SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark one)
[X] Annual Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended September 30, 1998, or
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ______________ to
_____________.
Commission File No. 0-11472
BIOMUNE SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Nevada 87-0380088
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2401 South Foothill Drive
Salt Lake City, Utah 84109-1405
(Address of principal executive offices with Zip Code)
(801) 466-3441
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: common stock
($0.0001 par value per share)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days: Yes [X] No [ ].
The aggregate market value of common stock held by non-affiliates of the
registrant was $1,878,212, based on a closing price of $2.00 per share on
January 4, 1999. The number of shares outstanding of the registrant's common
stock as of January 4, 1999 was 1,316,662. On November 10, 1997, and December
31, 1998, the registrant declared a one-for-ten reverse stock split of its
common stock, in each instance reducing the number of issued and outstanding
shares of stock by a factor of 10. Outstanding common stock data in this report
have been adjusted to reflect these reverse stock splits.
Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
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BIOMUNE SYSTEMS, INC.
1997 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Part I
Page
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Item 1. Business.........................................................................................3
Item 2. Properties......................................................................................11
Item 3. Legal Proceedings...............................................................................12
Item 4. Submission of Matters to a Vote of Security Holders............................................N/A
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters...........................13
Item 6. Selected Financial Data.........................................................................15
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations......................................................................16
Item 8. Financial Statements and Supplementary Data.....................................................28
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.......................................................................29
Part III
Item 10. Directors and Executive Officers of the Registrant..............................................29
Item 11. Executive Compensation..........................................................................32
Item 12. Security Ownership of Certain Beneficial Owners and Management..................................39
Item 13. Certain Relationships and Related Transactions..................................................41
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K................................42
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PART I
ITEM 1. BUSINESS
Introduction
Biomune Systems, Inc., a Nevada corporation ("Biomune" or the
"Company"), with its wholly owned subsidiary, Optim Nutrition, Inc., a Utah
corporation ("Optim") and majority owned subsidiary, Rockwood Companies, LLC, a
California limited liability company ("Rockwood"), is engaged in the research,
development, distribution and sale of biologic pharmaceutical products,
nutraceutical and medical food products and supplements, and health and beauty
aids. Certain of these products have been developed by the Company and
incorporate a patented whey protein technology (the "Technology," sometimes
referred to as "BWPT" or "ProMune(TM)"), which is designed to provide or
increase protective immunities from and immune response to disease and to
provide nutritional supplementation. Nutraceutical products are food supplements
that are derived from a food base and marketed as a beneficial source of
nutrients to promote good health. Among other things, the Company believes that
ProMune may be utilized to develop products to treat various gastrointestinal
and infectious diseases and that products derived from the Technology may help
increase the body's immune response. The Company also believes that certain
products derived from the Technology provide important nutritional
supplementation for persons who are nutritionally deprived or immune stressed or
compromised.
In years prior to 1998, the Company invested significant sums in the
research and development of the Technology and related products. These efforts
were funded almost entirely and independently by the Company, primarily through
the sale of its securities. In fiscal year 1997, the Company scaled back its
pharmaceutical product development effort, due primarily to limited capital. In
addition, the Company determined to focus its resources on the development and
marketing of nutraceutical products. Future research and development, if any, in
pharmaceutical products will require funding from joint venture partners,
strategic alliances, private or governmental grants or other third-party funding
sources. There can be no assurance that such sources will be available to the
Company or that the terms on which such funding may be offered in the future
will be favorable. Absent such third-party involvement, the Company anticipates
that it will continue to severely curtail research and development involving
existing or potential pharmaceutical product candidates based on the Technology,
and may postpone such efforts until third party participation becomes available.
As a result of its increased emphasis on the nutrition market, in 1998
the Company acquired the exclusive rights to distribute and sell a line of
sports and energy nutrition bars and a patented medical food bar created
specifically for diabetics. These products are manufactured for the Company by
contract manufacturers. The Company has been granted the exclusive world-wide
marketing and distribution rights to these products, in return for the payment
of royalties based on net sales of the products. The Company intends to acquire
additional products under license or by purchase of product rights. The bars are
sold to national and regional wholesale and retail chains under the names
Mountain Lift(TM) and NiteBite(TM).
During 1998, the Company also acquired a majority interest in Rockwood,
a California company that sells health and beauty aids and related products to
national and wholesale chains. Primary products of Rockwood include shampoos,
lotions and conditioners, marketed under brand names Aroma Gardens(TM),
Monterrey Naturals(TM) and Orchard Blends(TM).
In 1998, the Company sold its rights in certain medical waste
technologies consisting of a device for the sterilization and decontamination of
medical devices and wastes, a bioremediation process to detoxify and degrade
hazardous substances and) a device and process for the safe treatment of used
medical stain. The technologies were purchased by Bioxide Corporation, a Utah
corporation. In connection with the sale of these technologies, the Company also
terminated a license previously granted to Bioxide's predecessor. Bioxide is
owned or controlled by certain shareholders and former executive officers of the
Company.
The Company filed Investigational New Drug Applications ("IND") with
the US Food and Drug Administration (the "FDA"), the government agency that
regulates drugs for humans in the United States, on two
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biologic pharmaceutical drug candidates developed from the Technology:
BWPT-301(TM) (formerly known as Immuno-C), which the Company believes may
prevent and/or treat cryptosporidiosis, a gastrointestinal disease caused by the
cryptosporidium parvum microorganism that produces acute and severe diarrhea;
and BWPT- 302(TM), which the Company believes to be useful in the treatment of
infection by the life-threatening bacteria, Escherichia coli, strain 0157:H7.
This disease causes severe bloody diarrhea, and a hemolytic uremic syndrome
associated with a high risk of permanent kidney damage, particularly in
children.
Data obtained from clinical trials and other studies involving whey
protein concentrate (the "Base Product") and BWPT-301, suggest potential
health-related nutritional benefits from the use of nutraceutical products
developed utilizing the Technology. The Company has developed and is now
marketing Optimune(TM). The principal market for this product is
immune-compromised individuals who need nutritional supplementation for any
number of reasons.
Products
The Company's products include nutraceuticals, supplements and sports
and nutrition bars, medical food bars and biologic pharmaceuticals. Beginning in
1997, the Company shifted its primary focus to the development, acquisition,
marketing and sale of nutraceutical and functional food products.
Nutraceutical Activities
Since 1997, the Company has concentrated its resources and business
activity primarily on the development, distribution and sale of nutritional and
nutraceutical products, including products based upon the results of and the
information obtained from clinical trials and other studies involving the Base
Product and BWPT-301. These data suggest potential health-related benefits may
derive from the use of nutraceutical products using the Technology. Interest in
nutraceutical applications of the Technology dates back to 1995, when the
Company undertook an analysis of the nutraceutical market. Nutraceutical
products are food-based nutritional supplements marketed as a beneficial source
of nutrients to promote good health. Significant milestones in these development
activities of the Company include the following:
o October 1995, the Company incorporates Optim for the purpose
of developing and marketing nutraceutical products. Optim has
developed two nutraceutical products: Optimune, which is a
nutritional dietary supplement marketed primarily to people
who are HIV positive or have AIDS or other immune-compromised
individuals, and Maximune, a nutritional dietary supplement
similar in composition to Optimune, but manufactured in
capsule form and marketed primarily to healthy people who
desire weight maintenance or management assistance.
o December 1995, a patent application is filed relating to a
method for enhancing the immune system using the Technology
and the Base Product. The patent application relates to an
increase in CD4 cell count in immune-compromised individuals.
The title of this patent application is "A Method for
Enhancing the Immune System using Immunologically-Active
Bovine Whey Protein Concentrate." The authors of the patent
are Frank A. Eldredge, Ph.D., formerly the Company's Executive
Vice President -- New Product Development, David O. Lucas,
Ph.D., a member of the Company's Scientific Advisory Board,
and Craig D. Moffat, M.D., a consultant to the Company. The
patent has been assigned to the Company.
o May to June 1996, the Company completes a nutritional study
monitored by Clinimetric Research Associates, a contract
research organization. This study was conducted at St. Francis
Memorial Hospital in San Francisco, California, and the East
Bay AIDS Clinic in Berkeley, California. This pilot study was
designed to examine the effects of two different doses of
ProMune on wasting syndrome. Secondary objectives included
examining effects of ProMune on Karnofsky Performance Score
and quality of life as measured by HIV-Medical Outcome Study
(MOS). Patients were randomized to either 20g ProMune powder
daily or 60g ProMune powder daily (20g, 3 times a day), mixed
with cold food or beverage. The study period was 6 weeks after
which patients could elect to continue for an additional 6
weeks. BCM was measured using bioelectrical impedance
analysis.
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Study staff were trained to use the equipment prior to
beginning the study. Quality of life was measured using the
MOS-HIV 30-Item Form developed by the Medial Outcomes Trust.
35 patients were randomized, 29 patients completed 5 weeks,
and 23 patients completed 12 weeks. There were no significant
differences detected between the 2 doses, and results of this
study showed that 75.9% of the study participants were able to
reverse their involuntary weight loss. 83% of the participants
stated that their quality of life was the same or better, and
the doctor stated that 87% of the participants' quality of
life was the same or better.
o October 1997, Dr. Kotler at St. Lukes-Roosevelt Hospital
Center in New York completes a year-long metabolic study. Less
rigorous studies are conducted in California, Florida, New
York and Oklahoma. Study results from the Associates in
Medical and Mental Health (the Oklahoma site) indicate a
significant increase in body cell mass (muscle), body weight
and quality of life after 8 weeks on ProMune. Body cell mass
increased an average of 0.9kg (1.9 lbs.) an increase for 79%
of study participants. These nutritional studies are designed
to yield anecdotal and corroborating data of the previous
studies and provide new data that may encourage broader
exposure for Optimune. There is presently no timetable for
completing studies at other sites. The results of this study
will be publicly available at a future date in accordance with
the protocols and guidelines governing such studies.
The market for a weight gain, immune-enhancing nutrition supplement is
very competitive and relatively difficult to penetrate, particularly given the
limited financial resources presently available to the Company. The Company will
continue to promote its products in these markets, while pursuing its new
marketing plan of seeking broader applications of the Technology for products
with general market appeal. The Company will also devote considerable resources
to marketing the nutrition, sports and energy bars and medical food bars added
to its product line in September, 1998.
FDA approval is not required before marketing and selling nutraceutical
products. However, in order to make broad and non-specific claims regarding the
benefits of using a particular nutraceutical product, studies must be conducted
to substantiate those claims. In addition, the Company's nutraceutical products
must be appropriately labeled in accordance with the Dietary Supplement Health
and Education Act of 1994 (the "Dietary Supplement Act"). At any time subsequent
to commencement of marketing of a nutraceutical product, both the FDA and the
United States Federal Trade Commission (the "FTC") have the right to review the
accuracy of the product claims being made. Claims must be broadly made and may
not be made with respect to diagnosis, treatment, cure, mitigation or prevention
of a specific disease or illness.
Rockwood
In April 1998, the Company acquired a controlling equity interest (52%)
in Rockwood. The purchase price was approximately $360,000 cash, which had been
paid and expensed by the Company to the minority member in a previous year, a
commitment to issue 500,000 shares of preferred stock should certain benchmarks
(in sales) be obtained, and covenants on the part of the Company to loan
Rockwood or its affiliates approximately $1,500,000 over a one-year period. In
1997, the Company had entered into an agreement that it subsequently abandoned,
to purchase 100%of Rockwood's predecessor. Rockwood distributes and sells health
and beauty aids to wholesale and retail chains. Under the terms of the purchase
agreement and related agreements, Rockwood has the right to redeem part of the
Company's member interest if the Company fails to keep its covenants concerning
the further loans to Rockwood. Among other things, Rockwood could reduce the
Company's interest to approximately 20% of the total issued and outstanding
member interests. As of the date of this Report, the Company has not advanced
all of the funds required by the purchase agreement. Its ability to do so will
depend in part on the Company's success in obtaining additional debt or equity
financing and increasing sales of its products, for all of which there can be no
assurance. See "Certain Relationships and Related Transactions."
Optim
In September 1998, the Company acquired the exclusive worldwide
marketing and distribution rights to the Mountain Lift sports and energy
nutrition bars. The licensor of these rights is ML Industries of Encino,
California.
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Under the agreement, which has an initial term of 10 years and continues on a
year-to-year basis thereafter, the Company pays ML Industries a royalty of 7% of
net sales generated by the licensed products. The Mountain Lift product line
includes four flavors, Peanut Crunch, Chocolate, Cappuccino Crunch and Berry
Crunch. Each bar is formulated with all natural herbs to improve oxygen
utilization, increase energy and reduce muscle fatigue. The bars provide a full
supplement of ginseng and ginkgo biloba, together with 100% of the Recommended
Daily Allowance of 12 essential vitamins and major antioxidants. The bars are
low in fat and high in protein. "Inside Tracks" fitness magazine voted the
Mountain Lift bar the "best tasting and most nutritious bar in the USA" in
November 1997. The license agreement includes an option for the Company to
acquire ML Industries.
The distribution of the Mountain Lift bars introduces the Company to
the total energy and nutrition bar market, estimated by industry publications to
be more than $300,000,000 in 1998, with annual growth estimated at 40%.
According to industry reports, distribution into grocery channels is growing at
an even greater rate per year. Industry markets in which the Mountain Lift bars
compete include Snacks/Candy ($60 billion per year), Healthy Snacks/Meal
Replacements ($49 billion annually), Natural Foods ($6.9 billion annually), and
Healthy Snacks, which include granola and grain-based snacks, fruit snacks, and
nutrition bars ($3.8 billion per year).
Also in September 1998, the Company entered into an agreement acquiring
the exclusive worldwide distribution rights to a time-release glucose bar
developed to prevent hypoglycemia (low blood sugar) in diabetics. This product,
developed from research conducted at the Beth Israel Deaconess Medical Center,
Harvard Medical School, in Boston, Massachusetts, is licensed to the Company by
Medical Foods, Inc., a Delaware corporation. Under the agreement, the Company
pays Medical Foods a 12% royalty on net sales of the patented product, which is
marketed under the trade name NiteBite(TM). Minimum annual royalties of $150,000
are payable in 1999, with gradual increases annually thereafter through the
10-year term of the agreement. Both the Mountain Lift bars and the NiteBite bar
are manufactured for the Company under contract by third parties.
Hypoglycemia is a life-threatening low blood sugar condition
experienced primarily by people with diabetes whose condition requires them to
use insulin to regulate their blood sugar. It is estimated that this includes
approximately 4.3 million of the 9.6 million diabetics in the United States
(according to 1998 National Institutes of Health data). NiteBite brings the
Company into the expanding "medical food" industry, with food products designed
specifically to address medical conditions historically treated with drugs or
medications. The industry may be more broadly described as the "functional
foods" or "medical foods" industry and includes any food or food ingredient
considered to provide medical or health benefits, including the prevention and
treatment of disease. This industry segment overlaps both the
pharmaceutical/drug industry and the nutritional/dietary supplement industry, in
which the Company historically conducted its research, and represents a natural
extension of the Company's product development efforts. A recent study conducted
at the Joslin Diabetes Center in Boston reported that exercising diabetes
patients were able to consume fewer kilocalories with the NiteBite medical food
bar and experience less hyperglycemia with no greater incidence in hypoglycemia
compared with the higher-kilocalorie standard snack regimen. The conclusion of
the report on the study, published in "Diabetes Care," October 1998, stated,
"[T]his medical food bar should be a reliable snack for subjects with diabetes
who regularly engage in exercise. In this study, subjects using the snack
containing ingredients with varying glycemic indices [NiteBite] consumed fewer
kilocalories with less hyperglycemia and the same low rate of hypoglycemia
compared with a higher-kilocalorie snack."
Biologic Pharmaceutical Activities
Between 1994 and early 1997, the Company invested heavily in clinical
and non-clinical development of pharmaceutical applications of the Technology.
Toward the end of fiscal 1997, and continuing throughout fiscal year 1998, the
Company shifted its business focus to completing the development and marketing
of nutraceutical products. The emphasis on nutraceutical products resulted in
postponement of further pharmaceutical development until such time, if any, as
funding from private or governmental grants, joint ventures or other third
parties may become available to the Company.
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The key milestones of the Company's biologic pharmaceutical development
activities include the following:
o October 1994, the Company completes Phase I clinical trials on
BWPT-301, resulting in the establishment of a safety profile
in healthy humans within certain dose range parameters.
o November 1994, the Company reports the results of
Company-sponsored animal studies conducted by Dr. Joseph A.
Smith, Jr. and Dr. Mitchell S. Steiner at Vanderbilt
University showing the efficacy of drug candidates derived
from the Technology in reducing the growth rate of prostate
cancer tumors by 11%. Based on data from a separate study,
which discovered an over-production of an immune suppressing
agent in the presence of prostate cancer cells, Vanderbilt
University researchers selected the Technology to test the
theory that an immuno-modulating agent (such as the Base
Product) may counteract the immuno-suppression caused by
cancer cells and thus act to control, reduce and/or eliminate
the tumor. Dr. Smith continues to study the possible effects
of the Base Product against renal carcinoma cell tumors
extracted from humans and inducted into mice. No study data or
results from this on-going study have yet been released.
o May 1995, the Company reports the results of an in vivo study
on rats conducted by Dr. Steiner at Vanderbilt University.
This follow up study confirmed the data derived from an
earlier study conducted at Vanderbilt University and
demonstrated that there was a retardant effect on the growth
of prostate tumor cells in rats previously injected with such
cells.
o October 1995, a pediatrics protocol is submitted to the FDA
for the treatment of six pediatrics patients with advanced
AIDS and chronic cryptosporidiosis. There is presently no
time-table for commencing this study, and there can be no
assurance that the Company will ever commence clinical studies
under this research protocol.
o December 1995, the Company files an IND with the FDA in
connection with the development of BWPT-302. The Company has
concluded adult Phase I clinical trials. This second IND
focuses on certain strains of Escherichia coli. In 1996, this
IND was expanded to include strains of entero adherent
Escherichia coli. The Company has completed the administration
of BWPT-302 to healthy individuals in Phase I dose tolerance
trials. Through those dose tolerance trials, the Company
gained a general understanding of how well various doses of
BWPT-302(TM) are tolerated. There is presently no timetable
for continuing studies associated with this IND.
o January 1996 to December 1996, Dr. Frederick Clayton at the
Regional Veterans Administration Hospital in Salt Lake City,
Utah conducts indirect immuno-fluorescence testing of the Base
Product on various pathogenic enteric microorganisms.
Preliminary results from that research indicated a possible
immuno-reaction against several gastrointestinal tract
pathogenic bacteria. There is presently no timetable for
continuing research in these areas.
o March 1996, the Company announces the results from an
open-label, dose escalating Phase II study of the tolerance,
safety and efficacy of BWPT-301 in the treatment of
cryptosporidiosis in individuals with AIDS. That study was
conducted with six adult AIDS patients over a 10-day period at
St. Luke's-Roosevelt Hospital Center in New York City, New
York by Dr. Donald P. Kotler. The resulting data will be
utilized to design and conduct additional Phase II
dose-ranging studies on BWPT-301, at such time as the funding
for such studies becomes available to the Company.
o June 1996, the FDA approves an Emergency IND (No. 6679) for
the treatment of one pediatric patient with advanced AIDS and
cryptosporidiosis. The patient was treated according to the
Company's pediatrics protocol, which allows for 90 days of
dosing with the Base Product at a maximum dose of 3.0
g/kg/day. The patient was treated under the care of Dr.
Margarita Silio, who is affiliated with Dr. Russell Van Dyke,
head of the pediatric AIDS section at Tulane University and
Louisiana State University. The patient, a 12 year old girl
with advanced AIDS, had cryptosporidiosis for several months
before beginning the study and was experiencing diarrhea in
excess of 1,000 g/day at the
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commencement of the study. After 65 days of treatment at a
dose of 2 g/kg/day, the study investigator reported that the
girl's weight had increased 18%, to 59.6 lbs, with marked
clinical improvement. By the end of the study in September
1996, the patient's diarrhea had improved dramatically.
The Technology
The Technology is a patented process of filtering specific proteins
from bovine whey, a by-product of cheese production, to produce the Base
Product. The Company uses the Base Product to formulate its drug and product
candidates. The Technology was developed based on numerous pre-clinical studies
that indicate that a mother's colostrum provides a mechanism for her infants to
receive passive immunity. Colostrum contains thousands of immune enhancing
proteins known as immunoglobulins (or antibodies). The Company believes that
when antibodies from whey are concentrated, the beneficial effects of those
antibodies duplicate the effects of colostrum. Antibodies are found in cows'
milk (in addition to colostrom) and can be extracted from ordinary whey.
Biomune's Technology utilizes a filtration process that produces high
concentrations of antibodies, as well as protein and other molecules that may be
beneficial in the treatment of infectious diseases. The Company has the
exclusive right and license granted by Protein Technology, Inc. ("PTI"), to
utilize the Technology solely for human applications in the United States,
Canada, Kenya, Ivory Coast, Zimbabwe, Ghana and Nigeria and in the territories
and possessions of these countries.
The Technology differs significantly from competing technologies, such
as hyper-immunization and colostrum-based or colostrum-like technologies.
Hyper-immunization involves the injection or other exposure of a cow to a
particular disease and the extraction from the cow's milk or colostrum of
antibodies that are produced by the cow. The Company believes its process of
filtering and concentrating bovine whey represents a new and more effective and
economical approach in the development of pharmaceuticals for the treatment
and/or prevention of certain diseases and in the development of nutraceutical
products for the promotion of good health. The Technology utilizes readily
available whole milk from cows that have not been hyper-immunized and achieves a
higher degree of concentration of antibodies than hyper-immunization. Whole cow
milk is more readily available than colostrum, which is produced by the cow for
only a few days each year.
Based on the results of Phase I and Phase II clinical trials that were
conducted using the BWPT-301 pharmaceutical product candidate, the Company
believes that BWPT-based products may successfully improve and promote
gastrointestinal health, especially in people who are HIV positive or have AIDS,
immune-compromised patients such as those undergoing high-dose antibiotic or
chemotherapy treatment, and post-surgical and chronic care patients.
Other Pharmaceutical Applications
Until such time as there are funds available to the Company from joint
venture partners or grants from government or other third party sources, of
which there can be no assurance, the Company has ceased further direct research
and pre-clinical or clinical development efforts. Future studies, if and when
undertaken by the Company or on its behalf, will assess the feasibility of
filing additional INDs, followed by clinical trials, in respect of potential
drug candidates. It is anticipated that such drugs would utilize the Technology
and be designed to treat illness caused by certain infectious bacteria
(including, for example, H. pylori, C. difficile, C. jejuni, Y. enterocolitica
and Staph. aureus) and certain non-infectious immunologically-based syndromes,
diseases and conditions (including, for example, certain cancers, such as
prostate cancer, arthritis, irritable bowel syndrome and acne). At this time,
there can be no assurance that sufficient financial resources will be available
when and in the amounts needed, or that the development efforts of the Company
will be successful or that commercially viable pharmaceutical products
incorporating the Company's Technology will ever be developed.
Technology License
The Company has the exclusive right and license to utilize the Technology
for marketing and selling pharmaceutical and nutraceutical products, solely for
human applications, in the United States, Canada, Kenya, Ivory Coast, Zimbabwe,
Ghana, Zambia, and Nigeria, and their possessions and territories. The license
granted by PTI includes the rights under four United States patents, each of
which relates to methodologies to produce large proteins (immunoglobulins) on a
mass production basis. PTI has not represented or warranted the quality or
coverage of any of those patents, and therefore the Company does not and cannot
provide any assurance regarding PTI's rights therein. This license expires in
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May 1999 and the Company is presently negotiating with PTI to extend the term of
the license. The term of the license would be extended automatically through
March 2006, if the Company generated annual gross revenues from the sale of
products utilizing the Technology of not less than $2,000,000. However, this
minimum sales target has not been achieved and, unless minimum sales are
achieved in that amount or an extension of the license is agreed to by PTI prior
to the expiration date, the Company may lose its exclusive rights or its ability
to continue using the Technology.
PTI also may terminate the license if the Company fails to observe or
perform any of the covenants, terms, conditions or provisions of the agreement
or if it breaches any representation or warranty and fails to cure the breach
within 30 days after receipt of written notice thereof from PTI. Among other
things, the License requires that the Company maintain certain levels of product
liability insurance coverage. The Company presently does not maintain product
liability insurance coverage in the amounts required by the license. The Company
does, however, have product liability insurance in amounts that it believes are
sufficient in light of its obligations under the license, present sales levels
and its independent product liability exposure. Based on its current
relationship with PTI, the Company does not believe that its technical failure
to comply with the insurance coverage covenant of the license will result in
termination of the license by PTI. In addition, the Company anticipates that it
will provide the full amount of coverage required under the license when
revenues justify such an expense. There can be no assurance, however, that PTI
will not assert that the license has been breached in a material respect
justifying termination, and seek to enforce its rights under the license. The
license may also be terminated by PTI if the Company commences or has commenced
against it any proceeding under applicable bankruptcy law, makes a general
assignment for the benefit of its creditors, has a trustee or receiver
appointed, suffers the attachment, execution or judicial seizure of
substantially all of its assets, or becomes insolvent or liquidates or
dissolves.
The PTI license also provides that promptly following the issuance of
authorization or approval by the FDA for sales of any pharmaceutical products
covered by the license, the Company and PTI will negotiate in good faith for the
grant of license rights for pharmaceutical products in other parts of the world.
In addition, upon achieving nutraceutical product sales of $1,000,000 during any
12 month period, the Company and PTI will negotiate in good faith for the grant
of license rights in other parts of the world.
The Company is required to pay PTI royalties in the amount of 5% of
gross receipts from the sale of all products covered by the license with respect
to the first $3,500,000 of sales during each annual period and 7% of gross
receipts with respect to all sales in excess of $3,500,000 during such annual
period. Under the current agreement, if the license is extended past May 1999,
the Company is required to pay PTI annual advances to be applied against
royalties in the amount of $100,000 for the first year of such extension, and
increasing by $10,000 each year thereafter. As of September 30, 1998, the
Company had not paid any royalties to PTI under the License.
Manufacturing
The Company does not own or operate any manufacturing facilities. It
sources all of its products through third-party contract manufacturers.
Outsourcing allows the Company to enhance production flexibility and capacity,
leverage its working capital, transfer risk, and focus its energy and resources
on marketing and sales, while substantially reducing capital requirements and
avoiding the costs of managing a production workforce. The Company believes its
contract manufacturers have the capacity to fulfill its planned production needs
for at least the next 12 months. In addition, if arrangements with current
manufacturers were not satisfactory, or if they were either unable or unwilling
to continue production at rates satisfactory to the Company, the Company
believes it could locate and qualify other contract manufacturers to meet its
production needs. Contract manufacturers produce and package the Company's
products in accordance with Standard Operating Procedures for GMP by the FDA.
Raw materials are purchased from approved suppliers and inspected by the
contract manufacturer as they are received into the production facilities. They
are labeled to indicate source of supply, lot number and date of receipt, and
samples are kept for a minimum of two years from the date received. The
ingredients are mixed into batches under supervision of two quality assurance
contract manufacturer employees to verify adherence to the Company's
formulations and ensure taste consistency. The finished products are passed
through metal detectors, weighed, wrapped, and date coded. After each production
run, samples are analyzed to test the product for micro-impurities and to ensure
accurate labeling.
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<PAGE>
The Company orders all of its requirements for the Base Product from
PTI, which purchases the product from a distributor in New Zealand. The Base
Product used by the Company in connection with clinical trials of the Company's
drug candidates must be manufactured in accordance with current FDA-established
Good Manufacturing Practices ("GMP"). The FDA's GMP standards establish
stringent practices and procedures that must be followed by a manufacturer in
order to ensure the consistency of the product and minimize the possibility of
product contamination or adulteration. Currently, all Base Product is
manufactured in New Zealand. Based on initial inspections and follow-up visits
of the New Zealand facilities by consultants engaged by the Company, the Company
believes that those facilities are and will continue to be in full compliance
with current GMP standards. The Company intends to file or have the manufacturer
in New Zealand file, as may be appropriate, an Establishment License Application
("ELA"). The establishment license may be granted without inspection, but the
facility is subject to inspection by the FDA at least once every two years.
Marketing
The Company markets Optimune as a nutritional dietary supplement for
people who are HIV positive or have AIDS and who are suffering from weight loss.
It is also pursuing the marketing of Optimune or a similar nutraceutical product
as a nutritional dietary supplement for people experiencing weight loss as a
result of intensive antibiotic or chemotherapy treatment, as well as elderly
persons experiencing weight loss problems.
The Company markets its sports and energy nutrition bars as "nutrition
for peak performance." The Mountain Lift bars have been voted the "best tasting
and most nutritious bar" in the United States. The marketing efforts of the
Company are designed to draw attention to the vitamin and antioxidant content of
the bars and their effect on enhanced oxygen and increased energy for sports and
outdoor enthusiasts. Current marketing and advertising is designed to increase
consumer awareness of and demand for the products. The NiteBite medical food bar
is marketed as a supplement for diabetes patients who must use insulin. It is
the first medical food bar in the diabetes medical market.
The Company's objective is to develop or acquire and distribute
scientific products formulated on natural substances designed to enhance the
body's mechanisms. The products of the Company are promoted as "natural products
for a healthier world." The president of Optim, Randy Olshen, is experienced in
sales and marketing of pharmaceuticals, clinical nutrition products, functional
and medical foods. Prior to joining the Company in August 1998, Mr. Olshen
developed and launched functional and medical foods for other nutrition
companies, including the NiteBite bar. Mr. Olshen's services and those of other
marketing and sales personnel, are provided under an agreement with Harrogate
Marketing LLC, a Utah limited liability company owned by David G. Derrick a
former officer and director of the Company.
Competition
The Company's products compete in the medical food, nutrition and drug
industries. At present, there are several companies, such as ImmuCell
Corporation and GalaGen, Inc., that are involved in the research and development
of drugs derived from colostrum and hyper-immunized cows. In addition, the
Company faces competition from numerous pharmaceutical and other
biopharmaceutical companies that are currently developing products, utilizing
unrelated technologies, for the treatment or prevention of many of the diseases,
infections and syndromes identified by the Company for application of its
product candidates. Many of the Company's competitors have substantially greater
capital resources, research and development capabilities, manufacturing and
marketing resources, and experience than the Company.
Two nutraceutical products are produced and distributed by the Ross
Products Division of Abbott Laboratories - Ensure(R) and Advera(R). The Company
believes that Ensure is currently marketed to the elderly and others as a
nutritional supplement or meal replacement, while Advera is being marketed to
individuals who are HIV positive or have AIDS, as a nutritional supplement or
meal replacement and as a way to manage their weight. The Company believes that
the Ross Products Division of Abbott Laboratories currently controls
approximately 70% of the nutritional supplement and meal replacement markets.
The Company is also subject to increasing competition from companies that market
various powders and proteins for weight management and general health to
otherwise healthy individuals.
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The Company's principal competitors in the nutrition bar market are
PowerBar, ClifBar, Met-Rx, and Balance Bar. It believes its products are
differentiated from other nutrition bars by their taste and, in the case of the
medical food bar, the scientific and medical base of the product. However, these
competitors are larger, enjoy greater market recognition and have greater
financial resources than the Company allowing them to more widely promote and
market their products.
Government Regulation
The biopharmaceutical products and technologies owned by or licensed to
the Company are heavily regulated by the FDA, the EPA and other regulatory
authorities pursuant to applicable federal, state and local laws, rules and
regulations. The manufacturing, packaging, labeling, advertising, distribution,
and sale of the Company's nutrition and medical food bars are also subject to
regulation by various government agencies, principally the FDA. The FDA
regulates these products and activities pursuant to the Federal Food, Drug and
Cosmetic Act and the Fair Packaging and Labeling Act, and regulations under
these acts. The FDCA is intended, among other things, to ensure that foods are
wholesome, safe to eat, and produced under sanitary conditions, and that food
labeling is truthful and not deceptive. The FLPA provides requirements for the
content and placement of information on consumer packages to ensure that
labeling is useful and informative.
The Company's products are generally regulated and classified as foods
under the FDCA and are not subject to premarket approval by the FDA, unlike the
drug candidates and biopharmaceutical products of the Company. However, food
products are subject to comprehensive labeling and safety regulations of the
FDA, the violation of which could result in product seizure and condemnation,
injunction of business activities, or criminal or civil penalties. In addition,
if the FDA determines, on the basis of labeling, promotional claims or marketing
practices of the Company, that the promoted or intended use of any of the
Company's products is for the diagnosis, cure, mitigation, treatment, or
prevention of disease, it could regulate those products as drugs and require,
among other things, premarket approval for safety and efficacy. The Company
believes that it presently complies in all material respects with these rules
and regulations. However, there can be no assurance that non-compliance, or the
cost of future compliance with such laws or regulations will not have a material
adverse effect on the Company's business, results of operations or financial
condition.
The Company's advertising is subject to regulation by the FTC pursuant
to the Federal Trade Commission Act, which prohibits unfair or deceptive acts or
practices, including the dissemination of false or misleading advertising.
Violations of the FTCA may result in a cease and desist order, injunction, or
civil or criminal penalties. The FTC monitors advertising and entertains
inquiries and complaints from competing companies and consumers. It also reviews
referrals from industry self-regulatory organizations.
Employees
As of September 30, 1998, the Company had 3 full-time employees. Since
September 1, 1998, the Company leases 7 full-time employees under a marketing
agreement with Harrogate. The Harrogate employees staff the marketing and sales
operations of Optim, and include its President, Randy Olshen. Under the
agreement with Harrogate, the Company pays Harrogate a fee of 45% of gross
revenues from the nutrition bar and medical food products marketed by Optim.
Harrogate pays Mr. Olshen and the other employees and costs associated with its
duties under the agreement. Harrogate also received options to purchase 308,000
shares of Biomune common stock at a price of $2.00 per share, which it may use
as incentives and for compensation of its employees providing services to Optim.
None of the Company's employees are subject to a collective bargaining
agreement. See "Certain Relationships and Related Transactions."
ITEM 2. PROPERTIES
The corporate headquarters for Biomune and Optim are located at 2401 South
Foothill Drive, Salt Lake City, Utah under a written lease agreement with Young
Electric Sign Company, an unrelated third party (the "Lease Agreement"). That
Lease Agreement expires on September 30, 1999. The Lease Agreement involves the
lease for Biomune and Optim of approximately 3,500 square feet of office space
(approximately 2,800 square feet of which is being utilized by Biomune and the
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<PAGE>
approximately 700 remaining square feet of which are being utilized by Optim)
and approximately 800 square feet of research space. The monthly rent for both
Biomune's and Optim's space in 1998 was $7,875 per month in 1998 and increased
to $8,268.75 per month in 1999. The Company believes that its current corporate
headquarters is suitable for its needs for the foreseeable future up through and
including the termination of the Lease Agreement on September 30, 1999, and is
in good condition and repair. As of September 30, 1998, Biomune was utilizing
approximately 90% of the approximately 2,800 square feet of office space and
subletting the approximately 800 square feet of research space to Bioxide
Corporation.
In addition to the corporate headquarters, Optim leases approximately
3,800 square feet of warehouse space in West Valley City, Utah. Presently Optim
uses approximately 75% of the warehouse space. The Company believes that those
facilities will accommodate Optim's operations and projected growth for the
foreseeable future. Rockwood occupies approximately 4,000 square feet in leased
space in an office building in Los Angeles, California.
ITEM 3. LEGAL PROCEEDINGS
On October 12, 1995, a Proposed Class Action Complaint for Violations
of the Federal Securities Laws was filed in the United States District Court for
the District of Utah, Central Division, by Roman Sterlin (Civil No. 2:95CV-
0944G). The Complaint, as subsequently amended, named as defendants, the
Company, David G. Derrick (the Company's former Chief Executive Officer and
Chairman of the Board), Aaron Gold (a director of the Company), Charles J.
Quantz (a director of the Company), Jack D. Solomon (a founder of the Company
and a member of the Company's Business Advisory Board), Genesis Investment
Corporation (a shareholder of the Company) and The Institute for Social &
Scientific Development, Inc. (a shareholder of the Company). The plaintiff has
alleged violations by the defendants of Sections 10(b), 20(a) and 20(A)(a) of
the Exchange Act, Rule 10 b-5 promulgated under the Exchange Act and general
misappropriation of material non-public information. The Company and other
defendants prevailed in a motion to dismiss the lawsuit based, among other
grounds, on the expiration of applicable statutes of limitation. The plaintiff
appealed the decision of the District Court to the United States Court of
Appeals for the Tenth Circuit (No. 95-CV-944) in Denver, Colorado. On September
2, 1998, the Court of Appeals reversed the decision of the trial court and
remanded the case for a determination by the trial court of whether the
complaint had been timely filed in light of the decision of the appellate court.
No date has been set for a rehearing in the trial court. The Company believes
that the allegations made in the Complaint are wholly without merit and intends
to vigorously oppose the claims of the plaintiff. However, there can be no
assurance that the Company's defense will be successful. Until September 1998,
the Company has paid the legal fees and related expenses associated with the
defense of this action on behalf of the Company and the other named defendants.
On September 29, 1998, Bryan Furtek filed a lawsuit in the Third
Judicial District Court for Salt Lake County, Salt Lake Department, State of
Utah (Civil No. 9890909809), naming the Company, Bioxide Corporation, David G.
Derrick, Jack Solomon, Genesis Investment Corporation, and Biomed Patent
Development as defendants. The plaintiff's claims allegedly arose out of his
role in the development of certain waste disposal technologies. Those
technologies were included in the property sold by the Company in 1998 to
Bioxide Corporation. The defendants, including the Company, filed answers to the
complaint, denying all of plaintiff's principal allegations and claims and
asserting counterclaims against Mr. Furtek, including, among other things,
unjust enrichment and a claim that Furtek misrepresented his authority and
ability to patent the technology at the core of the litigation. The litigation
is presently in the discovery phase. The Company believes Furtek's claims to be
without merit and will vigorously defend itself in this action.
By agreement with the Company, entered into September 1998, Harrogate
has agreed to assume and pay all costs, including legal fees, of the Company in
connection with both of these matters.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is listed on the National Association of
Securities Dealers Automated Quotation ("Nasdaq") SmallCap Market. The Company's
common stock trades under the primary symbol "BIME" and was included on the
Nasdaq SmallCap Market commencing April 6, 1994. Prior to that date, the common
stock was traded in the over-the-counter market. The following table is based
upon information available to the Company and sets forth the range of the high
and low bid prices for the common stock for each full quarterly period within
the two most recent fiscal years, based upon quotations on the Nasdaq SmallCap
Market, (and giving effect to all stock splits occurring during such period or
prior to the issuance of this Report):
Quarter Ended High(1) Low(1)
September 30, 1998 $ 4.06 $ 4.00
June 30, 1998 $ 9.38 $ 8.75
March 31, 1998 $ 10.16 $ 9.38
December 31, 1997 $ 8.13 $ 6.56
September 30, 1997 $ 43.80 $ 37.50
June 30, 1997 $ 50.00 $ 46.90
March 31, 1997 $ 131.30 $ 118.80
December 31, 1996 $ 146.90 $ 121.90
- ---------------------
(1) The source of these high and low prices was the National Association of
Securities Dealers, Inc. These quotations reflect inter-dealer prices,
without retail mark-up, mark-down or commission and may not represent
actual transactions. These high and low prices are post-split prices,
reflecting the 1-for-10 reverse stock split effective November 10, 1997
and the 1-for-10 reverse stock split effective December 31, 1998. The
high and low prices listed have been rounded up to the next highest two
decimal places.
The market price of the common stock is subject to significant
fluctuations in response to variations in the Company's quarterly operating
results, general trends in the market for the Company's products and product
candidates, and other factors, over many of which the Company has little or no
control. In addition, broad market fluctuations, as well as general economic,
business and political conditions, may adversely affect the market for the
Company's common stock, regardless of the Company's actual or projected
performance. On January 4, 1999, the closing price of the common stock as
reported by Nasdaq was $2.00 per share.
On January 4, 1999, there were approximately 1,204 holders of record of
the Company's common stock and approximately 5,400 beneficial owners, including
shares of common stock held in street name.
The Company has never declared or paid cash dividends on its common
stock and does not anticipate paying any cash dividends on its common stock in
the foreseeable future. The Company currently anticipates that all of its cash
will be retained for use in the operation and expansion of its business. Any
future determination as to cash dividends will depend upon the earnings and
financial position of the Company and such other factors as the Board of
Directors may deem appropriate. Cash dividend payments to holders of common
stock are subject to preferred dividend payments to the holders of the Company's
preferred stock.
As of January 4, 1999, the Company had the following series of
preferred stock outstanding:
o Series A 10% Cumulative Convertible Preferred Stock - 39,774
shares outstanding, convertible into 1,193 shares of common
stock;
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o Series B 10% Cumulative Convertible Preferred Stock - 449
shares outstanding, convertible into 14 shares of common
stock;
o Series E 8% Cumulative Convertible Non-Voting Preferred Stock
- 322.68 shares outstanding, convertible into 278,173 shares
of common stock, based on conversion feature of the lesser of
42% discount to market or $0.60 per share.
o Series F 8% Cumulative Convertible Non-Voting Preferred Stock
- 1,318,749 shares outstanding. Subsequent to the end of the
fiscal year covered by this report the holders of a majority
of the issued and outstanding shares of Series F Preferred
consented to an amendment of the designation of rights and
preferences of the Series F Preferred whereby each share of
Series F Preferred will be convertible to .3 of a share of
common stock, however, not more than 250,000 shares of common
stock may be issued in the aggregate in conversion of all
shares of Series F Preferred unless stockholder approval is
received for the issuance of more than 250,000 shares.
Unconverted shares of Series F Preferred may be redeemed by
the Company at a price of $.80 per share.
o Series G 8% Non-Convertible, Non-Voting Preferred Stock. This
stock is to be issued in connection with the Rockwood
acquisition. 750,000 shares are authorized, of which 500,000
will be issued. The stock is entitled to annual dividends of
8% ($.80) per share, payable quarterly in additional shares of
stock or cash, at the option of the Company, and a liquidation
preference of $1.33 per share. It is not convertible into
common stock and is therefore anti-dilutive.
o Series J 10% Convertible, Non-Voting Preferred Stock - this
series has been authorized by the board of directors, but the
designation was not been filed with the State of Nevada until
December 31, 1998. The series consists of 2,000 shares
authorized, with a stated value of $1,000 per share. Holders
are entitled to a dividend of $100 per share annually, payable
quarterly in stock or cash at the option of the Company. Each
share is convertible to shares of common stock calculated by
dividing $1,000 by the market price of the Company's common
stock on the date of conversion; subject to an aggregate of
250,000 shares of common stock, as with the Series F
Preferred. As of September 30, 1998, the Company was obligated
to issue a total of 1,135 shares of Series J Preferred
following the acceptance of the designation by the state
authorities.
Recent Sales of Unregistered Equity Securities
The following information sets forth certain information for all
securities the Company sold during the past three years without registration
under the Securities Act.
In September 1998, the Company issued restricted shares of its common
stock and options to purchase restricted shares of common stock. A total of
32,910 shares of restricted stock were issued, primarily to satisfy outstanding
payables of Rockwood and for services provided to the Company or its
subsidiaries. The shares were issued at market value ($4.00) on the date of
issue. In addition, the Company issued one vendor options to purchase 1,000
shares of common stock at a price of $7.50 per share. In each case, issuance of
the securities was accomplished without registration under the Securities Act of
1933, as amended (the "Securities Act"), in reliance on the exemption from the
registration requirement afforded by Section 4(2) of the Securities Act that
pertains to issuances not involving any public offering of securities. The
certificates representing such shares, and the documents representing such
options bear legends containing ordinary and customary terms and may not be
resold except pursuant to registration under the Securities Act or pursuant to
an available exemption from the registration requirement of the Securities Act.
In September 1998, the Company accepted subscriptions in cash totaling
$675,000 for purchase of shares of its Series J Preferred Stock. The purchasers
of such shares were accredited investors as that term is defined under the
Securities Act and the rules and regulations promulgated under such Act. These
transactions were made pursuant to exemptions from the registration requirements
of the Securities Act for sales of restricted securities to accredited
investors.
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On August 1, 1997, the Company issued 1,000 shares of restricted common
stock and options to purchase 2,500 shares of restricted common stock to three
consultants for services provided to the Company. The shares of restricted
common stock issued were valued at $37.50 per share, and the exercise price of
the options is $37.50 per share, which price was the fair market value of the
Company's common stock on the date of issuance of such securities, adjusted for
intervening reverse stock splits. The issuance of such securities was
accomplished without registration under the Securities Act of 1933, as amended
(the "Securities Act"), in reliance on the exemption from the registration
requirement afforded by Section 4(2) of the Securities Act that pertains to
issuances not involving any public offering of securities. The certificates
representing such shares, and the documents representing such options bear
legends containing ordinary and customary terms and may not be resold except
pursuant to registration under the Securities Act or pursuant to an available
exemption from the registration requirement of the Securities Act.
In fiscal year 1996, the Company sold 5,000 shares of its Series C
Preferred for $5 million in cash (or $1,000 per share). The Company received a
total of $1.5 million in cash (less certain costs and expenses of the offering)
as of September 30, 1996, and the $3.5 million balance was received by the
Company in cash during fiscal year 1997. The Series C Preferred bears an 8%
cumulative dividend payable annually either in cash or in additional shares of
Series C Preferred, at the election of the Company's Board of Directors. In
connection with the sale of the Series C Preferred, the Company paid a finder's
fee of $500,000, or 10% of the gross offering amount from the subscription of
the Series C Preferred, and certain costs and expenses related to the offering,
including, but not limited to, legal fees, accounting fees and escrow fees.
Subject to certain conversion limitations on the Series C Preferred as set forth
in the Series C Preferred Designation of Rights and Preferences, each share of
Series C Preferred was convertible into common stock. See "Market for
Registrant's Common Equity and Related Stockholder Matters," subheading
"Preferred Stock -- Series C Preferred." The Series C Preferred offering was
made in reliance on Regulation D and Regulation S promulgated under the
Securities Act.
With respect to all of the foregoing offers and sales of restricted and
unregistered securities by the Company, the Company relied on the provisions of
Sections 3(b) and 4(2) of the Securities Act and rules and regulations
promulgated thereunder, including, but not limited to Rules 505 and 506 of
Regulation D, in that such transactions did not involve any public offering of
securities and were exempt from registration under the Securities Act. The offer
and sale of the securities in each instance was not made by any means of general
solicitation, the securities were acquired by the investors without a view
toward distribution, and all purchasers represented to the Company that they
were sophisticated and experienced in such transactions and investments and able
to bear the economic risk of their investment. A legend was placed on the
certificates and instruments representing these securities stating that the
securities evidenced by such certificates or instruments, as the case may be,
have not been registered under the Securities Act and setting forth the
restrictions on their transfer and sale. Each investor also signed a written
agreement that the securities would not be sold without registration under the
Securities Act or pursuant to an applicable exemption from such registration.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial information presented below has been derived
from the Company's consolidated audited financial statements for each of the
fiscal years ended September 30, 1994, 1995, 1996, 1997 and 1998. This selected
financial information should be read in conjunction with Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
below, and the Company's consolidated financial statements forming a part of
this Report. With respect to the information for the 1994 through 1997, the data
are derived from consolidated financial statements audited by Arthur Andersen
LLP. Information for the year ended September 30, 1998 is from consolidated
financial statements audited by Tanner + Company.
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<TABLE>
<CAPTION>
Consolidated Statement of As of and for the fiscal years ended September 30,
Operations Data From --------------------------------------------------
Continuing Operations: 1994 1995 1996 1997 1998
---------------------------------- --------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $ -- $ -- $ 2,001 $ 199,051 $ 2,806,853
Net loss from continuing operations $ (3,980,223) $ (3,005,188) $(5,020,398) $(7,348,281) $ (1,622,647)
Net Loss per common share
from continuing operations $ (32.50) $ (18.25) $ (27.20) $ (51.08) $ (4.52)*
Consolidated Balance Sheet Data:
Total assets $ 9,617,345 $ 6,718,420 $ 9,166,705 $ 2,732,498 $ 5,650,475
Long-term debt $ -- $ -- $ -- $ -- $ --
Shareholders' equity $ 9,404,636 $ 6,329,175 $ 8,646,525 $ 1,343,985 $ 3,745,726
Cash dividends per
common share $ -- $ -- $ -- $ -- $ --
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of the Company's financial
condition and results of operations should be read in conjunction with the
consolidated financial statements and the notes thereto appearing elsewhere in
this Report.
See Item 8, "Financial Statements and Supplementary Data."
Overview
The Company is engaged in the research, development, distribution and
sale of biologic pharmaceutical products, nutraceutical food products and
supplements, medical foods and health and beauty aids. Certain of these products
have been developed by the Company and incorporate a patented whey protein
technology, which is designed to provide or increase protective immunities from
an immune response to disease and to provide nutritional supplementation. The
Company's medical food bar is a patented formulation developed by researchers at
Beth Israel Deaconess Medical Center, Harvard Medical School, and marketed by
the Company under an exclusive license. The energy and sports nutrition bars of
the Company are also marketed under an exclusive license from the developer of
the products. Through a majority owned subsidiary, the Company also distributes
health and beauty aids and related products to national wholesale and retail
customers.
The Company believes its future results of operations will be affected
by factors such as:
o the availability of cash from financing activities to fund its
operations;
o the results of research and development efforts and the
clinical trials on BWPT-301, BWPT-302 and other future
pharmaceutical drug candidates based on or derived from the
Technology;
o market acceptance of Optimune, the nutrition and medical food
bars, and pharmaceutical drug candidates, increased
competitive pressures;
o changes in raw material sources and costs; and
o adverse changes in general economic conditions in any market
in which the Company conducts or markets its products.
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The Company believes that the majority of its future revenues will come
from its nutrition and medical food products and new nutraceutical products and
pharmaceutical drugs. The Company cannot determine the ultimate effect that new
products will have on revenues, earnings or the price of the Company's common
stock.
The Company's primary focus and efforts during the fiscal year ended
September 30, 1998, were the commercialization of its nutraceutical products,
assessing and obtaining additional nutraceutical and medical products to add to
product line, and, to a lesser extent, continuing its efforts to obtain FDA
approval of BWPT-301 for the treatment of cryptosporidiosis in people with AIDS
and BWPT-302 for the treatment of E. coli, strain 0157:H7. During the fiscal
year ended September 30, 1998, $116,860 of the Company's revenues were generated
from the sale of Optimune and Maximune. The Company also had revenues from
settlement of a royalty fee arrangement and discontinued operations of $400,000
and $28,027, respectively. The sale of health and beauty aids through the
Company's majority owned Rockwood subsidiary provided revenues of $2,261,966 in
1998. The sale of nutrition and medical food bars commenced in September 1998
and produced no material revenues during fiscal year 1998.
Continuing in fiscal year 1999, the Company will focus its resources
and efforts on:
o commercialization of its nutraceutical products;
o continued marketing and selling of the NiteBite and Mountain
Lift bars;
o acquisition of new nutraceutical and or medical food products;
o development of one or more additional nutraceutical products
based on the Technology; and
o approval of BWPT-301 and BWPT-302.
Results of Operations
Fiscal Year 1998 Compared to Fiscal Year 1997
During the fiscal year ended September 30, 1998, the Company generated
revenues from continuing operations totaling $2,806,853. These revenues were
generated primarily by Optim, the Company's nutraceutical product subsidiary and
Rockwood, the Company's beauty aid subsidiary. In fiscal year 1997, total
revenue was $199,051, all of which was generated by Optim. The increase in sales
during fiscal year 1998 is attributable primarily to sales by the Rockwood
subsidiary.
Management, consulting and research expenses from continuing operations
decreased from $3,563,682 in fiscal year 1997 to $1,052,674 in fiscal year 1998.
This decrease was due primarily to a reduction in expenditures for research and
development. The Company anticipates that it will continue to focus on reducing
expenditures for management, consulting and research fees in the foreseeable
future by reducing its expenses in the following areas:
o Phase II clinical trials on BWPT-301;
o Phase III clinical trials on BWPT-301;
o Phase I clinical trials on BWPT-302;
o Phase II clinical trials on BWPT-302;
o additional nutraceutical studies.
Other general and administrative expenses decreased from $4,074,580
during fiscal year 1997 to $1,924,429 during fiscal year 1998. The decrease in
other general and administrative expenses was primarily a result of decreased
activity in connection with the commercialization of the Company's nutraceutical
products, the reduction of sales,
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<PAGE>
marketing and support personnel for Optim, and the development and
commercialization of other nutraceutical products. The Company expects that
general and administrative expenses will increase in fiscal year 1999 as
compared to fiscal year 1998, as additional sales, marketing and support
personnel are added. This increase in other general and administrative expenses
is expected to be offset by increased sales of the Company's products.
Interest income decreased from $256,331 for fiscal year 1997, to
$144,042 for fiscal year 1998. This decrease was primarily attributable to the
use of cash for management, consulting and research, as well as other general
and administrative expenses. The Company incurred interest expense of $44,722 in
fiscal year 1998, compared to no interest expense in fiscal year 1997.
The Company had a net loss from continuing operations of $2,968,108
(after accounting for stock dividends on the outstanding shares of preferred
stock) in fiscal year 1998, as compared to a net loss from continuing operations
of $11,388,798 in fiscal year 1997. This decrease in net loss is attributable to
a decrease in accrued preferred stock dividends, the beneficial conversion
features on preferred stock, an increase in the Company's revenues, and a
reduction in other general and administrative expenses as described above.
Additional factors were decreases in management, consulting and research
expenses. The net loss per common share from continuing operations decreased
from $51.08 for fiscal year 1997 to $4.52 for fiscal year 1998. The decrease in
net loss per common share is due primarily to the decrease in management,
consulting and research and development expenses, as well as a reduction in
general and administrative expenses. The reasons for the decreases in these
expenses are described above.
The Company has incurred significant net operating losses, which
totaled $37,848,773 from inception through September 30, 1998. Certain of the
net operating loss carryforwards ("NOLs") related to the accumulated operating
loss may be limited by an ownership change (as that term is defined in Section
382 of the Internal Revenue Code of 1986, as amended) that may have occurred as
of December 10, 1991. See Note 11 to the consolidated financial statements for a
detailed discussion of the Company's NOLs.
Fiscal Year 1997 Compared to 1996
During the fiscal year ended September 30, 1997, the Company generated
revenues totaling $199,051, compared to $2,001 revenues in fiscal year 1996. The
increase in sales by Optim during fiscal 1997 is attributable to a full year of
marketing and selling the Company's first nutraceutical products.
Management, consulting and research expenses increased from $3,359,985
in fiscal year 1996 to $3,563,682 in fiscal year 1997. This increase was due to
the Company using outside consultants for filing the IND on BWPT-302 and for the
Company's fund raising activities. Such increases in management, consulting and
research expenses were funded by existing cash from previous sales of preferred
stock.
Other general and administrative expenses increased from $1,897,852
during fiscal year 1996 to $4,074,580 during fiscal year 1997. The increase in
other general and administrative expenses was primarily a result of increased
activity in connection with the development and commercialization of
nutraceutical products and the addition of sales, marketing and support
personnel for Optim, as well as activity in connection with preparing and filing
the Company's IND on BWPT-302 for E. coli, strain 0157:H7, and to report to the
FDA on the results of the Phase I clinical trials on BWPT-301, as well as the
preliminary results of the initial Phase II clinical trials on BWPT-302, and the
addition of physical space for Optim.
Interest income decreased from $271,690 for fiscal year 1996 to
$256,331for fiscal year 1997. This decrease was primarily attributable to the
use of cash for management, consulting and research, as well as general and
administrative expenses. The Company incurred no interest expense in either
fiscal year 1997 or fiscal year 1996.
The Company incurred a net loss from continuing operations of
$11,388,798 (after accounting for the payment of stock dividends on the
outstanding shares of preferred stock) in fiscal year 1997, as compared to a net
loss of $5,111,597 in fiscal year 1996. This increase in net loss from
continuing operations was attributable to an increase in management, consulting
and research expenses and other general and administrative expenses, offset in
part by a decrease in stock dividends paid on preferred stock because of the
conversion of shares of preferred stock into shares of
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common stock during fiscal year 1997. The net loss per common share from
continuing operations increased from $27.20 for fiscal year 1996 to $51.08 for
fiscal year 1997. The net loss per common share would have increased even more,
but for the fact that the weighted average number of shares of the Company's
Common stock outstanding increased as a result of conversions of preferred stock
into common stock. Preferred stock dividends increased from $91,199 in 1996 to
$337,766 in 1997, due to the sale of additional shares of preferred stock into
shares of common stock in 1997.
Liquidity and Capital Resources
The Company has been unable to finance its operations from cash flows
from operating activities. Substantial funds and additional time will be
required to continue commercializing the Company's nutraceutical products, to
complete Phase II and Phase III clinical trials on BWPT-301 (assuming efficacy
is established during the Phase II clinical trials), to complete the necessary
clinical trials on BWPT-302, to obtain regulatory approval for and commercialize
products utilizing the Technology and to develop and commercialize additional
nutraceutical products based on the Technology. Because operating activities
have not produced significant revenues to date and because the Company will
require significant capital to accomplish the objectives set forth above,
additional equity and/or debt funding will be required, although such funding
may not be available or may not be available on favorable terms. Management
believes that the Company-funded research and development efforts to date have
positioned the Company to pursue future research and development efforts and
clinical trials with joint venture, strategic alliance, government or private
grants or other third-party funding.
As of September 30, 1998, the Company had cash and cash equivalents of
$27,701 and working capital of $981,757 compared to cash and cash equivalents of
$1,585,099 and working capital of $925,166 as of September 30, 1997.
During fiscal year 1998, the Company's operating activities used
$1,740,736 of cash, which had previously been provided by the issuance of shares
of its preferred stock and the exercise of options for the purchase of common
stock. In 1997, the Company's operating activities used $4,401,787 of cash, also
principally provided by the sale of the Company's equity securities (primarily
preferred stock).
During fiscal year 1999, the Company anticipates incurring direct costs
of approximately $1,000,000 in marketing and selling its nutraceutical products.
The Company expects it will continue to seek funds to supplement sales revenue
for operations and to finance the continued commercialization of products
utilizing the Technology and the marketing of its other products.
The Company has not established a credit facility with any lending
institution. The Company has in the past, from time to time, borrowed money from
certain shareholders, but has no formal financing arrangement, agreement or
understanding with any of its shareholders or any other related or unrelated
party to do so in the future.
The consolidated 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 December
10, 1998, that includes an explanatory paragraph stating that the Company's
recurring losses and accumulated deficit, among other things, 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 financing from
the sale of its equity securities to sustain operations. Additional financing
will be required if the Company is to continue as a going concern. If such
additional funding cannot be obtained, the Company may be required to scale back
or discontinue its operations. Even if such additional financing is available to
the Company, there can be no assurance that it will be on terms favorable to the
Company. In any event, such financing will result in immediate and possibly
substantial dilution to existing shareholders.
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Year 2000 Issues
Since its inception, the Company has attempted to make use of
increasingly sophisticated computer hardware and software to manage its business
and operations. The Company also relies on third-parties to facilitate its
business including, for example:
o contract manufacturers who produce its products;
o telecommunications providers on whom the Company must rely for
its communications;
o public utilities which provide electrical power and other
utilities needed in the Company's operations;
o major credit card companies that process payments for the
Company's products;
o major shipping companies through which the Company ships its
products;
o financial institutions that provide commercial banking and
other financial services to the Company; and
o the Nasdaq Stock Market, on which the Company's common stock
is traded.
Many existing computer programs use only two digits to identify a year
in the date field and were designed, developed and modified without considering
the impact of the upcoming change in the century. If not corrected, such
computer applications could fail or create erroneous results by or after the
Year 2000 by erroneously identifying the year "00" as 1900, rather than 2000.
Correcting a Year 2000 problem on a large mainframe or network application can
be difficult and expensive. If a company does not successfully address its Year
2000 issues, it may face material adverse consequences. The Company is in the
process of insuring that all of its internal computer systems are Year 2000
compliant. The Company will assess the readiness of the Company for meeting the
Year 2000 problem. It is expected that the assessment and remediation, if any,
of Year 2000 issues affecting the Company's internal systems or products,
including any issues involving embedded technology, will be completed by June
30, 1999 and that the cost to the Company will not be significant.
With respect to third-party providers whose services are critical to
the Company, the Company intends to monitor the efforts of such providers as
they become Year 2000 compliant. The Company is presently not aware of any Year
2000 issues that have been encountered by any such third party which could
materially affect the Company's operations. Notwithstanding the foregoing, there
can be no assurance that the Company will not experience operational
difficulties as a result of Year 2000 issues, either arising out of internal
operations or caused by third-party service providers, which individually or
collectively could have a material adverse effect on the Company's business,
financial condition or results of operations.
Recent Accounting Pronouncements
In September 1997, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 130, "Reporting Comprehensive Income" (SFAS 130). SFAS 130
requires entities presenting a complete set of financial statements to include
details of comprehensive income that arise in the reporting period.
Comprehensive income consists of net earnings or loss for the current period and
other comprehensive income, which consists of revenue, expenses, gains and
losses that bypass the statement of earnings and are reported directly in a
separate component of equity. Other comprehensive income includes, for example,
foreign currency items, minimum pension liability adjustments and unrealized
gains and losses on certain investment securities.
SFAS 130 requires that components of comprehensive income be reported
in a financial statement that is displayed with the same prominence as other
financial statements. SFAS is effective for fiscal years beginning after
December 15, 1997 and requires restatement of prior period financial statements
presented for comparative purposes.
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Adoption of SFAS 130 is not required for reporting on interim periods prior to
the close of a fiscal year beginning after December 15, 1997. The Company will
adopt SFAS 130 commencing with the year ending September, 1999.
During January 1998, the American Institute of Certified Public
Accountants ("AICPA") issued Statement of Position 98-5 "Reporting on the Costs
of Start-up Activities" ("SOP 98-5). SOP 98-5 becomes effective for all fiscal
years beginning after December 15, 1998. The Company will adopt SOP 98-5 in its
fiscal year beginning October 1, 1999. Because the current amortization periods
of the product development costs and start-up costs averaging 12 months, the
Company does not expect the adoption of SOP 98-5 to have a material impact on
the Company's financial statements.
During January 1998, the AICPA issued Statement of Position 98-1
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" ("SOP 98-1"). SOP 98-1 becomes effective for all fiscal years
beginning after December 15, 1998. The Company does not expect the adoption of
SOP 98-1 to have a material adverse effect on the Company's financial
statements.
Certain Business Considerations and Risk Factors
The short and long-term success of the Company is subject to certain
risks, many of which are substantial in nature. Shareholders and prospective
shareholders in the Company should consider carefully the following risk
factors, in addition to other information contained in this Report.
History of Operating Losses; Uncertainty of Future Profitability. The
Company has incurred significant operating losses since formation. As of
September 30, 1998, the Company had an accumulated deficit of $37,726,503.
The factors contributing to these significant operating losses included:
o ongoing marketing expenditures;
o acquisition expenses and costs;
o expansion of its research and development programs;
o costs associated with pre-clinical studies and
clinical trials for its pharmaceutical product
candidates;
o nutritional studies;
o regulatory compliance requirements related to its
pharmaceutical product candidates;
o trials for other products that it or its subsidiaries
may develop; and
o implementation of programs to market products
ultimately approved for distribution, if any.
The Company's ability to achieve profitability depends upon its ability
to successfully market its products, to acquire, discover or develop new
products, to obtain regulatory approvals of its proposed pharmaceutical products
and to enter into agreements for product development, manufacturing,
distribution, and commercialization. There can be no assurance that the Company
will ever achieve significant revenues or profitable operations.
Going Concern. The consolidated 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 December 10, 1998 that includes an explanatory paragraph stating that the
Company's recurring losses and accumulated deficit, among other things, 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
financing from the sale of its equity securities to sustain operations.
Additional financing will be required if the Company is to continue as a going
concern. If such additional funding cannot be obtained, the Company may be
required to scale back or discontinue its
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operations. Even if such additional financing is available to the Company, there
can be no assurance that it will be on terms favorable to the Company.
Sale of Equity Securities; Future Dilution. The Company anticipates
that it will sell additional equity securities to fund its operations and to
acquire inventory. Absent such additional funding, the Company may find it
necessary to postpone or cancel some of its planned marketing and research and
development programs. This could adversely affect the Company's ability to
execute its business plan, generate future revenues and introduce new products.
There can be no assurance, however, that additional financing will be available,
or, if available, that it will be available on acceptable terms or in required
amounts. Furthermore, if additional funds are raised by issuing additional
shares of common stock or securities convertible to common stock, such sales or
conversion will result in further and possibly substantial dilution of the
equity ownership of the Company's existing holders of common stock. Such
dilution may make it more difficult for investors to sell their shares or may
result in a lower price of the Company's securities. The Company may also be
forced to obtain funds through arrangements with collaborative partners or
others may require the Company to relinquish rights to certain of its product
candidates or technologies or products.
Dependence on Licensed Technology. The Company is dependent upon
licenses granted by third parties for its product line and Technology. The
several license agreements require that the Company achieve minimum sales in
order to retain the license rights. There can be no assurance that the Company
will meet the minimum sales requirements to avoid cancellation of the licenses
or a change in its rights. The Company's failure to observe or perform any of
the covenants, terms, conditions or provisions contained in the license
agreements or in the event of a breach of any representation or warranty made by
the Company, may result in a termination or restriction of the Company's rights.
Termination of any of the licenses or any restriction or limitation of its
rights would adversely affect the Company's operations and could possibly result
in the termination of the Company's business.
Government Regulation. The Company's products and business activities
are subject to government regulations, including, without limitation, those
administered by the FDA and the FTC and state and local agencies. Similar
regulatory frameworks exist in other countries, where the Company is licensed to
distribute products. To date, the Company has completed extensive clinical
trials on BWPT-301pursuant to the submission to the FDA of an IND. The Company
has also commenced clinical trials on BWPT-302 pursuant to a second IND,
although communications with the FDA concerning this second IND remain at a very
early stage. Prior to marketing pharmaceutical products, such products must
undergo extensive clinical trials and an extensive regulatory approval process.
Any denials or delays in obtaining the requisite approvals would likely have a
material adverse effect on the Company. The pharmaceutical regulatory process
includes extensive pre-clinical safety, pharmacology and toxicological testing.
Pre-clinical data is required for the filing of an IND with the FDA to conduct
clinical testing to establish safety, efficacy, purity and potency of any
investigational biological product. With respect to each biological
pharmaceutical product candidate, the developer must initially conduct a limited
Phase I (safety) study, then more extensive Phase II studies, followed by a
Phase III study. This testing can take many years and require the expenditure of
substantial capital and other resources. There can be no assurance that this
testing will be completed on a timely basis or at all. Delays or denials of
marketing approval are encountered regularly, and the Company's activities with
respect to clinical studies since fiscal 1997 regarding its pharmaceutical
products have been curtailed due to financial restraints and the Company's
increased emphasis on nutraceutical products. Prior to commencing marketing of a
pharmaceutical product, a company must file a Product License Application
("PLA") and an Establishment License Application ("ELA") with the FDA and be
issued the appropriate product license and establishment license. A PLA relates
to the product itself, while an ELA relates to the manufacturing facilities to
be used to manufacture the product. Both a PLA and an ELA are required before
product marketing can begin. There can be no assurance that even after
successful clinical testing, regulatory approval of a PLA or an ELA will ever be
obtained. If obtained, regulatory approval may entail limitations on the
indicated uses for which any product may be marketed. Following regulatory
approval, a product and its manufacturer are subject to continuing regulatory
oversight and review. Later discovery of problems with a product or its
manufacturer may result in restrictions on the product or its manufacturer.
These restrictions may include withdrawal of the marketing approval for the
product. Violation of FDA requirements in general can lead to recall or seizure
of products, injunction against production, distribution, sales and marketing,
and criminal prosecution, among other sanctions. The cost to the Company of
conducting human clinical trials can vary dramatically based on a number of
factors, including, but not limited to, the order and timing of clinical
indications pursued, the size of the patient population, the number of
participating institutions and the number and type of end points subject to data
collection. Because of the intense
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competition in the market in which the Company operates, the Company may have
difficulty obtaining sufficient populations or clinician support to conduct its
clinical trials as planned and may have to expend substantial additional funds
to obtain access to such resources, or delay or modify its plans significantly.
There can be no assurance that the Company will have sufficient resources to
complete the required clinical testing regulatory review and approval process.
Moreover, there can be no assurance that clinical testing of the Company's
product candidates will provide sufficient evidence of safety and efficacy in
humans, that regulatory approvals will be granted for any product candidate or
that it will be economically feasible to commercialize any product candidate for
which regulatory approval is ultimately granted.
Uncertainty Regarding Patents and Proprietary Rights. The
pharmaceutical industry places considerable importance on obtaining patent and
trade secret protection for new technologies, products and processes. The
success of the Company will depend in large part on its ability or on the
ability of its current licensors, to defend patents, and on their ability, to
maintain trade secrets and operate without infringing the proprietary rights of
others. Patent protection is highly uncertain and involves complex legal and
factual questions. The Company relies on four patents issued to PTI on the
Technology, a patent applied for by the Company relating to an enhancement of
the Technology, and on a patent relating to the NiteBite medical food bar. The
patent application and issuance process can be expected to take several years
and could entail considerable expense to the Company, as it may be responsible
for such costs under the terms of any technology agreements. There can be no
assurance that patents will issue as a result of any applications or that the
existing patents and any patents resulting from such applications, will be
sufficiently broad to afford protection against competitors with similar or
competing technology. In addition, there can be no assurance that the patents
will not be challenged, invalidated or circumvented, or that the rights granted
thereunder will provide competitive advantages to the Company. The commercial
success of the Company will also depend upon avoiding infringement of any
patents issued to competitors. A United States patent application is maintained
under conditions of confidentiality while the application is pending, so the
Company cannot determine the inventions being claimed in pending patent
applications filed by third parties, if any. Litigation may be necessary to
defend or enforce the Company's patent and license rights or to determine the
scope and validity of others' proprietary rights. Defense and enforcement of
patent claims can be expensive and time consuming, even in those instances in
which the outcome is favorable, and could result in the diversion of substantial
resources and management time and attention from the Company's other activities.
An adverse outcome could subject the Company to significant liability to third
parties, require the Company to obtain licenses from third parties, require the
Company to alter its products or processes, or cease altogether any related
research and development activities or product sales, any of which may have a
material adverse effect on the Company's business, results of operations and
financial condition. With respect to the patents and other proprietary
technology licensed to the Company from third parties, the licensors have not
provided any representations or warranties to the Company relating to
non-infringement of third party proprietary rights and have not indemnified the
Company against any damages or expenses arising out of any such claims of
infringement. To the extent that the licensed rights or the Company's activities
or any portion thereof is found to infringe the proprietary rights of any other
person or entity, the Company could be liable for the payment of substantial
damages without the likelihood of any contribution by the licensor. Such event
could have a material adverse effect on the Company's operations. The Company
also relies on trade secrets, know-how and continuing technological advancement
to maintain its competitive position. No assurance can be given that others will
not gain access to its trade secrets, or that the Company will be able to
effectively protect its rights to its trade secrets. Furthermore, assurance
cannot be given that others will not independently develop substantially
equivalent proprietary information and techniques or otherwise gain access to
the Company's trade secrets.
Technological Changes. New process developments are expected to
continue at a rapid pace in the biologic pharmaceuticals, nutrition and medical
food industries. The Company's future success will depend on its ability to
develop and commercialize its existing product candidates and to develop or
acquire new products. There can be no assurance that the Company will
successfully complete the development of any of its existing product candidates
or that any of its future products will be commercially viable or achieve market
acceptance. In addition, there can be no assurance that research and development
and discoveries by others will not render some or all of the Company's programs
or products uncompetitive or obsolete.
Dependence on Third-Party Manufacturers. The Company is dependent on
third-party manufacturers to manufacture the Base Product and its nutritional
and medical food bars. Pursuant to the license with PTI, the Company has agreed
to purchase all of its requirements for the Base Product from PTI. A single
manufacturer in New Zeland
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produce all of such product at its New Zealand facilities. Although the PTI
license permits the Company to utilize alternate sources of supply during any
period in which PTI is unable to satisfy all of the Company's requirements for
the Base Product, if PTI or the sole manufacturer of Base Product fail to supply
any or all of the Company's requirements for the Base Product, or if the
Company's suppliers of nutrition and medical food bars fail to fulfill the
Company's requirements, there can be no assurance that alternate sources of
supply will be available to the Company at reasonable cost or at all, and, if
available at a reasonable cost, whether the Company will be able to secure such
alternate sources in a timely manner. If such alternate sources of supply are
not available on a timely basis or on reasonable economic terms, the Company's
results of operations could be severely and adversely affected. The
manufacturing facilities in which the Company's products are manufactured must
conform to current FDA GMP. Those standards must be met on an ongoing basis and
the licensed facilities are subject to inspection by the FDA at least once every
two years. If a contract manufacturer is unable or unwilling to obtain or retain
its FDA rating, the Company would be required to find an alternate source of
supply. If alternate manufacturing sources are not available on a timely basis
or on reasonable economic terms, the Company's results of operations could be
materially adversely affected.
Competition. The Company competes with companies that are currently
developing or selling products similar to or in direct competition with the
Company. Many of these competitors have substantially greater capital resources,
research and development capabilities, and manufacturing and marketing
resources, capabilities and experience than the Company. The Company's
competitors may succeed in developing products that are more effective or less
costly than any products that may be developed by the Company, or that gain
regulatory approval or market acceptance prior to any of the Company's products.
Other companies have competitive products that are in more advanced stages of
clinical testing than are the Company's pharmaceutical product candidates. There
can be no assurance that the Company will be able to compete successfully in any
market.
Dependence on Qualified Personnel; Potential Conflicts of Interest;
Part-Time Consultants. The Company's success is dependent upon its ability to
obtain and retain the services of qualified scientific, sales and marketing, and
executive management personnel. The Company faces intense competition for such
personnel from other companies, academic institutions, government entities and
other research organizations. There can be no assurance that the Company will be
successful in hiring or retaining qualified personnel. Moreover, managing the
integration of new personnel could pose significant risks to the Company's
development and progress and increase its operating expenses. The Company's
consultants and advisors devote only a portion of their time to the business of
the Company and may from time to time serve as officers, directors, consultants
or advisors to other pharmaceutical, health and fitness, nutrition or
biotechnology companies. There can be no assurance that such other companies
will not in the future have interests that conflict with those of the Company.
The Company also contracts with a related party to provide marketing services
and personnel.
Product Liability Exposure; Insurance. Product liability risk is
inherent in the testing, manufacture, marketing and sale of the Company's
products and product candidates, and there can be no assurance that the Company
will be able to avoid significant product liability exposure. Product liability
insurance for the pharmaceutical and nutraceutical industries, when available,
is extremely expensive. The Company currently maintains a general liability
insurance policy and a product liability insurance policy. There can be no
assurance that the Company will be able to maintain such insurance in sufficient
amounts to protect the Company against such liabilities at a reasonable cost. In
addition, the Company is required to indemnify its licensors and manufacturers
against any product liability claims incurred by then as a result of any
products developed and sold by the Company. Any future product liability claim
against the Company could result in liability for substantial damages, which may
not be covered in whole or in part by insurance, and which may have a material
adverse effect on the business and financial condition of the Company.
Litigation. The Company and certain affiliates and current and former
officers and directors are parties to certain legal proceedings. While the
Company believes that the allegations made by the plaintiffs in these actions
are wholly without merit, and it intends to vigorously oppose such actions.
There can be no assurance that the Company's defense will be successful. The
cost of defending against these lawsuits is substantial. See "Legal
Proceedings."
Possible de-Listing by Nasdaq. There can be no assurance that a market
will continue to be made or that any securities analysts will provide coverage
on the Company's common stock. Furthermore, under maintenance standards that
went into effect in February 1998, the Company does not satisfy the minimum
requirements for maintaining its
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listing with the Nasdaq Small Cap Market. Following a hearing before a Listing
Qualifications Panel in December, 1998, Nasdaq granted the Company a temporary
exception to the listing maintenance standards, pending the Company's
satisfaction of certain undertakings, including the filing of this Report,
achieving net earnings for the quarter ending December 31, 1998, and a minimum
stock price of $1.00 per share for at least ten trading days. To fulfill the
latter requirement, the Company effected a 1-for-10 reverse split of its common
stock on December 31, 1998. No assurance can be given regarding the Company's
continued Nasdaq SmallCap Market listing. If the Company's common stock is
delisted from the Nasdaq SmallCap Market, shareholders would likely find it more
difficult to sell shares of common stock. The Company may be required to take
actions acceptable to Nasdaq in order to continue to be included for listing.
Year 2000 Compliance. Many currently installed computer systems and
software products are coded to accept only two-digit entries in the date code
field. Beginning in the year 2000, these date code fields will need to accept
four digit entries to distinguish 21st century dates from 20th century dates. As
a result, in less than one year, computer systems and software used by many
companies may need to be upgraded to comply with such Year 2000 requirements.
Significant uncertainty exists concerning the potential effects associated with
such compliance or the failure to comply. The Company is currently assessing its
own readiness and the expense of correcting any problems in its own operating
systems, as well as monitoring the readiness of vendors, contractors and other
third parties with which it does business. Any Year 2000 compliance problem for
either the Company or third parties with whom it trades or does business could
result in a material adverse effect on the Company's business, operating
results, and financial condition.
Limited Availability of Conclusive Clinical Studies. The Company's
products include nutritional supplements and food bars that are made from
vitamins, minerals, herbs and other substances for which there is a long history
of human consumption. Some of the Company's products contain innovative
ingredients or combinations of ingredients. Although the Company believes all of
its products to be safe when taken as directed, there is little long-term
experience with human consumption of certain of these innovative product
ingredients or combinations of ingredients in concentrated form. The Company
relies primarily on the research of consultants and others for the formulation
and production of its products. Some of these consultants and suppliers may have
performed or sponsored only limited clinical studies relating to these products.
Furthermore, because these products are or will be highly dependent on
consumers' perception of the efficacy, safety and quality of the supplement
products, as well as similar products distributed by other companies, the
Company could be adversely affected in the event such products should prove or
be asserted to be ineffective or harmful to consumers or in the event of adverse
publicity associated with illness or other adverse effects resulting from
consumers' use or misuse of the Company's products or similar products.
Volatility of Stock Price. The trading price of the Common Stock has
been and is likely to continue to be subject to wide fluctuations in response to
the quarter-to-quarter variations in the Company's operating results, material
announcements by the Company or its competitors, governmental regulatory action,
conditions in the nutritional supplement industry, or other events or factors,
many of which are beyond the Company's control. The Company's operating results
in future quarters may be below the expectations of securities analysts and
investors. In such event, the price of the Common Stock would likely decline,
perhaps substantially. In addition, the stock market has historically
experienced extreme price and volume fluctuations which have particularly
affected the market prices of many nutritional supplement companies and network
marketing companies and which often have been unrelated to the operating
performance of such companies. Moreover, the Company's Common Stock may be even
more prone to volatility than the securities of other businesses in similar
industries in light of the relatively small number of shares of Common Stock not
held by affiliates. Given such a relatively small "public float," there can be
no assurance that the prevailing market price of Common Stock will not be
artificially inflated or deflated by trading even of relatively small amounts of
Common Stock.
Absence of Dividends. The Company has never declared or paid cash dividends
on its Common Stock and it does not anticipate that any cash dividends will be
declared on its Common Stock in the future. See "Dividend Policy."
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Special Statement Concerning Forward-looking Statements
This Report, in particular the "Business" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" sections, contain
forward-looking statements concerning the expectations and anticipated operating
results of the Company. All of these forward-looking statements contained herein
are intended to qualify for the safe harbor protection provided by the
Securities Act and the Securities Exchange Act of 1934, as amended. The reader
should understand that numerous factors govern whether any forward-looking
statement made by the Company will be or can be achieved. Any one of such
factors could cause actual results to differ materially from those projected bu
the forward-looking statements made in this Report. These forward-looking
statements include plans and objectives of management for future operations,
including plans and objectives relating to the products and the future economic
performance of the Company. The forward-looking statements and associated risks
relate to:
o market acceptance of the products;
o development of new nutraceutical products;
o the extent of additional research and development, general and
administrative and other direct costs associated with
obtaining final FDA approval on BWPT-301;
o the anticipated cost and related expense of the BWPT-301 and
BWPT-302 clinical trials until final FDA approval has been
received;
o unexpected delays in receipt of final FDA approval on BWPT-
301;
o the estimated commencement date of Phase III clinical trials
and the completion of those clinical trials on BWPT-301;
o and the lack of sufficient cash to fund current and projected
operations and budgeted research and development for fiscal
year 1999.
The forward-looking statements are based on current expectations that
maybe affected by a number of risks and uncertainties. The forward-looking
statements are based on certain assumptions, among others:
o the efficacy of BWPT-301 will be established during the
ongoing Phase II clinical trials and the Phase III clinical
trials;
o the Company will be able to successfully undertake and
complete clinical trials on BWPT-302(TM);
o the Company will be able to successfully market the health and
beauty aids and it's the nutraceutical products, and
successfully develop and commercialize other nutraceutical
products;
o the Company will be able to successfully develop and
commercialize the Technology;
o the Company will successfully conduct additional Phase II
clinical trials on BWPT-301and may need to conduct clinical
trials that are different from those that have been conducted
to date or that are currently contemplated by the Company; and
o the Company will be able to timely and properly quantify and
analyze the data derived from its clinical trials.
Assumptions involve judgments with respect to, among other things,
future economic, competitive and market conditions, future business decisions,
and the results of the clinical trials and the time and money required to
successfully complete those trials, all of which are difficult or impossible to
predict accurately and many of which are beyond the control of the Company.
Although the Company believes that the assumptions underlying the
-26-
<PAGE>
forward-looking statements in this Report are reasonable, any of these
assumptions could prove inaccurate. Therefore, there can be no assurance that
the results contemplated in any of the forward-looking statements will be
realized. Budgeting and other management decisions are subjective in many
respects and are susceptible to interpretations and periodic revision based on
actual experience and business developments, the impact of which may cause the
Company to alter its marketing capital expenditure plans or other budgets. This
will affect the Company's results of operations. In light of the significant
uncertainties inherent in the forward-looking statements, any such statement
should not be regarded as a representation by the Company or any other person
that the objectives or plans of the Company will be achieved.
OUTLOOK
The management team of the Company has assembled a talented marketing
team to establish the Company's position as a distributor of nutrition products
in the functional foods and medical foods industry. This team, together with the
Board of Directors and management, have developed a business strategy that
identifies the Company's strengths and objectives, outlines a vision of the
future market opportunities in the industry and articulates a corporate and
technology strategy that includes strategic alliances, collaborative development
agreements, strategic acquisitions and new product development.
The Company believes its primary operating strengths include:
- High quality, scientifically sound products
- Strong marketing team with industry experience
- Growing product lines and positive name recognition within the
industry
- Inclusive, supportive corporate culture
Management believes that these strengths can be used by the Company to
provide added access to capital markets, facilitate accomplishment of the
objectives of the Company and position the Company as an attractive investment
and development partner.
The Company will continue to pursue research and development of new
product offerings and enhancements to existing product lines and acquisition of
complementary technologies, products or entities that will enhance or expand its
current product lines. Acquisition targets will (i) have products or product
lines that are complementary to the Company's; (ii) offer existing products and
marketing strengths that provide immediate revenues to the Company and
complement its own products and marketing expertise, (iii) open new marketing
channels for the Company's products, and (iv) possess vertical market
applications expertise that can be leveraged by the Company in further product
development and marketing opportunities.
As the Company proceeds to implement its strategy and to reach its
objectives, it anticipates realizing several benefits for itself and for its
shareholders. In fiscal year 1999, the Company expects continued growth in
sales, primarily due to the introduction of the sports and energy nutrition
bars, NiteBite bars, and related products. In addition, the Company expects
further development of complementary technologies, added product and
applications development expertise, access to market channels, leverage of
strategic alliances, increased access to capital markets, and additional
opportunities for strategic alliances in other industry segments.
The strategy described above is not without risk, and shareholders and
others interested in the Company and its common stock should carefully consider
the risks contained elsewhere in this Report.
-27-
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
Index to Consolidated Financial Statements:
<S> <C>
Reports of Independent Public Accountants..........................................................F-1 and F-2
Consolidated Balance Sheets as of September 30, 1998 and 1997.............................................F- 3
Consolidated Statements of Operations for the Years Ended
September 30, 1998, 1997 and 1996 ........................................................................F- 4
Consolidated Statements of Shareholders' Equity for the Years Ended
September 30, 1998, 1997 and 1996 ........................................................................F- 5
Consolidated Statements of Cash Flows for the Years Ended
September 30, 1998, 1997 and 1996 .......................................................................F- 11
Notes to Consolidated Financial Statements...............................................................F- 14
</TABLE>
<PAGE>
BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
of Biomune Systems, Inc.
We have audited the consolidated balance sheet of Biomune Systems, Inc. and
subsidiaries as of September 30, 1998, and the related consolidated statements
of operations, shareholders' equity and cash flows for the year then ended.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Biomune Systems,
Inc. and subsidiaries as of September 30, 1998, and the results of their
operations and their cash flows for the year then ended, in conformity with
generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in note 2 to the
consolidated financial statements, the Company has had substantial reoccurring
losses from operations, has relied upon financing from the sale of its equity
securities to satisfy its obligations and the license to certain technology
expires in May 1999. These conditions raise substantial doubt about the ability
of the Company to continue as a going concern. Management's plans in regard to
that matter are also described in note 2. The consolidated financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
TANNER + CO.
Salt Lake City, Utah
December 10, 1998 except for Note 23,
which is dated January 8, 1999
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Biomune Systems, Inc.:
We have audited the accompanying consolidated balance sheet of Biomune Systems,
Inc. (a Nevada corporation) and subsidiaries as of September 30, 1997, and the
related consolidated statements of operations, shareholders' equity and cash
flows for the years ended September 30, 1997 and 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
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Biomune
Systems, Inc. and subsidiaries as of September 30, 1997, and the results of
their operations and their cash flows for the years ended September 30, 1997 and
1996, in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has incurred significant recurring losses
since its inception. As of September 30, 1997, the Company had an accumulated
deficit of $35,480,749 and minimal working capital of $925,166, of which
$846,137 was related to continuing operations. Revenues and sales backlog were
also minimal. These factors along with the development and marketing status of
the Company's nutraceutical products and the development status of the Company's
pharmaceutical products raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans with resepct to these matters
are also described in Note 2. The accompanying financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
ARTHUR ANDERSEN LLP
Salt Lake City, Utah
December 5, 1997
F-2
<PAGE>
<TABLE>
<CAPTION>
BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Balance Sheet
September 30,
- ----------------------------------------------------------------------------------------------------------
Assets 1998 1997
-----------------------------------
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 27,701 $ 1,585,099
Receivables, net 2,147,249 306,783
Inventories 661,243 342,768
Prepaid expenses 19,032 -
Net current assets of discontinued operations - 79,029
-----------------------------------
Total current assets 2,855,225 2,313,679
Property and equipment, net 150,544 96,041
Long-term receivables 1,391,260 -
Intangibles, net 814,009 27,988
Investments 425,000 -
Other 14,437 11,346
Long-term assets of discontinued operations - 283,444
-----------------------------------
$ 5,650,475 $ 2,732,498
-----------------------------------
- ----------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current liabilities:
Payables and accrued expenses $ 798,968 $ 1,388,513
Notes payable 1,074,500 -
-----------------------------------
Total current liabilities 1,873,468 1,388,513
-----------------------------------
Minority interest 31,281 -
-----------------------------------
Commitments and contingencies - -
Shareholders' equity:
Preferred stock, $.0001 par value; 50,000,000 shares authorized,
1,360,430 shares and 36,485 shares issued
and outstanding, respectively 2,573,015 2,478,421
Common stock, $.0001 par value; 500,000,000 shares
authorized, 1,286,662 and 323,881 shares
outstanding, respectively 128 32
Additional paid-in capital 39,042,910 33,633,900
Stock subscriptions receivable (55,192) (101,392)
Warrants 338,500 883,273
Deferred compensation and consulting (304,862) (69,500)
Accumulated deficit (37,848,773) (35,480,749)
-----------------------------------
Total shareholders' equity 3,745,726 1,343,985
-----------------------------------
$ 5,650,475 $ 2,732,498
-----------------------------------
- ----------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
F-3
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statement of Operations
Years Ended September 30,
- ----------------------------------------------------------------------------------------------------------
1998 1997 1996
-----------------------------------------------------
<S> <C> <C> <C>
Revenues $ 2,806,853 $ 199,051 $ 2,001
-----------------------------------------------------
Operating expenses:
Cost of revenues 1,415,428 165,401 -
Management, consulting and research 1,052,674 3,563,682 3,359,985
Other general and administrative 2,046,699 4,074,580 1,897,852
-----------------------------------------------------
Total operating expenses 4,514,801 7,803,663 5,257,837
-----------------------------------------------------
Loss from operations (1,707,948) (7,604,612) (5,255,836)
-----------------------------------------------------
Other income (expense):
Interest income 144,042 256,331 271,690
Interest expense (44,722) - -
Other expense, net (14,019) - (36,252)
-----------------------------------------------------
Total other income, net 85,301 256,331 235,438
-----------------------------------------------------
Net loss from continuing operations (1,622,647) (7,348,281) (5,020,398)
Loss from discontinued operations of
Volu-Sol, Inc. - (719,652) (1,402,222)
-----------------------------------------------------
Net loss before income taxes and minority
interest (1,622,647) (8,067,933) (6,422,620)
Provision for income taxes - - -
-----------------------------------------------------
Loss before minority interest (1,622,647) (8,067,933) (6,422,620)
Minority interest in net loss of subsidiary 14,200 - -
-----------------------------------------------------
Net loss $ (1,608,447) $ (8,067,933) $ (6,422,620)
-----------------------------------------------------
Preferred stock dividends and beneficial
conversion premium (1,359,661) (4,040,517) (91,199)
-----------------------------------------------------
Net loss applicable to common
shares $ (2,968,108) $ (12,108,450) $ (6,513,819)
-----------------------------------------------------
Net loss per common share:
Continuing operations $ (4.52) $ (51.08) $ (27.20)
Discontinued operations of Volu-Sol, Inc. - (3.22) (7.45)
-----------------------------------------------------
Net loss per common share $ (4.52) $ (54.30) $ (34.65)
-----------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
F-4
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statement of Shareholders' Equity
Years Ended September 30, 1998, 1997, and 1996
- ----------------------------------------------------------------------------------------------------------------------
Series A Series B Series C Series D
Preferred Stock Preferred Stock Preferred Stock Preferred Stock
-------------------------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount Shares Amount
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at October 1, 1995 213,833 $ 994,049 10,058 $ 148,837 - $ - - $ -
Effect of 1 for 10 stock split
(at December 31, 1998) - - - - - - - -
Issuance of preferred stock:
Series C - - - - 5,000 4,171,500 - -
Series D - - - - - - 5,200 4,010,227
Issuance of common stock for:
Cash - - - - - - - -
Services - - - - - - - -
Conversion of preferred
stock (98,738) (444,321) - - - - (3,200) (2,467,936)
Issuance of warrants and options
for services - - - - - - - -
Amortization of deferred
consulting expense - - - - - - - -
Cancellation of Series D
preferred stock subscription - - - - - - (2,000) (1,542,291)
Preferred stock dividends 20,494 102,471 1,000 15,000 - - - -
Net loss - - - - - - - -
----------------------------------------------------------------------------------------------
Balance at September 30, 1996 135,589 652,199 11,058 163,837 5,000 4,171,500 - -
Issuance of common stock for:
Cash - - - - - - - -
Services - - - - - - - -
Note receivable - - - - - - - -
Conversion of preferred
stock (116,027) (559,815) (12,058) (178,837) (1,817) (2,493,746) - -
Accretion of preferred stock:
Preferred stock - - - - - 2,632,084 - -
Volu-Sol Series A
preferred stock - - - - - - - -
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Series E Series F Series J
Preferred Stock Preferred Stock Preferred Stock
------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at October 1, 1995 - $ - - $ - - $ -
Effect of 1 for 10 stock split (at
December 31, 1998) - - - - - -
Issuance of preferred stock:
Series C - - - - - -
Series D - - - - - -
Issuance of common stock for:
Cash - - - - - -
Services - - - - - -
Conversion of preferred
stock - - - - - -
Issuance of warrants and options
for services - - - - - -
Amortization of deferred
consulting expense - - - - - -
Cancellation of Series D
preferred stock subscription - - - - - -
Preferred stock dividends - - - - - -
Net loss - - - - - -
------------------------------------------------------------
Balance at September 30, 1996 - - - - - -
Issuance of common stock for:
Cash - - - - - -
Services - - - - - -
Note receivable - - - - - -
Conversion of preferred
stock - - - - - -
Accretion of preferred stock:
Preferred stock - - - - - -
Volu-Sol Series A preferred
stock - - - - - -
- ------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-5
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statement of Shareholders' Equity
Continued
- -----------------------------------------------------------------------------------------------------------------------
Series A Series B Series C Series D
Preferred Stock Preferred Stock Preferred Stock Preferred Stock
-----------------------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount Shares Amount
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Redemption of Series C preferred
stock - - - - (1,500)(2,000,000) - -
Collections on common stock
subscriptions receivable - - - - - - - -
Issuance of warrants and options
for services - - - - - - - -
Amortization of deferred
consulting expense - - - - - - - -
Preferred stock dividends 15,240 76,199 1,000 15,000 - - - -
Net loss - - - - - - - -
-----------------------------------------------------------------------------------------
Balance at September 30, 1997 34,802 168,583 - - 1,683 2,309,838 - -
Issuance of common stock for:
Cash - - - - - - - -
Services - - - - - - - -
Acquisition of subsidiary - - - - - - - -
Debt - - - - - - - -
Accrued liabilities - - - - - - - -
Note receivable - - - - - - - -
Conversion of preferred
stock (1,996) (9,721) - - (2,055)(2,820,144) - -
Conversion of preferred stock to
preferred stock - - - - (100) (137,245) - -
Accretion - - - - - - - -
Issuance of stock options for
services - - - - - - - -
Deferred compensation - - - - - - - -
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Series E Series F Series J
Preferred Stock Preferred Stock Preferred Stock
------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Redemption of Series C
preferred stock - - - - - -
Collections on common stock
subscriptions receivable - - - - - -
Issuance of warrants and options
for services - - - - - -
Amortization of deferred
consulting expense - - - - - -
Preferred stock dividends - - - - - -
Net loss - - - - - -
------------------------------------------------------------------
Balance at September 30, 1997 - - - - - -
Issuance of common stock for:
Cash 274 234,050 1,000,000 489,450 85 85,000
Services 330 330,000 100,000 60,000 - -
Acquisition of
subsidiary 150 150,000 - - 300 300,000
Debt - - - - 100 100,000
Accrued liabilities - - - - - -
Note receivable - - - - 650 650,000
Conversion of preferred
stock (470) (796,457) - - - -
Conversion of preferred stock to
preferred stock - - 166,667 100,000 - -
Accretion - 600,084 - - - -
Issuance of stock options for
services - - - - - -
Deferred compensation - - - - - -
- ------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-6
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statement of Shareholders' Equity
Continued
- -----------------------------------------------------------------------------------------------------------------------
Series A Series B Series C Series D
Preferred Stock Preferred Stock Preferred Stock Preferred Stock
-----------------------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount Shares Amount
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Amortization of deferred
compensation - - - - - - - -
Collection of subscription
receivables - - - - - - - -
Expiration of Series D
preferred stock warrants - - - - - - - -
Reclassification to an asset
due to collection occurring
prior to issuance of the
audit report - - - - - - - -
Capital contribution - - - - - - - -
Preferred stock dividends 6,968 34,817 449 6,740 472 647,551 - -
Net loss - - - - - - - -
-----------------------------------------------------------------------------------------
Balance at September 30, 1998 39,774 $ 193,679 449 $ 6,740 - $ - - $ -
-----------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Series E Series F Series J
Preferred Stock Preferred Stock Preferred Stock
--------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Amortization of deferred
compensation - - - - - -
Collection of subscription
receivables - - - - - -
Expiration of Series D preferred
stock warrants - - - - - -
Reclassification to an asset due to
collection occurring prior to
issuance of the audit report - - - - - -
Capital contribution - - - - - -
Preferred stock dividends 39 39,220 52,082 31,249 - -
Net loss - - - - - -
--------------------------------------------------------------------
Balance at September 30, 1998 323 $ 556,897 1,318,749 $ 680,699 1,135 $ 1,135,000
--------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-7
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statement of Shareholders' Equity
Continued
- ------------------------------------------------------------------------------------------------------------------------
Additional Stock
Common Stock Paid-in subscriptions
-----------------------------
Shares Amount Capital Receivable
---------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at October 1, 1995 1,743,919 $ 174 $ 22,709,486 $ -
Effect of 1 for 10 reverse stock split
(at December 31, 1998) (1,569,527) (157) 157 -
Issuance of preferred stock:
Series C - - - -
Series D - - - (2,000,000)
Issuance of common stock for:
Cash 400 - 32,500 -
Services 2,172 - 522,857 -
Conversion of preferred stock 21,806 3 2,912,254 -
Issuance of warrants and options for services - - 674,900 -
Amortization of deferred consulting expense - - - -
Cancellation of Series D preferred stock subscription - - (457,709) 2,000,000
Preferred stock dividends - - - -
Net loss - - - -
----------------------------------------------------------
Balance at September 30, 1996 198,770 20 26,394,445 -
Issuance of common stock for:
Cash 5,083 - 291,476 -
Services 25,683 3 2,183,023 -
Note receivable 1,000 - 116,000 (116,000)
Conversion of preferred stock 93,345 9 3,232,389 -
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Deferred
Compensation
and Accumulated
Warrants Consulting Deficit
---------------------------------------------
<S> <C> <C> <C>
Balance at October 1, 1995 $ 10,000 $ (674,891) $(16,858,480)
Effect of 1 for 10 reverse stock split
(at December 31, 1998) - - -
Issuance of preferred stock:
Series C 328,500 - -
Series D 544,773 - -
Issuance of common stock for:
Cash - - -
Services - (238,783) -
Conversion of preferred stock - - -
Issuance of warrants and options for services - (329,000) -
Amortization of deferred consulting expense - 996,224 -
Cancellation of Series D preferred stock subscription - - -
Preferred stock dividends - - (91,199)
Net loss - - (6,422,620)
------------------------------------------
Balance at September 30, 1996 883,273 (246,450) (23,372,299)
Issuance of common stock for:
Cash - - -
Services - (1,334,330) -
Note receivable - - -
Conversion of preferred stock - - -
- ---------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-8
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statement of Shareholders' Equity
Continued
- ------------------------------------------------------------------------------------------------------------------------
Additional Stock
Common Stock Paid-in subscriptions
-----------------------------
Shares Amount Capital Receivable
---------------------------------------------------------------
<S> <C> <C> <C> <C>
Accretion of preferred stock:
Preferred stock - - 1,066,667 -
Volu-Sol Series A preferred stock - - - -
Redemption of Series C preferred stock - - - -
Collections on common stock subscriptions receivable - - - 14,608
Issuance of warrants and options for services - - 349,900 -
Amortization of deferred consulting expense - - - -
Preferred stock dividends - - - -
Net loss - - - -
----------------------------------------------
Balance at September 30, 1997 323,881 32 33,633,900 (101,392)
Issuance of common stock for:
Cash 41,261 4 206,299 -
Services 150,001 15 1,070,377 -
Acquisition of subsidiary 30,000 3 119,997 -
Debt - - - -
Accrued liabilities 10,065 1 59,133 -
Note receivable - - - (650,000)
Conversion of preferred stock 731,454 73 3,626,249 -
- ---------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Deferred
Compensation
and Accumulated
Warrants Consulting Deficit
---------------------------------------------
<S> <C> <C> <C>
Accretion of preferred stock:
Preferred stock - - (3,698,751)
Volu-Sol Series A preferred stock - - (4,000)
Redemption of Series C preferred stock - - -
Collections on common stock subscriptions receivable - - -
Issuance of warrants and options for services - (153,500) -
Amortization of deferred consulting expense - 1,664,780 -
Preferred stock dividends - - (337,766)
Net loss - - (8,067,933)
----------------------------------------
Balance at September 30, 1997 883,273 (69,500) (35,480,749)
Issuance of common stock for:
Cash - - -
Services - - -
Acquisition of subsidiary - - -
Debt - - -
Accrued liabilities - - -
Note receivable - - -
Conversion of preferred stock - - -
- ------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-9
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statement of Shareholders' Equity
Continued
- ------------------------------------------------------------------------------------------------------------------------
Additional Stock
Common Stock Paid-in subscriptions
-----------------------------
Shares Amount Capital Receivable
---------------------------------------------------------------
<S> <C> <C> <C> <C>
Conversion of preferred stock to preferred stock - - 37,245 -
Accretion - - (600,084) -
Issuance of stock options for services - - 295,750 -
Deferred compensation - - - -
Amortization of deferred compensation - - - -
Collection of subscription receivable - - - 46,200
Expiration of Series D preferred stock warrants - - 544,773 -
Reclassification of stock subscription satisfied
subsequent to year end - - - 650,000
Capital contribution - - 49,271 -
Preferred stock dividends - - - -
Net loss - - - -
-------------------------------------------------------
Balance at September 30, 1998 1,286,662 $ 128 $ 39,042,910 $ (55,192)
=======================================================
- --------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Deferred
Compensation
and Accumulated
Warrants Consulting Deficit
---------------------------------------------
<S> <C> <C> <C>
Conversion of preferred stock to preferred stock - - -
Accretion - - -
Issuance of stock options for services - (295,750) -
Deferred compensation - (447,584) -
Amortization of deferred compensation - 507,972 -
Collection of subscription receivable - - -
Expiration of Series D preferred stock warrants (544,773) - -
Reclassification of stock subscription satisfied
subsequent to year end - - -
Capital contribution - - -
Preferred stock dividends - - (759,577)
Net loss - - (1,608,447)
--------------------------------------------
Balance at September 30, 1998 $ 338,500 $ (304,862) $(37,848,773)
--------------------------------------------
- ------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-10
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statement of Cash Flows
Years Ended September 30,
- -----------------------------------------------------------------------------------------------------
1998 1997 1996
--------------------------------------------
Cash flows from operating activities:
<S> <C> <C> <C>
Net loss $(1,608,447) $(8,067,933) $(6,422,620)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 66,573 232,838 197,121
Provision for losses on receivables 114,698 - -
Recognition of revenues in exchange for investments (400,000) - -
Loss on disposal of fixed assets - - 69,043
Write-down of investment in technology - 337,873 244,839
Issuance of common stock and warrants for services 1,460,392 1,045,096 629,975
Amortization of deferred consulting expense 507,972 1,664,780 996,224
Reduction in related party note receivable - 40,000 125,660
Change in assets and liabilities,
net of effect of nonmonetary asset
acquisitions:
Receivables (463,306) (29,685) 23,618
Inventories 149,488 61,086 (456,418)
Prepaid expenses (19,032) - -
Net assets for discontinued operations 362,473 (337,691) -
Other assets 117,412 (15,825) (14,805)
Payables and accrued expenses (2,014,759) 751,674 178,506
Unearned revenue - (84,000) 84,000
Minority interest (14,200) - -
--------------------------------------------
Net cash used in
operating activities (1,740,736) (4,401,787) (4,344,857)
--------------------------------------------
Cash flows from investing activities:
Purchase of property, equipment, and intangibles (327,151) (41,096) (478,030)
Purchase of investments (25,000) - -
Net (advances to) repayments from related parties (1,152,430) (291,525) 222,143
--------------------------------------------
Net cash used in
investing activities (1,504,581) (332,621) (255,887)
--------------------------------------------
Cash flows from financing activities:
Proceeds from notes payable 1,074,500 - -
Proceeds from issuance of common stock 206,303 306,084 32,500
Proceeds from issuance of preferred stock and related
warrants 808,500 3,500,000 4,500,000
Increase in deferred compensation (447,584) - -
Payments received on stock subscription receivable 46,200 - -
Offering costs for Series C and D preferred stock - - (945,000)
Redemption of Series C preferred stock - (2,000,000) -
Issuance of preferred stock by Volu-Sol, Inc. - 320,555 -
--------------------------------------------
Net cash provided by
financing activities 1,687,919 2,126,639 3,587,500
--------------------------------------------
Net decrease in cash and cash equivalents (1,557,398) (2,607,769) (1,013,244)
Cash and cash equivalents at beginning of year 1,585,099 4,192,868 5,206,112
--------------------------------------------
Cash and cash equivalents at end of year $ 27,701 $ 1,585,099 $ 4,192,868
--------------------------------------------
- -----------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-11
</TABLE>
<PAGE>
BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statement of Cash Flows
Continued
- --------------------------------------------------------------------------------
Supplemental disclosure of noncash investing and financing activities:
During the fiscal year 1998, the Company purchased 52% of the outstanding common
stock of Rockwood. The Company entered into certain agreements to make loans to
Rockwood and pay cash if certain benchmarks are met, in exchange for the common
stock and recorded net assets from the acquisition as follows:
Receivables $ 582,928
Related party receivables 526,260
Inventories 439,463
Property and equipment, net 9,946
Other assets 120,503
Payables and accrued expenses (1,584,348)
Minority interest (45,481)
Equity (49,271)
-----------
-
-----------
During the year ended September 30, 1998:
o The Company issued preferred stock in payment of preferred stock
dividends of $759,577.
o The Company issued preferred stock in exchange for debt, receivables, and
acquisition of intangibles of $1,200,000.
o The Company issued common stock in exchange for debt and acquisition of
intangibles of $179,134.
o The Company increased common stock and additional paid-in-capital and
decreased preferred stock by $3,626,322 due to the conversion of preferred
stock to common stock.
o The Company increased preferred stock and decreased additional
paid-in-capital by $600,084 due to the preferred stock beneficial
conversion feature.
o The Company increased additional paid-in-capital and decreased warrants by
$544,773 due to certain preferred stock warrants expiring.
o The Company increased additional paid-in-capital and increased deferred
compensation by $295,750 due to the issuance of stock options for future
services.
o The Company increased additional paid-in-capital and decreased preferred
stock by $37,245 as a result of the conversion of Series C preferred stock
to Series F preferred stock.
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-12
<PAGE>
BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statement of Cash Flows
Continued
- --------------------------------------------------------------------------------
Supplemental disclosure of noncash investing and financing activities -
Continued:
During fiscal year 1997, 116,027 shares of Series A convertible preferred stock
with a recorded value of $559,815 were converted into 34,808 shares of common
stock. In addition, 12,058 and 1,817 shares of Series B and C convertible
preferred stock with a recorded value of $178,837 and $2,493,746 were converted
into 362 and 89,503 shares of common stock, respectively. During fiscal year
1997, the Company declared preferred stock dividends of $337,766. The Company
intends to issue 4,368 shares of Series A convertible preferred stock, 449
shares of Series B convertible preferred stock and 309 shares of Series C
convertible preferred stock as payment of these dividends.
During fiscal year 1996, 98,738 shares of Series A convertible preferred stock
with a recorded value of $444,321 were converted into 2,962 shares of common
stock. In addition, 3,200 shares of Series D convertible preferred stock with a
recorded value of $2,467,936 were converted into 18,844 shares of common stock.
During fiscal year 1996, the Company declared preferred stock dividends of
$91,199. During fiscal year 1996, the Company exercised its option to cancel
subscriptions for 2,000 shares of Series D convertible preferred stock.
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-13
<PAGE>
BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1998, 1997, and 1996
- --------------------------------------------------------------------------------
1. Nature of Operations
Biomune Systems, Inc. (Biomune) was incorporated in Nevada on December 31, 1981.
Biomune is a biopharmaceutical and nutraceutical company that, along with its
wholly owned subsidiary (the Company), Optim Nutrition, Inc. (Optim), is engaged
primarily in researching, developing, producing and marketing biologic
pharmaceutical products and nutraceutical food supplements derived from
Biomune's patented technology (ProMune). Nutraceutical food supplements are
derived from a whey protein food base and are marketed as a beneficial source of
nutrients to promote good health.
Effective April 1, 1998, Biomune acquired a 52% interest in Rockwood Companies,
LLC, a California limited liability company (Rockwood), which is engaged in the
research, development, distribution and sale of biologic pharmaceutical
products, nutraceutical and medical food products and supplements, and health
and beauty aids. The consolidated financial statements include those of Rockwood
from April 1, 1998 through September 30, 1998.
Another wholly owned subsidiary, Volu-Sol, Inc. (Volu-Sol), was engaged in
researching, developing, manufacturing, marketing and distributing medical
diagnostic stains and related equipment. Effective October 1, 1997, all of the
outstanding shares of Volu-Sol's common stock were distributed as a stock
dividend to the shareholders of Biomune and, as a result, Volu-Sol ceased to be
subsidiary of Biomune. Volu-Sol's net assets and results of operations are
presented as discontinued operations as of September 30, 1997 and for the years
ended September 30, 1997 and 1996.
- --------------------------------------------------------------------------------
F-14
<PAGE>
BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
2. Significant Accounting Policies
Going Concern
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As of September 30, 1998, the
Company had an accumulated deficit of $37,848,773 and incurred a loss of
$1,608,447 for the year then ended. Although Company sales and revenues have had
a substantial increase in 1998, the consolidated operations of the Company have
not had sustained profitability and the Company has relied upon financing from
the sale of its equity securities to satisfy its obligations. The Company has a
technology license which expires in May 1999 and although the Company is in
negotiations to renew the license there is no guarantee that the Company will
be able to renew the license. In addition, the Company is obligated to provide
financing to Rockwood and/or affiliates of the minority member. The Company is
required to provide an additional $1,000,000 in financing prior to March 15,
1999. These conditions raise substantial doubt about the ability of the Company
to continue as a going concern. The consolidated financial statements do not
include any adjustments that might result from the outcome of these
uncertainties.
The Company's ability to continue as a going concern is subject to the
attainment of profitable operations or obtaining necessary funding from outside
sources. Management's plan with respect to this uncertainty include raising
additional equity funding through the sale of the Company's securities,
evaluating new products and markets, and minimizing overhead and other costs.
However, there can be no assurance that management will be successful.
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.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company, and
its subsidiaries. All significant intercompany balances and transactions have
been eliminated.
Cash and Cash Equivalents
For purposes of the statement of cash flows, cash includes all cash and
investments with original maturities to the Company of three months or less.
- --------------------------------------------------------------------------------
F-15
<PAGE>
BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
2. Significant Accounting Policies
Continued
Inventories
Inventories are recorded at the lower of cost or market, cost being determined
on a first-in, first-out (FIFO) method.
Intangible Assets
Intangible assets consists primarily of licenses acquired to market and sell
certain products and goodwill acquired in the acquisition of Rockwood.
Intangibles are being amortized over a period of 5 to 10 years.
Investments
The Company has an investment in a Company related by common ownership. The
Company values its investment at cost which approximates market.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
Depreciation and amortization is determined using the straight-line method over
the estimated useful lives of the assets. Expenditures for maintenance and
repairs are expensed when incurred and betterments are capitalized. Gains and
losses on sale of property and equipment are reflected in operations.
Earnings Per Common and Common Equivalent Share
The computation of basic earnings per common share is computed using the
weighted average number of common shares outstanding during the year.
The computation of diluted earnings per common share is based on the weighted
average number of shares outstanding during the year plus common stock
equivalents which would arise from the exercise of stock options and warrants
outstanding using the treasury stock method and the average market price per
share during the year. Common stock equivalents are not included in the diluted
earnings per share calculation when their effect is antidilutive.
Preferred stock dividends and the impact of beneficial conversion premiums
increase the net loss attributable to common stockholders for purposes of
computing the net loss per common share.
Revenue Recognition
Revenue is recognized upon shipment of product.
- --------------------------------------------------------------------------------
F-16
<PAGE>
BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
2. Significant Accounting Policies
Continued
Management, Consulting and Research Expenses
Management, consulting and research expenses include amounts paid to third-party
and related-party consultants for marketing, investment banking, and other
business advisory services (see Notes 11 and 12), as well as costs related to
the Company's nutraceutical and pharmaceutical product research and development
activities. Research and development costs totaled approximately $17,000,
$560,000, and $822,000 for the years ended September 30, 1998, 1997, and 1996,
respectively.
Advertising
The Company expenses the cost of advertising when the advertising occurs. For
the years ended September 30, 1998, 1997, and 1996, advertising expenses totaled
approximately $85,000, $210,000, and $120,000, respectively, and are included in
other general and administrative expenses in the accompanying statement of
operations.
Income Taxes
The Company recognizes deferred income tax assets or liabilities for the
expected future tax consequences of events that have been recognized in the
financial statements or tax returns. Under this method, deferred income tax
assets or liabilities are determined based upon the difference between the
financial statement and income tax bases of assets and liabilities using enacted
tax rates expected to apply when differences are expected to be settled or
realized.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to concentration of
credit risk consist primarily of receivables. In the normal course of business,
the Company provides credit terms to its customers. Accordingly, the Company
performs ongoing credit evaluations of its customers and maintains allowances
for possible losses which, when realized, have been within the range of
management's expectations.
The Company maintains its cash in bank deposit accounts which, at times, may
exceed federally insured limits. The Company has not experienced any losses in
such accounts and believes it is not exposed to any significant credit risk on
cash and cash equivalents.
Reclassifications
Certain accounts in the 1997 and 1996 financial statements have been
reclassified to conform with the current year presentation.
- --------------------------------------------------------------------------------
F-17
<PAGE>
BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
3. Detail of Certain Balance Sheet Accounts
September 30,
------------------------------------
1998 1997
------------------------------------
Receivables:
Trade receivables $ 1,065,556 $ 80,758
Related party receivables (see
Note 5) 1,985,215 290,589
Interest and other 61,436 15,936
Subscription receivable 650,000 -
Less allowance for doubtful
accounts (223,698) (80,500)
------------------------------------
3,538,509 306,783
Less long-term portion (1,391,260) -
------------------------------------
Current portion $ 2,147,249 $ 306,783
------------------------------------
September 30,
------------------------------------
1998 1997
------------------------------------
Inventories:
Finished goods $ 220,234$ 111,431
Raw materials 541,009 231,337
Reserve allowance (100,000) -
------------------------------------
$ 661,243$ 342,768
------------------------------------
September 30,
------------------------------------
1998 1997
------------------------------------
Payables and accrued expenses:
Trade payables $ 707,221 $ 324,915
Preferred stock dividends payable - 337,766
Accrued legal expenses - 225,000
Accrued research expenses - 210,000
Accrued payroll and payroll taxes - 85,494
Other accrued expenses 91,747 205,338
------------------------------------
$ 798,968 $ 1,388,513
------------------------------------
- --------------------------------------------------------------------------------
F-18
<PAGE>
BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
3. Detail of Certain Balance Sheet Accounts
Continued
Preferred Stock:
September 30,
------------------------------------
1998 1997
------------------------------------
Series A, 10% cumulative, convertible;
39,774 shares and 34,802 shares
outstanding, respectively $ 193,679 $ 168,583
Series B, 10% cumulative, convertible
non-voting; 449 shares and -0- shares
outstanding, respectively 6,740 -
Series C, 8% cumulative, convertible
non-voting; -0- shares and 1,683
shares outstanding, respectively - 2,309,838
Series E, 8% cumulative, convertible
non-voting; 323 shares and -0- shares
outstanding, respectively 556,897 -
Series F, 8% cumulative, convertible,
non-voting; 1,318,749 shares and -0-
shares outstanding, respectively 680,699 -
Series G, 8% noncumulative, non-
voting, no shares issued and
outstanding - -
Series J, 10% cumulative, convertible
non-voting; 1,135 shares and -0-
shares outstanding, respectively 1,135,000 -
------------------------------------
$ 2,573,015 $ 2,478,421
------------------------------------
- --------------------------------------------------------------------------------
F-19
<PAGE>
BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
4. Property, Plant and Equipment
Property and equipment consists of the following:
September 30,
-----------------------------------
1998 1997
-----------------------------------
Furniture, fixtures, and equipment $ 275,303 $ 164,641
Leasehold improvements - 1,256
-----------------------------------
275,303 165,897
Less accumulated depreciation
and amortization (124,759) (69,856)
-----------------------------------
$ 150,544 $ 96,041
-----------------------------------
5. Related Party Receivables
Related party receivables are comprised of the following:
September 30,
-----------------------------------
1998 1997
-----------------------------------
Note receivable from the minority
interest member. The note bears
interest at 8%, requires quarterly
interest payments with principal
due January 2006, secured by the
remaining ownership of the
subsidiary, accounts receivable
from entity related to the minority
member, and the guarantee of entity
related to a former officer. On
January 8, 1999, the note
receivable was satisfied $ 891,260 $ -
Note receivable from a related
entity of the minority interest
member, requiring quarterly
interest payments at 7%, principal
due in August 2000, secured by the
remaining ownership of the
subsidiaries 500,000 -
- --------------------------------------------------------------------------------
F-20
<PAGE>
BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
5. Related Party Receivables
Continued
Note receivable from the former
subsidiary of the Company due on
demand unsecured with interest at
10% 276,149 -
Notes receivable from entities,
which are shareholders or are
controlled by an advisory board
chairman, which are due on
demand 254,091 290,589
Note receivable from individual who
is a relative to former officer of
the company at an interest rate of
1% over prime, unsecured and due
on demand 50,000 -
Employee advances 13,715 -
-----------------------------------
$ 1,985,215 $ 290,589
-----------------------------------
6. Intangibles
Intangible assets consist of the following:
September 30,
-----------------------------------
1998 1997
-----------------------------------
Licenses $ 595,000 $ -
Goodwill 222,700 -
ProMune Technology 70,000 70,000
-----------------------------------
887,700 70,000
Accumulated amortization (73,691) (42,012)
-----------------------------------
$ 814,009 $ 27,988
-----------------------------------
- --------------------------------------------------------------------------------
F-21
<PAGE>
BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
6. Intangibles
Continued
During 1997, the Company determined that facts and circumstances warranted the
write-down of the remaining net book value of approximately $337,800 related to
certain technology (see Note 12). This determination was based on the Company's
estimated future cash flows from this intangible asset taking into consideration
that required royalties under a license arrangement were not received from a
third party.
7. Notes Payable
The Company, at September 30, 1998, has a note payable to a trust in the amount
of $559,000 where in the trustee is the brother of the Company's president. The
note bears interest at 12% with monthly interest payments, maturity of the note
is February 1999 and is secured by the assets of the Company and a guarantee of
approximately 60,000 shares of the Company's stock owned by a former officer of
the Company.
The Company has $800,000 aggregate lines of credit from a bank. At September 30,
1998, the outstanding balance is $515,500. The lines have an interest rate of
10.25%, are due January 2000 and are secured by all assets of the subsidiary.
8. Income Taxes
The benefit for income taxes is different than amounts which would be provided
by applying the statutory federal income tax rate to loss before benefit for
income taxes for the following reasons:
Years Ended
September 30,
----------------------------------------------
1998 1997 1996
----------------------------------------------
Federal income tax benefit
at statutory rate $ 550,000 $ 2,743,000 $ 2,184,000
Change in valuation
allowance (550,000) (2,743,000) (2,184,000)
----------------------------------------------
$ - $ - $ -
----------------------------------------------
- --------------------------------------------------------------------------------
F-22
<PAGE>
BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
8. Income Taxes
Continued
Deferred tax assets (liabilities) are comprised of the following:
September 30,
-----------------------------------
1998 1997
-----------------------------------
Net operating loss carryforwards $ 10,300,000 $ 9,750,000
Valuation allowance (10,300,000) (9,750,000)
-----------------------------------
$ - $ -
-----------------------------------
As of September 30, 1998, the Company had net operating loss carryforwards
(NOLs) for federal income tax reporting purposes of approximately $29,900,000.
There can be no assurance that all of these NOLs will be available to offset
future taxable income, if any. An NOL generated in a particular year will expire
for federal tax purposes if not utilized within 15 years. Additionally, the
Internal Revenue Code contains other provisions which could reduce or limit the
availability and utilization of these NOLs. For example, limitations are imposed
on the utilization of NOLs if certain ownership changes have taken place or will
take place. In accordance with SFAS No. 109, a valuation allowance is provided
when it is more likely than not that some portion of the deferred income tax
asset will not be realized. Due to the uncertainty with respect to the ultimate
realization of the NOLs, the Company has established a valuation allowance for
all of its deferred income tax assets.
- --------------------------------------------------------------------------------
F-23
<PAGE>
BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
8. Income Taxes
Continued
The Company has determined that as of December 10, 1991 ownership changes (as
that term is defined in Section 382 of the Internal Revenue Code) may have
occurred. The impact of this ownership change is to limit the use of
approximately $1,661,000 of the Company's total NOLs. The Company estimates that
the use of these NOLs would be limited to approximately $502,000 per year (on a
cumulative basis). The NOLs that may have been limited by the possible ownership
change expire in the years and in the amounts indicated below:
Year Generated Amount Year of Expiration
- --------------------------------------------------------------------------------
1984 $ 333,000 1999
1985 10,000 2000
1986 148,000 2001
1987 149,000 2002
1988 137,000 2003
1989 234,000 2004
1990 252,000 2005
1991 226,000 2006
1992 172,000 2007
--------------------------
Total $ 1,661,000
--------------------------
The Company's NOLs that are not limited expire in the years and in the amounts
indicated below:
Year Generated Amount Year of Expiration
- --------------------------------------------------------------------------------
1992 $ 625,000 2007
1993 6,386,000 2008
1994 3,417,000 2009
1995 3,217,000 2010
1996 5,762,000 2011
1997 7,203,000 2012
1998 1,608,000 2013
--------------------------
Total $ 28,218,000
--------------------------
- --------------------------------------------------------------------------------
F-24
<PAGE>
BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
9. Distribution of Volu-Sol Shares
Pursuant to the terms of a Distribution and Separation Agreement between Biomune
and Volu-Sol, entered into in September 1997, the common stock of Volu-Sol was
distributed pro rata to Biomune shareholders of record as of March 5, 1997 (the
Distribution). The Distribution was effective October 1, 1997 on which date
Volu-Sol ceased to be a subsidiary of Biomune. The accompanying consolidated
financial statements present the financial position and results of operations of
Volu-Sol as discontinued operations. For the fiscal years 1997 and 1996 revenues
from Volu-Sol's operations totaled $493,754 and $434,691, respectively. As of
September 30, 1997, total liabilities of Volu-Sol of $151,207 have been netted
against total current assets of Volu-Sol and presented as net current assets of
discontinued operations in the accompanying consolidated balance sheets.
In accordance with the terms of the Distributions and Separation Agreement,
certain persons who remained Biomune employees or non-employee directors after
the Distribution, hold Add-on Volu-Sol Options. The obligations with respect to
the Add-on Volu-Sol options held by these individuals are obligations solely of
Biomune.
10. Reverse Common Stock Split
On November 10, 1997 and December 31, 1998, the Company's Board of Directors
approved a 1-for-10 reverse common stock split. All common share amounts, per
share information and numbers of common shares into which preferred stock is
convertible have been retroactively adjusted to reflect this reverse common
stock split in the accompanying consolidated financial statements.
11. Commitments
Financing
The Company has an agreement to provide up to $1.5 million of financing to
Rockwood and/or affiliates of the minority member over a one year period. Under
terms of the agreement, the minority member has the right to redeem part of the
Company's member interest if the Company fails to keep its covenants concerning
the financing loans to Rockwood or affiliates. Among other things, the minority
member could reduce the Company's interest to approximately 20% of the total
issued and outstanding member interests. As of the date of this report, the
Company has not advanced all of the funds required by the agreement. Under the
agreement, the Company is required to advance an additional $1,000,000 prior to
March 15, 1999.
- --------------------------------------------------------------------------------
F-25
<PAGE>
BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
11. Commitments
Continued
Optim
In September 1998, the Company acquired the exclusive worldwide marketing and
distribution rights to the Mountain Lift sports and energy nutrition bars. Under
the agreement, which has an initial term of 10 years and continues on a
year-to-year basis thereafter, the Company pays a royalty of 7% of net sales
generated by the licensed products. As of September 30, 1998, the Company had no
sales royalty payable under terms of the agreement.
NiteBite
Also, in September 1998, the Company entered into an agreement acquiring the
exclusive worldwide distribution rights to a time-release glucose bar. Under the
agreement, the Company pays a 12% royalty on net sales of the patented product,
which is marketed under the trade name NiteBite. The bars are manufactured for
the Company under contract by third parties.
As of September 30, 1998, the Company had no royalties payable under terms of
the agreement.
Technology
The Company has the exclusive right and license to utilize a patented process
technology (Technology) for pharmaceutical and nutraceutical products, solely
for human applications, in the United States, Canada, Kenya, Ivory Coast,
Zimbabwe, Ghana, Zambia, and Nigeria, and their possessions and territories. The
license includes the rights under four United States patents. This license
expires in May 1999 and the Company is presently negotiating to extend the term
of the license. The term of the license is extended automatically through March
2006, if the Company generates annual gross revenues from the sale of products
utilizing the Technology of not less than $2,000,000. However, this minimum
sales target has not been achieved and, unless minimum sales are achieved in
that amount or an extension of the license is agreed to, the Company may lose
its exclusive rights or its ability to continue using the Technology. The
Company has not capitalized any amounts related to this technology at September
30, 1998.
- --------------------------------------------------------------------------------
F-26
<PAGE>
BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
11. Commitments
Continued
Technology - Continued
The license may also terminate if the Company fails to observe or perform any of
the covenants, terms, conditions or provisions of the agreement or if it
breaches any representation or warranty and fails to cure the breach within 30
days after receipt of written notice. Among other things, the License requires
that the Company maintain certain levels of product liability insurance
coverage. The Company presently does not maintain product liability insurance
coverage in the amounts required by the license. The Company does, however, have
product liability insurance in amounts that it believes are sufficient in light
of its obligations under the license, present sales levels and its independent
product liability exposure. Based on its current relationship with the grantor,
the Company does not believe that its technical failure to comply with the
insurance coverage covenant of the license will result in termination of the
license.
The Company is required to pay royalties in the amount of 5% of gross receipts
from the sale of all products covered by the license with respect to the first
$3,500,000 of sales during each annual period and 7% of gross receipts with
respect to all sales in excess of $3,500,000 during such annual periods. Under
the current agreement, if the license is extended past May 1999, the Company is
required to pay annual advances to be applied against royalties in the amount of
$100,000 for the first year of such extension, and increasing by $10,000 each
year thereafter. As of September 30, 1998, the Company had not paid any
royalties under the License.
Consulting
The Company has a yearly consulting agreement with a former director of the
Company. During 1998, he received 120,000 shares of common stock for services.
During 1997, the Company entered into several consulting agreements for various
services through September 30, 1997. Under terms of the agreements, the Company
issued an aggregate of 7,880 shares of common stock. The common stock have
"piggy back" registration rights. The Company recorded $906,280 of consulting
expense for the year ended September 30, 1997.
- --------------------------------------------------------------------------------
F-27
<PAGE>
BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
11. Commitments
Continued
Leases
The Company is contingently liable for the facilities of its Rockwood
subsidiary, should the minority members related entities not make the payment.
The Company is also contingently liable for the Volu-Sol lease should Volu-Sol
not make the payment. See Note 19.
12. Medical Waste Technologies
On November 30, 1993, the Company purchased the proprietary rights, trade
secrets and interests in certain technologies (collectively, the "Medical Waste
Technologies"). The Medical Waste Technologies consist of the following: 1) a
device for the sterilization and decontamination of medical devices and waists,
2) a bioremediation process to detoxify and degrade hazardous substances through
the use of certain microbes, and 3) a device and process for the safe treatment
of used medical stains. An independent appraiser evaluated the Medical Waste
Technologies and found the concepts scientifically valid and feasible for
commercialization and further development.
Pursuant to a license agreement dated May 6, 1996 (the "Sterilization License"),
the Company granted a 15-year license to Biomed Patent Development L.L.C.
("Biomed") for the exclusive use of a portion of the Medical Waste Technologies,
known as the "Sterilization Technology," in connection with the manufacture and
distribution of medical devices based on the Sterilization Technology and the
provision of services related thereto. In September 1997, Biomed assigned its
rights under the Sterilization License to Bioxide Corporation ("Bioxide") in
exchange for Bioxide stock and the assumption of certain liabilities. Under the
Sterilization License, the Company received royalties for the first year of the
Sterilization License of $45,000, which were accounted for using the cost
recovery method. The Company is entitled to receive royalties for all subsequent
years equal to the greater of (a) 0.9 percent of gross sales of (b) $90,000. The
next royalty payment of $90,000 became due subsequent to year end, but was not
made to the Company. As a result, the Company has determined that its investment
in the Medical Waste Technologies has been impaired, and has recorded an
impairment loss equal to the remaining unamortized cost (see Note 6).
- --------------------------------------------------------------------------------
F-28
<PAGE>
BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
12. Medical Waste Technologies
Continued
Biomed has entered into a license with a third party in settlement of an alleged
infringement claim by such third party relating to the Sterilization Technology.
Biomed has indemnified the Company against any damages resulting from the claims
of such third party.
13. Common Stock Transactions
During fiscal years 1998, 1997, and 1996, the Company issued 150,001 and 25,683
and 2,172 shares of common stock, respectively, in exchange for services and
bonuses. These issuances have been recorded at prices which represent the fair
market value of the services received or the fair market value of the stock
issued, whichever was more readily determinable.
The Company sold 41,261, 5,083, and 400 shares of restricted common stock for
$206,303, $291,500, and $32,500 in fiscal years 1998, 1997, and 1996,
respectively. The shares were issued in connection with the exercise of existing
options and warrants.
At September 30, 1997, certificates for 48,491 shares of the total common
shares reflected in the accompanying consolidated financial statements as being
issued and outstanding were not physically issued. However, the Company was
obligated to, and is in the process of, issuing such stock certificates.
14. Preferred Stock
Effective September 30, 1998, the Company satisfied the accrued preferred stock
dividends through the issuance of additional shares of preferred stock from the
following series: Series A 6,968 shares, Series B 449 shares, Series C 472
shares, Series E 39 shares and Series F 52,082 shares.
In addition, the Company converted 1,996 shares of Series A, 2,055 shares of
Series B and 470 shares of Series E into 731,454 shares of the Company's common
stock.
- --------------------------------------------------------------------------------
F-29
<PAGE>
BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
14. Preferred Stock
Continued
During the year ended September 30, 1997 the Company converted 116,027 shares of
Series A, 12,058 shares of Series B and 1,817 shares of Series C into 93,345
shares of the Company's common stock. The Company issued 15,240 shares of Series
A, and 1,000 shares of Series B preferred stock to satisfy $337,766 of preferred
stock dividends. The Company also redeemed 1,500 shares of Series C preferred
stock for $2,000,000.
During the year ended September 30, 1996 the Company converted 98,738 shares of
Series A, and 3,200 shares of Series D into 21,806 shares of the Company's
common stock. The Company issued 20,494 shares of Series A and 1,000 shares of
Series B to satisfy $91,199 of preferred stock dividends.
15. Stock Options and Warrants
The Company has established the 1992, 1993, 1995, and 1996 Stock Incentive Plans
(collectively, "the Plans"), which allows for the granting of incentive stock
options, nonqualified stock options, and the award of common stock to certain
individuals, including employees, officers, directors, consultants, and others
as designated by the board of directors. The Company has designated 900,000
shares of common stock for issuance under the 1992 plan, 1,500,000 shares under
the 1993 plan, and 2,250,000 shares under the 1995 plan, and 2,500,000 under the
1996 plan. Under the terms of the Plans, the exercise prices for incentive stock
options shall not be less than the fair market value at the date of grant. The
exercise price for nonqualified stock options shall not be less than the lesser
of: 1) the book value per share of common stock as of the end of the fiscal year
of Biomune immediately preceding the date of grant, or 2) 50 percent of the fair
market value per share of common stock on the date of grant. Options are
exercisable within periods determined by the Board of Directors but may not
exceed ten years from the date of grant. At September 30, 1997, 44,400, 33,450,
0, and 145,990 shares were available for issuance under the 1992, 1993, 1995,
and 1996 plans, respectively. The 1992, 1993, 1995, and 1996 plans expire in
December 1997, September 1998, February 2005, and March 2006, respectively.
- --------------------------------------------------------------------------------
F-30
<PAGE>
BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
15. Stock Options and Warrants
Continued
A summary of the stock option and warrant activity for fiscal years 1998, 1997,
and 1996 is as follows:
Weighted
Number Average
of Exercise
Shares Price
----------------------------------
Outstanding at October 1, 1995 64,472 $ 238.90
Exercised (400) 81.20
Canceled (4,600) 283.30
Granted 33,741 234.90
----------------------------------
Outstanding at September 30, 1996 93,213 229.20
Exercised (6,576) 64.70
Canceled (11,867) 206.20
Revalued (58,294) 157.40
Granted 107,744 62.70
----------------------------------
Outstanding at September 30, 1997 124,220 129.40
Exercised (41,260) 37.00
Canceled (31,587) 206.18
Granted 369,000 3.62
----------------------------------
Outstanding at September 30, 1998 420,373 $ 212.64
----------------------------------
Exercisable at September 30, 1998 118,881
----------------------------------
- --------------------------------------------------------------------------------
F-31
<PAGE>
BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
15. Stock Options and Warrants
Continued
When accounting for the issuance of stock options and warrants financial
accounting standards allows entities the choice between adopting a fair value
method or an intrinsic value method with footnote disclosures of the pro forma
effects if the fair value method had been adopted. The Company has opted for the
latter approach. Had the Company's options and warrants been determined based on
the fair value method, the results of operations would have been reduced to the
pro forma amounts indicated below:
Years Ended
September 30,
-------------------------------------------------
1998 1997 1996
-------------------------------------------------
Net loss applicable to
common shares - as
reported $ (2,968,108) $ (12,108,450) $ (6,513,819)
Net loss applicable to
common shares -
pro forma $ (2,986,846) $ (13,307,910) $ (7,445,759)
Loss per common
share - as reported $ (4.52) $ (54.30) $ (34.65)
Loss per common share -
pro forma $ (4.55) $ (59.70) $ (39.60)
-------------------------------------------------
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions:
September 30,
---------------------------------------------
1998 1997 1996
---------------------------------------------
Expected dividend yield $ - $ - $ -
Expected stock price volatility 108% 80% 80%
Risk-free interest rate 5% 5.5% 5.5%
Expected life of options 2 years 2 years 3 years
---------------------------------------------
The weighted average fair value of options granted during 1998, 1997, and 1996
are $.29, $45.00, and $70.70, respectively.
- --------------------------------------------------------------------------------
F-32
<PAGE>
BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
15. Stock Options and Warrants
Continued
The following table summarizes information about stock options and warrants
outstanding at September 31, 1998:
Outstanding Exercisable
--------------------------------------------------------------
Weighted
Average
Number Remaining Weighted Number Weighted
Range of Outstanding Contractual Average Exercisable Average
Exercise Prices at Life Exercise at Exercise
09/30/98 (Years) Price 09/30/98 Price
- --------------------------------------------------------------------------------
$ 2.00 to 17.50 369,000 2.3 $ 3.62 67,508 $ 2.51
37.00 to 68.80 25,182 2.2 38.75 25,182 37.75
167.00 to 400.00 26,191 1.0 255.56 26,191 255.56
- --------------------------------------------------------------------------------
$ 2.00 to 400.00 420,373 2.2 $ 21.42 118,881 $ 65.94
- --------------------------------------------------------------------------------
16. Earnings Per Share
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128 (SFAS 128) "Earnings Per Share," which requires
companies to present basic earnings per share (EPS) and diluted earnings per
share, instead of the primary and fully diluted EPS as previously required. The
new standard also requires additional informational disclosures, and makes
certain modifications to the previously applicable EPS calculations defined in
Accounting Principles Board No. 15. The new standard is required to be adopted
by all public companies for reporting periods ending after December 15, 1997,
and requires restatements of EPS for all prior periods reported. During the year
ended September 30, 1998, the Company adopted this standard. Adoption of this
standard had no impact on the financial condition or operations of the Company.
- --------------------------------------------------------------------------------
F-33
<PAGE>
BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
16. Earnings Per Share
Continued
Earnings per share information is as follows:
Years Ended
September 30,
-------------------------------------------------
1998 1997 1996
-------------------------------------------------
Net loss available to
common stockholders $ (2,968,108) $ (12,108,450) $ (6,513,819)
-------------------------------------------------
Average equivalent
shares (basic and diluted) 656,000 223,000 188,000
-------------------------------------------------
Net loss per share
(basic and diluted) $ (4.52) $ (54.30) $ (34.65)
-------------------------------------------------
17. Fair Value of Financial Instruments
None of the Company's financial instruments are held for trading purposes. The
Company estimates that the fair value of all financial instruments at September
30, 1998, does not differ materially from the aggregate carrying values of its
financial instruments recorded in the accompanying balance sheet. The estimated
fair value amounts have been determined by the Company using available market
information and appropriate valuation methodologies. Considerable judgement is
necessarily required in interpreting market data to develop the estimates of
fair value, and, accordingly, the estimates are not necessarily indicative of
the amounts that the Company could realize in a current market exchange.
- --------------------------------------------------------------------------------
F-34
<PAGE>
BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
18. Related Party Transactions
The Company has the following related party activities:
The Company has various notes and receivables due from related parties see
Note 5. Interest income recorded under the notes was approximately $102,000
and $31,000 during the years ended September 30, 1998 and 1997,
respectively.
The Company at September 30, 1998 has a note payable to a trust who's
trustee is the brother of the president of the Company. See Note 7.
Interest expense was $16,770 for the year ended September 30, 1998.
The Company in 1998 has a management agreement with an entity owned by a
shareholder and former officer of the Company. The agreement provides that
the entity will provide management and marketing services to the Company in
exchange for a fee equal to 45% of the gross revenues of the nutrition and
medical food products. The Company had no payments due under terms of this
agreement, which expires September 30, 1999.
The Company during 1998 sold to another company under common control
certain rights including royalties rights to a waste disposal technology
for a gain of $400,000.
The Company paid $37,000 rent to the minority interest member for the year
ended September 30, 1998.
The Company in 1996 had a consulting agreement with an indirect
shareholder, whereby the shareholder received $10,000 per month and
reimbursement of any out-of-pocket expenses. Effective October 1, 1996, the
consulting agreement was terminated. The services provided to the Company
included primarily financial and general business consulting services and
introductions to the scientific, medical, financial and business
communities. The Company recorded consulting expense of $120,000 in the
fiscal year ended September 30, 1996.
The Board of Directors approved the reimbursement to the shareholder of
certain legal costs which Genesis incurred in connection with a litigation
matter discussed in Note 21. For the year ended September 30, 1997, this
amount totaled $96,000.
- --------------------------------------------------------------------------------
F-35
<PAGE>
BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
19. Operating Leases
The Company leases its facilities related to continuing operations under
noncancellable operating leases, which expire through July 2001. Lease expense
for the years ended September 30, 1998, 1997, and 1996 was approximately
$114,000, $117,000, and $47,000, respectively. Future minimum lease commitments
are as follows:
Fiscal year Amount
-----------------
1999 $ 119,000
2000 20,000
2001 13,000
-----------------
$ 152,000
-----------------
These minimum lease commitments do not include any amounts associated with
Volu-Sol's leased facility. To the extent that Volu-Sol defaults on any lease
payments, Biomune is obligated to make such payments as the lessee. These lease
commitments total $4,617 per month through November 2000.
20. Acquisition
During the year ended September 30, 1998, the Company acquired a 52% majority
interest in Rockwood, which was accounted for as a purchase and, accordingly, is
included in the consolidated financial statements since April 1, 1998 (date of
acquisition). The purchase price consisted of costs incurred in acquiring
Rockwood and the commitment by the Company to advance up to $1.5 million of
operating resources to Rockwood or related entities of the minority shareholder.
The Company is also required to issue up to 500,000 shares of preferred stock if
certain operating benchmarks are met. No operating benchmarks have been met at
September 30, 1998. The excess of the purchase price over assets acquired of
$222,700 has been included in goodwill and is being amortized over a period of
five years.
- --------------------------------------------------------------------------------
F-36
<PAGE>
BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
20. Acquisition
Continued
The following unaudited pro forma consolidated results of operations have been
prepared as if the 1998 acquisition had occurred at the beginning of fiscal
1996:
Pro Forma Results of Operations
------------------------------------------------
1998 1997 1996
------------------------------------------------
Total revenue $ 7,494,488 $ 4,790,304 $ 3,653,102
Total expenses 10,132,819 12,638,553 10,116,398
------------------------------------------------
Net loss $ (2,638,331) $ (7,848,249) $ (6,463,296)
------------------------------------------------
Net loss per share $ (4.02) $ (35.19) $ (34.38)
------------------------------------------------
The pro forma consolidated results do not purport to be indicative of results
that would have occurred had the acquisitions been in effect for the periods
presented, nor do they purport to be indicative of the results that will be
obtained in the future.
21. Litigation
The Company and certain of its officers and directors are currently involved in
litigation with a shareholder. On October 12, 1995, a Proposed Class Action
Complaint for violation of federal securities laws was filed in U.S. District
Court. The complaint alleges various violations of the Securities and Exchange
Act of 1934. On April 2, 1997, the trial court dismissed with prejudice all
claims of the plaintiff and assessed costs of the litigation against the
plaintiff. In May 1997, the plaintiff appealed the decision. On September 2,
1998, the Court of Appeals reversed the decision of the trial court and remanded
the case for a determination by the trial court whether the complaint had been
timely filed. No date had been set for a rehearing by the trial court.
The Company believes that the allegations made in the Complaint are wholly
without merit and intends to vigorously oppose the claims of the plaintiff.
However, there can be no assurance that the Company's defense will be
successful. Until September 1998, the Company has paid the legal fees and
related expenses associated with the defense of this action on behalf of the
Company and the other named defendants. The financial statements do not include
any accrued amounts should the Company not prevail in the litigation.
- --------------------------------------------------------------------------------
F-37
<PAGE>
BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
21. Litigation
Continued
On September 29, 1998, a lawsuit was filed in the Third Judicial District Court
for Salt Lake County, naming the Company, Bioxide Corporation, and individuals
and related entities as defendants. The plaintiff's claims allegedly arose out
of his role in the development of certain waste disposal technologies. Those
technologies were included in the property sold by the Company in 1998 to
Bioxide Corporation. The defendants, including the Company, filed answers to the
complaint, denying all of the plaintiff's principal allegations and claims and
asserting counterclaims against the plaintiff, including, among other things,
unjust enrichment and a claim that the plaintiff misrepresented his authority
and ability to patent the technology at the core of the litigation. The
litigation is presently in the discovery phase. The Company believes the
plaintiff's claims to be without merit and will vigorously defend itself in this
action. No amounts have been accrued in the financial statements.
By agreement with the Company, Harrogate Marketing LLC has agreed to assume and
pay all costs, including legal fees, of the Company in connection with both of
these matters.
22. Recent Accounting Pronoucements
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income," Statement No.
131, "Disclosures about Segments on an Enterprise and Related Information" and
Statement No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits." Statements No. 130 and No. 131 are effective for years
beginning after December 15, 1997. Statement No. 132 is effective for years
beginning after December 15, 1998. It is not expected that the adoption of these
statements will have a material impact on the Company's financial statements.
During January 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 98-5, "Reporting on the Costs of Start-up
Activities" ("SOP 98-5). SOP 98-5 becomes effective for all fiscal years
beginning after December 15, 1998. The Company will adopt SOP 98-5 in its fiscal
year beginning October 1, 1999. The Company does not expect the adoption of SOP
98-5 to have a material impact on the Company's financial statements.
- --------------------------------------------------------------------------------
F-38
<PAGE>
BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
23. Subsequent Events
The Company, during 1998, sold common stock for a note receivable. Subsequent to
the year end, the Company received $650,000. As part of the Company's
acquisition of Rockwood, the minority shareholder agreed to contribute other
assets totaling approximately $891,000. This contribution was originally in the
form of a note. On January 8, 1999, the note was satisfied.
Subsequent to September 30, 1998, the holders of a majority of the issued and
outstanding shares of Series F Preferred consented to an amendment of the
designation of rights and preferences of the Series F Preferred whereby each
share of Series F Preferred will be convertible to .3 of a share of common
stock. However, not more than 250,000 shares of common stock may be issued in
the aggregate in conversion of all shares of Series F Preferred unless
stockholder approval is received for the issuance of more than 250,000 shares.
Unconverted shares of Series F Preferred may be redeemed by the Company at a
price of $.80 per share.
- --------------------------------------------------------------------------------
F-39
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On June 15, 1998, the Company appointed Tanner + Co. ("Tanner") to
replace Arthur Andersen LLP ("Andersen") as independent auditors of the Company.
Andersen's services as the Company's auditor terminated on the same date.
The report of Andersen on the Company's consolidated financial
statements for the years ended September 30, 1997 and 1996 contained no adverse
opinion or disclaimer of opinion and was not qualified or modified as to
uncertainty, audit scope or accounting principle, except that such report on the
consolidated financial statements included an explanatory paragraph with respect
to the Company being in the development stage and its having suffered recurring
losses which raise substantial doubt about its ability to continue as a going
concern.
The decision to engage Tanner as the Company's independent auditors was
approved by the Company's board of directors.
Except as discussed below, in connection with the audits for the years
ended September 30, 1997 and 1996, and through the interim period through June
15, 1998, there were no disagreements or "reportable events" with Andersen as
described in Items 304(a)(1)(iv) and (v) of Regulation S-K on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, which disagreements if not resolved to the satisfaction of
Andersen would have caused it to make reference thereto in its report on the
consolidated financial statements for 1997 and 1996.
During the course of Andersen's review of the consolidated financial
statements of the Company for the quarter ended March 31, 1998, certain matters
came to Andersen's attention that were reported to the Audit Committee of the
Company in a letter dated May 14, 1998. Andersen informed the Audit Committee
that with respect to certain related-party notes receivable and trade accounts
receivable significant collections had not been received to date. Additionally,
Andersen informed the Audit Committee that with respect to certain of the
Company's nutraceutical inventories there had been minimal sales activity.
Andersen informed the Audit Committee that management's assessment was that both
the receivables and the inventory balances were fully realizable and no
additional reserves were necessary. Andersen encouraged the Audit Committee to
monitor these issues with management.
Substantive audit tests and further investigation into these issues
would have been a necessary part of Andersen's audit procedures for the fiscal
year-end September 30, 1998 financial statements had the client/auditor
relationship not terminated. Andersen has been authorized by the Company to
respond to any and all inquiries by the
-28-
<PAGE>
successor auditors, without limitation. The Company has cooperated fully with
the new auditors to address these matters and these matters had no bearing on
the decision to change auditors.
Andersen provided to the Company a letter addressed to the Securities
and Exchange Commission stating that it had reviewed the disclosure provided in
the Current Report filed by the Company on June 19, 1998 to report the change
and that it had no disagreement with the relevant portions of the disclosure
contained in such Current Report, which is repeated here, pursuant to the
requirements of Item 304(a)(3) of Regulation S-K. A copy of such letter, dated
as of June 19, 1998, was filed as Exhibit 16 to the Current Report on Form 8-K.
During the years ended September 30, 1997 and 1996, and through the
interim period through June 15, 1998, there were no other reportable events (as
referenced in Item 304(a)(1)(iv) and (v) of Regulation S-K).
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
As of January 8, 1998, the directors and executive officers of the
Company were as follows:
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
Christopher D. Illick...............................58..............................Director, Chairman of the Board
Michael G. Acton....................................35.................Director, Chief Executive Officer, President
Thomas Q. Garvey, III, M.D..........................55.....................................................Director
Aaron Gold, D.D.....................................70.....................................................Director
Charles J. Quantz, Esq..............................70.....................................................Director
</TABLE>
Christopher D. Illick Mr. Illick has been a Director of the Company since
February 1995 and a Director of Optim since May 1, 1996. He has been Chairman of
the Board of Directors since July 1998. Mr. Illick is Sr. Vice President of
Brean Murry & Co., Inc., an investment banking firm. Since March 1995, Mr.
Illick has been a limited partner in the investment banking firm of Oaks
Fitzwilliams & Co., L.P. in New York City, New York. He has also been a general
partner of Illick Brothers, a real estate and management concern since 1965, and
was the founder and President of the U.S. subsidiary of Robert Fleming Holding,
Ltd. of London, England, from 1973 to 1983. Mr. Illick is also a member of the
board of directors of National Transaction Network, Inc.
Michael G. Acton, C.P.A. Mr. Acton has been Chief Executive Officer of
the Company since June 1998. Prior to that time, Mr. Acton was the Chief
Financial Officer since July 1997 and Controller of the Company since October
1994. He was the President of Volu-Sol from March 15, 1996 until March 1997 and
has been Chief Executive Officer and Chairman of Volu-Sol since March 1997. 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.
Thomas Q. Garvey, III, M.D. Dr. Garvey has been a Director of the
Company since April 1994 and a member of the Company's scientific advisory board
and a scientific and regulatory consultant to the Company since November 1992.
Dr. Garvey has also served as a Director of Optim since May 1, 1996. Dr. Garvey
is a gastroenterologist in private medical and scientific consulting practice
with Garvey Associates, Inc. in Potomac, Maryland, since 1981. Prior to that
time, Dr. Garvey was the supervisory medical officer of the Cardio-Renal Drug
Products Center of Drug Evaluation at the FDA for approximately five years.
Prior to that time, he was in private practice with the Massachusetts General
Hospital in Boston, Massachusetts, and with the National Cancer Institute at the
National Institutes of Health. As a consultant to various pharmaceutical
companies, Dr. Garvey has developed, written and consulted on many new drug
applications and has assisted the Company in preparing its investigational new
drug applications and the development of protocols for clinical trials of the
Company's proposed drug products.
-29-
<PAGE>
Aaron Gold, D.D. Dr. Gold has been a Director of the Company since April
1984 and a Director of Optim since May 1, 1996. Dr. Gold has been a businessman
and religious leader in San Diego, California since 1974. Between July 1974 and
September 1992, Dr. Gold was a Rabbi with the Tiferth Israel Synagogue in San
Diego, California. From July 1994 to the present he has been a Rabbi with the
Nertamid Synagogue in Rancho Bernardo, California. He holds a Doctor of Divinity
Degree from the Jewish Theological Seminary of America and a Doctorate in
Philosophy from Columbia University.
Charles J. Quantz Mr. Quantz has been a Director of the Company since April
1984 and a Director of Optim since May 1, 1996. Mr. Quantz was a practicing
attorney in California for twenty-six years prior to his retirement in 1981.
No family relationships exist between or among any of the Company's
officers and directors. In addition to the above executive officers and
directors, the Company's Optim subsidiary is managed by Randy Olshen, President.
Randy Olshen. Mr. Olshen has been President of Optim since August 1998.
Prior to joining the Company, Mr. Olshen was director of sales and marketing at
Nellson Nutraceutical, where he directed all marketing and research and
development activities for the private label business of pharmaceutical,
clinical nutrition and medical food companies, worked on new product concept
development, coordinated state-by-state medical reimbursement programs, lobbied
for medical food bars to be included on state formularies, managed branded
disease specific products, and built customer business and marketing relations
with wholesalers, institutions, retailers, physicians, dieticians and patients.
Before joining Nellson, Mr. Olshen was employed as business manager for sales
and marketing at McGaw, Inc.
Ira E. Ritter. Mr. Ritter served briefly as President of the Company from
July 9, 1997 until January 1998. Prior to joining the Company, Mr. Ritter was
the Vice Chairman of Quality King Distributors, a wholesale distributor of
health and beauty care, grocery and pharmaceutical products. Since January 1997,
Mr. Ritter has been the President of Rockwood and its predecessor companies. Mr.
Ritter provides his services to Rockwood on a part-time basis and continues to
be active in other business, community and personal pursuits. For the past ten
years, Mr. Ritter has been the Chief Executive Officer of Andela Group, Inc., a
California venture capital company. From 1983 to 1985, Mr. Ritter was active in
the publishing business, founder or co-founder of several successful magazines
and the executive publisher of best-selling books. He has also been active in
civic and political circles. Mr. Ritter attended California State University at
Northridge and founded his first successful magazine, Environmental Quality
Magazine at the age of 21.
Board of Directors Committees
The Board of Directors has established a Compensation Committee and an
Audit Committee. The Board of Directors does not have and does not intend to
establish a Nominating Committee, as such functions will continue to be
performed by the entire Board of Directors.
Compensation Committee
The Compensation Committee makes recommendations to the Board of
Directors with respect to the compensation of management employees and
administers plans and programs relating to employee benefits, incentives and
compensation. The Compensation Committee also determines the persons to whom
options should be granted under the Company's Stock Option Plans and the number
of options to be granted to each person. The current members of the Compensation
Committee are Michael G. Acton, Thomas Q. Garvey, III, and Christopher D.
Illick. Mr. Acton abstains from all votes of the Compensation Committee with
respect to matters involving his compensation.
Audit Committee
The Audit Committee makes recommendations to the Board of Directors with
respect to the engagement of the Company's independent public accountants and
reviews the scope and effect of the audit engagement. The current members of the
Audit Committee are Michael G. Acton, Charles J. Quantz and Christopher D.
Illick.
-30-
<PAGE>
Scientific Advisory Board
The Company has a Scientific Advisory Board comprised of medical
practitioners and distinguished academicians and scientists in the field of
medicine to assist the Company with the development of its pharmaceutical drug
candidates and nutraceutical products. The Company's management periodically
consults with members of the Scientific Advisory Board with respect to issues
arising within a particular member's area of expertise. Although the Company
periodically receives guidance from certain of the members of the Scientific
Advisory Board, all of the members of the Company's Scientific Advisory Board
are otherwise employed on a full-time basis and, accordingly, are able to devote
only a small portion of their time to the Company. Each member of the Scientific
Advisory Board has entered into a Confidentiality Agreement with the Company and
has agreed not to disclose any of the Company's confidential information during
the period such person serves on the Scientific Advisory Board and for a period
of five years thereafter. The members of the Scientific Advisory Board at
September 30, 1998 are as follows:
Allan H. Barker, M.D. Dr. Barker has been a Clinical Associate Professor of
Internal Medicine at the University of Utah, College of Medicine since 1965, and
the President of the Salt Lake Clinic Research Foundation since 1967. Dr. Barker
has over 40 years of experience in the field of internal medicine and has been
the principal investigator in over 30 drug study projects and has overseen
clinical trials on over 36 drugs. Dr. Barker has published approximately 40
books and papers primarily on the subject of internal medicine.
Erwin W. Gelfand, M.D. Dr. Gelfand has been the Chairman of the Department
of Pediatrics, National Jewish Center for Immunology and Respiratory Medicine in
Denver, Colorado, and has also been a professor of microbiology and immunology
at that institution. Dr. Gelfand has written over 300 published books and papers
on these subjects. Dr. Gelfand was a research fellow at Harvard Medical School
and at the Max Planck Institute in West Germany.
David O. Lucas, Ph.D. Dr. Lucas has been the President of PediaPharm
Corporation, a development stage pharmaceutical company based in California,
since 1994. Dr. Lucas has over 25 years of experience in the fields of
microbiology and immunology and serves as a consultant to Technology Resources
Group, a biomedical company based in California. From 1991 to 1994, Dr. Lucas
was Vice President of the Children's Hospital Medical Center of Northern
California, and prior to that, from 1986 to 1990, was Vice President of PTI, the
company from which the Company licenses the Technology. From 1970 to 1986, Dr.
Lucas was an associate professor of Microbiology and Immunology at the
University of Arizona, College of Medicine. While at the University of Arizona,
Dr. Lucas and Dr. Gerald Stott began research on what ultimately resulted in the
Technology. Dr. Lucas is a named inventor on the patents that are the subject of
the license with PTI.
Joseph A. Smith, Jr., M.D. Dr. Smith has been Professor of Surgery and
Chairman of the Department of Urology at the Vanderbilt University Medical
Center in Nashville, Tennessee, since 1991. Prior to that time, Dr. Smith was a
Professor of Surgery and Chairman of the Division of Urology at the University
of Utah Medical Center. Dr. Smith was a research fellow at the Memorial
Sloan-Kettering Cancer Center in New York. Dr. Smith specializes in the
treatment of cancer and immune-compromised patients as a result of chemotherapy
treatment. He has written and published 105 articles, participated in writing 48
books and is the sole author of nine books.
Thomas Q. Garvey III, M.D. Dr. Garvey is also a director of the Company.
Please refer to his biographical information above.
Except for Dr. Garvey, who has a separate agreement with the Company,
members of the Scientific Advisory Board are paid either $250 per hour or $1,000
per day for their services, depending on the individual. Dr. Garvey's agreement
with the Company provides for the payment of $400 per hour, $1,500 per half-day
and $3,000 per full day for his services.
Business Advisory Board
The Company also has a Business Advisory Board, the purpose of which is to
advise the Company's management and the Board of Directors regarding the
Company's development and future growth. None of the members of the Business
Advisory Board are members of the Company's Board of Directors. The Company's
-31-
<PAGE>
management periodically consults with members of the Business Advisory Board
concerning business issues. The members of the Business Advisory Board at
September 30, 1998, are as follows:
Royden G. Derrick. Mr. Derrick has been a prominent business and civic
leader. Mr. Derrick has served on numerous boards, including as Chairman of the
Board of U & I Corporation, member-director of the Federal Reserve, Salt Lake
City Branch, and as a director of First Security Corporation. He founded and
owned Western Steel Company, which eventually merged into Joy Manufacturing. As
a civic leader, Mr. Derrick was Chairman of the University of Utah Board of
Regents, Chairman of Partners of the Americas and a General Authority for The
Church of Jesus Christ of Latter-day Saints. Royden G. Derrick is the father of
the Company's former President, CEO, and Chairman, David G. Derrick.
Wilford W. Kirton, Jr., Esq. Mr. Kirton is a prominent lawyer who founded
the Salt Lake City, Utah-based law firm of Kirton & McConkie. Mr. Kirton has
served on numerous boards, including Lawyers Title Company, Murdock Travel and
the American Bar Association. He is David G. Derrick's father-in-law.
Jacob ("Jack") D. Solomon. Mr. Solomon was one of the Company's founders
and has served as a consultant to the Company since its incorporation. Mr.
Solomon was also a founder and director of First Federal Financial Corporation
and the American Bank of Commerce. He has been Chairman and Chief Executive
Officer of Federal Electronics Corporation, International Technical Development
Corporation and Advanced Patent Technology Corporation. Mr. Solomon has served
on numerous corporate boards, including Cinecolor Corporation, Western
Transistor Corporation and Federal Research and Development Corporation. During
the Johnson and Kennedy Administrations, Mr. Solomon was the National Director
of the Equal Opportunities Foundation. See Item 13, "Certain Relationships and
Related Transactions," below.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the annual and long-term compensation in
fiscal years 1998, 1997 and 1996 for services in all capacities to the Company
of any person serving as Chief Executive Officer during fiscal year 1998. No
other current or former executive officer of the Company received salary or
bonus compensation exceeding $100,000 in 1998. No options or long-term incentive
plan awards were granted or made to the referenced executive officers, except as
noted in the table below:
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation
------------------------------- ------------------------------
Awards Payouts
(a) (b) (c) (d) (e) (f) (g) (h) (i)
- ------------------------------------------------------------------------------------------------------------------
Securities
Other RestrictedUnderlying
Annual Stock Options/ LTIP All Other
Name and Principal position Year (1) Salary Bonus Compensation Awards SARs(#) Payouts($) Compensation($)
- --------------------------- -------- ------ ----- ------------ ------ ------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
David G. Derrick,(3) 1998 $ 69,230 -0- -0- -0- 349,252(4) -0- -0-
CEO/President 1997 $200,000 -0- -0- -0- 31,000 -0- -0-
Chairman of the Board 1996 $203,000 (5) -0- -0- -0- 6,000 -0- -0-
Michael G. Acton, 1998 $100,000 (6) -- -0- -0- 0 -0- -0-
CFO 1997 80,000 -- -- -- 2,500 -- --
President/CEO 1996 60,000 -- -- 2,350 2,350 -- --
- -----------------------
</TABLE>
(1) Ended September 30th of each of the fiscal years indicated.
(2) Adjusted to reflect 1-for-10 reverse stock split effective November 10,
1997 and the 1-for-10 reverse split effective December 31, 1998.
-32-
<PAGE>
(3) Pursuant to a management agreement (the "Management Agreement") between
the Company and ADP Management Corporation ("ADP"), through June 15,
1996, ADP provided the Company with the management and administrative
services necessary to manage the daily business operations and affairs
of the Company and, in addition, furnished the Company with a president
or chief executive officer (Mr. Derrick). The Management Agreement with
ADP was terminated on June 15, 1996. While that Management Agreement
was in force, the Company's Board of Directors determined the dollar
amount of compensation that was paid to Mr. Derrick (through ADP). Mr.
Derrick and his wife own ADP. The Management Agreement was replaced by
an Employment and Non-Competition Agreement, which terminated on
September 30, 1997. Mr. Derrick resigned as CEO, President and director
of the Company in July, 1998. Mr. Acton replaced Mr. Derrick at that
time. Amounts for Mr. Acton for periods prior to July, 1998 were paid
to Mr. Acton in his position as Chief Financial Officer of the Company.
See "Certain Relationships and Related Transactions. Mr. Derrick served
as the Company's President during fiscal year 1995 and to January 1996,
from April 1997 to July 1997, and resumed in that position effective
January 1998. During all of fiscal years 1995, 1996 and 1997, and
continuing to June 1998, he served as the Company's Chief Executive
Officer and Chairman of the Board of Directors.
(4) Includes (a) repricing of options for the purchase of 41,252 shares,
and (b) 308,000 shares covered by options held by Harrogate, a limited
liability company owned 100% by Mr. Derrick. Mr. Derrick disclaims
beneficial ownership of the Harrogate options, given the limitation
placed thereon by the Company that their exercise will be permitted if
and only to the extent that the ownership of shares acquired upon such
exercise, when aggregated with all other shares of the Company's common
stock beneficially owned by Mr. Derrick, will not exceed 4.9% of the
issued and outstanding common stock of the Company.
(5) Represents salary pursuant to the June 15, 1996 Employment and
Non-Competition Agreement plus $3,000 in director's fees paid to Mr.
Derrick between October 1, 1995 and June 15, 1996, during which time
Mr. Derrick was the Chairman of the Board, but not an employee of the
Company.
(6) Mr. Acton was the chief accounting officer and, later, the chief
financial officer of the Company until June 1998. For a brief period of
time, from September 1997 until January 1998, Ira E. Ritter, President
of Rockwood, also served as President of the Company. He received no
compensation in such capacity and he resigned in January 1998.
All of the Company's executive officers and directors have entered into
Confidentiality Agreements with the Company and have agreed not to disclose any
of the Company's confidential information during the period of service with the
Company and for a period of five years thereafter.
STOCK PLANS
In December 1992, July 1993, February 1995 and March, 1996, the
Company's Board of Directors approved the 1992 Stock Incentive Plan, the 1993
Stock Incentive Plan, the 1995 Stock Incentive Plan, and the 1996 Stock
Incentive Plan, respectively. The 1992 Stock Incentive Plan terminated December
31, 1997 and no additional options may be granted under it. As of September 30,
1998, 2370 shares of the Company's common stock were subject to options and
issuable upon exercise of options granted previously under the 1992 Stock
Incentive Plan. The 1993 Stock Incentive Plan has also terminated. A total of
12,438 shares of common stock were issuable upon exercise of options previously
granted and outstanding under the 1993 Stock Incentive Plan at September 30,
1998. No shares of common stock were available for additional grants under the
1995 Stock Incentive Plan, and 19,230 shares of common stock were issuable upon
exercise of outstanding options under the Plan at September 30, 1998. As of
September 30, 1998, a total of 20,271 shares were issuable upon exercise of
options granted under the 1996 Stock Incentive Plan. There are approximately
403,000 shares available for future grants under this plan.
-33-
<PAGE>
Option Grants in Fiscal Year 1998
The following table sets forth information concerning the grant of
stock options and stock appreciation rights (SARs) made under the Company's
plans during the fiscal year ended September 30, 1998 to the Chief Executive
Officer and President:
<TABLE>
<CAPTION>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
Potential Realizable Value at Assumed
Annual Rates of Stock Price
Individual Grants Appreciation for Option Term
- ------------------------------------------------------------------------- ----------------------------------------
(a) (b) (c) (d) (e) (f) (g)
% of Total
Number of Options/SARs
Securities Granted to
Underlying Employees Exercise or
Options/SARs in Fiscal Base Price Expiration
Name Granted (#) Year ($/Share) Date 5% ($) 10% ($)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
David G. Derrick (1) 308,000 308,000 $2.00 9/30/2003 $30,800 $61,600
Michael G. Acton 0 0 N/A N/A N/A N/A
</TABLE>
(i) All options granted Harrogate under a marketing services
agreement. Harrogate is wholly owned by Mr. Derrick, however
Mr. Derrick disclaims beneficial ownership of such shares. See
Summary Compensation Table above.
Aggregated Option Exercises and Fiscal Year-end Option Value
The following table sets forth information with respect to the exercise
of stock options by the Company's Chief Executive Officer and President during
the fiscal year ended September 30, 1998, as well as the aggregate number and
value of unexercised options held by such officer on September 30, 1998.
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
Number of securities
Underlying Value of Unexercised
Unexercised options In-the-Money Options at
At September 30, 1998(#) September 30, 1998 ($)
Shares Acquired Value Exercisable/ Exercisable/
Name On Exercise(#) Realized($) Unexercisable Unexercisable
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
David G. Derrick 41,252 (1) $371,268(2) 349,252/-0- N/A/(3)/-0-
Michael G. Acton 0 (1) - 4,306/-0- N/A(3)/-0-
</TABLE>
(1) All share amounts adjusted to reflect 1-for-10 reverse stock
split effective November 10, 1997, and the 1-for-10 reverse
split effective December 31, 1998. The exercise price was
$5.00 per share and the market price on the date of exercise
was $14.00 per share (also adjusted for the intervening
reverse stock split).
(2) Shares acquired upon exercise of this option have been pledged
as collateral security for the Company's obligation under a
loan agreement. See "Certain Relationships and Related
Transactions."
(3) At September 30, 1998, none of the options were in the money.
-34-
<PAGE>
Report on Repricing of Options
In December 1997, the Board of Directors adjusted the exercise price of
options previously granted under the Stock Option Plans to certain individuals,
including certain of the Named Executive Officers. The Compensation Committee of
the Board recommended the changes to bring the exercise prices closer to the
market price for the Company's Common Stock at the time of the repricing such
that the options continued to provide incentive for the persons who held them.
The new exercise price was based on the market price at the close of trading on
the date the repricing was adopted. The following table summarizes information
concerning the adjustments made to the exercise price of options held by all
executive officers of the Company during the past 10 fiscal years.
<TABLE>
<CAPTION>
Ten-Year Option Repricings
(a) (b) (c) (d) (e) (f) (g)
Number of Market
Securities Price Exercise Length of
Underlying Of Price Original
Options/ Stock at At Time Option Term
SARs Time of Of New Remaining at
Repriced or Repricing Repricing Exercise Date of
Amended Or Amend-ment Or Amend- Price Repricing or
Name and Position Date (#) ($) ment ($) ($) Amendment
- ---------------------------- --------------- ---------------- ----------------- --------------- ------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Michael G. Acton 10/23/96 1,600 116 250 116 4 years
CFO, President, CEO 10/23/96 750 116 200 116 4 years
7/28/97 1,600 37 116 37 3 years
7/28/97 750 37 116 37 3 years
David G. Derrick (1) 10/23/96 4,000 $116 $200 $116 4 years
Former President and CEO 10/23/96 1,400 116 200 116 4 years
10/23/96 6,000 116 200 116 4 years
7/28/97 4,000 37 116 37 3 years
7/28/97 1,400 37 116 37 3 years
7/28/97 6,000 37 116 37 3 years
7/28/97 1,000 37 116 37 4 years
12/15/97 4,000 5 37 5 2 years
12/15/97 1,400 5 37 5 2 years
12/15/97 6,000 5 37 5 2 years
12/15/97 1,000 5 37 5 3 years
James J. Dalton 10/23/96 1,200 116 200 116 4 years
Former Vice President 10/23/96 1,000 116 231 116 4 years
7/28/97 1,200 37 116 37 3 years
7/28/97 1,000 37 116 37 3 years
7/28/97 1,440 37 116 37 4 years
7/28/97 750 37 116 37 4 years
Milton G. Adair 10/23/96 750 116 234 116 4.5 years
Former CEO
</TABLE>
- -----------------------
(1) Includes options held by ADP Management under a contract by which ADP
made Mr. Derrick's services available as President and CEO of the
Company.
-35-
<PAGE>
Executive Compensation Report of the Compensation Committee
Notwithstanding anything to the contrary set forth in any of the
previous filings made by the Company under the Securities Act or the 1934 Act
that might incorporate future filings, including, but not limited to, this
Annual Report on Form 10-K, in whole or in part, the following Executive
Compensation Report and the performance graph appearing herein shall not be
deemed to be incorporated by reference into any such future filings.
This section discusses the Company's executive compensation policies
and the basis for the compensation paid to the Company's executive officers,
including its former Chief Executive Officer, David G. Derrick, and its current
Chief Executive Officer, Michael G. Acton, during the fiscal year ended
September 30, 1998.
Compensation Policy
The Company's policy with respect to executive compensation has been
designed to:
o Adequately and fairly compensate executive officers in
relation to their responsibilities, capabilities and
contributions to the Company and in a manner that is
commensurate with compensation paid by companies of comparable
size or within the Company's industry;
o Reward executive officers for the achievement of short-term
operating goals and for the enhancement of the long-term value
of the Company; and
o Align the interests of the executive officers with those of
the Company's shareholders with respect to short-term
operating goals and long-term increases in the price of the
Company's Common stock.
The components of compensation paid to executive officers consist of:
o base salary;
o incentive compensation in the form of annual bonus payments
and stock options awarded by the Company under the Company's
Stock Incentive Plans; and
o certain other benefits provided to the Company's executive
officers.
The Company's Compensation Committee is responsible for reviewing and
approving cash compensation paid by the Company to its executive officers and
members of the Company's senior management team, including annual bonuses and
stock options awarded under the Company's Stock Incentive Plans, selecting the
individuals who will be awarded bonuses and stock options under the Stock
Incentive Plans, and determining the timing, pricing and amount of all stock
options granted thereunder, each within the terms of the Company's Stock
Incentive Plans.
The Company's executive compensation program historically has
emphasized the use of incentive-based compensation to reward the Company's
executive officers and members of senior management for the achievement of goals
established by the Board of Directors. The Company uses stock options to provide
an incentive for its officers and employees, including selected members of
management, and to reward such officers and employees for achieving goals that
have been established for the Company. The Company believes its incentive
compensation plan rewards management when the Company and its shareholders have
benefitted from achieving the Company's goals and targeted research and
development objectives, all of which the Compensation Committee feels will
dictate, in large part, the Company's future operating results. The Compensation
Committee believes that its policy of compensating officers and employees with
incentive-based compensation fairly and adequately compensates those individuals
in relation to their responsibilities, capabilities and contribution to the
Company, and in a manner that is commensurate with compensation paid by
companies of comparable size or within the Company's industry.
-36-
<PAGE>
Components of Compensation
The primary components of compensation paid by the Company to its
executive officers and senior management personnel, and the relationship of such
components of compensation to the Company's performance, are discussed below:
Base Salary. The Compensation Committee periodically reviews and
approves the base salary paid by the Company to its executive officers and
members of the senior management team. Adjustments to base salaries are
determined based upon a number of factors, including the Company's performance
(to the extent such performance can fairly be attributed or related to each
executive's performance), as well as the nature of each executive's
responsibilities, capabilities and contributions. In addition, the Compensation
Committee periodically reviews the base salaries of its senior management
personnel in an attempt to ascertain whether those salaries fairly reflect job
responsibilities and prevailing market conditions and rates of pay. The
Compensation Committee believes that base salaries for the Company's executive
officers are reasonable in relation to the Company's size and performance in
comparison with the compensation paid by similarly sized companies or companies
within the Company's industry.
Incentive Compensation. As discussed above, a portion of each executive
officer's compensation package is in the form of incentive compensation designed
to reward the achievement of short-term operating goals and long-term increases
in shareholder value. The Company's Stock Incentive Plans allow the Board of
Directors or the Compensation Committee to grant stock options to executive
officers and employees for the purchase of shares of the Company's Common stock.
Under the terms of the Stock Incentive Plans, the Board of Directors and the
Compensation Committee have authority, within the terms of the Stock Incentive
Plans, to select the executive officers and employees who will be granted stock
options and to determine the timing, pricing and number of stock options to be
awarded. The Compensation Committee believes that the stock options granted
under the Stock Incentive Plans reward executive officers only to the extent
that shareholders have benefitted from increases in the value of the Company's
Common stock.
Other Benefits. The Company maintains certain other plans and
arrangements for the benefit of its executive officers and members of senior
management. The Company believes these benefits are reasonable in relation to
the executive compensation practices of other similarly sized companies or
companies within the Company's industry.
Conclusion
The Compensation Committee believes that the concepts discussed above
further the shareholders' interests. At the same time, the Compensation
Committee believes that the program encourages responsible management of the
Company. The Compensation Committee regularly considers plan design so that the
total program is as effective as possible in furthering shareholder interests.
The Compensation Committee bases its review on the experience of its own
members, on information requested from management personnel, and on discussions
with and information compiled by various independent consultants retained by the
Company.
Compensation Committee:
Christopher D. Illick
Michael G. Acton
Thomas Q. Garvey III, M.D.
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<PAGE>
STOCK PERFORMANCE GRAPH
The following graph compares the yearly cumulative total returns from
the Company's common stock during the five fiscal year period ended September
30, 1998, with the cumulative total return on the Media General Index and the
Standard Industrial Classification (SIC) Code Index for that same period. The
comparison assumes $100 was invested on October 1, 1993 in the Company's common
stock and in the common stock of the companies in the referenced Indexes and
further assumes reinvestments of dividends.
COMPARE 5-YEAR CUMULATIVE TOTAL RETURN
AMONG BIOMUNE SYSTEMS, INC.,
MEDIA GENERAL INDEX AND SIC CODE INDEX
[LINE GRAPH APPEARS HERE]
ASSUMES $100 INVESTED ON OCT. 01, 1993
ASSUMES DIVIDEND REINVESTED
FISCAL YEAR ENDING SEPT. 30, 1998
Fiscal Year Ending September 30,
--------------------------------
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Biomune Systems, Inc. 100 284.43 187.43 117.96 22.46 2.46
Commercial Physical Research 100 74.10 116.82 111.03 133.28 107.45
Media General Composite 100 104.92 125.75 149.50 203.79 209.69
</TABLE>
-38-
<PAGE>
Compensation of Directors
Members of the Board of Directors who are not directly or indirectly
employed by the Company are paid $500 for each Board meeting attended, in
addition to having their expenses in connection with attending meetings of the
Board of Directors. No stock options were issued during fiscal year 1998 to any
such Directors for their service on the board.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the 1934 Act requires the Company's directors and
executive officers, and persons who own more than 10% of a registered class of
the Company's equity securities, to file with the SEC initial reports of
ownership and reports of changes in ownership of the Company's common stock and
other equity securities. Officers, directors and greater than 10% shareholders
are requested by SEC Regulations to furnish the Company with copies of all
Section 16(a) reports they file. Based solely upon a review of the copies of
such reports furnished to the Company and written representations that no other
reports were required, the Company believes that there was compliance for the
fiscal year ended September 30, 1998 with all Section 16(a) filing requirements
applicable to the Company's officers, directors and greater than 10% beneficial
owners.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
To the Company's knowledge, the following table sets forth information
regarding ownership of the Company's outstanding common stock on January 4, 1999
by beneficial owners of more than 5% of the outstanding shares of common stock;
each director and each executive officer; and all directors and executive
officers as a group. Except as otherwise indicated below and subject to
applicable community property laws, each owner has sole voting and sole
investment powers with respect to the stock listed.
<TABLE>
<CAPTION>
Shares of Common stock
Name and Address Beneficially Owned (2)
of Beneficial Owner (1) Number Percentage of Class
- ------------------------------------------------------ ------------------------------------------
Directors/Officers
<S> <C> <C>
Michael G. Acton (3) (Executive Officer/Director) 9,057 *
Aaron Gold, D.D. (4) (Director) 2,046 *
4373 Sheldon Drive
La Mesa, CA 92401
Charles J. Quantz. (5) (Director) 872 *
Post Office Box 8186
Emeryville, CA 94663
Thomas Q. Garvey, III, M.D. (6) (Director) 1,050 *
10125 Gary Road
Potomac, MD 20854
Christopher D. Illick (7) (Director) 17,520 1.3%
22 Mountain Avenue
Princeton, N.J. 08450
All executive officers and
directors as a group (persons) (8) 30,545 2.3%
- ------------------------------
</TABLE>
* Less than 1% [Footnotes continued on next page.]
-39-
<PAGE>
(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 on which
beneficial ownership is calculated, upon the exercise of options or
warrants or otherwise. Each beneficial owner's percentage of ownership
is determined by assuming that options, warrants, or other rights to
acquire shares, held by such person (but not those held by any other
person) and exercisable within sixty (60) days from the date hereof
have been fully exercised. Percentages are calculated based on
1,316,662 shares of common stock outstanding as of January 4, 1999 (as
adjusted for shares deemed to be beneficially owned by such
shareholder).
(3) Mr. Acton owns 4,752 shares of common stock directly and options to
purchase 4,306 shares of common stock.
(4) Dr. Gold owns 696 shares of common stock directly and options to
purchase 1,350 shares of common stock.
(5) Mr. Quantz owns 122 shares of common stock directly and options to
purchase 750 shares of common stock
(6) Dr. Garvey owns 53 shares of common stock directly and options to
purchase 997 shares of common stock.
(7) Mr. Illick owns 16,470 shares of common stock directly and options to
purchase 1,050 shares of common stock.
(8) Based on a total of 1,325,115 shares of common stock, assuming the
exercise of all options held by such person and exercisable within 60
days of the date of this statement.
Approximately 2.3% of the issued and outstanding shares of the
Company's common stock are beneficially owned by current directors and executive
officers of the Company. 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.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
David Derrick
ADP. The Company entered into an Employment and Non- Competition
Agreement with David G. Derrick, the Company's Chief Executive Officer and
Chairman of the Board, effective as of June 15, 1996, which expired September
30, 1997. Mr. Derrick continued that position under a modified agreement until
July, 1998.
MK Financial, Inc. In fiscal year 1998, the Company entered into an
investment banking arrangement with MK Financial, Inc., an entity owned by David
G. Derrick. Under this arrangement, the Company paid $150,000 to MK Financial
for fees and commissions related to investment banking services performed during
fiscal year 1998.
Harrogate Marketing LLC. The Company has an agreement with Harrogate
under which Harrogate provides marketing and management services and is paid a
fee equal to 45% of the gross revenues from the sale of nutrition and medical
food products. Harrogate is owned by David Derrick. The Company also granted
Harrogate an option to purchase 308,000 shares of common stock at a price of
$2.00 per share. Harrogate agreed to assume the expense (including legal fees
and costs) of pending litigation and all marketing costs.
Rockwood Transaction. Mr. Derrick was required to personally guarantee
certain obligations of the Company in connection with the Rockwood purchase. The
Company agreed to indemnity Mr. Derrick in connection with such guarantee. In
addition, certain obligations of Cypress Springs LLC, the minority owner of
Rockwood, relating to the assumption of the negative net worth of Rockwood at
September 30, 1998, are guaranteed by Greenmints Investment Corp., a Delaware
corporation. The assets of Greenmints securing this obligation of Cypress
comprise trust deed notes secured by real property beneficially owned by Mr.
Derrick and members of his immediate family. In January 1999, Mr. Derrick
satisfied this note to Rockwood through a contribution of assets.
-40-
<PAGE>
Calvin Black Trust Loan. The Company borrowed $600,000 from the Calvin
Black Trust. The trustee of the Trust is Phil B. Acton, the brother of the
Company's President and CEO, Michael G. Acton. The loan to the Company is
secured by assets, including accounts receivable and inventory. The obligation
is guaranteed personally by Mr. Derrick, whose guarantee is further secured by
the pledge of 60,000 shares of common stock of the Company beneficially owned by
Mr. Derrick. The note is due February 28, 1999.
James J. Dalton
Consulting Agreement. The Company has a consulting agreement (the
"Consulting Agreement") with James J. Dalton, a former director of the Company.
Pursuant to the Consulting Agreement, the Company pay Mr. Dalton a fee of $5,000
and 600 shares of common stock each month (for a total of 7,200 shares). Mr.
Dalton was also granted a five year warrant exercisable for 10,000 shares of the
Company's common stock. During fiscal year 1997, the Company issued to Mr.
Dalton options to purchase 49,400 shares of the Company's common stock at $3.70
per share.
Loans. During fiscal year 1995 and fiscal year 1994, the Company made
loans aggregating $175,000 and $90,000, respectively, to Mr. Dalton. These loans
were unsecured, bore interest at an annual rate of 12% and were due on demand.
During fiscal year 1996, 1995 and 1994, Mr. Dalton made principal and interest
payments totaling $60,000, $16,605 and $90,000, respectively, on those loans. On
January 29, 1996, the Company agreed to eliminate the remaining principal and
interest balances on these loans, which totaled approximately $126,000, in
exchange for Mr. Dalton relinquishing his right to receive 50% of the future net
profits of Volu-Sol (a former subsidiary of the Company), if any, for three
years after the expiration of his agreement with the Company (or any extension
thereof).
Christopher D. Illick
The Company has a Consulting Agreement with Christopher D. Illick, one
of the Company's directors and a member of its Compensation and Audit
Committees. That Consulting Agreement provides for Mr. Illick's services as a
director of the Company and as a member of the Company's Compensation and Audit
Committees. Pursuant to that Consulting Agreement, the Company issues Mr. Illick
225 shares of common stock each month.
-41-
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) Documents filed as part of this Form 10-K:
1. Financial Statements (included in Part II, Item 8)
Consolidated Balance Sheets as of September 30, 1998 and 1997
Consolidated Statements of Operations for the Years Ended
September 30, 1998, 1997 and 1996
Consolidated Statements of Shareholders' Equity for the Years
Ended September 30, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the Years Ended
September 30, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
2. Financial Statement Schedules: Financial statement schedules
have been omitted because they are not required or are not
applicable, or because the required information is shown in
the financial statements or notes thereto.
3. Exhibits: The following Exhibits are filed with this Form 10-K:
Exhibit No. Description of Exhibit
3.1+ Amended and Restated Articles of Incorporation
3.2+ Amended and Restated Bylaws (adopted March 22, 1996)
3.3+ Certificate and Statement of Determination of Rights
and Preferences of Series A 10% Cumulative
Convertible Preferred Stock
3.4+ Certificate and Statement of Determination of Rights
and Preferences of Series B 10% Cumulative
Convertible Non-Voting Preferred Stock
3.5+ Certificate and Statement of Determination of Rights
and Preferences of Series D 8% Cumulative Convertible
Non-Voting Stock
3.6+ Certificate of Amendment to the Designation of Rights
and Preferences Related to Series A 10% Cumulative
Convertible Preferred Stock
3.7+ Certificate and Statement of Determination of Rights
and Preferences of Series C 8% Cumulative Convertible
Non-Voting Preferred Stock
3.8 Certificate and Statement of Determination of Rights
and Preferences of Series E, 8% Cumulative
Convertible Preferred Stock
3.9 Certificate of Amendment of Determination of Rights
and Preferences of Series F, 8% Cumulative
Convertible Preferred Stock
3.10 Amendment to Determination of Rights and Preferences
of Series F Preferred
-42-
<PAGE>
3.11 Certificate and Statement of Determination of Rights
and Preferences of Series G, 8% Cumulative Preferred
Stock
3.12 Amendment to Designation of Rights and Preferences of
Series G Preferred
3.13 Certificate and Statement of Determination of Rights
and Preferences of the Series J, 8% Cumulative
Convertible Preferred Stock
4.1** Form of Common Stock Certificate
4.3** Form of Series A 10% Cumulative Convertible Preferred
Stock Certificate
4.4* Form of Series B 10% Cumulative Convertible Preferred
Stock Certificate
4.5# Form of Series D 8% Cumulative Convertible Preferred
Stock Certificate
4.6+ Form of Series C 8% Cumulative Convertible Preferred
Stock Certificate
4.7 Form of Series E Certificate
4.8 Form of Series F Certificate
4.9 Form of Series G Amendment
4.10 Form of Series J Certificate
10.43* Office Lease Agreement
10.50* Thomas Q. Garvey, III Indemnification Agreement
10.51* St. Luke's-Roosevelt Hospital Center Statement of
Agreement
10.52* Michael G. Acton Agreement
10.53* Frank A. Eldredge Agreement
10.54* James Dalton Agreement
10.60# Amended License Agreement with PTI
10.77# 1995 Stock Incentive Plan
10.80# Incentive Stock Option Agreement with Michael G.
Acton (May 4, 1995)
10.82# Amended 1995 Stock Incentive Plan
10.83# Non-Qualified Stock Option Agreement with Christopher
D. Illick
10.84# Schedule Identifying Other Non-Qualified Stock Option
Agreements
10.85# Incentive Stock Option Agreement with Frank A.
Eldredge
10.86# Schedule Identifying Other Incentive Stock Option
Agreements
10.95+ Lease Agreement with Young Electric Sign Company
-43-
<PAGE>
10.97+ Form of Registration Rights Agreement (Series C
Preferred)
10.98+ Form of Investor Questionnaire and Subscription
Agreement (Series C Preferred)
10.108+ License Agreement with Biomed Patent Development LLC
10.112+ First Amendment to Amended License Agreement with PTI
10.113 Contract with ML Industries
10.114 Contract with Medical Foods, Inc.
10.115 Contract with Harrogate Marketing LLC
10.116 Rockwood Purchase Agreement, as amended
23.1 Consent of Tanner + Co.
23.2 Consent of Arthur Andersen LLP
27 Financial Data Schedule
- -----------------------
# Incorporated by reference to the Company's Annual Report on Form 10-K/A
for the fiscal year ended September 30, 1995.
o Incorporated by reference to the Company's Annual Report on Form 10-KSB
for the fiscal year ended September 30, 1994.
** Incorporated by reference to the Company's Annual Report on Form 10-K
for the fiscal year ended September 30, 1993 and the two month period
ended November 30, 1993.
*** Incorporated by reference to the Company's Annual Report on Form 10-K
for the fiscal year ended September 30, 1992.
+ Incorporated by reference to the Company's Annual Report on From 10-K
for the fiscal year ended September 30, 1996
(B) Reports filed on Form 8-K during the last quarter of the fiscal year
ended September 30, 1998:
On August 18, 1998, the Company filed a Current Report on Form 8-K to
report changes to the terms of the Rockwood purchase and to file the
audited financial statements and proforma financial data relative to
the transaction.
-44-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on this 8th day of
January, 1998.
BIOMUNE SYSTEMS, INC.
(Registrant)
By: /s/ Michael G. Acton
-------------------------
Michael G. Acton
Its: Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
Signature Title Date
/s/ Michael G. Acton Chief Executive Officer and January 8, 1999
- ------------------------------------------ Director (Principal Executive
Michael G. Acton and Accounting Officer)
/s/ Aaron Gold Director January 8, 1999
- ------------------------------------------
Aaron Gold
/s/ Charles J. Quantz Director January 8, 1999
- ------------------------------------------
Charles J. Quantz
/s/ Christopher D. Illick Director, Chairman January 8, 1999
- ------------------------------------------
Christopher D. Illick
</TABLE>
-45-
CERTIFICATE AND STATEMENT OF DETERMINATION OF
RIGHTS AND PREFERENCES OF SERIES E 8% CUMULATIVE CONVERTIBLE
NON-VOTING PREFERRED STOCK OF
BIOMUNE SYSTEMS, INC.
The undersigned, being the Chief Executive Officer and Secretary of Biomune
Systems, Inc., a Nevada corporation, do hereby certify and declare as follows:
1. The name of the corporation is Biomune Systems, Inc.
2. Attached hereto as Exhibit A and incorporated herein by this
reference is a true and correct copy of the Designation of Rights and
Preferences of Series E 8% Cumulative Convertible Non-Voting
Preferred Stock of Biomune Systems, Inc.
3. The Designation of Rights and Preferences described above was
approved unanimously by the members of the Board of Directors of
Biomune Systems, Inc. by consent in lieu of meeting pursuant to
Chapter 78.315 of the Nevada Revised Statutes.
IN WITNESS WHEREOF, we have signed this Certificate this 7 day of January
1998.
BIOMUNE SYSTEMS, INC., a Nevada corporation
By: /s/ David G. Derrick
---------------------------
David G. Derrick, Chief Executive Officer
By: /s/ Christopher D. Illick
---------------------------
Christopher D. Illick, Secretary
Attested and Verified:
/s/ Christopher D. Illick
- ----------------------------
Christopher D. Illick, Secretary
<PAGE>
STATE OF UTAH )
:ss
COUNTY OF Salt Lake )
On the 7th day of January, 1998, David G. Derrick, who, being by me duly
sworn, did say that he is the Chief Executive Officer of Biomune Systems, Inc.,
a Nevada corporation, and that the foregoing instrument was signed on behalf of
such Corporation by authority of its Bylaws and such officer acknowledged to me
that the Corporation executed the same.
/s/ Carol S. MacKay
- ------------------------------------------
NOTARY PUBLIC
My Commission Expires: 10/16/99
STATE OF New York )
:ss
COUNTY OF New York )
On the _ day of December, 1997, Christopher D. Illick, who, being by me
duly sworn, did say that he is the Secretary of Biomune Systems, Inc., a Nevada
corporation, and that the foregoing instrument was signed on behalf of such
Corporation by authority of its Bylaws and such officer acknowledged to me that
the Corporation executed the same.
/s/ Myrna Karger
- ------------------------------------------
NOTARY PUBLIC
My Commission Expires: Jan. 31, 1999
<PAGE>
EXHIBIT A
BIOMUNE SYSTEMS, INC.
DESIGNATION OF RIGHTS AND PREFERENCES
OF
SERIES E 8% CUMULATIVE CONVERTIBLE NON-VOTING PREFERRED STOCK
Pursuant to the authority vested in the Board of Directors of BIOMUNE SYSTEMS,
INC., a Nevada corporation (the ACompany@), in its Articles of Incorporation and
as permitted by Section 602 of the Nevada Private Corporations Act, as amended
(the ANevada Act@), the Company=s Board of Directors does hereby establish a
series of the Company=s Preferred Stock designated as Series E 8% Cumulative
Convertible Non-Voting Preferred Stock (ASeries E Preferred Stock@) and does
hereby designate the rights, preferences, privileges and other attributes of the
shares of Series E Preferred Stock, as follows:
1. Designation and Number of Shares. A series of the Company=s Preferred
Stock is hereby established, to be designated and known as ASeries E 8%
Cumulative Convertible Non-Voting Preferred Stock@ (hereinafter referred to as
the ASeries E Preferred Stock@), consisting of thirty thousand (30,000) shares
of the authorized and unissued shares of the Company=s Preferred Stock, $0.0001
par value per share. The Company shall from time to time, in accordance with the
laws of the State of Nevada, increase the number of shares of its Common Stock,
$0.0001 par value per share, if at any time the number of shares of the
Company=s Common Stock remaining unissued and available for issuance shall not
be sufficient to permit conversion of the Series E Preferred Stock provided
herein.
2. Dividends. The holders of shares of Series E Preferred Stock shall be
entitled to receive an annual dividend out of any of the Company=s assets
legally available therefor, prior and in preference to any declaration or
payment of any dividend on the Common Stock of the Company, at the rate of eight
percent (8%) per annum on the stated value of the Series E Preferred Stock (or
$80.00 per share of Series E Preferred Stock). Dividends will be paid either in
cash or in additional shares of Series E Preferred stock at the discretion of
the Board of Directors to holders of record of shares of Series E Preferred
Stock as they appear on the books and records of the Company on such record
dates not less than ten (10) days nor more than sixty (60) days preceding the
payment dates thereof, as may be fixed by the Board of Directors of the Company.
Dividends shall be fully cumulative and shall accrue from the date of original
issuance of the Series E Preferred Stock. Once dividends are paid on the Series
E Preferred Stock, holders of shares of Series E Preferred Stock will not
participate in dividends paid to holders of Common Stock. Except as described
below, no dividends shall be paid or declared and set apart for payment on any
class or series of shares of the Company that are junior to the Series E
Preferred Stock for any period unless full cumulative dividends have been paid
ro contemporaneously are declared and paid or set apart for payment on the
Series E Preferred Stock. A dividend payable in shares of Common Stock or in
shares of another class of shares junior to the Series E Preferred Stock may,
however, be made. Dividends on the Series E Preferred Stock may, at the option
of the Company=s Board of Directors, be paid in either cash or in additional
shares of Series E Preferred Stock; provided, however, that if accrued dividends
on the Series E Preferred Stock are paid in additional shares of Series E
Preferred Stock, accrued dividends paid subsequent thereto shall not be paid on
shares of Series E Preferred Stock that were previously paid as stock dividends.
Holders of Series E Preferred Stock shall not participate in excess dividends
remaining following payment of all accrued and unpaid dividends owing to holders
of Series E Preferred Stock.
3. Liquidation Preference.
(a) In the event of any voluntary or involuntary liquidation, dissolution or
winding up of the Company, the holders of Series E Preferred Stock shall be
entitled to receive out of the assets of the Company available for distribution
to shareholders before any distribution or payment is made to holders of shares
of Common Stock, or to holders of any other shares of the Company ranking junior
upon liquidation to the Series E Preferred Stock, liquidation distributions in
the amount of One Thousand Dollars ($1,000.00) per share plus all accrued and
unpaid regular or special dividends, if any, multiplied by 133%, before any
payment is made to holders of shares of the Company=s equity securities that are
junior to the Series E Preferred Stock. If upon any voluntary or involuntary
liquidation, dissolution or winding up of the Company, the assets of the Company
shall be insufficient to make the full payment on the Series E Preferred Stock
as described in the immediately preceding sentence, and similar payments on any
other class of shares ranking on a parity with the Series E Preferred Stock upon
liquidation, then the holders of the Series E Preferred Stock and of such other
class of shares will share ratably in any such distribution of assets of the
Company in proportion to the full respective distributable amounts to which they
are entitled.
(b) After payment to the holders of the Series E Preferred Stock of the amounts
set forth in subparagraph 3(a) above, the holders of Series E Preferred Stock
will not be entitled to any further participation in any distribution or payment
by the Company, and the entire remaining assets and funds of the Company legally
available for distribution, if any, shall be distributed among the holders of
shares of Common Stock in proportion to the shares of Common Stock then held by
them.
(c) A consolidation or merger of the Company with or into any other corporation
or corporations, or a sale of all or substantially all of the assets of the
Company that does not involve a distribution by the Company of cash or other
property to the holders of shares of Common Stock, shall be deemed to be a
liquidation, dissolution or winding up of the Company within the meaning of this
Section 3, but rather shall be subject to the provisions of Section 6 below.
4. Voting Rights.
(a) Except as otherwise expressly provided herein or as required by Nevada law,
the holders of Series E Preferred Stock shall not be entitled to voting rights,
except that without the approval of holders of a majority of the outstanding
shares of Series E Preferred Stock, the Company will not (i) authorize, create
or issue any shares of any class or series ranking senior to the Series E
Preferred Stock as to liquidation rights; (ii) amend, alter or repeal by any
means the Company=s Articles of Incorporation if the powers, preferences or
special rights of the Series E Preferred Stock would be materially adversely
affected; or (iii) become subject to any restriction on the Series E Preferred
Stock other than restrictions arising solely under the Nevada Act or existing
under the Company=s Articles of Incorporation as in effect on December 20, 1997.
Upon conversion of shares of Series E Preferred Stock by holders thereof into
Common Stock of the Company, holders (to the extent of their Common Stock) shall
be entitled to voting rights pertaining to the Common Stock received upon such
conversion.
5. Conversion of Series E Preferred Stock. The holders of shares of Series E
Preferred Stock shall have the following conversion rights.
(a) Right to Convert. Subject to the Conversion Limitation set forth in Section
5(b) below, each share of Series E Preferred Stock may be converted as provided
below into the number of shares of the Company=s Common Stock determined by
dividing $1,000.00 plus any accrued and unpaid dividends by an amount equal to
the Market Price (as defined below) less 42%. The applicable denominator in the
formula set forth in the foregoing sentence shall be referred to herein as the
AConversion Factor.@ AMarket Price@ shall mean the average closing bid price of
the Company=s Common Stock for the five (5) trading days immediately preceding
the applicable Conversion Date (as defined below), as reported by the National
Association of Securities Dealers Automated Quotation System or such other
inter-dealer system as may list the Company=s Common Stock. Subject to the
Conversion Limitation set forth in Section 5(c) below, each conversion shall be
effected by the holder surrendering the certificate(s) for the shares of Series
E Preferred Stock to be converted to the Company with a Conversion Certificate
executed by the holder for not less than $50,000.00 aggregate conversion amount
including any accrued and unpaid regular and special dividends and accompanied,
as required by the Company, by proper assignment. The date of execution of such
Conversion Certificate and delivery by facsimile to the Company at (801)466-3741
shall be defined as the AConversion Date.@ Upon conversion the Company shall use
its reasonable best efforts to deliver to the holder certificates evidencing
shares of the Company=s Common Stock within five (5) business days of the
Conversion Date. The Company shall use reasonable best efforts to deliver to the
holder certificates evidencing shares of Series E Preferred Stock that are not
converted within three (3) business days of the Conversion date. In the event a
merger, consolidation or sale of all or substantially all of the assets of the
Company or a similar business combination involving the Company, all of the
shares of Series E Preferred Stock, at the option of the holder, may be
converted into the number of shares of Common Stock into which the shares of
Series E Preferred Stock are convertible at the time of the closing of such
transaction; subject, however, to the redemption rights of the Company as
provided below.
(b) Conversion Limitations. Notwithstanding the conversion rights regarding the
Series E Preferred Stock set forth in Section 5(a) above, any single holder (or
affiliated holders) may not at any time hold shares of the Company=s Common
Stock exceeding 4.9% of the total number of issued and outstanding shares of
Common Stock. Thus, any holder or group of affiliated holders will only be
allowed to convert shares of Series E Preferred Stock into shares of Common
Stock in an amount such that such holder=s ownership of shares of Common Stock
does not exceed 4.9% of the total number of issued and outstanding shares of
Common Stock.
(c) Mechanics of Conversion. Before any holder of Series E Preferred Stock shall
be entitled to convert the same into shares of Common Stock, such holder shall
surrender the certificate or certificates thereof, duly endorsed, at the office
of the Company or of any transfer agent for such stock with the form of
conversion certificate executed by the holder thereof, or a specified portion
thereof (as provided in the Conversion Certificate and for not less than
$50,000.00 aggregate conversion amount including accrued and unpaid regular and
special dividends, if any) and accompanied, if required by the Company, by
proper assignment in blank, and shall give written notice to the Company at such
office that such holder elects to convert the same and shall state therein the
name or names into which such holder wishes the certificate or certificates for
shares of Common Stock to be issued. The Company shall, as soon as practicable
thereafter, issue and deliver at such office to such holder a certificate or
certificates for the number of shares of Common Stock to which such holder shall
be entitled as aforesaid. The person or persons entitled to receive the shares
of Common Stock issuable upon such conversion shall be treated for all purposes
as the record holder or holders of such shares of Common Stock on such date.
(d) Adjustments for Combinations or Subdivisions of Common Stock. In the event
the Company at any time or from time to time after the date on which a share of
Series E Preferred Stock was first issued shall declare or pay any dividend on
the Common Stock payable in shares of Common Stock or in any right to acquire
shares of Common Stock, or shall effect a subdivision of the outstanding shares
of Common Stock into a greater number of shares of Common Stock (by stock split,
reclassification or otherwise), or in the event the outstanding shares of Common
Stock shall be combined or consolidated, by reclassification or otherwise, into
a lesser number of shares of Common Stock, then the Series E Preferred Stock
conversion formula set forth in Section 5(a) above in effect immediately prior
to such event shall, concurrently with the effectiveness of such event, be
proportionately increased or decreased, as appropriate.
(e) Other Distributions. In the event the Company shall at any time or from time
to time make or issue, or fix a record date for the determination of holders of
Common Stock entitled to receive, a dividend or other distribution payable in
securities of the Company or any of its subsidiaries, if any, then in each such
event a provision shall be made so that the holders of shares of Series E
Preferred Stock shall receive, upon the conversion thereof, the securities of
the Company that they would have received had their Series E Preferred Stock
been converted into shares of Common Stock on the date of such event.
(f) No Impairment. The Company will not, by amendment to its Articles of
Incorporation or through any reorganization, transfer of assets, consolidation,
merger, dissolution, issue or sale of securities or any other voluntary action,
avoid or seek to avoid the observance or performance of any of the terms to be
observed or performed hereunder by the Company, but will at all times in good
faith assist in the carrying out of all of the provisions of this Section 5 and
in the taking of all such action as may be necessary or appropriate in order to
protect the conversion rights of the holders of Series E Preferred Stock against
impairment. No amendment shall be made to the Company=s Articles of
Incorporation that would alter or change the powers, preferences or privileges
of the shares of Series E Preferred Stock so as to affect them adversely without
the vote or approval of the holders of at least a majority of the outstanding
shares of Series E Preferred Stock.
(g) Certificates as to Adjustments. Upon the occurrence of each adjustment or
readjustment of the Series E Preferred Stock conversion formula pursuant to this
Section 5, the Company at its expense shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and cause an independent public
accountant selected by the Company=s Board of Directors to verify such
computation and prepare and furnish to each holder of Series E Preferred Stock a
certificate setting forth such adjustment or readjustment and showing in detail
the facts upon which such adjustment or readjustment is based. The Company
shall, upon the written request at any time of any holder of Series E Preferred
Stock, furnish or cause to be furnished to such holder a like certificate
setting forth (i) such adjustments and readjustments; (ii) the Series E
Preferred Stock conversion formula at the time in effect; and (iii) the number
of shares of Common Stock that at the time would be received upon the conversion
of shares of Series E Preferred Stock.
(h) Notices of Record Date. In the event of any taking by the Company of a
record of the holders of any class of securities for the purpose of determining
the holders thereof who are entitled to receive any dividend or other
distribution, any security or right convertible into or entitling the holder
thereof to receive additional shares of Common Stock, or any right to subscribe
for, purchase or otherwise acquire any shares of stock of any class or any other
securities or property or to receive any other right, the Company shall mail to
each holder of Series E Preferred Stock at least ten (10) days prior to the date
specified therein, a notice specifying the date on which any such record is to
be taken for the purpose of such dividend, distribution, security or right, and
the amount and character of such dividend, distribution, security or right.
(i) Issue Taxes. The Company shall pay any and all issue and other taxes that
may be payable in respect of any issue or delivery of shares of Common Stock
upon conversion of shares of Series E Preferred Stock pursuant hereto; provided,
however, that the Company shall not be obligated to pay any transfer taxes
resulting from any transfer requested by any holder of shares of Series E
Preferred Stock in connection with any such conversion.
(j) Reservation of Stock Issuable Upon Conversion. The Company shall at all
times reserve and keep available out of its authorized but unissued shares of
Common Stock, solely for the purpose of effecting the conversion of the shares
of Series E Preferred Stock, such number of its shares of Common Stock as shall
from time to time be sufficient to effect the conversion of all of the shares of
issued and outstanding Series E Preferred Stock; and if at any time the number
of authorized but unissued shares of Common Stock shall not be sufficient to
effect the conversion of all of the shares of issued and outstanding Series E
Preferred Stock, the Company will take such corporate action as may, in the
opinion of its counsel, be necessary to increase its authorized but unissued
shares of Common Stock to such number of shares as shall be sufficient for such
purpose, including, without limitation, engaging in best efforts to obtain the
requisite shareholder approval of any necessary amendment to the Company=s
Articles of Incorporation.
(k) Fractional Shares. No fractional share of Common Stock or securities
representing fractional shares of Common Stock shall be issued upon the
conversion of any share or shares of Series E Preferred Stock. All shares of
Common Stock (including fractions thereof) issuable upon conversion of more than
one (1) share of Series E Preferred Stock by a holder thereof shall be
aggregated for purposes of determining whether the conversion would result in
the issuance of any fractional share. If, after the aforementioned aggregation,
the conversion would result in the issuance of a fraction of a share of Common
Stock, the Company shall, in lieu of issuing any fractional share, pay the
holder otherwise entitled to such fraction a sum in cash equal to the current
market value of such fraction on the date of conversion.
(l) Notices. Any notice required by the provisions of this Section 5 to be given
to the holders of shares of Series E Preferred Stock shall be deemed given if
deposited in the United States mail, postage prepaid, and addressed to each
holder of record at such holder=s address appearing on the books and records of
the Company.
(m) Adjustments. In case of any reorganization or any
reclassification of the capital stock of the Company, any consolidation or
merger of the Company with or into another corporation or corporations, or the
conveyance of all or substantially all of the assets of the Company to another
corporation, each share of Series E Preferred Stock shall thereafter be
convertible into the number of shares of stock or other securities or property
(including cash) to which a holder of the number of shares of Common Stock
deliverable upon conversion of such shares of Series E Preferred Stock would
have been entitled upon the record date (or date of, if no record date is fixed)
such reorganization, reclassification, consolidation, merger or conveyance; any,
in any case, appropriate adjustment (as determined by the Company=s Board of
Directors) shall be made in the application of the provisions herein set forth
with respect to the rights and interests thereafter of the holders of such
Series E Preferred Stock, to the end that the provisions set forth herein shall
thereafter be applicable, as nearly as equivalent as is practicable, in relation
to any shares of stock or the securities or property (including cash) thereafter
deliverable upon the conversion of the shares of such Series E Preferred Stock.
6. Merger or Consolidation.
(a) At any time, in the event of:
(i) any transaction or series of related transactions (including, without
limitation, any reorganization, merger or consolidation) that will result
in the Company=s shareholders immediately prior to such transaction not
holding (by virtue of such shares or securities issued solely with respect
thereto) at least fifty percent (50%) of the voting power of the surviving
or continuing entity; or
(ii) a sale of all or substantially all of the assets of the Company,
unless the Company=s shareholders immediately prior to such sale will, as a
result of such sale, hold (by virtue of securities issued as consideration
for the Company=s sale) at least fifty percent (50%) of the voting power of
the purchasing entity;
(the foregoing events are individually referred to herein as a ASales
Transaction@), then, holders of the Series E Preferred Stock of record as of the
date of consummation of the Sales Transaction shall be entitled to receive,
prior and in preference to any payment of consideration to the holders of Common
Stock, in cash or in securities received from the acquiring corporation, or in a
combination thereof, at the closing of any such Sales Transaction, at the
holder=s discretion, an amount per share equal to One Thousand Dollars
($1,000.00) per share (as adjusted for any combinations, consolidations, stock
distributions or stock dividends with respect to such shares), plus all declared
or accumulated but unpaid dividends on such shares as of the date of closing of
such Sales Transaction. In the event the proceeds of the Sales Transaction are
not sufficient to make full payment of the aforementioned preferential amounts
to the holders of the Series E Preferred Stock in accordance herewith, then the
entire amount payable in respect of the proposed Sales Transaction shall be
distributed ratably among the holders of the Series E Preferred Stock in
proportion to the product of the liquidation preference of each such share and
the number of such shares owned by each such holder. Upon completion of the
payment to the holders of Series E Preferred Stock as provided above, the
remaining proceeds of such Sales Transaction shall be distributed among the
holders of record (as of the date of the consummation of the Sales Transaction)
of shares of Common Stock in proportion to the number of shares of Common Stock
then held. Unless otherwise consented to by the holders of a majority of the
outstanding shares of Series E Preferred Stock, such payments shall be made with
respect to the Series E Preferred Stock and to holders of Common Stock by
purchase of such shares of Series E Preferred Stock and Common Stock by the
surviving corporation, entity or person, or by redemption of such shares by the
Company, in the discretion of the Company.
(b) Any securities to be delivered to the holders of Series E Preferred Stock
pursuant to Section 6(a) above shall be valued as follows:
(i) Securities not subject to investment letter or other similar
restrictions on free marketability as provided for in subsection (ii)
below:
(A) If traded on a securities exchange or reported on the NASDAQ
SmallCap Market, the value shall be deemed to be the average of the
closing prices of the securities on such exchange over the thirty (30)
day period ending three (3) days prior to the closing;
(B) If actively traded over-the-counter, the value shall be deemed to
be the average of the closing bid or sale prices (whichever is
applicable) over the thirty (30) day period ending three (3) days
prior to the closing; and
(C) If there is no active public market, the value shall be the fair
market value thereof, as mutually determined by the Company=s Board of
Directors and the holders of a majority of the outstanding shares of
Series E Preferred Stock.
(iii) The method of valuation of securities subject to investment letter or
other restrictions on free marketability (other than restrictions arising
solely by virtue of a shareholder=s status as an affiliate or former
affiliate of the Company) shall be to make an appropriate discount from the
market value determined in Section 6(b)(i)(A), (B) or (C) above to reflect
the approximate fair market value thereof, as mutually determined by the
Company and the holders of a majority of the outstanding shares of Series E
Preferred Stock.
(c) In the event the requirements of Section 6(a) above are not complied with,
the Company shall forthwith either:
(i) cause such closing to be postponed until such time as the requirements
of this Section 6 have been complied with; or
(ii) cancel such transaction, in which event the rights, preferences and
privileges of the holders of Series E Preferred Stock shall revert to and
be the same as such rights, preferences and privileges existing immediately
prior to the date of the first notice referred to in Section 6(d) below.
(d) The Company shall give each holder of record of Series E Preferred Stock
written notice of such impending transaction not later than ten (10) days prior
to the shareholders= meeting called to approve such transaction. The notice
shall describe the material terms and conditions of the impending transaction
and the provisions of this Section 6, and the Company shall thereafter give such
holders prompt notice of any material changes to the impending transaction. The
transaction shall in no event take place soon than twenty (20) days after the
Company has given the notice provided for herein or sooner than ten (10) days
after the Company has given the notice of any material changes in the impending
transaction as provided for herein; provided, however, that such periods may be
shortened upon the written consent of the holders of a majority of the
outstanding shares of Series E Preferred Stock.
7. Restrictions and Limitations. So long as any shares of Series E Preferred
Stock remain issued and outstanding, the Company shall not without the consent
of the holders of a majority of the shares of Series E Preferred Stock then
outstanding:
(a) Purchase, redeem, or otherwise acquire (or pay into or set aside for a
sinking fund for such purpose) any of the Common Stock of the Company; provided,
however, that this restriction shall not apply to the repurchase of fractional
shares, odd lots or shares of Common Stock from directors, officers, consultants
or employees of the Company or any subsidiary, if any; or
(b) Effect any reclassification, recapitalization or other change with respect
to any outstanding shares of stock that results in the issuance of shares of
stock having any preference or priority as to dividends, redemption rights,
liquidation preferences, conversion rights, voting rights or otherwise, that are
superior to any such preference or priority of the Series E Preferred Stock; or
(c) Increase or decrease (other than by redemption or conversion) the total
number of authorized shares of the Company=s Preferred Stock or the total number
of shares of the Company=s Preferred Stock designated as Series E Preferred
Stock; or
(d) Authorize or issue, or obligate itself to issue, any other equity security
senior to the Series E Preferred Stock as to dividends, redemption rights,
liquidation preferences, conversion rights, voting rights or otherwise, or
create any obligation or security convertible into or exchangeable for, or
having any option or rights to purchase, any such equity security that is senior
to, the Series E Preferred Stock. The consent of the holders of a majority of
the shares of Series E Preferred Stock shall not be required if any other equity
security on parity with the Series E Preferred Stock as to dividends, redemption
rights, liquidation preferences, conversion rights, voting rights, or otherwise
is to be issued.
8. No Reissuance of Series E Preferred Stock. No share or shares of Series E
Preferred Stock acquired by the Company by reason of redemption, purchase,
conversion or otherwise shall be reissued, and all such shares shall be returned
to the status of undesignated shares of the Company=s Preferred Stock.
9. Redemption. The Company shall have the right to call for redemption that
portion of the shares that are eligible for conversion at any time and from time
to time as provided in Paragraph 2, above, by giving notice, regardless of
whether any holder shall have also given notice of intent to convert such
shares. Notwithstanding what the Market Price or the Conversion Factor may be at
any time, the redemption price payable the Company shall be as follows 133% of
the Conversion Price per share at the time of the redemption.
After the date fixed for redemption, dividends on shares of Series E Preferred
Stock called for redemption shall cease to accrue, such shares shall no longer
be deemed to be issued and outstanding, and all rights of the holders thereof as
shareholders of the Company shall cease unless the Company defaults on the
payment of the redemption price. Redemption shall be made on a pro rata basis
among all holders of the Series E Preferred Stock. The redemption price paid
shall be applied first to the redemption of shares that would otherwise be
subject to conversion in the year the redemption is made.
10. United States Dollars. All references herein to Dollars shall be deemed to
refer to United States Dollars.
CERTIFICATE AND STATEMENT OF DETERMINATION OF
RIGHTS AND PREFERENCES OF SERIES F 8% CUMULATIVE CONVERTIBLE
NON-VOTING PREFERRED STOCK OF
BIOMUNE SYSTEMS, INC.
The undersigned, being the Chief Executive Officer and Secretary of
Biomune Systems, Inc., a Nevada corporation, do hereby certify and declare as
follows:
1. The name of the corporation is Biomune Systems, Inc.
2. Attached hereto as Exhibit A and incorporated herein by this
reference is a true and correct copy of the Designation of
Rights and Preferences of Series F 8% Cumulative Convertible
Non-Voting
Preferred Stock of Biomune Systems, Inc.
3. The Designation of Rights and Preferences described above was
approved by the Board of Directors of Biomune Systems, Inc. at
a meeting duly convened following notice as required by the
Bylaws of the Company.
IN WITNESS WHEREOF, we have signed this Certificate this 4th day of
February, 1998.
BIOMUNE SYSTEMS, INC., a Nevada corporation
By: /s/ David G. Derrick
---------------------------------------
David G. Derrick, Chief Executive Officer
By: /s/ Christopher D. Illick
---------------------------------------
Christopher D. Illick, Secretary
Attested and Verified:
/s/ Christopher D. Illick
- ------------------------------
Christopher D. Illick, Secretary
<PAGE>
STATE OF UTAH )
:ss
COUNTY OF Salt Lake )
On the 4th day of February 1998, David G. Derrick, who, being by me duly
sworn, did say that he is the Chief Executive Officer of Biomune Systems, Inc.,
a Nevada corporation, and that the foregoing instrument was signed on behalf of
such Corporation by authority of its Bylaws and such officer acknowledged to me
that the Corporation executed the same.
/s/ Carol S. MacKay
- ------------------------------------------
NOTARY PUBLIC
My Commission Expires: 10/16/99
STATE OF New York )
:ss
COUNTY OF New York )
On the 4th day of February 1998, Christopher D. Illick, who, being by me
duly sworn, did say that he is the Secretary of Biomune Systems, Inc., a Nevada
corporation, and that the foregoing instrument was signed on behalf of such
Corporation by authority of its Bylaws and such officer acknowledged to me that
the Corporation executed the same.
/s/ Myrna Karger
- ------------------------------------------
NOTARY PUBLIC
My Commission Expires: Jan. 31, 1999
<PAGE>
EXHIBIT A
AMENDMENT TO DESIGNATION OF RIGHTS AND PREFERENCES
OF
SERIES F 8% CUMULATIVE CONVERTIBLE NON-VOTING PREFERRED STOCK
Pursuant to the authority vested in the Board of Directors of Biomune
Systems, Inc., a Nevada corporation (the "Company"), in its Articles of
Incorporation and as permitted by Title 7, Chapter 78 of the Nevada Revised
Statutes, the Company's Board of Directors does hereby amend the Designation of
Rights and Preferences of the Company's Series F 8% Cumulative Convertible
Non-Voting Preferred Stock as follows:
5. Conversion of Series F Preferred Stock. The holders of shares
of Series F Preferred Stock shall have the following
conversion rights:
(a) Right to Convert. Subject to the Conversion
Limitation set forth in Section 5(b) below, each
share of Series F Preferred Stock may be converted at
the holder's option at any time after January 1, 1999
into shares of the Company's Common Stock determined
by dividing $1,000 plus any accrued and unpaid
regular or special dividends by an amount equal to
$.20. The applicable denominator in the formula set
forth in the foregoing sentence shall be referred to
herein as the "Conversion Factor." Subject to the
Conversion Limitation set forth in Section 5(c)
below, each conversion shall be effected by the
holder surrendering the certificate(s) for the shares
of Series F Preferred Stock to be converted to the
Company with a Conversion Certificate executed by the
holder for not less than $50,000 aggregate conversion
amount including any accrued and unpaid regular and
special dividends and accompanied, as required by the
Company, by proper assignment. The date of execution
of such Conversion Certificate and delivery by
facsimile to the Company at (801) 466-3741 shall be
defined as the "Conversion Date." Upon conversion the
Company shall use its reasonable best efforts to
deliver certificates evidencing shares of the
Company's Common Stock within five (5) business days
of the Conversion Date. Subject to the limitations in
Section 5(c), in the event of a merger, consolidation
or sale of all or substantially all of the assets of
the Company or a similar business combination
involving the Company, all of the shares of Series F
Preferred Stock, at the option of the holder, may be
converted into the number of shares of Common Stock
into which the shares of Series F Preferred Stock are
convertible at the time of the closing of such
transaction. In the event the Company shall fail to
deliver certificates evidencing shares of the
Company's Common Stock upon any conversion of shares
of Series F Preferred Stock within five (5) business
days of the Conversion Date, the Company shall pay
the holder daily liquidated damages in an amount
equal to 1% of the principal amount of the shares of
Series F Preferred Stock converted into Common Stock
for each day beyond said five (5) business days.
(b) Certain Conversion Restrictions.
(A) In no event shall any Holder be entitled
to convert any Series F Preferred Stock to the extent
that, after such conversion, the sum of (1) number of
shares of Common Stock beneficially owned by such
Holder and its affiliates (other than the shares of
Common Stock which may be deemed beneficially owned
through the ownership of the unconverted portion of
the Preferred Stock), and (2) the number of shares of
Common Stock issuable upon the conversion of the
Preferred Stock with respect to which the
determination of this proviso is being made, would
result in beneficial ownership by the Holder and its
affiliates of more than 4.99% of the outstanding
shares of Common Stock. For purposes of the
immediately preceding sentence, beneficial ownership
shall be determined in accordance with section 13(d)
of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), except as otherwise provided in
clause (1) of the preceding sentence. To the extent
that the limitation contained in this paragraph
applies, the determination of whether shares of
Preferred Stock are convertible (in relation to other
securities owned by a Holder) and of
<PAGE>
which shares of Preferred Stock are convertible shall
be in the sole discretion of the Holder, and the
submission of shares of Preferred Stock for
conversion shall be deemed to be the Holder's
determination of whether such shares of Preferred
Stock are convertible (in relation to other
securities owned by the Holder) and of which portion
of such shares of Preferred Stock are convertible, in
each case subject to such aggregate percentage
limitation, and the Company shall have no obligation
to verify or confirm the accuracy of such
determination. Nothing contained herein shall be
deemed to restrict the right of the Holder to convert
shares of Preferred Stock at such time as such
conversion will not violate the provisions of this
paragraph. The provisions of this Section may be
waived by a Holder (but only as to itself and not to
any other Holder) upon not less than 75 days prior
notice to the Company (in which case, the Holder
shall make such filings with the Commission,
including under Rule 13D or 13G, as are required by
applicable law), and the provisions of this Section
shall continue to apply until such 75th day (or
later, if stated in the notice of waiver). Other
Holders shall be unaffected by any such waiver.
(B) If on any Conversion Date (1) the Common
Stock is listed for trading on the Nasdaq SmallCap
Market or the Nasdaq National Market, or any national
exchange (2) the Conversion Price then in effect is
such that the aggregate number of shares of Common
Stock that would then be issuable upon conversion in
full of all then outstanding shares of Series F
Preferred Stock and as payment of dividends thereon
in shares of Common Stock, together with any shares
of the Common Stock previously issued upon conversion
of shares of Series F Preferred Stock and as payment
of dividends thereon, would equal or exceed the
lesser of (a) 19.9% of the number of shares of the
Common Stock outstanding on the Original Issue Date
or (b) 2,500,000 shares of Common Stock (such number
of shares as would not equal or exceed such 19.9%
limit, the "Issuable Maximum" and any such Conversion
Date, the "Record Date"), and (C) the Company shall
not have previously obtained the vote of shareholders
(the "Shareholder Approval"), if any, as may be
required by the applicable rules and regulations of
The Nasdaq Stock Market (or any successor entity or
other exchange on which the Common Stock is listed or
approved for trading) applicable to approve the
issuance of shares of Common Stock in excess of the
Issuable Maximum in a private placement whereby
shares of Common Stock are deemed to have been issued
at a price that is less than the greater of book or
fair market value of the Common Stock, then the
Company shall issue to the Holder so requesting a
conversion a number of shares of Common Stock equal
to the Issuable Maximum and, with respect to the
remainder of the aggregate Stated Value of the shares
of Preferred Stock then held by such Holder for which
a conversion in accordance with the Conversion Price
would result in an issuance of Common Stock in excess
of the Issuable Maximum (the "Excess Stated Value"),
the Company shall, within one year of the Record
Date, use its best efforts to obtain the Shareholder
Approval applicable to such issuance. If the Company
shall either (i) fail to seek such Shareholder
Approval, or (ii) indicate in a notice to the Holder
that it does not intend to obtain the Shareholder
Approval applicable to such issuance, then the
converting Holder shall have the option to require
the Company to either (1) if the Company has not
prior thereto attempted or has attempted to and has
failed to obtain the Shareholder Approval in
accordance with this Section, use its best efforts to
obtain the Shareholder Approval applicable to such
issuance as soon as is possible, but in any event not
later than the 90th day after such request, or (2)
redeem the remaining shares of Preferred Stock as
provided below. If the Company fails to pay the
Redemption Amount in full pursuant to this Section
within seven (7) days after the date payable, the
Company will pay interest thereon at a rate of 8% per
annum to the converting Holder, accruing daily from
the Conversion Date until such amount, plus all such
interest thereon, is paid in full.
9. Redemption. At any time after three years from the date of the
sale of the Series F Preferred Stock, the Company shall have
the right to call for redemption that portion of the shares
that are eligible for conversion at any time and from time to
time as provided in Paragraph 2, above, by giving notice,
regardless of whether any holder shall have also given notice
of intent to convert such shares.
<PAGE>
Notwithstanding what the Market Price or the Conversion Factor
may be at any time, the redemption price payable the Company
shall be $0.80 per share. After the date fixed for redemption,
dividends on shares of Series F Preferred Stock called for
redemption shall cease to accrue, such shares shall no longer
be deemed to be issued and outstanding, and all rights of the
holders thereof as shareholders of the Company shall cease
unless the Company defaults on the payment of the redemption
price. Redemption shall be made on a pro rata basis among all
holders of the Series F Preferred Stock. The redemption price
paid shall be applied first to the redemption of shares that
would otherwise be subject to conversion in the year the
redemption is made.
The remaining provisions of the Designation of Rights and Preferences of the
Series F Preferred Stock shall remain unchanged and in full force and effect.
AMENDMENT
TO DESIGNATION OF RIGHTS AND PREFERENCES OF
SERIES F 8% CUMULATIVE CONVERTIBLE NON-VOTING PREFERRED STOCK
Pursuant to the authority vested in the Board of Directors of Biomune
Systems, Inc., a Nevada corporation (the "Company"), in its Articles of
Incorporation and as permitted by Title 7, Chapter 78 of the Nevada Revised
Statutes, the Company's Board of Directors does hereby amend the Designation of
Rights and Preferences of the Company's Series F 8% Cumulative Convertible
Non-Voting Preferred Stock as follows:
5. Conversion of Series F Preferred Stock. The holders of shares
of Series F Preferred Stock shall have the following conversion
rights:
(a) Right to Convert. Subject to the Conversion
Limitation set forth in Section 5(b) below, each share of Series
F Preferred Stock may be converted at the holder's option at any
time after January 1, 1999 into 3 shares of the Company's Common
Stock ($0.60 divided by $.20) (the "Conversion Ratio"). Subject
to the Conversion Limitation set forth in Section 5(c) below,
each conversion shall be effected by the holder surrendering the
certificate(s) for the shares of Series F Preferred Stock to be
converted to the Company with a Conversion Certificate executed
by the holder for not less than $50,000 aggregate conversion
amount including any accrued and unpaid regular and special
dividends and accompanied, as required by the Company, by proper
assignment. The date of execution of such Conversion Certificate
and delivery by facsimile to the Company at (801) 466-3741 shall
be defined as the "Conversion Date." Upon conversion the Company
shall use its reasonable best efforts to deliver certificates
evidencing shares of the Company's Common Stock within five (5)
business days of the Conversion Date. Subject to the limitations
in Section 5(c), in the event of a merger, consolidation or sale
of all or substantially all of the assets of the Company or a
similar business combination involving the Company, all of the
shares of Series F Preferred Stock, at the option of the holder,
may be converted into the number of shares of Common Stock into
which the shares of Series F Preferred Stock are convertible at
the time of the closing of such transaction. In the event the
Company shall fail to deliver certificates evidencing shares of
the Company's Common Stock upon any conversion of shares of
Series F Preferred Stock within five (5) business days of the
Conversion Date, the Company shall pay the holder daily
liquidated damages in an amount equal to 1% of the principal
amount of the shares of Series F Preferred Stock converted into
Common Stock for each day beyond said five (5) business days.
(b) Certain Conversion Restrictions.
(A) In no event shall any Holder be entitled
to convert any Series F Preferred Stock to the extent that, after
such conversion, the sum of (1) number of shares of Common Stock
beneficially owned by such Holder and its affiliates (other than
the shares of Common Stock which may be deemed beneficially owned
through the ownership of the unconverted portion of the Preferred
Stock), and (2) the number of shares of Common Stock issuable
upon the conversion of the Preferred Stock with respect to which
the determination of this proviso is being made, would result in
beneficial ownership by the Holder and its affiliates of more
than 4.9% of the outstanding shares of Common Stock. For purposes
of the immediately preceding sentence, beneficial ownership shall
be determined in accordance with section 13(d) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), except as
otherwise provided in clause (1) of the preceding sentence. To
the extent that the limitation contained in this paragraph
applies, the determination of whether shares of Preferred Stock
are convertible (in relation to other securities owned by a
Holder) and of which shares of Preferred Stock are convertible
shall be in the sole discretion of the Holder, and the submission
of shares of Preferred Stock for conversion shall be deemed to be
the Holder's determination of whether such shares of Preferred
Stock are convertible (in relation to other securities owned by
the Holder) and of which portion of such shares of Preferred
Stock are convertible, in each case subject to such aggregate
percentage limitation, and the Company shall have no obligation
to verify or confirm the accuracy of such determination. Nothing
contained herein shall be deemed to restrict the right of the
Holder to convert shares of Preferred Stock at such time as such
conversion will not violate the provisions of this paragraph.
(B) If on any Conversion Date (1) the Common
Stock is listed for trading on the Nasdaq SmallCap Market or the
Nasdaq National Market, or any national exchange (2) the
Conversion Price then in effect is such that the aggregate number
of shares of Common Stock that would then be issuable upon
conversion in full of all then outstanding shares of Series F
Preferred Stock and as payment of dividends thereon in shares of
Common Stock, together with any shares of the Common Stock
previously issued upon conversion of shares of Series F Preferred
Stock and as payment of dividends thereon, would equal or exceed
the lesser of (a) 19.9% of the number of shares of the Common
Stock outstanding on the Original Issue Date or (b) 2,500,000
shares of Common Stock (such number of shares as would not equal
or exceed such 19.9% limit, the "Issuable Maximum" and any such
Conversion Date, the "Record Date"), and (3) the Company shall
not have previously obtained the vote of shareholders (the
"Shareholder Approval"), if any, as may be required by the
applicable rules and regulations of The Nasdaq Stock Market (or
any successor entity or other exchange on which the Common Stock
is listed or approved for trading) applicable to approve the
issuance of shares of Common Stock in excess of the Issuable
Maximum in a private placement whereby shares of Common Stock are
deemed to have been issued at a price that is less than the
greater of book or fair market value of the Common Stock, then
the Company shall issue to the Holder so requesting a conversion
a number of shares of Common Stock equal to the Issuable Maximum
and, with respect to the remainder of the aggregate Stated Value
of the shares of Preferred Stock then held by such Holder for
which a conversion in accordance with the Conversion Price would
result in an issuance of Common Stock in excess of the Issuable
Maximum (the "Excess Stated Value"), the Company shall, within
one year of the Record Date, use its best efforts to obtain the
Shareholder Approval applicable to such issuance. If the Company
shall either (i) fail to seek such Shareholder Approval, or (ii)
indicate in a notice to the Holder that it does not intend to
obtain the Shareholder Approval applicable to such issuance, then
the converting Holder shall have the option to require the
Company to either (1) if the Company has not prior thereto
attempted or has attempted to and has failed to obtain the
Shareholder Approval in accordance with this Section, use its
best efforts to obtain the Shareholder Approval applicable to
such issuance as soon as is possible, but in any event not later
than the 90th day after such request, or (2) redeem the remaining
shares of Preferred Stock as provided below. If the Company fails
to pay the Redemption Amount in full pursuant to this Section
within seven (7) days after the date payable, the Company will
pay interest thereon at a rate of 8% per annum to the converting
Holder, accruing daily from the Conversion Date until such
amount, plus all such interest thereon, is paid in full.
9. Redemption. At any time after three years from the date of the
sale of the Series F Preferred Stock, the Company shall have the right
to call for redemption that portion of the shares that are eligible
for conversion at any time and from time to time as provided in
Paragraph 2, above, by giving notice, regardless of whether any holder
shall have also given notice of intent to convert such shares.
Notwithstanding what the Market Price or the Conversion Factor may be
at any time, the redemption price payable the Company shall be $0.80
per share. After the date fixed for redemption, dividends on shares of
Series F Preferred Stock called for redemption shall cease to accrue,
such shares shall no longer be deemed to be issued and outstanding,
and all rights of the holders thereof as shareholders of the Company
shall cease unless the Company defaults on the payment of the
redemption price. Redemption shall be made on a pro rata basis among
all holders of the Series F Preferred Stock. The redemption price paid
shall be applied first to the redemption of shares that would
otherwise be subject to conversion in the year the redemption is made.
The remaining provisions of the Designation of Rights and Preferences of the
Series F Preferred Stock shall remain unchanged and in full force and effect.
CERTIFICATE AND STATEMENT OF DETERMINATION OF
RIGHTS AND PREFERENCES
OF
8% SERIES G NON-CONVERTIBLE NON-VOTING PREFERRED STOCK
OF
BIOMUNE SYSTEMS, INC.
The undersigned, being the Chief Executive Officer and Secretary of
Biomune Systems, Inc., a Nevada corporation, do hereby certify and declare as
follows:
1. The name of the corporation is Biomune Systems, Inc.
2. Attached hereto as Exhibit A and incorporated herein by this
reference is a true and correct copy of the Designation of
Rights and Preferences of 8% Series G Non-Convertible
Non-Voting Preferred Stock of Biomune Systems, Inc.
3. The Designation of Rights and Preferences described above was
approved by the Board of Directors of Biomune Systems, Inc. at
a meeting duly convened following notice as required by the
Bylaws of the Company.
IN WITNESS WHEREOF, we have signed this Certificate this 29 day of
December 1998.
BIOMUNE SYSTEMS, INC., a Nevada corporation
/s/ Michael G. Acton
By: __________________________________
Michael G. Acton,
President and Chief Executive Officer
By: __________________________________
Kevin R. Pinegar, Secretary
Attested and Verified:
/s/ Kevin R. Pinegar
- ------------------------------
Kevin R. Pinegar, Secretary
<PAGE>
STATE OF Salt Lake )
):ss
COUNTY OFSalt Lake )
On the 29 day of December 1998, Michael G. Acton, who, being by me duly
sworn, did say that he is the President and Chief Executive Officer of Biomune
Systems, Inc., a Nevada corporation, and that the foregoing instrument was
signed on behalf of such Corporation by authority of its Bylaws and such officer
acknowledged to me that the Corporation executed the same.
/s/ Carol McKay
- -----------------------------------
NOTARY PUBLIC
My Commission Expires:
STATE OF Salt Lake )
):ss
COUNTY OF New York )
On the 29 day of December 1998, Kevin R. Pinegar, who, being by me duly
sworn, did say that he is the Secretary of Biomune Systems, Inc., a Nevada
corporation, and that the foregoing instrument was signed on behalf of such
Corporation by authority of its Bylaws and such officer acknowledged to me that
the Corporation executed the same.
/s/ Carol McKay
- ----------------------------------
NOTARY PUBLIC
My Commission Expires:
<PAGE>
BIOMUNE SYSTEMS, INC.
AMENDED
DESIGNATION OF RIGHTS AND PREFERENCES
OF
8% SERIES G NON-CONVERTIBLE NON-VOTING PREFERRED STOCK
Pursuant to the authority vested in the Board of Directors of BIOMUNE
SYSTEMS, INC., a Nevada corporation (the "Company"), in its Articles of
Incorporation and as permitted by Section 602 of the Nevada Private Corporations
Act, as amended (the "Nevada Act"), the Company's Board of Directors does hereby
amend the designation of rights and preferences for its series of the Company's
Preferred Stock designated as 8% Series G Non-Convertible Non-Voting Preferred
Stock and does hereby designate the rights, preferences, privileges and other
attributes of the shares of such series as follows:
1. Designation and Number of Shares. A series of the Company's
Preferred Stock is hereby established, to be designated and known as "8% Series
G Non-Convertible Non-Voting Preferred Stock" (hereinafter referred to as the
"Series G Preferred Stock"), consisting of 750,000 shares of the authorized and
unissued shares of the Company's Preferred Stock, $0.0001 par value per share.
The Company shall from time to time, in accordance with the laws of the State of
Nevada, increase the number of shares of its Common Stock, $0.0001 par value per
share, if at any time the number of shares of the Company's Common Stock
remaining unissued and available for issuance shall not be sufficient to permit
conversion of the Series G Preferred Stock provided herein.
2. Dividends. The holders of shares of Series G Preferred Stock shall
be entitled to receive an annual dividend out of any of the Company's assets
legally available therefor, prior and in preference to any declaration or
payment of any dividend on the Common Stock of the Company, at the rate of eight
percent (8%) per annum on the stated value of the Series G Preferred Stock. The
stated value is $1.00 per share and the dividend rate will be $0.80 per annum
per share of Series G Preferred Stock. At the exclusive option of the Company,
dividends may be paid either in cash or in additional shares of Series G
Preferred Stock or other securities of the Company at the discretion of the
Board of Directors to holders of record of shares of Series G Preferred Stock as
they appear on the books and records of the Company on such record dates not
less than ten (10) days nor more than sixty (60) days preceding the payment
dates thereof, as may be fixed by the Board of Directors of the Company.
Dividends shall be fully cumulative and shall accrue from the date of original
issuance of the Series G Preferred Stock. Once dividends are paid on the Series
G Preferred Stock, holders of shares of Series G Preferred Stock will not
participate in dividends paid to holders of Common Stock or other series of
Preferred Stock. Except as described below, no dividends shall be paid or
declared and set apart for payment on any class or series of shares of the
Company that are junior to the Series G Preferred Stock for any period unless
full cumulative dividends have been paid ro contemporaneously are declared and
paid or set apart for payment on the Series G Preferred Stock. A dividend
payable in shares of Common Stock or in shares of another class of shares junior
to the Series G Preferred Stock may, however, be made. Dividends on the Series G
Preferred Stock may, at the option of the Company's Board of Directors, be paid
in either cash or in additional shares of Series G Preferred Stock or in shares
of other securities issued by the Company; provided, however, that if accrued
dividends on the Series G Preferred Stock are paid in additional shares of
Series G Preferred Stock, accrued dividends paid subsequent thereto shall not be
paid on shares of Series G Preferred Stock that were previously paid as stock
dividends. Holders of Series G Preferred Stock shall not participate in excess
dividends remaining following payment of all accrued and unpaid dividends owing
to holders of Series G Preferred Stock.
<PAGE>
3. Liquidation Preference.
(a) In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the Company, the holders of Series G
Preferred Stock shall be entitled to receive out of the assets of the
Company available for distribution to shareholders before any
distribution or payment is made to holders of shares of Common Stock,
or to holders of any other shares of the Company ranking junior upon
liquidation to the Series G Preferred Stock, liquidation distributions
in the amount of One Dollar ($1.00) per share plus all accrued and
unpaid regular or special dividends, if any, before any payment is made
to holders of shares of the Company's equity securities that are junior
to the Series G Preferred Stock. If upon any voluntary or involuntary
liquidation, dissolution or winding up of the Company, the assets of
the Company shall be insufficient to make the full payment on the
Series G Preferred Stock as described in the immediately preceding
sentence, and similar payments on any other class of shares ranking on
a parity with the Series G Preferred Stock upon liquidation, then the
holders of the Series G Preferred Stock and of such other class of
shares will share ratably in any such distribution of assets of the
Company in proportion to the full respective distributable amounts to
which they are entitled.
(b) After payment to the holders of the Series G Preferred
Stock of the amounts set forth in subparagraph 3(a) above, the holders
of Series G Preferred Stock will not be entitled to any further
participation in any distribution or payment by the Company, and the
entire remaining assets and funds of the Company legally available for
distribution, if any, shall be distributed among the holders of shares
of Common Stock in proportion to the shares of Common Stock then held
by them.
(c) A consolidation or merger of the Company with or into any
other corporation or corporations, or a sale of all or substantially
all of the assets of the Company that does not involve a distribution
by the Company of cash or other property to the holders of shares of
Common Stock, shall be deemed to be a liquidation, dissolution or
winding up of the Company within the meaning of this Section 3, but
rather shall be subject to the provisions of Section 6 below.
4. Voting Rights.
(a) Except as otherwise expressly provided herein or as
required by Nevada law, the holders of Series G Preferred Stock shall
not be entitled to voting rights, except that without the approval of
holders of a majority of the outstanding shares of Series G Preferred
Stock, the Company will not (i) authorize, create or issue any shares
of any class or series ranking senior to the Series G Preferred Stock
as to liquidation rights; (ii) amend, alter or repeal by any means the
Company's Articles of Incorporation if the powers, preferences or
special rights of the Series G Preferred Stock would be materially
adversely affected; or (iii) become subject to any restriction on the
Series G Preferred Stock other than restrictions arising solely under
the Nevada Act or existing under the Company's Articles of
Incorporation as in effect on December 31, 1998.
5. Conversion. The Series G Preferred Stock may not be converted to
Common Stock or any other class or series of stock issued by the Company.
6. Merger or Consolidation.
(a) At any time, in the event of:
(i) any transaction or series of related
transactions
<PAGE>
(including, without limitation, any reorganization, merger or
consolidation) that will result in the Company's shareholders
immediately prior to such transaction not holding (by virtue
of such shares or securities issued solely with respect
thereto) at least fifty percent (50%) of the voting power of
the surviving or continuing entity; or
(ii) a sale of all or substantially all of the assets
of the Company, unless the Company's shareholders immediately
prior to such sale will, as a result of such sale, hold (by
virtue of securities issued as consideration for the Company's
sale) at least fifty percent (50%) of the voting power of the
purchasing entity;
(the foregoing events are individually referred to herein as a "Sales
Transaction"), then, holders of the Series G Preferred Stock of record
as of the date of consummation of the Sales Transaction shall be
entitled to receive, prior and in preference to any payment of
consideration to the holders of Common Stock, in cash or in securities
received from the acquiring corporation, or in a combination thereof,
at the closing of any such Sales Transaction, at the holder's
discretion, an amount per share equal to One Dollar ($1.00) per share
(as adjusted for any combinations, consolidations, stock distributions
or stock dividends with respect to such shares), plus all declared or
accumulated but unpaid dividends on such shares as of the date of
closing of such Sales Transaction. In the event the proceeds of the
Sales Transaction are not sufficient to make full payment of the
aforementioned preferential amounts to the holders of the Series G
Preferred Stock in accordance herewith, then the entire amount payable
in respect of the proposed Sales Transaction shall be distributed
ratably among the holders of the Series G Preferred Stock in proportion
to the product of the liquidation preference of each such share and the
number of such shares owned by each such holder. Upon completion of the
payment to the holders of Series G Preferred Stock as provided above,
the remaining proceeds of such Sales Transaction shall be distributed
among the holders of record (as of the date of the consummation of the
Sales Transaction) of shares of Common Stock in proportion to the
number of shares of Common Stock then held. Unless otherwise consented
to by the holders of a majority of the outstanding shares of Series G
Preferred Stock, such payments shall be made with respect to the Series
G Preferred Stock and to holders of Common Stock by purchase of such
shares of Series G Preferred Stock and Common Stock by the surviving
corporation, entity or person, or by redemption of such shares by the
Company, in the discretion of the Company.
(b) Any securities to be delivered to the holders of Series G
Preferred Stock pursuant to Section 6(a) above shall be valued as
follows:
(i) Securities not subject to investment letter or
other similar restrictions on free marketability as provided
for in subsection (ii) below:
(A) If traded on a securities exchange or
reported on the Nasdaq SmallCap Market, the value
shall be deemed to be the average of the closing
prices of the securities on such exchange over the
thirty (30) day period ending three (3) days prior to
the closing;
(B) If actively traded over-the-counter, the
value shall be deemed to be the average of the
closing bid or sale prices (whichever is applicable)
over the thirty (30) day period ending three (3) days
prior to the closing; and
<PAGE>
(C) If there is no active public market, the
value shall be the fair market value thereof, as
mutually determined by the Company's Board of
Directors and the holders of a majority of the
outstanding shares of Series G Preferred Stock.
(ii) The method of valuation of securities subject to
investment letter or other restrictions on free marketability
(other than restrictions arising solely by virtue of a
shareholder's status as an affiliate or former affiliate of
the Company) shall be to make an appropriate discount from the
market value determined in Section 6(b)(i)(A), (B) or (C)
above to reflect the approximate fair market value thereof, as
mutually determined by the Company and the holders of a
majority of the outstanding shares of Series G Preferred
Stock.
(c) In the event the requirements of Section 6(a) above are
not complied with, the Company shall forthwith either:
(i) cause such closing to be postponed until such
time as the requirements of this Section 6 have been complied
with; or
(ii) cancel such transaction, in which event the
rights, preferences and privileges of the holders of Series G
Preferred Stock shall revert to and be the same as such
rights, preferences and privileges existing immediately prior
to the date of the first notice referred to in Section 6(d)
below.
(d) The Company shall give each holder of record of Series G
Preferred Stock written notice of such impending transaction not later
than ten (10) days prior to the shareholders' meeting called to approve
such transaction. The notice shall describe the material terms and
conditions of the impending transaction and the provisions of this
Section 6, and the Company shall thereafter give such holders prompt
notice of any material changes to the impending transaction. The
transaction shall in no event take place soon than twenty (20) days
after the Company has given the notice provided for herein or sooner
than ten (10) days after the Company has given the notice of any
material changes in the impending transaction as provided for herein;
provided, however, that such periods may be shortened upon the written
consent of the holders of a majority of the outstanding shares of
Series G Preferred Stock.
7. Restrictions and Limitations. So long as any shares of Series G
Preferred Stock remain issued and outstanding, the Company shall not without the
consent of the holders of a majority of the shares of Series G Preferred Stock
then outstanding:
(a) Effect any reclassification, recapitalization or other
change with respect to any outstanding shares of stock that results in
the issuance of shares of stock having any preference or priority as to
liquidation preferences that are superior to any such preference or
priority of the Series G Preferred Stock; or
(b) Increase or decrease (other than by redemption or
conversion) the total number of authorized shares of the Series G
Preferred Stock.
8. No Reissuance of Series G Preferred Stock. No share or shares of
Series G Preferred Stock acquired by the Company by reason of redemption,
purchase or otherwise shall be reissued, and all such shares shall be returned
to the status of undesignated shares of the Company's Preferred Stock.
9. Redemption. The Company shall have the right to call for redemption
<PAGE>
part or all of the shares of Series G Preferred Stock at any time and from time
to time, by giving notice, regardless of whether any holder shall have also
given notice of intent to convert such shares. The redemption price payable the
Company shall be $1.15 per share at the time of the redemption. After the date
fixed for redemption, dividends on shares of Series G Preferred Stock called for
redemption shall cease to accrue, such shares shall no longer be deemed to be
issued and outstanding, and all rights of the holders thereof as shareholders of
the Company shall cease unless the Company defaults on the payment of the
redemption price. Redemption shall be made on a pro rata basis among all holders
of the Series G Preferred Stock. The redemption price paid shall be applied
first to the redemption of shares that would otherwise be subject to conversion
in the year the redemption is made. At its sole option, the Company may offset
amounts owed the Company by a holder of the Series G Preferred Stock or any
affiliate of such a holder against any redemption price payable against the
shares of Series G Preferred Stock owned by such holder.
10. United States Dollars. All references herein to Dollars shall be
deemed to refer to United States Dollars.
BIOMUNE SYSTEMS, INC.
AMENDED
DESIGNATION OF RIGHTS AND PREFERENCES
OF
8% SERIES G NON-CONVERTIBLE NON-VOTING PREFERRED STOCK
Pursuant to the authority vested in the Board of Directors of BIOMUNE
SYSTEMS, INC., a Nevada corporation (the "Company"), in its Articles of
Incorporation and as permitted by Section 602 of the Nevada Private Corporations
Act, as amended (the "Nevada Act"), the Company's Board of Directors does hereby
amend the designation of rights and preferences for its series of the Company's
Preferred Stock designated as 8% Series G Non-Convertible Non-Voting Preferred
Stock and does hereby designate the rights, preferences, privileges and other
attributes of the shares of such series as follows:
1. Designation and Number of Shares. A series of the Company's Preferred
Stock is hereby established, to be designated and known as "8% Series G
Non-Convertible Non-Voting Preferred Stock" (hereinafter referred to as the
"Series G Preferred Stock"), consisting of 750,000 shares of the authorized and
unissued shares of the Company's Preferred Stock, $0.0001 par value per share.
The Company shall from time to time, in accordance with the laws of the State of
Nevada, increase the number of shares of its Common Stock, $0.0001 par value per
share, if at any time the number of shares of the Company's Common Stock
remaining unissued and available for issuance shall not be sufficient to permit
conversion of the Series G Preferred Stock provided herein.
2. Dividends. The holders of shares of Series G Preferred Stock shall be
entitled to receive an annual dividend out of any of the Company's assets
legally available therefor, prior and in preference to any declaration or
payment of any dividend on the Common Stock of the Company, at the rate of eight
percent (8%) per annum on the stated value of the Series G Preferred Stock. The
stated value is $1.00 per share and the dividend rate will be $0.80 per annum
per share of Series G Preferred Stock. At the exclusive option of the Company,
dividends may be paid either in cash or in additional shares of Series G
Preferred Stock or other securities of the Company at the discretion of the
Board of Directors to holders of record of shares of Series G Preferred Stock as
they appear on the books and records of the Company on such record dates not
less than ten (10) days nor more than sixty (60) days preceding the payment
dates thereof, as may be fixed by the Board of Directors of the Company.
Dividends shall be fully cumulative and shall accrue from the date of original
issuance of the Series G Preferred Stock. Once dividends are paid on the Series
G Preferred Stock, holders of shares of Series G Preferred Stock will not
participate in dividends paid to holders of Common Stock or other series of
Preferred Stock. Except as described below, no dividends shall be paid or
declared and set apart for payment on any class or series of shares of the
Company that are junior to the Series G Preferred Stock for any period unless
full cumulative dividends have been paid ro contemporaneously are declared and
paid or set apart for payment on the Series G Preferred Stock. A dividend
payable in shares of Common Stock or in shares of another class of shares junior
to the Series G Preferred Stock may, however, be made. Dividends on the Series G
Preferred Stock may, at the option of the Company's Board of Directors, be paid
in either cash or in additional shares of Series G Preferred Stock or in shares
of other securities issued by the Company; provided, however, that if accrued
dividends on the Series G Preferred Stock are paid in additional shares of
Series G Preferred Stock, accrued dividends paid subsequent thereto shall not be
paid on shares of Series G Preferred Stock that were previously paid as stock
dividends. Holders of Series G Preferred Stock shall not participate in excess
dividends remaining following payment of all accrued and unpaid dividends owing
to holders of Series G Preferred Stock.
3. Liquidation Preference.
(a) In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the Company, the holders of Series G Preferred
Stock shall be entitled to receive out of the assets of the Company
available for distribution to shareholders before any distribution or
payment is made to holders of shares of Common Stock, or to holders of any
other shares of the Company ranking junior upon liquidation to the Series G
Preferred Stock, liquidation distributions in the amount of One Dollar
($1.00) per share plus all accrued and unpaid regular or special dividends,
if any, before any payment is made to holders of shares of the Company's
equity securities that are junior to the Series G Preferred Stock. If upon
any voluntary or involuntary liquidation, dissolution or winding up of the
Company, the assets of the Company shall be insufficient to make the full
payment on the Series G Preferred Stock as described in the immediately
preceding sentence, and similar payments on any other class of shares
ranking on a parity with the Series G Preferred Stock upon liquidation,
then the holders of the Series G Preferred Stock and of such other class of
shares will share ratably in any such distribution of assets of the Company
in proportion to the full respective distributable amounts to which they
are entitled.
(b) After payment to the holders of the Series G Preferred Stock
of the amounts set forth in subparagraph 3(a) above, the holders of Series
G Preferred Stock will not be entitled to any further participation in any
distribution or payment by the Company, and the entire remaining assets and
funds of the Company legally available for distribution, if any, shall be
distributed among the holders of shares of Common Stock in proportion to
the shares of Common Stock then held by them.
(c) A consolidation or merger of the Company with or into any
other corporation or corporations, or a sale of all or substantially all of
the assets of the Company that does not involve a distribution by the
Company of cash or other property to the holders of shares of Common Stock,
shall be deemed to be a liquidation, dissolution or winding up of the
Company within the meaning of this Section 3, but rather shall be subject
to the provisions of Section 6 below.
4. Voting Rights.
(a) Except as otherwise expressly provided herein or as required
by Nevada law, the holders of Series G Preferred Stock shall not be
entitled to voting rights, except that without the approval of holders of a
majority of the outstanding shares of Series G Preferred Stock, the Company
will not (i) authorize, create or issue any shares of any class or series
ranking senior to the Series G Preferred Stock as to liquidation rights;
(ii) amend, alter or repeal by any means the Company's Articles of
Incorporation if the powers, preferences or special rights of the Series G
Preferred Stock would be materially adversely affected; or (iii) become
subject to any restriction on the Series G Preferred Stock other than
restrictions arising solely under the Nevada Act or existing under the
Company's Articles of Incorporation as in effect on December 31, 1998.
5. Conversion. The Series G Preferred Stock may not be converted to Common
Stock or any other class or series of stock issued by the Company.
6. Merger or Consolidation.
(a) At any time, in the event of:
(i) any transaction or series of related transactions
(including, without limitation, any reorganization, merger or
consolidation) that will result in the Company's shareholders
immediately prior to such transaction not holding (by virtue of such
shares or securities issued solely with respect thereto) at least
fifty percent (50%) of the voting power of the surviving or continuing
entity; or
(ii) a sale of all or substantially all of the assets
of the Company, unless the Company's shareholders immediately prior to
such sale will, as a result of such sale, hold (by virtue of
securities issued as consideration for the Company's sale) at least
fifty percent (50%) of the voting power of the purchasing entity;
(the foregoing events are individually referred to herein as a "Sales
Transaction"), then, holders of the Series G Preferred Stock of record as
of the date of consummation of the Sales Transaction shall be entitled to
receive, prior and in preference to any payment of consideration to the
holders of Common Stock, in cash or in securities received from the
acquiring corporation, or in a combination thereof, at the closing of any
such Sales Transaction, at the holder's discretion, an amount per share
equal to One Dollar ($1.00) per share (as adjusted for any combinations,
consolidations, stock distributions or stock dividends with respect to such
shares), plus all declared or accumulated but unpaid dividends on such
shares as of the date of closing of such Sales Transaction. In the event
the proceeds of the Sales Transaction are not sufficient to make full
payment of the aforementioned preferential amounts to the holders of the
Series G Preferred Stock in accordance herewith, then the entire amount
payable in respect of the proposed Sales Transaction shall be distributed
ratably among the holders of the Series G Preferred Stock in proportion to
the product of the liquidation preference of each such share and the number
of such shares owned by each such holder. Upon completion of the payment to
the holders of Series G Preferred Stock as provided above, the remaining
proceeds of such Sales Transaction shall be distributed among the holders
of record (as of the date of the consummation of the Sales Transaction) of
shares of Common Stock in proportion to the number of shares of Common
Stock then held. Unless otherwise consented to by the holders of a majority
of the outstanding shares of Series G Preferred Stock, such payments shall
be made with respect to the Series G Preferred Stock and to holders of
Common Stock by purchase of such shares of Series G Preferred Stock and
Common Stock by the surviving corporation, entity or person, or by
redemption of such shares by the Company, in the discretion of the Company.
(b) Any securities to be delivered to the holders of Series G
Preferred Stock pursuant to Section 6(a) above shall be valued as follows:
(i) Securities not subject to investment letter or
other similar restrictions on free marketability as provided for in
subsection (ii) below:
(A) If traded on a securities exchange or
reported on the Nasdaq SmallCap Market, the value shall be deemed
to be the average of the closing prices of the securities on such
exchange over the thirty (30) day period ending three (3) days
prior to the closing;
(B) If actively traded over-the-counter, the
value shall be deemed to be the average of the closing bid or
sale prices (whichever is applicable) over the thirty (30) day
period ending three (3) days prior to the closing; and
(C) If there is no active public market, the
value shall be the fair market value thereof, as mutually
determined by the Company's Board of Directors and the holders of
a majority of the outstanding shares of Series G Preferred Stock.
(ii) The method of valuation of securities subject to
investment letter or other restrictions on free marketability (other
than restrictions arising solely by virtue of a shareholder's status
as an affiliate or former affiliate of the Company) shall be to make
an appropriate discount from the market value determined in Section
6(b)(i)(A), (B) or (C) above to reflect the approximate fair market
value thereof, as mutually determined by the Company and the holders
of a majority of the outstanding shares of Series G Preferred Stock.
(c) In the event the requirements of Section 6(a) above are not
complied with, the Company shall forthwith either:
(i) cause such closing to be postponed until such time
as the requirements of this Section 6 have been complied with; or
(ii) cancel such transaction, in which event the
rights, preferences and privileges of the holders of Series G
Preferred Stock shall revert to and be the same as such rights,
preferences and privileges existing immediately prior to the date of
the first notice referred to in Section 6(d) below.
(d) The Company shall give each holder of record of Series G
Preferred Stock written notice of such impending transaction not later than
ten (10) days prior to the shareholders' meeting called to approve such
transaction. The notice shall describe the material terms and conditions of
the impending transaction and the provisions of this Section 6, and the
Company shall thereafter give such holders prompt notice of any material
changes to the impending transaction. The transaction shall in no event
take place soon than twenty (20) days after the Company has given the
notice provided for herein or sooner than ten (10) days after the Company
has given the notice of any material changes in the impending transaction
as provided for herein; provided, however, that such periods may be
shortened upon the written consent of the holders of a majority of the
outstanding shares of Series G Preferred Stock.
7. Restrictions and Limitations. So long as any shares of Series G
Preferred Stock remain issued and outstanding, the Company shall not without the
consent of the holders of a majority of the shares of Series G Preferred Stock
then outstanding:
(a) Effect any reclassification, recapitalization or other change
with respect to any outstanding shares of stock that results in the
issuance of shares of stock having any preference or priority as to
liquidation preferences that are superior to any such preference or
priority of the Series G Preferred Stock; or
(b) Increase or decrease (other than by redemption or conversion)
the total number of authorized shares of the Series G Preferred Stock.
8. No Reissuance of Series G Preferred Stock. No share or shares of Series
G Preferred Stock acquired by the Company by reason of redemption, purchase or
otherwise shall be reissued, and all such shares shall be returned to the status
of undesignated shares of the Company's Preferred Stock.
9. Redemption. The Company shall have the right to call for redemption part
or all of the shares of Series G Preferred Stock at any time and from time to
time, by giving notice, regardless of whether any holder shall have also given
notice of intent to convert such shares. The redemption price payable the
Company shall be $1.15 per share at the time of the redemption. After the date
fixed for redemption, dividends on shares of Series G Preferred Stock called for
redemption shall cease to accrue, such shares shall no longer be deemed to be
issued and outstanding, and all rights of the holders thereof as shareholders of
the Company shall cease unless the Company defaults on the payment of the
redemption price. Redemption shall be made on a pro rata basis among all holders
of the Series G Preferred Stock. The redemption price paid shall be applied
first to the redemption of shares that would otherwise be subject to conversion
in the year the redemption is made. At its sole option, the Company may offset
amounts owed the Company by a holder of the Series G Preferred Stock or any
affiliate of such a holder against any redemption price payable against the
shares of Series G Preferred Stock owned by such holder.
10. United States Dollars. All references herein to Dollars shall be deemed
to refer to United States Dollars.
CERTIFICATE AND STATEMENT OF DETERMINATION OF
RIGHTS AND PREFERENCES
OF
10% SERIES J CONVERTIBLE, NON-VOTING PREFERRED STOCK
OF
BIOMUNE SYSTEMS, INC.
The undersigned, being the Chief Executive Officer and Secretary of Biomune
Systems, Inc., a Nevada corporation, do hereby certify and declare as follows:
1. The name of the corporation is Biomune Systems, Inc.
2. Attached hereto as Exhibit A and incorporated herein by this reference
is a true and correct copy of the Designation of Rights and Preferences of 10%
Series J Convertible Non-Voting Preferred Stock of Biomune Systems, Inc.
3. The Designation of Rights and Preferences described above was approved
by the Board of Directors of Biomune Systems, Inc. at a meeting duly convened
following notice as required by the Bylaws of the Company.
IN WITNESS WHEREOF, we have signed this Certificate this 29 day of December
1998.
BIOMUNE SYSTEMS, INC.,
a Nevada corporation
By: /s/ Michael G. Acton
- -------------------------------------
Michael G. Acton,
President and Chief Executive Officer
By: /s/ Kevin R. Pinegar
- -------------------------------
Kevin R. Pinegar, Secretary
Attested and Verified:
/s/ Kevin R. Pinegar
- --------------------------------------
Kevin R Pinegar, Secretary
<PAGE>
STATE OF Utah )
):ss
COUNTY OF Salt Lake )
On the 29 day of December 1998, Michael G. Acton, who, being by me duly sworn,
did say that he is the President and Chief Executive Officer of Biomune Systems,
Inc., a Nevada corporation, and that the foregoing instrument was signed on
behalf of such Corporation by authority of its Bylaws and such officer
acknowledged to me that the Corporation executed the same.
/s/ Linda Haskins
- --------------------------
NOTARY PUBLIC
STATE OF Utah )
):ss
COUNTY OF Salt Lake )
On the 29 day of December 1998, Kevin R. Pinegar, who, being by me duly sworn,
did say that he is the Secretary of Biomune Systems, Inc., a Nevada corporation,
and that the foregoing instrument was signed on behalf of such Corporation by
authority of its Bylaws and such officer acknowledged to me that the Corporation
executed the same.
/s/ Linda Haskins
- --------------------------
NOTARY PUBLIC
<PAGE>
BIOMUNE SYSTEMS, INC.
DESIGNATION OF RIGHTS AND PREFERENCES
OF
10% SERIES J CONVERTIBLE NON-VOTING PREFERRED STOCK
Pursuant to the authority vested in the Board of Directors of BIOMUNE
SYSTEMS, INC., a Nevada corporation (the "Company"), in its Articles of
Incorporation and as permitted by Section 602 of the Nevada Private Corporations
Act, as amended (the "Nevada Act"), the Company's Board of Directors does hereby
establish a new series of the Company's Preferred Stock designated as 10% Series
J Convertible Non-Voting Preferred Stock and does hereby designate the rights,
preferences, privileges and other attributes of the shares of such series as
follows:
1. Designation and Number of Shares. A series of the Company's Preferred
Stock is hereby established, to be designated and known as "10% Series J
Convertible, Non-Voting Preferred Stock" (hereinafter referred to as the "Series
J Preferred Stock"), consisting of 2,000 shares of the authorized and unissued
shares of the Company's Preferred Stock, $0.0001 par value per share. The
Company shall from time to time, in accordance with the laws of the State of
Nevada, increase the number of shares of its Common Stock, $0.0001 par value per
share, if at any time the number of shares of the Company's Common Stock
remaining unissued and available for issuance shall not be sufficient to permit
conversion of the Series J Preferred Stock provided herein.
2. Dividends. The holders of shares of Series J Preferred Stock shall be
entitled to receive an annual dividend out of any of the Company's assets
legally available therefor, prior and in preference to any declaration or
payment of any dividend on the Common Stock of the Company, at the rate of ten
percent (10%) per annum on the stated value of the Series J Preferred Stock. The
stated value is $1,000 per share and the dividend rate will be $100 per annum
per share of Series J Preferred Stock. At the exclusive option of the Company,
dividends may be paid either in cash or in additional shares of Series J
Preferred Stock or other securities of the Company at the discretion of the
Board of Directors to holders of record of shares of Series J Preferred Stock as
they appear on the books and records of the Company on such record dates not
less than ten (10) days nor more than sixty (60) days preceding the payment
dates thereof, as may be fixed by the Board of Directors of the Company.
Dividends shall be fully cumulative and shall accrue from the date of original
issuance of the Series J Preferred Stock. Once dividends are paid on the Series
J Preferred Stock, holders of shares of Series J Preferred Stock will not
participate in dividends paid to holders of Common Stock or other series of
Preferred Stock. Except as described below, no dividends shall be paid or
declared and set apart for payment on any class or series of shares of the
Company that are junior to the Series J Preferred Stock for any period unless
full cumulative dividends have been paid or contemporaneously are declared and
paid or set apart for payment on the Series J Preferred Stock. A dividend
payable in shares of Common Stock or in shares of another class of shares junior
to the Series J Preferred Stock may, however, be made. Dividends on the Series J
Preferred Stock may, at the option of the Company's Board of Directors, be paid
in either cash or in additional shares of Series J Preferred Stock or in shares
of other securities issued by the Company; provided, however, that if accrued
dividends on the Series J Preferred Stock are paid in additional shares of
Series J Preferred Stock, accrued dividends paid subsequent thereto shall not be
paid on shares of Series J Preferred Stock that were previously paid as stock
dividends. Holders of Series J Preferred Stock shall not participate in excess
dividends remaining following payment of all accrued and unpaid dividends owing
to holders of Series J Preferred Stock.
3. Liquidation Preference.
(a) In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the Company, the holders of Series J Preferred
Stock shall be entitled to receive out of the assets of the Company
available for distribution to shareholders before any distribution or
payment is made to holders of shares of Common Stock, or to holders of any
other shares of the Company ranking junior upon liquidation to the Series J
Preferred Stock, liquidation distributions in the amount of One Thousand
Dollars ($1,000.00) per share plus all accrued and unpaid regular or
special dividends, if any, before any payment is made to holders of shares
of the Company's equity securities that are junior to the Series J
Preferred Stock. If upon any voluntary or involuntary liquidation,
dissolution or winding up of the Company, the assets of the Company shall
be insufficient to make the full payment on the Series J Preferred Stock as
described in the immediately preceding sentence, and similar payments on
any other class of shares ranking on a parity with the Series J Preferred
Stock upon liquidation, then the holders of the Series J Preferred Stock
and of such other class of shares will share ratably in any such
distribution of assets of the Company in proportion to the full respective
distributable amounts to which they are entitled.
(b) After payment to the holders of the Series J Preferred Stock
of the amounts set forth in subparagraph 3(a) above, the holders of Series
J Preferred Stock will not be entitled to any further participation in any
distribution or payment by the Company, and the entire remaining assets and
funds of the Company legally available for distribution, if any, shall be
distributed among the holders of shares of Common Stock in proportion to
the shares of Common Stock then held by them.
(c) A consolidation or merger of the Company with or into any
other corporation or corporations, or a sale of all or substantially all of
the assets of the Company that does not involve a distribution by the
Company of cash or other property to the holders of shares of Common Stock,
shall be deemed to be a liquidation, dissolution or winding up of the
Company within the meaning of this Section 3, but rather shall be subject
to the provisions of Section 6 below.
4. Voting Rights. Except as otherwise expressly provided herein or as
required by Nevada law, the holders of Series J Preferred Stock shall not be
entitled to voting rights, except that without the approval of holders of a
majority of the outstanding shares of Series J Preferred Stock, the Company will
not (i) authorize, create or issue any shares of any class or series ranking
senior to the Series J Preferred Stock as to liquidation rights; (ii) amend,
alter or repeal by any means the Company's Articles of Incorporation if the
powers, preferences or special rights of the Series J Preferred Stock would be
materially adversely affected; or (iii) become subject to any restriction on the
Series J Preferred Stock other than restrictions arising solely under the Nevada
Act or existing under the Company's Articles of Incorporation as in effect on
December 31, 1998.
5. Conversion.
(a) Generally.
(i) Conversions at Option of Holder. Each share of
Preferred Stock shall be convertible into shares of Common Stock
(subject to the limitations set forth in Section 5(a)(iii) hereof) at
the Conversion Ratio (as defined in Section 5(c), below) at the option
of a Holder, at any time and from time to time, from and after the
Original Issue Date (the "Initial Conversion Date"). A Holder shall
effect conversions by surrendering the certificate or certificates
representing the shares of Preferred Stock to be converted to the
Company, together with a written notice of conversion ("Conversion
Notice"). Each Conversion Notice shall specify the number of shares of
Preferred Stock to be converted, and the date on which such conversion
is to be effected, which date may not be prior to the date the holder
delivers such Conversion Notice by facsimile (the "Conversion Date").
If no Conversion Date is specified in a Conversion Notice, the
Conversion Date shall be the date that the Conversion Notice is deemed
delivered to the Company pursuant to Section 5(h). Each Conversion
Notice, once given, shall be irrevocable. If the Holder is converting
less than all of the shares of Preferred Stock represented by the
certificate or certificates tendered by the holder with the Conversion
Notice, or if a conversion hereunder cannot be effected in full for
any reason, the Company shall promptly deliver to such holder (in the
manner and within the time set forth in Section 5(b) below) a
certificate for such number of shares as have not been converted.
(ii) Automatic Conversion. Subject to the restrictions
in Section 5(a)(iii), all outstanding shares of Preferred Stock for
which conversion notices have not previously been received or for
which redemption has not been made or required hereunder shall be
automatically converted on the third anniversary of the Original Issue
Date at the Conversion Price on such date. The conversion contemplated
by this paragraph shall not occur if at such time (A) the Holder is
not permitted to resell underlying shares of Common Stock pursuant to
Rule 144(k) promulgated under the Securities Act, without volume
restrictions, as evidenced by an opinion letter of counsel acceptable
to the Holder and the transfer agent for the Common Stock; (B) there
are not sufficient shares of Common Stock authorized and reserved for
issuance upon such conversion; or (C) the Company shall have defaulted
on its covenants and obligations hereunder.
(iii) Certain Conversion Restrictions.
(A) In no event (except (i) with respect to
an automatic conversion of the Preferred Stock as provided in
Section 5(a)(ii) hereof, (ii) if the Company is in default of any
of its obligations hereunder, or (iii) except as otherwise set
forth herein) shall any Holder be entitled to convert any
Preferred Stock to the extent that, after such conversion, the
sum of (1) the number of shares of Common Stock beneficially
owned by such Holder and its affiliates (other than the shares of
Common Stock which may be deemed beneficially owned through the
ownership of the unconverted portion of the Preferred Stock), and
(2) the number of shares of Common Stock issuable upon the
conversion of the Preferred Stock with respect to which the
determination of this proviso is being made, would result in
beneficial ownership by the Holder and its affiliates of more
than 4.9% of the outstanding shares of Common Stock. For purposes
of the immediately preceding sentence, beneficial ownership shall
be determined in accordance with section 13(d) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), except as
otherwise provided in clause (1) of the preceding sentence. To
the extent that the limitation contained in this paragraph
applies, the determination of whether shares of Preferred Stock
are convertible (in relation to other securities owned by a
Holder) and of which shares of Preferred Stock are convertible
shall be in the sole discretion of the Holder, and the submission
of shares of Preferred Stock for conversion shall be deemed to be
the Holder's determination of whether such shares of Preferred
Stock are convertible (in relation to other securities owned by
the Holder) and of which portion of such shares of Preferred
Stock are convertible, in each case subject to such aggregate
percentage limitation, and the Company shall have no obligation
to verify or confirm the accuracy of such determination. Nothing
contained herein shall be deemed to restrict the right of the
Holder to convert shares of Preferred Stock at such time as such
conversion will not violate the provisions of this paragraph. The
provisions of this Section will not apply to any conversion
pursuant to Section 5 (a)(ii) hereof.
(B) If on any Conversion Date (1) the Common
Stock is listed for trading on the Nasdaq SmallCap Market or the
Nasdaq National Market, (2) the Conversion Price then in effect
is such that the aggregate number of shares of Common Stock that
would then be issuable upon conversion in full of all then
outstanding shares of Preferred Stock and as payment of dividends
thereon in shares of Common Stock, together with any shares of
the Common Stock previously issued upon conversion of shares of
Preferred Stock and as payment of dividends thereon, would equal
or exceed the lesser of (a) 19.9% of the number of shares of the
Common Stock outstanding on the Original Issue Date or (b)
2,500,000 shares of Common Stock (such number of shares as would
not equal or exceed such 19.9% limit, the "Issuable Maximum" and
any such Conversion Date, the "Record Date"), and (3) the Company
shall not have previously obtained the vote of shareholders (the
"Shareholder Approval"), if any, as may be required by the
applicable rules and regulations of The Nasdaq Stock Market (or
any successor entity) applicable to approve the issuance of
shares of Common Stock in excess of the Issuable Maximum in a
private placement whereby shares of Common Stock are deemed to
have been issued at a price that is less than the greater of book
or fair market value of the Common Stock, then the Company shall
issue to the Holder so requesting a conversion a number of shares
of Common Stock equal to the Issuable Maximum and, with respect
to the remainder of the aggregate Stated Value of the shares of
Preferred Stock then held by such Holder for which a conversion
in accordance with the Conversion Price would result in an
issuance of Common Stock in excess of the Issuable Maximum (the
"Excess Stated Value"), the Company shall, within one year of the
Record Date, use its best efforts to obtain the Shareholder
Approval applicable to such issuance. If the Company shall either
(i) fail to seek such Shareholder Approval, or (ii) indicate in a
notice to the Holder that it does not intend to obtain the
Shareholder Approval applicable to such issuance, then the
converting Holder shall have the option to require the Company to
either (1) if the Company has not prior thereto attempted or has
attempted to and has failed to obtain the Shareholder Approval in
accordance with this Section, use its best efforts to obtain the
Shareholder Approval applicable to such issuance as soon as is
possible, but in any event not later than the 90th day after such
request, or (2) redeem the remaining shares of Preferred Stock as
provided below. If the Company fails to pay the Redemption Amount
in full pursuant to this Section within seven (7) days after the
date payable, the Company will pay interest thereon at a rate of
8% per annum to the converting Holder, accruing daily from the
Conversion Date until such amount, plus all such interest
thereon, is paid in full.
(b) Not later than three (3) Trading Days after a Conversion
Date, the Company will deliver to the holder (i) a certificate or
certificates representing the number of shares of Common Stock being issued
upon the conversion of shares of Preferred Stock (subject to reduction
pursuant to the restrictions set forth above), (ii) one or more
certificates representing the number of shares of Preferred Stock not
converted, (iii) a bank check in the amount of accrued and unpaid dividends
(if the Company has elected or is required to pay accrued and unpaid
dividends in cash) and (iv) if the Company has elected and is permitted
hereunder to pay accrued dividends in shares of Common Stock or additional
shares of Preferred Stock, certificates representing such number of shares
of Common or Preferred Stock as are issuable on account of accrued
dividends. Notwithstanding the foregoing, the Company shall not be
obligated to issue certificates evidencing the shares of Common Stock
issuable upon conversion of any shares of Preferred Stock until
certificates evidencing such shares of Preferred Stock are either delivered
for conversion to the Company or any transfer agent for the Preferred Stock
or Common Stock, or the holder of such Preferred Stock notifies the Company
that such certificates have been lost, stolen or destroyed and provides a
bond (or other adequate security) reasonably satisfactory to the Company to
indemnify the Company from any loss incurred by it in connection therewith.
The Company shall, upon request of the holder, use its best efforts to
deliver any certificate or certificates required to be delivered by the
Company under this Section electronically through the Depository Trust
Corporation or another established clearing corporation performing similar
functions.
(c) Conversion Ratio.
(i) The conversion ratio for each share of Preferred
Stock (the "Conversion Ratio") on any Conversion Date shall be
calculated by dividing $1,000 by the market price of the Company's
Common Stock on such date.
(ii) If the Company, at any time while any shares of
Preferred Stock are outstanding, (a) shall pay a stock dividend or
otherwise make a distribution on account of or to holders of Junior
Securities payable in shares of Common Stock, (b) subdivide
outstanding shares of Common Stock into a larger number of shares, or
(c) combine outstanding shares of Common Stock into a smaller number
of shares, then the Conversion Price shall be multiplied by a
fraction, the numerator of which shall be the number of shares of
Common Stock (excluding treasury shares, if any) outstanding before
such event and the denominator of which shall be the number of shares
of Common Stock outstanding after such event. Any adjustment made
pursuant to this Section 5(c)(ii) shall become effective immediately
after the record date for the determination of stockholders entitled
to receive such dividend or distribution and shall become effective
immediately after the effective date in the case of a subdivision or
combination.
(d) The Company covenants that it will at all times reserve and
keep available out of its authorized and unissued Common Stock solely for
the purpose of issuance upon conversion of Preferred Stock and payment of
dividends on Preferred Stock, each as herein provided, free from preemptive
rights or any other actual contingent purchase rights of persons other than
the holders of Preferred Stock, not less than such number of shares of
Common Stock as shall (subject to any additional requirements of the
Company as to reservation of such shares set forth in the Purchase
Agreement) be issuable (taking into account the adjustments and
restrictions of Section 5(c)) upon the conversion of all outstanding shares
of Preferred Stock and payment of dividends hereunder. The Company
covenants that all shares of Common Stock that shall be so issuable shall,
upon issue, be duly and validly authorized, issued and fully paid and
non-assessable.
(e) Upon a conversion hereunder the Company shall not be required
to issue stock certificates representing fractions of shares of Common
Stock, but may if otherwise permitted and unless waived by the holder of
the Preferred Stock, make a cash payment in respect of any final fraction
of a share based on the Per Share Market Value at such time. If the Company
elects not, or is unable, to make such a cash payment, the holder of a
share of Preferred Stock shall be entitled to receive, in lieu of the final
fraction of a share, one whole share of Common Stock.
(f) The issuance of certificates for shares of Common Stock on
conversion of Preferred Stock shall be made without charge to the holders
thereof for any documentary stamp or similar taxes that may be payable in
respect of the issue or delivery of such certificate, provided that the
Company shall not be required to pay any tax that may be payable in respect
of any transfer involved in the issuance and delivery of any such
certificate upon conversion in a name other than that of the holder of such
shares of Preferred Stock so converted and the Company shall not be
required to issue or deliver such certificates unless or until the person
or persons requesting the issuance thereof shall have paid to the Company
the amount of such tax or shall have established to the satisfaction of the
Company that such tax has been paid.
(g) Shares of Preferred Stock converted into Common Stock shall
be canceled and shall have the status of authorized but unissued shares of
undesignated stock. They may not be reissued as shares of this series.
(h) Any and all notices or other communications or deliveries to
be provided by the holders of the Preferred Stock hereunder, including,
without limitation, any Conversion Notice, shall be in writing and
delivered personally, by facsimile, sent by a nationally recognized
overnight courier service or sent by certified or registered mail, postage
prepaid, addressed to the attention of the President of the Company at the
facsimile telephone number or address of the principal place of business of
the Company as set forth in the Purchase Agreement. Any and all notices or
other communications or deliveries to be provided by the Company hereunder
shall be in writing and delivered personally, by facsimile, sent by a
nationally recognized overnight courier service or sent by certified or
registered mail, postage prepaid, addressed to each holder of Preferred
Stock at the facsimile telephone number or address of such holder appearing
on the books of the Company, or if no such facsimile telephone number or
address appears, at the principal place of business of the holder. Any
notice or other communication or deliveries hereunder shall be deemed given
and effective on the earliest of (i) the date of transmission, if such
notice or communication is delivered via facsimile at the facsimile
telephone number specified in this Section prior to 5:00 p.m. (Salt Lake
City time), (ii) the date after the date of transmission, if such notice or
communication is delivered via facsimile at the facsimile telephone number
specified in this Section later than 5:00 p.m. (Salt Lake City time) on any
date and earlier than 11:59 p.m. (Salt Lake City time) on such date, (iii)
four days after deposit in the United States mails, (iv) the Business Day
following the date of mailing, if send by nationally recognized overnight
courier service, or (v) upon actual receipt by the party to whom such
notice is required to be given. For purposes of Section 5(c)(h), if a
Conversion Notice is delivered by facsimile prior to 5:00 p.m. (Salt Lake
City time) on any date, then the day prior to such date shall be the last
Trading Day calculated to determine the Conversion Price applicable to such
Conversion Notice, and the date of such delivery shall commence the
counting of days for purposes of Section 5(b).
6. Merger or Consolidation.
(a) At any time, in the event of:
(i) any transaction or series of related transactions
(including, without limitation, any reorganization, merger or
consolidation) that will result in the Company's shareholders
immediately prior to such transaction not holding (by virtue of such
shares or securities issued solely with respect thereto) at least
fifty percent (50%) of the voting power of the surviving or continuing
entity; or
(ii) a sale of all or substantially all of the assets
of the Company, unless the Company's shareholders immediately prior to
such sale will, as a result of such sale, hold (by virtue of
securities issued as consideration for the Company's sale) at least
fifty percent (50%) of the voting power of the purchasing entity;
(the foregoing events are individually referred to herein as a "Sales
Transaction"), then, holders of the Series J Preferred Stock of record as
of the date of consummation of the Sales Transaction shall be entitled to
receive, prior and in preference to any payment of consideration to the
holders of Common Stock, in cash or in securities received from the
acquiring corporation, or in a combination thereof, at the closing of any
such Sales Transaction, at the holder's discretion, an amount per share
equal to One Thousand Dollars ($1,000.00) per share (as adjusted for any
combinations, consolidations, stock distributions or stock dividends with
respect to such shares), plus all declared or accumulated but unpaid
dividends on such shares as of the date of closing of such Sales
Transaction. In the event the proceeds of the Sales Transaction are not
sufficient to make full payment of the aforementioned preferential amounts
to the holders of the Series J Preferred Stock in accordance herewith, then
the entire amount payable in respect of the proposed Sales Transaction
shall be distributed ratably among the holders of the Series J Preferred
Stock in proportion to the product of the liquidation preference of each
such share and the number of such shares owned by each such holder. Upon
completion of the payment to the holders of Series J Preferred Stock as
provided above, the remaining proceeds of such Sales Transaction shall be
distributed among the holders of record (as of the date of the consummation
of the Sales Transaction) of shares of Common Stock in proportion to the
number of shares of Common Stock then held. Unless otherwise consented to
by the holders of a majority of the outstanding shares of Series J
Preferred Stock, such payments shall be made with respect to the Series J
Preferred Stock and to holders of Common Stock by purchase of such shares
of Series J Preferred Stock and Common Stock by the surviving corporation,
entity or person, or by redemption of such shares by the Company, in the
discretion of the Company.
(b) Any securities to be delivered to the holders of Series J
Preferred Stock pursuant to Section 6(a) above shall be valued solely for
purposes of this Section, as follows:
(i) Securities not subject to investment letter or
other similar restrictions on free marketability as provided for in
subsection (ii) below:
(A) If traded on a securities exchange or
reported on the NASDAQ SmallCap Market, the value shall be deemed
to be the average of the closing prices of the securities on such
exchange over the thirty (30) day period ending three (3) days
prior to the closing;
(B) If actively traded over-the-counter, the
value shall be deemed to be the average of the closing bid or
sale prices (whichever is applicable) over the thirty (30) day
period ending three (3) days prior to the closing; and
(C) If there is no active public market, the
value shall be the fair market value thereof, as mutually
determined by the Company's Board of Directors and the holders of
a majority of the outstanding shares of Series J Preferred Stock.
(ii) The method of valuation of securities subject to
investment letter or other restrictions on free marketability (other
than restrictions arising solely by virtue of a shareholder's status
as an affiliate or former affiliate of the Company) shall be to make
an appropriate discount from the market value determined in Section
6(b)(i)(A), (B) or (C) above to reflect the approximate fair market
value thereof, as mutually determined by the Company and the holders
of a majority of the outstanding shares of Series J Preferred Stock.
(c) In the event the requirements of Section 6(a) above are not
complied with, the Company shall forthwith either:
(i) cause such closing to be postponed until such time
as the requirements of this Section 6 have been complied with; or
(ii) cancel such transaction, in which event the
rights, preferences and privileges of the holders of Series J
Preferred Stock shall revert to and be the same as such rights,
preferences and privileges existing immediately prior to the date of
the first notice referred to in Section 6(d) below.
(d) The Company shall give each holder of record of Series J
Preferred Stock written notice of such impending transaction not later than
ten (10) days prior to the shareholders' meeting called to approve such
transaction. The notice shall describe the material terms and conditions of
the impending transaction and the provisions of this Section 6, and the
Company shall thereafter give such holders prompt notice of any material
changes to the impending transaction. The transaction shall in no event
take place soon than twenty (20) days after the Company has given the
notice provided for herein or sooner than ten (10) days after the Company
has given the notice of any material changes in the impending transaction
as provided for herein; provided, however, that such periods may be
shortened upon the written consent of the holders of a majority of the
outstanding shares of Series J Preferred Stock.
7. Restrictions and Limitations. So long as any shares of Series J
Preferred Stock remain issued and outstanding, the Company shall not without the
consent of the holders of a majority of the shares of Series J Preferred Stock
then outstanding:
(a) Effect any reclassification, recapitalization or other change
with respect to any outstanding shares of stock that results in the
issuance of shares of stock having any preference or priority as to
liquidation preferences that are superior to any such preference or
priority of the Series J Preferred Stock; or
(b) Increase or decrease (other than by redemption or conversion)
the total number of authorized shares of the Series J Preferred Stock.
8. No Reissuance of Series J Preferred Stock. No share or shares of Series
J Preferred Stock acquired by the Company by reason of redemption, purchase or
otherwise shall be reissued, and all such shares shall be returned to the status
of undesignated shares of the Company's Preferred Stock.
9. Redemption. The Company shall have the right to call for redemption part
or all of the shares of Series J Preferred Stock at any time and from time to
time, by giving notice, regardless of whether any holder shall have also given
notice of intent to convert such shares. The redemption price payable by the
Company at any time shall be $1,333 per share at the time of the redemption.
After the date fixed for redemption, dividends on shares of Series J Preferred
Stock called for redemption shall cease to accrue, such shares shall no longer
be deemed to be issued and outstanding, and all rights of the holders thereof as
shareholders of the Company shall cease unless the Company defaults on the
payment of the redemption price. Redemption shall be made on a pro rata basis
among all holders of the Series J Preferred Stock. The redemption price paid
shall be applied first to the redemption of shares that would otherwise be
subject to conversion in the year the redemption is made. At its sole option,
the Company may offset amounts owed the Company by a holder of the Series J
Preferred Stock or any affiliate of such a holder against any redemption price
payable against the shares of Series J Preferred Stock owned by such holder.
10. United States Dollars. All references herein to Dollars shall be deemed
to refer to United States Dollars.
Narrative Form of Series E Stock Certificate [FACE OF CERTIFICATE]
Incorporated Under The Laws of
Nevada
BIOMUNE SYSTEMS, INC.
Number _____ _________ Shares
Series E 8% Cumulative Convertible Non-Voting Preferred Stock
SEE RESTRICTIVE LEGEND ON REVERSE
THIS CERTIFIES THAT _____________ is the recordholder of ___________________
shares of Series E 8% Cumulative Convertible Non-Voting Preferred Stock, $0.0001
par value per share, of Biomune Systems, Inc., transferable only on the Books of
the Corporation by the holder hereof in person, or by duly authorized attorney,
on the surrender of this certificate properly endorsed.
IN WITNESS WHEREOF the duly authorized officers of this Corporation have
hereunto subscribed their names and caused the Seal to be hereto affixed at Salt
Lake City, Utah this ___ day of ______________, ____ A.D.
- ------------------------------ -----------------------------------
, Secretary , President
Shares $0.0001 EachREVERSE SIDE OF CERTIFICATE:
For value received, ______ hereby sell, assign and transfer unto___________
______________ shares of the Capital Stock represented by the within
Certificate, and do hereby irrevocably constitute and appoint ________________
to transfer the said Stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated: _______________________, ____
In presence of
------------------------------- -------------------------------
NOTICE: THE SIGNATURES ON THIS ASSIGNMENT MUST CORRESPOND WITH THE NAMES AS
WRITTEN UPON THE FACE OF THIS CERTIFICATE, IN EVERY PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT, OR ANY CHANGE WHATSOEVER.
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER ANY APPLICABLE STATE SECURITIES
LAWS, AND MAY NOT BE TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS THEY HAVE BEEN
REGISTERED UNDER THAT ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR THE
CORPORATION RECEIVES AN OPINION OF COUNSEL SATISFACTORY TO IT THAT AN EXEMPTION
FROM REGISTRATION IS AVAILABLE. THE SHARES MAY NOT BE OFFERED FOR SALE, SOLD OR
OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT
UNDER THE ACT OR PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE ACT, THE
AVAILABILITY OF WHICH IS TO BE ESTABLISHED TO THE SATISFACTION OF THE COMPANY. A
FULL STATEMENT OF THE VOTING POWERS, DESIGNATIONS, PREFERENCES, LIMITATIONS,
RESTRICTIONS AND RELATIVE RIGHTS GRANTED TO OR IMPOSED UPON THE RESPECTIVE
CLASSES AND FOR SERIES OF SHARES OF STOCK OF THE CORPORATION AND THE
QUALIFICATIONS, LIMITATIONS AND RESTRICTIONS OF SUCH RIGHTS MAY BE OBTAINED BY
ANY SHAREHOLDER UPON REQUEST AT THE PRINCIPAL OFFICE OF THE CORPORATION AND THE
CORPORATION WILL FURNISH SUCH SHAREHOLDER, WITHOUT CHARGE, A COPY OF SUCH
STATEMENT.
Narrative Form of Series F Stock Certificate [FACE OF CERTIFICATE]
Incorporated Under The Laws of
Nevada
BIOMUNE SYSTEMS, INC.
Number _____ _________ Shares
Series8% Cumulative Convertible Non-Voting Preferred Stock
SEE RESTRICTIVE LEGEND ON REVERSE
THIS CERTIFIES THAT _____________ is the recordholder of ___________________
shares of Series F 8% Cumulative Convertible Non-Voting Preferred Stock, $0.0001
par value per share, of Biomune Systems, Inc., transferable only on the Books of
the Corporation by the holder hereof in person, or by duly authorized attorney,
on the surrender of this certificate properly endorsed.
IN WITNESS WHEREOF the duly authorized officers of this Corporation have
hereunto subscribed their names and caused the Seal to be hereto affixed at Salt
Lake City, Utah this ___ day of ______________, ____ A.D.
- ------------------------------ -----------------------------------
, Secretary , President
Shares $0.0001 EachREVERSE SIDE OF CERTIFICATE:
For value received, ______ hereby sell, assign and transfer unto___________
______________ shares of the Capital Stock represented by the within
Certificate, and do hereby irrevocably constitute and appoint ________________
to transfer the said Stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated: _______________________, ____
In presence of
------------------------------- -------------------------------
NOTICE: THE SIGNATURES ON THIS ASSIGNMENT MUST CORRESPOND WITH THE NAMES AS
WRITTEN UPON THE FACE OF THIS CERTIFICATE, IN EVERY PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT, OR ANY CHANGE WHATSOEVER.
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER ANY APPLICABLE STATE SECURITIES
LAWS, AND MAY NOT BE TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS THEY HAVE BEEN
REGISTERED UNDER THAT ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR THE
CORPORATION RECEIVES AN OPINION OF COUNSEL SATISFACTORY TO IT THAT AN EXEMPTION
FROM REGISTRATION IS AVAILABLE. THE SHARES MAY NOT BE OFFERED FOR SALE, SOLD OR
OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT
UNDER THE ACT OR PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE ACT, THE
AVAILABILITY OF WHICH IS TO BE ESTABLISHED TO THE SATISFACTION OF THE COMPANY.
A FULL STATEMENT OF THE VOTING POWERS, DESIGNATIONS, PREFERENCES, LIMITATIONS,
RESTRICTIONS AND RELATIVE RIGHTS GRANTED TO OR IMPOSED UPON THE RESPECTIVE
CLASSES AND FOR SERIES OF SHARES OF STOCK OF THE CORPORATION AND THE
QUALIFICATIONS, LIMITATIONS AND RESTRICTIONS OF SUCH RIGHTS MAY BE OBTAINED BY
ANY SHAREHOLDER UPON REQUEST AT THE PRINCIPAL OFFICE OF THE CORPORATION AND THE
CORPORATION WILL FURNISH SUCH SHAREHOLDER, WITHOUT CHARGE, A COPY OF SUCH
STATEMENT.
Narrative Form of Series G Stock Certificate [FACE OF CERTIFICATE]
Incorporated Under The Laws of
Nevada
BIOMUNE SYSTEMS, INC.
Number _____ _________ Shares
Series8% Cumulative Non-Convertible Non-Voting Preferred Stock
SEE RESTRICTIVE LEGEND ON REVERSE
THIS CERTIFIES THAT _____________ is the recordholder of ___________________
shares of Series G 8% Cumulative Non-Convertible Non-Voting Preferred Stock,
$0.0001 par value per share, of Biomune Systems, Inc., transferable only on the
Books of the Corporation by the holder hereof in person, or by duly authorized
attorney, on the surrender of this certificate properly endorsed.
IN WITNESS WHEREOF the duly authorized officers of this Corporation have
hereunto subscribed their names and caused the Seal to be hereto affixed at Salt
Lake City, Utah this ___ day of ______________, ____ A.D.
- ------------------------------ -----------------------------------
, Secretary , President
Shares $0.0001 EachREVERSE SIDE OF CERTIFICATE:
For value received, ______ hereby sell, assign and transfer unto___________
______________ shares of the Capital Stock represented by the within
Certificate, and do hereby irrevocably constitute and appoint ________________
to transfer the said Stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated: _______________________, ____
In presence of
------------------------------- -------------------------------
NOTICE: THE SIGNATURES ON THIS ASSIGNMENT MUST CORRESPOND WITH THE NAMES AS
WRITTEN UPON THE FACE OF THIS CERTIFICATE, IN EVERY PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT, OR ANY CHANGE WHATSOEVER.
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER ANY APPLICABLE STATE SECURITIES
LAWS, AND MAY NOT BE TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS THEY HAVE BEEN
REGISTERED UNDER THAT ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR THE
CORPORATION RECEIVES AN OPINION OF COUNSEL SATISFACTORY TO IT THAT AN EXEMPTION
FROM REGISTRATION IS AVAILABLE. THE SHARES MAY NOT BE OFFERED FOR SALE, SOLD OR
OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT
UNDER THE ACT OR PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE ACT, THE
AVAILABILITY OF WHICH IS TO BE ESTABLISHED TO THE SATISFACTION OF THE COMPANY.
A FULL STATEMENT OF THE VOTING POWERS, DESIGNATIONS, PREFERENCES, LIMITATIONS,
RESTRICTIONS AND RELATIVE RIGHTS GRANTED TO OR IMPOSED UPON THE RESPECTIVE
CLASSES AND FOR SERIES OF SHARES OF STOCK OF THE CORPORATION AND THE
QUALIFICATIONS, LIMITATIONS AND RESTRICTIONS OF SUCH RIGHTS MAY BE OBTAINED BY
ANY SHAREHOLDER UPON REQUEST AT THE PRINCIPAL OFFICE OF THE CORPORATION AND THE
CORPORATION WILL FURNISH SUCH SHAREHOLDER, WITHOUT CHARGE, A COPY OF SUCH
STATEMENT.
Narrative Form of Series J Stock Certificate [FACE OF CERTIFICATE]
Incorporated Under The Laws of
Nevada
BIOMUNE SYSTEMS, INC.
Number _____ _________ Shares
Series J 10% Cumulative Convertible Non-Voting Preferred Stock
SEE RESTRICTIVE LEGEND ON REVERSE
THIS CERTIFIES THAT _____________ is the recordholder of ___________________
shares of Series J 10% Cumulative Convertible Non-Voting Preferred Stock,
$0.0001 par value per share, of Biomune Systems, Inc., transferable only on the
Books of the Corporation by the holder hereof in person, or by duly authorized
attorney, on the surrender of this certificate properly endorsed.
IN WITNESS WHEREOF the duly authorized officers of this Corporation have
hereunto subscribed their names and caused the Seal to be hereto affixed at Salt
Lake City, Utah this ___ day of ______________, ____ A.D.
- ------------------------------ -----------------------------------
, Secretary , President
Shares $0.0001 EachREVERSE SIDE OF CERTIFICATE:
For value received, ______ hereby sell, assign and transfer unto___________
______________ shares of the Capital Stock represented by the within
Certificate, and do hereby irrevocably constitute and appoint ________________
to transfer the said Stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated: _______________________, ____
In presence of
------------------------------- -------------------------------
NOTICE: THE SIGNATURES ON THIS ASSIGNMENT MUST CORRESPOND WITH THE NAMES AS
WRITTEN UPON THE FACE OF THIS CERTIFICATE, IN EVERY PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT, OR ANY CHANGE WHATSOEVER.
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER ANY APPLICABLE STATE SECURITIES
LAWS, AND MAY NOT BE TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS THEY HAVE BEEN
REGISTERED UNDER THAT ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR THE
CORPORATION RECEIVES AN OPINION OF COUNSEL SATISFACTORY TO IT THAT AN EXEMPTION
FROM REGISTRATION IS AVAILABLE. THE SHARES MAY NOT BE OFFERED FOR SALE, SOLD OR
OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT
UNDER THE ACT OR PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE ACT, THE
AVAILABILITY OF WHICH IS TO BE ESTABLISHED TO THE SATISFACTION OF THE COMPANY.
A FULL STATEMENT OF THE VOTING POWERS, DESIGNATIONS, PREFERENCES, LIMITATIONS,
RESTRICTIONS AND RELATIVE RIGHTS GRANTED TO OR IMPOSED UPON THE RESPECTIVE
CLASSES AND FOR SERIES OF SHARES OF STOCK OF THE CORPORATION AND THE
QUALIFICATIONS, LIMITATIONS AND RESTRICTIONS OF SUCH RIGHTS MAY BE OBTAINED BY
ANY SHAREHOLDER UPON REQUEST AT THE PRINCIPAL OFFICE OF THE CORPORATION AND THE
CORPORATION WILL FURNISH SUCH SHAREHOLDER, WITHOUT CHARGE, A COPY OF SUCH
STATEMENT.
MARKETING, DISTRIBUTION, LICENSING
AND SUPPLY AGREEMENT
This MARKETING, DISTRIBUTION, LICENSING AND SUPPLY AGREEMENT
("Agreement") is made and entered into as of the 1st day of September 1998,
("Effective Date") by and between Optim Nutrition, Inc., a Utah corporation
("Licensee") located at 2401 South Foothill Drive, Salt Lake City, UT 84109, and
ML Industries ("Licensor") located at 4233 Alonzo Avenue, Encino, CA 91316.
Licensor and Licensee are sometimes referred to singly herein as "Party" and
collectively as "Parties."
WHEREAS, Licensor has developed and owns all right, title and interest
in food bars currently marketed under the name Mountain Lift(tm) and certain
technologies related to such food bars (collectively the "Products");
WHEREAS, Licensor desires to grant exclusive manufacturing, marketing,
distribution and related rights to Licensee on the terms and conditions
hereinafter set forth; and
WHEREAS, Licensee desires to license exclusive manufacturing, marketing
and distribution rights to the Products from Licensor under the terms and
conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the terms and provisions of this
Agreement, and for other good and valuable consideration, the receipt and
sufficiency of which is acknowledged by the execution and delivery thereof, the
parties hereto hereby agree as follows:
1. Definitions: For purposes of this Agreement, the terms hereinafter set
forth shall be defined as follows:
a. "Exclusive" means a covenant on the part of Licensor not to make, use,
distribute, sell or otherwise dispose of the Products and not grant further
licenses with respect to the Products so long as this Agreement is in effect.
b. "Licensed Marks" means those trademarks, trade names, service marks or other
designations listed on Exhibit A hereto, by this reference incorporated in and
made a part of this Agreement.
c. "Licensee" means Optim Nutrition, Inc., a Utah corporation, and any and all
of its Affiliates.
d. "Products" means the food bars further described and specified on Exhibit B
hereto, by this reference incorporated in and made a part hereof, including any
enhancements or modifications thereof, whether developed by Licensee or
Licensor.
e. "Term" has the meaning set forth in Section 3, below.
<PAGE>
f. "Transition Period" means the thirty-day period commencing on the Effective
Date.
2. License. Licensee is hereby granted the Exclusive right and license to
manufacture, market, distribute and sell the Products anywhere in the world.
Such Exclusive right is sometimes referred to herein as the License.
3. Term. The Term of this Agreement commences with the Effective Date and
continues, subject to the rights of termination set forth elsewhere in this
Agreement, through September ___, 2008. Licensee, at its sole discretion, may
extend the Term of the Agreement (under the original terms of the Agreement) for
an additional five years by giving written notice to Licensor not fewer than 180
days before this Agreement would otherwise expire.
4. Grant of Option and Right of First Refusal. Licensor hereby grants Licensee
the irrevocable and exclusive right ("Option") to purchase a majority equity
ownership in Licensor. Such Option may be exercised at any time and from time to
time commencing with the date at which aggregate gross sales of the Products
equals or exceeds $2,000,000. In addition, Licensor hereby grants Licensee the
first right of refusal to acquire up to 100% of the remaining equity interests
in Licensor ("Right of First Refusal") at any time during the term of this
Agreement.
5. Licensed Marks. The License granted under this Agreement includes the
Licensee's right, during the Term of this Agreement, to the free and Exclusive
use of the Licensed Marks identified on the attached Exhibit A, including, but
not limited to the Mountain Lift(tm) name and trademark, for the sole purpose of
promoting, marketing, manufacturing, distributing and selling the Products.
6. Fees. In consideration of the grant of the License, Option and Right of First
Refusal, Licensee shall pay Licensor 500,000 shares of the Series F Preferred
Stock of Licensee's parent, Biomune Systems, Inc., a Nevada corporation
("Biomune") and a royalty of 7% of net sales of the Products. The obligation to
pay the royalty will commence on the 30th day following the last day of the
Transition Period. The royalty may be paid in cash, shares of Biomune Common or
Preferred Stock or a combination of stock and cash, as the Parties may hereafter
from time to time agree.
7. Other Assets. In addition to the other rights granted Licensee hereunder, the
Licensor shall give Licensee unrestricted access and use of Licensor's entire
proprietary database for the purpose of promoting, marketing, distributing and
selling the Products during the Term of this Agreement. In addition, Licensor
hereby grants Licensee the unrestricted and Exclusive right to use, modify,
update and maintain the world wide web domain name www.mountainlift.com for the
purpose of marketing, distributing, promoting and selling the Products. Licensor
also grants Licensee the unrestricted and Exclusive right to use of the toll
free number 800-865-3134, as well as any and all collateral material, existing
software files and documentation for logos, advertisements and packaging for the
Products. Licensor will promptly deliver control of these assets to Licensee
during the Transition Period.
<PAGE>
8. Assignment of Certain Assets and Assumption of Certain Liabilities. Licensor
hereby assigns, transfers and conveys to Licensee all of Licensor's rights in
and to inventory and accounts receivable relating to the Products as of the
Effective Date. In consideration of such assignment and transfer, Licensee
agrees to assume Licensor's accounts payable and amounts owing on a line of
credit with a bank, guaranteed by Steve Sherlin ("Sherlin") totaling
approximately $225,000, all as of the Effective Date; provided, however, that
the aggregate amount of all such liabilities assumed by Licensee shall not
exceed the value of the accounts receivable and inventory assigned and conveyed
to Licensee under this Section.
9. Consulting Agreement. Licensee hereby agrees to engage Sherlin as a
consultant to Licensee for a period of three years from the last day of the
Transition Period and continuing so long as Sherlin continues to provide
services to the satisfaction of Licensee ("Consulting Term"). Commencing with
the last day of the Transition Period and so long as Sherlin continues to
provide services to the satisfaction of Licensee, Licensee will pay a consulting
fee of $120,000 per year ($10,000 per month) which will be reviewed on a
semi-annual basis. In addition, so long as the services of Sherlin continue to
the satisfaction of Licensee, Licensee will pay a $400 per month car allowance
(including auto insurance). During the Consulting Period, Licensee will also pay
Sherlin a bonus equal to 2% of gross sales of the Products, provided the
Licensee realizes profits from sales of the Products of 3% or more after payment
of the consulting fee and other benefits described herein and the bonus to
Sherlin. The Consulting Term may be extended from year to year following the
initial three-year term if the Parties and Sherlin mutually agree to such
extension.
10. Sales Material and Literature. Licensor agrees to furnish to Licensee, free
of charge, all printed material published or distributed by Licensor relating to
the Products. Licensee may at its discretion translate such sales material and
literature and generate its own sales material and literature relating to the
Products.
11. Ownership Warranty. Licensor represents and warrants that it has all
necessary rights in and to all copyrights, patents and other proprietary rights
associated with the Products that are necessary to market, distribute and
license the Products. Licensor has the unrestricted right and authority to enter
into this Agreement and to grant the rights and licenses hereunder with respect
to the Products. The rights granted Licensee hereunder do not infringe upon or
violate the rights of any third party.
12. Copyrights or Patents. Licensor agrees to defend at its expense any suits
against Licensee or its affiliates or customers based upon a claim that any
Product sold under this Agreement infringes any copyright or patent registered
under any copyright or patent law. If a claim arises that any Product sold under
this Agreement infringes any patent, copyright, or design registered under any
jurisdiction, Licensee shall immediately upon receiving notice of any such
claim, notify Licensor of such claim and render any and all assistance as
Licensor may reasonably request for the purpose of defending, settling, or
compromising any such claim. Licensor shall be permitted to defend, settle,
compromise, or otherwise respond to any such claim in whatever manner, in its
discretion, it sees fit and shall have complete charge of such a claim. Licensor
shall not agree to any settlement or compromise under which Licensee shall be
liable to pay any such of money or do or refrain from doing any other act
without the consent in writing of Licensee. Licensee shall not, without the
written consent of Licensor, admit any liability on any claim or agree to any
settlement or compromise or agree to pay any sum of money.
<PAGE>
13. Trademarks and Trade Names; Ownership to Remain in Licensor. Licensor shall
remain the owner of the Licensed Marks and Licensee covenants that it will not
dispute or otherwise challenge Licensor's ownership thereof.
14. Assignment. Licensee may not assign any rights or obligations hereunder
without prior written consent of Licensor.
15. Export; Import. Licensee assumes responsibility for complying with
applicable laws and regulations and for obtaining required export and import
authorizations of the Products.
16. Survival of Representations and Warranties and Indemnification for their
Breach. All representations, warranties and covenants of the Parties hereto as
set forth in this Agreement shall be true as of the time of and, together with
the agreements set forth herein, shall survive the Effective Date. The Parties,
jointly and severally, agree that any Party who has breached or breaches any
representation warranty or covenant, shall protect, indemnify and save harmless
any other non-breaching Party or Parties from and against any and all claims,
demands, liabilities, demands, damages, or causes of action of every kind and
character resulting from any breach thereof by the breaching Party.
17. Notices. All notices and requests in connection with this Agreement shall be
given in writing and may be given by registered or certified mail, telegram,
facsimile or other customary means of written communication, addressed as
indicated below or to such other address as the party to receive the notice or
request shall designate by notice to the other party. The effective date of any
notice or request given in connection with this Agreement shall be the date on
which the addressee receives it.
Licensor: ML Industries
4233 Alonzo Avenue
Encino, CA 91396
Attn: Steve Sherlin
FAX: (___) ___-____
With a copy (in the event of any notice of termination,
breach, or other matters not in the ordinary conduct of business) to:
Licensee: Optim Nutrition, Inc.
2401 South Foothill Blvd.
Salt Lake City, Utah 84109
FAX: (801) 466-3741
With a copy (in the event of any notice of termination, breach,
or other matters not in the ordinary conduct of business) to:
Kevin R. Pinegar, Esq.
DURHAM, EVANS, JONES & PINEGAR, P.C.
Suite 850 Key Bank Tower
50 South Main Street
Salt Lake City, Utah 84144
FAX: (801) 363-1835
<PAGE>
18. Waiver. No variation, modification, or waiver of any provision of this
Agreement, or consent to any departure therefrom, shall be of any force or
effect in any event unless confirmed in writing and signed by the parties; and
then such variation, modification, waiver, or consent shall be effective only in
the specific instance, for the purpose and to the extent for which made or
given.
19. Governing Law. This Agreement, including the validity and interpretation
hereof, and any disputes which may arise under, out of or in connection with
this Agreement, shall be governed by the laws of the State of Utah.
20. Independent Contractors. It is expressly agreed that the Parties hereto are
acting hereunder as independent contractors and under no circumstances shall any
of the employees of one party be deemed the employees of the other for any
purpose. This Agreement shall not be construed as authority for either party to
act for the other party in any agency or other capacity or to make commitments
of any kind for the account of, or on behalf of, the other party, except to the
extent, and for the purposes, expressly provided for and set forth herein.
21. Entire Agreement. This Agreement embodies the entire understanding of the
parties as it relates to the sale and purchase of the Products by the parties
and there are no other agreements or understandings between the parties relating
to the subject matter hereof. No amendment or modification of this Agreement
shall be valid or binding upon the parties unless in writing and duly signed by
their respective authorized officers.
22. Interpretation. Unless otherwise provided, all terms shall have the meaning
given them in the ordinary English usage and as customarily used. Words in any
gender shall include both other genders. Whenever the context requires, the
singular shall include the plural, the plural shall include the singular, and
the whole shall include any part thereof.
23. Invalid Provision; Severability. In case any one or more of the provisions
of this Agreement shall, for any reason, be held to be invalid, illegal or
unenforceable in any respect, such invalid, illegal or unenforceable
provision(s) shall be curtailed, limited, construed or eliminated only to the
extent necessary to remove such invalidity, illegality or unenforceability with
respect to the applicable law as it shall then be applied, and the other
provisions of this Agreement shall not be affected thereby.
24. Headings. The section and other headings contained in this Agreement are for
purposes of reference only and shall not limit, expand, or otherwise affect the
construction of any of the provisions of this Agreement.
<PAGE>
25. Authorized Execution. The individuals signing below each represent and
warrant (i) that they are authorized to execute this Agreement for and on behalf
of the party for whom they are signing, (ii) that such party shall be bound in
all respects hereby, and (iii) that such execution presents no conflict with any
other agreement of such party. This Agreement shall not be effective unless and
until it has been duly executed by an authorized representative of each Party.
26. Facsimile Signatures. The parties hereto agree that transmission to the
other party of this Agreement with its facsimile signatures shall bind the party
transmitting this Agreement by facsimile in the same manner as if such party's
original signature had been delivered. Without limiting the foregoing, each
party who transmits this Agreement with its facsimile signature covenants to
deliver the original thereof to the other party as soon as possible thereafter.
27. Default and Termination. If either Party defaults or otherwise breaches any
provisions of this Agreement, and fails to cure such default or breach within
thirty (30) days after a written demand for performance by the other Party, or
if either Party suspends business or commits and act amounting to a business
failure, the other Party may, at its option, declare such Party to be in default
and at any time thereafter the non-defaulting Party may exercise one or more of
the following remedies, as it shall elect:
a) Terminate this Agreement by written notice; and/or
b) Proceed by appropriate court action, either at law or in equity, to enforce
performance by the other Party of this Agreement or to recover damages for the
breach thereof.
28. Force Majeure. The failure of any Party hereunder to perform any obligation
otherwise due as a result of governmental action, law, order or regulation, or
as a result of war, act of public enemy, strike or other labor disturbance,
fire, flood, act of God or other causes of like kind beyond the reasonable
control of such Party, shall be excused for so long as said cause exists to the
extent such failure is caused by such an event.
DATED THIS 1st day of September 1998.
MOUNTAIN LIFT INDUSTRIES OPTIM NUTRITION, INC.
By: [signature illegible] By: /s/ Randy Olshen
----------------------------------
Title: President Title: President
Product License and Distribution Agreement
This PRODUCT LICENSE AND DISTRIBUTION AGREEMENT (the "Agreement") is made
as of September 25, 1998 (the "Effective Date") by and between Medical Foods,
Inc., a Delaware corporation, having principal place of business at Five
Cambridge Center, Cambridge, MA 02142 ("Licensor"), and Biomune Systems, Inc., a
Nevada corporation, having principal place of business at 2401 South Foothill
Drive, Salt Lake City, Utah 84109("Licensee"). Licensor and Licensee are
sometimes referred to heroin as a "Party" or the "Parties."
WHEREAS, Licensor has developed a medical food product, known as NiteBite
(the Product, as further defined in Article I below) and is the owner of certain
Technology (as further defined in Article I below); relating to and contained in
the Product; and
WHEREAS, Licensor wishes to have the Product marketed, sold and distributed
in the Territory (as defined in Article I below); and
WHEREAS, Licensor wishes to designate Licensee, and Licensee wishes to be
designated, as Licensor's exclusive distributor of the Product in the Territory,
on the terms and conditions set forth for this Agreement; and
WHEREAS, Licensor wishes to grant, and Licensee wishes to acquire, licenses
of the Technology for the purpose of manufacturing, marketing, distributing and
selling the Product;
NOW THEREFORE, in consideration of the foregoing premises and the covenants
set forth below, the Parties agree as follows:
1. DEFINITIONS
1.1 "Affiliate" shall mean any corporation or other business entity
directly or indirectly controlled by, controlling, or tinder common control with
Licensee during the term of this Agreement. For this purpose, "control" means
direct or indirect beneficial ownership:
(a) of at least fifty percent (50%) of the voting stock; or
(b) of at least fifty percent (50%) interest in the income of such
corporation or other business.
1.2 "Commercial Sales" shall mean sales of Product by Licensee or its agent
to the public or to a third party that makes the Product available for purchase
by members of the public in amounts within the relevant country which exceed the
Minimum Commercial Sales by Country set forth in Exhibit C.
<PAGE>
1.3 "Confidential Information" shall mean any information or materials
received by one Party from the other Party. In particular, Confidential
Information may include, but is not necessarily limited to, trade secret
components of the Technology, research projects, work in process, future
developments, scientific, engineering, manufacturing, marketing, business plan,
financial or personnel matter relating to either Party, its present or future
products, sales, supplies, customers, employees, investors or business, whether
in oral, written, graphic or electronic form, to the extent provided by one
Party to the other. Notwithstanding the foregoing, Confidential Information
shall not include any information which:
(a) is now, or hereafter becomes, through no act or failure to act on the
part of the receiving Party, generally known or available;
(b) is known by the receiving Party at the time of receiving such
information as evidenced by its written records;
(c) is hereafter furnished to the receiving Party by a third party, as a
matter of right without restriction on disclosure; or
(d) is the subject of a written permission to disclose provided by the
disclosing Party.
1.4 "Exclusive," with reference to the licenses granted to Licensee, means
Licensor will not make, use, distribute, sell or otherwise dispose of the
Product and has not granted and shall not grant further licenses with respect to
the Product or the Technology as applied to the Product in the Territory, so
long as this Agreement is in effect.
1.5 "Licensed Trademarks" shall mean those trademarks listed on Exhibit A.
1.6 "Licensee" is understood to include Biomune Systems, Inc. and any
and all of its Affiliates.
1.7 "Combination Product" is defined as a unit of sale containing Product
along with an item or items other than the Product.
1.8 "Net Sales" shall mean the gross revenues actually received by Licensee
the sale of Products to independent third parties who are not Affiliates of
Licensee, less the following deductions.
(1) Prompt payment or quantity discounts actually allowed and taken in
such amounts as are customary in the trade;
(2) Taxes, tariffs and duties levied on shipments or sales of
<PAGE>
the Product or exportation of monies (other than taxes on the net income of
Licensee) actually paid or withheld;
(3) Credit for returns.
(4) In the event that the Product is sold in the form of a Combination
Product, then Net Sales for such Combination Products will be calculated by
multiplying the actual Net Sales of such Combination Products by the fraction
A/(A+B) where A is the invoice price of the Product if sold separately, and B is
the invoice price of the other product or products in the Combination Product if
sold separately.
1.9 "Patent Rights" refers to Licensor's rights arising from Provisional
U.S. Patent Application 08/815,595 including any foreign patent applications
corresponding thereto, any United States divisions, continuations, reissues, or
reexaminations thereof (the "Patent Applications"), and any United States or
foreign patent(s) issued or granted therefrom in and any United States or
foreign patents or patent applications claiming any elements of the Technology.
1.10 "Product" shall mean the NiteBite Timed-release Glucose Bar (TM), any
enhanced or modified versions thereof that Licensor develops during the Term of
this Agreement, and all oral delivery formats (e.g., nutrition bars, beverages,
etc.) which provide the benefits of the timed-release glucose formulation in
NiteBite for the management of blood glucose in people with diabetes that are
developed, manufactured, used or sold by Licensee during the Term of this
Agreement.
1.11 Technology means all Patent Rights, know-how, technology, trade
secrets, processes, data, material, methods or other information, whether
patentable or unpatentable, which Licensor owns, controls or has a license to
(with a right to sublicense) and which is useful in the manufacture, marketing,
sale, distribution or use of the Product in the Territory.
1.12 "Term" shall have the meaning set forth in Section 11 of this
Agreement.
1.13 "Transition Period" shall mean the thirty (30) day period commencing
on the Effective Date.
1.14 "Territory" shall mean North America and those countries listed in
Exhibit B, "Tier One Countries" shall mean those countries designated as such on
Exhibit B, and "Tier Two Countries" shall mean those countries designated as
such on Exhibit B.
<PAGE>
2. LICENSE GRANT
2.1 Product and Technology Licenses. Licensor hereby grants and Licensee
hereby accepts an Exclusive right and license to make, have made, use,
distribute, license, sell, have sold or otherwise dispose of the Product, and to
use the Technology to undertake such activities with respect to the Product in
the Territory during the Term of the Agreement.
2.2 Trademark Licenses
(a) Licensor hereby grants to Licensee an Exclusive license to use the
Licensed Trademarks in Part I of Exhibit A, in connection with the manufacture,
offer, sale and distribution of the Product in the Territory for the Term of
this Agreement.
(b) Licensor hereby grants to Licensee a non-exclusive license to use
the Licensed Trademarks in Part II of Exhibit A, in connection with the
manufacture, offer, sale and distribution of the Product in the Territory for
the Term of this Agreement.
(c) In order to assure the quality of goods marketed under the
Licensed Trademarks, Licensor shall have the right to inspect samples of the
Products and, upon reasonable notice from Licensor, Licensee shall supply
Licensor with quantities of Product sufficient for such inspection. Licensee
shall conduct its business in a manner which will enhance the reputation and
goodwill attached to the Licensed Trademarks, and goodwill shall inure to the
benefit of Licensor as owner of the marks.
(d) Licensee agrees to use the Licensed Trademarks only to offer, sell
and distribute the Product in the Territory for the Term of this Agreement and
not for any other purpose.
2.3 Marketing Information Licenses. Licensor agrees to permit Licensee to
have non-Exclusive access and use of the database of information developed by
Licensor with respect to historical communications with health care
professionals, pharmacists, consumers, and others. Licensee shall be responsible
for paying any license fees to third parties is are necessary to allow Licensee
to use such database.
2.4 Domain Name. Licensor hereby grants Licensee an Exclusive license to
use the domain name www.nitebit.com in connection with the manufacture, offer,
sale and distribution of the Product in the Territory for the Term of this
Agreement, and to maintain and modify the world wide web site designated by such
domain name.
<PAGE>
2.5 Toll Free Telephone Number. Subject to the consent of the provider of
the telephone service to) such transfer and to the release by such provider of
all responsibilities of Licensor, Licensor will transfer to Licensee Exclusive
rights to the use of the toll free telephone number 800-795-1880.
2.6 Sublicenses. Licensee shall not have the right to sublicense any of its
rights under this Section 2 without Licensor's prior written consent, Such
consent shall be subject to the negotiation of economic, terms satisfactory to
Licensor and to such other conditions as n-lay be reasonably imposed by
Licensor. Nothing in this Agreement shall prohibit Licensee from contracting for
the services of third parties in the performance of Licensee's duties hereunder.
3. LICENSE FEE AND ROYALTIES
3.1 License Fee. Licensee shall pay to Licensor a license fee of $25,000
upon execution of this Agreement. This license fee shall be non-refundable and
shall not be creditable against any future payments due to Licensor.
3.2 Royalties.
(a) Royalty payment. In consideration of the license granted to
Licensee herein, Licensee shall pay to Licensor a royalty equal to 12% of Net
Sales of Product during the Term, following the expiration of the Transition
Period.
(b) Minimum Royalty Payment. For each calendar year during which the
licenses are in effect, beginning in 1999, Licensee shall pay to Licensor a
minimum royalty payment in the amount set forth in Exhibit D with respect to Net
Sales of Products in North America. The minimum royalty payment for each
calendar year shall be due and payable on or before thirty (30) days following
the end of the calendar year for which payment is due. Royalties paid to
Licensor under Section 3.2 for Net Sales made during a calendar year shall be
credited toward the minimum royalty payments due for that calendar year.
3.3 Currency. The royalty on sales in currencies other than U.S. Dollars
shall be calculated using the appropriate foreign exchange rate into U.S.
Dollars for such currency as quoted by the Wall Street Journal, New York, U.S.A.
on the close of business on the last banking day of each month. Royalty payments
to Licensor shall be in U.S. Dollars.
4. REPORTS AND PAYMENTS; ACCOUNTING; TAXES
<PAGE>
4.1 Monthly Royalty Payment and Report. Licensee shall make written reports
and royalty payments to Licensor within thirty (30) days after the end of each
calendar month following the expiration of the Transition Period and during the
term of this Agreement. This report shall state the number, description, and
aggregate Net Sales of Products during such completed calendar month, and
resulting calculation of earned royalty payment due Licensor for such completed
month. Concurrent with the making of each such report, Licensee shall include
payment due Licensor of royalties for the calendar month covered by such report.
4.2 Accounting. Licensee agrees to keep records during the Term of the
Agreement, and for a period of two (2) years thereafter, showing the
manufacturing, sales, use, and other disposition of Products sold or otherwise
disposed of under the licenses herein granted in sufficient detail to enable the
royalties payable hereunder by Licensee to be determined, and further agrees to
permit its books and records to be examined from time to time by a certified
public accountant of a nationally recognized accounting firm, who is selected
and paid for by Licensor.
4.3 Withholding Taxes. In the event Licensee is required to withhold taxes
imposed upon Licensor for any payment by Licensee to Licensor under this
Agreement, by virtue of the statutes, laws, codes or governmental regulations of
a country in which Products are sold, then such payments will be made by
Licensee on behalf of Licensor by deducting them from the payment then due
Licensor and remitting such taxes to the proper authorities on a timely basis,
and such tax payments shall count toward the royalty payments due under Section
3 above. Licensee shall obtain a receipt as promptly as possible from the
relevant taxing authorities for all withholding taxes paid and promptly forward
such receipts to Licensor to enable Licensor to claim any and all tax credits
and refunds for which it may be eligible.
5. TRANSITION PERIOD
5.1 Operations. During the Transition Period:
(a) Licensee shall commence marketing and prepare for sales and
distribution of the Product in North America.
(b) Licensor shall continue to sell the Product and payment for all such sale of
the Product shall be made directly to Licensor.
(c) Licensor shall use commercially reasonable efforts to continue to
do business in the ordinary course.
5.2 Sales and Marketing Support. During the Transition Period,
<PAGE>
Licensor or shall provide, at its own expense, transitional sales and marketing
support services.
5.3 Returns. With respect to any Product sold prior to the end of the
Transition Period that is returned to Licensee by the purchaser of such Product
within the three (3) months following the expiration of the Transition Period,
Licensor shall reimburse Licensee for any amounts refunded to such purchaser.
6. CERTAIN OBLIGATIONS OF LICENSOR
6.1 Transfer of Technology and Documentation. Licensor agrees to convey to
Licensee the following items:
(a) Technology Documentation. On the Effective Date, Licensor shall
transfer to Licensee the documentation that describes or embodies the
Technology.
(b) Product Documentation. On the Effective Date, Licensor shall
transfer to Licensee copies of all regulatory filings, governmental licenses,
approvals and communications, test results, clinical trial documentation and all
Other written materials reasonably requested pertaining to the manufacture,
research and development of the Product prior to the Effective Date.
(c) Sales and Marketing Information. On the Effective Date, Licensor
shall provide Licensee with all information reasonably requested relating to the
marketing, sale and distribution of the Product, including, but not limited to,
marketing materials and customer lists.
6.2 Inventory. On or prior to the Effective Date, the Parties shall
mutually agree on certain quality and dating standards to be used to determine
whether existing inventory of the Product is marketable or suitable for use as
samples. On the expiration date of the Transition Period, Licensor shall deliver
to Licensee at its warehouse all existing Product inventory which meets such
agreed-upon standards (the "Inventory"). Licensee may request delivery of
certain portions of the Inventory at particular times during the Transition
Period, and Licensor shall, it such times, deliver such portions of the
Inventory as Licensee may reasonably have requested so long as such amounts are
not necessary for Licensor's sales during the Transition Period. As
consideration for the Inventory determined marketable under mutually agreed
quality and dating standards, Licensee shall pay, within fifteen (15) days
following the delivery of inventory a price for the Inventory equal to the cost
paid by Licensor to the manufacturer of the Inventory and to transport the
Inventory from the manufacturer to Boston plus the cost of delivery to
<PAGE>
Licensee's warehouse. As consideration for the Inventory not marketable but
determined suitable for samples under mutually agreed quality and dating
standards, Licensee shall pay within fifteen (15) days following the delivery of
inventory a price for the Inventory equal to fifty percent (50%) of the cost
paid by Licensor to the manufacturer of the Inventory and to transport the
Inventory from the manufacturer to Boston plus one hundred percent (100%) of the
cost of delivery to Licensee's warehouse.
6.3 Support. During the Term of this Agreement, Licensor shall provide such
scientific support to Licensee with respect to the Product as Licensee may
reasonably request. Such scientific support shall include, but not be limited
to: providing interpretation and results of clinical trials that Licensor has
completed as of the Effective Date, has in process as of the Effective Date, or
may choose, at its discretion, to conduct in the future, and responding to
reasonable requests for information which may pertain to the classification of
the Product as a "medical food" as defined by 21 U.S.C. 360ee(b)(3); and shall
otherwise assist Licensee in providing information to the U.S. Food and Drug
Administration or any other governmental agency, provided, however, that all
such assistance shall not exceed 8 hours per month and 250 hours in the
aggregate.
6.4 Assignment of Supply Agreement. Licensor hereby assigns to Licensee the
Supply Agreement between Nellson Nutraceutical and Medical Foods, Inc. dated May
28, 1997 (a copy of which is attached hereto as Exhibit E) (the "Supply
Agreement") and all rights, and obligations thereunder, pursuant To which
Nellson Nutraceutical has manufactured the Product for the Licensor and Licensee
hereby assumes all of such obligations with respect to activities during the
Term of this Agreement.
7. CERTAIN OBLIGATIONS OF LICENSEE
7.1 Minimum Royalties, Commercial Sales.
(a) If Licensee fails to pay the minimum royalty payment due pursuant
to Section 3.2(b) for any calendar year, such failure shall be a material breach
of this Agreement.
(b) Following December 31, 2000, those Tier One Countries in which
Licensee has not achieved Commercial Sales shall thereafter be excluded from the
Territory.
(c) Following December 31, 2001, those Tier Two Countries in which
Licensee has not achieved Commercial Sales shall thereafter be excluded from the
Territory.
7.2 Covenant not to Sell Competitive Product. Licensee hereby
<PAGE>
covenants not to manufacture, market, sell or distribute directly or indirectly
through one or more third parties, any timed release glucose products, other
than the Product, in the Territory during the Term of this Agreement.
7.3 Acknowledgment of Licensor. Licensee agrees to acknowledge Licensor as
developer of the Product and owner of the Trademarks on its packaging and
promotional materials in accordance with the specifications in Exhibit F.
8. REPRESENTATIONS AND WARRANTIES
8.1 Representations and Warranties of Licensor. Licensor hereby represents
and warrants as follows:
(a) Corporate Power. Licensor is duly organized and validly existing
under the laws of Delaware and has full corporate power and authority to enter
into this Agreement and to carry Out the provisions hereof.
(b) Due Authorization. Licensor is duly authorized to execute and
deliver this Agreement and to perform its obligations hereunder.
(c) Binding Agreement. This Agreement is a legal and valid obligation
binding upon Licensor and is enforceable in accordance with its terms. Licensor
has the right to grant Licensee the licenses granted herein. The execution,
delivery and performance of this Agreement by Licensor and the granting of the
licenses granted herein do not conflict with any agreement, instrument or
understanding, oral or written, to which it is a party or by which it may be
bound, nor violate any law or regulation of any court, governmental body or
administrative or other agency having authority over it, Licensor has not
granted any rights in the Technology, the Patent Rights and the Licensed
Trademarks, or any other right in the Product to any third party.
(d) Licensed Trademarks. Licensor is the owner of the Licensed
Trademarks. Licensee is and shall be free to use the Licensed Trademarks
pursuant to this Agreement in all commercially reasonable ways in connection
with the Product without restriction. To Licensor's knowledge, there is no
unauthorized use, infringement, or misappropriation of the Licensed Trademarks
by any third party, including any employee or former employee of Licensor.
Licensor has no knowledge or belief that Licensee's use of the Licensed
Trademarks pursuant to this Agreement will infringe the rights of others. No
person or entity has asserted or threatened to assert any material claim with
respect to the Licensed Trademarks.
(e) Patent Rights. Licensor has no knowledge that has caused it
<PAGE>
to believe that the practice of the Patent rights will be blocked by or infringe
the patent rights of others. Licensor has no knowledge of any information which
it believes is likely to have a material effect on the validity or
enforceability of any Patent Right or claim thereof which was not disclosed in
the Patent Applications at the time such applications were filed or during the
pendency of such applications.
(f) Right to License. Licensor represents and warrants that Licensor
has obtained written release and/or assignments from each person who contributed
to the Product or the Technology to the extent necessary to vest in Licensor all
right, title and interest in such contributions (including the right to license
such contributions free and clear of any liens or encumbrances).
(g) Licensor Licenses from Third Parties. Licensor represents and
warrants that Exhibit G, attached hereto, is a complete list of all persons and
entities from whom Licensor has licensed any of the Technology, Trademarks, or
other rights relating to the rights licensed hereunder and copies of all
agreements and related documentation. Licensee acknowledges that this Agreement
may be terminated or assigned to Beth Israel Deaconess Medical Center in
accordance with section 3.2 of the agreement attached hereto as Exhibit G should
that agreement be terminated.
(h) Supply Agreement. Licensor represents and warrants that it is not
in material breach of the Supply Agreement, that Licensor has fulfilled all of
its obligation (including without limitation, payment obligation) thereunder
throughout the Effective Date, and that it has the right to assign the Supply
Agreement to Licensee, as set forth in Section 6.4 hereof.
8.2 Representations and Warranties of Licensee. Licensee hereby represents
and warrants as follows:
(a) Corporate Power. Licensee is duly organized and validly existing
under the laws of Nevada and has full corporate power and authority to enter
into this Agreement, and to carry out the provisions hereof.
(b) Due Authorization. Licensee is duly authorized to execute and
deliver this Agreement and to perform its obligations hereunder.
(c) Binding Agreement. This Agreement is a legal and valid obligation
binding upon Licensee and is enforceable in accordance with its terms. The
execution, delivery and performance of this Agreement by Licensee does not
conflict with any agreement, instrument or understanding, oral or written, to
which it is a Party or by which it may be bound, nor violate, any law or
regulation of any court, governmental body or administrative or other
<PAGE>
agency having authority over it.
9. INTELLECTUAL PROPERTY RIGHTS
9.1 Ownership of Intellectual Property. Subject to the terms of this
agreement, Licensor shall retain all of its rights, title and interest in and to
the Technology, including but not limited to all copyrights, patents, including
but not limited to the Patent Rights, trademarks, including but not limited to
the Licensed Trademarks, and trade names and all other industrial and
intellectual property embodied in or related to the Product. Notwithstanding the
foregoing, Licensee shall retain all rights, title, and interest to (a) all
brand names, marks, trade dress, marketing programs, advertising copy and
related materials it creates or has created for it in connection with the sale,
marketing, and distribution of the Products, and (b) all research, development
and technical improvements (including copyrightable materials) Licensee creates
or has created for it at Licensee's own expense that pertain to the Technology
and the Products.
9.2 Prosecution of Patent Applications. Licensor shall have the sole right
to file and prosecute patent applications and maintain patents relating to the
Technology and any improvements thereto made by the Licensor. Licensee shall
reimburse Licensor for all costs incurred in connection with the preparation,
filing, prosecution and maintenance of any patent applications and patents
referred to in the preceding sentence that are within the Territory. Licensee
shall cooperate with Licensor in regard to such maintenance and prosecution.
Licensor shall provide Licensee with copies of all filings and relevant
documentation and an opportunity to comment thereon prior to their submission.
Should Licensor determine not to file, to abandon prosecution of, or to cease to
maintain, any patent or patent application in any jurisdiction within the
Territory, Licensor shall so notify Licensee and shall permit Licensee, should
Licensee choose to do so at Licensee's expense, to file, continue to prosecute
or maintain such patent in such jurisdiction, and Licensor shall cooperate with
Licensee in regard thereto.
9.3 Defense of Intellectual Property Suits. If a third party asserts that a
patent, trademark or other proprietary right owned by it is infringed or
otherwise violated by the manufacture, offer, distribution or sale of the
Product in the Territory, the Party against whom such a claim was asserted shall
immediately provide the other Party notice of such claim and the related facts
in reasonable detail. Licensee shall have the first right, but not the
obligation, to control such defense. If Licensee shall fail to take any such
action against any such third party, Licensor shall have the right, but not the
obligation, upon notice to Licensee, to take any steps Licensor may deem
appropriate with respect to such third party at Licensor's own expense,
including asserting control of any such defense. If Licensee assumes the
<PAGE>
defense, Licensor shall to the extent which is reasonable in the circumstances
cooperate with Licensee and shall have the right to be represented separately by
counsel of its own choice. If Licensor will assume control of the defense, then
Licensor shall have the right, but not the obligation, to so control the defense
by counsel of its own choice. In such event, Licensee shall cooperate with
Licensor to the extent which is reasonable in the circumstances and shall have
the right to be represented separately by counsel of its own choice. The entity
(whether Licensor or Licensee) that controls the defense of a given claim with
respect to the manufacture, offer, sale or distribution of the Product in the
Territory shall also have the right to control settlement of such a claim;
provided, however, that no settlement shall be entered into without the consent
of the other Party if such settlement would materially adversely affect the
interests of such other Party in the Product in the Territory in a manner
different from the interests of the Party controlling the defense. If Licensee
controls the defense, it shall not enter into any settlement that may adversely
affect the Product outside the Territory without the prior written consent of
Licensor. If Licensee assumes the control of the defense and settlement
negotiation of any claim, pursuant to this Section 9.3, Licensee shall bear the
cost of such defense and settlement negotiation.
9.4 Enforcement of Intellectual Property Rights. In the case of any
infringement of any Patent Rights or any violation of any other intellectual
property right contained in the Technology by any third party (an "Infringer")
in the Territory during the term of this Agreement. Licensee shall have the
right, but not the obligation, at Licensee's expense, to cause such third party
to cease such infringement and to otherwise enforce such Patent Rights or such
other intellectual property right. Any amount recovered as a result of any
action taken by Licensee hereunder shall be first applied to reimbursing
Licensee for its out-of-pocket expenses incurred in connection therewith and the
remainder, if any, shall be divided appropriately between Licensee and Licensor
with reference to the relative monetary injury suffered by each of them by
reason of the infringement for which said amounts are recovered. If, following
reasonable notice from the Licensor, Licensee shall fail to take any action
against any Infringer which Licensor may reasonably deem necessary or desirable
to prevent such infringement or violation, or to recover damages therefor, in
addition to any other remedy available to it, Licensor shall have the right, but
not the obligation, upon notice to Licensee, to take any steps Licensor may deem
appropriate against such Infringer at Licensor's own expense. Licensee shall
assist Licensor, at Licensee's expense, as reasonably requested in taking any
such action against any such Infringer. Any amount recovered as a result of any
such action taken by Licensor shall be retained by Licensor. This paragraph
shall survive the termination or expiration of this Agreement.
9.5 Additional Proprietary Rights. Licensee may, in its sole
<PAGE>
discretion and at its expense, use, develop, apply for, prosecute, record or
maintain any additional proprietary rights relating to the Product, including,
without limitation, patents, trademarks, servicemarks, copyrights and trade
secrets, as it may desire, and rights therein shall be retained by Licensee as
set forth in Section 9.1. Licensor shall provide reasonable cooperation in any
such effort, including, without limitation, execution of necessary documents and
provision of testimony in the form of affidavits.
10. CONFIDENTIALITY
10.1 Confidentiality Obligations. During the term of this Agreement, and
for a period of three (3) years after termination hereof, each Party will
maintain all Confidential Information in trust and confidence, will not disclose
any Confidential Information to any third party or use any Confidential
Information for any unauthorized purpose and will otherwise protect the
Confidential Information of the other Party with at least the same degree of
care as it uses for its own materials of a like nature. Each Party may use such
Confidential Information only to the extent required to accomplish the purposes
of this Agreement. Confidential Information shall not be used for any purpose or
in any manner that would constitute a violation of any laws or regulations,
including without limitation the export control laws of the United States.
Confidential Information shall not be reproduced in any form except as required
to accomplish the intent of this Agreement. No Confidential Information sha1l be
disclosed to any employee, agent, consultant, sublicensee or supplier who does
not have a need for such information. To the extent that disclosure is
authorized by this Agreement, the disclosing Party will obtain prior agreement
from its employees, agents, consultants, sublicenses or suppliers to whom
disclosure is to be made to hold in confidence and not make use of such
information for any purpose other than those permitted by this Agreement. Each
Party promptly notify the other upon discovery of any unauthorized use or
disclosure of the Confidential Information.
10.2 Terms of this Agreement. The Parties agree that the material financial
terms of this Agreement will be considered Confidential Information of both
Parties. However, each Party shall have the right to disclose the material
financial terms of this Agreement to any potential acquirer, merger partner, or
other bona fide potential financial or strategic partner, subject to a
requirement of all reasonable efforts to secure confidential treatment of such
information.
10.3 Authorized Disclosure. Notwithstanding any other provision of this
Agreement, each Party may disclose Confidential Information if such disclosure:
<PAGE>
(a) is in response to a valid order of a court or other governmental
body of the United States or any political subdivision thereof, provided,
however that the responding Party shall first have given notice to the other
Party hereto and shall have made a reasonable effort to obtain a protective
order requiring that the Confidential Information so disclosed be used only for
the purposes for which the order was issued;
(b) is otherwise necessary to file or prosecute patent applications,
prosecute or defend litigation or comply with applicable governmental
regulations or otherwise establish rights or enforce obligations under this
Agreement, but only to the extent that any such disclosure is necessary,
provided that the disclosing Party rakes all available steps to designate the
information as confidential and to prevent further disclosure by the recipient;
or
(c) is otherwise required by law, provided that the disclosing Party
takes all available steps to designate the information as confidential and to
prevent further disclosure by the recipient.
10.4 Return of Confidential Information.
(a) Upon the receipt of a written request from the disclosing Party,
the receiving Party shall promptly return to the disclosing Party that Party's
Confidential Information, unless retention is otherwise expressly authorized
hereunder or is reasonably necessary to the receiving Party's performance of any
continuing duties or obligations, or its exercise of any continuing rights under
this Agreement or any other agreement with the disclosing Party.
(b) As soon as practicable after the termination of this Agreement for
any reason, the receiving Party shall return to the disclosing Party all
Confidential Information and all copies thereof in the possession, custody or
control of the receiving Party or shall destroy or render unusable a11 such
Confidential Information and all copies thereof and shall certify in writing to
the disclosing Party all such Confidential Information has been delivered to the
disclosing Party or destroyed; provided, however, that this Section 10.4 shall
not apply to any Confidential Information retention of which is otherwise
expressly authorized hereunder or which is reasonably necessary to the receiving
Party's performance of any continuing duties or obligation, or its exercise of
any continuing rights under this Agreement or any other agreement with the
disclosing Party, or which is required to be maintained to be in compliance with
applicable U.S. governmental regulations and other regulations applicable to the
Territory.
10.5 Remedies. Any breach of Section 10.1 or Section 10.2 hereof shall
<PAGE>
cause immediate and irreparable injury to the other Party, and monetary damages
shall be inadequate to compensate for such breach. Thus, in the event of such
breach, the injured Party shall be entitled to injunctive relief and any and all
other remedies available at law or in equity.
10.6 Survival. The provisions of this Section 10 shall survive any
termination of this Agreement or the suspension or termination of either Party's
duties hereunder.
11. TERM AND TERMINATION
11.1 Term. This Agreement shall become effective on the Effective Date and,
unless earlier terminated pursuant to this Section 11, shall remain in effect
until the tenth anniversary of the Effective Date ("Term"). Licensee, in its
sole discretion, may extend the Term for an additional five (5) years by giving
written notice to Licensor not fewer than 180 days before this Agreement would
otherwise expire.
11.2 Termination by Either Party. Notwithstanding anything herein to the
contrary, each Party shall have the right, in addition and without prejudice to
any other rights or remedies, to terminate this Agreement if,
(a) the other Party commits any material breach of the terms hereof
which, in the case of a breach capable of remedy, shall not have been remedied
within sixty (60) days of the receipt by the Party in default of notice
specifying the breach; or
(b) the other shall dissolve, liquidate, or cease to carry on business
operations.
11.3 Early Termination by Licensee. Licensee shall have the right to
terminate this Agreement at any time upon ninety (90) days written notice to
Licensor and payment of all amounts due Licensor through the effective date of
termination.
11.4 Effect of Termination. Upon the effective date of expiration or early
termination of this Agreement, the following shall occur:
(a) Termination of Licenses. The licenses set forth in Section 2 shall
terminate and Licensee shall immediately discontinue all manufacture, marketing,
sales and distribution of the Product in the Territory. Licensee shall
discontinue all use of the Licensed Trademarks and the Technology.
Notwithstanding the foregoing, Licensee shall have the right, for a period not
to exceed ninety (90) days to sell any Products remaining in inventory and to
<PAGE>
fill any orders outstanding on the date of termination. Sales of Products made
during such 90 day period shall be subject to royalties pursuant to Section 12.
Except to the extent of selling its remaining inventory as permitted by this
Section 11.4(a), after expiration or termination, Licensee shall not represent
or hold itself out as authorized manufacturer, distributor or sales
representative for the Product in the Territory or engage in any practices which
might make it appear that Licensee is such an authorized manufacturer,
distributor or sales representative.
(b) Accrued Rights Upon Termination. The rights of either Party which
may have accrued up to the date of such termination shall not be affected.
(c) Minimum Royalty Payments. Licensee shall have no further
obligations to make any minimum royalty payments under Section 3.2 other than a
pro rata portion of the minimum royalty payments due for the year during which
the effective date of termination occurs based on the portion of such year which
occurred prior to such effective date.
11.5 No Other Rights Upon Termination. Neither Party hereto shall be
responsible to the other for compensation, damages, or otherwise as a result of
termination of this Agreement in accordance with its terms. Obligations which
arose prior to such termination shall survive such termination.
11.6 Survival. The provisions of Sections 4.1, 4.2, 4.3, 7.2, 8, 9.1, 9.2,
9.4, 10, 11.4, 11.5, 11.6 and 12 shall survive any expiration or termination of
this Agreement.
12. MISCELLANEOUS PROVISIONS
12.1 Governing Law. This Agreement shall be governed by and construed in
accordance with the substantive laws of the Commonwealth of Massachusetts,
without regard to its principles of conflicts of laws.
12.2 Force Majeure. The failure of any party hereunder to perform any
obligation otherwise due as a result of governmental action, law, order or
regulation, or as a result of war, act of public enemy, strike or other labor
disturbance, fire, flood, act of God or other causes of like kind beyond the
reasonable control of such party, shall be excused for so long as said cause
exists to the extent such failure is caused by such an event.
12.3 Notice. All notices and requests required or authorized hereunder
shall be made in writing and shall be deemed to have been duly given if
delivered personally, delivered by facsimile with confirmation of receipt,
delivered by commercial overnight courier, or three (3) days after mailing, if
<PAGE>
delivered by United States certified mail, postage prepaid, return receipt
requested, to a Party at its address set forth below or at such address as shall
be specified by such party to the other in accordance with this Section 12.3.
If to Licensor:
Medical Foods, Inc.
Five Cambridge Center
8th Floor
Cambridge, MA 02142
Attention: Alan T. Barber
Telephone: (617)588-1600
Facsimile: (617)542-2241
with a copy to:
Mintz, Levin, Colin, Ferris, Glovsky and Popeo, PC
One Financial Center
41st Floor
Boston, MA 02111
Attention: Douglas A, Zingale, Esq.
Telephone: (617) 542-6000
Facsimile: (617) 542-2241
If to Licensee:
Biomune Systems, Inc.
2401 South Foothill Drive
Salt Lake City, Utah 84109
Attention: Randy Olshen
Telephone: (8OI) 466-3441
Facsimile: (801) 466-3741
With a copy to:
Durham, Evans, Jones & Pinegar
Key Bank Tower
50 South Main Street
Suite 850
Salt Lake City, Utah 84144
Attention: Kevin R. Pinegar
<PAGE>
Telephone: (8O1) 538-2424
Facsimile: (8O1) 538-2425
12.4 Severability. If any term or provision of this Agreement is found to
be invalid under any applicable statute or rule of law then, that provision
notwithstanding, this Agreement shall remain in full force and effect and such
provision shall be amended to reflect as fully as possible the intent of the
Parties and, at the same time, to be valid, unless such amendment cannot be made
without materially defeating the intent of the parties in entering into this
Agreement, in which case this Agreement shall terminate, with the consequences
set forth in Section 11.
12.5 Limitation of Liability. EXCEPT FOR BREACHES OF SECTIONS 7.2, 8 AND 10
HEREOF, UNDER NO CIRCUMSTANCE SHALL EITHER PARTY BE LIABLE TO THE OTHER FOR ANY
CONSEQUENTIAL, SPECIAL OR INCIDENTAL DAMAGES ARISING OUT OF OR RELATED TO THIS
AGREEMENT (INCLUDING LOSS OF PROFITS AND LOSS OF BUSINESS) EVEN IF AWARE OF THE
POSSIBILITY OF SUCH DAMAGES. LICENSEE'S DAMAGES SHALL BE LIMITED TO THE AMOUNTS,
IF ANY, OWED PURSUANT TO SECTION 3.
12.6 Assignment. Neither party shall assign any of its rights or delegate
any of its duties under this Agreement without the prior written consent of the
other, except that either Party may assign this Agreement without such consent
to any Affiliate or successor by merger or sale of substantially all of its
business unit to which this Agreement relates. Any attempted assignment or
delegation in contravention of this Article shall be void and of no effect.
12.7 Amendment; Waiver. This Agreement may not be modified, amended,
rescinded, canceled or waived in whole or part, except by a written instrument
signed by the parties. No waiver of any provision of this Agreement or of any
rights or obligations of any party hereunder shall be effective unless made in a
written instrument executed by the party or parties waiving compliance. Any such
waiver shall be effective only in the specific instance and for the specific
purpose stated in such writing.
12.8 Counterparts. This Agreement may be executed in counterparts with the
same force and effect as if each of the signatories had executed the same
instrument.
12.9 Independent Contractors. Each Party shall act as an independent
contractor under the terms of this Agreement. Neither Party is, nor shall it
represent itself to be, nor shall it be deemed to be, an employee, agent, co-
<PAGE>
venturer, franchisee or legal representative of the other for any purpose.
Neither party shall attempt to act, or represent itself as having the power, to
bind the other or create any obligation on behalf of the other.
12.10 Rights and Remedies Cumulative. Except as expressly provided herein,
the rights and remedies provided in this Agreement shall be cumulative and not
exclusive of any other rights and remedies provided by law or otherwise.
12.11 Captions. The captions herein have been inserted solely for
convenience of reference and in no way define or limit the scope or substance of
any provision of this Agreement.
12.12 Meaning of Certain Terms. As used in this Agreement, "herein" and
"hereof" shall refer to this Agreement as a whole, and "including" shall mean
"including but not limited to." All dollar amounts stated herein are expressed
in United States dollars.
12.13 Complete Agreement. This Agreement and the Exhibits hereto constitute
and express the final, complete and exclusive agreement and understanding
between the parties with respect to their subject matter and supersede all
previous communications, representations or agreements, whether written or oral,
with respect to the subject matter hereof, including but not limited to the
non-binding, letter of intent between the parties dated September 2, 1998.
[Signatures on the following page]
<PAGE>
IN WITNESS WHEREOF, the Parties have each caused this Agreement to beI
signed and delivered by their duly authorized representatives as of the date
first written above.
Date: 9/27/98 Date: 28 September 1998
MEDICAL FOODS, INC. BIOMUNE SYSTEMS, INC.
By: /s/ Peter J. Vitulli By: /s/ Michael G. Acton
------------------------ ------------------------
Peter J. Vitulli Michael G. Acton
President and CEO President and CEO
[Exhibits Omitted]
<PAGE>
LIST OF EXHIBITS
Exhibit A: Licensed Trademarks
Exhibit B: Territory
]Exhibit C: Minimum Commercial Sales by Country
Exhibit D: Minimum Royalty Payments
Exhibit F: Supply Agreement
Exhibit F: Acknowledgment of Licensor as Developer
Exhibit G: Third Party Licenses
AMENDED AND RESTATED
MARKETING AND CONSULTING SERVICES AGREEMENT
This Amended and Restated Marketing and Consulting (the "Agreement") is
amended as of December 10, 1998, by and between Harrogate Marketing, L.L.C.
("Harrogate") and Biomune Systems, Inc., a Nevada corporation ("Biomune") who
hereby mutually agree as follows:
1. Term. The term of this Agreement will begin on the date this Agreement is
executed by all parties hereto and continue until such time as Biomune
discontinues all of the Products (defined in Section 2, below) reasonably
contemplated by this Agreement, subject to termination as provided in
Section 8, below.
2. Services. Harrogate agrees to perform the following services in a
professional manner and in accordance with applicable industry
standards.
(a) This Agreement contemplates the personal services of Randy
Olshen and should Mr. Olshen fail or become unable to perform such
services personally, then such failure will be deemed a breach of this
Agreement and Biomune may terminate the Agreement. Mr. Olshen will
serve as the President of Biomune's Optim Nutrition, Inc. subsidiary
("Optim").
(b) For purposes of this Agreement, the term "Services" shall
include the following:
(i) identifying vitamin and nutritional supplement
formulations for marketing by Biomune through Optim, including,
but not limited to the NiteBite medical food bar and the Mountain
Lift food bars (collectively the "Products");
(ii) assisting and advising Biomune in negotiations with
vendors as to product formulation, manufacture, pricing,
packaging, delivery schedules, and all aspects of the Products;
(iii) assisting and advising Biomune in connection with
the preparation, design, content, style and production of all
literature, brochures, manuals, labels and other documentation
relating to the Products;
(iv) monitoring and advising Biomune concerning all
regulatory approvals, permits and issues relating to the Products,
including appropriate labeling, packaging and instructions;
(v) assisting and advising in connection with customer
support and training in the use of the Products;
(vi) formulating point-of-sale displays and marketing
literature and assisting in the creating of an over-all marketing
strategy for the Products;
(vii) attending trade shows, marketing seminars, and
similar events as directed by Biomune;
(viii) assisting in customer and distributor training and
promotion of Products;
(ix) monitoring and advising Biomune relative to
competitive issues pertinent to the Products.
(c) Notwithstanding the definition of Services, any demands of
Harrogate by Biomune will be reasonable in terms of volume of sales,
prior notice and availability.
3. Compensation.
(a) Fees. So long as this Agreement is in force, as compensation
for all Services rendered under this Agreement, Biomune will pay
Harrogate a fee (the "Marketing Fee") in an amount equal to forty-five
percent (45%) of gross revenues from the sale of the Products. At its
sole discretion and option, Biomune may pay part or all of such fee in
shares of its common stock; provided, that if it elects to do so, the
shares shall be valued at the fair market value of the common stock as
of the date of this Agreement ($0.20 per share).
(b) Expenses. Harrogate will finance its own operations and will
not be reimbursed by Biomune for any expenses incurred in connection
with the performance of Services under this Agreement. Harrogate will
not receive or accept any payment or consideration of any kind from or
on behalf of any Biomune vendor, or such vendor's officers, directors,
employees, subsidiaries, or related parties. Harrogate will assume and
pay from its funds all expenses (including, without limitation, legal
fees and costs) associated with the defense of the Sterlin and Furtek
litigation proceedings or will reimburse Biomune for any such expenses
paid by Biomune. If and to the extent that Biomune provides office
space, insurance, accounting or bookkeeping services or similar
services to Harrogate, Harrogate will reimburse or pay such expenses as
invoiced by Biomune. Biomune may, at its option, offset any amounts
owing under this Section 3(b) against the payment of fees under Section
3(a), above.
(c) Additional Consideration. As additional consideration for the
Services to be provided by Harrogate under this Agreement, Biomune
grants to Harrogate an options to purchase a total of 3,080,000 shares
of Biomune Common Stock at a price of $0.20 per share. It is understood
and agreed that of this amount, Olshen will receive an option to
acquire 80,000 shares of Common Stock. The options granted under this
section 3(c) will vest and become exercisable only as the exercise
thereof would not cause the holder, assuming exercise in full, to be
the beneficial owner of more than 5% of the issued and outstanding
Common Stock of Biomune. The options may be assigned or transferred to
employees, consultants and other affiliates of Harrogate or persons
providing services to Harrogate in furtherance of its duties under this
Agreement.
(d) commission of 10% of the value of certain sales contracts
payable in cash or stock or a combination thereof at the time of
execution of such sales contracts.
(e) Timing. Biomune will pay the Marketing Fee monthly, based on
the sales results of the previous month. Payment will be made within 15
days of the last day of each month and shall be accompanied by a
detailed accounting of all sales for such month, including where
practical, year-to-date information showing buyer and quantity
purchased.
4. Confidential Information.
(a) Proprietary and Confidential Information. As used in this
Agreement, "Proprietary and Confidential Information" will mean data,
techniques, technical information, know-how, equipment specifications,
or other information specifically designated as "Confidential
Information" during the term of this Agreement. Notwithstanding any
other provision of this Agreement, Proprietary and Confidential
Information will not include any information that is:
(i) independently developed by the receiving party;
(ii) becomes or is already available to the general
public without breach of this Agreement;
(iii) rightfully received by the receiving party from a
third party without obligation of confidence; or
(iv) released for disclosure by the disclosing party with
its written consent.
(b) Unilateral Transfer. Biomune does not desire to receive any
proprietary or confidential information of Harrogate or any third
party. Harrogate warrants and represents that none of the information,
Services, or results thereof shall contain any proprietary or
confidential information of Harrogate or any third party.
(c) Confidentiality Obligation. Harrogate agrees to use the same
care and discretion to avoid disclosure, publication or dissemination
of the received Proprietary and Confidential Information as it employs
for similar information of its own that it does not desire to publish,
disclose or disseminate, except to those employees or subcontractors of
Harrogate who have signed an agreement for protection of the
information and who have a need to know for purposes of achieving the
purposes of this Agreement.
(d) Return. Within thirty (30) days after termination of this
Agreement, Harrogate agrees to return or destroy all documents and
tangible items in its possession that contain any part of the
Confidential Information received by Harrogate or provide a certificate
of destruction if the information is destroyed.
(e) Limitations. This Agreement will not be interpreted to restrict
either party from using, disclosing or disseminating its own
Confidential Information in any way. Except as otherwise provided in
this Agreement, this Agreement will in no way preclude either party
from competing with the other or from independently developing, having
developed, acquiring or marketing any other material, products, and
services.
5. Representations. Harrogate represents and warrants as follows:
(a) that it is able to perform the Services and that it does not
have any understanding or agreement with anyone else which restricts
its ability to perform such services;
(b) that any Services it provides and information or materials it
develops for or discloses to Biomune will not in any way be based upon
confidential or proprietary information derived from any source other
than Biomune, unless Harrogate is specifically authorized in writing by
such source to use such proprietary information; and
(c) that if Biomune incurs any liability or expense as a result of
any valid claim that any of the above warranties is not true, Harrogate
will indemnify Biomune and hold it harmless against all such liability
or expense, including reasonable attorneys' fees, provided that Biomune
notifies Harrogate of the claim and cooperates with Harrogate in
defending against the claim. Harrogate will notify Biomune if it ever
becomes aware of any such claim.
6. Work for Hire. Everything Harrogate (including its employees) writes or
develops for Biomune or any copyrightable work created for Biomune while
performing the Services, provided that such writing or development is
contemplated by the Project, shall be works made for hire and therefore the
property of Biomune. In addition, Harrogate agrees to assign to Biomune all
right, title and interest in any invention, patentable or not, made or
conceived solely or jointly during the course of performing the Services and
related to or contemplated by the Project. Harrogate will promptly disclose
any such invention to Biomune and will, upon request, execute an assignment
to Biomune of any patent, trade secret or other proprietary right and will
do anything else reasonably necessary to enable Biomune to perfect its
rights therein. Harrogate will not license or grant any right to Products
developed under the Project to any other entity during the term of this
Agreement and it is acknowledged that the rights of Biomune under this
Agreement are exclusive worldwide.
(a) Preexisting Works. In the event that something Harrogate writes
or develops while performing the Services constitutes a derivative work
of any preexisting work, Harrogate shall provide Biomune with written
notification that indicates:
(i) the nature of such preexisting work;
(ii) its owner;
(iii) any restrictions or royalty terms applicable to
Harrogate's use of such preexisting work or Biomune's exploitation
of the deliverable as a derivative work; and
(iv) the source of Harrogate's authority to employ the
preexisting work in the preparation of any material required by
the Project Assignment.
Before initiating the preparation of any material that is a
derivative work of a preexisting work, Harrogate shall cause Biomune,
its successor, and assignees, to have and obtain an irrevocable,
nonexclusive, worldwide, royalty-free right and license to use such
derivative work(s) for any purpose whatsoever.
In the event that Harrogate fails to comply with this provision,
Harrogate shall grant and hereby grants to Biomune on behalf of itself
as well as each third party who has a color of title to the derivative
work(s) and such preexisting works as may be incorporated into the
derivative work(s) an irrevocable, nonexclusive, worldwide,
royalty-free right and license to use such derivative work(s) and
preexisting materials for any purpose whatsoever.
(b) Patent License. From any Services performed for Biomune under
this Agreement, Harrogate hereby grants to Biomune, its successors, and
assignees, the royalty-free, worldwide, nonexclusive right and license
under any patents developed for or owned by Harrogate, or with respect
to which Harrogate has a right to grant such rights and licenses, to
the extent required by Biomune to exploit the materials and exercise
its full rights in the same, including the right to make, use, and sell
products and services based on or incorporating such materials
developed under this Agreement or in connection with the Harrogate's
Services hereunder.
7. Exclusivity; Right to Purchase. The grant of marketing rights to
Harrogate hereunder is exclusive and Biomune agrees it will not appoint any
other party to represent the Products during the term of this Agreement.
Harrogate agrees to diligently provide the Services and promote sales of the
Products during the term hereof. In consideration of the grant of exclusive
rights to market the Products, Harrogate hereby grants to Biomune the
irrevocable right to acquire 100% of the equity interests of Harrogate in
exchange for $1,000,000 at any time so long as this Agreement is in full
force and effect.
8. Termination.
(a) By Either Party After September 30, 1999. After September 30,
1999, either party may terminate this Agreement at any time following
thirty (30) days written notice to the other party.
(b) By Either Party in the Event of Breach and Failure to Cure.
This Agreement may be terminated by either party at any time in the
event that the other party has not performed a material covenant or has
otherwise breached any material term of this Agreement upon receipt of
written notice thereof if the nonperformance or breach is incapable of
cure, or upon the expiration of 30 days after receipt of written notice
thereof if the nonperformance or breach is capable of cure and has not
been cured or significant steps have not been undertaken to effect such
cure.
(c) Certain Rights of Biomune. If Harrogate breaches this
Agreement, Biomune may (in addition to all of its other rights) require
Harrogate to give it all work in progress in exchange for reasonable
compensation based on the percentage of the work completed. Harrogate
acknowledges that its breach (or threatened breach) of any of its
obligations under Sections 4, 5, or 6 could irreparably injure Biomune
and Harrogate could not remedy the damage caused Biomune simply by
paying Biomune some amount of money.
(d) Limitation of Damages. OTHER THAN FOR BREACHES OF HARROGATE'S
OBLIGATIONS UNDER SECTIONS 4, 5, OR 6, IN NO EVENT WILL EITHER PARTY BE
LIABLE TO THE OTHER FOR ANY CONSEQUENTIAL, INCIDENTAL OR SPECIAL
DAMAGES ARISING OUT OF ANY DEFAULT UNDER THIS AGREEMENT, WHETHER IN
CONTRACT OR TORT.
(e) Termination of Obligations. Upon termination of this Agreement,
all obligations of Biomune to pay Harrogate the compensation provided
for in Section 3 will cease. Termination of this Agreement will not
under any circumstances prevent or hinder Biomune from pursuing the
sale or marketing of the Products through third parties or otherwise
following such termination.
9. Dispute Resolution. Any dispute arising under this Agreement or its
interpretation will be resolved by arbitration in accordance with the rules
of the American Arbitration Association. Arbitration will occur in Salt Lake
City, Utah, with each party selecting one arbitrator and the two arbitrators
so selected choosing a third arbitrator. A decision of the majority of such
panel will be binding upon the parties and may be enforced in the courts of
the state of Utah in accordance with local law.
10. Non-competition. It is acknowledged and agreed by Harrogate that the
limitations imposed by Section 4 and Section 6 of this Agreement are
intended to prohibit and prevent Harrogate from competing in any way with
Biomune. Therefore, except as expressly permitted hereunder, Harrogate will
not, directly or indirectly, compete with Biomune as to the Project or the
Products during the term of this Agreement.
11. Miscellaneous.
(a) Harrogate will continue to be bound by all obligations
described in Sections 4, 5, 6 and 10 after the termination of this
Agreement for whatever reason.
(b) The laws of the state of Utah will govern this Agreement
(without regard to its laws governing conflicts of law). The parties
consent to the exclusive jurisdiction and venue of Utah state and
federal courts in any action arising out of this Agreement.
(c) This Agreement constitutes the entire agreement of the parties
regarding the subject matter hereof and supersedes all prior
representations, proposals, discussions, and communications, whether
oral or in writing. This Agreement may be modified only in writing and
shall be enforceable in accordance with its terms when signed by the
party sought to be bound.
(d) Harrogate will indemnify and hold Biomune harmless from all
loss and liability on account of claims of personal injury, death, and
property damages resulting from any act or omission by Harrogate
(including Harrogate's agents, employees, or subcontractors) in the
course of performing this Agreement. Biomune will indemnify and hold
Harrogate harmless from all loss and liability on account of claims of
personal injury, death, and property damages resulting from any act or
omission by Biomune (including Biomune's agents, employees, or
subcontractors) in the course of performing this Agreement.
(e) Harrogate agrees that it will not recommend to Biomune any
manufacturer of products unless said manufacturer will name Biomune as
an additional insured on a product liability policy of at least
$1,000,000 relating to the Products and agrees to provide Biomune with
copies of such policies and proof of insurance upon request.
(f) Neither this Agreement nor any of the rights or obligations of
Harrogate arising under this Agreement may be assigned or transferred
without Biomune's prior written consent. This Agreement is for the
benefit of Biomune's successors and assignees, and will be binding on
Harrogate's heirs and legal representatives.
(g) If either party cannot perform any of its respective
obligations because something has happened which is beyond its
reasonable control, then the non-performing party will notify the other
party, take reasonable steps to resume performance as soon as possible
and not be considered in breach during the period performance is beyond
the party's reasonable control.
(h) In the event that any term or provision of this Agreement will
be deemed by a court of competent jurisdiction to be overly broad in
scope, duration or area of applicability, the court considering the
same will have the power and is hereby authorized and directed to limit
such scope, duration or area of applicability, or all of them, so that
such term or provision is no longer overly broad and to enforce the
same as so limited. Subject to the foregoing sentence, in the event any
provision of this Agreement will be held to be invalid or unenforceable
for any reason, such invalidity or un-enforceability will attach only
to such provision and will not affect or render invalid or
unenforceable any other provision of this Agreement.
(i) Either party's waiver of a default by the other does not
constitute a waiver of future or other defaults.
(j) Harrogate is performing services for Biomune as an independent
contractor, and the parties are not partners or joint venturers.
Neither party may bind the other to any agreement with anyone else.
Harrogate shall not represent that Harrogate is or ever has been an
employee of Biomune. It is acknowledged that Harrogate is owned by a
former executive officer and director of Biomune and by the present
manager of a majority owned subsidiary of Biomune. The parties
acknowledge the conflict inherent in such relationships and waive any
claim of conflict of interest that may arise as a result of this
business transaction. The parties believe the terms of this Agreement
are fair to all parties and were negotiated at arms' length. Counsel
for Biomune participated in the preparation of this Agreement and has
advised each party that it should consider seeking independent legal
counsel in connection with this transaction. To the extent the parties
have not sought the advice of independent legal counsel, they waive
such right.
(k) Harrogate will be solely responsible for and must maintain
adequate records of expenses incurred in the course of performing
services under this Agreement. No part of Harrogate's compensation will
be subject to withholding by Biomune for the payment of any social
security, federal, state or any other employee payroll taxes. Biomune
will regularly report amounts paid to Harrogate by filing Form
1099-MISC with the Internal Revenue Service as required by law.
(l) Each provision of this Agreement has been subject to the mutual
consultation, negotiation and agreement of Biomune and Harrogate and
shall not be construed for or against either party.
[SIGNATURES ARE ON THE FOLLOWING PAGE.]
<PAGE>
ACKNOWLEDGED AND AGREED, this 31 day of December 1998, effective December 10,
1998.
Biomune Systems, Inc.
By: /s/ Michael G. Acton
------------------------
Its: President/CEO
Date: December 31, 1998
Harrogate Marketing, L.L.C.
By: /s/ David G. Derrick
-----------------------
Its: Manager
Date: December 31, 1998
RESTATED AND AMENDED PURCHASE AGREEMENT
RESTATED AND AMENDED PURCHASE AGREEMENT, effective May 27, 1998 (the
"Agreement"), by and among CYPRESS SPRINGS LLC, a California limited liability
company ("Cypress") managed by Ira E. Ritter, an individual residing in
California ("Ritter"), Rockwood Companies, LLC, a California limited liability
company (with its predecessors, "Rockwood") and BIOMUNE SYSTEMS, INC., a Nevada
corporation ("Biomune"). This Agreement is executed by the Parties on December
30, 1998, with the effective date indicated above.
RECITALS
A. Cypress is the sole owner of all of the issued and outstanding member
interests of Rockwood formerly known as Rockwood Investments, Inc., d.b.a.
Rockwood Cosmetics, Inc. ("Cosmetics"), which is in the business of marketing
and distributing vitamin, nutrition and personal care products, including the
products formerly marketed through Cosmetics and Rockwood Vitamins LLC
("Vitamins").
B. Biomune is a Nevada corporation engaged in the business of researching,
developing and selling pharmaceutical and nutraceutical products based on a
patented whey protein technology. In July 1997, Biomune entered into an
agreement with Ritter to acquire Cosmetics and pursuant to that agreement
Biomune made option and other payments to Ritter and Cosmetics totaling $360,000
toward the purchase price of Cosmetics. That agreement was terminated by Biomune
in January 1998.
C. Pursuant to this Agreement herein, Biomune intends to purchase a
controlling interest in Rockwood as contemplated herein.
D. Upon completion of the transactions contemplated herein, the parties
desire to have Rockwood owned 52% by Biomune and 48% by Cypress, subject to the
provisions of the Operating Agreement of Rockwood, as the same may be from time
to time amended ("Operating Agreement").
AGREEMENT
In consideration for the promises, conditions and warranties contained
herein and in order to consummate such plan of reorganization, the parties
hereto represent, warrant, covenant and agree as follows:
1. Condition Precedent. Prior to the execution of this Agreement, Ritter
and Cypress shall have caused Rockwood to succeed to all of the business and
ownership of all of the assets of Cosmetics and Vitamins.
2. Cash Payment and Commitment to Loan Funds. Rockwood and Cypress
acknowledge the previous payment of $360,000 as a down payment by Biomune under
this Agreement in consideration for the sale and transfer of 52% of the
membership interest of Rockwood. Biomune also agrees to issue to Cypress 500,000
shares of Biomune's 8% Series G Non-voting, Non-convertible Redeemable Preferred
Stock, following authorization of such series by the Biomune board of directors.
Biomune also agrees to loan certain funds to Rockwood as provided in the Loan
Commitment Letter of even date herewith ("Commitment"), according to the
schedule provided in such Commitment. Rockwood hereby transfers, sells, assigns,
and conveys to Biomune, 52% of the membership interest in Rockwood, in
accordance with the terms of the Operating Agreement.
3. Line of Credit. Following the closing, Biomune will make available or
will cause to be made available to Rockwood, an operating line of credit of up
to $1,000,000 (the "Line of Credit"). Amounts outstanding under the Line of
Credit will bear interest at the prime rate plus one percent (the prime rate
being the prime rate established by the principal bank used by Biomune in its
business transactions or another national financial institution selected by
Biomune). Interest on outstanding amounts will be payable monthly. The Line of
Credit will be secured by a perfected security interest in all of the assets,
accounts receivable, inventory and other property of Rockwood and Rockwood will
sign and agree to filing of all forms and agreements reasonably requested by
Biomune for the purpose of perfecting such security interest. The term of the
Line of Credit will be for one year; provided, however, that if there is no
default under the Line of Credit at the end of such term (and any renewal
thereof), the Line of Credit may be renewed on substantially the same terms and
conditions for up to two (2) consecutive one-year renewal terms. No equity
distributions will be made by Rockwood (except as necessary for the payment of
taxes) in any year in which the Line of Credit has not been paid in full,
without the prior written consent of Biomune. Amounts loaned to Rockwood prior
to the closing will be deemed to have been loaned pursuant to and will be rolled
into the Line of Credit. In the event of a default under the Note which is not
cured and following which Cypress shall exercise its right to rescind this
transaction or to foreclose on the collateral for such Note, all amounts
outstanding on the Line of Credit will be converted to a promissory note, with
interest continuing at the rate then applicable (the "Rockwood Note"). The
principal and unpaid interest under the Rockwood Note will be amortized and
payable over 18 months from the original maturity date, with monthly payments of
principal and interest. The security interest will not be released until the
Rockwood Note is paid in full together with all interest thereon.
4. Rockwood Operating Agreement. The operations of Rockwood following
closing will be conducted pursuant to and under the terms of an Operating
Agreement in form and content substantially as the Operating Agreement attached
to this Agreement as Exhibit "C" and by this reference incorporated herein.
Andela Group, Inc. ("Andela"), a California corporation owned and controlled by
Ritter will be the manager of Rockwood, and will provide the personal services
of Ritter on behalf of Rockwood with the title of "President." A "Board of
Directors" will direct the activities of the manager and other executives of
Rockwood. One member of the board will be appointed by Cypress and two will be
appointed by Biomune. Voting on matters properly before the members of Rockwood
will be according to their respective equity (member) interest. Andela's
engagement as manager and compensation (including Ritter's employment as
President) will be governed by a five-year agreement in form and content
substantially as that "Management Agreement" attached hereto as Exhibit "D" and
by this reference incorporated in and made a part of this Agreement.
5. Representations and Warranties of Cypress, Ritter and Rockwood. Cypress,
Ritter and Rockwood, and each of them, additionally represent and warrant to
Biomune as follows:
5.1 Organization and Standing. Rockwood is a limited liability
company, duly organized, validly existing and in good standing under the
laws of the State of California with full power and authority to own,
lease, use and operate its properties and to conduct its business as and
where now owned, leased, used, operated and conducted. Rockwood is duly
qualified to do business and in good standing in each jurisdiction in which
the nature of the business conducted by it or the property it owns, leases
or operates makes qualification necessary, except where the failure to be
so qualified or in good standing in such jurisdiction would not have a
material adverse effect on Rockwood. Rockwood is not in default in the
performance, observance or fulfillment or otherwise in violation of any
provision of its Articles of Organization or its Operating Agreement, as in
effect on the date hereof, copies of which have been previously delivered
to Biomune.
5.2 Power and Authority. Rockwood has all requisite power and
authority to enter into this Agreement and to consummate the transactions
contemplated by this Agreement. The execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby have
been duly authorized by all necessary action on the part of Rockwood.
5.3 Agreement Binding. This Agreement has been duly executed and
delivered by Rockwood and Cypress and constitutes the legal, valid and
binding obligation of each of them, enforceable against them in accordance
with its terms.
5.4 Financial Statements. Rockwood will furnish to Biomune the
audited balance sheets of Rockwood as of September 30, 1997, and the
related statements of income, changes in stockholders' equity, and cash
flows for the fiscal years then ended, including, in each case, the related
notes (collectively, the "Rockwood Audited Statements"), which are
accompanied by the unqualified audit reports of Tanner + Company. Audited
statements for future periods will also be provided as requested by
Biomune.
5.5 Taxes. Rockwood has paid or caused to be paid all taxes
required to be paid by it through the date hereof. Rockwood has filed or
caused to be filed all Tax Returns required to be filed by it through the
date hereof.
5.6 Compliance with Law. To Rockwood's knowledge, Rockwood is in
compliance in all material respects with all applicable laws, statutes,
orders, rules, regulations, policies or guidelines promulgated, or judg-
ments, decisions or orders entered by any governmental authority
(collectively, "Applicable Laws") relating to Rockwood or its business or
properties.
5.7 Intellectual Property. Rockwood owns and has good and
marketable title to, or is licensed or otherwise possesses legally
enforceable rights to use (free and clear of any lien, encumbrance or
security interest), its trademarks, trade names, service marks, and
copyrights, all of which have been previously disclosed to Biomune. To
Rockwood's knowledge, there has not been and there is not now any
unauthorized use, disclosure, infringement or misappropriation of any
intellectual property rights of Rockwood, any trade secret material to
Rockwood, or any intellectual property right of any third party to the
extent licensed by or through Rockwood, by any third party, including any
employee or former employee of Rockwood.
5.8 Title to and Condition of Properties. Rockwood has good,
valid and indefeasible title to all of its assets and properties of every
kind, nature and description, tangible or intangible, wherever located. All
such properties are owned free and clear of all mortgages, pledges, liens,
security interests, encumbrances and restrictions of any nature whatsoever.
5.9 Litigation. Except as previously disclosed in writing to
Biomune, there is no suit, claim, action, proceeding or investigation
pending or, to the knowledge of Rockwood, threatened against Rockwood or
any officer or director of Rockwood which, individually or in the
aggregate, if adversely determined, would have a material adverse effect on
Rockwood. Rockwood is not subject to any outstanding order, writ,
injunction or decree which, individually or in the aggregate, insofar as
can be reasonably foreseen, could have a material adverse effect on
Rockwood or a material adverse effect on the ability of Rockwood to con-
summate the transactions contemplated hereby.
5.10 Brokerage and Finder's Fees; Expenses. Neither Rockwood nor
any stockholder, director, officer or employee thereof, has incurred or
will incur on behalf of Rockwood, any brokerage, finder's or similar fee in
connection with the transactions contemplated by this Agreement.
5.11 Contracts. Rockwood has disclosed to Biomune all material
written or oral contracts, agreements, guarantees, leases and executory
commitments (each a "Contract") to which Rockwood is a party. All such
Contracts are valid and binding obligations of Rockwood and, to the
Knowledge of Rockwood, the valid and binding obligation of each other party
thereto, and will continue to be legal, valid, binding, enforceable, and in
full force and effect on identical terms following the consummation of the
transactions contemplated. Neither Rockwood nor, to the Knowledge of
Rockwood, any other party thereto is in violation of or in default in any
material respect in respect of, nor has there oc-
curred an event or condition which with the passage of time or giving of
notice (or both) would constitute a material default under or permit the
termination of, any Contract. There are no Contracts outside the ordinary
course of business.
5.12 Accounts Receivable. All accounts and notes receivable
(including lease and finance notes receivable) and accrued interest re-
ceivable of Rockwood have arisen in the ordinary course of business.
5.13 Undisclosed Liabilities. Rockwood does not have any
liabilities or obligations of any nature, whether known or unknown,
absolute, accrued, contingent or otherwise and whether due or to become
due, that, individually or in the aggregate, have or could be reasonably
likely to have a material adverse effect on Rockwood.
5.14 Books of Account; Records. Rockwood's general ledgers, stock
record books, minute books and other material records are, in all material
respects, complete and correct.
6. Representations and Warranties of Biomune. Biomune represents and
warrants to Rockwood that the statements contained in this Section 6 are correct
and complete as of the date of this Agreement.
6.1 Organization, Standing and Power. Biomune is a corporation
duly organized, validly existing and in good standing under the laws of
Nevada. Biomune has the corporate power to own its properties and to carry
on its business as now being conducted and as proposed to be conducted and
is duly qualified to do business and is in good standing in each
jurisdiction in which the failure to be so qualified and in good standing
would have a material adverse effect on Biomune. Biomune is not in
violation of any of the provisions of its Articles of Incorporation or
Bylaws or equivalent organizational documents.
6.2 Authority. Biomune has all requisite corporate power and
authority to enter into this Agreement and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly
authorized by all necessary corporate action on the part of Biomune. This
Agreement has been duly executed and delivered by Biomune and constitutes
the valid and binding obligations of Biomune. The execution and delivery of
this Agreement do not and the consummation of the transactions contemplated
hereby will not conflict with, or result in any violation of, or default
under (with or without notice or lapse of time, or both), or give rise to a
right of termination, cancellation or acceleration of any material
obligation or loss of a material benefit under (i) any provision of the
Articles of Incorporation or Bylaws of Biomune or any of its subsidiaries,
as amended, or (ii) to Biomune's knowledge, any material mortgage,
indenture, lease, contract or other agreement or instrument permit,
concession, franchise, license, judgment, order, decree, statute, law,
ordinance, rule or regulation applicable to Biomune or any of its
subsidiaries or their properties or assets. No consent approval, order or
authorization of or registration, declaration or filing with, any
governmental entity, is required by or with respect to Biomune or any of
its subsidiaries in connection with the execution and delivery of this
Agreement by Biomune or the consummation by Biomune of the transactions
contemplated hereby, except for (i) the filing of a Form 8-K with the
Securities and Exchange Commission ("SEC") and Nasdaq Stock Market within
15 days after the Closing Date, (ii) any filings as may be required under
applicable state securities laws and the securities laws of any foreign
country, (iii) the filing with the Nasdaq SmallCap Market of a Notification
Form of Listing of Additional Shares with respect to the Common Shares and
the shares of Biomune Common Stock issuable upon conversion of the
Preferred Shares, and (iv) such other consents, authorizations, filings,
approvals and registrations which, if not obtained or made, would not have
a material adverse effect on Biomune and would not prevent, materially
alter or delay any of the transactions contemplated by this Agreement.
6.3 SEC Documents; Financial Statements. Biomune has furnished or
otherwise made available to Rockwood a true and complete copy of each
statement, report, registration statement, definitive proxy statement, and
other filings filed with the SEC by Biomune since September 30, 1997
(collectively, the "Biomune SEC Documents"). All documents required to be
filed as exhibits to Biomune SEC Documents have been so filed, and all
material contracts so filed as exhibits are in full force and effect except
those which have expired in accordance with their terms, and neither
Biomune nor any of its subsidiaries is in default thereunder. As of their
respective filing dates, Biomune SEC Documents complied in all material
respects with the requirements of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and the Securities Act and none of Biomune
SEC Documents contained any untrue statement of a material fact or omitted
to state a material fact required to be stated therein or necessary to make
the statements made therein, in light of the circumstances in which they
were made, not misleading, except to the extent corrected by a subsequently
filed Biomune SEC Document prior to the date hereof. The financial
statements of Biomune, including the notes thereto, included in Biomune SEC
Documents (the "Biomune Financial Statements"), complied as to form in all
material respects with applicable accounting requirements and with the
published rules and regulations of the SEC with respect thereto as of their
respective dates, and have been prepared in accordance with GAAP applied on
a basis consistent throughout the periods indicated and consistent with
each other (except as may be indicated in the notes thereto or, in the case
of unaudited statements included in Quarterly Reports on Form 10-Q, as
permitted by Form 10-Q of the SEC). Biomune Financial Statements fairly
present the consolidated financial condition and operating results of
Biomune and its subsidiaries at the dates and during the periods indicated
therein (subject, in the case of unaudited statements, to normal, recurring
year-end adjustments). There has been no material change in Biomune's
accounting policies except as described in the notes to Biomune Financial
Statement. Since September 30, 1997, no event has occurred that would have
required the filing of any report that otherwise would have been included
among the SEC Documents and for which an appropriate report was not filed.
6.4 Absence of Certain Changes. Since March 31, 1998 (the
"Biomune Balance Sheet Date"), except as described in Biomune SEC
Documents, Biomune has conducted its business in the ordinary course of
business consistent with past practice and there has not occurred: (i) any
change, event or condition (whether or not covered by insurance) that has
resulted in, or might reasonably be expected to result in, a material
adverse effect to Biomune; (ii) any acquisition, sale or transfer of any
material asset of Biomune or any of its subsidiaries other than in the
ordinary course of business and consistent with past practice; (iii) any
material change in accounting methods or practices (including any change in
depreciation or amortization policies or rates) by Biomune or any
revaluation by Biomune of any of its assets; (iv) any declaration, setting
aside, or payment of a dividend or other distribution with respect to the
shares of Biomune, or any direct or indirect redemption, purchase or other
acquisition by Biomune of any of its shares of capital stock; (v) any
material contract entered into by Biomune, other than in the ordinary
course of business and as provided to Rockwood or any material amendment or
termination of, or default under, any material contract to which Biomune is
a party or by which it is bound; (vi) any amendment or change to Biomune's
Articles of Incorporation or Bylaws; or (vii) any negotiation or agreement
by Biomune or any of its subsidiaries to do any of the things described in
the preceding clauses (i) through (vi) (other than negotiations with
Rockwood and its representatives regarding the transactions contemplated by
this Agreement).
6.5 Absence of Undisclosed Liabilities. Biomune has no material
obligations or liabilities of any nature (matured or unmatured, fixed or
contingent) other than (i) those set forth or adequately provided for in
the Balance Sheet included in Biomune's Quarterly Report on Form 10-Q for
the period ended March 31, 1998 (the "Biomune Balance Sheet"), (ii) those
incurred in the ordinary course of business and not required to be set
forth in Biomune Balance Sheet under GAAP, and (iii) those incurred in the
ordinary course of business since Biomune Balance Sheet Date and consistent
with past practice.
6.6 Taxes. Biomune has paid or caused to be paid all taxes
required to be paid by it through the date hereof and has filed or caused
to be filed all Tax Returns required to be filed by it through the date
hereof.
6.7 Compliance with Law. To Biomune's knowledge, Biomune is in
compliance in all material respects with all applicable laws, statutes,
orders, rules, regulations, policies or guidelines promulgated, or judg-
ments, decisions or orders entered by any governmental authority
(collectively, "Applicable Laws") relating to Biomune or its business or
properties.
6.9 Litigation. Except as described in Biomune SEC Documents or
otherwise to Rockwood, there is no private or governmental action, suit,
proceeding, claim, arbitration or investigation pending before any agency,
court or tribunal, foreign or domestic, or, to the knowledge of Biomune or
any of its subsidiaries, threatened against Biomune or any of its
subsidiaries or any of their respective properties or any of their
respective officers or directors (in their capacities as such) that,
individually or in the aggregate, could reasonably be expected to have a
material adverse effect on Biomune. There is no judgment, decree or order
against Biomune or any of its subsidiaries or, to the knowledge of Biomune
or any of its subsidiaries, any of their respective directors or officers
(in their capacities as such) that could prevent, enjoin, or materially
alter or delay any of the transactions contemplated by this Agreement, or
that could reasonably be expected to have a material adverse effect on
Biomune.
6.8 Governmental Authorization. Biomune and each of its
subsidiaries have obtained each federal, state, county, local or foreign
governmental consent, license, permit, grant, or other authorization of a
governmental entity (i) pursuant to which Biomune or any of its
subsidiaries currently operates or holds any interest in any of its
properties or (ii) that is required for the operation of Biomune's or any
of its subsidiaries' business or the holding of any such interest ((i) and
(ii) herein collectively called "Biomune Authorizations"), and all of such
Biomune Authorizations are in full force and effect, except where the
failure to obtain or have any of such Biomune Authorizations could not
reasonably be expected to have a Material Adverse Effect on Biomune.
6.9 Broker's and Finders' Fees. Biomune has not incurred, nor
will it incur, directly or indirectly, any liability for brokerage or
finders' fees or agents' commissions or investment bankers' fees or any
similar charges in connection with this Agreement or any transaction
contemplated hereby.
6.10 Potential Delisting by Nasdaq. Biomune has received
notification from the Nasdaq Stock Market that it will be delisted unless
it can satisfy the Market Qualifications Division of Nasdaq that it
continues to meet the maintenance requirements for continued listing. If
Biomune's Common Stock is delisted, the stock will continue to be traded on
the over-the-counter market. However, delisting from Nasdaq SmallCap Market
may result in a less active market for Biomune's securities and may
adversely affect the price at which such securities are traded.
6.11 Books of Account; Records. Biomune's general ledgers, stock
record books, minute books and other material records are, in all material
respects, complete and correct.
7. Survival of Representations and Warranties and Indemnification for their
Breach. All representations, warranties and covenants of the parties or some of
the parties hereto as set forth in this Agreement shall be true as of the time
of and, together with the agreements set forth herein, shall survive the Closing
date hereunder. The parties, jointly and severally, agree that any party who has
breached or breaches any representation warranty or covenant, shall protect,
indemnify and save harmless any other non-breaching party or parties from and
against any and all claims, demands, liabilities, demands, damages, or causes of
action of every kind and character resulting from any breach thereof by the
breaching party.
8. Commissions and Finder's Fees. Each of the parties represents and
warrants that the negotiations relating to this Agreement and the transactions
contemplated hereby will not give rise to any valid claims against any other
party for a brokerage commission, finder's fee, or other like payment.
9. Tax Matters. Each party or the pass-through entities or individuals
shall be responsible for income and/or franchise taxes and product liability
claims for occurrences prior to and up to the date of this Agreement. The tax
returns of Rockwood shall be prepared and filed and elections and allocations
made so as to give Ritter the best possible advantage under the tax laws.
Similarly, it is anticipated that the terms of the purchase of the Rockwood
interest by Biomune hereunder will be treated by the parties in such a way as to
provide the best possible advantage under tax laws for the parties.
10. Notices. All notices, requests, and other communications hereunder
shall be in writing and shall be deemed to have been duly given if delivered, or
mailed first class postage prepaid:
If to Cypress: Cypress Springs LLC
Ira E. Ritter, Manager
11845 West Olympic Boulevard, Suite 710
Los Angeles, California 90064
Facsimile No.: (310) 479-5902
with a copy to: Riordan & McKinzie
300 South Grand Avenue, 29th Floor
Los Angeles, California 90071
Attention: Thomas L. Harnsberger, Esq.
Facsimile No.: (213) 229-8550
If to Biomune: Biomune Systems, Inc.
2401 South Foothill Drive
Salt Lake City, Utah 84109
Attention: Michael G. Acton, CEO
Facsimile No.: (801) 466-3741
with a copy to: Durham, Evans, Jones & Pinegar
50 South Main Street, Suite 850
Salt Lake City, Utah 84144
Attention: Kevin R. Pinegar, Esq.
Facsimile No.: (801) 538-2425
Such names and addresses may be changed by written notice thereof to all of the
parties hereto.
11. Entire Agreement and Amendments. This Agreement, including the exhibits
referred to herein which are a part hereof, contains the entire understanding of
the parties hereto with respect to the subject matter contained herein and may
be amended only by a written instrument executed by all affected parties. There
are no restrictions, promises, warranties, covenants or undertakings other than
those expressly set forth herein. The section and paragraph headings contained
in this Agreement are for reference purposes only and shall not affect in any
way the meaning or interpretation of this Agreement. All addendum agreements,
letter agreements, memoranda of understanding, and other agreements executed by
the parties in connection with this transaction prior to December 10, 1998 are
of no further force and effect and are superseded in their entirety by this
Agreement and such other agreements as may be entered into by the parties
subsequent to such date that incorporate this Agreement by reference or which
may attached to this Agreement and incorporated by reference herein.
12. Counterparts. This Agreement may be executed simultaneously in two or
more counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
13. Parties in Interest. This Agreement shall not be assignable by any
party, shall be binding upon each party and their respective successors and,
except as otherwise expressly provided, shall inure only to the benefit of the
parties signatory to this Agreement and any persons receiving any consideration
in this reorganization.
14. Costs. Except as otherwise provided herein or by separate agreement,
the parties shall each pay their own expenses and costs incurred in connection
with negotiating, preparing and consummating the transactions contemplated by
this Agreement, including but not limited to fees and expenses of their
attorneys and accountants.
15. Governing Law. This Agreement shall be construed, interpreted, governed
by and enforced in accordance with the laws of the state of California and the
parties hereto submit to personal jurisdiction of such courts and waive any
objections based on lack of personal jurisdiction, improper venue or forum non
conveniens to the conduct of any proceeding in any such court
16. Savings Clause. In the event that any term of this Agreement is deemed
by any court of competent jurisdiction to be overly broad in scope, duration or
area of applicability, the court considering the same shall have the power and
is hereby authorized and directed to limit such scope, duration or area of
applicability, or all of them, so that such term or provision is no longer
overly broad and to enforce the same as so limited. Subject to the foregoing
sentence, in the event any provision of this Agreement will be held to be
invalid or unenforceable for any reason, such invalidity or unenforceability
will attach only to such provision and will not affect or render invalid or
unenforceable any other provision of this Agreement.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement
effective on the date first above written.
BIOMUNE SYSTEMS, INC.,
a Nevada corporation
By: /s/ David G. Derrick
----------------------------------
Its: President
CYPRESS SPRINGS LLC
By: /s/ Ira E. Ritter
---------------------------------
Its: Manager
/s/ Ira E. Ritter
------------------------------------
IRA E. RITTER
ACKNOWLEDGED AND AGREED:
ROCKWOOD COMPANIES LLC
a California limited liability company
By: /s/ Ira E. Ritter
---------------------------------
Its: Manager
CONSENT OF
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
As independent public accountants, we hereby consent to the incorporation of our
report dated December 10, 1998 except for Note 23, which is dated January 8,
1999, included in this Annual Report on Form 10-K, into the Biomune Systems,
Inc. previously filed Registration Statements on Form S-8, File Nos. 333-29113
and 333-18157.
TANNER + CO.
Salt Lake City, Utah
January 13, 1999
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report dated December 5, 1997 included in this Annual Report on Form 10-K, into
the Company's previously filed Registration Statements on Form S-8, File Nos.
333-29113 and 333-18157.
ARTHUR ANDERSEN LLP
Salt Lake City, Utah
January 13, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
BIOMUNE SYSTEM, INC. SEPTEMBER 30, 1998 FINANCIAL STATEMENTS AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<CASH> 27,701
<SECURITIES> 425,000
<RECEIVABLES> 3,762,207
<ALLOWANCES> 223,698
<INVENTORY> 661,243
<CURRENT-ASSETS> 2,855,225
<PP&E> 275,303
<DEPRECIATION> 124,759
<TOTAL-ASSETS> 5,650,475
<CURRENT-LIABILITIES> 1,873,468
<BONDS> 1,074,500
0
2,573,015
<COMMON> 128
<OTHER-SE> 1,172,583
<TOTAL-LIABILITY-AND-EQUITY> 5,650,475
<SALES> 2,406,853
<TOTAL-REVENUES> 2,950,895
<CGS> 1,415,428
<TOTAL-COSTS> 4,514,801
<OTHER-EXPENSES> 14,019
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 44,722
<INCOME-PRETAX> (1,608,447)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,608,447)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,608,447)
<EPS-PRIMARY> (4.52)
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