . . . . .16
5.13 REPRESENTATION OF SHARES OF OTHER CORPORATIONS.. . . . . . . . .17
5.14 AUTHORITY AND DUTIES OF OFFICERS.. . . . . . . . . . . . . . . .17
ARTICLE 6 INDEMNITY. . . . . . . . . . . . . . . . . . . . . . . . . . .17
6.1 THIRD PARTY ACTIONS. . . . . . . . . . . . . . . . . . . . . . .17
6.2 ACTIONS BY OR IN THE RIGHT OF THE CORPORATION. . . . . . . . . .18
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TABLE OF CONENTS
(continued)
PAGE
6.3 SUCCESSFUL DEFENSE.. . . . . . . . . . . . . . . . . . . . . . .18
6.4 DETERMINATION OF CONDUCT.. . . . . . . . . . . . . . . . . . . .18
6.5 PAYMENT OF EXPENSES IN ADVANCE.. . . . . . . . . . . . . . . . .19
6.6 INDEMNITY NOT EXCLUSIVE. . . . . . . . . . . . . . . . . . . . .19
6.7 INSURANCE INDEMNIFICATION. . . . . . . . . . . . . . . . . . . .19
6.8 THE CORPORATION. . . . . . . . . . . . . . . . . . . . . . . . .19
6.9 EMPLOYEE BENEFIT PLANS.. . . . . . . . . . . . . . . . . . . . .19
6.10 INDEMNITY FUND.. . . . . . . . . . . . . . . . . . . . . . . . .20
6.11 INDEMNIFICATION OF OTHER PERSONS.. . . . . . . . . . . . . . . .20
6.12 SAVINGS CLAUSE.. . . . . . . . . . . . . . . . . . . . . . . . .20
6.13 CONTINUATION OF INDEMNIFICATION AND ADVANCEMENT OF EXPENSES. . .20
ARTICLE 7 RECORDS AND REPORTS. . . . . . . . . . . . . . . . . . . . . .21
7.1 MAINTENANCE AND INSPECTION OF RECORDS. . . . . . . . . . . . . .21
7.2 INSPECTION BY DIRECTORS. . . . . . . . . . . . . . . . . . . . .21
7.3 ANNUAL STATEMENT TO STOCKHOLDERS.. . . . . . . . . . . . . . . .22
ARTICLE 8 GENERAL MATTERS. . . . . . . . . . . . . . . . . . . . . . . .22
8.1 CHECKS.. . . . . . . . . . . . . . . . . . . . . . . . . . . . .22
8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS.. . . . . . . .22
8.3 STOCK CERTIFICATES; PARTLY PAID SHARES.. . . . . . . . . . . . .22
8.4 SPECIAL DESIGNATION ON CERTIFICATES. . . . . . . . . . . . . . .23
8.5 LOST CERTIFICATES. . . . . . . . . . . . . . . . . . . . . . . .23
8.6 CONSTRUCTION; DEFINITIONS. . . . . . . . . . . . . . . . . . . .23
8.7 DIVIDENDS. . . . . . . . . . . . . . . . . . . . . . . . . . . .24
8.8 FISCAL YEAR. . . . . . . . . . . . . . . . . . . . . . . . . . .24
8.9 SEAL.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24
8.10 TRANSFER OF STOCK. . . . . . . . . . . . . . . . . . . . . . . .24
8.11 STOCK TRANSFER AGREEMENTS. . . . . . . . . . . . . . . . . . . .24
8.12 REGISTERED STOCKHOLDERS. . . . . . . . . . . . . . . . . . . . .24
ARTICLE 9 AMENDMENTS . . . . . . . . . . . . . . . . . . . . . . . . . .25
CERTIFICATE OF ADOPTION OF BYLAWS. . . . . . . . . . . . . . . . . . . . . .26
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ARTICLE 1
CORPORATE OFFICES
1.1 REGISTERED OFFICE. The registered office of the corporation shall
be in the City of Wilmington, County of New Castle, State of Delaware. The
name of the registered agent of the corporation at such location is The
Corporation Trust Company.
1.2 OTHER OFFICES. The board of directors may at any time establish
other offices at any place or places where the corporation is qualified to do
business.
ARTICLE 2
MEETINGS OF STOCKHOLDERS
2.1 PLACE OF MEETINGS. Meetings of stockholders shall be held at any
place, within or outside the State of Delaware, designated by the board of
directors. In the absence of any such designation, stockholders' meetings
shall be held at the registered office of the corporation.
2.2 ANNUAL MEETINGS. The annual meeting of stockholders shall be held
each year on a date and at a time designated by the board of directors. At
the meeting, directors shall be elected and any other proper business may be
transacted.
2.3 SPECIAL MEETINGS. A special meeting of the stockholders may be
called at any time by the board of directors, or by the chairman of the
board, or by the president, or by one or more stockholders holding shares in
the aggregate entitled to cast not less than twenty percent (20%) of the
votes at such meeting.
For a stockholder to call a special meeting, the stockholder must
have given timely notice thereof in writing to the secretary of the
corporation. To be timely, a stockholder's notice must be delivered to or
mailed and received at the principal executive offices of the corporation not
less than sixty (60) days prior to the proposed date for such meeting. A
stockholder's notice to the secretary shall set forth as to each matter the
stockholder proposes to bring before the special meeting the following
information: (a) a brief description of the business desired to be brought
before the special meeting and the reasons for conducting such business at
the special meeting, (b) the name and address, as they appear on the
corporation's books, of the stockholder proposing such business, (c) the
class and number of shares of the corporation which are beneficially owned by
the stockholder and (d) any material direct
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or indirect interest, financial or otherwise of the stockholder or its
affiliates or associates in such business. The board of directors may reject
any stockholder proposal not timely made in accordance with this Section 2.3.
If the board of directors determines that the information provided in a
stockholder's notice does not satisfy the information requirements hereof,
the secretary of the corporation shall promptly notify such stockholder of
the deficiency in the notice. The stockholder shall then have an opportunity
to cure the deficiency by providing additional information to the secretary
within such period of time, not to exceed ten (10) days from the date such
deficiency notice is given to the stockholder, as the board of directors
shall determine. If the deficiency is not cured within such period, or if
the board of directors determines that the additional information provided by
the stockholder, together with the information previously provided, does not
satisfy the requirements of this Section 2.3, then the board of directors may
reject such stockholder's proposal. The secretary of the corporation shall
notify a stockholder in writing whether the stockholder's proposal has been
made in accordance with the time and information requirements hereof. The
officer receiving the request shall cause notice to be promptly given to the
stockholders entitled to vote, in accordance with the provisions of Sections
2.4 and 2.5 of this Article II, that a meeting will be held at the time
requested by the person or persons who called the meeting, not less than
sixty (60) nor more than ninety (90) days after the receipt of the request.
If the notice is not given within twenty (20) days after the receipt of the
request, the person or persons requesting the meeting may give the notice.
Nothing contained in this paragraph of this Section 2.3 shall be construed as
limiting, fixing, or affecting the time when a meeting of stockholders called
by action of the board of directors may be held.
2.4 NOTICE OF STOCKHOLDERS' MEETINGS. All notices of meetings of
stockholders shall be in writing and shall be sent or otherwise given in
accordance with Section 2.5 of these bylaws not less than ten (10) nor more
than sixty (60) days before the date of the meeting to each stockholder
entitled to vote at such meeting. The notice shall specify the place, date,
and hour of the meeting, and in the case of a special meeting, the purpose or
purposes for which the meeting is called.
2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE. Written notice of
any meeting of stockholders, if mailed, is given when deposited in the United
States mail, postage prepaid, directed to the stockholder at his address as
it appears on the records of the corporation. An affidavit of the secretary
or an assistant secretary or of the transfer agent of the corporation that
the notice has been given shall, in the absence of fraud, be prima facie
evidence of the facts stated therein.
2.6 QUORUM. The holders of a majority of the stock issued and
outstanding and entitled to vote thereat, present in person or represented by
proxy, shall constitute a quorum at all meetings of the stockholders for the
transaction of business except as otherwise provided by statute or by the
certificate of incorporation. If, however, such quorum is not present or
represented at any meeting of the stockholders, then either (i) the chairman
of the meeting or (ii) the stockholders entitled to vote thereat, present in
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person or represented by proxy, shall have power to adjourn the meeting from
time to time, without notice other than announcement at the meeting, until a
quorum is present or represented. At such adjourned meeting at which a
quorum is present or represented, any business may be transacted that might
have been transacted at the meeting as originally noticed.
2.7 ADJOURNED MEETING; NOTICE. When a meeting is adjourned to another
time or place, unless these bylaws otherwise require, notice need not be
given of the adjourned meeting if the time and place thereof are announced at
the meeting at which the adjournment is taken. At the adjourned meeting the
corporation may transact any business that might have been transacted at the
original meeting. If the adjournment is for more than thirty (30) days, or
if after the adjournment a new record date is fixed for the adjourned
meeting, a notice of the adjourned meeting shall be given to each stockholder
of record entitled to vote at the meeting.
2.8 CONDUCT OF BUSINESS. The chairman of any meeting of stockholders
shall determine the order of business and the procedure at the meeting,
including such regulation of the manner of voting and the conduct of business.
2.9 VOTING. The stockholders entitled to vote at any meeting of
stockholders shall be determined in accordance with the provisions of Section
2.12 of these bylaws, subject to the provisions of Sections 217 and 218 of
the General Corporation Law of Delaware (relating to voting rights of
fiduciaries, pledgors and joint owners of stock and to voting trusts and
other voting agreements).
Except as may be otherwise provided in the certificate of
incorporation, each stockholder shall be entitled to one vote for each share
of capital stock held by such stockholder.
2.10 WAIVER OF NOTICE. Whenever notice is required to be given under
any provision of the General Corporation Law of Delaware or of the
certificate of incorporation or these bylaws, a written waiver thereof,
signed by the person entitled to notice, whether before or after the time
stated therein, shall be deemed equivalent to notice. Attendance of a person
at a meeting shall constitute a waiver of notice of such meeting, except when
the person attends a meeting for the express purpose of objecting, at the
beginning of the meeting, to the transaction of any business because the
meeting is not lawfully called or convened. Neither the business to be
transacted at, nor the purpose of, any regular or special meeting of the
stockholders need be specified in any written waiver of notice unless so
required by the certificate of incorporation or these bylaws.
2.11 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING. Any
action required by this article to be taken at any annual or special meeting
of stockholders of the corporation, or any action that may be taken at any
annual or special meeting of such stockholders, may not be taken by written
consent without a meeting, without prior notice, and without a vote.
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2.12 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS. In
order that the corporation may determine the stockholders entitled to notice
of or to vote at any meeting of stockholders or any adjournment thereof, or
entitled to express consent to corporate action in writing without a meeting,
or entitled to receive payment of any dividend or other distribution or
allotment of any rights, or entitled to exercise any rights in respect of any
change, conversion or exchange of stock or for the purpose of any other
lawful action, the board of directors may fix, in advance, a record date,
which shall not be more than sixty (60) nor less than ten (10) days before
the date of such meeting, nor more than sixty (60) days prior to any other
action.
If the board of directors does not so fix a record date:
(i) The record date for determining stockholders entitled to
notice of or to vote at a meeting of stockholders shall be at the close of
business on the day next preceding the day on which notice is given, or, if
notice is waived, at the close of business on the day next preceding the day
on which the meeting is held.
(ii) The record date for determining stockholders entitled to
express consent to corporate action in writing without a meeting, when no
prior action by the board of directors is necessary, shall be the day on
which the first written consent is expressed.
(iii) The record date for determining stockholders for any other
purpose shall be at the close of business on the day on which the board of
directors adopts the resolution relating thereto.
A determination of stockholders of record entitled to notice of or
to vote at a meeting of stockholders shall apply to any adjournment of the
meeting; provided, however, that the board of directors may fix a new record
date for the adjourned meeting.
2.13 PROXIES. Each stockholder entitled to vote at a meeting of
stockholders or to express consent or dissent to corporate action in writing
without a meeting may authorize another person or persons to act for him by a
written proxy, signed by the stockholder and filed with the secretary of the
corporation, but no such proxy shall be voted or acted upon after three (3)
years from its date, unless the proxy provides for a longer period. A proxy
shall be deemed signed if the stockholder's name is placed on the proxy
(whether by manual signature, typewriting, facsimile, telegraphic
transmission or otherwise) by the stockholder or the stockholder's
attorney-in-fact. The revocability of a proxy that states on its face that
it is irrevocable shall be governed by the provisions of Section 212(c) of
the General Corporation Law of Delaware.
2.14 LIST OF STOCKHOLDERS ENTITLED TO VOTE. The officer who has charge
of the stock ledger of the corporation shall prepare and make, at least ten
(10) days before every meeting of stockholders, a complete list of the
stockholders entitled to vote at the meeting, arranged in alphabetical order,
and showing the address of each stockholder
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and the number of shares registered in the name of each stockholder. Such
list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at
least ten (10) days prior to the meeting, either at a place within the city
where the meeting is to be held, which place shall be specified in the notice
of the meeting, or, if not so specified, at the place where the meeting is to
be held. The list shall also be produced and kept at the time and place of
the meeting during the whole time thereof, and may be inspected by any
stockholder who is present. Such list shall presumptively determine the
identity of the stockholders entitled to vote at the meeting and the number
of shares held by each of them.
ARTICLE 3
DIRECTORS
3.1 POWERS. Subject to the provisions of the General Corporation Law
of Delaware and any limitation in the certificate of incorporation or these
bylaws relating to action required to be approved by the stockholders or by
the outstanding shares, the business and affairs of the corporation shall be
managed and all corporate powers shall be exercised by or under the direction
of the board of directors.
3.2 NUMBER OF DIRECTORS. The number of directors shall initially be
five (5) persons and, thereafter, shall be fixed exclusively by the Board of
Directors pursuant to a resolution adopted by a majority of the total number
of authorized directors (whether or not there exist any vacancies in
previously authorized directorships at the time any such resolution is
presented to the Board for adoption) until changed by a proper amendment of
this Section 3.2 but in no event shall there be fewer than five (5) nor more
than eight (8) directors. No reduction of the authorized number of directors
shall have the effect of removing any director before that director's term of
office expires.
3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS. Except
as provided in Section 3.4 of these bylaws, directors shall be elected at
each annual meeting of stockholders to hold office until the next annual
meeting. Directors need not be stockholders unless so required by the
certificate of incorporation or these bylaws, wherein other qualifications
for directors may be prescribed. Each director, including a director elected
to fill a vacancy, shall hold office until his successor is elected and
qualified or until his earlier resignation or removal. Elections of
directors need not be by written ballot.
The directors of the corporation shall be divided into three
classes as nearly equal in size as is practicable, hereby designated Class I,
Class II and Class III. The term of office of the initial Class I directors
shall expire at the first regularly-scheduled annual meeting of the
stockholders following the effective date of the Certificate of
Incorporation (the "Effective Date"), the term of office of the initial Class
II
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directors shall expire at the second annual meeting of the stockholders
following the Effective Date and the term of office of the initial Class III
directors shall expire at the third annual meeting of the stockholders
following the Effective Date. For the purposes hereof, the initial Class I,
Class II and Class III directors shall be those directors so designated by
the Board of Directors in 1998. At each annual meeting of stockholders,
commencing with the first regularly-scheduled annual meeting of stockholders
following the Effective Date, each of the successors elected to replace the
directors of a Class whose term shall have expired at such annual meeting
shall be elected to hold office until the third annual meeting next
succeeding his or her election and until his or her respective successor
shall have been duly elected and qualified. If the number of directors is
hereafter changed, any newly created directorships or decrease in
directorships shall be so apportioned among the classes as to make all
classes as nearly equal in number as is practicable, provided that no
decrease in the number of directors constituting the Board of Directors shall
shorten the term of any incumbent director.
3.4 RESIGNATION AND VACANCIES. Any director may resign at any time
upon written notice to the attention of the secretary of the corporation.
When one or more directors so resigns and the resignation is effective at a
future date, a majority of the directors then in office, including those who
have so resigned, shall have power to fill such vacancy or vacancies, the
vote thereon to take effect when such resignation or resignations shall
become effective, and each director so chosen shall hold office as provided
in this section in the filling of other vacancies.
Vacancies occurring on the Board of Directors for any reason
and newly created directorships resulting from an increase in the authorized
number of directors may be filled only by vote of a majority of the remaining
members of the Board of Directors, although less than a quorum, at any
meeting of the Board of Directors. A person so elected by the Board of
Directors to fill a vacancy or newly created directorship shall hold office
until the next election of the class for which such director shall have been
chosen and until his or her successor shall have been duly elected and
qualified.
Unless otherwise provided in the certificate of incorporation or
these bylaws:
(i) Vacancies and newly created directorships resulting from any
increase in the authorized number of directors elected by all of the
stockholders having the right to vote as a single class may be filled by a
majority of the directors then in office, although less than a quorum, or by
a sole remaining director.
(ii) Whenever the holders of any class or classes of stock or
series thereof are entitled to elect one or more directors by the provisions
of the certificate of incorporation, vacancies and newly created
directorships of such class or classes or
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series may be filled by a majority of the directors elected by such class or
classes or series thereof then in office, or by a sole remaining director so
elected.
If at any time, by reason of death or resignation or other cause,
the corporation should have no directors in office, then any officer or any
stockholder or any executor, administrator, trust or guardian of a
stockholder, or other fiduciary entrusted with like responsibility for the
person or estate of a stockholder, may call a special meeting of stockholders
in accordance with the provisions of the certificate of incorporation or
these bylaws, or may apply to the Court of Chancery for a decree summarily
ordering an election as provided in Section 211 of the General Corporation
Law of Delaware.
If, at the time of filling any vacancy or any newly created
directorship, the directors then in office constitute less than a majority of
the whole board (as constituted immediately prior to any such increase), then
the Court of Chancery may, upon application of any stockholder or
stockholders holding at least twenty-five percent (25%) of the total number
of the shares at the time outstanding having the right to vote for such
directors, summarily order an election to be held to fill any such vacancies
or newly created directorships, or to replace the directors chosen by the
directors then in office as aforesaid, which election shall be governed by
the provisions of Section 211 of the General Corporation Law of Delaware as
far as applicable.
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE. The board of directors
of the corporation may hold meetings, both regular and special, either within
or outside the State of Delaware.
Unless otherwise restricted by the certificate of incorporation or
these bylaws, members of the board of directors, or any committee designated
by the board of directors, may participate in a meeting of the board of
directors, or any committee, by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other, and such participation in a meeting shall
constitute presence in person at the meeting.
3.6 REGULAR MEETINGS. Regular meetings of the board of directors may
be held without notice at such time and at such place as shall from time to
time be determined by the board.
3.7 SPECIAL MEETINGS; NOTICE. Special meetings of the board of
directors for any purpose or purposes may be called at any time by the
chairman of the board, the president, the secretary or any two (2) directors.
Notice of the time and place of special meetings shall be
delivered personally or by telephone to each director or sent by first-class
mail, by overnight mail or courier, facsimile, or telegram, charges prepaid,
addressed to each director at that director's address as it is shown on the
records of the corporation. If the notice is mailed, it shall be deposited
in the United States mail at least four (4) days before the
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time of the holding of the meeting. If the notice is delivered personally,
by overnight mail or courier, facsimile, or by telephone or by telegram, it
shall be delivered personally, by overnight mail or courier, facsimile or by
telephone or to the telegraph company at least forty-eight (48) hours before
the time of the holding of the meeting. Any oral notice given personally or
by telephone may be communicated either to the director or to a person at the
office of the director who the person giving the notice has reason to believe
will promptly communicate it to the director. The notice need not specify the
purpose or the place of the meeting, if the meeting is to be held at the
principal executive office of the corporation.
3.8 QUORUM. At all meetings of the board of directors, a majority of
the authorized number of directors shall constitute a quorum for the
transaction of business and the act of a majority of the directors present at
any meeting at which there is a quorum shall be the act of the board of
directors, except as may be otherwise specifically provided by statute or by
the certificate of incorporation. If a quorum is not present at any meeting
of the board of directors, then the directors present thereat may adjourn the
meeting from time to time, without notice other than announcement at the
meeting, until a quorum is present.
A meeting at which a quorum is initially present may continue to
transact business notwithstanding the withdrawal of directors, if any action
taken is approved by at least a majority of the required quorum for that
meeting.
3.9 WAIVER OF NOTICE. Whenever notice is required to be given under
any provision of the General Corporation Law of Delaware or of the
certificate of incorporation or these bylaws, a written waiver thereof,
signed by the person entitled to notice, whether before or after the time
stated therein, shall be deemed equivalent to notice. Attendance of a person
at a meeting shall constitute a waiver of notice of such meeting, except when
the person attends a meeting for the express purpose of objecting, at the
beginning of the meeting, to the transaction of any business because the
meeting is not lawfully called or convened. Neither the business to be
transacted at, nor other purpose of, any regular or special meeting of the
directors, or members of a committee of directors, need be specified in any
written waiver of notice unless so required by the certificate of
incorporation or these bylaws.
3.10 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING. Unless
otherwise restricted by the certificate of incorporation or these bylaws, any
action required or permitted to be taken at any meeting of the board of
directors, or of any committee thereof, may be taken without a meeting if all
members of the board or committee, as the case may be, consent thereto in
writing and the writing or writings are filed with the minutes of proceedings
of the board or committee.
3.11 FEES AND COMPENSATION OF DIRECTORS. Unless otherwise restricted
by the certificate of incorporation or these bylaws, the board of directors
shall have the authority to fix the compensation of directors.
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3.12 APPROVAL OF LOANS TO OFFICERS. The corporation may lend money to,
or guarantee any obligation of, or otherwise assist any officer or other
employee of the corporation or of its subsidiaries, including any officer or
employee who is a director of the corporation or its subsidiaries, whenever,
in the judgment of the directors, such loan, guaranty or assistance may
reasonably be expected to benefit the corporation. The loan, guaranty or
other assistance may be with or without interest and may be unsecured, or
secured in such manner as the board of directors shall approve, including,
without limitation, a pledge of shares of stock of the corporation. Nothing
contained in this section shall be deemed to deny, limit or restrict the
powers of guaranty or warranty of the corporation at common law or under any
statute.
3.13 REMOVAL OF DIRECTORS. Unless otherwise restricted by statute, by
the certificate of incorporation or by these bylaws, any director or the
entire board of directors may be removed from office by the holders of a
majority of the shares then entitled to vote at an election of directors only
for cause.
3.14 NOMINATION OF DIRECTORS; STOCKHOLDER BUSINESS AT ANNUAL MEETINGS.
Subject to the rights of holders of any class or series of stock having a
preference over the Common Stock as to dividends or upon liquidation,
nominations for the election of directors may be made by the board of
directors or any nominating committee appointed by the board of directors or
by any stockholder entitled to vote in the election of directors generally.
However, a stockholder generally entitled to vote in the election of
directors may nominate one or more persons for election as directors at a
meeting only after written notice of such stockholder's intent to make such
nomination or nominations has been given, either by person delivery or by
United States mail, postage prepaid, to the secretary of the corporation not
later than (i) with respect to an election to be held at an annual meeting of
stockholders, sixty (60) days in advance of such meeting and (ii) with
respect to an election to be held at a special meeting of stockholders for
the election of directors, the close of business on the seventh (7th) day
following the date on which notice of such meeting is first given to
stockholders. Each such notice shall set forth the following information:
(a) the name and address of the stockholder who intends to make the
nomination and of the person or persons to be nominated; (b) a representation
that the stockholder is a holder of record of stock of the corporation
entitled to vote at such meeting and intends to appear in person or by proxy
at the meeting to nominate the person or persons specified in the notice; (c)
a description of all arrangements or understandings between the stockholder,
each nominee or any other person or persons (naming such person or persons)
pursuant to which the nomination or nominations are to be made by the
stockholder; (d) such other information regarding each nominee proposed by
such stockholder as would be required to be included in a proxy statement
filed pursuant to the proxy rules of the Securities and Exchange Commission,
had the nominee been nominated, or intended to be nominated, by the board of
directors of the corporation; and (e) the consent of each nominee to serve as
a director of the corporation if so elected. At the request of the board of
directors, any person nominated by the board of directors for election as a
director shall furnish to the secretary of the corporation that information
required to be
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set forth in a stockholder's notice of nomination which pertains to the
nominee. No person shall be eligible of reelection as a director of the
corporation unless nominated in accordance with the procedures set forth
herein. A majority of the board of directors may reject any nomination by a
stockholder not timely made or otherwise not in accordance with the terms of
this Section 3.14. If a majority of the board of directors reasonably
determines that the information provided in a stockholder's notice does not
satisfy the informational requirements of this Section 3.14 in any material
respect, the secretary of the corporation shall promptly notify such
stockholder of the deficiency in writing. The stockholder shall have an
opportunity to cure the deficiency by providing additional information to the
secretary within such period of time, not to exceed ten (10) days from the
date such deficiency notice is given to the stockholder, as a majority of the
board of directors shall reasonably determine. If the deficiency is not
cured within such period, or if a majority of the board of directors
reasonably determines that the additional information provided by the
stockholder, together with the information previously provided, does not
satisfy the requirements of this Section 3.14 in any material respect, then a
majority of the board of directors may reject such stockholder's nomination.
The secretary of the corporation shall notify a stockholder in writing
whether the stockholder's nomination has been made in accordance with the
time and information requirements of this Section 3.14.
At an annual meeting of the stockholders, only such business
shall be conducted as shall have been brought before the meeting (i) by or at
the direction of the chairman of the meeting or (ii) by any stockholder of
the corporation who complies with the notice procedures set forth in this
Section 3.14. For business to be properly brought before an annual meeting
by a stockholder, the stockholder must have given timely notice thereof in
writing to the secretary of the corporation. To be timely, a stockholder's
notice must be delivered to or mailed and received at the principal executive
offices of the corporation not less than sixty (60) days prior to the
meeting; provided, however, that in the event that less than seventy (70)
days notice or prior public disclosure of the date of the meeting is given or
made to the stockholders, notice by the stockholder to be timely must be
received not later than the close of business on the tenth (10th) day
following the earlier of the day on which such notice of the date of the
annual meeting was mailed or such public disclosure was made. A
stockholder's notice to the secretary shall set forth as to each matter the
stockholder proposes to bring before the annual meeting the following
information: (a) a brief description of the business desired to be brought
before the annual meeting and the reasons for conducting such business at the
annual meeting, (b) the name and address, as they appear on the corporation's
books, of the stockholder proposing such business, (c) the class and number
of shares of the corporation which are beneficially owned by the stockholder
and (d) any material direct or indirect interest, financial or otherwise of
the stockholder or its affiliates or associates in such business. The board
of directors may reject any stockholder proposal not timely made in
accordance with this Section 3.14. If the board of directors determines that
the information provided in a stockholder's notice does not satisfy the
informational requirements hereof, the secretary of the corporation shall
promptly notify such stockholder of the deficiency in the notice. The
stockholder
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shall then have an opportunity to cure the deficiency by providing additional
information to the secretary within such period of time, not to exceed ten
days from the date such deficiency notice is given to the stockholder, as the
board of directors shall determine. If the deficiency is not cured within
such period, or if the board of directors determines that the additional
information provided by the stockholder, together with the information
previously provided, does not satisfy the requirements of this Section 3.14,
then the board of directors may reject such stockholder's proposal. The
secretary of the corporation shall notify a stockholder in writing whether
the stockholder's proposal has been made in accordance with the time and
information requirements hereof.
This provision shall not prevent the consideration and
approval or disapproval at an annual meeting of reports of officers, directors
and committees of the board of directors, but in connection therewith no new
business shall be acted upon at any such meeting unless stated, filed and
received as herein provided.
ARTICLE 4
COMMITTEES
4.1 COMMITTEES OF DIRECTORS. The board of directors may, by
resolution passed by a majority of the whole board, designate one or more
committees, with each committee to consist of one or more of the directors of
the corporation. The board may designate one or more directors as alternate
members of any committee, who may replace any absent or disqualified member
at any meeting of the committee. In the absence or disqualification of a
member of a committee, the member or members thereof present at any meeting
and not disqualified from voting, whether or not he or they constitute a
quorum, may unanimously appoint another member of the board of directors to
act at the meeting in the place of any such absent or disqualified member.
Any such committee, to the extent provided in the resolution of the board of
directors or in the bylaws of the corporation, shall have and may exercise
all the powers and authority of the board of directors in the management of
the business and affairs of the corporation, and may authorize the seal of
the corporation to be affixed to all papers that may require it; but no such
committee shall have the power or authority to (i) amend the certificate of
incorporation (except that a committee may, to the extent authorized in the
resolution or resolutions providing for the issuance of shares of stock
adopted by the board of directors as provided in Section 151(a) of the
General Corporation Law of Delaware, fix the designation and any of the
preferences or rights of such shares relating to dividends, redemption,
dissolution, any distribution of assets of the corporation or the conversion
into, or the exchange of such shares for, shares of any other class or
classes or any other series of the same or any other class or classes of
stock of the corporation or fix the number of shares of any series of stock
or authorize the increase or decrease of the shares of any series), (ii)
adopt an agreement of merger or consolidation under Sections 251 or 252 of
the General Corporation Law of
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Delaware, (iii) recommend to the stockholders the sale, lease or exchange of
all or substantially all of the corporation's property and assets, (iv)
recommend to the stockholders a dissolution of the corporation or a
revocation of a dissolution, or (v) amend the bylaws of the corporation; and,
unless the board resolution establishing the committee, the bylaws or the
certificate of incorporation expressly so provide, no such committee shall
have the power or authority to declare a dividend, to authorize the issuance
of stock, or to adopt a certificate of ownership and merger pursuant to
Section 253 of the General Corporation Law of Delaware.
4.2 COMMITTEE MINUTES. Each committee shall keep regular minutes of
its meetings and report the same to the board of directors when required.
4.3 MEETINGS AND ACTION OF COMMITTEES. Meetings and actions of
committees shall be governed by, and held and taken in accordance with, the
provisions of Article III of these bylaws, Section 3.5 (place of meetings and
meetings by telephone), Section 3.6 (regular meetings), Section 3.7 (special
meetings and notice), Section 3.8 (quorum), Section 3.9 (waiver of notice),
and Section 3.10 (action without a meeting), with such changes in the context
of those bylaws as are necessary to substitute the committee and its members
for the board of directors and its members; provided, however, that the time
of regular meetings of committees may be determined either by resolution of
the board of directors or by resolution of the committee, that special
meetings of committees may also be called by resolution of the board of
directors and that notice of special meetings of committees shall also be
given to all alternate members, who shall have the right to attend all
meetings of the committee. The board of directors may adopt rules for the
government of any committee not inconsistent with the provisions of these
bylaws.
ARTICLE 5
OFFICERS
5.1 OFFICERS. The officers of the corporation shall be a president, a
secretary, and a chief financial officer. The corporation may also have, at
the discretion of the board of directors, a chairman of the board, one or
more vice presidents, one or more assistant vice presidents, one or more
assistant secretaries, and one or more assistant treasurers, and any such
other officers as may be appointed in accordance with the provisions of
Section 5.3 of these bylaws. Any number of offices may be held by the same
person.
5.2 APPOINTMENT OF OFFICERS. The officers of the corporation, except
such officers as may be appointed in accordance with the provisions of
Sections 5.3 or 5.5 of these bylaws, shall be appointed by the board of
directors, subject to the rights, if any, of an officer under any contract of
employment.
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5.3 SUBORDINATE OFFICERS. The board of directors may appoint, or
empower the president to appoint, such other officers and agents as the
business of the corporation may require, each of whom shall hold office for
such period, have such authority, and perform such duties as are provided in
these bylaws or as the board of directors may from time to time determine.
5.4 REMOVAL AND RESIGNATION OF OFFICERS. Subject to the rights, if
any, of an officer under any contract of employment, any officer may be
removed, either with or without cause, by an affirmative vote of the majority
of the board of directors at any regular or special meeting of the board or,
except in the case of an officer chosen by the board of directors, by any
officer upon whom such power of removal may be conferred by the board of
directors.
Any officer may resign at any time by giving written notice to the
corporation. Any resignation shall take effect at the date of the receipt of
that notice or at any later time specified in that notice; and, unless
otherwise specified in that notice, the acceptance of the resignation shall
not be necessary to make it effective. Any resignation is without prejudice
to the rights, if any, of the corporation under any contract to which the
officer is a party.
5.5 VACANCIES IN OFFICES. Any vacancy occurring in any office of the
corporation shall be filled by the board of directors.
5.6 CHAIRMAN OF THE BOARD. The chairman of the board, if such an
officer be elected, shall, if present, preside at meetings of the board of
directors and exercise and perform such other powers and duties as may from
time to time be assigned to him by the board of directors or as may be
prescribed by these bylaws. If there is no chief executive officer, then the
chairman of the board shall also be the chief executive officer of the
corporation and shall have the powers and duties prescribed in Section 5.7 of
these bylaws.
5.7 CHIEF EXECUTIVE OFFICER. Subject to such supervisory powers, if
any, as may be given by the board of directors to the chairman of the board,
if there be such an officer, the chief executive officer of the corporation
shall, subject to the control of the board of directors, have general
supervision, direction, and control of the business and the officers of the
corporation. He or she shall preside at all meetings of the stockholders
and, in the absence or nonexistence of a chairman of the board, at all
meetings of the board of directors. He or she shall have the general powers
and duties of management usually vested in the office of chief executive
officer of a corporation and shall have such other powers and duties as may
be prescribed by the board of directors or these bylaws
5.8 PRESIDENT. Subject to such supervisory powers, if any, as may be
given by the board of directors to the chairman of the board, if there be
such an officer, the president shall, subject to the control of the board of
directors, have the general powers and duties of management usually vested in
the office of president of a corporation and
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shall have such other powers and duties as may be prescribed by the board of
directors or these bylaws.
5.9 VICE PRESIDENTS. In the absence or disability of the president,
the vice presidents, if any, in order of their rank as fixed by the board of
directors or, if not ranked, a vice president designated by the board of
directors, shall perform all the duties of the president and when so acting
shall have all the powers of, and be subject to all the restrictions upon,
the president. The vice presidents shall have such other powers and perform
such other duties as from time to time may be prescribed for them
respectively by the board of directors, these bylaws, the president or the
chairman of the board.
5.10 SECRETARY. The secretary shall keep or cause to be kept, at the
principal executive office of the corporation or such other place as the
board of directors may direct, a book of minutes of all meetings and actions
of directors, committees of directors, and stockholders. The minutes shall
show the time and place of each meeting, whether regular or special (and, if
special, how authorized and the notice given), the names of those present at
directors' meetings or committee meetings, the number of shares present or
represented at stockholders' meetings, and the proceedings thereof.
The secretary shall keep, or cause to be kept, at the principal
executive office of the corporation or at the office of the corporation's
transfer agent or registrar, as determined by resolution of the board of
directors, a share register, or a duplicate share register, showing the names
of all stockholders and their addresses, the number and classes of shares
held by each, the number and date of certificates evidencing such shares, and
the number and date of cancellation of every certificate surrendered for
cancellation.
The secretary shall give, or cause to be given, notice of all
meetings of the stockholders and of the board of directors required to be
given by law or by these bylaws. He or she shall keep the seal of the
corporation, if one be adopted, in safe custody and shall have such other
powers and perform such other duties as may be prescribed by the board of
directors or by these bylaws.
5.11 CHIEF FINANCIAL OFFICER. The chief financial officer shall keep
and maintain, or cause to be kept and maintained, adequate and correct books
and records of accounts of the properties and business transactions of the
corporation, including accounts of its assets, liabilities, receipts,
disbursements, gains, losses, capital retained earnings, and shares. The
books of account shall at all reasonable times be open to inspection by any
director.
The chief financial officer shall deposit all moneys and other
valuables in the name and to the credit of the corporation with such
depositories as may be designated by the board of directors. He or she shall
disburse the funds of the corporation as may be ordered by the board of
directors, shall render to the president
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and directors, whenever they request it, an account of all his or her
transactions as chief financial officer and of the financial condition of the
corporation, and shall have other powers and perform such other duties as may
be prescribed by the board of directors or these bylaws.
The chief financial officer shall be the treasurer of the
corporation.
5.12 ASSISTANT SECRETARY. The assistant secretary, or, if there is
more than one, the assistant secretaries in the order determined by the board
of directors (or if there be no such determination, then in the order of
their election) shall, in the absence of the secretary or in the event of his
or her inability or refusal to act, perform the duties and exercise the
powers of the secretary and shall perform such other duties and have such
other powers as may be prescribed by the board of directors or these bylaws.
5.13 ASSISTANT TREASURER. The assistant treasurer, or, if there is
more than one, the assistant treasurers, in the order determined by the board
of directors (or if there be no such determination, then in the order of
their election), shall, in the absence of the chief financial officer or in
the event of his or her inability or refusal to act, perform the duties and
exercise the powers of the chief financial officer and shall perform such
other duties and have such other powers as may be prescribed by the board of
directors or these bylaws.
5.14 REPRESENTATION OF SHARES OF OTHER CORPORATIONS. The chairman of
the board, the president, any vice president, the chief financial officer,
the secretary or assistant secretary of this corporation, or any other person
authorized by the board of directors or the president or a vice president, is
authorized to vote, represent, and exercise on behalf of this corporation all
rights incident to any and all shares of any other corporation or
corporations standing in the name of this corporation. The authority granted
herein may be exercised either by such person directly or by any other person
authorized to do so by proxy or power of attorney duly executed by such
person having the authority.
5.15 AUTHORITY AND DUTIES OF OFFICERS. In addition to the foregoing
authority and duties, all officers of the corporation shall respectively have
such authority and perform such duties in the management of the business of
the corporation as may be designated from time to time by the board of
directors or the stockholders.
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ARTICLE 6
INDEMNITY
6.1 THIRD PARTY ACTIONS. Subject to the provisions of this Article
VI, the corporation 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, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation) by
reason of the fact that he or she is or was a director or officer of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement (if such
settlement is approved in advance by the corporation, 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 reasonably believed to be in or not opposed to the
best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his or her conduct was
unlawful. The termination of any action, suit or proceeding by judgment,
order, settlement, conviction, or upon a plea of nolo contendere or its
equivalent, shall not, of itself, create a presumption that the person did
not act in good faith and in a manner which he or she reasonably believed to
be in or not opposed to the best interest of the corporation, and, with
respect to any criminal action or proceeding, had reasonable cause to believe
that his conduct was unlawful.
6.2 ACTIONS BY OR IN THE RIGHT OF THE CORPORATION. Subject to the
provisions of this Article VI, the corporation 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 corporation 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 corporation, or is or was
serving at the request of the corporation 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 corporation, 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 corporation 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.
Notwithstanding any other provision of this Article VI, no person shall be
indemnified hereunder for any expenses or amounts paid in settlement with
respect to any action to
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recover short-swing profits under Section 16(b) of the Securities Exchange
Act of 1934, as amended.
6.3 SUCCESSFUL DEFENSE. To the extent that a director, officer,
employee or agent of the corporation has been successful on the merits or
otherwise in defense of any action, suit or proceeding referred to in
Sections 6.1 and 6.2, or in defense of any claim, issue or matter therein, he
or she shall be indemnified against expenses (including attorneys' fees)
actually and reasonably incurred by him or her in connection therewith.
6.4 DETERMINATION OF CONDUCT. Any indemnification under Sections 6.1
and 6.2 (unless ordered by a court) shall be made by the corporation only as
authorized in the specific case upon a determination that the indemnification
of the director, officer, employee or agent is proper in the circumstances
because he or she has met the applicable standard of conduct set forth in
Sections 6.1 and 6.2. Such determination shall be made (i) by the Board of
Directors or the Executive Committee by a majority vote of a quorum
consisting of directors who were not parties to such action, suit or
proceeding or (ii) if such quorum is not obtainable or, even if obtainable, a
quorum of disinterested directors so directs, by independent legal counsel in
a written opinion, or (iii) by the stockholders. Notwithstanding the
foregoing, a director, officer, employee or agent of the corporation shall be
entitled to contest any determination that the director, officer, employee or
agent has not met the applicable standard of conduct set forth in Sections
6.1 and 6.2 by petitioning a court of competent jurisdiction.
6.5 PAYMENT OF EXPENSES IN ADVANCE. Expenses incurred in defending a
civil or criminal action, suit or proceeding, by an individual who may be
entitled to indemnification pursuant to Section 6.1 or 6.2, shall be paid by
the corporation in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of the director,
officer, employee or agent to repay such amount if it shall ultimately be
determined that he or she is not entitled to be indemnified by the
corporation as authorized in this Article VI.
6.6 INDEMNITY NOT EXCLUSIVE. The indemnification and advancement of
expenses provided by or granted pursuant to the other sections of this
Article VI shall not be deemed exclusive of any other rights to which those
seeking indemnification or advancement of expenses may be entitled under any
bylaw, agreement, vote of stockholders or disinterested directors or
otherwise, both as to action in his or her official capacity and as to action
in another capacity while holding such office.
6.7 INSURANCE INDEMNIFICATION. The corporation shall have the power
to purchase and maintain insurance on behalf of any person who is or was a
director, officer, employee or agent of the corporation, or is or was serving
at the request of the corporation, as a director, officer, employee or agent
of another corporation, partnership, joint venture, trust or other
enterprise, against any liability asserted against him and incurred by him or
her in any such capacity or arising out of his status as such,
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whether or not the corporation would have the power to indemnify him or her
against such liability under the provisions of this Article VI.
6.8 THE CORPORATION. For purposes of this Article VI, references to the
"corporation" shall include, in addition to the resulting corporation, any
constituent corporation (including any constituent of a constituent) absorbed in
a consolidation or merger which, if its separate existence had continued, would
have had power and authority to indemnify its directors and officers, so that
any person who is or was a director, officer, employ or agent of such
constituent corporation, or is or was serving at the request of such constituent
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, shall stand in the same
position under and subject to the provisions of this Article VI (including,
without limitation, the provisions of Section 6.4) with respect to the resulting
or surviving corporation as he or she would have with respect to such
constituent corporation if its separate existence had continued.
6.9 EMPLOYEE BENEFIT PLANS. For purposes of this Article VI, references
to "other enterprises" shall include employee benefit plans; references to
"fines" shall include any excise taxes assessed on a person with respect to an
employee benefit plan; and references to "serving at the request of the
corporation" shall include any service as a director, officer, employee or agent
of the corporation which imposes duties on, or involves services by, such
director, officer, employee, or agent with respect to an employee benefit plan,
its participants, or beneficiaries; and a person who acted in good faith and in
a manner he or she reasonably believed to be in the interest of the participants
and beneficiaries of an employee benefit plan shall be deemed to have acted in a
manner "not opposed to the best interests of the corporation" as referred to in
this Article VI.
6.10 INDEMNITY FUND. Upon resolution passed by the Board, the
corporation may establish a trust or other designated account, grant a security
interest or use other means (including, without limitation, a letter of credit),
to ensure the payment of certain of its obligations arising under this Article
VI and/or agreements which may be entered into between the corporation and its
officers and directors from time to time.
6.11 INDEMNIFICATION OF OTHER PERSONS. The provisions of this Article VI
shall not be deemed to preclude the indemnification of any person who is not a
director or officer of the corporation or is not serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, but whom the corporation
has the power or obligation to indemnify under the provisions of the General
Corporation Law of the State of Delaware or otherwise. The corporation may, in
its sole discretion, indemnify an employee, trustee or other agent as permitted
by the General Corporation Law of the State of Delaware. The corporation shall
indemnify an employee, trustee or other agent where required by law.
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6.12 SAVINGS CLAUSE. If this Article VI or any portion thereof shall be
invalidated on any ground by any court of competent jurisdiction, then the
corporation shall nevertheless indemnify each person entitled to indemnification
hereunder against expenses (including attorney's fees), judgments, fines and
amounts paid in settlement with respect to any action, suit, proceeding or
investigation, whether civil, criminal or administrative, and whether internal
or external, including a grand jury proceeding and an action or suit brought by
or in the right of the corporation, to the full extent permitted by any
applicable portion of this Article that shall not have been invalidated, or by
any other applicable law.
6.13 CONTINUATION OF INDEMNIFICATION AND ADVANCEMENT OF EXPENSES. The
indemnification and advancement of expenses provided by, or granted pursuant to,
this Article VI shall, unless otherwise provided when authorized or ratified,
continue as to a person who has ceased to be a director, officer, employee or
agent and shall inure to the benefit of the heirs, executors and administrators
of such a person.
ARTICLE 7
RECORDS AND REPORTS
7.1 MAINTENANCE AND INSPECTION OF RECORDS. The corporation shall,
either at its principal executive office or at such place or places as
designated by the board of directors, keep a record of its stockholders listing
their names and addresses and the number and class of shares held by each
stockholder, a copy of these bylaws as amended to date, accounting books, and
other records.
Any stockholder of record, in person or by attorney or other agent,
shall, upon written demand under oath stating the purpose thereof, have the
right during the usual hours for business to inspect for any proper purpose the
corporation's stock ledger, a list of its stockholders, and its other books and
records and to make copies or extracts therefrom. A proper purpose shall mean a
purpose reasonably related to such person's interest as a stockholder. In every
instance where an attorney or other agent in the person who seeks the right to
inspection, the demand under oath shall be accompanied by a power of attorney or
such other writing that authorizes the attorney or other agent so to act on
behalf of the stockholder. The demand under oath shall be directed to the
corporation at its registered office in Delaware or at its principal place of
business.
The officer who has charge of the stock ledger of the corporation
shall prepare and make, at least ten (10) days before every meeting of
stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, showing the address of each stockholder
and the number of shares registered in the name of each stockholder. Such list
shall be open to the examination of any
19
<PAGE>
stockholder, for any purpose germane to the meeting, during ordinary business
hours, for a period of at least ten (10) days prior to the meeting, either at
a place within the city where the meeting is to be held, which place shall be
specified in the notice of the meeting, or, if not so specified, at the place
where the meeting is to be held. The list shall also be produced and kept at
the time and place of the meeting during the whole time thereof, and may be
inspected by any stockholder who is present.
7.2 INSPECTION BY DIRECTORS. Any director shall have the right to
examine the corporation's stock ledger, a list of its stockholders, and its
other books and records for a purpose reasonably related to his position as a
director. The Court of Chancery is hereby vested with the exclusive
jurisdiction to determine whether a director is entitled to the inspection
sought. The Court may summarily order the corporation to permit the director to
inspect any and all books and records, the stock ledger, and the stock list and
to make copies or extracts therefrom. The Court may, in its discretion,
prescribe any limitations or conditions with reference to the inspection, or
award such other and further relief as the Court may deem just and proper.
7.3 ANNUAL STATEMENT TO STOCKHOLDERS. The board of directors shall
present at each annual meeting, and at any special meeting of the stockholders
when called for by vote of the stockholders, a full and clear statement of the
business and condition of the corporation.
ARTICLE 8
GENERAL MATTERS
8.1 CHECKS. From time to time, the board of directors shall determine
by resolution which person or persons may sign or endorse all checks, drafts,
other orders for payment of money, notes or other evidences of indebtedness that
are issued in the name of or payable to the corporation, and only the persons so
authorized shall sign or endorse those instruments.
8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS. The board of
directors, except as otherwise provided in these bylaws, may authorize any
officer or officers, or agent or agents, to enter into any contract or execute
any instrument in the name of and on behalf of the corporation; such authority
may be general or confined to specific instances. Unless so authorized or
ratified by the board of directors or within the agency power of an officer, no
officer, agent or employee shall have any power or authority to bind the
corporation by any contract or engagement or to pledge its credit or to render
it liable for any purpose or for any amount.
8.3 STOCK CERTIFICATES; PARTLY PAID SHARES. The shares of the
corporation shall be represented by certificates, provided that the board of
directors of the
20
<PAGE>
corporation may provide by resolution or resolutions that some or all of any
or all classes or series of its stock shall be uncertificated shares. Any
such resolution shall not apply to shares represented by a certificate until
such certificate is surrendered to the corporation. Notwithstanding the
adoption of such a resolution by the board of directors, every holder of
stock represented by certificates and upon request every holder of
uncertificated shares shall be entitled to have a certificate signed by, or
in the name of the corporation by the chairman or vice-chairman of the board
of directors, or the president or vice president, and by the chief financial
officer or an assistant treasurer, or the secretary or an assistant secretary
of the corporation representing the number of shares registered in
certificate form. Any or all of the signatures on the certificate may be a
facsimile. In case any officer, transfer agent or registrar who has signed
or whose facsimile signature has been placed upon a certificate has ceased to
be such officer, transfer agent or registrar before such certificate is
issued, it may be issued by the corporation with the same effect as if he
were such officer, transfer agent or registrar at the date of issue.
The corporation may issue the whole or any part of its shares as
partly paid and subject to call for the remainder of the consideration to be
paid therefor. Upon the face or back of each stock certificate issued to
represent any such partly paid shares, upon the books and records of the
corporation in the case of uncertificated partly paid shares, the total amount
of the consideration to be paid therefor and the amount paid thereon shall be
stated. Upon the declaration of any dividend on fully paid shares, the
corporation shall declare a dividend upon partly paid shares of the same class,
but only upon the basis of the percentage of the consideration actually paid
thereon.
8.4 SPECIAL DESIGNATION ON CERTIFICATES. If the corporation is
authorized to issue more than one class of stock or more than one series of any
class, then the powers, the designations, the preferences, and the relative,
participating, optional or other special rights of each class of stock or series
thereof and the qualifications, limitations or restrictions of such preferences
and/or rights shall be set forth in full or summarized on the face of back of
the certificate that the corporation shall issue to represent such class or
series of stock; provided, however, that, except as otherwise provided in
Section 202 of the General Corporation Law of Delaware, in lieu of the foregoing
requirements there may be set forth on the face or back of the certificate that
the corporation shall issue to represent such class or series of stock a
statement that the corporation will furnish without charge to each stockholder
who so requests the powers, the designations, the preferences, and the relative,
participating, optional or other special rights of each class of stock or series
thereof and the qualifications, limitations or restrictions of such preferences
and/or rights.
8.5 LOST CERTIFICATES. Except as provided in this Section 8.5, no new
certificates for shares shall be issued to replace a previously issued
certificate unless the latter is surrendered to the corporation and canceled at
the same time. The
21
<PAGE>
corporation may issue a new certificate of stock or uncertificated shares in
the place of any certificate theretofore issued by it, alleged to have been
lost, stolen or destroyed, and the corporation may require the owner of the
lost, stolen or destroyed certificate, or his legal representative, to give
the corporation a bond sufficient to indemnify it against any claim that may
be made against it on account of the alleged loss, theft or destruction of
any such certificate or the issuance of such new certificate or
uncertificated shares.
8.6 CONSTRUCTION; DEFINITIONS. Unless the context requires otherwise,
the general provisions, rules of construction, and definitions in the Delaware
General Corporation Law shall govern the construction of these bylaws. Without
limiting the generality of this provision, the singular number includes the
plural, the plural number includes the singular, and the term "person" includes
both a corporation and a natural person.
8.7 DIVIDENDS. The directors of the corporation, subject to any
restrictions contained in (i) the General Corporation Law of Delaware or
(ii) the corporation's certificate of incorporation, may declare and pay
dividends upon the shares of its capital stock. Dividends may be paid in cash,
in property, or in shares of the corporation's capital stock.
The directors of the corporation may set apart out of any of the
funds of the corporation available for dividends a reserve or reserves for any
proper purpose and may abolish any such reserve. Such purposes shall include
but not be limited to equalizing dividends, repairing or maintaining any
property of the corporation, and meeting contingencies.
8.8 FISCAL YEAR. The fiscal year of the corporation shall be fixed by
resolution of the board of directors and may be changed by the board of
directors.
8.9 SEAL. The corporation may adopt a corporate seal, which shall be
adopted and which may be altered by the board of directors, and may use the same
by causing it or a facsimile thereof to be impressed or affixed or in any other
manner reproduced.
8.10 TRANSFER OF STOCK. Upon surrender to the corporation or the
transfer agent of the corporation of a certificate for shares duly endorsed or
accompanied by proper evidence of succession, assignation or authority to
transfer, it shall be the duty of the corporation to issue a new certificate to
the person entitled thereto, cancel the old certificate, and record the
transaction in its books.
8.11 STOCK TRANSFER AGREEMENTS. The corporation shall have power to
enter into and perform any agreement with any number of stockholders of any one
or more classes of stock of the corporation to restrict the transfer of shares
of stock of the corporation of any one or more classes owned by such
stockholders in any manner not prohibited by the General Corporation Law of
Delaware.
22
<PAGE>
8.12 REGISTERED STOCKHOLDERS. The corporation shall be entitled to
recognize the exclusive right of a person registered on its books as the owner
of shares to receive dividends and to vote as such owner, shall be entitled to
hold liable for calls and assessments the person registered on its books as the
owner of shares, and shall not be bound to recognize any equitable or other
claim to or interest in such share or shares on the part of another person,
whether or not it shall have express or other notice thereof, except as
otherwise provided by the laws of Delaware.
ARTICLE 9
AMENDMENTS
The original or other bylaws of the corporation may be adopted,
amended or repealed by the stockholders entitled to vote; provided, however,
that the corporation may, in its certificate of incorporation, confer the power
to adopt, amend or repeal bylaws upon the directors. The fact that such power
has been so conferred upon the directors shall not divest the stockholders of
the power, nor limit their power to adopt, amend or repeal bylaws.
23
<PAGE>
Exhibit 2.2
CERTIFICATE OF ADOPTION OF BYLAWS
OF
THE RICEX COMPANY, A DELAWARE CORPORATION
CERTIFICATE BY SECRETARY OF ADOPTION BY BOARD OF DIRECTORS
The undersigned hereby certifies that she is the duly elected,
qualified, and acting Secretary of The RiceX Company, a Delaware Corporation and
that the foregoing bylaws, comprising twenty three (23) pages, were adopted as
the Bylaws of the corporation as of May 13, 1998, by the Board of Directors of
the corporation.
IN WITNESS WHEREOF, the undersigned has hereunto set her hand and
affixed the corporate seal as of the 13th day of May, 1998.
/S/ Karen D. Berriman
---------------------
Karen D. Berriman, Secretary
24
<PAGE>
Exhibit 3.1
SPECIMEN
STOCK CERTIFICATE
Cusip No.
NUMBER: SHARES:
100,000,000 Authorized Shares of Common Stock
Par Value: $.001 Per Share
10,000,000 Authorized Shares of Preferred Stock
Par Value: $.001 Per Share
THE RICEX COMPANY
This certifies that is the record holder of
fully paid and non-assessable shares of
the Common Stock of THE RICEX COMPANY transferable on the books of the
Corporation in person or by duly authorized attorney upon surrender of this
Certificate properly endorsed. This Certificate is not valid until countersigned
by the Transfer Agent and registered by the Registrar.
Witness the facsimile seal of the Corporation and the facsimile
signatures of its duly authorized officers.
Dated:
The RiceX Company
Corporate Seal
Delaware
Secretary President
ON REVERSE:
Notice: Signature must be guaranteed by a firm which is a member of a
registered national stock exchange, or by a bank (other than a
saving bank), or a trust company. The following abbreviations,
when used in the inscription on the face of this certificate,
shall be construed as though they were written out in full
according to applicable laws or regulations.
TEN COM - as tenants in common UNIF GIFT MIN ACT ...Custodian ...
TEN ENT - as tenants by the entireties (Cust) (Minor)
JT TEN - as joint tenants with right of under Uniform Gifts to Minors Act
survivorship and not as tenants ---------------------------------
in common (State)
Additional abbreviations may also be used though not in the above list.
For Value Received, hereby sell, assign and transfer unto
Please Insert Social Security or Other
Identifying Number of Assignee
(Please Print or Typewrite Name and Address, Including Zip Code, of Assignee)
Shares of the capital stock represented by the within certificate, and do hereby
irrevocably constitute and appoint
Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated
Notice: The signature to this assignment must correspond with
the name as written upon the face of the certificate in every
particular without alteration or enlargement or any change
whatever
THE SHARES OF STOCK REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD OR OTHERWISE
TRANSFERRED UNLESS COMPLIANCE WITH THE REGISTRATION PROVISION OF SUCH ACT HAS
BEEN MADE OR UNLESS AVAILABILITY OF AN EXEMPTION FROM SUCH REGISTRATION
PROVISIONS HAS BEEN ESTABLISHED, OR UNLESS SOLD PURSUANT TO RULE 144 UNDER THE
SECURITIES ACT OF 1933.
<PAGE>
RESCISSION OF LOAN AGREEMENT
This Rescission of Loan Agreement (the "Rescission") is executed effective
as of August __, 1998, by and among THE RICEX COMPANY (the "Company") and ALLEN
J. SIMON, an individual ("Simon").
RECITALS
WHEREAS, on April 18, 1997, the Company granted Simon an option to purchase
2,000,000 shares of Common Stock at an exercise price of $2.00 per share (the
"Option");
WHEREAS on May 29, 1997, the Company and Simon amended the Option to allow
Simon to exercise the Option by means of a Promissory Note (the "Amendment").
WHEREAS, on May 29, 1997, Simon exercised the Option by means of a
Restricted Stock Purchase Agreement, dated May 29, 1997, as amended May 29,
1997, a $1,333,333.34 Promissory Note Secured by Pledge of Stock, dated May 29,
1997, a $1,333,333.33 Promissory Note Secured by Pledge of Stock, dated May 29,
1997, a $1,333,333.33 Promissory Note Secured by Pledge of Stock, dated May 29,
1997, a Security Agreement, dated May 29, 1997 relating to 666,666 shares of
Common Stock, a Security Agreement dated May 29, 1997, relating to 1,333,334
shares of Common Stock, the Escrow Agreement, dated May 29, 1997 ("Escrow
Agreement") and other related documents (all of the foregoing agreements and the
Amendment are referred to as the "Loan and Purchase Agreements" and the exercise
of the Option is referred to as the "Exercise Transaction");
WHEREAS, the Company and Simon believe that it is in the best interest of
the Company that upon an equity investment of at least $1.5 million from the
client of Impact Capital/West Sussex Trading, Inc., the Loan and Purchase
Agreements and the Exercise Transaction be rescinded in their and its entirety
and that the parties be placed in the same position they were in prior to the
execution of the Loan and Purchase Agreements.
NOW, THEREFORE, in connection with the Rescission and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto hereby agree as follows:
1. RESCISSION OF LOAN AGREEMENT. Effective upon the closing of an equity
financing with the Company of gross proceeds of at least $1.5 million (the
"Financing"), the Loan and Purchase Agreements and Exercise Transaction are
hereby cancelled and terminated and all rights and obligations arising
thereunder are hereby withdrawn and cancelled such that the only agreement with
respect to the Option remaining outstanding after the Financing is the Option.
<PAGE>
2. RELEASE FROM ESCROW AGREEMENT AND CANCELLATION OF SHARES. By
executing this Rescission, Simon consents to the release of all shares held in
escrow by the Bank of San Francisco, as escrow agent under the terms of the
Escrow Agreement, to the Company and Simon hereby covenants to return to the
Company all shares of Common Stock received by him in connection with the
Exercise Transaction (the "Simon Shares"). It is further agreed that all such
shares returned to the Company shall immediately be cancelled and, for all
purposes, shall be treated as if they had never been outstanding.
3. EFFECT OF RESCISSION. The effect of this Rescission shall be to place
Simon and the Company in the identical position with respect to the Option as
they were immediately prior to the execution of the Loan and Purchase Agreements
and the Exercise Transaction. This Rescission shall in no way affect the terms
of the Option and the Option shall remain in full force and effect.
4. SPECIFIC PERFORMANCE. The Company shall be entitled, in addition to
all other rights and remedies as may be provided by law, to seek specific
performance and injunctive and other equitable relief to enforce Simon's
covenant to return the Simon Shares to the Company for cancellation.
5. NOTICES AND OTHER COMMUNICATIONS. All notices and other
communications provided for hereunder shall be in writing and shall be delivered
by mail, telecopier, express mail service (such as Federal Express or its
equivalent), telegram or cable, as to each party hereto, at its address set
forth on the first page of this Rescission or at such other address as shall be
designated by such party in a written notice to the other party. All such
communications shall be effective upon receipt.
6. SEVERABILITY. Whenever possible, each provision of this Rescission
shall be interpreted in such manner as to be effective and valid under
applicable law; but if any provision or portion of any provision of this
Rescission should be invalid under applicable law, such provision or portion of
such provision shall be ineffective to the extent of such invalidity without
invalidating the remainder of such provision or the remaining provisions of this
Rescission.
7. GOVERNING LAW. This Rescission shall be governed by and construed in
accordance with the domestic laws of the State of California, without giving
effect to any choice of law or conflict of law, provision or rule (whether of
the State of California or any other jurisdiction) that would cause the
application of the laws of any jurisdiction other than the State of California.
8. SEVERABILITY. To the extent any provision of this Rescission shall be
invalid or unenforceable, it shall be considered deleted herefrom and the
remainder of such provision and of this Rescission shall be unaffected and shall
continue in full force and effect.
2
<PAGE>
9. SUCCESSORS AND ASSIGNS. This Rescission shall be binding upon and
inure to the benefit of the parties and their successors and assigns.
10. WRITTEN AGREEMENT TO GOVERN. This Rescission sets forth the entire
understanding and supersedes all prior and contemporaneous agreements between
the parties relating to the subject matter contained herein and merges all prior
and contemporaneous discussions between them.
11. ATTORNEYS' FEES. If any action or proceeding shall be commenced to
enforce this Rescission or any right arising in connection with this Rescission,
the prevailing party in such action or proceeding shall be entitled to recover
from the other party the reasonable costs, expenses and attorneys' fees (and all
related costs and expenses) incurred by such prevailing party in connection with
such action or proceeding.
IN WITNESS WHEREOF, the parties have executed this Rescission effective as
of the date first written above.
THE RICEX COMPANY
by:
------------------------------------
Its:
-----------------------------------
1241 Hawk's Flight Court
El Dorado Hills, CA 95762
SIMON
- ---------------------------------------
Allen J. Simon
- ---------------------------------------
- ---------------------------------------
- ---------------------------------------
3
<PAGE>
July 27, 1998
Mr. Allen J. Simon
Chief Executive Officer
RiceX Company
1241 Hawk's Flight Court
El Dorado Hills, CA 95762
Re: First Amendment to Letter Agreement of March 16, 1998
Dear Mr. Simon:
This letter confirms the agreement of Monsanto Company ("Monsanto") and RiceX
Company, formerly Food Extrusion, Inc. ("RiceX") to amend the letter agreement
entered into between the parties, dated March 16, 1998 (the "Letter Agreement"),
as follows:
1. Paragraph 9 OTHER NEGOTIATIONS. The ninety (90) day period referred to in
Paragraph 9 shall be extended to September 30, 1998.
2. Paragraph 12 TERMINATION. The termination date referred to in Paragraph 12
shall be extended to 5:00 p.m., St. Louis time, on September 30, 1998.
Except as amended above, the Letter Agreement shall remain in full force and
effect as originally executed.
If the foregoing amendment is fully acceptable to RiceX, please execute both
copies of this amendment, returning one copy to my attention.
Sincerely,
/s/ Charles F. Hough
Charles F. Hough
Business Development Director
Monsanto Company
ACCEPTED AND AGREED:
RICEX COMPANY
BY:/s/ Allen Simon
TITLE: Chief Executive Officer
DATE: July 29, 1998
<PAGE>
[PriceWaterhouse Coopers Letterhead]
July 28, 1998
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Gentlemen:
We have read the statements made by The RiceX Company (Company), formerly Food
Extrusion, Inc. (copy attached), which we understand was filed with the
Commission, pursuant to Item 304 of Regulation S-B as part of the Company's From
10-SB/A dated May 18, 1998. We agree with the statements concerning or Firm in
such Form 10-SB/A.
Very truly yours,
/s/ PriceWaterhouse Coopers LLP
PriceWaterhouse Coopers LLP
(Formerly Coopers & Lybrand L.L.P.)
<PAGE>
ITEM 3. CHANGES IN AND DISAGREEMENT 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 in the subject matter
of the disagreements in connection with its report.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 113,848
<SECURITIES> 0
<RECEIVABLES> 336,576
<ALLOWANCES> 20,000
<INVENTORY> 610,802
<CURRENT-ASSETS> 1,216,563
<PP&E> 4,145,809
<DEPRECIATION> 1,284,381
<TOTAL-ASSETS> 5,679,427
<CURRENT-LIABILITIES> 2,982,460
<BONDS> 6,599,088
1,550,000
0
<COMMON> 20,215
<OTHER-SE> (5,472,336)
<TOTAL-LIABILITY-AND-EQUITY> 5,679,427
<SALES> 1,517,229
<TOTAL-REVENUES> 1,537,568
<CGS> 1,055,463
<TOTAL-COSTS> 3,789,301
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 218,173
<INCOME-PRETAX> (2,301,474)
<INCOME-TAX> 400
<INCOME-CONTINUING> (2,301,874)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,301,874)
<EPS-PRIMARY> (.11)
<EPS-DILUTED> (.11)
</TABLE>
