<PAGE>
FORM 10-QSB
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED
March 31, 2000
Commission file number 0-24285
THE RICEX COMPANY
68-0412200
Incorporated in Delaware IRS Employer Identification No.
1241 Hawk's Flight Court, El Dorado Hills, CA 95762
Registrant's Telephone No. (916) 933-3000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
Number of shares of common stock outstanding as of May 1, 2000:
36,575,923
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (Check One):
Yes No X
----- -----
<PAGE>
The RiceX Company
(formerly Food Extrusion, Inc.)
Form 10-QSB for the Quarter Ended March 31, 2000
Index
<TABLE>
<CAPTION>
Part I. Financial Information
Item 1. Financial Statements Page
----
<S> <C>
a) Consolidated Balance Sheet at March 31, 2000 3
b) Consolidated Statements of Operations for the
quarters ended March 31, 2000 and 1999 4
c) Consolidated Statements of Cash Flows for the
quarters ended March 31, 2000 and 1999 5
d) Notes to financial statements 6
Item 2. Management's Discussion and Analysis or Plan of Operation 8
Part II. Other Information
Item 2. Changes in Securities 10
Item 6. Exhibits and Reports on Form 8-K. 10
a) Exhibit 27, Financial data schedule
b) Reports on Form 8-K
Signatures 11
</TABLE>
2
<PAGE>
THE RICEX COMPANY
(formerly Food Extrusion, Inc.)
CONSOLIDATED BALANCE SHEET
March 31, 2000
(unaudited)
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,105,059
Trade accounts receivable 576,656
Inventories 277,422
Deposits and other current assets 50,523
------------
Total current assets 2,009,660
PROPERTY AND EQUIPMENT, net 2,845,532
OTHER ASSETS 91,986
------------
$ 4,947,178
============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Note payable to shareholder $ 1,850,000
Accounts payable and accrued liabilities 573,584
------------
Total current liabilities 2,423,584
CONVERTIBLE NOTE 2,500,000
------------
Total liabilities 4,923,584
------------
COMMITMENTS AND CONTINGENCIES --
SHAREHOLDERS' EQUITY (DEFICIT)
Preferred stock, par value $.001 per share,
10,000,000 shares authorized,
no shares issued and outstanding --
Common stock, par value $.001 per share,
100,000,000 shares authorized,
36,561,787 shares issued and outstanding 36,562
Additional paid-in capital 27,415,190
Accumulated deficit (24,776,958)
Deferred expenses relating to equity issuance (1,572,700)
Note receivable from shareholder (1,078,500)
------------
Total shareholders' equity 23,594
------------
$ 4,947,178
============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
3
<PAGE>
THE RICEX COMPANY
(formerly Food Extrusion, Inc.)
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Quarters ended
----------------------------
March 31, March 31,
2000 1999
------------ ------------
<S> <C> <C>
Revenues
Sales $ 867,737 $ 773,641
Royalties 9,169 7,477
------------ ------------
876,906 781,118
Cost of sales 575,629 439,927
------------ ------------
301,277 341,190
Research and development expenses 52,993 155,582
Selling, general and administrative expenses 307,501 306,940
Stock option and warrant compensation to employees 24,948 --
Professional fees 479,626 80,647
------------ ------------
Loss from operations (563,791) (201,978)
Other income (expense):
Interest and other income 55,839 4,176
Interest and other expense (255,945) (324,955)
------------ ------------
Loss before provision for income taxes (763,897) (522,757)
Provision for income taxes -- --
------------ ------------
Net loss $ (763,897) $ (522,757)
============ ============
Basic and diluted earnings per share:
Net loss per share $ (0.02) $ (0.02)
============ ============
Weighted average number of shares outstanding 36,488,178 22,027,997
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
4
<PAGE>
THE RICEX COMPANY
(formerly Food Extrusion, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Quarters ended
--------------------------
March 31, March 31,
2000 1999
----------- -----------
<S> <C> <C>
Cash flow from operating activities:
Net loss $ (763,897) $ (522,757)
Adjustments to reconcile net loss to
net cash from operating activities
Depreciation and amortization 162,829 175,737
Shares, warrants and options issued for
compensation and services 81,075 --
Amortization of investor relations fees 281,527 --
Amortization of prepaid processing fees 19,531 --
Accretion of debt discount -- 28,149
Amortization of prepaid interest and debt
issuance costs 254,973 254,973
Net changes in operating assets and liabilities
Trade accounts receivable (61,957) (81,016)
Inventories 32,767 (86,345)
Deposits and other current assets (24,698) 92
Deferred debt issuance costs -- 19,622
Accounts payable and accrued liabilities 34,125 (313,237)
----------- -----------
Net cash from operating activities 16,275 (524,782)
----------- -----------
Cash flows from investing activities
(Purchases) sales of property and equipment, net (23,421) --
Collection on note receivable -- 30,900
----------- -----------
Net cash from investing activities (23,421) 30,900
----------- -----------
Cash flows from financing activities
Proceeds from issuance of common stock 126,000 --
Proceeds from issuance of long-term debt -- 700,000
Proceeds on notes to shareholder -- 249,975
Principal payments on long-term debt -- (1,293,212)
Private Placement financing expenses (43,844) --
----------- -----------
Net cash from financing activities 82,156 (343,237)
----------- -----------
Net (decrease) increase in cash and cash equivalents 75,010 (837,119)
Cash and cash equivalents, beginning of period 1,030,049 1,158,302
----------- -----------
Cash and cash equivalents, end of period $ 1,105,059 $ 321,183
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
5
<PAGE>
THE RICEX COMPANY
(formerly Food Extrusion, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
The RiceX Company ("RiceX"), formerly Food Extrusion, Inc., was incorporated in
California in 1989 and in 1998 was reincorporated in Delaware and changed its
name to The RiceX Company. RiceX has a wholly owned subsidiary, Food Extrusion
Montana, Inc. (FoodEx Montana). The consolidated financial statements include
the accounts of RiceX and FoodEx Montana (collectively "the Company"), after the
elimination of all inter-company balances and transactions.
The Company is an agribusiness food technology company, which has developed a
proprietary process to stabilize rice bran. RiceX 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 two mills.
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 in exchange for the
payment of 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 and fiber complex form of the
Company's rice bran products are produced at the Montana facility.
There have been no changes in the Company's significant accounting policies as
set forth in the Company's audited financial statements for the year ended
December 31, 1999, which were included in the Company's Form 10-KSB. These
unaudited financial statements for the three months ended March 31, 2000 have
been prepared in accordance with generally accepted accounting principles for
interim financial information. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. The results of operations for the three months
ended March 31, 2000 are not necessarily indicative of the results expected for
the full year.
2. PROPERTY AND EQUIPMENT
At March 31, 2000, property and equipment consists of the following:
<TABLE>
<S> <C>
Land and buildings $ 367,961
Equipment 4,158,743
Leasehold improvements 381,642
Furniture and fixtures 225,417
-------------
5,133,763
Less accumulated depreciation and amortization (2,490,131)
-------------
2,643,632
Equipment not placed in service 201,900
-------------
$ 2,845,532
=============
</TABLE>
6
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3. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
At March 31, 2000, accounts payable and accrued liabilities consist of the
following:
<TABLE>
<S> <C>
Trade accounts payable $ 220,801
Other accrued liabilities 352,783
-------------
$ 573,584
=============
</TABLE>
4. DEBT
At March 31, 2000, debt consists of the following:
<TABLE>
<S> <C>
Note payable to shareholder, stated interest rate of 18%,
Interest prepaid in common stock, due December 2000 1,850,000
=============
Convertible Note:
Convertible note payable to a venture capitalist firm secured by
FoodEx Assets, Non-interest bearing, pending due diligence to 2,500,000
convert to equity =============
</TABLE>
The Company is taking steps to address the $2,500,000 convertible note and
$1,850,000 debt that matures in December 2000. The Company expects to use cash
generated from operations and equity financing to retire these obligations.
5. SHAREHOLDERS' EQUITY (DEFICIT)
SHARES ISSUED FOR SERVICES
During April 2000, the Company issued 14,134 shares of common stock to an
agent for introducing investors to the Company. The value of the common stock
was approximately $10,601 and is recorded in shareholders' equity. 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.
SHARES ISSUED IN PRIVATE PLACEMENT
During the first quarter of 2000, the Company had issued and sold 182,138
shares of its common stock to private placement investors for $136,604. Also
in connection with the transaction, the investors received warrants to
purchase up to 182,138 shares of the Company's common stock. The warrants are
exercisable at $1.00 per share during the first year from the date of
issuance, $1.25 per share during the second year from the date of issuance
and at an exercise price of $1.50 per share during the third year from the
date of issuance. The warrants expire three years from the date of issuance.
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.
6. NET LOSS PER SHARE
Basic net loss per share is computed by dividing net loss by the weighted
average number of common shares outstanding during all periods presented.
Options and warrants are excluded from the basic net loss per share calculation
because they are currently anti-dilutive.
7
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following is a discussion of the consolidated financial condition of The
RiceX Company and the results of operations for the quarters ended March 31,
2000 and 1999.
When used in this report, the words "believe," "expect," "anticipate" and
similar expressions, together with other discussion of future trends or results,
are intended to identify forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and
Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). Such statements are subject to certain risks and uncertainties, including
those discussed below that could cause actual results to differ materially from
those projected. These forward-looking statements speak only as of the date
hereof. All of these forward-looking statements are based on estimates and
assumptions made by management of the Company which, although believed to be
reasonable, are inherently uncertain and difficult to predict; therefore, undue
reliance should not be placed upon such statements. The following important
factors, among others, could cause the Company's results of operations to be
adversely affected in future periods: (i) increased competitive pressures from
existing competitors and new entrants; (ii) increases in interest rates or the
Company's cost of borrowing or a default under any material debt agreements;
(iii) deterioration in general or regional economic conditions; (iv) adverse
state or federal legislation or regulation that increases the costs of
compliance, or adverse findings by a regulator with respect to existing
operations; (v) loss of customers or sales weakness; (vi) inability to achieve
future sales levels or other operating results; (vii) the unavailability of
funds for capital expenditures; and (viii) operational inefficiencies in
distribution or other Company systems. Many of such factors are beyond the
control of the Company. There can be no assurance that the Company will not
incur new or additional unforeseen costs in connection with the ongoing conduct
of its business. Accordingly, any forward-looking statements included herein do
not purport to be predictions of future events or circumstances and may not be
realized. In addition, assumptions relating to budgeting, marketing,
advertising, litigation and other management decisions are subjective in many
respects and thus susceptible to interpretations and periodic revisions based on
actual experience and business developments, the impact of which may cause the
Company to alter its marketing, capital expenditure or other budgets, which may
in turn affect the Company's financial positions and results of operations.
QUARTERS ENDED MARCH 31, 2000 AND 1999
Consolidated revenues through March 2000 of $877,000 increased $96,000, or 12%,
from the same period last year. The sales increase is attributed to a year to
date increase in two product categories, SRB Regular and Solubles. SRB Regular
showed an increase in revenue of $69,000 to $646,000, while Solubles increased
$36,000 to $174,000. SRB Fine decreased $10,000 to $23,000 and a decrease in
Fiber of $1,000 to $26,000 compared to sales through March 1999.
Gross margins through March 2000 were $301,000 or 34% of $877,000 compared to
$341,000 or 44% of $781,000 during the same period last year. The decrease was
the result of no production of Solubles at our Montana plant during the first
quarter of this year which resulted in unabsorbed costs of $101,000 through
March 2000. Gross margins on the Company's various products vary widely and the
gross margins are impacted from period to period by sales mix and utilization of
production capacity. The Company expects that gross margins will improve as
sales volumes increase.
Research and development ("R&D") expenses reflect substantial decreases for
quarter ended March 31, 2000 compared to the same period last year. R&D
expenditures decreased from $156,000 for the quarter ended March 31, 1999 to
$53,000 for the current quarter.
S, G & A expenses were $308,000 for the quarter ended March 31, 2000, compared
to $307,000 for quarter ended March 31, 1999, an increase of $1,000.
Stock option compensation expense is a non-cash charge relating to the issuance
of favorably priced stock options to employees and directors to attract these
executives to the Company. The charge represents the
8
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difference between the exercise price and the trading value on the date of the
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 vested immediately. The charges in 2000 of $25,000 relate to the stock
option compensation expenses associated with option grants to three executive
officers.
Professional fees increased to $480,000 for the quarter ended March 31, 2000
from $81,000 for the prior year's quarter. The increase of $399,000, is due
primarily to the retention and subsequent release of an investor relations
company, expenditures for legal and accounting fees in connection with equity
financing, and the preparation of Form 10-KSB.
Interest expense for quarter ended March 31, 2000 was $256,000 compared to
$325,000 for the same period last year. In both quarters ended March 31, 2000
and 1999, these charges primarily represent the amortization of certain debt
issuance costs and accrued interest. The $69,000 decrease for quarter ended
March 31, 2000 compared to the quarter ended March 31, 1999 is associated
with the reduction of amortized and accrued interest costs on debt that was
paid off in November 1999.
For the 3 months ending March 2000, the Company's net loss was $764,000 or $.02
per share compared to a loss of $523,000 or $.02 per share in 1999, an increased
loss of $241,000 over the same period last year. The increase in losses for the
year is primarily due to the accelerated investor relations and other
professional expenses during the first quarter of 2000.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has been substantially dependent on private placement
of its equity securities and debt financing to fund its cash requirements due to
the preliminary nature of its operation. However, during the quarter ended March
31, 2000 the cash balance and cash flow improved over the same time period last
year. Cash balance at March 31, 2000 increased $784,000 to $1,105,000 from
$321,000 at March 31, 1999.
During quarter ended March 31, 2000 the Company showed a $966,000 improvement in
cash generated from operations and financing activities compared with the same
time period last year. The cash flows from these activities generated more than
$98,000 at quarter ended March 31, 2000 compared with a deficit of $868,000 for
quarter ended March 31, 1999. Cash flows from operating activities were $16,000
and negative $525,000 at quarters ended March 31, 2000 and 1999 respectively.
Cash flows from financing activities were $82,000 and negative $343,000 at
quarters ended March 31, 2000 and 1999 respectively.
During 2000, the Company entered into an agreement with a company for the
granting of an exclusive license to sell RiceX products in the nutraceutical
market. As part of this transaction, Patricia McPeak resigned as President of
the Company and became an officer and shareholder of that new company. In
exchange for the exclusive license in the nutraceutical market, the Company
will receive license fees and has become a shareholder in that new company.
Also, in connection with this transaction, the Company's technical employees
agreed to terminate their employment agreements with the Company and enter
into employment agreements with the new company. The Company has agreed to
issue the former employees warrants to purchase 153,000 shares of common
stock at $.79 per share in exchange for canceling their employee options and
waiving any claims under their employment agreements. As of the reference
date, the Company has not issued the warrants to these former employees but
recognizes the obligation to do so.
In December 1999, the Company entered into a letter of intent with a venture
capital firm ("Firm") to provide up to $6,000,000 in equity financing to pay
off the Company's debt and expand its manufacturing capacity and marketing
efforts. The agreement is structured to provide an initial investment of
$2,500,000 as a convertible note. Within a maximum period of 120 days,
subject to the satisfactory completion of due diligence, the note was to be
converted into equity at $.70 per share. On March 29, 2000, the Firm
successfully completed their due diligence and concluded that an equity
investment in the Company is prudent. However, the constituent members of the
Firm could not reach an agreement that would identify their desired course of
action. Consequently, the Company has suspended negotiations with the Firm
until such time the members of the Firm reach an understanding among
themselves. The $2,500,000 note is secured by the assets of Foodex Montana
and is non-interest
9
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bearing during 120-day due diligence period that expired in April 2000. If
the note is not converted to equity the note may be extended for a period of
12 months with an interest rate of Wall Street Journal prime plus two percent.
The Company is taking steps to address the $2,500,000 convertible note and
$1,850,000 debt that matures in December 2000. The Company expects to use cash
generated from operations and equity financing to retire these obligations.
There can be no assurance that such arrangements will be successful.
For 2000, 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 efforts. 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 such expansion
requirements.
The Company is taking steps to raise equity capital. 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 shareholders.
PART II. OTHER INFORMATION
Item 2. CHANGES IN SECURITIES
During the first quarter of 2000, the Company had issued and sold 182,138 shares
of its common stock to private placement investors for $136,604. Also in
connection with the transaction, the investors received warrants to purchase up
to 182,138 shares of the Company's common stock. The warrants are exercisable at
$1.00 per share during the first year from the date of issuance, $1.25 per share
during the second year from the date of issuance and at an exercise price of
$1.50 per share during the third year from the date of issuance. The warrants
expire three years from the date of issuance. 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.
During April 2000, the Company issued 14,134 shares of common stock to an agent
for introducing investors to the Company. The value of the common stock was
approximately $10,601 and is recorded in shareholders' equity. 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.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
10.45 Stabilized Rice Bran Processing, Sales, and Marketing Agreement between
California Pacific Rice Milling, Inc. and the Company effectively dated
January 1, 2000.*
10.46 Licensing Agreement between NutraStar, Inc. and the Company.*
(a) Exhibit 27, Financial Data Schedule
(b) Reports on Form 8-K
None
10
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* Confidential treatment granted as to certain portions.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this to be signed on its behalf by the undersigned, thereto duly authorized.
THE RICEX COMPANY
Date: May 11, 2000 By: /s/ Daniel L. McPeak
--------------------
Daniel L. McPeak
Chairman of the Board and
Chief Executive Officer
Date: May 11, 2000 By: /s/ Todd C. Crow
----------------
Todd C. Crow
Vice President of Finance and
Chief Financial Officer
11
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EXHIBIT 10.45
CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT
TO THE OMITTED PORTIONS.
Stabilized Rice Bran Processing, Sales, and Marketing Agreement
between California Pacific Rice Milling, Inc. and the Company effectively
dated January 1, 2000.*
[*] = CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT
TO THE OMITTED PORTIONS.
<PAGE>
AGREEMENT
This Agreement ("Agreement") is executed as of November 1,1999, by and
between The RiceX Company, a Delaware corporation ("RiceX"), and NutraStar, a
Nevada corporation ("NutraStar").
A. RiceX is a producer of nutritionally dense ingredients and related
products (the "Products").
B. NutraStar has been formed to engage in the distribution and sale of
nutraceutical products involving nutritionally dense ingredients, and desires to
obtain a supply of nutritionally dense ingredients and an exclusive arrangement
with RiceX for the sale of nutritionally dense ingredients to the entire
nutraceutical and human market on the terms set forth below.
C. RiceX is willing to grant NutraStar a right of first refusal to
acquire its nutritionally dense ingredients and to grant NutraStar an exclusive
arrangement with RiceX in the entire nutraceutical and human market on the terms
and conditions set forth below.
NOW, THEREFORE, in consideration of the foregoing recitals and for
other valuable consideration, the parties agree as follows:
1. SALE OF PRODUCTS. RiceX agrees to sell its Products
identified in Exhibit "A" attached hereto to NutraStar on the terms and subject
to the conditions of this Agreement. NutraStar shall be entitled to a "most
favored customer" status, exclusive of samples (which shall be free). The price
to be charged to NutraStar for its purchase of any Products shall be that price
which is published in the RiceX standard price sheet or the price negotiated
with other customers for like quantities and like Products, whichever is less
("Price"); PROVIDED, HOWEVER, that for a period of one year from the date
hereof, RiceX shall sell its Products to NutraStar at a five percent (5%)
discount from the Price, to the extent the Products are to be resold to existing
customers of RiceX, all of which are identified in Exhibit "B" attached hereto.
All payments due to RiceX hereunder shall be paid to RiceX in United States
dollars not later than thirty (30) days following the date of the applicable
invoice from RiceX. All Products delivered to NutraStar shall be FOB RiceX's
plant of origin of the Products, and upon delivery to the proper carrier title
and risk of loss and delay shall pass to NutraStar. RiceX shall deliver Products
to the common carrier specified by NutraStar within ten (10) days after the date
for which delivery of Products is requested in a mutually executed
1
<PAGE>
purchase order from NutraStar, and shall assist NutraStar in arranging any
desired insurance (in amounts that NutraStar shall determine) and
transportation to any destinations specified in writing from time to time by
NutraStar. All insurance premiums and other expenses relating to such
transportation and delivery shall be at NutraStar's expense.
2. RIGHT OF FIRST REFUSAL.
(a) RIGHT OF FIRST REFUSAL. RiceX hereby grants to
NutraStar a right of first refusal (the "Right of First Refusal") to purchase
all of the RiceX Products not already under contract to RiceX non-human/feed
customers.
(b) EXERCISE RIGHT OF FIRST REFUSAL. In order to
exercise the right of first refusal granted to it hereunder, RiceX will provide
NutraStar with production surplus for the first half of 2000, and will notify
NutraStar on or before April 1 and October 1 of each year commencing in 2000 of
the amount of estimated production of Products during the following six (6)
calendar months. Thereafter, on or before May 1 and November 1 of each year
commencing in 2000, NutraStar shall inform RiceX in writing of the amount of
each Product that NutraStar is willing to purchase during the following six (6)
calendar months To the extent that NutraStar commits to purchase RiceX Products,
RiceX shall be obligated to manufacture and supply such Products, and NutraStar
then shall be obligated to purchase the Products on a take or pay basis. In
addition, should NutraStar commit to purchase a certain quantity of RiceX
Products per month, but elects to take delivery of a lesser amount, RiceX shall
be paid for the total contracted production but will deliver the additional
Products as and when directed by NutraStar during the ensuing twelve (12) month
period. Should NutraStar fail to direct delivery of said production during the
ensuing twelve (12) month period, NutraStar shall forfeit prepaid funds and the
right to receive the Product.
(c) SALES TO OTHER CUSTOMERS. In the event that
NutraStar does not elect to purchase all of the estimated semi-annual production
of RiceX, RiceX then shall be entitled to sell the balance of its production to
other customers, but not to customers in the human market. Notwithstanding the
foregoing, if NutraStar declines to sell to any customer in the human market,
NutraStar will notify RiceX and, if NutraStar consents (in writing), RiceX shall
be entitled to sell to such human market customer.
(d) TERM. The term of this right of first refusal
(and of this Agreement) shall be for ten (10) years commencing on the date
hereof and continuing until October 31, 2009. In addition, provided that
2
<PAGE>
NutraStar is not then in material default under this Agreement, NutraStar shall
have the option to extend the term of this Agreement for four (4) periods of
five (5) years each. Such extensions shall occur automatically unless NutraStar
gives written notice to RiceX at least ninety (90) days prior to the expiration
of the initial term or each renewal term that it does not elect to extend the
term of this Agreement.
3. EXCLUSIVE RIGHT TO SELL.
(a) EXCLUSIVE RIGHT TO SELL. Subject to meeting the
minimum purchase requirements set forth in paragraph 3(b) below, RiceX hereby
grants to NutraStar the exclusive right to sell Products which include RiceX
ingredients to the entire nutraceutical and human market, including current
customers of RiceX. During the term of this Agreement, no one other than
NutraStar shall sell Products for the nutraceutical and human market, except as
provided in paragraph 2(c) above. In addition, in the event anyone contacts
RiceX with a business opportunity for the nutraceutical or human market, RiceX
shall forward that inquiry to NutraStar.
(b) MINIMUM PURCHASE REQUIREMENTS. The exclusive
rights granted to NutraStar under paragraph 3(a) of this Agreement (but no other
rights granted hereunder) shall terminate in the event that NutraStar purchases
less than $2,000,000 (not including sales to customers indicated on Exhibit "B"
attached hereto) of Products through April 30, 2001, and $5,000,000 of Products
in 2002. Thereafter, the exclusive rights granted to NutraStar hereunder shall
be subject to minimum purchases of $6,000,000 in 2003, $7,200,000 in 2004,
$8,640,000 in 2005, and increasing thereafter at the rate of five percent (5%)
per annum from 2006 through the remaining term of this Agreement. All purchases
in excess of the required minimum per year shall be carried over to the
following year, and NutraStar's obligation to meet such minimum purchase
requirements is subject to RiceX manufacturing sufficient Product to allow
NutraStar to meet such minimum purchases.
(c) LICENSE FOR TRADEMARKS. In addition to the
exclusive right to sell described in this paragraph, and in consideration of
NutraStar's payment of all filing fees for future trademarks and patents, so
long as NutraStar is not in default hereunder, RiceX hereby grants to
NutraStar an exclusive license to use the trademarks "MiraChol-Registered
Trademark-" and "MaxE-Registered Trademark-," and the non-exclusive right to
use the RiceX trademark. NutraStar also shall be required to imprint the
RiceX trademark brand on all products incorporating RiceX Products sold by
NutraStar during the term of this Agreement. RiceX agrees that it is the
holder of the trademarks ("Trademarks") mentioned in this paragraph, and that
the sale and use of the Products and the Trademarks will not infringe any
person's rights. RiceX shall indemnify and defend NutraStar against any and
all such infringement claims, demands,
3
<PAGE>
actions, losses, damages, fines, penalties, costs and expenses (including
reasonable attorneys' fees). NutraStar acknowledges that RiceX's right in the
Trademarks are subject to an existing security interest in favor of a lender.
(d) TERM OF EXCLUSIVE RIGHT TO SELL AND EXCLUSIVE
LICENSE TO USE TRADEMARKS. The term of the exclusive rights granted to NutraStar
hereunder shall be for the term of this Agreement (including extensions) as
provided in paragraph 2(d) above.
(e) PAYMENT FOR EXCLUSIVE RIGHTS. In consideration
for granting the exclusive rights and license to NutraStar hereunder, NutraStar
shall pay to RiceX the following:
(i) A royalty of two percent (2%) of
NutraStar's gross receipts other than receipts constituting royalties received
from sublicensing the rights granted by RiceX hereunder, and payment of all
royalty fees received from sublicensing the rights granted by RiceX hereunder.
For purposes of this Agreement, the term "gross receipts" means the total
receipts received by NutraStar who are involved in the sale of nutraceutical
products from all sources, but shall be net of freight charges and other similar
costs and shall exclude refunds for merchandise returned which were previously
included in gross receipts, allowances or adjustments granted to customers to
the extent that these were previously included in gross receipts, transfers of
merchandise from warehouse to warehouse provided that such transfer was not for
the purpose of delivery of merchandise sold, merchandise returned to vendors,
and sales, use, gross receipts, excise and like taxes which are added to the
selling price of merchandise at the point of sale and paid for by the customer,
(ii) NutraStar shall keep full and complete
records and books of account reflecting all sales and business transactions in
order to enable RiceX to ascertain the royalty payments due hereunder. NutraStar
agrees to keep all records pertaining to gross receipts at its main office for a
period of not less than three (3) years following the date on which NutraStar
submits its report of gross receipts based on such records. NutraStar also shall
prepare and deliver to RiceX within thirty (30) days after the end of each
calendar quarter a true written statement signed by NutraStar or its duly
authorized officer or agent showing in such form and detail as RiceX shall
reasonably specify the elements and amounts of gross receipts during such
calendar quarter or fraction thereof. With said statement for each calendar
quarter, NutraStar shall pay to RiceX the amount of royalty due for such
calendar quarter. If NutraStar shall fail to prepare and deliver, within the
time above mentioned, any statement of gross receipts or other related
information required hereunder, RiceX may elect to treat NutraStar's failure as
a
4
<PAGE>
breach of this Agreement. RiceX also may elect to conduct an audit of all
books and records of NutraStar which in any way pertain to or show gross
receipts. Such audit may be conducted by RiceX or by its authorized
representative. If the statement prepared as a result of such audit indicates
that any additional royalties are due, NutraStar shall pay such royalties,
plus interest thereon at the maximum rate from the date such payment was due
until the date of payment, and in addition, in any case where the amount of
gross receipts shown by such audit is equal to or in excess of one hundred
four percent (104%) of the amount disclosed by NutraStar's statement for the
same period, NutraStar shall pay for the cost of the audit.
(f) INFRINGEMENT. RiceX shall use its best efforts to
prevent others from infringing upon the exclusive rights granted to NutraStar
hereunder, but shall not be liable for such infringement, nor shall such
infringement affect any payments required hereunder.
(g) TERRITORY. This Agreement shall relate to
domestic sales only. During the term of this Agreement, RiceX may sell Products
to customers in other countries, however RiceX will negotiate with NutraStar for
an extension of this Agreement to cover sales in other countries on a
country-by-country basis. In addition, during the term of this Agreement, RiceX
shall make every reasonable effort, including written notification to customers,
to make certain that RiceX Products purchased by customers outside of the United
States shall only be distributed in the country of purchase.
(h) INDEMNIFICATION.
(i) RiceX agrees to indemnify NutraStar for,
and hold it harmless from and against, any and all costs, expenses and damages
(including reasonable attorneys' fees and expenses) incurred in connection with
any suit, action or claim arising out of, or as a result of, any claims for
damages to person or property occasioned from the use of the products to be sold
by NutraStar after the date hereof, if and only if, such damages are caused by
the Products purchased hereunder from RiceX and not any additions to or
modifications of the Products made by NutraStar ("Additions and Modifications").
(ii) NutraStar agrees to indemnify RiceX
for, and hold it harmless from and against, any and all costs, expenses and
damages (including reasonable attorneys' fees and expenses) incurred in
connection with any suit, action or claim arising out of, or as a result of, any
claims for damages to person or property occasioned from the use of the products
to be sold by NutraStar after the date hereof, if and only if, such damages are
caused by the Modifications and Additions and not the Products purchased
hereunder from RiceX.
5
<PAGE>
4. DEFAULT. A party shall be in default under this
Agreement if any of the following shall occur:
(a) NutraStar shall fail to pay any royalty due
hereunder as and when due;
(b) RiceX shall fail to manufacture Products for sale
to NutraStar hereunder; or
(c) Either party shall otherwise breach any term or
condition of this Agreement.
If an event of default shall occur and is not cured within thirty (30) days
after the giving of written notice thereof to the defaulting party, the other
party shall be entitled to terminate this Agreement and the exclusive rights and
exclusive license granted hereby, and pursue any and all claims for damages. In
addition, in the event that NutraStar fails to meet the minimum purchase
requirements for December 31, 2000 as set forth in paragraph 3(b) above, all
results, reports, information and materials derived from the clinical trials,
testing and research to be undertaken by NutraStar (which materials and
information currently are owned by NutraStar) shall become the property of RiceX
and shall be delivered to RiceX by NutraStar, subject to a non-exclusive right
in favor of NutraStar to continue to use such materials and information free of
charge.
5. ADDITIONAL OBLIGATIONS OF NUTRASTAR. In
consideration of the rights granted to NutraStar hereunder, NutraStar agrees
to assume the following obligations from and after the date hereof:
(a) NutraStar shall sublease from RiceX a portion of
RiceX's premises pursuant to the sublease agreement attached hereto as Exhibit
"C" and incorporated herein by reference.
(b) NutraStar shall assume and pay all costs
associated with RiceX's current scientific staff, as well as all other personnel
working within the premises which will be subleased to NutraStar as provided in
paragraph 5(a) above. RiceX agrees to terminate such scientific staff and other
employees and NutraStar agrees to employ such scientific staff and personnel,
all as of March 1, 2000.
(c) NutraStar further agrees to perform all quality
control functions required for the Products produced by RiceX. Such quality
control functions will be as reasonably agreed by RiceX and will not exceed
thirty (30) hours per week of time commitment. All costs and expenses associated
with such quality control function will be paid by NutraStar.
6
<PAGE>
6. MISCELLANEOUS.
(a) TIME IS OF THE ESSENCE. Time is of the essence in
the performance of the parties' respective obligations herein contained.
(b) FURTHER ASSURANCE. Each party agrees that upon
the request of the other it will, from time to time, execute and deliver to such
other party all such instruments and documents of further assurance or
otherwise, and will do any and all such acts and things, as reasonably may be
required to carry out the obligations of such party hereunder and consummate the
transactions contemplated hereby.
(c) HEADINGS. The headings of this Agreement are
included for purposes of reference and convenience only and shall not limit or
otherwise affect the construction or interpretation of any of the provisions of
this Agreement.
(d) ENTIRE AGREEMENT: MODIFICATION. This Agreement,
including all exhibits, constitutes the entire agreement between the parties
hereto pertaining to the subject matter hereof and supersedes all prior and
contemporaneous agreements and understandings of the parties in connection
herewith. No supplement, modification or amendment of this Agreement shall be
effective unless executed in writing by all of the parties hereto.
(e) NOTICE. Whenever the service or the giving of any
document or consent by or on behalf of any party hereto upon any other party is
herein provided for, or becomes necessary or convenient under the provisions of
this Agreement or any document related hereto, a valid and efficient service of
such document shall be effected by delivering the same in writing to such party
in person, by Federal Express or other reputable courier, by facsimile, or by
sending the same by registered or certified mail, return receipt requested, and
shall be deemed received upon personal delivery if delivered personally, by
Federal Express or other reputable courier or by facsimile, or four (4) business
days after deposit in the mail in the United States, postage prepaid, addressed
to the person to receive such notice or communication at the following address:
The RiceX Company: 1241 Hawk's Flight Court
El Dorado Hills, California 95762
7
<PAGE>
Attention: Daniel L McPeak, Sr.
Telephone: (916) 933-3000
Facsimile: (916) 933-3232
NutraStar: 1261 Hawk's Flight Court
El Dorado Hills, California 95762
Attention: Patricia McPeak
Telephone: (916) 933-7000
Facsimile: (916) 933-7001
Notice of change of address shall be given by written notice in the manner
detailed in this paragraph 6(e).
(f) COUNTERPARTS. This Agreement may be executed in
counterparts, each of which shall be deemed an original, but all of which,
together, shall constitute one and the same instrument.
(g) SUCCESSORS AND ASSIGNS. Neither party may assign
any of its rights or obligations under this Agreement without the prior written
consent of the other party, which consent may be withheld in such party's sole
and absolute discretion. Subject to the foregoing, this Agreement shall be
binding upon and enforceable by, and shall inure to the benefit of, the parties
hereto and their respective successors and assigns.
(h) SEVERABILITY. In the event any portion of this
Agreement shall be declared by any court of competent jurisdiction to be
invalid, illegal or unenforceable, such portion shall be deemed severed from
this Agreement, and the remaining parts hereof shall remain in full force and
effect, as fully as though such invalid, illegal or unenforceable portion had
never been a part of this Agreement.
(i) GENDER AND NUMBER. As used in this Agreement, the
masculine, the feminine and the neuter gender, and the singular or plural
number, shall be deemed to include the others wherever the context so indicates
or requires.
(j) ATTORNEYS' FEES. In the event of the bringing of
any action by any party hereto against any other party arising out of this
Agreement, the party who is determined to be the prevailing party shall be
entitled to recover from the other party all costs and expenses of suit,
including reasonable attorneys' fees.
(k) GOVERNING LAW; DISPUTES. This Agreement shall be
governed by and construed
8
<PAGE>
under the law of the State of California, disregarding any principles of
conflicts of law that would otherwise provide for the application of the
substantive law of another jurisdiction. Each of the undersigned (i) agrees
that any legal suit, action or proceeding arising out of or relating to this
Agreement shall be instituted exclusively in the Superior Court of the State
of California, (ii) waives any objection to the venue of any such suit,
action or proceeding and the right to assert that such forum is not a
convenient forum, and (iii) irrevocably consents to the jurisdiction of the
Superior Court of the State of California in any such suit, action or
proceeding. Each of the undersigned further agrees to accept and acknowledge
service of any and all process which may be served in any such suit, action
or proceeding in the Superior Court of the State of California and agrees
that service of process upon it mailed by certified mail to its address shall
be deemed in every respect effective service of process upon it in any such
suit, action or proceeding.
(l) FORCE MAJEURE. Either party shall be excused from
all obligations under this Agreement to the extent performance is prevented by a
Force Majeure. For purposes of this Agreement, a "Force Majeure" includes only
Acts of God; hurricane, tornado and other weather conditions; labor strike,
lockout or other major industrial disturbance; war, riot, sabotage, act of
public enemy, terrorist act or gang violence; serious illness or epidemic;
earthquake or other earth movement, flood or other natural disaster; bomb blast
or other explosion; fire; or government action that prevents performance.
IN WITNESS WHEREOF, the parties have executed this Agreement
as of the date first above written.
The RiceX Company
A Delaware Corporation
("RiceX")
By: /s/ DANIEL MCPEAK, SR
------------------------------------
Name: Daniel McPeak, Sr
Its: Chief Executive Officer and
Chairman of the Board
NutraStar
A Nevada Corporation
("NutraStar")
By: /s/ PATRICIA McPEAK
------------------------------------
Name: Patricia McPeak
Its: President
9
<PAGE>
EXHIBIT "A"
PRODUCT LINE
Stabilized Rice Bran (SRB Fine)
SRB Fine
Dextrinized SRB
Rice Soluble
Rice Bran Fiber Concentrate
High Beta-Glucan
Stabilized Flaxseed and Flaxseed Meal
Rice Bran Oil
Enhanced Rice Bran Oil
And any and all other products developed by RiceX during the term of
this Agreement
10
<PAGE>
EXHIBIT "B"
Customer List*
* Confidential treatment granted as to certain portions.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS FOUND ON FORM 10-QSB
FOR PERIOD ENDED 3/31/2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 1,105,059
<SECURITIES> 0
<RECEIVABLES> 576,656
<ALLOWANCES> 17,516
<INVENTORY> 277,422
<CURRENT-ASSETS> 2,009,660
<PP&E> 5,335,663
<DEPRECIATION> 2,490,131
<TOTAL-ASSETS> 4,947,178
<CURRENT-LIABILITIES> 573,584
<BONDS> 0
0
0
<COMMON> 36,562
<OTHER-SE> 23,594
<TOTAL-LIABILITY-AND-EQUITY> 4,947,178
<SALES> 867,737
<TOTAL-REVENUES> 876,906
<CGS> 575,629
<TOTAL-COSTS> 575,629
<OTHER-EXPENSES> 865,008
<LOSS-PROVISION> 17,516
<INTEREST-EXPENSE> 255,945
<INCOME-PRETAX> (763,897)
<INCOME-TAX> 0
<INCOME-CONTINUING> (763,897)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (763,897)
<EPS-BASIC> (.02)
<EPS-DILUTED> 0
</TABLE>
