SCHEDULE 14C INFORMATION
Information Statement Pursuant to Section 14(c)
of the Securities Exchange Act of 1934
Check the appropriate box:
[X] Preliminary Information Statement
[ ] Confidential, for Use of the Commission Only (as permitted
by Rule 14c-5(d)(2))
[ ] Definitive Information Statement
BIOMUNE SYSTEMS, INC.
........................................................................
(Name of Registrant as Specified in Charter)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14c-5(g) and 0-11.
1) Title of each class of securities to which transaction applies:
............................................................
2) Aggregate number of securities to which transaction applies:
.......................................................
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
............................................................
4) Proposed maximum aggregate value of transaction:
............................................................
5) Total fee paid:
............................................................
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:.....................................
2) Form, Schedule or Registration Statement No.:...............
3) Filing Party:...............................................
4) Date Filed:.................................................
<PAGE>
[BIOMUNE LETTERHEAD]
November 17, 1997
Dear Shareholder:
The Board of Directors of Biomune Systems, Inc. ("Biomune") has approved
a pro-rata tax free dividend (the "Distribution") of all of the outstanding
shares of voting common stock, par value $.0001 per share ("Volu-Sol Common
Stock"), of Volu-Sol, Inc. ("Volu-Sol"), to the holders of Biomune common
stock, par value $.0001 per share (the "Biomune Common Stock"). As a result
of the Distribution, Volu-Sol will be an independent publicly-held company.
Volu-Sol will operate the medical stain manufacturing and distribution
business presently operated by Biomune through Volu-Sol as its wholly owned
subsidiary. The enclosed Information Statement contains information about the
Distribution and about Volu-Sol. Mr. Michael G. Acton will serve as Chairman
of the Board, Chief Executive Officer and Chief Financial Officer of Volu-Sol
and will continue as Chief Financial Officer of Biomune.
If you were a holder of record of Biomune Common Stock at the close of
business on March 5, 1997 (the "Distribution Record Date"), upon consummation
of the Distribution, you will receive as a dividend one share of Volu-Sol
Common Stock for every ten shares of Biomune Common Stock you held on that
date. We expect to mail the Volu-Sol Common Stock certificates starting on or
about December 31, 1997.
Since Biomune will continue forward, the shareholders of Biomune on the
Distribution Record Date should retain their Biomune share certificates. You
will receive new certificates representing your shares of Volu-Sol Common
Stock.
We are enthusiastic about this separation and the growth opportunities it
will create for each company and its shareholders.
Sincerely,
/s/ David G. Derrick
David G. Derrick
Chief Executive Officer
Biomune Systems, Inc.
<PAGE>
[VOLU-SOL LETTERHEAD]
November 17, 1997
Dear Shareholder:
We would like to take this opportunity to welcome you as a shareholder
and introduce you to your company.
Volu-Sol, Inc. ("Volu-Sol") is engaged in the business of manufacturing
and marketing medical diagnostic stains and solutions and related equipment.
Prior to the transaction described in the enclosed Information Statement,
Volu-Sol operated as a wholly owned subsidiary of Biomune Systems, Inc., a
Nevada corporation ("Biomune"), primarily engaged in the research,
development, marketing and sale of pharmaceutical and nutraceutical products.
The business of Volu-Sol is described in greater detail in the Information
Statement.
There is no current public market for the common stock of Volu-Sol.
Although it is anticipated that the Volu-Sol Common Stock will initially trade
in the over-the-counter market after the Distribution with quotations being
published in the OTC Bulletin Board or the National Quotation Bureau's "Pink
Sheets", there is no assurance that an active market will develop following
the Distribution.
Management's intent is to expand Volu-Sol's business through addition of
in-house sales personnel and new products. Our business plan is outlined in
the Information Statement. We look forward to working together to accomplish
the goals set by management.
Sincerely,
/s/ Michael G. Acton
Michael G. Acton,
Chief Executive Officer
VOLU-SOL, INC.
<PAGE>
[VOLU-SOL LOGO]
BIOMUNE SYSTEMS, INC.
INFORMATION STATEMENT
VOLU-SOL, INC.
COMMON STOCK
This Information Statement is being furnished in connection with the
distribution (the "Distribution") to holders of common stock, par value $.0001
per share ("Biomune Common Stock"), of Biomune Systems, Inc. ("Biomune") of
all of the outstanding shares of voting common stock, par value $.0001 per
share ("Volu-Sol Common Stock"), of Volu-Sol, Inc. ("Volu-Sol" or the
"Company"), pursuant to the terms of a Distribution and Separation Agreement
("Distribution Agreement") between Biomune (the Company's sole shareholder)
and the Company dated as of September 10, 1997. Upon the effectiveness of the
Distribution, Biomune will cease to own any interest in the Company. See "The
Distribution," "The Company," "Results of the Distribution" and "Risk Factors."
Shares of Volu-Sol Common Stock will be distributed to holders of record of
Biomune Common Stock as of the close of business on March 5, 1997 (the
"Distribution Record Date"). Each such holder will receive one share of
Volu-Sol Common Stock for every ten shares of Biomune Common Stock held on the
Distribution Record Date. The Distribution is scheduled to occur on or about
December 31, 1997 (the "Distribution Date"). Certificates for the Volu-Sol
Common Stock will be mailed as soon as practicable thereafter. No
consideration will be paid by holders of Biomune Common Stock for shares of
Volu-Sol Common Stock. See "The Distribution."
There is no current trading market for Volu-Sol Common Stock and there is no
assurance that a market for the Volu-Sol Common Stock will ever develop. The
Volu-Sol Common Stock has not been approved for listing on any stock exchange
and there can be no assurance that it will qualify for inclusion on any
exchange in the near future without a significant capital infusion. See
"Listing and Trading of Volu-Sol Common Stock."
IN REVIEWING THIS INFORMATION STATEMENT, YOU SHOULD CAREFULLY CONSIDER THE
MATTERS DESCRIBED UNDER THE CAPTION "RISK FACTORS."
NO SHAREHOLDER APPROVAL OF THE DISTRIBUTION IS REQUIRED OR SOUGHT.
THE COMPANY IS NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND A
PROXY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS INFORMATION STATEMENT.
THIS INFORMATION STATEMENT DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES.
Shareholders of Biomune with inquiries related to the Distribution should
contact Michael G. Acton, Chief Financial Officer, Biomune Systems, Inc., 2401
South Foothill Dr., Salt Lake City, Utah 84109, telephone: (801) 466-3441; or
the Company's stock transfer agent: American Stock Transfer & Trust Company,
40 Wall Street, New York, New York 10005.
The date of this Information Statement is November 27, 1997.
<PAGE>
TABLE OF CONTENTS
Description Page
- ------------------------------------------ ----
Summary of Certain Information 3
Additional Information Concerning Volu-Sol 5
The Distribution 5
Summary Financial Data 9
The Company 10
Corporate Structure Pre-Distribution 16
Distribution Agent 17
Manner of Effecting the Distribution 17
Results of the Distribution 17
Listing and Trading of Volu-Sol Common Stock 17
Reasons for Furnishing the Information Statement 18
Risk Factors 18
Additional Actions and Relationships 22
Dividends 23
Financial Statements 23
Management's Discussion and Analysis or Plan of Operation 23
Property 25
Management 25
Executive Compensation 26
Director Compensation 26
Employment Agreements 26
Stock Plans 27
Security Ownership of Certain Beneficial Owners and Management 29
Description of the Company's Capital Stock 30
Liability and Indemnification of Officers and Directors of the Company 31
Independent Public Accountants 31
Additional Information 31
Financial Statements F-1
Unaudited Pro Forma Condensed Consolidated Financial Data P-1
<PAGE>
SUMMARY OF CERTAIN INFORMATION
This Summary is qualified by the more detailed information set forth elsewhere
in this Information Statement, which should be read in its entirety.
Capitalized terms used but not defined in this Summary are defined elsewhere
in this Information Statement. References herein to the Company, unless the
context otherwise requires, are to Volu-Sol.
The Distributing Company
Biomune Systems, Inc., a Nevada corporation
Shares to be Distributed
Approximately 2,111,216 shares of Volu-Sol Common Stock representing all
of the outstanding shares of Volu-Sol Common Stock. All such shares are, or
immediately prior to the Distribution will be, held by Biomune. In addition,
Volu-Sol will reserve for issuance 323,118 shares of Volu-Sol Common Stock in
connection with the conversion of certain shares of Biomune Preferred Stock
issued and outstanding at the Distribution Record Date, as well as 247,059
shares for issuance upon exercise of certain warrants (the "Biomune
Warrants"), and 709,602 shares for issuance upon exercise of the Add-on
Volu-Sol Options, described below, in each case if as and when such conversion
or exercise occurs.
Distribution Ratio
One (1) share of Volu-Sol Common Stock for each ten (10) shares of
Biomune Common Stock. No fractional shares will be issued. All fractional
interests will be rounded to the nearest whole share. No payment need be made
by shareholders of Biomune for the shares of Volu-Sol Common Stock to be
received by them in the Distribution, nor will they be required to surrender
or exchange shares of Biomune Common Stock in order to receive Volu-Sol Common
Stock.
Federal Income Tax Consequences
The Company does not intend to obtain a ruling from the Internal Revenue
Service ("IRS") concerning the United States federal income tax status of the
Distribution. The Company believes that for United States Federal income tax
purposes, no gain or loss will be recognized by holders of Biomune Common
Stock upon receipt of Volu-Sol Common Stock in the Distribution and that no
gain or loss will be recognized by Biomune or Volu-Sol in respect of the
Distribution. Biomune shareholders are urged to consult their own tax
advisors as to the specific tax consequences of the Distribution to them.
Trading Market
There is currently no public market for Volu-Sol Common Stock and there
is no assurance that a trading market will develop at any time following the
Distribution.
Distribution Record Date
March 5, 1997
Distribution Date
Expected to be December 31, 1997 or as soon as practicable thereafter
(the "Distribution Date"). Commencing on or about the Distribution Date,
American Stock Transfer & Trust Company (the "Distribution Agent") will begin
mailing share certificates for shares of Volu-Sol Common Stock to holders of
Biomune Common Stock as of the Distribution Record Date. Biomune shareholders
will not be required to make any payment or to take any other action to
receive the Volu-Sol Common Stock to which they are entitled in the
Distribution.
Distribution Agent
American Stock Transfer & Trust Company, 40 Wall Street, New York, New
York 10005.
Conditions to the Distribution
The Distribution is conditioned, among other things, upon (i) the receipt
of any material governmental approvals and third party consents necessary to
consummate the Distribution; (ii) the absence of any order, injunction, decree
or other legal restraint or prohibition to prevent the consummation of the
Distribution; and (iii) formal approval by the Board of Directors of Biomune.
Principal Business to be Retained by Biomune
Biomune will retain all of its business heretofore conducted or conducted
at the time of the Distribution Date other than the Volu-Sol medical
diagnostic stain business.
Dividends
The Company presently expects to retain all available earnings, if any,
generated by its operations and does not expect to pay any cash dividends in
the foreseeable future. See "Risk Factors" and "Dividends."
Anti-Takeover Provisions
The Articles of Incorporation (the "Articles") and Bylaws (the "Bylaws") of
the Company, and Utah statutory law, contain provisions (the "Control
Provisions") that may have the effect of discouraging an acquisition of
control of the Company not approved by the Board of Directors of the Company.
In addition, the Articles authorize the creation by the Board of Directors of
the Company, without shareholder approval, under certain circumstances of one
or more series of preferred stock which may include a series having enhanced
voting rights (the "Preferred Stock"). The Control Provisions and the
Preferred Stock have been designed to enable the Company to develop its
business and foster its long-term goals without disruptions caused by the
threat of a takeover not deemed by the Board to be in the best interests of
the Company and its shareholders. The Control Provisions and the Preferred
Stock also may have the effect of discouraging third parties from making
proposals involving an acquisition or change of control of the Company,
although such proposals, if made, might be considered desirable by a majority
of the Company's shareholders. The Control Provisions and the Preferred Stock
could further have the effect of making it more difficult for third parties to
cause the replacement of the current management of the Company without the
concurrence of the Board. See "Risk Factors -- Certain Anti-Takeover
Features," "Related Party Transactions" and "Description of the Company's
Capital Stock."
Risk Factors
See "Risk Factors" for a discussion of factors that should be considered
in connection with Volu-Sol Common Stock received in the Distribution.
Relationship with Biomune after the Distribution
Biomune will have no stock ownership in the Company upon consummation of
the Distribution. Except as noted below, each of Biomune and its subsidiaries
(excluding the Company) on the one hand and the Company on the other hand have
their own separate and independent management. Biomune has, however, provided
certain financial advice and assistance to the Volu-Sol business. For
purposes of governing certain ongoing relationships between the Company and
Biomune after the Distribution and to provide for an orderly transition, the
Company and Biomune have entered into or will enter into certain agreements.
Such agreements include the Distribution Agreement providing for, among other
things, the Distribution, indemnifications with respect to the respective
businesses of the Company and Biomune and allocation of tax liabilities that
relate to periods prior to the Distribution Date. Biomune may also continue
to provide certain advice and assistance to the Company on a transitional
basis. After the Distribution the only person who will serve as an officer
and/or director of both the Company and Biomune will be Mr. Michael G. Acton.
Mr. Acton is a Director, Chairman of the Board, Chief Executive Officer and
Chief Financial Officer of the Company and he will continue to serve as the
Chief Financial Officer of Biomune following the completion of the
Distribution. Mr. Acton is not a director of Biomune.
ADDITIONAL INFORMATION CONCERNING VOLU-SOL
Volu-Sol was incorporated in Utah on July 27, 1995, as a wholly owned
subsidiary of Biomune. The Company was organized to engage in the business of
manufacturing and marketing medical diagnostic stains and solutions and
related equipment, which business operations were conducted prior to that time
as an unincorporated division of Biomune called the Volu-Sol Medical
Division. Biomune purchased the assets comprising the Volu-Sol Medical
Division in December 1991 from Logos Scientific, Inc. After the Company's
incorporation, Biomune transferred all of the assets of the Volu-Sol Medical
Division to the Company. Through fiscal 1995, Volu-Sol operated out of leased
facilities in Henderson, Nevada. On October 16, 1995, the Company relocated
to West Valley City, Utah (a suburb of Salt Lake City, Utah), where it
continues to have its manufacturing facility and corporate offices.
On or about September 30, 1997, approximately 2,111,216 shares of the
Company's $.0001 par value Common Stock, constituting all of the issued and
outstanding shares of the Company's Common Stock, are to be distributed pro
rata as a stock dividend to the holders of the Common Stock of Biomune as of
March 5, 1997 (the "Distribution"). As a consequence of the Distribution, the
Company will cease to be a subsidiary of Biomune and will commence operations
as of the effective date of the Distribution, as a separate, independent
company. The Company will continue the same operations as it has conducted
while it has been a subsidiary of Biomune.
Volu-Sol employs nine persons full-time. Its corporate offices are located at
5095 West 2100 South, Salt Lake City, Utah 84120. This location has
approximately 2,500 square feet of office space and approximately 9,000 square
feet of warehouse space. The premises are occupied pursuant to a five-year
Commercial and Industrial Lease effective as of October 16, 1995, with an
option to renew for an additional five years at the end of the initial term.
The building is in good condition and repair and Volu-Sol believes that the
facility should accommodate its operations and projected growth for at least
the next 12 months. Its telephone number is (801) 974-9474.
THE DISTRIBUTION
Generally
The Distribution will be made on the Distribution Date to the holders of
Biomune Common Stock at the close of business on March 5, 1997 (the
Distribution Record Date) on the basis of one share of Volu-Sol Common Stock
for each ten shares of Biomune Common Stock held of record as of such time.
No certificates or scrip representing fractional shares of Volu-Sol Common
Stock will be issued. Fractions of one-half or larger of a share will be
rounded up and fractions of less than one-half will be rounded down to the
nearest whole number of shares of Volu-Sol Common Stock.
On July 27, 1995, in connection with the incorporation of the Company as a
wholly owned subsidiary of Biomune, 10,000 shares of the Company's Common
Stock, consisting of all of the issued and outstanding shares of Common Stock
prior to the Distribution, were issued to Biomune. Prior to the
Distribution, the Company's Common Stock will be subject to a forward split of
approximately 211 for 1 to permit the issuance of a sufficient number of
shares to the shareholders of record of Biomune as of March 5, 1997. At the
close of business on the Distribution Record Date there were 21,112,156 shares
of Biomune Common Stock issued and outstanding, held of record by
approximately 1,070 holders. Accordingly, an aggregate of approximately
2,111,216 shares of Volu-Sol Common Stock will be distributed to such holders
on the Distribution Date. In addition, the Company will reserve a total of
323,118 shares of Common Stock for future issuance upon conversion of the
Biomune Preferred Stock outstanding at March 5, 1997, as well as 709,602
shares for issuance upon the exercise of the Add-on Volu-Sol Options and
247,059 shares for issuance upon exercise of the Biomune Warrants.
NO HOLDER OF BIOMUNE COMMON STOCK WILL BE REQUIRED TO MAKE ANY PAYMENT FOR THE
SHARES OF VOLU-SOL COMMON STOCK TO BE RECEIVED IN THE DISTRIBUTION, OR TO
SURRENDER OR EXCHANGE SHARES OF BIOMUNE COMMON STOCK, OR TO TAKE ANY OTHER
ACTION IN ORDER TO RECEIVE VOLU-SOL COMMON STOCK TO WHICH THEY ARE ENTITLED IN
THE DISTRIBUTION.
Expenses of the Distribution
It is estimated that the direct legal, financial advisory, accounting,
printing, mailing and other expenses (including the fees of Biomune's and
Volu-Sol's stock transfer agents) will total approximately $150,000, and will
be borne 50% by Volu-Sol and 50% by Biomune. These expenses do not include
any of the costs associated with the time spent by Biomune's and Volu-Sol's
officers and accounting and other personnel in connection with the
Distribution or other internal costs of either corporation. Upon request,
Biomune will pay the reasonable expenses of brokerage firms, custodians,
nominees and fiduciaries who are record holders of Biomune Common Stock for
forwarding this Information Statement to the beneficial owners of such shares.
Reasons for the Distribution
The Distribution is designed to separate Biomune's interests in the medical
diagnostic stain business from its nutritional, pharmaceutical and
nutraceutical research, development, marketing and distribution businesses.
The medical diagnostic stain business conducted by Volu-Sol uses a distinctly
different distribution network from that employed by Biomune. The separation
of the two businesses will permit each entity to focus on its primary markets
without concern for the objectives of or distractions caused by the business
needs and activities of the other entity.
The separation of the business activities will allow investors in Biomune to
evaluate the merits and outlooks of Biomune's research and development,
nutritional supplements and pharmaceutical/nutraceutical activities apart from
the medical diagnostic stain business conducted by Volu-Sol. Management
believes, although there is no assurance, that by separating Biomune from
Volu-Sol and allowing the market to establish a separate valuation for
Volu-Sol, the Distribution may result in an increase in the long-term value of
Biomune's shareholders' current investment in Volu-Sol. The Distribution
would also give current and potential investors the opportunity to direct
future investment to their specific area of interest, or to continue to retain
an interest in both entities. The separate market valuation for Volu-Sol
should also enhance Volu-Sol's ability to attract, motivate and retain high
quality employees by designing effective incentive-based compensation programs
based solely on Volu-Sol's performance. Finally, as part of the Biomune
organization, Volu-Sol is one of several business activities competing for
allocation of Biomune's financial resources. As a separate public company,
however, Volu-Sol would be able to issue its own securities and seek to raise
capital and effect acquisitions using its own securities and other resources.
Notwithstanding the foregoing, there is currently no market for the Volu-Sol
Common Stock and there is no assurance that a market will ever develop for
such securities.
Certain Consequences of the Distribution
As a result of the Distribution, Biomune's interests in the medical diagnostic
stain industry will be owned and operated by a separate publicly held
company. The Biomune shareholders as of the Distribution Record Date will own
the same interest in each of Biomune and Volu-Sol that they held in Biomune at
the Distribution Record Date, but in the form of separate securities, i.e.,
Biomune Common Stock and Volu-Sol Common Stock. The Distribution will not
affect the number of outstanding shares of Biomune Common Stock or the rights
of any Biomune shareholder with respect thereto.
Restrictions on Transfer
The shares of Volu-Sol Common Stock distributed to the Biomune shareholders
pursuant to the Distribution will be freely transferable under the Securities
Act, except for shares received by persons who may be deemed to be
"affiliates" of Volu-Sol as that term is defined in Rule 144 promulgated under
the Securities Act. Persons who may be deemed to be affiliates of Volu-Sol
after the Distribution generally include individuals or entities that control,
are controlled by, or are under common control with, Volu-Sol and may include
certain officers and directors of Volu-Sol as well as principal shareholders
of Volu-Sol. Persons who are affiliates of Volu-Sol will be permitted to sell
their shares of Volu-Sol Common Stock only pursuant to an effective
registration statement under the Securities Act or an exemption from the
registration requirements of the Securities Act, such as the exemptions
provided by Section 4(2) of the Securities Act or Rule 144 thereunder.
Certain Federal Income Tax Consequences of the Distribution
The Distribution is intended to qualify as a tax-free distribution under
Section 355 of the Internal Revenue Code (the "Code"). Although the Company
believes that the Distribution will qualify as a tax-free distribution, the
Company does not intend to seek a ruling from the IRS to that effect. So long
as the Distribution qualifies under Section 355 of the Code, neither Biomune
nor Volu-Sol will recognize any income, gain or loss with respect to the
Distribution and Biomune shareholders will not recognize any income, gain or
loss upon the receipt of Volu-Sol Common Stock.
A Biomune shareholder's tax basis for the Biomune Common Stock with respect to
which Volu-Sol Common Stock is received will be apportioned between such
shares of Biomune Common Stock and such shares of Volu-Sol Common Stock in
proportion to the fair market value of each on the Distribution Date. Such
allocation must be calculated separately for each block of shares of Biomune
Common Stock with respect to which Volu-Sol Common Stock is received, that is,
separately for each block of Biomune Common Stock that was purchased at
different times or at different costs. The holding period for such Volu-Sol
Common Stock received will include the period during which such shares of
Biomune Common Stock were held provided that such shares of Biomune Common
Stock are held as a capital asset.
The U.S. Treasury Regulations governing Section 355 of the Code require that
each Biomune shareholder who receives Volu-Sol Common Stock pursuant to the
Distribution attach a statement to his or her federal income tax return for
the taxable year in which he or she receives such stock, which statement shows
the applicability of Section 355 of the Code to the Distribution. Biomune will
provide each Biomune shareholder with the information necessary to comply with
this requirement.
Neither Volu-Sol nor Biomune is aware of any present facts or circumstances
which would cause the assumptions upon which the above tax treatment is based
to be untrue. However, certain extraordinary purchases of Biomune Common
Stock or Volu-Sol Common Stock, and other events which are not within the
control of Biomune or Volu-Sol, could cause the Distribution not to qualify as
tax-free. The Distribution Agreement between Biomune and Volu-Sol provides
that notwithstanding anything to the contrary in such Agreement if, as a
result of the acquisition of all or a portion of the capital stock or assets
of Volu-Sol, the Distribution fails to qualify as a tax-free distribution
under Section 355 of the Code, then Volu-Sol and Biomune will be equally
liable for payment of any and all increases in corporate tax attributable
thereto.
Should the Distribution ultimately be determined not to qualify under Section
355 of the Code, Biomune shareholders would be required to recognize ordinary
dividend income upon their receipt of Volu-Sol Common Stock in an amount equal
to the fair market value of such Volu-Sol Common Stock on the Distribution
Date. Biomune shareholders would have a tax basis for such Volu-Sol Common
Stock equal to such fair market value and the tax basis for their Biomune
Common Stock would not be affected. Biomune would recognize gain upon the
Distribution equal to the excess of any of the fair market value of the
Volu-Sol Common Stock distributed on the Distribution Date over Biomune's tax
basis for such Volu-Sol Common Stock.
THE FOREGOING SUMMARY OF THE FEDERAL INCOME TAX CONSEQUENCES OF THE
DISTRIBUTION REPRESENTS THE OPINION OF MANAGEMENT AND IS PROVIDED FOR GENERAL
INFORMATION ONLY AND MAY NOT APPLY TO BIOMUNE SHAREHOLDERS WHO ACQUIRE THEIR
SHARES IN CONNECTION WITH THE GRANT OF A SHARE OF RESTRICTED STOCK OR
OTHERWISE AS COMPENSATION, WHO ARE NOT CITIZENS OR RESIDENTS OF THE UNITED
STATES, OR WHO ARE OTHERWISE SUBJECT TO SPECIAL TREATMENT UNDER THE CODE. ALL
BIOMUNE SHAREHOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS AS TO THE
PARTICULAR TAX CONSEQUENCES OF THE DISTRIBUTION TO THEM, INCLUDING THE
APPLICATION OF STATE, LOCAL AND FOREIGN TAX LAWS.
Treatment of Outstanding Biomune Stock Options
Certain officers, directors and employees of Biomune have been granted options
to purchase shares of Biomune Common Stock (the "Biomune Options"). The
Biomune Options have been granted pursuant to various stock plans of Biomune
(the "Biomune Plans"). The Biomune Plans give the committee of the Biomune
Board that administers the plans (the "Biomune Plan Committee") the authority
to make equitable adjustments to outstanding Biomune Options in the event of
certain transactions, such as the Distribution.
The Biomune Plan Committee and the Biomune Board have determined that,
immediately prior to the Distribution, each Biomune Option will be divided
into two separately exercisable options: (i) an option to purchase Volu-Sol
Common Stock (the "Add-on Volu-Sol Option") in an amount that would have been
issued in the Distribution in respect of the shares of Biomune Common Stock
subject to the applicable Biomune Option, if such Biomune Option had been
exercised in full immediately prior to the Distribution Record Date, and
containing substantially equivalent terms as the existing Biomune Option, and
(ii) an option to purchase Biomune Common Stock (an "Adjusted Biomune
Option"), exercisable for the same number of shares of Biomune Common Stock as
the corresponding Biomune Option had been. The per share exercise price of
the Biomune Option will remain the same in the Adjusted Biomune Option, and
all other terms of such Biomune Option will remain the same in all material
respects. The Add-on Volu-Sol Option will carry an option exercise price per
share equal to the price per share of the exercise price under the Biomune
Option.
As a result of the foregoing, certain persons who remain Biomune employees or
non-employee directors after the Distribution will hold both Adjusted Biomune
Options and separate Add-on Volu-Sol Options. The obligations with respect to
the Adjusted Biomune Options and Add-on Volu-Sol Options held by Biomune
employees and non-employee directors following the Distribution will be
obligations solely of Biomune. The Company will reserve 709,602 shares of
Common Stock for issuance upon the exercise of the Add-on Volu-Sol Options.
<PAGE>
Effects of the Distribution on Outstanding Preferred Stock of Biomune
Upon conversion of the outstanding shares of Biomune Preferred Stock of any
series held at March 5, 1997, the holders of such shares of Preferred Stock
also will receive one share of Volu-Sol Common Stock for every ten shares of
Biomune Common Stock received in the conversion. No shares of Volu-Sol Common
Stock will be issued in respect of dividends accruing on the Preferred Stock
after March 5, 1997. Accordingly, the Company will reserve 323,118 shares of
Volu-Sol Common Stock for issuance at such time as the Biomune Preferred Stock
is converted to Biomune Common Stock.
For purposes of each of the above adjustments, the determination of the
Biomune Board as to the fair market value of the Volu-Sol Common Stock
distributed in the Distribution shall be conclusive.
Effects of the Distribution on Certain Rights to Acquire Biomune Common Stock
Biomune has granted rights to purchase Biomune Common Stock in the form of
warrants (the "Biomune Warrants"). Under the agreements governing the grant
and exercise of the Biomune Warrants, Biomune has agreed to issue to the
holders of such rights securities otherwise issuable with respect to the
Biomune Common Shares underlying the Biomune Warrants if and to the extent the
Biomune Warrants are exercised. Consequently, if the holders of the Biomune
Warrants exercise their rights thereunder, Biomune must issue to those holders
one share of Volu-Sol Common Stock for each ten shares of Biomune Common Stock
issued in connection with such exercise. Volu-Sol has agreed to sell to
Biomune 247,059 shares of Volu-Sol Common Stock required to meet this
obligation of Biomune at such time and from time to time as the Biomune
Warrants may be exercised. The purchase price of such shares of Volu-Sol
Common Stock will be a sum equal to 10% of the consideration received by
Biomune in exercise of the Biomune Warrants.
Trading of Volu-Sol Common Stock
There is currently no public market for Volu-Sol Common Stock. There can be
no assurance as to the prices which trading in Volu-Sol Common Stock may occur
after the Distribution. Until Volu-Sol Common Stock has been fully
distributed and an orderly trading market developed, the prices at which
trading in such stock occurs may fluctuate significantly. There can be no
assurance that an active trading market in Volu-Sol Common Stock will develop
or be sustained in the future.
The prices at which Volu-Sol Common Stock may trade will be determined by the
marketplace and may be influenced by many factors including, among others,
Volu-Sol's performance and prospects, the depth and liquidity of the market
for Volu-Sol Common Stock, investor perception of Volu-Sol and of the medical
diagnostic stain industry, Volu-Sol's dividend policy, general financial and
other market conditions, and domestic and international economic conditions.
In addition, financial markets have experienced extreme price and volume
fluctuations that have affected the market price of many smallcap stocks and
that at times could be viewed as unrelated or disproportionate to the
operating performance of such companies. Such fluctuations have also affected
the share prices of many newly public issuers. Such volatility and other
factors may materially adversely affect the market price of Volu-Sol Common
Stock.
Volu-Sol initially will have approximately 1,070 shareholders of record, based
upon the number of record holders of Biomune Common Stock on the Distribution
Record Date.
Arrangements Between Biomune and Volu-Sol After the Distribution
Following the Distribution, Volu-Sol and Biomune will operate independently
and neither will have any stock ownership, beneficial or otherwise, in the
other. For purposes of governing the ongoing relationship between Biomune and
Volu-Sol after the Distribution, and to provide mechanisms for an orderly
transition, on or before the Distribution Date, Volu-Sol and Biomune will
enter into various agreements, including the Distribution Agreement.
SUMMARY FINANCIAL DATA
The Summary Financial Data set forth below for the fiscal years ended
September 30, 1994, 1995 and 1996 have been derived from the audited financial
statements of Volu-Sol and Biomune, as applicable. The Summary Financial Data
set forth below for the nine months ended June 30, 1996 and 1997 have been
derived from the unaudited financial statements of Volu-Sol and Biomune and,
in the opinion of management, reflect all adjustments, consisting only of
normal recurring adjustments, considered necessary for a fair presentation of
the results for such periods. This Summary Financial Data should be read in
conjunction with Management's Discussion and Analysis or Plan of Operation,
and the financial statements of Volu-Sol and Biomune and related notes
thereto, included elsewhere or incorporated by reference in the Information
Statement.
VOLU-SOL
<TABLE>
<CAPTION>
Statement of Operations Data:
Nine Months
Years Ended September 30, Ended June 30,
----------------------------------- ------------------------
1994 1995 1996 1996 1997
---------- --------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Sales $ 365,189 $458,981 $ 434,691 $ 338,016 $ 368,731
Loss from operations (330,366) (617,785) (1,369,431) (771,445) (475,663)
Other income (expense) 12,216 - (32,791) (32,791) -
Net loss (318,150) (617,785) (1,402,222) (804,236) (475,663)
Pro forma net loss per common share(1) (0.66) (0.38) (0.23)
</TABLE>
<TABLE>
<CAPTION>
Balance Sheet Data:
September 30, June 30,
---------------------
1995 1996 1997
--------- ---------- ----------
<S> <C> <C> <C>
Current assets $200,479 $ 199,677 $368,884
Property and equipment, net 51,334 334,872 285,211
Intangible and other assets, net 297,263 6,249 6,199
Total assets 549,076 570,798 660,294
Current liabilities 80,316 105,297 440,332
Stockholder's equity 468,760 435,501 219,962
</TABLE>
(1) Presented on a pro forma basis assuming total common shares of 2,111,216 to
be outstanding upon completion of the Distribution.
BIOMUNE
<TABLE>
<CAPTION>
Statement of Operations Data:
Years Ended September 30, Nine Months Ended June 30,
---------------------------------------------------- -------------------------------------
1994 1995 1996 1996 1997
----------- ----------- ------------------------- ----------- ------------------------
Actual Pro Forma(1) Actual Pro Forma(1)
------------------------- ------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales $ 365,189 $ 458,981 $ 436,691 $ 2,000 $ 338,016 $ 673,868 $ 305,137
Loss from operations (4,475,497) (4,095,355 (6,625,265) (5,255,834) (4,653,489) (4,578,027) (4,102,364)
Other income (expense) 177,124 472,382 202,645 235,436 220,518 201,306 201,306
Net loss applicable to common shares (4,746,718) (3,740,444) (6,513,819) (5,111,597) (4,505,645) (5,419,919) (4,944,256)
Net loss per common share $ (0.35) $ (0.22) $ (0.35) $ (0.27) $ (0.24) $ (0.26) $ (0.23)
Weighted average common shares
outstanding 13,630,334 17,114,407 18,799,194 18,799,194 18,946,521 21,120,550 21,120,550
</TABLE>
<TABLE>
<CAPTION>
Balance Sheet Data:
September 30. June 30,
--------------------------
1995 1996 1997
-------------------------- ----------------------------
Actual Pro Forma (1)
------------- -------------
<S> <C> <C> <C> <C>
Current assets $ 5,767,643 $8,339,394 $3,689,280 $3,320,396
Property and equipment, net 105,763 434,205 390,490 105,279
Other assets 845,014 498,403 445,893 704,194
Total assets 6,718,420 9,272,002 4,525,663 4,129,869
Current liabilities 389,245 625,477 605,593 429,761
Stockholders' equity 6,329,175 8,646,525 3,920,070 3,700,108
</TABLE>
[Footnote on following page.]
<PAGE>
(1) Gives effect to the Distribution of Volu-Sol common stock to the
shareholders of Biomune as if such distribution had occurred on October 1,
1995 for purposes of the statements of operations and as of June 30, 1997 for
purposes of the balance sheet. See "Unaudited Pro Forma Condensed
Consolidated Financial Data" included elsewhere in the Information Statement.
INCORPORATION BY REFERENCE
To the extent necessary to provide shareholders with information regarding
stock ownership of Biomune, management and executive compensation of Biomune,
the business and financial condition of Biomune and certain transactions and
relationships involving Biomune and/or its affiliates, the following documents
filed by Biomune with the Commission are incorporated herein by reference:
(1) The Annual Report on Form 10-K for the fiscal year ended September
30, 1996.
(2) The Company's Quarterly Reports on Form 10-QSB for the quarters
ended December 31, 1996, March 31, 1997 and June 30, 1997;
(3) Definitive Proxy Statement on Schedule 14A, filed September 8, 1997
relating to the Company's Annual Meeting of Shareholders held in October 1997;
(4) Annual Report to Shareholders 1997;
(5) Current Reports on Form 8-K filed July 23, 1997 and November 10,
1997 relating to the acquisition of Rockwood Cosmetics, Inc. ("Rockwood"); and
(6) Current Report on Form 8-K filed November 10, 1997 relating to the
reverse split of the Company's Common Stock.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Information Statement to the extent that a statement
contained herein, or in any other subsequently filed document that also is or
is deemed to be incorporated by reference herein, modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Information
Statement.
The Company will provide, without charge, to each person to whom a copy of
this Information Statement is delivered, upon the written or oral request of
such person, a copy of any or all of the documents that have been incorporated
herein by reference, other than exhibits to such documents (unless such
exhibits are specifically incorporated by reference therein). Requests for
such copies should be directed to: Michael G. Acton, Chief Financial Officer,
Biomune Systems, Inc., 2401 South Foothill Drive, Salt Lake City, Utah
84109-1405, telephone number (801) 466- 3441.
THE COMPANY
Volu-Sol was incorporated in Utah on July 27, 1995, as a wholly owned
subsidiary of Biomune. The Company was organized to engage in the business of
manufacturing and marketing medical diagnostic stains and solutions and
related equipment, which business operations were conducted prior to that time
as an unincorporated division of Biomune called the Volu-Sol Medical
Division. Biomune purchased the assets comprising the Volu-Sol Medical
Division in December 1991 from Logos Scientific, Inc. After the Company's
incorporation, Biomune transferred all of the assets of the Volu-Sol Medical
Division to the Company. Through fiscal 1995, Volu-Sol operated out of leased
facilities in Henderson, Nevada. On October 16, 1995, the Company relocated
to West Valley City, Utah (a suburb of Salt Lake City, Utah), where it
continues to have its manufacturing facility and corporate offices.
On the Distribution Date, 2,111,216 shares of the Company's $.0001 par value
Common Stock, constituting all of the issued and outstanding shares of the
Company's Common Stock, are to be distributed pro rata as a stock dividend to
the holders of the Common Stock of Biomune as of March 5, 1997. Following the
Distribution, approximately 323,118 shares of Volu-Sol Common Stock will also
be issuable to holders of Preferred Stock issued by Biomune at the time such
shares are converted to Biomune Common Stock. In addition, Volu-Sol has
agreed to sell Biomune shares of Common Stock for the purpose of allowing
Biomune to issue Volu-Sol Common Stock upon the exercise of the Biomune
warrants. As a consequence of the Distribution, the Company will cease to be
a subsidiary of Biomune and will commence operations as of the effective date
of the Distribution, as a separate, independent company. The Company will
continue the same operations as it has conducted while it has been a
subsidiary of Biomune.
Business Strategy
The Company's primary business strategy is to capitalize on the global medical
diagnostic industry by providing "building block" stains and reagents which
are not subject to regulatory overview or the risk and volatility inherent in
developing pharmaceuticals, and to grow through the selective acquisition of
medical distributors, and complementary devices and product lines. The
Company's strategy includes the following elements:
Acquire Complementary Businesses, New Products and Technologies. The Company
intends to evaluate potential acquisitions of distributors and complementary
products and businesses from time to time and to consummate transactions in
those situations where there is an appropriate economic and strategic fit.
Expand Distribution. The Company intends to increase its distribution base
through acquisition of distributors and through agreements with independent
distributors. The Company expects to increase sales through the addition of
more focused and committed sales personnel who work only for the Company,
thereby eliminating up to 35% in mark-up presently paid to independent
distributors. The payroll and related costs of in-house sales personnel will
offset to some degree the savings expected to be achieved from eliminating the
mark-up associated with the use of an outside sales force.
Develop Broader Product Lines. The Company offers over 70 products in four
major product lines in an effort to serve effectively a diverse and highly
decentralized industry. The Company believes that its many and diverse
products economically and reliably address the needs of medical diagnosticians
and laboratory technicians. Nevertheless, the Company recognizes that it can
improve its revenue-generating capacity by adding to its existing product
line.
Offer Top Quality Products. The Company constantly strives to offer products
with the greatest purity and reliability possible through its quality control
system. It intends to continue to assure the quality of its product line.
Outsource Non-Stain Manufacturing. To minimize capital requirements
associated with the manufacture of products other than stains, solutions and
other chemicals, the Company intends to continue to take advantage of
strategic alliances with third-party manufacturers.
Esprit de Corps. The Company seeks to create a team spirit among its
employees, foster awareness of the Company's objectives and strategies at all
levels within the Company, and reward meritorious performance with
compensation and other incentives. The Company believes this creates loyalty
to the Company and pride in its products, which translates into greater
product quality and enhanced customer service.
Business Plan
The Company intends to continue to implement its Business Strategy by
completing a private placement (the "Offering") of the Company's Series A 10%
convertible non-voting Preferred Stock ("Series A Preferred"). The Offering
is intended to provide the Company with gross proceeds of up to $2,400,000.
The offering is to accredited investors as that term is defined by Rule 501 of
Regulation D, promulgated under the Securities Act. These proceeds will be
used to repay debt to Biomune (totaling approximately $390,500 through the
date of this Information Statement), pay the expenses of the Offering and the
Distribution (including legal and accounting fees in each transaction,
estimated to be approximately $75,000), and finance the Company's operations
within the framework of the Business Strategy. The primary focus will be on
the acquisition of distributors and additional products to expand the current
product line. As of September 30, 1997, the Company had received
subscriptions to purchase $1,225,000 of Series A Preferred, for which cash of
$325,000 had been received. Payments with respect to the remaining
subscriptions are due as follows: $300,000 upon the effective date of the
Company's Registration Statement on Form 10-SB ("Form 10-SB), $300,000 within
45 days of the effective date of the Form 10-SB, and $300,000 within 90 days
of the effective date of the Form 10-SB.
During the time the Company operated as a division and subsidiary of Biomune,
its chief focus was to manufacture and sell products to a distinct segment of
a much larger market. As a separate entity, the Company will seek to broaden
its base in the medical supply industry through adding in-house distribution
capacity to its present business. Specifically, the Company will look to
acquire small medical distributors, having 3-5 representatives and annual
sales of between $2.0 and $3.5 million. The Company expects that such
acquisitions will expand the capacity for distributing the Company's products,
as well as add to the number of products being sold by or through the Company.
The Company has not had discussions or entered into negotiations with any
acquisition candidates. Sales through in-house representatives are expected
to reduce the cost of distribution by as much as 35% thereby increasing
profitability. The primary focus will continue to be the medical diagnostic
stain business. With its own distribution, the Company believes it can expand
sales much more quickly than if it continues relying upon large independent
distributors who may sell or represent many other products or manufacturers,
including some that are unrelated to the Company's product line.
Volu-Sol's Medical Diagnostic Industry Operations
The Company provides supplies to certain segments of the medical diagnostics
industry, which the Company believes to be a $6 to $8 billion industry
globally. An important aspect of the medical diagnostic industry is the
ability of medical professionals to diagnose pathologies and otherwise assess
conditions of body fluids and tissues by microscopically analyzing slides
containing samples of the fluids or tissue. To enhance the ability of medical
practitioners and researchers to accurately assess samples and render
diagnoses based on those samples, microscope slides are prepared by smearing a
suspension containing the target biological sample on the slide. The slide is
then allowed to dry or is heated on a slide warmer to affix the sample to the
slide. The slide is then treated with one or more chemical stains or
reagents, according to the type of stain used and the types of conditions
being assessed. The effect of this staining process is to highlight or detect
certain properties of or abnormalities in the sample.
Stains are of two general types: (1) simple stains consisting of the addition
to the slide-mounted sample of one dye that serves to delineate certain
characteristics, but leaves all of the microscopic structures the same hue;
and (2) differential stains consisting of more than one dye added in multiple
steps, which has the effect of highlighting different structures or properties
of the sample with different colors. A host of different medical diagnostic
stains, solutions and chemical agents are used with different tissue samples
and to highlight or detect different tissue characteristics or abnormalities.
The Company estimates that the current global market for such staining
products is over $75 million annually.
Current Product Line
Stains, Solutions, Reagents, and Related Equipment. The Company manufactures
and markets a diversified line of simple and differential stains and solutions
as well as related equipment used by commercial and research laboratories as
well as medical clinics, hospitals, physician-operated laboratories ("POLs")
and veterinary clinics. Volu-Sol's staining product line includes over 90
separate products that are marketed to the hematology, microbiology, mycology
and histology/cytology segments of the medical diagnostics industry. The
Company's stain solutions and related products are sold separately in various
quantities or as integrated kits configured to the requirements of specified
diagnostic devices produced by a variety of manufacturers. In addition to
sales of its own stains, solutions and other chemical products, Volu-Sol has
contracted with several original equipment manufacturers ("OEMs") with respect
to manufacturing and packaging medical diagnostic stains for distribution by
these OEMs.
The Definitive Slide Stainer Device. In addition to manufacturing and selling
stains, solutions buffers and other biochemical products and related
equipment, in fiscal 1997, the Company introduced and commenced the contract
manufacturing and marketing of the Definitive Slide Stainer Device (the
"Definitive"), an automated staining device that improves the efficiency and
accuracy of small to medium-scale slide staining laboratory operations. The
Definitive is capable of staining up to three slides simultaneously under
controlled conditions. The Definitive's chief advantages are its small size
(having a footprint of just 12 inches wide by 14 inches long), its
self-containment allowing it to be placed anywhere in the laboratory (as
opposed to other staining devices which require placement in close proximity
to drains and water supplies), its efficiency and reliability when compared to
the chief alternative--manually preparing slides, and its relatively low
cost. The Definitive achieves increased accuracy, reliability and consistency
through the use of a proprietary microchip which regulates with exact
precision the amount of reagent timing. That chip also automatically
activates an alarm on the Definitive when the stain pack needs to be
replaced. Although other automated staining devices are commercially
available that are capable of staining as many as 70 to 100 slides
simultaneously, such equipment is cost-prohibitive for smaller laboratories,
research institutions and hospitals. The Company believes that the Definitive
will fill an important market need for smaller laboratories, clinics and POLs,
whose only alternative is labor-intensive, inefficient and less-reliable
manual preparation of slides by laboratory technicians. The Company estimates
that there is a $250 million market for automated staining devices.
The Company manufactures and markets various custom-designed stainer packs for
use with the Definitive. The Company anticipates that as more units are sold
over time, the provision of stainer packs for the devices will create a
substantial opportunity to capitalize on a continuing stream of revenues. The
Definitive is covered by a 1-year manufacturer's warranty that is serviced by
Volu-Sol. Under that warranty arrangement, Volu-Sol will repair or replace
any defective unit without charge to the end-purchaser. The same warranty is
extended by the manufacturer to Volu-Sol. Consequently, the Company incurs no
expense on repairs or replacements made under warranty.
Manufacturing
The Company historically has manufactured the majority of the stains,
solutions, reagents, powders and other chemical compounds that make up its
product line, and intends to continue to do so for the foreseeable future.
Volu-Sol's chemical manufacturing process consists of the purchase by Volu-Sol
of certain raw materials, including bulk chemicals such as alcohol, ethanol,
methanol and various powders and stains. These chemicals are purchased from
different suppliers and are widely available. The ingredients are then mixed
in vats on Volu-Sol's premises in accordance with certain non-proprietary
formulas. The finished stains are then bottled and appropriately labeled and
sold through medical supply distributors and OEMs. Since it has been engaged
in the medical diagnostic stain industry, the Company has refined its
production capabilities such that it presently is able to manufacture its
products to exacting clinical standards. It also has developed a quality
control program that allows it to both maintain the reliability, integrity and
uniformity of its product line and to quickly and accurately identify and
resolve any potential problem by keeping detailed production records by lot.
With respect to the ancillary equipment sold by the Company in connection with
its stains, solutions, reagents, and other chemicals, such as glass slides,
manual staining equipment, and other related laboratory equipment and
supplies, such products are manufactured by third parties and can easily be
obtained from a number of suppliers.
With respect to the Definitive, the Company has entered into a worldwide
exclusive licensing agreement (the "License Agreement") with GG&B Engineering,
Inc. ("GG&B"), a Texas corporation with its principal place of business in
Wichita Falls, Texas. GG&B owns the technology underlying the proprietary
microchip that is packaged with the stain packs used with the Definitive.
Under the License Agreement, GG&B manufactures the Definitive on an as-needed
basis. GG&B also provides the proprietary microchip that is packaged with the
stain packs. Other than copyright protection as to the code incorporated in
the proprietary microchips, neither the Company nor GG&B claim any proprietary
interest in the technology incorporated into the Definitive. Under the
License Agreement, Volu-Sol is obligated to use its best efforts to promote
the sale and distribution of the Definitive, in return for which GG&B must
provide Volu-Sol with its requirements for the Definitive and microchips
during the term of the Agreement, with a minimum purchase requirement of 600
units per year. Upon a default by the Company, GG&B has the right, under the
License Agreement, to convert the license into a nonexclusive license and
grant to others the right to distribute the Definitive upon written notice to
Volu-Sol. The License Agreement was signed on October 21, 1996. Unless it is
terminated earlier in accordance with its terms, the License Agreement is
perpetual. As of September 30, 1997, the Company had purchased a total of 228
units. If it fails to meet its purchase obligations, the Company's business
may be adversely affected. The Company will not meet its minimum purchase
obligation for this calendar year. The manufacturer may exercise its right to
convert the license and distributorship to a non-exclusive license and
distributorship, which may adversely affect the ability of the Company to
effectively market the Definitive or may adversely affect the number of units
the Company is able to sell in future periods. The Company has no experience
in manufacturing hardware devices such as the Definitive and does not have any
manufacturing facilities for such products. Consequently, the Company is
presently dependent and will continue to depend on third parties such as GG&B
to manufacture products other than stains, solutions and other related
chemical products. In the event that the Company's relationship with GG&B is
disrupted or is no longer viable due to financial or other difficulties of
GG&B or the Company, or otherwise, or if the Company is unable to obtain
third-party manufacturing for any products it may add to its line in the
future, its operations and ability to generate revenue would be adversely
affected.
The manufacture of the Company's products is subject to the Food and Drug
Administration's current Good Manufacturing Practices ("cGMP") regulations.
These regulations require that the Company manufacture its products and
maintain its documents in a prescribed manner with respect to manufacturing,
testing and control activities. No assurance can be given that the Company's
third-party manufacturers will comply with cGMP regulations or other
regulatory requirements now or in the future. The Company's current
dependence upon third parties for the manufacture of its products may
adversely affect its profit margin, if any, on the sale of future products and
the Company's ability to deliver products on a timely and competitive basis.
The Company is inspected on a routine basis for compliance with applicable FDA
laws and regulations, in particular the extent to which it observes cGMP
regulations in connection with the manufacture of its chemical products.
Further, the Company is required to comply with various FDA requirements for
labeling. If the FDA believes the Company is not in compliance with the
applicable laws or regulations, it can institute proceedings to detain or
seize the Company's products, issue a recall, enjoin future violations and
assess civil and criminal penalties against the Company, its officers or its
employees. The FDA may proceed to ban, or request recall, repair, replacement
or refund of the cost of any product manufactured or distributed by the
Company.
Quality Control
The Company places great emphasis on providing quality products to its
customers. An integrated network of quality systems, including control
procedures that are implemented by technically trained professionals, result
in strict requirements for manufacturing and packaging materials. On a
statistical sampling basis, a quality assurance organization tests components
and finished goods at different stages in the manufacturing process to assure
that exacting standards are met. Customers may return defective merchandise
for credit or replacement. In recent years, such returns have been
insignificant.
Marketing and Sales
The Company markets and sells its products through a network of regionally
located medical diagnostic laboratory supply distributors. The Company also
employs in-house sales personnel who are involved in sales through direct
personal contact with potential customers and attendance at industry and trade
shows. The Company intends to expand its in-house distribution capacity
through acquisition of small medical products distributors. The Company
intends to increase its marketing and sales efforts, capital permitting, by
attending more trade shows, establishing distributor relationships in Europe,
South America and Asia, and placing advertisements in periodic trade journals
and publications.
Availability of Raw Materials
The principal raw materials for the stains, solutions and other chemical
products of the Company are "off-the-shelf" bulk chemicals that can be
purchased from any of a number of chemical companies. The Company believes
that it maintains adequate supplies of raw materials on hand to allow it to
continue to manufacture products and meet customer demand, and that those
materials that it does not produce internally are readily available from
multiple sources.
<PAGE>
Competition
The Company believes that its products have a good reputation in the
marketplace and are competitively priced. However, the medical diagnostic
industry in general and the medical diagnostic stain industry in particular
are, or potentially could be very competitive. Several large chemical,
medical and laboratory supply companies could dominate the market, many if not
all of which have vastly greater manufacturing capabilities, financial
resources, scientific expertise, research resources and much more pervasive,
mature and experienced marketing operations. Accordingly, Volu-Sol is subject
to intense competition and is subject to the pricing and distribution policies
of these large competitors. Currently, Volu-Sol's sales amount to less than
1% of total industry sales. There can be no assurance that, in light of the
level of competition in the industry in which the Company operates, it will be
able to achieve or sustain profitable operations.
Patents and Proprietary Rights
The Company does not own any patents and does not believe that patent
protection is available for any of its products or processes. To the extent
that the Definitive and the stain packs that are marketed for use with that
device incorporate proprietary technologies, the Company licenses such
technologies from GG&B under the License Agreement. The Company claims the
name "Volu-Sol" as a trademark. The Company also believes that certain aspects
of its manufacturing, production and marketing operations are proprietary and
has generally sought to protect its interests by treating its know-how as
trade secrets and by requiring all employees to execute confidentiality
agreements with the Company. The Company believes that its processes can only
be understood from direct observation and are not ascertainable by examination
of the end product. However, there can be no assurance that others will not
independently develop the same or similar information, obtain unauthorized
access to the Company's proprietary information or misuse information to which
the Company has granted access.
Government Regulation
Following are brief summaries of some of the Federal laws and regulations
which may have an impact on the Company's business. These summaries are only
illustrative of the extensive regulatory requirements of the Federal, state
and local governments and are not intended to provide the specific details of
each law or regulation.
The Clean Air Act, as amended, and the regulations promulgated thereunder,
regulates the emission of harmful pollutants to the air outside of the work
environment. Federal or state regulatory agencies may require companies to
acquire permits, perform monitoring and install control equipment for certain
pollutants.
The Clean Water Act, as amended, and the regulations promulgated thereunder,
regulates the discharge of harmful pollutants into the waters of the United
States. Federal or state regulatory agencies may require companies to acquire
permits, perform monitoring and to treat waste water before discharge to the
waters of the United States or a Publicly Owned Treatment Works.
<PAGE>
The Occupational Safety and Health Act of 1970 ("OSHA"), including the Hazard
Communication Standard ("Right to Know"), and the regulations promulgated
thereunder, requires the labeling of hazardous substance containers, the
supplying of Material Safety Data Sheets ("MSDS") on hazardous products to
customers and hazardous substances the employee may be exposed to in the
workplace, the training of the employees in the handling of hazardous
substances and the use of the MSDS, along with other health and safety
programs.
The Resource Conservation and Recovery Act of 1976, as amended, and the
regulations promulgated thereunder, requires certain procedures regarding the
treatment, storage and disposal of hazardous waste.
The Comprehensive Environmental Response, Compensation and Liability Act of
1980 and the Superfund Amendments and Reauthorization Act of 1986, and the
regulations promulgated thereunder, require notification of certain chemical
spills and notification to state and local emergency response groups of the
availability of MSDS and the quantities of hazardous materials in the
Company's possession.
The Toxic Substances Control Act of 1976, requires reporting, testing and
pre-manufacture notification procedures for certain chemicals. Exemptions are
provided from some of these requirements with respect to chemicals
manufactured in small quantities solely for research and development use.
The Department of Transportation has promulgated regulations pursuant to the
Hazardous Materials Transportation Act, referred to as the Hazardous Material
Regulations ("HMR"), which set forth the requirements for hazard labeling,
classification and packaging of chemicals, shipment modes and other goods
destined for shipment in interstate commerce.
Without limiting the generality of the foregoing, a summary of how certain
specific governmental regulations affect the Company's operations is as
follows: The Company engages principally in the business of selling products
which are not foods or food additives, drugs or cosmetics within the meaning
of the Federal Food, Drug and Cosmetic Act, as amended (the "FDC Act").
Nevertheless, the chemicals used to produce the medical diagnostic stains
manufactured and sold by Volu-Sol have a methanol base and generally are
classified as hazardous materials, the use of which subjects the Company to
one or more of the regulatory schemes described above. Additionally, the
manufacturing and shipping operations of Volu-Sol are heavily regulated by
federal, state and local environmental, health and safety authorities.
Volu-Sol is subject to the FDA's cGMP standards and applicable Occupational
Safety and Health Administration ("OSHA") regulations. Representatives of the
FDA periodically conduct inspections at Volu-Sol's facilities regarding the
cleanliness and safety standards followed in the manufacturing process.
Moreover, representatives of OSHA periodically conduct inspections of
Volu-Sol's facilities for compliance with applicable safety and health
regulations. The Company believes that Volu-Sol is in compliance in all
material respects with applicable environmental, health and safety laws, rules
and regulations. There can be no assurance, however, that the Company will
not in the future be found in violation of some or all of these regulations,
which could materially and adversely affect the Company and its operations.
Research and Development
The Company has not invested material amounts in research and development
because of the extent of the product line acquired when Biomune purchased the
assets comprising the Volu-Sol business. The Company does not presently
anticipate investing materially different amounts in research and development
activities for the foreseeable future.
Dependence on Major Customers
Barrett Healthcare Corporation ("Barrett"), a former distributor of the
Company's products, accounted for more than 10% of Volu-Sol's total revenues
in fiscal years 1994 and 1995. During fiscal years 1994 and 1995 sales to
Barrett accounted for approximately 15% and 17%, respectively, of Volu-Sol's
(and prior to July 27, 1995, the Volu-Sol Medical Division's) total revenues.
Barrett ceased operations in March 1996. Prior to ceasing operations, Barrett
accounted for approximately 12% of Volu-Sol's sales through March 1996.
Except for Barrett, no other medical supply distributor or company has
accounted for more that 10% of Volu-Sol's revenues. After Barrett, Hardy
Diagnostics Corporation historically has been the next largest medical supply
distributor for Volu-Sol's products, representing less than 10% of Volu-Sol's
revenues. Almost 80% of Volu-Sol's sales are accomplished through medical
supply distributors who carry a large range of products for medical
laboratories.
Employees
The Company has 9 full time employees. The Company will, as needed, hire
additional employees or sub-contract the balance of its personnel requirements
through independent contractors. The Company's manufacturing operations do
not require specially-skilled employees and the Company believes that it will
be able to satisfy its labor requirements for the foreseeable future. None of
the Company's employees are represented by a collective bargaining
arrangement, and the Company believes its relationship with its employees is
good.
CORPORATE STRUCTURE PRE-DISTRIBUTION
The medical diagnostic stain business is currently conducted by Biomune
through its wholly owned subsidiary, Volu-Sol, Inc. Except for certain
accounting and financial activities provided by Biomune, the Volu-Sol business
operations are separate from the pharmaceutical and nutraceutical business of
Biomune. The organization structure of Volu-Sol will not significantly change
following the Distribution. The current officers and directors of Volu-Sol
will continue to serve in the same capacities following the Distribution.
DISTRIBUTION AGENT
The Distribution Agent is American Stock Transfer & Trust Company, 40 Wall
Street, New York, NY 10005.
MANNER OF EFFECTING THE DISTRIBUTION
The general terms and conditions relating to the Distribution are set forth in
the Distribution Agreement dated as of September 10, 1997, between the Company
and Biomune. Biomune will effect the Distribution on the Distribution Date by
delivering shares of Volu-Sol Common Stock to the Distribution Agent for
distribution to the holders of record of Biomune Common Stock as of the close
of business on the Distribution Record Date. The Distribution will be made on
the basis of one share of Volu-Sol Common Stock for every ten shares of
Biomune Common Stock held as of the close of business on the Distribution
Record Date. The shares of Volu-Sol Common Stock will be fully paid and
nonassessable, and the holders thereof will not be entitled to preemptive
rights. See "Description of the Company's Capital Stock." It is expected
that certificates representing shares of Volu-Sol Common Stock will be mailed
to holders of record of Biomune Common Stock as soon as practicable after the
Distribution Date.
HOLDERS OF BIOMUNE COMMON STOCK SHOULD NOT SEND CERTIFICATES TO THE COMPANY,
BIOMUNE OR THE DISTRIBUTION AGENT. THE DISTRIBUTION AGENT WILL MAIL THE STOCK
CERTIFICATES REPRESENTING SHARES OF VOLU-SOL COMMON STOCK AS SOON AS
PRACTICABLE AFTER THE DISTRIBUTION DATE. BIOMUNE STOCK CERTIFICATES WILL
CONTINUE TO REPRESENT SHARES OF BIOMUNE COMMON STOCK AFTER THE DISTRIBUTION IN
THE SAME AMOUNT SHOWN ON THE CERTIFICATES.
No certificates or scrip representing fractional interests in shares of
Company Common Stock will be issued to holders of Biomune Common Stock as part
of the Distribution.
No holder of Biomune Common Stock will be required to pay any cash or other
consideration for the shares of Volu-Sol Common Stock to be received in the
Distribution or to surrender or exchange shares of Biomune Common Stock or to
take any other action in order to receive Volu-Sol Common Stock pursuant to
the Distribution.
RESULTS OF THE DISTRIBUTION
After the Distribution, the Company will be a separate public company which
will own and operate the Volu-Sol business. The number and identity of the
holders of Volu-Sol Common Stock immediately after the Distribution will be
substantially the same as the number and identity of the holders of Biomune
Common Stock on the Distribution Record Date. Immediately after the
Distribution, the Company expects to have approximately 1,070 holders of
record of Volu-Sol Common Stock and 2,111,216 shares of Volu-Sol Common Stock
outstanding based on the number of record shareholders and outstanding shares
of Biomune Common Stock as of the close of business on the Distribution Record
Date and the distribution ratio of one share of Volu-Sol Common Stock for
every ten shares of Biomune Common Stock. Following the Distribution,
approximately 323,118 shares of Volu-Sol Common Stock will also be issuable to
holders of Preferred Stock issued by Biomune at the time such shares are
converted to Biomune Common Stock. Volu-Sol has agreed to sell Biomune shares
of Common Stock for the purpose of allowing Biomune to issue Volu-Sol Common
Stock upon the exercise of certain options and warrants for purchase of
Biomune Common Stock (other than options granted pursuant to the Biomune
Plans). The Distribution will not affect the number of outstanding shares of
Biomune Common Stock or any rights of Biomune shareholders.
LISTING AND TRADING OF VOLU-SOL COMMON STOCK
There is not currently a public market for Volu-Sol Common Stock. Prices at
which Volu-Sol Common Stock may trade following the Distribution cannot be
predicted. Until Volu-Sol Common Stock is fully distributed and an orderly
market develops, the prices at which trading in such stock occurs may
fluctuate significantly. The prices at which Volu-Sol Common Stock trades will
be determined by the marketplace and may be influenced by many factors,
including, among others, the depth and liquidity of the market for Volu-Sol
Common Stock, investor perception of the Company and the industry in which the
Company participates, the Company's dividend policy and general economic and
market conditions. Such prices may also be affected by certain provisions of
the Company's Articles of Incorporation and Bylaws as each will be in effect
following the Distribution, which may have an anti-takeover effect. See "Risk
Factors".
The Volu-Sol Common Stock has not been approved for listing on any stock
exchange. The Company intends to make application for listing at such time as
it believes it may meet the listing requirements for such exchanges. It is
the Company's belief that Volu-Sol Common Stock distributed to Biomune's
shareholders in the Distribution will be freely transferable, except for (i)
securities received by persons who may be deemed to be "affiliates" of Biomune
within the meaning of Rule 144 promulgated under the Securities Act. In this
case such persons may not publicly offer or sell Volu-Sol Common Stock
received in connection with the Distribution except pursuant to a registration
statement under the Securities Act or pursuant to Rule 144 and (ii) securities
received by persons that were holders of restricted shares of Biomune Common
Stock in which case such holders will receive Volu-Sol Common Stock containing
the same such restrictions. For purposes of Rule 144(c), the Company will not
be deemed to satisfy the currently available public information requirements
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
until 90 days after the Distribution Date.
On October 1, 1997, the Company filed with the Securities and Exchange
Commission a Registration Statement on Form 10-SB under the Exchange Act. The
Registration Statement has or will become effective by operation of law in 60
days from the filing date, at which time the Company will become subject to
the reporting requirements under the Exchange Act. Those requirements include
the filing of quarterly and annual reports containing, among other things,
interim and annual financial statements for the Company.
REASONS FOR FURNISHING THE INFORMATION STATEMENT
This Information Statement is being furnished by Biomune solely to provide
information to Biomune shareholders who will receive Volu-Sol Common Stock in
the Distribution. It is not, and is not to be construed as an inducement or
encouragement to buy or sell any securities of the Company or Biomune. The
information contained in this Information Statement is believed by the Company
and Biomune to be accurate as of the date set forth on its cover. Changes may
occur after that date, and neither the Company nor Biomune will update the
information except in the normal course of their respective disclosure
practices.
RISK FACTORS
Shareholders of Biomune should be aware that the Distribution and ownership of
Volu-Sol Common Stock involves certain risks, including those described below
and elsewhere in this Information Statement, which could adversely affect the
value of their holdings. Neither the Company nor Biomune makes, nor is any
other person authorized to make, any representation as to the future market
value of Company Common Stock. Any forward-looking statements contained in
this Information Statement should not be relied upon as predictions of future
events. Such forward-looking statements may be found in the material set
forth under "Summary of Certain Information," "Risk Factors" and "Management's
Discussion and Analysis or Plan of Operation" as well as elsewhere in this
Information Statement generally. Such statements are necessarily dependent on
assumptions, data or methods that may be incorrect or imprecise and that may
be incapable of being realized. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth in the following risk
factors and elsewhere in this Information Statement.
Absence of Profitable Operations
Between the time Biomune acquired the assets used in conducting its medical
diagnostic supply business and July 1995 when the Company was incorporated and
acquired those assets from Biomune, Biomune's medical diagnostic division did
not have profitable operations. Moreover, from the Company's incorporation to
date, the Company has not achieved profitable operations and continues to
operate at a loss. The Company's present business strategy is to improve its
profitability and cash flows by adding to its existing product line and
expanding its sales and marketing efforts, including the addition of in-house
sales personnel. These expanded sales and marketing efforts are expected to
be funded through sales of the Company's securities and/or debt, including the
Series A Preferred financing being conducted prior to and concurrent with the
Distribution. While management believes the cash generated by operations
together with the proceeds from the sale of shares of its Series A Preferred
will satisfy the Company's ordinary cash requirements for at least 12 months,
there can be no assurance that the Company will ever be able to achieve
profitable operations or that it will not require additional financing to
fulfill its business plan. As of September 30, 1997, the Company had received
subscriptions to purchase $1,225,000 of Series A Preferred, for which cash of
$325,000 had been received. Payments with respect to the remaining
subscriptions are due as follows: $300,000 upon the effective date of the
Company's Form 10-SB, $300,000 within 45 days of the effective date of the
form 10-SB, and $300,000 within 90 days of the Form 10-SB. See "Management's
Discussion and Analysis or Plan of Operation."
"Going Concern" Issues
The financial statements of the Company have been prepared on the assumption
that the Company will continue as a going concern. The Company's independent
public accountants have issued their report dated August 15, 1997 that
includes an explanatory paragraph stating that the Company's recurring losses
and accumulated deficit raise substantial doubt about the Company's ability to
continue as a going concern. The Company's product line is limited and it has
been necessary to rely upon loans and capital contributions from Biomune to
sustain operations. The Company intends to sell up to $2.4 million in Series
A Preferred to unrelated accredited investors. As of September 30, 1997,
subscriptions for $1,225,000 of Series Preferred have been received by the
Company in the offering, with payments made or to be made as described above.
Management believes the proceeds from such offering will provide sufficient
capital when combined with revenues from operations to meet the Company's
operating cash needs for a minimum of 12 months. Additional financing may be
required if the Company is to continue as a going concern. If such additional
funding is needed and cannot be obtained, the Company may be required to scale
back or discontinue its operations.
Uncertainty of Future Financial Results
Profitability depends upon many factors, including the success of the
Company's marketing program, the Company's ability to identify and obtain the
rights to additional products to add to its existing product line, expansion
of its distribution and customer base, maintenance or reduction of expense
levels and the success of the Company's business activities. The Company
(since its incorporation in July 1995) has an accumulated deficit as of June
30, 1997 of $1,980,849. The Company anticipates that it will continue to
incur operating losses in the future or until such time as it is able to
successfully market the Definitive or other devices that it may yet add to its
product line. The Company's ability to achieve profitable operations will
also depend on its ability to develop and maintain an adequate marketing and
distribution system. There can be no assurance that the Company will be able
to develop and maintain adequate marketing and distribution resources. If
adequate funds are not available, the Company may be required to materially
curtail or cease its operations. See "Management's Discussion and Analysis or
Plan of Operation."
Lack of Proprietary Technologies
The Company uses certain trademarks and tradenames with certain of its
products. Nevertheless, the Company's core products, medical diagnostic
stains and solutions and other biochemical products, as well as the
Definitive, are not based on technology proprietary to the Company. Indeed,
the majority of the Company's present product line is based on technology that
is in the public domain and therefore there are effectively no entry barriers
for potential competitors to the Company. The Company has entered into an
exclusive license agreement with the third-party entity that owns the
intellectual property rights associated with the Definitive and manufactures
the Definitive for the Company. There can be no assurance that such third
party entity will be able in the future to adequately protect its proprietary
rights upon which the Definitive is based or that such third party will
continue to manufacture the Definitive on terms favorable to the Company. If
the third party fails to meet its obligations to manufacture a sufficient
number of units for any reason, the Company would be forced to locate a new
manufacturer for the Definitive which may disrupt and adversely affect the
Company's operations.
Intense Competition
The medical diagnostic supply and biochemical industries, including those
segments devoted to manufacturing and distributing laboratory equipment, stain
solutions and chemical reagents are characterized by intense competition. The
Company faces, and will continue to face, competition in the stain solution,
reagent and related equipment fields. Many, if not most, of the Company's
competitors and potential competitors are much larger and consequently have
greater access to capital as well as to mature and highly sophisticated
distribution channels. Some of the Company's larger competitors are able to
manufacture chemical products on a much larger scale and therefore presumably
would be able to take advantage of economies of scale not presently enjoyed by
the Company. Moreover, many of the Company's competitors have far greater
name recognition and experience in the medical diagnostic supply industry.
There can be no assurance that competition from other companies will not
render the Company's products noncompetitive.
Uncertainties Related to Ability to License Proprietary Technology
The Company historically has not been involved in research and development of
new technologies. Consequently, the Company's success in adding to its
existing product line will depend on its ability to acquire or otherwise
license competitive technologies and products and to operate without
infringing the proprietary rights of others, both in the United States and
internationally. No assurance can be given that any licenses required from
third parties will be made available on terms acceptable to the Company, or at
all. If the Company does not obtain such licenses, it could encounter delays
in product introductions while it attempts to adopt alternate measures, or
could find that the manufacture or sale of products requiring such licenses is
not possible. Litigation may be necessary to defend against claims of
infringement, to protect trade secrets or know-how owned by the Company, or to
determine the scope and validity of the proprietary rights of others. Such
litigation could have an adverse and material impact on the Company and its
operations.
Inability to Adequately Protect Proprietary Information
The Company relies upon unpatented trade secrets and improvements, unpatented
know-how and continuing technological innovation to develop and maintain its
competitive position, which it seeks to protect, in part, by confidentiality
agreements with its employees and consultants. There can be no assurance that
such agreements will not be breached or that they will be enforceable by the
Company, or that the Company's trade secrets and know-how will not otherwise
be compromised.
Uncertainty of Ability to Attract and Retain Key Management, Employees and
Consultants
The Company is highly dependent on its executive officers and certain of its
scientific, technical and operations employees. The loss of services of any
of these personnel could impede the achievement of the Company's objectives.
There can be no assurance that the Company will be able to attract and retain
qualified executive personnel on acceptable terms.
Reliance on Third-Party Manufacturing
The Company's manufacturing experience and capabilities are limited to the
manufacture of staining solution, reagent and certain related chemical
compounds. With respect to the manufacturing of devices and equipment related
to the staining solution products, including without limitation the
Definitive, the Company has in the past used, and intends to continue to use,
third-party manufacturing resources. Consequently, the Company is dependent
on contract manufacturers for the production of existing products and will
depend on third-party manufacturing resources to manufacture equipment and
devices it may add to its product line in the future. In the event that the
Company is unable to obtain or retain third-party manufacturing, it will not
be able to continue its operations as they relate to the sale of equipment and
devices. The Company's current dependence upon a third party for the
manufacture of the Definitive may adversely affect its profit margins and the
Company's ability to deliver products on a timely and competitive basis.
Environmental Risks
The chemical manufacturing processes of the Company involve the controlled use
of hazardous materials. The Company is subject to federal, state and local
laws and regulations governing the use, manufacture, storage, handling and
disposal of such materials and certain waste products. Although the Company
believes that its activities currently comply with the standards prescribed by
such laws and regulations, the risk of accidental contamination or injury from
these materials cannot be eliminated. In the event of such an accident, the
Company could be held liable for any damages that result and any such
liability could exceed the resources of the Company. In addition, there can
be no assurance that the Company will not be required to incur significant
costs to comply with environmental laws and regulations in the future.
Sufficiency of Marketing and Sales Capabilities
The Company sells its products to approximately 75 independent distributors
who are free to resell the products. In order to achieve profitable
operations, the Company must maintain its current base of sales staff and must
expand that base in the future. There can be no assurance that the Company
will be able to enter into arrangements with qualified sales staff if and when
such additional staff are required. The Company's sales staff will compete
with other companies that currently have experienced and well funded marketing
and sales operations. To the extent that the Company enters into co-promotion
or other marketing and sales arrangements with other companies, any revenues
to be received by the Company will be dependent on the efforts of others, and
there can be no assurance that such efforts will be successful.
Potential Product Liability Exposure and Limited Insurance Coverage
The use of any of the Company's existing or potential products in laboratory
or clinical settings may expose the Company to liability claims. These claims
could be made directly by persons who assert that inaccuracies or deficiencies
in their test results were caused by defects in the Company's products.
Alternatively, the Company could be exposed to liability indirectly by being
named as a third-party defendant in actions brought against companies or
persons who have purchased the Company's products. The Company has obtained
limited product liability insurance coverage in the amount of $1 million per
occurrence and $2 million in the aggregate. The Company intends to expand its
insurance coverage on an as-needed basis as its sales revenue increases.
However, insurance coverage is becoming increasingly expensive, and no
assurance can be given that the Company will be able to maintain insurance
coverage at a reasonable cost or in sufficient amounts to protect the Company
against losses due to liability. There can also be no assurance that the
Company will be able to obtain commercially reasonable product liability
insurance for any products added to its product line in the future. A
successful product liability claim or series of claims brought against the
Company could have a material adverse effect on its business, financial
condition and results of operations.
Uncertainty Related to Health Care Reform Measures and Third-Party
Reimbursement
Political, economic and regulatory influences are likely to lead to
fundamental change in the health care industry in the United States. Numerous
proposals for comprehensive reform of the nation's health care system have
been introduced in Congress over the past years. In addition, certain states
are considering various health care reform proposals. The Company anticipates
that Congress and state legislatures will continue to review and assess
alternative health care delivery systems and payment methodologies, and that
public debate of these issues will likely continue in the future. Due to
uncertainties regarding the ultimate features of reform initiatives and their
enactment and implementation, the Company cannot predict which, if any,
reforms will be adopted, when they may be adopted, or what impact they may
have on the Company. The Company's ability to earn sufficient returns on its
products may also depend in part on the extent to which reimbursement for the
costs of such products will be available from government health administration
authorities, private health insurers and other organizations. Third-party
payors are increasingly challenging the price and cost effectiveness of
medical products and services, including medical diagnostic procedures. There
can be no assurance that adequate reimbursement will be available or
sufficient to allow the Company to sell its products on a competitive basis.
Certain Tax Considerations
Biomune has not sought or received and does not intend to seek a ruling from
the IRS to the effect, among other things, that the Distribution will qualify
as a tax free distribution under Section 355 of the Code. The Company
believes that the distribution does qualify for tax free treatment under the
Code. However, if the Distribution were not to qualify under Section 355 of
the Code, then in general, a corporate tax would be payable by the
consolidated group of which Biomune is the common parent based upon the
difference between (i) the fair market value of Company Common Stock and (ii)
the adjusted basis of Volu-Sol Common Stock. The corporate level tax would be
payable one-half by Biomune and one-half by the Company. In addition, under
the consolidated return regulations, each member of the consolidated group
(including the Company) is severally liable for such tax liability.
Furthermore, if the Distribution were not to qualify under Section 355 of the
Code, then each holder of Biomune Common Stock who receives shares of Volu-Sol
Common Stock in the Distribution would be treated as if such shareholder
received a taxable distribution in an amount equal to the fair market value of
Volu-Sol Common Stock received. This would result in (i) a dividend to the
extent paid out of Biomune's current and accumulated earnings and profits;
then (ii) a reduction in such shareholder's basis in Biomune Common Stock to
the extent the amount received exceeds the amount referenced in clause (i);
and then (iii) gain from the exchange of Biomune Common Stock to the extent
the amount received exceeds the sum of the amounts referenced in clauses (i)
and (ii).
Fraudulent Transfer Considerations; Legal Dividend Requirements
It is a condition to the consummation of the Distribution that the Biomune
Board shall have determined the permissibility of the Distribution under
Nevada corporation law. In February 1997, the Biomune Board made such a
determination. There is no certainty, however, that a court would find the
decision of the Biomune Board to be binding on creditors of the Company and
Biomune or that a court would reach the same conclusions as the Biomune Board
in determining whether the Company or Biomune was insolvent at the time of, or
after giving effect to, the Distribution. If a court in a lawsuit by an
unpaid creditor or representative of creditors, such as a trustee in
bankruptcy, were to find that at the time Biomune effected the Distribution,
the Company or Biomune, as the case may be, (i) was insolvent; (ii) was
rendered insolvent by reason of the Distribution; (iii) was engaged in a
business or transaction for which the Company's or Biomune's remaining assets,
as the case may be, constituted unreasonably small capital; or (iv) intended
to incur, or believed it would incur, debts beyond its ability to pay as such
debts matured, such court may be asked to void the Distribution (in whole or
in part) as a fraudulent conveyance and require that the shareholders return
the special dividend (in whole or in part) to Biomune or require the Company
to fund certain liabilities for the benefit of creditors. The measure of
insolvency for purposes of the foregoing will vary depending upon the
jurisdiction whose law is being applied. Generally, however, the Company or
Biomune, as the case may be, would be considered insolvent if the fair value
of their respective assets were less than the amount of their respective
liabilities or if they incurred debt beyond their ability to repay such debt
as it matures. The Biomune Board and management believe that, in accordance
with their own examination of the financial statements of Biomune and the
Company and expected capital infusions concurrent with or in advance of the
Distribution, the Company will be solvent at the time of the Distribution (in
accordance with the foregoing definitions), will be able to repay or refinance
its debts as they mature following the Distribution and will have sufficient
capital to carry on its business.
Dilution
A significant number of shares of Volu-Sol's Common Stock are authorized but
not issued. In addition, there are a substantial number of shares of Common
Stock of the Company reserved for issuance upon the exercise of certain
options, warrants and preferred stock conversion rights. If and to the extent
such options, warrants or rights are exercised, or if the Board of Directors
determines to issue authorized but previously unissued shares of Common Stock
in connection with acquisitions or other transactions, such issuances could
substantially dilute the voting power of the existing shareholders of the
Company, including all shareholders receiving their shares of the Company's
Common Stock as part of the spinoff. Furthermore, the possibility of such
issuances may adversely affect the market for the Company's Common Stock
(should such a market ever develop).
ADDITIONAL ACTIONS AND RELATIONSHIPS
Biomune, as sole shareholder of the Company, has approved the adoption by the
Company of a Stock Option Plan (the "Plan") for purposes of granting awards of
options to purchase Volu-Sol Common Stock to directors, officers, employees
and consultants and advisors of the Company subsequent to the Distribution.
Biomune also has approved the reservation by the Company of 5,000,000 shares
under the Plan. For a discussion of the principal terms and conditions of the
Plan, see "Management -- Stock Option Plan."
After the Distribution the only person who will serve as an officer and/or
director of the Company and Biomune and their respective subsidiaries will be
Mr. Michael G. Acton. Mr. Acton, Chief Executive Officer, Chief Financial
Officer and Chairman of the Board of the Company, will continue to serve as
Chief Financial Officer of Biomune following the Distribution. There will be
no other overlapping officers or directors of Biomune and its subsidiaries on
the one hand and the Company on the other hand.
DIVIDENDS
The Company currently intends to retain all available earnings, if any,
generated by its operations. Accordingly, the Company does not anticipate
paying dividends on Company Common Stock in the foreseeable future. Any
future determination as to the payment of dividends will be at the discretion
of the Company's Board and will be dependent upon the Company's results of
operations, financial condition, contractual restrictions, if any, and other
factors deemed relevant by the Board.
FINANCIAL STATEMENTS
The historical financial statements of the Company are attached to and form a
part of this Information Statement and should be read in conjunction with the
accompanying notes.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following Management's Discussion and Analysis or Plan of Operation
contains forward-looking statements which involve risks and uncertainties. The
Company's actual results could differ materially from those anticipated in
these forward-looking statements as a result of certain factors, including
those set forth under the heading "Risk Factors," set forth above.
In an effort to increase Volu-Sol's revenues, in fiscal 1994, the Company
reorganized Volu-Sol's (then the Volu-Sol Medical Division's) management and
emphasized increasing its revenues. During fiscal 1995, Volu-Sol experienced
an approximately 25% increase in its revenues resulting in part from this
reorganization and in part from the Company's efforts to increase Volu-Sol's
revenues. During the months of June, July and August, 1997, the Company
generated approximately $39,000 per month in revenues. In order to provide
greater production capacity and efficiencies and enhanced customer service
with a view to further increasing Volu-Sol's revenues, in October 1996, the
Company relocated Volu-Sol's production facilities to the Salt Lake City, Utah
metropolitan area, closer to its former parent's (Biomune Systems, Inc.'s)
current principal place of business.
Results of Operations
Nine Months Ended June 30, 1997 Compared to Nine Months Ended June 30, 1996
During the nine months ended June 30, 1997, the Company generated revenues
totaling $368,731 compared to $338,016 for the same period in 1996. This
increase in revenues is attributable to the sale of the Definitive, which
accounted for additional revenues of approximately $60,000 during the nine
months ended June 30, 1997, offset in part by a decrease in revenues from the
sale of stains and reagents. The decline in sales of stains and reagents is
mainly attributable to the loss of the Company's largest customer during the
fourth quarter of fiscal 1996 and the Company not having sufficient resources
to adequately market its stain and reagent products. Subsequent to June 30,
1997, the Company experienced technical complications with the design of the
Definitive, which have now been corrected. However, due to these technical
issues, sales since June 30, 1997, have been negligible.
Cost of goods sold for the nine months ended June 30, 1997 totaled $301,870
compared to $280,939 for the same period in 1996. The overall gross margin for
the nine months ended June 30, 1997 was 18.1 percent of revenues compared to
16.9 percent of revenues for the same period in fiscal year 1996. The
increase in the gross margin is attributable to the sale of the Definitive,
which contributed a margin of approximately 32 percent during the nine months
ended June 30, 1997. The gross margin for the nine months ended June 30,
1997, excluding the impact of the Definitive, was approximately 15.3 percent.
The decrease in the gross margin on sales of stains and reagents is
attributable to increases in raw materials costs and increases in labor costs
as a result of adding additional manufacturing overhead labor.
Selling, general and administrative expenses totaled $542,524 for the nine
months ended June 30, 1997, compared to $828,522 for the nine months ended
June 30, 1996, an overall decrease of $285,998. This decrease is due to: (1)
decreases in the level of marketing and advertising expenditures due to
insufficient cash flows to fund such activities, and (2) significant
relocation costs which were incurred in 1996 associated with the Company's
move from Henderson, Nevada to Salt Lake City, Utah. In addition, selling,
general and administrative expenses for the nine months ended June 30, 1997
included amounts allocated from Biomune for payroll-related and professional
services of approximately $40,000, compared to allocations of approximately
$124,000 for the same period in 1996. This decrease related to an allocation
of approximately $90,000 during the nine months ended June 30, 1996 related to
the granting of Biomune options to a former Volu-Sol consultant. After the
Distribution, payroll costs with respect to officers and key employees is not
expected to be significantly different (not greater than 10 percent) than the
amounts allocated from Biomune. Recurring financing costs and other operating
costs as a result of operating on a stand alone basis are not expected to be
significantly different from those allocated.
The Company incurred a net loss of $475,663 for the nine months ended June 30,
1997 compared to a net loss of $804,236 for the nine months ended June 30,
1996. This decrease in net loss is primarily due to decreased selling,
general and administrative expenditures and to the loss on disposal of assets
experienced during the nine months ended June 30, 1996 as a result of
relocating to Salt Lake City, Utah.
It is anticipated that the net loss applicable to common shareholders will
increase in the future in connection with dividends and the impact of the
beneficial conversion feature associated with the Company's private placement
of its Series A Preferred Stock. Assuming the sale of Series A Preferred
Stock is limited to $1,225,000 (for which there are subscriptions receivable
or cash receipts as of September 30, 1997), the net loss applicable to common
shareholders would increase by approximately $306,000 for the one-time charge
related to the beneficial conversion feature and by approximately $122,500 per
year for recurring dividends at 10 percent. Sales of Series A Preferred Stock
could be as high as $2,400,000, in which case the dividends and the impact of
the beneficial conversion feature would increase accordingly.
Fiscal Year 1996 Compared to Fiscal Year 1995
For the fiscal year ended September 30, 1996, the Company generated revenues
totaling $434,691 compared to $458,981 for the fiscal year ended September
30, 1995. The decrease in revenues resulted from management's decision to
discontinue selling products to the Company's largest customer. This decision
was a result of that customer's deteriorating financial condition and was made
during the fourth quarter of fiscal year 1996. Sales to that customer
represented approximately 12 and 17 percent of the Company's total revenues
during the fiscal years ended September 30, 1996 and 1995, respectively.
The Company continued its concentrated marketing effort that began in fiscal
year 1995; however, the Company changed its marketing focus from attempting to
obtain large OEM contracts to a focus of attempting to increase its domestic
image and domestic distribution base. Total expenditures on this concentrated
marketing effort were relatively consistent with fiscal year 1995. Assuming
the Company has the financial wherewithal, it will continue this focus in the
future and will also expand its focus towards developing an international
distribution base.
Cost of goods sold for the year ended September 30, 1996 totaled $357,471
compared to $369,373 for the fiscal year ended September 30, 1995. The gross
margin for the year ended September 30, 1996 was 17.8 percent of revenues
compared to 19.5 percent of revenues for the fiscal year ended September 30,
1995. This decrease in the gross margin percentage results from an increase
in cost of goods sold of approximately $7,500 which is mainly due to slight
increases in production labor and overhead costs as a result of relocating
operations to Salt Lake City, Utah.
Selling, general and administrative expenses totaled $1,446,651 for the fiscal
year ended September 30, 1996, compared to $707,393 for the fiscal year ended
September 30, 1995, an overall increase of $739,258. This significant
increase in selling, general and administrative expenses is mainly due to: (1)
expenditures of approximately $250,000 resulting from the relocation from
Henderson, Nevada to Salt Lake City, Utah; (2) the continued concentrated
marketing efforts that began in fiscal year 1995 resulting in additional
payroll expenditures of approximately $80,000; (3) compensation of $100,000
related to the reduction in a note receivable owed by Jim Dalton, a consultant
to the Company, in exchange for his relinquishment of his right to receive 50
percent of the future net profits; (4) the write off of receivables totaling
approximately $50,000 due to the determination that the likelihood of payment
by the Company's largest customer was remote; and (5) a write off of
approximately $245,000 related to the impairment of intangible assets
consisting of medical diagnostic technologies acquired in 1991. The
determination that the intangible assets were impaired was based on continuing
operating losses, projected sales of products using the technology at roughly
the same levels as in prior years and the framework set out in Statement of
Financial Accounting Standards No. 121, issued in March 1995 (future
undiscounted cash flows not expected to exceed the carrying value of the
intangible assets).
Selling, general and administrative expenses for the year ended September 30,
1996 included amounts allocated from Biomune for payroll-related and
professional services of approximately $165,000, compared to allocations of
approximately $189,000 for the year ended September 30, 1995.
The Company incurred a net loss of $1,402,222 for the fiscal year ended
September 30, 1996, compared to a net loss of $617,785 during the fiscal year
ended September 30, 1995. This increase in net loss is due to a combination
of the decreased margin and the increased selling, general and administrative
expenditures as described above.
Fiscal Year 1995 Compared to Fiscal Year 1994
For the fiscal year ended September 30, 1995, the Company generated revenues
totaling $458,981 compared to $365,189 for the fiscal year ended September 30,
1994. This increase in revenues resulted from a concentrated marketing effort
that included advertising in trade journals and telemarketing. These
marketing efforts were designed to assist the Company to obtain large OEM
contracts. Although the Company was unsuccessful in obtaining OEM contracts,
it did receive an incidental increase in revenues through its efforts.
Cost of goods sold for the year ended September 30, 1995 totaled $369,373
compared to $250,121 for the fiscal year ended September 30, 1994. The
overall gross margin for the year ended September 30, 1995 was 19.5 percent of
revenues compared to 31.5 percent of revenues for the fiscal year ended
September 30, 1994. This significant decrease resulted from an increase in
production labor costs as a result of hiring a full-time production manager
and the Company's decision to increase the safety of its manufacturing
employees through the use of more stringent manufacturing processes and
procedures to increase quality control measures.
Selling, general and administrative expenses totaled $707,393 for the fiscal
year ended September 30, 1995, compared to $445,434 for the fiscal year ended
September 30, 1994. This significant increase in selling, general and
administrative expenses was due to: (1) approximately $90,000 in expenditures
related to a concentrated marketing effort that included advertising in trade
journals and telemarketing; (2) additional rent expenditures associated with
an extended month to month lease as well as related legal charges; (3) costs
of $20,000 related to damages experienced in a fire; and (4) increased payroll
and consulting costs related to redesigning the manufacturing process and
increasing the sales efforts. In addition, selling, general and
administrative expenses for the year ended September 30, 1995 included amounts
allocated from Biomune for payroll-related and professional services of
approximately $189,000, compared to allocations of approximately $53,000 for
the year ended September 30, 1994. The increase in amounts allocated resulted
from expenses associated with the grant of Biomune options to a Volu-Sol
Consultant.
The Company incurred a net loss of $617,785 for fiscal year ended September
30, 1995, compared to a net loss of $318,150 for the fiscal year ended
September 30, 1994. This increase in net loss is due to a combination of the
decreased margin and the increased selling, general and administrative
exenses, as described above.
Liquidity and Capital Resources
The Company currently is unable to finance its operations solely from its cash
flows from operating activities. From October 1, 1993 through September 1,
1997, Biomune financed the Company's operations through a series of loans and
other capital contributions totaling approximately $2,750,000. Of this
amount, $332,500 represents loans which amount bear interest at the rate of
10% per year and which are payable on demand. After the Distribution, the
Company does not anticipate receiving additional amounts from Biomune, from
loans or otherwise. The Company has agreed to sell up to 12,000 shares of its
Series A Preferred, for a total of up to $2,400,000. The Series A Preferred
will be convertible to Common Stock of the Company commencing January 1,
1998. The "conversion price" which is the basis for such conversion is the
lesser of (i) 80% of the average closing bid price of the Company's Common
Stock for the three trading days immediately preceding the date of conversion
or (ii) $1.25 per share. As of September 30, 1997, the Company had received
subscriptions for $1,225,000 of Series A Preferred, for which cash of $325,000
had been received. Payments with respect to the remaining subscriptions are
due as follows: $300,000 upon the effective date of the Form 10-SB (on or
about December 1, 1997), $300,000 within 45 days of the effective date of the
Form 10-SB and $300,000 within 90 days of the effective date of the Form
10-SB. The Company intends to keep the private placement open through
December 31, 1997 and may raise up to an additional $1,175,000.
The Company intends to use the proceeds from such Offering to repay its
indebtedness to Biomune (approximately $390,500 as of November 21, 1997), pay
the expenses of the Offering and the Distribution (including legal and
accounting fees incurred in each transaction estimated to be approximately
$75,000), acquire yet-to-be identified medical product distributors or product
rights, and supplement working capital. The Company believes that cash
generated by operations, together with the proceeds of the Offering will be
sufficient to meet its capital requirements for a minimum of 12 months.
As of June 30, 1997, the Company had cash and cash equivalents of $110,605 and
a working capital deficit of $71,448 as compared to cash of $12,167 and
working capital of $94,380 as of September 30, 1996.
During the nine months ended June 30, 1997, the Company's operating activities
used cash of $424,486, much of which was provided primarily by loans and
capital contributions from Biomune. Similarly, during fiscal year 1996, the
Company's operating activities required cash in the amount of $987,680, which
was provided by capital contributions from Biomune. During fiscal year 1995,
the Company's operating activities required cash in the amount of $552,261,
which was provided primarily by capital contributions from Biomune.
The Company is obligated under a manufacturing agreement with the supplier of
the Definitive to purchase 600 automated slide stainers ("stainers") per
calendar year. In the event the Company purchases fewer than 600 stainers,
the manufacturer has the option to convert the Company's exclusive worldwide
license and distributorship to a non-exclusive license and distributorship.
As of September 30, 1997, the Company had purchased 228 stainers, of which 170
are in inventory. Subsequent to September 30, 1997, the Company informed the
manufacturer of the Definitive that the Company would not meet the annual
purchase commitment. It appears that the Company's exclusive worldwide
license and distributorship will be converted to a non-exclusive license and
distributorship, which could have a negative impact on the number of units
sold by the Company.
The Company presently has no credit facility with any commercial lending
institution. In the past, the Company has borrowed and received capital from
time to time from Biomune, but the Company has no formal financing
arrangement, agreement or understanding with Biomune or any other party to
provide debt financing in the future.
The Company has agreed to sell its Series A Preferred shares to raise funds to
finance operations, market the Definitive and acquire or develop in-house
distribution capacity and new products and devices. There can be no assurance
that additional financing will not be needed in the future.
PROPERTY
The Company leases approximately 11,500 square feet of laboratory facilities
at 5095 West 2100 South, West Valley City, Utah. The leased premises serve as
the Company's manufacturing, warehousing and shipping facilities as well as
its corporate headquarters and offices. Base monthly rent payments are $4,620
until November 1997, after which the monthly base rent amount will be adjusted
according to changes in the Consumer Price Index. The leased premises
originally were leased by Biomune, but Biomune has assigned its rights under
the lease to the Company. The lessor of the Company's facility is an
unaffiliated third party. The lease was the product of arms-length
negotiations. The lease extends through November 2000. The Company believes
that its facilities will be adequate to meet its needs at least through fiscal
year 1998.
MANAGEMENT
The executive officers and directors of the Company are as follows:
Name Age Position
- -------------------- ----- --------------------------------
Michael G. Acton 34 Chairman, Chief Executive Officer,
Chief Financial Officer
James R. Derrick 53 President, Director
Jack W. Job 35 Director
Michael G. Acton, CPA. Mr. Acton has been Chairman and Chief Executive
Officer of Volu-Sol since February 1997. He has also been Chief Financial
Officer and Controller of Biomune since October 1994. From June 1989 through
October 1994, Mr. Acton was employed by Arthur Andersen LLP in Salt Lake City,
Utah, where he performed various tax, audit and business advisory services.
Mr. Acton received a Bachelor of Science degree in Accounting in 1988 and a
Master of Professional Accountancy degree in 1989, both from the University of
Utah. He is a Certified Public Accountant in the State of Utah. Biomune has
a class of securities registered under the Securities Exchange Act of 1934
and, until the consummation of the Distribution was the parent of the Company.
James R. Derrick. Mr. Derrick has been the Company's President since February
1997, and a director since May 1997. Between July 1994 and February 1997, he
was employed as a business and engineering consultant by Derrick Consultants.
From October 1979 to July 1994, Mr. Derrick was the chief executive officer of
Crib Retaining Walls, Inc., a manufacturing and construction firm based in
North Salt Lake, Utah. Mr. Derrick received a Bachelor of Science degree in
Industrial Engineering from the University of Utah in 1971.
Jack W. Job. Mr. Job has been a director of the Company since May 1997. He
presently is the Chief Financial Officer of Utah Technology Finance
Corporation located in Salt Lake City, Utah. Prior to his present position
with UTFC, from May 1990 to May 1995, Mr. Job was employed by Arthur Andersen
LLP in its Salt Lake City office as a senior accountant performing tax and
audit functions. He is a Certified Public Accountant and a member of the Utah
Association of Certified Public Accountants and the American Institute of
Certified Public Accountants. Mr. Job received a bachelor of science degree
and masters of accountancy degree (Magna Cum Laude) from Brigham Young
University.
In addition to the foregoing executive officers and directors, the Company
expects the following employee to make significant contributions to the
Company:
Dawn Perdue. Ms. Perdue, age 36, is Director of Operations and acts as the
Company's Compliance Officer for regulatory affairs. She came to the Company
in October 1995 with more than 12 years experience in science and management
positions in clinical and industrial operations. Prior to joining the
Company, Ms. Perdue was Manager of Research and Development of Genzyme
Corporation, a leading biotechnical company. She graduated in biology from
Western New England College (Massachusetts) and has a Certificate of Special
Studies in Administration from Harvard University.
None of the Company's executive officers or directors are related to any other
executive officer or director of the Company.
EXECUTIVE COMPENSATION
Since March 1997, the Company has paid Mr. Acton, its Chief Executive Officer,
Chief Financial Officer and Chairman, a consulting fee of $6,000 per month.
No executive officer or employee of the Company is paid more than $100,000 per
year in salary and benefits. Mr. Acton provides his services on a part-time
basis. Following the Distribution, he will continue to provide such services
on the same basis. He also serves as Chief Financial Officer of Biomune. The
Company's President, James R. Derrick, receives an annual salary of $60,000.
DIRECTOR COMPENSATION
Members of the Board of Directors who are not employees of the Company are
paid $500 for each meeting of the Board of Directors attended. Following the
Distribution, this fee is to be paid $250 in cash and $250 in shares of the
Company's Common Stock.
EMPLOYMENT AGREEMENTS
Aside from the payments described above to Mr. Acton and Mr. Derrick, there
are no consulting or employment contracts with management at this time.
STOCK PLANS
The 1997 Volu-Sol, Inc. Transition Plan
The Company has adopted the 1997 Volu-Sol, Inc. Transition Plan (the
"Transition Plan") to govern the issuance and exercise of certain options to
purchase the Company's Common Stock. Certain officers, directors and
employees of Biomune have been granted options to purchase shares of Biomune
Common Stock (the "Biomune Options"). The Biomune Options have been granted
pursuant to various stock plans of the Company (the "Biomune Plans"). The
Biomune Plans give the committee of the Biomune Board that administers the
plans (the "Biomune Plan Committee") the authority to make equitable
adjustments to outstanding Biomune Options in the event of certain
transactions, of which the Distribution is one.
The Biomune Plan Committee and the Biomune Board have determined that,
immediately prior to the Distribution, each Biomune Option will be divided
into two separately exercisable options: (i) an option to purchase Volu-Sol
Common Stock (the "Add-on Volu-Sol Option") in an amount that would have been
issued in the Distribution in respect of the shares of Biomune Common Stock
subject to the applicable Biomune Option, if such Biomune Option had been
exercised in full immediately prior to the Distribution Record Date, and
containing substantially equivalent terms as the existing Biomune Option, and
(ii) an option to purchase Biomune Common Stock (an "Adjusted Biomune
Option"), exercisable for the same number of shares of Biomune Common Stock as
the corresponding Biomune Option had been. The per share exercise price of
the Biomune Option will remain the same in the Adjusted Biomune Option, and
all other terms of such Biomune Option will remain the same in all material
respects. The Add-on Volu-Sol Option will carry an option exercise price per
share equal to the price per share of the exercise price under the Biomune
Option.
As a result of the foregoing, certain persons who remain Biomune employees or
non-employee directors after the Distribution will hold both Adjusted Biomune
Options and separate Add-on Volu-Sol Options. The obligations with respect to
the Adjusted Biomune Options and Add-on Volu-Sol Options held by Biomune
employees and non-employee directors following the distribution will be
obligations solely of Biomune. The Company will reserve a total of 709,602
shares of Common Stock for issuance upon exercise of the Add-on Volu-Sol
Options. The Transition Plan will be administered by the Board of Directors
or a Committee of the Board of Directors appointed by the Board.
Other Stock Purchase Rights
Biomune has granted rights to purchase Biomune Common Stock in the form of
warrants (the "Biomune Warrants"). Under the agreements governing the grant
and exercise of the Biomune Warrants, Biomune has agreed to issue to the
holders of such rights securities otherwise issuable with respect to the
Biomune Common Shares underlying the Biomune Warrants if and to the extent the
Biomune Warrants are exercised. Consequently, if the holders of the Biomune
Warrants exercise their rights thereunder, Biomune must issue to those holders
one share of Volu-Sol Common Stock for each ten shares of Biomune Common Stock
issued in connection with such exercise. Volu-Sol has agreed to sell to
Biomune the shares of Volu-Sol Common Stock needed to meet this obligation of
Biomune. The purchase price of such shares of Volu-Sol Common Stock will be a
sum equal to 10% of the consideration received by Biomune in exercise of the
Biomune Warrants. The Company will reserve 247,059 shares of Common Stock for
issuance upon exercise of the Biomune Warrants. If all of such Biomune
Warrants are exercised, the Company will receive $588,000 from Biomune as
consideration for the Volu-Sol Common Stock sold to Biomune as described
above.
The 1997 Volu-Sol, Inc. Stock Incentive Plan
The Company has adopted the 1997 Volu-Sol, Inc. Stock Incentive Plan ("1997
Plan"). The 1997 Plan was approved by action of Biomune, the sole shareholder
of the Company, in August 1997. Under the 1997 Plan, the Company may issue
stock options, stock appreciation rights ("SARs"), restricted stock awards,
and other incentives to employees, officers and directors of the Company. The
principal features of the 1997 Plan are summarized below, but the following
Summary is qualified in its entirety by the written plan.
The 1997 Plan provides for the award of incentive stock options to key
employees and directors of the Company and the award of nonqualified stock
options, stock appreciation rights, bonus rights, and other incentive grants
to employees and certain non-employees who have important relationships with
the Company or its subsidiaries. 5,000,000 shares are available for issuance
pursuant to awards granted under the 1997 Plan. To date no awards of any kind
have been made under the 1997 Plan. The Board of Directors presently acts as
the committee that administers the 1997 Plan (the "Plan Committee").
Stock Option Grants. The Plan Committee may grant Incentive Stock Options
("ISOs") and Non-Statutory Stock Options ("NSOs") under the 1997 Plan. With
respect to each option grant, the Plan Committee will determine the number of
shares subject to the option, the option price, the period of the option, the
time or times at which the option may be exercised (including whether the
option will be subject to any vesting requirements and whether there will be
any conditions precedent to exercise of the option), and the other terms and
conditions of the option.
Stock Appreciation Rights ("SARs") may be granted under the 1997 Plan. Each
SAR entitles the holder, upon exercise, to receive from the Company an amount
equal to the excess of the fair market value on the date of exercise of one
share of Common Stock of the Company over its fair market value on the date of
grant (or, in the case of a SAR granted in connection with an option, the
excess of the fair market value of one share of Common Stock of the Company
over the option price per share under the option to which the SAR relates),
multiplied by the number of shares covered by the SAR, may be made in Common
Stock, in cash, or in any combination of Common Stock and cash. No SARs have
been granted under the 1997 Plan.
Restricted Stock. The Plan Committee may issue shares of Common Stock under
the 1997 Plan subject to the terms, conditions, and restrictions determined
thereby. Upon the issuance of restricted stock the number of shares reserved
for issuance under the 1997 Plan will be reduced by the number of shares
issued. No restricted shares have been granted under the 1997 Plan.
Cash Bonus Rights. The Plan Committee may grant cash bonus rights under the
1997 Plan in connection with (i) options granted or previously granted, (ii)
SARs granted or previously granted, (iii) stock bonuses awarded or previously
awarded and (iv) shares issued under the 1997 Plan. No bonus rights have been
granted under the 1997 Plan.
Changes in Capital Structure. The 1997 Plan provides that if the outstanding
Common Stock of the Company is increased or decreased or changed into or
exchanged for a different number or kind of shares or other securities of the
Company or of another corporation by reason of any recapitalization, stock
split or certain other transactions, appropriate adjustment will be made by
the Plan Committee in the number and kind of shares available for grants under
the 1997 Plan. In addition, the 1997 Plan Committee will make appropriate
adjustments in the number and kind of shares as to which outstanding options
will be exercisable. In the event of a merger, consolidation or other
fundamental corporate transformation, the Board may, in its sole discretion,
permit outstanding options to remain in effect in accordance with their terms;
to be converted into options to purchase stock in the surviving or acquiring
corporation in the transaction; or to be exercised, to the extent then
exercisable, during a period prior to the consummation of the transaction
established by the Plan Committee or as may otherwise be provided in the 1997
Plan.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Presently, Volu-Sol is a wholly owned subsidiary of Biomune. In the
Distribution, each holder of Biomune Common Stock at March 5, 1997 will
receive one share of Volu-Sol Common Stock for every ten shares of Biomune
Common Stock held at that date. In addition, certain shares must be issued to
the holders of Preferred Stock of Biomune at such time as the Preferred Stock
may be converted by the holders thereof.
The following table sets forth certain information on a pro forma basis
regarding beneficial ownership of the Company's Common Stock after giving
effect to the Distribution of 2,111,216 shares of Common Stock (i) by each
person (or group of affiliated persons) who is expected by the Company to own
beneficially more than 5 percent of the outstanding shares of Common Stock,
(ii) by each director and executive officer of the Company, and (iii) by all
of the directors and executive officers of the Company as a group. As of
March 5, 1997, Biomune had 21,112,156 shares of Common Stock issued and
outstanding. The chart below does not give effect to the possible conversion
of the Biomune Preferred Stock, the issuance of shares upon exercise of the
Biomune Warrants, or the conversion of the Company's Series A Preferred Stock.
<TABLE>
<CAPTION>
Name and Address Shares of Common Stock
of Beneficial Owner (1) Beneficially Owned (2) Percentage of Class
- ------------------------ ---------------------- --------------------
<S> <C> <C>
David G. Derrick (3) 169,850 7.60%
2401 S. Foothill Dr.
Salt Lake City, Utah 84109
Leviticus Trust (4) 210,755 9.98%
1233 Beech Street, #315
Atlantic Beach, NY 11509
Michael G. Acton (5) 23,544 1.10%
(Director and Executive
Officer)
James R. Derrick - -
(Director)
Jack W. Job - -
(Director)
All executive officers and
directors as a group (3 persons) 23,544 1.10%
_________________________
</TABLE>
(1) Unless otherwise indicated, such person's address is the same as the
Company's address.
(2) A person is deemed to be the beneficial owner of securities that can be
acquired by such person within 60 days from the date of this Memorandum upon
the exercise of options or warrants. Each beneficial owner's percentage of
ownership is determined by assuming that options or warrants held by such
person (but not those held by any other person) and exercisable within 60 days
from the date of this Memorandum have been fully exercised. Unless otherwise
noted, the Company believes the persons named in this table will possess sole
voting and investment power with respect to all shares of Common Stock shown
as being beneficially owned. Percentages are calculated based on 2,111,216
shares of Common Stock outstanding immediately following the Distribution (as
adjusted for shares deemed to be beneficially owned by such shareholder).
(3) David Derrick will own 45,850 shares of Common Stock directly and will
receive options to purchase 124,000 shares of Common Stock. Mr. Derrick is
the CEO and Chairman of Biomune and the brother of the Company's President,
James R. Derrick.
(4) The Leviticus Trust will own approximately 210,755 shares of Common
Stock directly. The Leviticus Trust is an irrevocable trust established for
the benefit of its sole beneficiary, Genesis Investment Corporation. The
trustee of the Leviticus Trust is Diana Rothstein, an individual residing in
New York. The trustee has the power to vote and to dispose of the shares held
by the Leviticus Trust, consistent with the terms and subject to the
conditions of the Trust Declaration establishing the trust.
(5) Mr. Acton will own approximately 44 shares of Common Stock directly and
will hold options to purchase 23,500 shares of Common Stock.
Except for the matters described herein, there are no arrangements known to
the Company, the operation of which may, at a subsequent date, result in a
change of ownership or control of the Company.
DESCRIPTION OF THE COMPANY'S CAPITAL STOCK
Common Stock
The Company is authorized to issue 50,000,000 shares of Common Stock, $0.0001
par value per share. As of March 5, 1997, there were 21,112,156 shares of
Common Stock of Biomune outstanding held of record by approximately 1,070
shareholders. Accordingly, immediately after the Distribution, the Company
will have approximately 1,070 shareholders of record and approximately
2,111,216 shares outstanding. The Company also will reserve 323,118 shares of
Common Stock for issuance upon conversion of the Biomune Preferred Stock
outstanding at March 5, 1997. The Company has agreed with Biomune to sell
247,059 shares of its Common Stock to Biomune to permit Biomune to meet its
obligations to deliver Common Stock of the Company upon exercise of certain
warrants and options (other than options issued under employee stock option
plans). The purchase price of such shares of Common Stock will be a sum equal
to 10% of the consideration received by Biomune in connection with the
exercise of the right to acquire Biomune Common Stock.
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the shareholders, and do not have
cumulative voting rights. Subject to preferences that may be applicable to any
outstanding Preferred Stock, the holders of Common Stock are entitled to
receive ratably the dividends, if any, that may be declared from time to time
by the Board of Directors out of funds legally available for such dividends.
In the event of a liquidation, dissolution or winding up of the Company, the
holders of Common Stock would be entitled to share ratably in all assets
remaining after payment of liabilities and the satisfaction of any liquidation
preferences granted the holders of any outstanding shares of Preferred Stock.
Holders of Common Stock have no preemptive rights and no conversion rights or
other subscription rights. There are no redemption or sinking fund provisions
applicable to the Common Stock. All the outstanding shares of Common Stock
are, and the Common Stock to be distributed by Biomune hereby, when issued,
will be validly issued, fully paid and non-assessable.
Preferred Stock
The Company is authorized to issue 10,000,000 shares of undesignated Preferred
Stock, $0.0001 par value per share. Pursuant to the Company's Articles of
Incorporation, the Company's board of directors has the authority to amend the
Company's Articles of Incorporation, without further shareholder approval, to
designate and determine, in whole or in part, the preferences, limitations and
relative rights of the Preferred Stock before any issuance of the Preferred
Stock and to create one or more series of Preferred Stock and fix the number
of shares of each such series and determine the preferences, limitations and
relative rights of each series of Preferred Stock, including dividend rights,
dividend rates, conversion rights, voting rights, terms of redemption,
redemption prices, and liquidation preferences. The issuance of Preferred
Stock may have the effect of delaying, deferring or preventing a change in
control of the Company without further action by the shareholders and may
adversely affect the voting and other rights of the holders of Common Stock.
The Company has authorized the issuance of 20,000 shares of Series A Preferred
and intends to issue up to 12,000 shares of such Preferred Stock for $2.4
million concurrent with or prior to the Distribution. The Company and Biomune
have agreed that if the Securities and Exchange Commission has not declared
the Company's Registration Statement on Form 10-SB effective within 180 days
of its filing, then the holders of the Series A Preferred may convert such
shares as they then hold to Biomune Common Stock. As of September 30, 1997,
the Company had received subscriptions for $1,225,000 of Series A Preferred,
for which $325,000 has been received. Payments for the remaining
subscriptions are due as follows: $300,000 upon the effective date of the Form
10-SB, $300,000 within 45 days of the effective date of the Form 10-SB, and
$300,000 within 90 days of the effective date of the Form 10-SB.
Anti-Takeover Provisions
Certain provisions of Volu-Sol's Articles of Incorporation and Bylaws, as each
will be in effect as of the date of Distribution, and of applicable Utah State
Corporation Law, have the effect of making more difficult an acquisition of
control of Volu-Sol in a transaction not approved by Volu-Sol's Board of
Directors.
Dilution
The Company has a large number of shares of Common Stock authorized in
comparison to the number of shares issued and outstanding. The Board of
Directors determines when and under what conditions and at what prices to
issue the stock of the Company. In addition, a significant number of shares
of Common Stock of the Company are reserved for issuance upon exercise of
purchase or conversion rights. The issuance of such shares, whether in
connection with new equity offerings, acquisitions, or the exercise of option
or conversion rights will result in dilution of the equity and voting
interests of existing shareholders. See "Risk Factors - Dilution."
LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS OF THE COMPANY
The Company's Articles of Incorporation and Article VIII of the Company's
Bylaws provides for indemnification of the officers and directors to the
fullest extent permitted by the provisions of the Utah Revised Business
Corporation Act (the "Utah Act").
Under Section 16-10a-902 of the Utah Act, a corporation may indemnify a past
or present director against liability incurred in a proceeding if (1) the
director conducted himself in good faith, (2) the director reasonably believed
that his conduct was in, or not opposed to, the corporation's best interest,
and (3) in the case of any criminal proceeding, the director had no reasonable
cause to believe his conduct was unlawful; provided, however, that a
corporation may not indemnify a director (i) in connection with a proceeding
by or in the right of the corporation in which the director is adjudged liable
to the corporation, or (ii) in connection with any other proceeding charging
improper personal benefit to him in which he is adjudged liable on the basis
that personal benefit was improperly received by him.
In addition, pursuant to Section 16-10a-903 of the Utah Act, unless limited by
the Articles of Incorporation, a corporation shall indemnify a director who is
wholly successful, on the merits or otherwise, in the defense of any
proceeding to which he is party because he is or was a director against
reasonable expenses incurred by him in connection with the proceeding. Under
16-10a-905 of the Utah Act, an officer is entitled to the benefit of the same
indemnification provisions as apply to directors, but in addition a
corporation may indemnify and advance expenses to an officer who is not a
director to the extent, consistent with public policy, provided by the
corporation's Articles of Incorporation, the corporation's bylaws, general or
specific action of the board of directors, or contract. Unless the
corporation's Articles of Incorporation provide otherwise, Section 16-10a-905
of the Utah Act permits a court in certain circumstances to order the payment
of indemnification to a director, whether or not he met the applicable
standard of conduct, if the director is fairly and reasonably entitled to
indemnification in view of all the relevant circumstances.
INDEPENDENT PUBLIC ACCOUNTANTS
The Board has selected Arthur Andersen LLP to audit the Company's financial
statements for the year ended September 30, 1997. Arthur Andersen LLP have
served as independent public accountants of Biomune and the Company throughout
the periods covered by the financial statements included in this Information
Statement.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
10-SB under the Exchange Act (the "Registration Statement") with respect to
the Volu-Sol Common Stock, including the shares that are to be distributed in
the Distribution to shareholders of Biomune in the Distribution. This
Information Statement does not contain all of the information set forth in the
Registration Statement and the exhibits thereto, to which reference is hereby
made. Statements made in this Information Statement as to the contents of any
contract, agreement and other documents referred to herein are not necessarily
complete. With respect to each such contract, agreement or other documents
filed as an exhibit to the Registration Statement, reference is made to such
exhibit for a more complete description of the matter involved, and each such
statement shall be deemed qualified in its entirety by such reference.
The Registration Statement and the exhibits thereto filed by the Company with
the Commission, as well as reports and other information submitted by the
Company to the Commission, may be inspected and copied at the Public Reference
Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the regional offices of the Commission
located at Seven World Trade Center, Suite 1300, New York, New York 10048 and
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of all or part of such materials can be obtained from the Public
Reference Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549 at prescribed rates. Such material may
also be accessed electronically by means of the Commission's Web Site
(http://www.sec.gov).
Following consummation of the Distribution, the Company will be subject to the
informational reporting requirements of the Exchange Act. In accordance with
the Exchange Act, the Company will file with the Commission the reports and
other information required to be filed under the Exchange Act.
The Company intends to furnish holders of its Common Stock with annual reports
containing financial statements audited by an independent public accounting
firm and quarterly reports for the first three quarters of each fiscal year
containing unaudited financial information.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS
OTHER THAN THOSE CONTAINED IN THIS INFORMATION STATEMENT, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED. NEITHER THE DELIVERY OF THIS INFORMATION STATEMENT NOR ANY
DISTRIBUTION OF SECURITIES MADE HEREUNDER SHALL IMPLY THAT THERE HAS BEEN NO
CHANGE IN THE INFORMATION SET FORTH HEREIN OR IN THE AFFAIRS OF THE COMPANY OR
BIOMUNE SINCE THE DATE HEREOF.
ATTACHMENTS:
Financial Statements of Volu-Sol, Inc.
Biomune Systems, Inc. Annual Report on Form 10-K for Year Ended September 30,
1996
Biomune Systems, Inc. Quarterly Report on Form 10-QSB for Quarter Ended June
30, 1997
Pro Forma Financial Information
<PAGE>
VOLU-SOL, INC. (INCLUDING ITS PREDECESSOR)
FINANCIAL STATEMENTS AS OF
SEPTEMBER 30, 1995 AND 1996 AND
JUNE 30, 1997 (UNAUDITED) AND
FOR EACH OF THE THREE YEARS IN
THE PERIOD ENDED SEPTEMBER 30, 1996
AND THE NINE MONTHS ENDED
JUNE 30, 1996 AND 1997 (UNAUDITED)
TOGETHER WITH REPORT OF
INDEPENDENT PUBLIC ACCOUNTANTS
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Volu-Sol, Inc.:
We have audited the accompanying balance sheets of Volu-Sol, Inc. (the
"Company"), a Utah corporation and wholly owned subsidiary of Biomune Systems,
Inc., as of September 30, 1995 and 1996, and the related statements of
operations, stockholder's equity/parent's investment and cash flows (including
Volu-Sol, Inc.'s predecessor) for each of the three years in the period ended
September 30, 1996. 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 in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatements. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As discussed in Note 1 to the financial statements, the accompanying financial
statements present the carved-out portion of Biomune Systems, Inc.'s net
assets and results of operations related to its medical stain manufacturing
and sales operations prior to July 27, 1995 and its wholly owned subsidiary,
Volu-Sol, Inc., from July 27, 1995 through September 30, 1996, and may not
necessarily be indicative of the financial condition or the results of
operations that would have existed if the medical stain operations or the
subsidiary had been operated as an unaffiliated company. Certain expenses are
the result of allocations of total expenses incurred by Biomune Systems, Inc.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Volu-Sol, Inc. as of
September 30, 1995 and 1996, and the results of its operations and its cash
flows (including those of its predecessor) for each of the three years in the
period ended September 30, 1996 in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from
operations and as of June 30, 1997 has an unaudited accumulated deficit
totaling $1,980,849. These matters raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 1. The financial
statements do not include any adjustments that might result from the outcome
of this uncertainty.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Salt Lake City, Utah
August 15, 1997 (except with respect
to the matters discussed in the first
paragraph of Note 4 and Note 10,
as to which the date is September 29, 1997)
<PAGE>
VOLU-SOL, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
September 30,
-------------------------------- June 30,
1995 1996 1997
-------------- -------------- --------------
(unaudited)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash $ 4,753 $ 12,167 $ 110,605
Accounts receivable, less allowance for
doubtful accounts of $10,000, $13,000
and $13,000, respectively 95,402 74,784 67,293
Inventories 100,324 112,726 190,986
-------------- -------------- --------------
Total current assets 200,479 199,677 368,884
-------------- -------------- --------------
PROPERTY AND EQUIPMENT, at cost:
Leasehold improvements 85,207 221,063 221,165
Furniture and fixtures 72,561 30,924 30,924
Machinery and equipment 64,408 166,052 167,650
-------------- -------------- --------------
222,176 418,039 419,739
Less accumulated depreciation and amortization (170,842) (83,167) (134,528)
-------------- -------------- --------------
Net property and equipment 51,334 334,872 285,211
-------------- -------------- --------------
INTANGIBLE AND OTHER ASSETS, net 297,263 6,249 6,199
-------------- -------------- --------------
Total assets $ 549,076 $ 540,798 $ 660,294
============== ============== ==============
</TABLE>
LIABILITIES AND STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
<S> <C> <C> <C>
CURRENT LIABILITIES:
Related-party notes payable $ - $ - $ 264,500
Accounts payable 64,140 55,090 129,768
Accrued liabilities 16,176 50,207 46,064
-------------- -------------- --------------
Total current liabilities 80,316 105,297 440,332
-------------- -------------- --------------
COMMITMENTS AND CONTINGENCIES (Notes 1, 5, 9 and 10)
STOCKHOLDER'S EQUITY:
Preferred stock, $.0001 par value; 10,000,000
shares authorized, none issued - - -
Common stock, $.0001 par value; 50,000,000
shares authorized, 10,000 shares outstanding 1 1 1
Additional paid-in capital 571,723 1,940,686 2,200,810
Accumulated deficit (102,964) (1,505,186) (1,980,849)
-------------- -------------- --------------
Total stockholder's equity 468,760 435,501 219,962
-------------- -------------- --------------
Total liabilities and stockholder's equity $ 549,076 $ 540,798 $ 660,294
============== ============== ==============
</TABLE>
The accompanying notes to financial statements are
an integral part of these balance sheets.
<PAGE>
VOLU-SOL, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Nine Months Ended
Years Ended September 30, June 30,
------------------------------------------- ----------------------------
1994 1995 1996 1996 1997
------------- ------------- ------------- ------------- -------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
SALES $ 365,189 $ 458,981 $ 434,691 $ 338,016 $ 368,731
COST OF GOODS SOLD 250,121 369,373 357,471 280,939 301,870
------------- ------------- ------------- ------------- -------------
Gross margin 115,068 89,608 77,220 57,077 66,861
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 445,434 707,393 1,446,651 828,522 542,524
------------- ------------- ------------- ------------- -------------
LOSS FROM OPERATIONS (330,366) (617,785) (1,369,431) (771,445) (475,663)
OTHER INCOME (EXPENSE) 12,216 - (32,791) (32,791) -
------------- ------------- ------------- ------------- -------------
NET LOSS $ (318,150) $ (617,785) $ (1,402,222) $ (804,236) $ (475,663)
============= ============= ============= ============= =============
NET LOSS PER COMMON
SHARE (Note 2) $ (140.22) $ (80.42) $ (47.57)
============= ============= =============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING (Note 2) 10,000 10,000 10,000
============= ============= =============
PRO FORMA NET LOSS PER
COMMON SHARE (Note 2) $ (.66) $ (.38) $ (.23)
============= ============= =============
PRO FORMA WEIGHTED AVERAGE
COMMON SHARES OUTSTANDING
(Note 2) 2,111,216 2,111,216 2,111,216
============= ============= =============
</TABLE>
The accompanying notes to financial statements are
an integral part of these statements.
<PAGE>
VOLU-SOL, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY/PARENT'S INVESTMENT
FOR THE YEARS ENDED SEPTEMBER 30, 1994, 1995 AND 1996
AND THE NINE MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
Common Stock Additional
Parent's ------------------- Paid-in Accumulated Total
Investment Shares Amount Capital Deficit Equity
----------- --------- -------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1993 $ 622,063 - $ - $ - $ - $ 622,063
Contributions from Parent 234,987 - - - - 234,987
Net loss (318,150) - - - - (318,150)
----------- --------- -------- ------------ ------------- -------------
Balance at September 30, 1994 538,900 - - - - 538,900
Contributions from Parent 547,645 - - - - 547,645
Net loss through July 26, 1995 (514,821) - - - - (514,821)
Incorporation on July 27, 1995 (571,724) 10,000 1 571,723 - -
Net loss from date of
incorporation through
September 30, 1995 - - - - (102,964) (102,964)
----------- --------- -------- ------------ ------------- -------------
Balance at September 30, 1995 - 10,000 1 571,723 (102,964) 468,760
Contributions from Parent - - - 1,368,963 - 1,368,963
Net loss - - - - (1,402,222) (1,402,222)
----------- --------- -------- ------------ ------------- -------------
Balance at September 30, 1996 - 10,000 1 1,940,686 (1,505,186) 435,501
Contributions from Parent
(unaudited) - - - 260,124 - 260,124
Net loss (unaudited) - - - - (475,663) (475,663)
----------- --------- -------- ------------ ------------- -------------
Balance at June 30, 1997 (unaudited) $ - 10,000 $ 1 $ 2,200,810 $(1,980,849) $ 219,962
=========== ========= ======== ============ ============= =============
</TABLE>
The accompanying notes to financial statements are
an integral part of these statements
<PAGE>
VOLU-SOL, INC.
STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash
<TABLE>
<CAPTION>
Nine Months Ended
Years Ended September 30, June 30,
---------------------------------------- --------------------------
1994 1995 1996 1996 1997
------------ ------------ ------------ ------------ ------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (318,150) $ (617,785) $(1,402,222) $ (804,236) $ (475,663)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation 48,551 48,547 57,540 35,703 51,361
Amortization of intangibles 46,636 46,636 46,636 34,769 -
Write down of intangible asset - - 244,836 - -
Loss on disposal of fixed assets - - 32,791 32,791 -
Change in assets and liabilities-
(Increase) decrease in
accounts receivable 23,233 (47,478) 20,618 (16,875) 7,491
(Increase) decrease in
inventories 17,403 (36,940) (12,402) 8,662 (78,260)
(Increase) decrease in
other assets - (3,000) (458) (558) 50
Increase (decrease) in
accounts payable (15,960) 47,298 (9,050) (4,250) 74,678
Increase (decrease) in
accrued liabilities (18,170) 10,461 34,031 7,057 (4,143)
------------ ------------ ------------ ------------ ------------
Net cash used in
operating activities (216,457) (552,261) (987,680) (706,937) (424,486)
------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (4,439) (17,361) (373,869) (377,911) (1,700)
------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net investment from parent 234,987 547,645 1,368,963 1,107,758 260,124
Proceeds from issuance of notes
payable to Parent - - - - 264,500
------------ ------------ ------------ ------------ ------------
Net cash provided by
financing activities 234,987 547,645 1,368,963 1,107,758 524,624
------------ ------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH 14,091 (21,977) 7,414 22,910 98,438
CASH AT BEGINNING OF PERIOD 12,639 26,730 4,753 4,753 12,167
------------ ------------ ------------ ------------ ------------
CASH AT END OF PERIOD $ 26,730 $ 4,753 $ 12,167 $ 27,663 $ 110,605
============ ============ ============ ============ ============
</TABLE>
The accompanying notes to financial statements are
an integral part of these statements.
<PAGE>
VOLU-SOL, INC.
NOTES TO FINANCIAL STATEMENTS
(Including notes related to unaudited periods)
(1) Nature of Operations and Organization
Volu-Sol, Inc. (the "Company"),a wholly owned subsidiary of Biomune Systems,
Inc. ("Biomune"), was incorporated on July 27, 1995 in the state of Utah.
Biomune contributed certain assets and operations to the Company that had been
previously acquired by Biomune in December 1991. Prior to its incorporation,
the Company had been operated as a division of Biomune. The accompanying
financial statements present the carved-out portion of Biomune's net assets
and results of operations related to its medical stain manufacturing and sales
operations (operated as a division through July 26, 1995 and as a subsidiary
thereafter). Certain expenses presented in the financial statements are the
result of allocations of total expenses incurred by Biomune. These reported
results may not be indicative of the financial condition and results of
operations that would have existed if the medical stain manufacturing and
sales business would have been operated as an unaffiliated company.
The Company engages in the manufacturing, marketing and distribution of
medical diagnostic stains and the marketing and distribution of a related
medical instrument.
On February 25, 1997, the board of directors of Biomune approved the
distribution of the Company to the Biomune common stockholders of record as of
March 5, 1997 (the "Distribution"). This approval is subject to the
completion of certain definitive agreements. Stockholders of record as of
March 5, 1997 are expected to receive one share of Volu-Sol, Inc. common stock
for every ten shares of Biomune common stock owned. Immediately upon
completion of the Distribution, there are expected to be 2,111,216 shares of
Volu-Sol, Inc. common stock outstanding.
The Company has experienced net losses of $318,150, $617,785 and $1,402,222
and negative cash flows from operating activities of $216,457, $552,261 and
$987,680 for the years ended September 30, 1994, 1995 and 1996, respectively.
For the nine months ended June 30, 1996 and 1997, the Company experienced net
losses of $804,236 and $475,663, respectively and negative cash flows from
operating activities of $706,937 and $424,486, respectively. Historically,
the Company has depended upon funding from Biomune to fund its operations and
such funding will not be available after the Distribution. The Company's
continued existence is dependent upon its ability to increase revenues to a
self-sustaining level and to obtain debt or equity funding to meet its short-
term and long-term liquidity needs. These conditions raise substantial doubt
about the Company's ability to continue as a going concern. The accompanying
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
Management's plans with respect to this uncertainty include obtaining debt or
equity funding to finance the Company's operations. The Company is in the
process of completing a private placement of Series A 10% Convertible, Non-
Voting Preferred Stock (the "Offering"). The Offering is intended to provide
the Company with gross proceeds of up to $2,400,000. Subsequent to year-end,
the Company has received subscriptions to purchase $1,225,000 of preferred
stock, for which cash of $325,000 has been collected (see Note 10). The
Company has recently introduced a new hematology staining instrument (the
"Definitive") that contains a microchip (proprietary to a third party) that
regulates precise stain amounts. Management believes that this new product
will enhance future revenues of the Company. Management plans to acquire
other related instruments to further enhance its product offerings. The
Company is subject to special risk factors. These risk factors include:
(a) The Company did not achieve profitable operations while it was operated
as a division of Biomune, nor has the Company achieved profitable
operations since the date of its incorporation. The Company's present
business strategy is to improve its cash flows by adding to its existing
product line and expanding its sales and marketing efforts. There can
be no assurance that the Company will be able to achieve profitable
operations.
(b) The Company anticipates that it will continue to incur operating losses
in the future until such time as it is able to successfully market the
Definitive or other devices that it has yet to add to its product line.
There can be no assurance that the Company will be able to achieve
profitable operations with its existing product line or that the Company
will be able to supplement its existing product line with additional
products that will allow it to achieve profitable operations. The
Company's ability to achieve profitable operations will also depend on
its ability to develop and maintain an adequate marketing and
distribution system. There can be no assurance that the Company will
be able to develop and maintain adequate distribution resources.
(c) The Company will require substantial additional funding in order to
acquire or license additional technologies and products to add to its
existing product line, for operational expenses, and for establishing
and maintaining manufacturing and marketing capabilities in the future.
There can be no assurance that the Company's cash reserves and other
liquid assets, including the proceeds of any future third-party
financings will be adequate to satisfy its capital and operating
requirements.
(d) The Company uses certain trademarks and tradenames for certain of its
products. Nevertheless, the Company's core products, medical diagnostic
stains and solutions and other biochemical products, as well as the
Definitive, are not based on technology proprietary to the Company. The
majority of the Company's present product line is based on technology
that is in the public domain and therefore there are effectively no
entry barriers to potential competitors of the Company. The Company has
entered into a license agreement with the third-party entity that owns
the intellectual property rights associated with the Definitive and
manufactures the Definitive for the Company. There can be no assurance
that such third party will be able to adequately protect its proprietary
rights or to continue to manufacture the Definitive on terms favorable
to the Company.
(e) The medical diagnostic supply and biochemical industries are
characterized by intense competition. Many, if not most, of the
Company's competitors and potential competitors are much larger and
consequently have greater access to capital as well as mature and highly
sophisticated distribution channels. Many of the Company's larger
competitors are able to manufacture chemical products on a much larger
scale and therefore presumably would be able to take advantage of
economies of scale not presently enjoyed by the Company. There can be
no assurance that competition from other companies will not render the
Company's products noncompetitive.
(f) The Company historically has not been involved in significant research
and development of new technologies. Consequently, the Company's
success in adding to its existing product line will depend on its ability
to acquire or otherwise license competitive technologies and products and
to operate without infringing the proprietary rights of others. No
assurance can be given that any licenses required from third parties will
be made available on terms acceptable to the Company, or at all.
(g) The Company is highly dependent on certain of its scientific, technical
and operations employees. The loss of services of any of these
personnel could impede the achievement of the Company's objectives.
There can be no assurance that the Company will be able to attract and
retain qualified personnel on acceptable terms.
(h) The use of any of the Company's existing or potential products in
laboratory or clinical settings may expose the Company to liability
claims. These claims could be made directly by persons who assert that
inaccuracies or deficiencies in their test results were caused by
defects in the Company's products. The Company has obtained limited
product liability insurance coverage. However, there can be no
assurance that the Company will be able to obtain commercially
reasonable product liability insurance for any products added to its
product line in the future. A successful product liability claim or
series of claims brought against the Company could have a material
adverse effect on its business, financial condition and results of
operations.
(i) Political, economic and regulatory influences are likely to lead to
fundamental change in the health care industry in the United States.
Third-party payors are increasingly challenging the price and cost
effectiveness of medical products and services, including medical
diagnostic procedures. There can be no assurance that adequate
reimbursement will be available or sufficient to allow the Company to
sell its products on a competitive basis.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Interim Period Presentation
The accompanying balance sheet at June 30, 1997, the statements of operations
and cash flows for the nine months ended June 30, 1996 and 1997 and the
statement of stockholder's equity for the nine months ended June 30, 1997 are
unaudited. In the opinion of management, these statements have been prepared
on the same basis as the audited financial statements and include all
adjustments, consisting only of normal recurring adjustments, necessary for
the fair statement of the results of the interim periods. The data disclosed
in the notes to financial statements for these periods are also unaudited.
Results for the unaudited nine-month period ended June 30, 1997 are not
necessarily indicative of the results to be expected for the Company's full
fiscal year.
Revenue Recognition
Revenues from the sale of the Company's products are recognized when the
products are shipped to the customer.
Allocation of Parent Company General and Administrative Expenses
Expenses specifically identifiable to the Company and paid by Biomune have
been presented as those of the Company. A portion of expenses which are not
specifically identifiable, consisting primarily of payroll-related and
professional expenses, have been allocated to the Company based on estimates
of personnel and third party involvement related to the respective activities
as estimated by management. These allocations are considered reasonable by
management and totaled approximately $53,000, $189,000, $165,000, $124,000 and
$40,000 for the years ended September 30, 1994, 1995 and 1996 and for the nine
months ended June 30, 1996 and 1997, respectively.
The Company, as both a division and a subsidiary, was operated relatively
autonomously from Biomune. As a result, management does not anticipate that
actual stand alone expenditures will be significantly different from those
allocated.
Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or
market value. Inventories consist of the following:
<TABLE>
<CAPTION>
September 30, June 30,
1995 1996 1997
------------ ------------ ------------
(unaudited)
<S> <C> <C> <C>
Raw materials, packaging and
Supplies $ 78,731 $ 62,545 $ 61,789
Instruments, biological stains
and reagents 21,593 50,181 129,197
------------ ------------ ------------
$ 100,324 $ 112,726 $ 190,986
============ ============ ============
</TABLE>
Property and Equipment
Property and equipment are recorded at cost and are depreciated using the
straight-line method over their estimated useful lives of 2 to 10 years.
Maintenance, repairs, minor renewals and betterments are expensed as incurred.
Major renewals and betterments are capitalized. The cost of property and
equipment sold or otherwise disposed of and the related accumulated
depreciation are relieved from the accounts, and any resulting gains or losses
are included in the determination of net loss.
Intangible Asset
The Company's intangible asset consists of medical diagnostic technologies
acquired by Biomune in its acquisition of the Company's predecessor's net
assets in 1991. During fiscal 1996, the Company determined that facts and
circumstances warranted the write off of the remaining net book value of
approximately $245,000. The determination that this asset was impaired was
based on continuing operating losses and the framework set out in Statement of
Financial Accounting Standards No. 121.
Income Taxes
The Company recognizes a liability or asset for the deferred tax consequences
of all temporary differences between the tax bases of assets and liabilities
and their reported amounts in the financial statements that will result in
taxable or deductible amounts in future years when the reported amounts of the
assets and liabilities are recovered or settled. These deferred tax assets or
liabilities are measured using the enacted tax rates and laws that will be in
effect when the differences are expected to reverse.
Concentrations of Credit Risk
Financial instruments that subject the Company to concentrations of credit
risk consist primarily of trade receivables. In the normal course of
business, the Company provides unsecured credit to its customers. In
connection with providing unsecured credit, the Company performs ongoing
credit evaluations of its customers and maintains allowances for estimated
losses.
Net Loss Per Common Share and Stock Split
The Company computes net loss per common share based on the weighted average
number of common shares outstanding during the period. Net loss per common
share information has not been presented for periods prior to the Company's
incorporation (July 27, 1995). In connection with Biomune's proposed
Distribution of the Company, approximately 2,111,216 shares of the Company's
$0.0001 par value Common Stock, constituting all of the issued and outstanding
shares of the Company's Common Stock, are to be distributed pro rata as a
stock dividend to the holders of the Common Stock of Biomune as of March 5,
1997. As a consequence of the Distribution, the Company will cease to be a
subsidiary of Biomune. Prior to the Distribution, the Company will complete a
forward common stock split of approximately 211 for 1 to permit the issuance
of a sufficient number of shares to the stockholders of record of Biomune as
of March 5, 1997. All pro forma share and per share information in the
accompanying statements of operations have been based on the outstanding
number of shares expected upon completion of the proposed Distribution.
Warrants and options outstanding have not been included in the computations
since any assumption of conversion would have an antidilutive effect, thereby
reducing the net loss per common share.
Use of Estimates in the Preparation of Financial Statements
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.
(3) INCOME TAXES
The Company files a consolidated tax return with its parent, Biomune. No tax
sharing agreement exists between the Company and Biomune. Upon the completion
of the distribution, all net operating loss carryforwards and credit
carryforwards will remain with Biomune and will not be available to be
utilized by the Company.
As of June 30, 1997, the Company has a net deferred tax asset of approximately
$40,000 resulting from reserves and depreciation recorded for financial
reporting purposes but not currently deductible for income tax reporting
purposes. In accordance with SFAS No. 109, a valuation allowance is provided
when it is more likely than not that all or some portion of the deferred
income tax asset will not be realized. Accordingly, the Company has
established a valuation allowance for the entire deferred income tax asset.
(4) STOCKHOLDER'S EQUITY AND PARENT COMPANY CAPITAL CONTRIBUTIONS
The Company is authorized to issue 50,000,000 shares of Common Stock, $0.0001
par value per share, and 10,000,000 shares of Preferred Stock, $0.0001 par
value per share. Pursuant to the Company's Articles of Incorporation, the
Company's board of directors has the authority to amend the Company's Articles
of Incorporation, without further stockholder approval, to designate and
determine, in whole or in part, the preferences, limitations and relative
rights of the Preferred Stock before any issuance of the Preferred Stock and
to create one or more series of Preferred Stock. Subsequent to year-end, the
Company has authorized the issuance of 20,000 shares of Series A 10%
Convertible Non-Voting Preferred Stock and issued 1,625 shares for gross
proceeds of $325,000 (See Note 10).
From Volu-Sol's acquisition in 1991 through March 5, 1997, Biomune made
capital contributions, including expenses allocated or paid on behalf of Volu-
Sol, to the Company in order to fund the Company's cash flow needs.
Subsequent to March 5, 1997, any additional cash advances made by Biomune to
the Company were in the form of demand loans and as of June 30, 1997 totaled
$264,500 (see Note 6).
(5) COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases facilities under a noncancelable operating lease that
expires in November 2000. Lease expense for the years ended September 30,
1994, 1995 and 1996 was approximately $55,000, $69,000 and $69,000,
respectively. Lease expense for the nine months ended June 30, 1996 and 1997
was approximately $41,000. Future minimum lease commitments are as follows:
Fiscal Year Amount
----------- --------
1997 $ 55,400
1998 55,400
1999 55,400
2000 55,400
2001 9,240
--------
$230,840
========
Purchase Commitments
The Company is obligated under a manufacturing agreement with the supplier of
the Definitive to purchase 600 automated slide stainers ("stainers") per
calendar year. In the event the Company purchases fewer than 600 stainers,
the manufacturer has the option to convert the Company's exclusive worldwide
license and distributorship to a non-exclusive license and distributorship.
Subsequent to year-end, the Company informed the manufacturer of the
manufacturer of the Definitive that the Company would not meet the annual
purchase commitment. It appears that the Company's exclusive worldwide
license and distributorship will be converted to a non-exclusive license and
distributorship.
The Company has agreed to pay the supplier of the Definitive a royalty of
three percent of the net sales price for all component parts sold by the
Company, exclusive of stainer sales.
(6) RELATED-PARTY TRANSACTIONS
From March 5, 1997 through June 30, 1997, the Company obtained loans from
Biomune totaling $264,500 which remain outstanding. These loans bear an
annual interest rate of ten percent and are due on demand.
Subsequent to June 30, 1997, Biomune made additional loans totaling $68,000
that bear interest at an annual rate of ten percent and are due on demand.
(7) SIGNIFICANT CUSTOMER
During the years ended September 30, 1994, 1995 and 1996, sales to Barret
Healthcare Corporation ("Barret") accounted for approximately 15 percent, 17
percent and 12 percent, respectively, of the Company's total revenues. No
other single customer accounted for more than 10 percent of the Company's
total revenues. During the year ended September 30, 1996, the Company
discontinued selling products to Barret and wrote off outstanding accounts
receivable balances of approximately $55,000.
(8) STOCK INCENTIVE AND OPTION PLANS
The Company has adopted the 1997 Volu-Sol, Inc. Stock Incentive Plan ("1997
Plan"). The 1997 Plan was approved by action of Biomune, the sole stockholder
of the Company, in August 1997. Under the 1997 Plan, the Company may issue
stock options, stock appreciation rights, restricted stock awards, and other
incentives to employees, officers and directors of the Company. Five million
shares are available for grant under the 1997 Plan, but to date no grants have
been made.
(9) EVENTS CONCURRENT WITH THE DISTRIBUTION
Add-on Volu-Sol Options
The Board of Directors of Biomune has determined that, immediately prior to
the Distribution, each Biomune stock option ("Biomune Option") will be divided
into two separately exercisable options: an option to purchase Biomune Common
Stock and an option to purchase Volu-Sol Common Stock (the latter being the
"Add-on Volu-Sol Option"). The Add-on Volu-Sol Options would grant the holder
the right to purchase the Company's Common Stock in an amount that would have
been issued in the Distribution in respect of the shares of Biomune Common
Stock subject to the applicable Biomune Option, if such Biomune Option had
been exercised in full immediately prior to the Distribution, and containing
substantially equivalent terms as the existing Biomune Option. The Add-on
Volu-Sol Options will carry an option exercise price per share equal to the
price per share of the exercise price under the Biomune Option.
As a result of the foregoing, certain persons who remain Biomune employees or
non-employee directors after the Distribution will hold both Biomune Options
and separate Add-on Volu-Sol Options. The obligations with respect to the
Biomune Options and Add-on Volu-Sol Options held by Biomune employees and
non-employee directors following the Distribution will be obligations solely
of Biomune.
As of March 5, 1997, there were 7,096,017 Biomune Options outstanding at
exercise prices ranging from $1.16 to $4.00 with a weighted-average exercise
price of $1.80. As a result, concurrent with the Distribution, there will be
in existence options to purchase 709,602 shares of Volu-Sol Common Stock at
exercise prices ranging from $1.16 to $4.00 with a weighted average exercise
price of $1.80. The Company has reserved 709,602 shares of its Common Stock
for issuance upon the exercise of these options.
Volu-Sol Warrants
Biomune has granted rights to purchase Biomune Common Stock in the form of
warrants (the "Biomune Warrants"). Under the agreements governing the grant
and exercise of the Biomune Warrants, Biomune has agreed to issue to the
holders of such rights, securities otherwise issuable with respect to the
Biomune Common Shares underlying the Biomune Warrants if and to the extent the
Biomune Warrants are exercised. Consequently, if the holders of the Biomune
Warrants exercise their rights thereunder, Biomune must issue to those holders
one share of Volu-Sol Common Stock for each ten shares of Biomune Common Stock
issued in connection with such exercise. Volu-Sol has agreed to sell to
Biomune the shares of Volu-Sol Common Stock needed to meet this obligation of
Biomune. The sales price of such shares of Volu-Sol Common Stock will be a
sum equal to 10 percent of the consideration received by Biomune in exercise
of the Biomune Warrants.
Concurrent with the Distribution, there will be in existence warrants to
purchase 247,059 shares of Volu-Sol Common Stock at exercise prices ranging
from $2.13 to $3.00 with a weighted average exercise price of $2.38. The
Company has reserved 247,059 shares of its Common Stock for issuance upon
exercise of these warrants.
Conversion of Biomune Preferred Stock
Upon conversion of the outstanding shares of Biomune's Preferred Stock, the
preferred shareholders will receive one share of the Company's Common Stock
for every ten shares of Biomune Common Stock received in the conversion.
The Company has reserved a total of 323,118 shares of Common Stock for
issuance in connection with the conversion of the Biomune Series A, B and C
Preferred Stock outstanding at March 5, 1997.
(10) SUBSEQUENT EVENT
On September 8, 1997, the Company amended its articles of incorporation to
create a series of preferred stock, the Series A 10% Convertible Non-Voting
Preferred Stock (the "Series A Preferred"). The Company is attempting to sell
up to 12,000 shares of the Series A Preferred in a private placement for total
gross proceeds of up to $2,400,000. As of September 29, 1997, subscriptions
for $1,225,000 have been received by the Company for which cash of $325,000
has been collected. Payments with respect to the remaining subscriptions are
due as follows: $300,000 upon the effective date of the Company's Form 10-SB,
$300,000 within 45 days of the effective date of the Company's Form 10-SB and
$300,000 within 90 days of the effective date of the Company's Form 10-SB.
The Series A Preferred will be convertible into common stock commencing
January 1, 1998. The "conversion price", which is the basis for such
conversion, is the lesser of (i) 80 percent of the average closing bid price
of the Company's Common Stock for the three trading days immediately preceding
the date of conversion or (ii) $1.25 per share.
<PAGE>
BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
The following unaudited pro forma condensed consolidated financial data
is based upon the historical consolidated financial statements of Biomune
Systems, Inc. and subsidiaries ("Biomune") as adjusted to give effect to the
Distribution to the holders of common stock of Biomune of all of the
outstanding shares of common stock of Volu-Sol (a wholly owned subsidiary)
pursuant to the terms of the Distribution Agreement. Upon completion of the
Distribution, Biomune will cease to own any interest in Volu-Sol.
The pro forma adjustments are based upon available information and
certain assumptions that management of the Company believes are reasonable.
The unaudited pro forma condensed consolidated balance sheet and statements of
operations are not necessarily indicative of future results of operations of
Biomune, its financial position or the results of operations which may have
occurred had the Distribution occurred on October 1, 1995. The unaudited pro
forma adjustments are described in the accompanying notes to unaudited pro
forma condensed consolidated financial data.
This unaudited pro forma condensed financial data should be read in
conjunction with the consolidated financial statements of Biomune and related
notes thereto, incorporated by reference herein, and the financial statements
of Volu-Sol, Inc., and related notes thereto, and Management's Discussion and
Analysis or Plan of Operation included elsewhere in the Information Statement.
<PAGE>
BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 1997
<TABLE>
<CAPTION>
Historical Pro Forma
Biomune Adjustments Pro Forma
---------- -------------- ----------
<S> <C> <C> <C>
Current Assets:
Cash and cash equivalents $2,346,017 $(110,605) (a) $2,235,412
Accounts receivable, net 223,362 (67,293) (a) 156,069
Inventories 567,288 (190,986) (a) 376,302
Amounts due from related parties 552,613 - 552,613
---------- ---------- ----------
Total current assets 3,689,280 (368,884) (a) 3,320,396
Property and Equipment, net 390,490 (285,211) (a) 105,279
Note Receivable from Volu-Sol - 264,500 (b) 264,500
Other Assets, net 445,893 (6,199) (a) 439,694
---------- ---------- ----------
Total assets $4,525,663 $(395,794) $4,129,869
========== ========== ==========
Current Liabilities:
Accounts payable $ 217,892 $(129,768) (a) $ 88,124
Preferred stock dividends payable 294,648 - 294,648
Accrued payroll and payroll taxes 69,921 (46,064) (a) 23,857
Other accrued liabilities 23,132 - 23,132
---------- ---------- ----------
605,593 (175,832) 429,761
---------- ---------- ----------
Stockholders' Equity:
Convertible preferred stock 3,094,680 - 3,094,680
Common stock 2,194 - 2,194
Additional paid-in capital 29,277,757 (2,200,811) (a) 27,076,946
Deficit accumulated during the development stage (28,792,218) 1,980,849 (a) (26,811,369)
Deferred consulting expense (429,616) - (429,616)
Related-party receivable from sale of common stock (116,000) - (116,000)
Common stock warrants 883,273 - 883,273
----------- ---------- ----------
Total stockholders' equity 3,920,070 (219,962) 3,700,108
----------- ---------- ----------
Total liabilities and stockholders' equity $ 4,525,663 $(395,794) $4,129,869
=========== ========== ==========
</TABLE>
See accompanying notes to unaudited pro forma
condensed consolidated financial data.
<PAGE>
BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Year Ended September 30, 1996
Historical Pro Forma
Biomune Adjustments Pro Forma
----------- ---------------- -----------
<S> <C> <C> <C>
Revenues $ 436,691 $ (434,691) (c) $ 2,000
----------- ------------ -----------
Operating Expenses:
Cost of revenues 357,471 (357,471) (c) -
Management, consulting and research fees 4,077,887 (142,491) (c) 3,935,396
Other general and administrative 2,626,598 (1,304,160) (c) 1,322,438
---------- ------------ -----------
Total operating expenses 7,061,956 (1,804,122) 5,257,834
---------- ------------ -----------
Loss From Operations (6,625,265) 1,369,431 (5,255,834)
Other Income 202,645 32,791 (c) 235,436
---------- ------------ -----------
Net Loss (6,422,620) 1,402,222 (5,020,398)
Preferred Stock Dividends (91,199) - (91,199)
---------- ------------ -----------
Net Loss Applicable to Common Shares $(6,513,819) $ 1,402,222 $(5,111,597)
=========== ============ ===========
Net Loss Per Common Share $ (0.35) $ (0.27)
=========== ===========
Weighted Average Common Shares Outstanding 18,799,194 18,799,194
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
For the Nine Months Ended June 30, 1997
Historical Pro Forma
Biomune Adjustments Pro Forma
------------ ----------- -----------
<S> <C> <C> <C>
Revenues $ 673,868 $ (368,731) (c) $ 305,137
------------ ----------- -----------
Operating Expenses:
Cost of revenues 383,987 (258,958) (c) 125,029
Management, consulting and research fees 2,103,420 (36,225) (c) 2,067,195
Other general and administrative 2,764,488 (549,211) 2,215,277
----------- ----------- -----------
Total operating expenses 5,251,895 (844,394) 4,407,501
----------- ----------- -----------
Loss From Operations (4,578,027) 475,663 (4,102,364)
Other Income 201,306 - 201,306
----------- ----------- -----------
Net Loss (4,376,721) 475,663 (3,901,058)
Preferred Stock Dividends and Premium (1,043,198) - (1,043,198)
----------- ----------- -----------
Net Loss Applicable to Common Shares $(5,419,919) $ 475,663 $(4,944,256)
=========== =========== ===========
Net Loss Per Common Share $ (0.26) $ (0.23)
=========== ===========
Weighted Average Common Shares Outstanding 21,120,550 21,120,550
=========== ===========
</TABLE>
See accompanying notes to unaudited pro forma
condensed consolidated financial data.
<PAGE>
BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
(1) Basis of Presentation
The accompanying unaudited pro forma condensed consolidated balance sheet
assumes that the Distribution occurred on June 30, 1997. The unaudited pro
forma condensed consolidated statements of operations assume that the
Distribution occurred on October 1, 1995, the first day of Biomune's fiscal
1996 year.
(2) Pro Forma Adjustments
(a) Adjustments to eliminate assets, liabilities and equity related
to Volu-Sol's operations.
(b) Adjustment to record cash advances totaling $264,500 made by
Biomune to Volu-Sol during the period from March 5, 1997 through June 30,
1997. Such advances were in the form of demand loans and bear interest at
10%. All advances made by Biomune to Volu-Sol prior to March 5, 1997 were
capital contributions. Subsequent to June 30, 1997, Biomune made additional
demand loans to Volu-Sol totaling approximately $126,000.
(c) Adjustments to eliminate sales and expenses related to Volu-Sol's
operations including the allocation of general and administrative expenses of
Biomune to the Volu-Sol operations.
For the year ended September 30, 1996, allocated expenses totaled
$164,832 and consisted of (i) $59,487 of payroll expenses of five individuals
who performed administrative functions for both entities, (ii) stock option
expense of $90,000 related to Biomune options issued for Volu-Sol related
consulting contracts and (iii) $19,319 of audit and other professional fees.
For the nine months ended June 30, 1997, allocated expenses totaled
$40,125 and consisted of (i) $23,250 of payroll expenses of two individuals
who performed administrative functions for both entities and (ii) $16,875 of
audit and other professional fees.
These allocations, as determined by management, are based on estimates of
Company personnel and third party involvement and are considered reasonable by
management. Volu-Sol, as a separate division or subsidiary of Biomune,
historically was operated relatively autonomously from Biomune.
