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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(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, 1999
[ ] 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 $7,687,416, based on a closing price of $1.69 per share on
January 7, 2000. The number of shares outstanding of the registrant's common
stock as of January 7, 2000 was 4,999,312 .
On December 31, 1998, the registrant declared a one-for-ten reverse stock split
of its common stock, 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 this reverse stock split.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation SB 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.
1999 FORM 10-KSB ANNUAL REPORT
TABLE OF CONTENTS
Part I
Page
Item 1. Business.............................................................3
Item 2. Properties..........................................................11
Item 3. Legal Proceedings...................................................12
Item 4. Submission of Matters to a Vote of Security Holders.................12
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 7. Financial Statements and Supplementary Data..........................28
Part III
Item 9. Directors and Executive Officers of the Registrant.................29
Item 10. Executive Compensation..............................................32
Item 11. Security Ownership of Certain Beneficial Owners and Management......39
Item 12. Certain Relationships and Related Transactions......................41
Item 13. 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") is engaged in the research, development, distribution and
sale of biologic pharmaceutical products, nutraceutical and medical food
products and supplements. 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, Biomune invested significant sums in the
research and development of the Technology and related products. These efforts
were funded almost entirely and independently by Biomune, primarily through the
sale of its securities. In fiscal year 1997, Biomune scaled back its
pharmaceutical product development effort, due primarily to limited capital. In
addition, Biomune determined to focus its resources on the development and
marketing of nutraceutical products. Future research and development activities,
if any, 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 funding may be offered in the future will be favorable to the
Company. Absent third-party involvement, Biomune 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 Biomune 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 Biomune by
contract manufacturers. Biomune 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 bars are sold to national
and regional wholesale and retail chains under the names Mountain Lift(TM) and
NiteBite(TM). Biomune intends to acquire additional products under license or by
purchase of product rights.
Biomune has previously 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 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. As a result of this research activity,
Biomune 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.
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Products
Biomune sells nutraceuticals, supplements and sports and nutrition
bars, medical food bars and biologic pharmaceuticals.
Nutraceutical Activities
Since 1997, Biomune has engaged primarily in 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 BWPT-301 and its Base Product. 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 Biomune 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, Optim is incorporated to develop and market
nutraceutical products. Optim has developed Optimune, 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, Biomune files a patent application 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 former 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, Biomune 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. 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
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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. Biomune 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. Biomune 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 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, Biomune acquired a controlling equity interest (52%)
in Rockwood Companies LLC (referred to as "Rockwood LC") for $360,000 cash, a
commitment to issue 500,000 shares of preferred stock (payable if certain
benchmarks in sales were obtained), and covenants on the part of the Company to
loan $1,500,000 to Rockwood LC or its affiliates over a one-year period.
Rockwood LC distributes and sells health and beauty aids to wholesale and retail
chains. Rockwood LC retained the right to redeem a portion of the Company's
member interest if the Company failed to keep its covenants to make the loans to
Rockwood LC. As of December 31, 1998, Biomune had not advanced $850,000 of the
funds it had covenanted to loan to Rockwood LC. By letter dated March 15, 1999
Rockwood exercised its right to reduce the Company's interest to 19% and to
terminate, effective December 31, 1998, other on-going commitments and
agreements between Biomune and Rockwood. See "Certain Relationships and Related
Transactions."
Optim
In September 1998, Biomune 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. Under the
agreement, which has an initial term of 10 years and continues on a year-to-year
basis thereafter, Biomune 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 total energy and nutrition bar market is 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, Biomune 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 Biomune by
Medical Foods, Inc., a Delaware corporation. Under the agreement, Biomune pays
Medical Foods a 12% royalty on net sales of the patented product, which is
marketed under the trade name
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NiteBite(TM). Minimum annual royalties of $180,000 were payable in 1999, with
gradual increases annually thereafter through the 10-year term of the agreement.
In September 1999 the Company notified Medical Foods that it was terminating the
agreement. Since that time the parties have been negotiating a resolution of
issues relating to product returns and minimum royalties. As of the date of this
report no agreement has been reached regarding the on-going relationship of the
Company with Medical Foods.
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 is a "medical
food." This industry includes 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, Biomune 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,
Biomune 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.
The key milestones of the Company's biologic pharmaceutical
development activities include the following:
o October 1994, Biomune 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, Biomune 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, Biomune 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
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this study, and there can be no assurance that the Company
will ever commence clinical studies under this research
protocol.
o December 1995, Biomune files an IND with the FDA in
connection with the development of BWPT-302. Biomune 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. Biomune 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, Biomune 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
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. Biomune 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). Biomune 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 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. Biomune 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
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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
Biomune has the exclusive right and license ("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 Protein Technology, Inc. ("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. The License has been extended through
March 28, 2006.
PTI 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. 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 provides that promptly following the issuance of
authorization or approval by the FDA for sales of any pharmaceutical products
covered by the license, Biomune 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.
Manufacturing
Biomune does not own or operate any manufacturing facilities.
Products are sourced through third-party contract manufacturers. Outsourcing
allows the Company to enhance production flexibility and capacity, leverage its
working capital and 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. Biomune 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
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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.
Biomune orders all of its requirements for the Base Product from PTI,
which purchases it from a distributor in New Zealand. The Base Product used by
the Company in connection with clinical trials of its 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, Biomune believes that those facilities
are and will continue to be in full compliance with current GMP standards.
Biomune 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
Biomune 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.
Biomune 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 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 Optim in August 1998, Mr. Olshen developed
and launched functional and medical foods for other nutrition companies. 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, Biomune
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 its 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). Biomune
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. Biomune believes that the
Ross
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Products Division of Abbott Laboratories currently controls approximately 70% of
the nutritional supplement and meal replacement markets. Biomune is also subject
to increasing competition from companies that market various powders and
proteins for weight management and general health to otherwise healthy
individuals.
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 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. Biomune 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, 1999, the Company had 3 full-time employees.
Since September 1, 1998, the Company leases 6 full-time employees under a
marketing agreement with Harrogate. The Harrogate employees staff the marketing
and sales operations of Optim, including its President, Randy Olshen. Under the
agreement with Harrogate, the Company pays Harrogate a fee of 45% through March
31, 1999, 10% April 1, 1999, through December 31, 1999, and 45% thereafter 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. During 1999 the total compensation paid by Harrogate for employees
providing services to the Company was approximately $400,000. None of the
Company's employees are subject to a collective bargaining agreement. See
"Certain Relationships and Related Transactions."
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Item 2. Description of 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").
The current Lease Agreement expires on July 31, 2000. The monthly rent for both
Biomune's and Optim's space under the Lease Agreement was $7,875 per month in
1998 and increased to $8,268.75 per month in 1999. The Company recently reduced
the amount of space used in the premises to 3500 square feet with reduced rental
payments of $5,187 per month. Biomune believes that its current corporate
headquarters are sufficient for its needs for the foreseeable future up through
and including the termination of the Lease Agreement. A new lease has been
negotiated and will expire on July 31, 2000.
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. Biomune believes that those
facilities will accommodate Optim's operations and projected growth for the
foreseeable future.
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 10b-5 promulgated under the Exchange Act and general
misappropriation of material non-public information. Biomune 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 in part 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.
The trial court has permitted the parties to conduct additional discovery before
a hearing on the issue. Biomune expects to complete discovery in the next six
months. Biomune 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 1999, 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. This case has
been settled and the lawsuit dismissed.
By agreement with the Company, entered into September 1998, Harrogate
agreed to assume and pay all costs, including legal fees of the Company in
connection with these cases.
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 under the
primary symbol "BIME" since April 6, 1994. The following table contains
information about the range of high and low bid prices for the common stock for
each full quarterly period within the
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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, 1999 $ 1.94 $ 0.97
June 30, 1999 $ 2.63 $ 1.19
March 31, 1999 $ 2.78 $ 2.00
December 31, 1998 $ 4.38 $ 1.88
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
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(1) The source of these high and low prices was Nasdaq. 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 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 7, 2000, the closing price of the common stock as
reported by Nasdaq was $1.69 per share.
On January 7, 2000, there were approximately 1,700 holders of record
of the Company's common stock and approximately 3,500 beneficial owners,
including shares of common stock held in street name.
Biomune 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. Biomune 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 7, 2000, Biomune had the following series of preferred
stock outstanding:
Series A 10% Cumulative Convertible Preferred Stock - 36,499 shares
outstanding, convertible into 1,093 shares of common stock;
Series B 10% Cumulative Convertible Preferred Stock - 449 shares
outstanding, convertible into 14 shares of common stock;
Series J 10% Convertible, Non-Voting Preferred Stock - 1,036.1 shares
outstanding. 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.
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Recent Sales of Unregistered Equity Securities
The following information sets forth certain information for all
securities Biomune sold during the past three years without registration under
the Securities Act.
1999
During the year ended September 30, 1999, 323 shares of Series E
Preferred Stock were converted and exchanged for approximately 290,000 shares of
common stock of the Company. Subsequent to September 30, 1999, a total of
1,420,081 shares of Series F Preferred Stock were converted and exchanged for
1,512,000 shares of common stock and 210 shares of Series J Preferred Stock were
converted and exchanged for 394,899 shares of common stock.
During the quarter ended September 30, 1999 and pursuant to the
annual meeting of the Company held June 23, 1999, the shareholders approved an
amendment to the designation of rights and preferences of the Series F Preferred
Stock to convert at the lesser of the fair market value of the Company's common
stock or $1.10 per share.
1998
In 1998, the Company issued 180,000 shares of common stock to David
Pomerantz for consulting services provided to the Company.
In September 1998, Biomune issued restricted shares of its common
stock and options to purchase restricted shares of common stock. A total of
32,910 restricted shares 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 September 1998, Biomune 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.
1997
On August 1, 1997, Biomune issued 1,000 restricted shares of common
stock and options to purchase 2,500 restricted shares of common stock to three
consultants for services provided to the Company. The shares 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.
With respect to the foregoing offers and sales of restricted and
unregistered securities 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.
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Item 6. Management's Discussion and Analysis or Plan of Operation
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 7, "Financial Statements and Supplementary Data."
Overview
Biomune is engaged in the research, development, distribution and
sale of biologic pharmaceutical products, nutraceutical food products and
supplements, medical foods. In addition it has a minority interest in a company
that distributes health and beauty aids. Certain of the biologic pharmaceutical
and nutraceutical products developed by the Company 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. Biomune's medical food bar is a patented formulation developed
by researchers at Beth Israel Deaconess Medical Center, Harvard Medical School,
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.
Biomune 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.
Biomune expects that the majority of its future revenues will come
from its nutrition products and new nutraceutical products and pharmaceutical
drugs. Biomune cannot determine the ultimate effect that new products will have
on revenues, earnings or the price of its common stock.
Biomune's primary focus and efforts during the fiscal year ended
September 30, 1999, 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, 1999, generated $1,501,406 in revenues from the sale of
its products.
Continuing in fiscal year 2000, the Company will focus its resources
and efforts on:
o commercialization of its nutraceutical products;
o continued marketing and selling of the Mountain Lift bars;
o acquisition of new nutraceutical and 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.
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Results of Operations
During the fiscal year ended September 30, 1999, Biomune generated
revenues from continuing operations totaling $1,501,406. These revenues were
generated by Optim, the Company's nutraceutical product subsidiary. In fiscal
year 1998, total revenue was $2,806,853. These revenues were generated primarily
by Optim, the Company's nutraceutical product subsidiary and Rockwood. The
decrease in sales during fiscal year 1999 is attributable to the Company
reducing its ownership interest in Rockwood from 52% to 19%.
Management, consulting and research expenses from continuing
operations decreased from $1,052,674 in fiscal year 1998 to $304,894 in fiscal
year 1999. This decrease was due primarily to a reduction in expenditures for
research and development. Biomune anticipates that it will continue to focus on
reducing expenditures for management, consulting and research fees in the
foreseeable future.
Other general and administrative expenses decreased from $2,046,699
during fiscal year 1999 to $1,025,618 during fiscal year 1999. The decrease in
other general and administrative expenses was primarily a result of the
Company's efforts to reduce overhead costs and a reduction in the number of
employees. Biomune expects that general and administrative expenses will remain
at approximately 1999 levels.
Interest income decreased from $144,042 for fiscal year 1998, to
$101,751 for fiscal year 1999. This decrease was primarily attributable to the
use of cash for management, consulting and research, as well as other general
and administrative expenses.
Biomune had a net loss from continuing operations of $2,076,093
(after accounting for stock dividends on the outstanding shares of preferred
stock) in fiscal year 1999, as compared to a net loss from continuing operations
of $2,968,108 in fiscal year 1998. 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 was $1.15 for fiscal year 1999, compared
to a net loss per common share of $4.52 for fiscal year 1998. The decrease in
the 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.
Biomune has incurred significant net operating losses, which totaled
$39,919,639 from inception through September 30, 1999. 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.
Liquidity and Capital Resources
Biomune has been unable to finance its operations solely from cash
flows from operating activities. Substantial funds and additional time will be
required to continue commercializing the Company's nutraceutical products,
completing Phase II and Phase III clinical trials on BWPT-301 (assuming efficacy
is established during the Phase II clinical trials), completing the necessary
clinical trials on BWPT-302, obtaining regulatory approval for and
commercializing products utilizing the Technology and developing and
commercializing 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 or debt financing will be
required, although financing may not be available at all or may not be available
on terms favorable to the Company. 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, 1999, Biomune had a deficit of cash and cash
equivalents of $7,828 and a working capital deficit of $16,605 compared to cash
and cash equivalents of $27,701 and working capital of $981,757 as of September
30, 1998.
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<PAGE>
During fiscal year 1999, the operating activities used $273,578,
provided mainly by the sale of the Company's securities and the exercise of
options for the purchase of common stock. In 1998, operating activities used
$1,740,736 of cash, provided by the sale of preferred stock and the exercise of
options for the purchase of common stock.
During fiscal year 2000, Biomune anticipates incurring direct costs
of approximately $1,000,000 to market and sell its nutraceutical products.
Biomune expects it will continue to finance operations in part from the sale of
its securities, as well as from sales.
Biomune has no established credit facility with any lending
institution. From time to time, Biomune borrowed money from certain
shareholders, but it 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 audited consolidated financial statements of the Company have
been prepared on the assumption that it will continue as a going concern. The
Company's independent public accountants have issued their report dated January
7, 2000, 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 additional
financing cannot be obtained, Biomune may be required to scale back or
discontinue its operations. Even if 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.
Recent Accounting Pronouncements
For the year ended September 30, 1999, the Company adopted SFAS No.
130 issued by the Financial Accounting Standards Board ("FASB"). SFAS 130,
"Reporting Comprehensive Income" 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.
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. Biomune 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, Biomune
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 became effective for all fiscal years
beginning after December 15, 1998. Biomune 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 Biomune 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.
Biomune has incurred significant net operating losses since formation. As of
September 30, 1999, Biomune had an accumulated deficit of $39,919,639. The
factors contributing to these significant operating losses included:
o ongoing marketing expenditures;
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<PAGE>
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.
Biomune'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 Biomune 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 January 7, 2000 that includes an explanatory paragraph stating that the
Company's recurring losses and accumulated deficit, among other things, raise
substantial doubt about the its 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 financing 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.
Sale of Equity Securities; Future Dilution. Biomune anticipates that
it will sell additional equity securities to fund its operations and to acquire
inventory. Absent such additional financing, the Company may find it necessary
to postpone or cancel some of its planned business activities. 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 shares of common stock or securities convertible to
common stock, those sales or conversion will result in further and possibly
substantial dilution of the Company's shareholder. Substantial dilution may make
it more difficult for investors to sell their shares or may result in a lower
price of the Company's securities. Biomune may also be forced to obtain funds
through arrangements with collaborative partners or others may require it to
relinquish rights to certain of its product candidates or technologies or
products.
Dependence on Licensed Technology. Biomune is dependent upon licenses
granted by third parties. Some of these license agreements require that the
Company achieve minimum sales in order to retain the license rights. There can
be no assurance that it will meet the minimum sales requirements to avoid
cancellation of the licenses or a change in its rights. The failure to observe
or perform a material covenant, term, condition or provision in a license
agreements or the material breach of a representation or warranty made by the
Company, may result in a termination or restriction of its rights under these
agreements. Termination of any of the licenses or any restriction or limitation
of the Company's rights would adversely affect its operations.
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-301 pursuant to the submission to the FDA of an IND. Biomune has
also commenced clinical trials on BWPT-302 pursuant to a second IND, although
communications with
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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 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. Biomune 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
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<PAGE>
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. Biomune 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. Biomune 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 Zealand 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. Biomune 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. Biomune 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,
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<PAGE>
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. Biomune 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. Biomune 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. Biomune 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.
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 Biomune 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. Biomune 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 Company's 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 held by
non-affiliates of the Company. 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. Biomune 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. Furthermore, the right of
common shareholders to receive a cash dividend is subject to the preferences of
the several series of preferred stock issued by the Company and presently
outstanding.
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<PAGE>
Special Statement Concerning Forward-looking Statements
This Report, in particular the "Business" and "Management's
Discussion and Analysis or Plan of Operation" sections, contains forward-looking
statements concerning the expectations and anticipated operating results of the
Company. All of the forward-looking statements contained in this report are made
in reliance upon the safe harbor protection for forward-looking statements
provided by the Securities Act and the Exchange Act. Numerous factors govern
whether any forward-looking statement made by the Company will be or can be
achieved. Any one of those 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. Forward-looking
statements are based on current expectations that maybe affected by a number of
risks and uncertainties. They are also based on certain assumptions.
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 Biomune believes that the assumptions underlying the 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 and marketing team of the Company has worked to
establish and develop 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.
Biomune 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 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.
Biomune 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. 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 2000, the Company expects continued growth
in sales, primarily due to the introduction of the sports and energy nutrition
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.
Item 7. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements:
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<PAGE>
Report of Independent Public Accountants..........................F-1
Consolidated Balance Sheet as of September 30, 1999..............F-3
Consolidated Statements of Operations for the Years Ended
September 30, 1999 and 1998.......................................F-4
Consolidated Statements of Shareholders' Equity for the Years Ended
September 30, 1999 and 1998 ......................................F-5
Consolidated Statements of Cash Flows for the Years Ended
September 30, 1999 and 1998......................................F-11
Notes to Consolidated Financial Statements.......................F-14
Part III
Item 9. Directors and Executive Officers
The following table lists the executive officers and directors of the
Company as of January 7, 2000.
Name Age Position
Christopher D. Illick........59..................Director, Chairman of the Board
Michael G. Acton.............36.....Director, Chief Executive Officer, President
Thomas Q. Garvey, III, M.D...56.........................................Director
Aaron Gold, D.D..............71.........................................Director
Charles J. Quantz, Esq.......71.........................................Director
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 Managing
Director of Brean Murry & Co., Inc., an investment banking firm. From March 1995
until May 1997, Mr. Illick was 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 from March 1997 to
January 1998. Since March 1999 he has been Secretary Treasurer of Volu-Sol, Inc.
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 in the FDA's division of
the Cardio-Renal Drug Products Center. Prior to that time, he completed a
fellowship in Geratenology at the Massachusetts General Hospital in Boston,
Massachusetts, and with the National Cancer Institute at the National Institutes
of Health in Bethesda, Maryland. As a consultant to various pharmaceutical
companies, Dr. Garvey has developed, written and consulted on many new drug
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<PAGE>
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.
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.
Board of Directors Committees
The Board of Directors has established a Compensation Committee and
an Audit Committee.
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 receive
options under the Company's stock option plans and the number of options to be
granted. The 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 members of the
Audit Committee are Michael G. Acton, Charles J. Quantz and Christopher D.
Illick.
Scientific Advisory Board
Biomune 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
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<PAGE>
period such person serves on the Scientific Advisory Board and for a period of
five years thereafter. The members of the Scientific Advisory Board 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.
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 Biomune.
Please refer to his biographical information above.
Except for Dr. Garvey, who has a separate agreement with Biomune,
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 Biomune 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
Biomune also has a Business Advisory Board, the purpose of which is
to advise Biomune's management and the Board of Directors regarding the
Company's development and future growth. Business Advisory Board members are not
members of the Company's Board of Directors. The Company's management
periodically consults with members of the Business Advisory Board concerning
business issues. The members of the Business Advisory Board 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.
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.
Jacob ("Jack") D. Solomon. Mr. Solomon was one of the Company's
founders and has served as a consultant to Biomune 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.
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<PAGE>
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, 1999 with all Section 16(a) filing requirements
applicable to the Company's officers, directors and greater than 10% beneficial
owners.
Item 10. Executive Compensation
The following table sets forth the annual and long-term compensation
in fiscal years 1999, 1998 and 1997 for the Company's Chief Executive Officer.
No other executive officer of Biomune received salary or bonus compensation
exceeding $100,000 in 1999.
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation Long-Term Compensation
Awards Payouts
(a) (b) (c) (d) (e) (f) (g) (h) (i)
- ------------------------------------------------------------------------------------------------------------------------------------
Securities
Other Restricted Underlying
Annual Stock Options/ LTIP All Other
Name and Principal position Year (1) Salary Bonus Compensation Awards SARs(#)(2) Payouts($) Compensation($)
- --------------------------- -------- ------ ----- ------------ ------ ---------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Michael G. Acton (3) 1999 $100,000 -- -0- -0- 240,000 -0-- -0--
1998 $100,000 -- -0- -0- 0 -0-- -0--
1997 80,000 -- -- -- 2,500 -- --
</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.
(3) Mr. Acton was the chief accounting officer and, later, the chief
financial officer of Biomune until June 1998. Amounts shown for Mr.
Acton for periods prior to July 1998 were paid to Mr. Acton in his
position as Chief Financial Officer of Biomune.
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. These plans were also subsequently approved by the
shareholders of the Company. The 1992 Stock Incentive Plan terminated December
31, 1997 and no additional options may be granted under it. As of September 30,
1999, 2,370 shares of the Company's common stock were subject to options and
issuable upon exercise of options granted 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, 1999. 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, 1999. As of September 30,
1999, a total of 611,200 shares were issuable upon exercise of options granted
under the 1996 Stock Incentive Plan. There are approximately 641,200 shares
available for future grants under this plan. In 1999 the Company adopted the
1999 Stock Option Plan and authorized 500,000 shares for issuance pursuant to
future grants under the plan. No grants have been made under this plan as of the
date of this Report.
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<PAGE>
Option Grants in Fiscal Year 1999
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, 1999 to the Chief Executive
Officer:
<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>
Michael G. Acton 240,000 -- $1.00 -- $12,000 $24,000
</TABLE>
Aggregated Option Exercises and Fiscal Year-end Option Value
The following table sets forth information with respect to the
exercise of stock options by the Company's Chief Executive Officer and President
during the fiscal year ended September 30, 1999, as well as the aggregate number
and value of unexercised options held by such officer on September 30, 1999.
Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year-end Option Values
<TABLE>
<CAPTION>
Number of securities
Underlying Value of Unexercised
Unexercised options In-the-Money Options at
At September 30, 1999(#) September 30, 1999 ($)
Shares Acquired Value Exercisable/ Exercisable/
Name On Exercise(#) Realized($) Unexercisable Unexercisable
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Michael G. Acton 0 (1) - 244,306/-0- N/A(2)/-0-
</TABLE>
(1) All share amounts and exercise prices were adjusted to
reflect 1-for-10 reverse stock split effective November 10,
1997, and the 1-for-10 reverse split effective December 31,
1998.
(2) At September 30, 1999, none of the options were in the
money.
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 1999 to any
such Directors for their service on the board.
-26-
<PAGE>
Item 11. 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 7, 1999 by (i) beneficial owners of more than 5% of the outstanding
shares of common stock; (ii) each director and each executive officer; (iii) 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) 249,057 4.7%
Aaron Gold, D.D. (4) (Director) 42,046 *
4373 Sheldon Drive
La Mesa, CA 92401
Charles J. Quantz. (5) (Director) 40,872 *
Post Office Box 8186
Emeryville, CA 94663
Thomas Q. Garvey, III, M.D. (6) (Director) 41,050 *
10125 Gary Road
Potomac, MD 20854
Christopher D. Illick (7) (Director) 77,520 1.5%
154 Mercer Street
Princeton, N.J. 08450
All executive officers and
directors as a group (persons) (8) 450,545 2.3%
- ------------------------------
</TABLE>
* Less than 1%
(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 4,999,312 shares of common stock outstanding as of January
7, 2000 (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 244,306 shares of common stock.
(4) Dr. Gold owns 696 shares of common stock directly and options to
purchase 41,350 shares of common stock.
(5) Mr. Quantz owns 122 shares of common stock directly and options to
purchase 40,750 shares of common stock
[Footnotes continued on next page.]
-27-
<PAGE>
(6) Dr. Garvey owns 53 shares of common stock directly and options to
purchase 40,997 shares of common stock.
(7) Mr. Illick owns 16,470 shares of common stock directly and options to
purchase 61,050 shares of common stock.
(8) Based on a total of 450,545 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 8.3% 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 12. Certain Relationships and Related Transactions
David Derrick - Mr. Derrick was an executive officer and director of the Company
until July 1998.
ADP. Biomune entered into an Employment and Non-Competition
Agreement with David G. Derrick, then 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, Biomune entered into an
investment banking arrangement with MK Financial, Inc., an entity owned by David
G. Derrick. Under this arrangement, Biomune paid $150,000 to MK Financial for
fees and commissions related to investment banking services performed during
fiscal year 1998.
Harrogate Marketing LLC. Biomune has an agreement with Harrogate
under which Harrogate provides marketing and management services and is paid a
fee equal to 10% (45% after January 1, 2000) of the gross revenues from the sale
of nutrition and medical food products. Mr. Derrick is the sole owner of
Harrogate. Biomune also granted Harrogate an option to purchase 308,000 shares
of common stock at a price of $2.00 per share. As part of the agreement,
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 its purchase of
Rockwood. Biomune agreed to indemnity Mr. Derrick in connection with his
guarantee. In addition, certain obligations of Cypress Springs LLC, the other
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 and the
guarantee released.
Calvin Black Trust Loan. In 1998 Biomune borrowed $600,000 from the
Calvin Black Trust. The trustee of the Trust is Phil B. Acton, the brother of
Biomune'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 was due February 28, 1999. On March 31, 1999, Biomune
entered into an agreement with IMG, Ltd., a Utah limited liability company, for
the sale of 300,000 shares of Bioxide Corporation common stock owned by the
Company. The purchase price for these securities was $3.00 per share and was
paid in cash (total price of $341,000) and the assumption of the Calvin Black
Trust Loan note by IMG. At March 31, 1999, principal and accrued interest due
under the Note was $570,552.27. In connection with the assumption of the note,
the Trust and IMG entered into a separate agreement pursuant to which the Trust
released its claims against the Company. The sole member and manager of IMG is
David G. Derrick.
James J. Dalton - Until 1998, Mr. Dalton was a director and officer of the
Company.
Consulting Agreement. Biomune has a consulting agreement (the
"Consulting Agreement") with Mr. Dalton. Pursuant to the Consulting Agreement,
the Company paid 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 the purchase of
-28-
<PAGE>
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.
Christopher D. Illick - Mr. Illick is the Chairman of the Company's Board of
Directors.
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.
Item 13. Exhibits, Financial Statement Schedules, And Reports on Form 8-k
(a) Documents filed as part of this Form 10-KSB:
1. Financial Statements (included in Part II, Item 8)
Consolidated Balance Sheets as of September 30, 1999 and
1998
Consolidated Statements of Operations for the Years Ended
September 30, 1999, 1998 and 1997
Consolidated Statements of Shareholders' Equity for the
Years Ended September 30, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the Years Ended
September 30, 1999, 1998 and 1997
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
-29-
<PAGE>
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
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
-30-
<PAGE>
10.86# Schedule Identifying Other Incentive Stock Option
Agreements
10.95+ Lease Agreement with Young Electric Sign Company
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
10.117 Marketing and Consulting Services Agreement between
Biomune Systems, Inc., and Harrogate Marketing, L.L.C.
dated as of August 14, 1999
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
++ Incorporated by reference to the Company's Annual Report on Form
10-KSB for the fiscal year ended September 30, 1998
(b) No reports on Form 8-K were filed during the last quarter of the period
covered by this report.
-31-
<PAGE>
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Exchange
Act, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
BIOMUNE SYSTEMS, INC.
(Registrant)
/s/ Michael G. Acton
------------------------------------
By: Michael G. Acton
Its: Chief Executive Officer
Date: January 10, 2000
In accordance with the Exchange Act, this report has been signed
below by the following persons on behalf of the registrant and in the capacities
and on the dates indicated.
Signature Title Date
/s/ Michael G. Acton Chief Executive Officer and January 10, 2000
- --------------------------------- Director (Principal Executive
Michael g. Acton and Accounting Officer)
/s/ Charles J. Quantz Director January 12, 2000
- ---------------------------------
Charles J. Quantz
/s/ Christopher D. Illick Director, Chairman January 10, 2000
- ---------------------------------
Christopher D. Illick
/s/ Thomas Q. Garvey III, MD Director January 12, 2000
- ---------------------------------
Thomas Q. Garvey
-32-
<PAGE>
BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
Index to Consolidated Financial Statements
Page
Independent auditors' report F-1
Consolidated balance sheet F-2
Consolidated statement of operations F-3
Consolidated statement of shareholders' equity F-4
Consolidated statement of cash flows F-8
Notes to consolidated financial statements F-11
See accompanying notes to consolidated financial statements.
<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, 1999, and the related consolidated statements
of operations, shareholders' equity, and cash flows for the years ended
September 30, 1999 and 1998. 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 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 consolidated 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 financial position of Biomune Systems,
Inc. and subsidiaries as of September 30, 1999, and the results of their
operations and their cash flows for the years ended September 30, 1999 and 1998,
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, and has relied upon financing from the sale of its
equity securities to satisfy its obligations. 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
January 11, 2000
See accompanying notes to consolidated financial statements.
F-1
<PAGE>
BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Balance Sheet
<TABLE>
<CAPTION>
September 30, 1999
- ---------------------------------------------------------------------------------------------------
Assets
<S> <C>
Current assets:
Receivables, net $ 483,995
Inventories 255,992
Prepaid expenses 306,638
---------------------
Total current assets 1,046,625
Marketable securities, available for sale 1,977,026
Property and equipment, net 82,805
Related party receivables 84,091
Intangibles, net 554,081
Investment in and advances to affiliate 450,377
Deposits 11,346
---------------------
$ 4,206,351
---------------------
- --------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current liabilities:
Cash overdraft $ 7,828
Payables and accrued expenses 620,402
Notes payable 435,000
---------------------
Total current liabilities 1,063,230
---------------------
Commitments and contingencies -
Shareholders' equity:
Preferred stock, $.0001 par value; 50,000,000 shares
authorized, 1,458,278 shares issued and outstanding 2,174,043
Common stock, $.0001 par value; 500,000,000 shares
authorized, 2,522,413 outstanding 252
Additional paid-in capital 41,914,343
Stock subscriptions receivable (55,192)
Deferred compensation and consulting (202,486)
Accumulated other comprehensive income (loss) (768,200)
Accumulated deficit (39,919,639)
---------------------
Total shareholders' equity 3,143,121
---------------------
$ 4,206,351
---------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
Consolidated Statement of Operations
<TABLE>
<CAPTION>
Years Ended September 30,
- ----------------------------------------------------------------------------------------------------------------------
1999 1998
-------------------------- ---------------
<S> <C> <C>
Revenues $ 1,501,406 $ 2,806,853
-------------------------- ---------------
Operating expenses:
Cost of revenues 883,140 1,415,428
Management, consulting and research 304,894 1,052,674
Other general and administrative 1,025,618 2,046,699
-------------------------- ---------------
Total operating expenses 2,213,652 4,514,801
-------------------------- ---------------
Loss from operations (712,246) (1,707,948)
-------------------------- ---------------
Other income (expense):
Loss on investment in affiliate (1,506,000) -
Gain on sale of marketable securities from related party 304,053 -
Interest income 101,751 144,042
Interest expense (64,329) (44,722)
Other expense, net (825) (14,019)
-------------------------- ---------------
Total other (expense) income, net (1,165,350) 85,301
-------------------------- ---------------
Loss before income taxes and minority interest (1,877,596) (1,622,647)
Provision for income taxes - -
-------------------------- ---------------
Loss before minority interest (1,877,596) (1,622,647)
Minority interest in net loss of subsidiary - 14,200
-------------------------- ---------------
Net loss $ (1,877,596) $ (1,608,447)
-------------------------- ---------------
Preferred stock dividends and beneficial conversion premium (198,497) (1,359,661)
-------------------------- ---------------
Net loss applicable to common shares $ (2,076,093) $ (2,968,108)
-------------------------- ---------------
Net loss per common share - basic and diluted $ (1.15) $ (4.52)
-------------------------- ---------------
Weighted average common shares - basic and diluted 1,806,000 656,000
-------------------------- ---------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statement of Shareholders' Equity
<TABLE>
<CAPTION>
Years Ended September 30, 1998 and 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Series A Series B Series C
Preferred Stock Preferred Stock Preferred Stock
---------------------------- --------------------- -------------------------------
Shares Amount Shares Amount Shares Amount
---------------------------- --------------------- -------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at October 1, 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 - - - - (100) (137,245)
stock
Accretion - - - - - -
Issuance of stock options for services - - - - - -
Deferred compensation - - - - - -
Amortization of deferred compensation - - - - - -
Collection of subscription receivables - - - - - -
Expiration of Series D preferred stock warrants - - - - - -
Reclassification of stock subscription
satisfied subsequent to year end - - - - - -
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>
Balance at October 1, 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 - - 166,667 100,000 - -
stock
Accretion - 600,084 - - - -
Issuance of stock options for services - - - - - -
Deferred compensation - - - - - -
Amortization of deferred compensation - - - - - -
Collection of subscription receivables - - - - - -
Expiration of Series D preferred stock warrants - - - - - -
Reclassification of stock subscription
satisfied subsequent to year end - - - - - -
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
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statement of Shareholders' Equity
Continued
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Series A Series B Series C
Preferred Stock Preferred Stock Preferred Stock
---------------------------- --------------------------- -------------------------
Shares Amount Shares Amount Shares Amount
---------------------------- --------------------------- -------------------------
<S> <C> <C> <C> <C> <C> <C>
Comprehensive net income:
Net loss - - - - - -
Other comprehensive loss, change in
unrealized holding loss on marketable
securities - - - - - -
Total comprehensive loss - - - - - -
Issuance of common stock for:
Services - - - - - -
Advances to related parties - - - - - -
Conversion of preferred stock (5,625) (28,125) - - - -
Acquisition of marketable securities - - - - - -
Accretion - - - - - -
Issuance of common stock options for services - - - - - -
Amortization of deferred compensation - - - - - -
Expiration of Series D preferred stock warrants - - - - - -
Capital contribution - - - - - -
Preferred stock dividends 2,350 11,750 - - - -
---------------------------- --------------------------- -------------------------
Balance at September 30, 1999 36,499 $ 177,304 449 $6,740 - $ -
---------------------------- --------------------------- -------------------------
</TABLE>
<TABLE>
<CAPTION>
Series E Series F Series J
Preferred Stock Preferred Stock Preferred Stock
----------------------------- --------------------------- --------------------------
Shares Amount Shares Amount Shares Amount
----------------------------- --------------------------- --------------------------
Comprehensive net income:
<S> <C> <C> <C> <C> <C> <C>
Net loss - - - - - -
Other comprehensive loss, change in
unrealized holding loss on marketable
securities - - - - - -
Total comprehensive loss - - - - - -
Issuance of common stock for:
Services - - - - - -
Advances to related parties - - - - - -
Conversion of preferred stock (330) (569,344) - - - -
Acquisition of marketable securities - - - - - -
Accretion - 5,227 - - - -
Issuance of common stock options for services - - - - - -
Amortization of deferred compensation - - - - - -
Expiration of Series D preferred stock warrants - - - - - -
Capital contribution - - - - - -
Preferred stock dividends 7 7,220 101,332 60,800 114 113,500
----------------------------- --------------------------- --------------------------
Balance at September 30, 1999 - $ - 1,420,081 $ 741,499 1,249 $1,248,500
----------------------------- --------------------------- --------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statement of Shareholders' Equity
Continued
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Additional Stock
Common Stock Paid-in Subscriptions
-----------------------------------
Shares Amount Capital Receivable Warrants
------------------------------------ ------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
Balance at October 1, 1997 323,881 $ 32 $33,633,900 $ (101,392) $ 883,273$
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 - -
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 - (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) 338,500
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Deferred Other
Compensation Comprehensive Accumulated
and Consulting Income Deficit Total
---------------- -------------------- ----------------- ------------------
<S> <C> <C> <C> <C>
Balance at October 1, 1997 $ (69,500) $ - $(35,480,749) $ 1,343,985
Issuance of common stock for:
Cash - - - 1,014,803
Services - - - 1,460,392
Acquisition of subsidiary - - - 570,000
Debt - - - 100,000
Accrued liabilities - - - 59,134
Note receivable - - - -
Conversion of preferred stock - - - -
Conversion of preferred stock to preferred stock - - - -
Accretion - - - -
Issuance of stock options for services (295,750) - - -
Deferred compensation (447,584) - - (447,584)
Amortization of deferred compensation 507,972 - - 507,972
Collection of subscription receivable - - - 46,200
Expiration of Series D preferred stock warrants - - - -
Reclassification of stock subscription satisfied
subsequent to year end - - - 650,000
Capital contribution - - - 49,271
Preferred stock dividends - - (759,577) -
Net loss - - (1,608,447) (1,608,447)
---------------- -------------------- ----------------- ------------
Balance at September 30, 1998 (304,862) - (37,848,773) 3,745,726
</TABLE>
See accompany notes to financial statements.
F-6
<PAGE>
BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statement of Shareholders' Equity
Continued
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Additional Stock
Common Stock Paid-in Subscriptions
---------------------------------
Shares Amount Capital Receivable Warrants
--------------------------------- --------------- ----------------- --------------
<S> <C> <C> <C> <C> <C>
Comprehensive net income:
Net loss - - - - -
Other comprehensive loss, change in unrealized
holding loss on marketable securities - - - - -
Total comprehensive loss - - - - -
Issuance of common stock for:
Services 34,100 4 63,413 - -
Advances to related parties 403,400 41 806,857 - -
Conversion of preferred stock 356,251 35 597,434 - -
Acquisition of marketable securities 442,000 44 828,156 - -
Accretion - - (5,227) - -
Issuance of common stock options for services - - 242,300 - -
Amortization of deferred compensation - - - - -
Expiration of Series D preferred stock warrants - - 338,500 - (338,500)
Preferred stock dividends - - - - -
--------------------------------- --------------- ----------------- --------------
Balance at September 30, 1999 2,522,413 $ 252 $ 41,914,343 $ (55,192) $ -
--------------------------------- --------------- ----------------- --------------
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Deferred Other
Compensation Comprehensive Accumulated
and Consulting Income Deficit Total
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Comprehensive net income:
Net loss - - - (1,877,596)
Other comprehensive loss, change in unrealized
holding loss on marketable securities - (768,200) - (768,200)
-----------------
Total comprehensive loss - - - (2,645,796)
-----------------
Issuance of common stock for:
Services - - - 63,417
Advances to related parties - - - 806,898
Conversion of preferred stock - - - -
Acquisition of marketable securities - - - 828,200
Accretion - - - -
Issuance of common stock options for services - - - 242,300
Amortization of deferred compensation 102,376 - - 102,376
Expiration of Series D preferred stock warrants - - - -
Preferred stock dividends - - (193,270) -
---------------- ------------------ --------------- -----------------
Balance at September 30, 1999 $(202,486) $ (768,200) $(39,919,639) $ 3,143,121
---------------- ------------------ --------------- -----------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
Years Ended September 30,
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998
-------------------------- ------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,877,596) $ (1,608,447)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 41,320 66,573
Recognition of revenues in exchange for investments - (400,000)
Loss on investment in affiliate 1,506,000 -
Gain on sale of marketable securities related party (304,053) -
Issuance of common stock, stock options and warrants for services 305,717 1,460,392
Amortization of deferred consulting expense 102,376 507,972
Change in assets and liabilities, net of effect of nonmonetary asset
acquisitions:
Receivables (226,881) (348,608)
Inventories (51,773) 149,488
Prepaid expenses (306,638) (19,032)
Net assets for discontinued operations - 362,473
Other assets - 117,412
Payables and accrued expenses 530,122 (2,014,759)
Cash overdraft 7,828 -
Minority interest - (14,200)
-------------------------- ---------------
Net cash used in
operating activities (273,578) (1,740,736)
-------------------------- ---------------
Cash flows from investing activities:
Proceeds from sale of marketable securities to related parties 504,125 -
Purchase of property, equipment, and intangibles (51,833) (327,151)
Purchase of investments - (25,000)
Cash in unconsolidated entity (25,662) -
Net (advances to) repayments from related parties 575,151 (1,152,430)
Net change in unconsolidated entity (11,301) -
Purchase of marketable securities of related parties (1,179,603) -
-------------------------- ---------------
Net cash used in
investing activities (189,123) (1,504,581)
-------------------------- ---------------
Cash flows from financing activities:
Proceeds from notes payable 435,000 1,074,500
Proceeds from issuance of common stock - 206,303
Proceeds from issuance of preferred stock and related
warrants 808,500
Increase in deferred compensation - (447,584)
Payments received on stock subscription receivable - 46,200
-------------------------- ---------------
Net cash provided by
financing activities 435,000 1,687,919
-------------------------- ---------------
Net decrease in cash and cash equivalents (27,701) (1,557,398)
Cash and cash equivalents at beginning of year 27,701 1,585,099
-------------------------- ---------------
Cash and cash equivalents at end of year $ - $ 27,701
-------------------------- ---------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statement of Cash Flows
Continued
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
1999 1998
--------------------- --------------------
<S> <C> <C>
Interest paid $ 44,561 $ -
--------------------- --------------------
Income tax paid $ - $ -
--------------------- --------------------
</TABLE>
Supplemental disclosure of noncash investing and financing activities:
During the year ended September 30, 1999:
o The Company had preferred stock dividends of $193,270.
o The Company converted 5,625 shares of Series A preferred stock and 330
shares of Series E preferred stock (aggregating $597,469) into 356,251
shares of common stock.
o The Company's warrants for Series D preferred stock expired and $338,500
was transferred to additional paid in capital from warrants.
o The Company had an unrealized loss on its related party marketable
securities of $768,500.
o The Company had accretion of $5,227 on Series E preferred stock.
o The Company reduced notes payable by $559,000 and $11,553 of interest
payable by exchanging marketable securities from parties. The Company
realized a gain of $146,660.
o The Company exchanged common stock for marketable equity securities
from a related party at $828,200
o The Company received $1,586,594 of marketable securities from a related
entity to satisfy a receivable from a related party.
o The Company issued common stock for advances of $806,898.
See accompanying notes to consolidated financial statements.
F-9
<PAGE>
BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statement of Cash Flows
Continued
Supplemental disclosure of noncash investing and financing activities
- Continued:
o The Company had its ownership interest in Rockwood reduced from 52% to
19%. This change in ownership increased the carrying amount of its
investment in Rockwood by reclassifying the following:
<TABLE>
<CAPTION>
<S> <C>
Cash $ 25,662
Receivables 2,346,004
Inventories 457,024
Prepaid expenses 19,032
Property and equipment 87,031
Other assets 3,090
Intangibles 251,150
Payables (697,136)
Notes payable (515,500)
Minority interest (31,281)
----------------------
Investment in Rockwood $ 1,945,076
----------------------
</TABLE>
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:
<TABLE>
<CAPTION>
<S> <C>
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)
---------------------
$ -
---------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-10
<PAGE>
BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statement of Cash Flows
Continued
Supplemental disclosure of noncash investing and financing activities
- Continued:
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-11
<PAGE>
BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1999 and 1998
1. Organization and Significant Accounting Policies
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.
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 and Basis of Presentation During the year ended
September 30, 1999 the Company's ownership interest in Rockwood companies LC
(Rockwood) was reduced from 52% to 19%. The Company's financial statement at
September 30, 1998 and the year then ended reflect Rockwood in the consolidated
financial statements from April 1, 1998 (date of acquisition). At September 30,
1999 and for the year then ended Rockwood is accounted for on the cost method.
The net operations of Rockwood in 1998 prior to the ownership decrease to 19%
was netted with the write down of the Company's investment in Rockwood.
The consolidated financial statements include the accounts of the Company, and
its subsidiaries. All significant intercompany balances and transactions have
been eliminated.
F-12
<PAGE>
BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
1. Organization and Significant Accounting Policies - Continued
Marketable Securities
The Company Classifies its marketable debt and equity securities as "held to
maturity. All other marketable debt and equity securities are classified as
"available for sale" are carried in the financial statements at fair market
value. Realized gains and losses, determined using the specific identification
method, are included in earnings; unrealized holding gains and losses are
reported as a separate component of stockholders' equity. Securities classified
as held to maturity are carried at amortized cost.
For both categories of securities, declines in fair market value below amortized
cost that are other than temporary are included in earnings.
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.
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 consist primarily of licenses acquired to market and sell
certain products and technology acquired in the acquisition of Rockwood.
Intangibles are being amortized over a period of 5 to 10 years.
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.
F-13
<PAGE>
BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
1. Organization and Significant Accounting Policies - Continued
Earnings Per Common and Common Equivalent Share - Continued 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.
Investments
The Company accounts for its investments using the lower of cost or market
method.
Revenue Recognition
Revenue is recognized upon shipment of the product.
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, as well as costs related to the Company's
nutraceutical and pharmaceutical product research and development activities.
Research and development costs totaled approximately $0 and $17,000 for the
years ended September 30, 1999 and 1998, respectively.
Advertising
The Company expenses the cost of advertising when the advertising occurs. For
the years ended September 30, 1999 and 1998, advertising expenses totaled
approximately $12,000 and $85,000, 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.
F-14
<PAGE>
BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
1. Organization and Significant Accounting Policies - Continued
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 1998 financial statements have been reclassified to
conform with the current year presentation.
2. Going Concern
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As of September 30, 1999, the
Company had an accumulated deficit and has had substantial recurring losses. 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 and
liquidation of other assets to satisfy its obligations. 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.
F-15
<PAGE>
BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
3. Detail of Certain Balance Sheet Accounts
<TABLE>
<CAPTION>
<S> <C>
Receivables:
Trade receivables $ 148,678
Current portion of related party receivables
(see note 6) 230,000
Interest and other 120,317
Less allowance for doubtful
accounts (15,000)
-----------------------
$ 483,995
-----------------------
Inventories:
Finished goods $ 180,639
Raw materials 105,353
Reserve for obsolescence (30,000)
-----------------------
$ 255,992
-----------------------
Payables and accrued expenses:
Trade payables $ 442,635
Accrued royalties payable 129,872
Accrued payroll and payroll taxes 31,695
Accrued interest expense 16,200
-----------------------
$ 620,402
-----------------------
</TABLE>
F-16
<PAGE>
BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
3. Detail of Certain Balance Sheet Accounts - Continued
<TABLE>
<CAPTION>
Preferred Stock:
<S> <C>
Series A, 10% cumulative, convertible; 36,499
shares outstanding $ 177,304
Series B, 10% cumulative, convertible non-voting;
449 shares outstanding 6,740
Series F, 8% cumulative, convertible, non-voting;
1,420,081 shares outstanding 741,499
Series J, 10% cumulative, convertible non-voting;
1,249 shares outstanding 1,248,500
-----------------------
$2,174,043
-----------------------
</TABLE>
4. Marketable Securities
During the years ended September 30, 1999 and 1998, the Company purchased common
and preferred stock of two companies which are controlled by the same
individuals which control the Company. The Company acquired these shares in
exchange for the following amounts:
<TABLE>
<CAPTION>
<S> <C>
Cash $ 424,908
Sale of inventories 400,000
Exchanged for related party receivables 1,862,743
Exchanged for common stock 828,200
Less: cost of shares sold (770,625)
unrealized holding loss (768,200)
-----------------------
$ 1,977,026
-----------------------
</TABLE>
The Company's marketable securities in companies under common control,
classified as available-for-sale consist of the following:
<TABLE>
<CAPTION>
<S> <C>
Marketable securities, at cost $ 2,745,226
Gross unrealized holding loss (768,200)
-----------------------
Marketable securities, at fair value $ 1,977,026
-----------------------
</TABLE>
F-17
<PAGE>
BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
4. Marketable Securities - Continued
Changes in the unrealized holding loss on marketable securities
available-for-sale and reported as a separate component of stockholders' equity
are as follows:
<TABLE>
<CAPTION>
<S> <C>
Balance, beginning of year $ -
Unrealized holding loss (768,200)
Deferred income tax effect related to
the unrealized holding gain -
-----------------------
Balance, end of year $ (768,200)
-----------------------
</TABLE>
5. Property, Plant and Equipment
Property and equipment consists of the following:
<TABLE>
<CAPTION>
<S> <C>
Furniture, fixtures, and equipment $ 224,177
Less accumulated depreciation
and amortization (141,372)
-----------------------
$ 82,805
-----------------------
</TABLE>
6. Related Party Receivables
Related party receivables consist of the following:
<TABLE>
<CAPTION>
<S> <C>
Notes receivable from entities, which are shareholders
or are controlled by an advisory board chairman, interest
at various interest rates due on demand $ 265,091
Note receivable from an individual who is a relative of
a major shareholder of the company, at an interest rate
of 1% over prime, unsecured and due on demand 50,000
-----------------------
314,091
Less current portion (230,000)
-----------------------
$ 84,091
-----------------------
</TABLE>
F-18
<PAGE>
BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
7. Intangibles
Intangible assets consist of the following:
<TABLE>
<CAPTION>
<S> <C>
Licenses $ 595,000
ProMune Technology 70,000
-----------------------
665,000
Accumulated amortization (110,919)
-----------------------
$ 554,081
-----------------------
</TABLE>
8. Investment in and Advances to Affiliate
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 statements of operations, cash flows and
shareholder's equity and comprehensive income for the period of April 1, 1998
(date of acquisition) to September 30, 1998. Due to the Company not meeting
certain financing obligations as provided for in the purchase agreement of
Rockwood, the Company's interest in Rockwood was reduced to 19%. In addition,
during the year ended September 30, 1999 the Company exchanged its interest in
Rockwood for a 19% interest in Twin Eagles LLC, which is engaged in the business
of health and beauty products.
The Company's investment also includes an advance made to the management company
of Rockwood in the amount of $500,000, as a long-term advance to assist in the
capital funding of Rockwood. This loan was secured by the 48% interest in
Rockwood, bears interest of 8% per annum, and matures on January 15, 2006.
Interest payments are due quarterly begin January 15, 1999 and equal principal
and interest payments are due annually beginning January 15, 2002. At September
30, 1999 interest receivable was in arrears in the amount of $50,000.
F-19
<PAGE>
BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
8. Investment in and Advances to Affiliate - Continued
During the year ended September 30, 1999, the Company recognized a loss in the
investment in and advances to Rockwood and its management company due to the
estimated recoverability of the investment as follows:
<TABLE>
<CAPTION>
<S> <C>
Investment and advances at cost $ 2,156,377
Loss for estimated recoverabliity (1,706,000)
---------------------
Investment and advances to affiliate at
September 30, 1999 $ 450,377
---------------------
</TABLE>
9. Notes Payable
Notes payable consist of the following:
<TABLE>
<CAPTION>
<S> <C>
Unsecured notes payable to an individual at rates
ranging from 24%to 30%, due on demand $ 275,000
Unsecured notes payable to individuals at rates
ranging from 24% to 30%, due in February and
March 2000 145,000
Unsecured note payable to an officer of the
Company, with 8% interest, due on demand 15,000
---------------------
$ 435,000
---------------------
</TABLE>
F-20
<PAGE>
BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
10. 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:
<TABLE>
<CAPTION>
Years Ended
September 30,
--------------------- -----------------
1999 1998
--------------------- -----------------
<S> <C> <C>
Federal income tax benefit
at statutory rate $ 639,000 $ 550,000
Change in valuation
allowance (639,000) (550,000)
--------------------- -----------------
$ - $ -
--------------------- -----------------
</TABLE>
Deferred tax assets (liabilities) are comprised of the following:
<TABLE>
<CAPTION>
<S> <C>
Net operating loss carryforwards $ 10,071,000
Write-down of assets 615,000
Allowance for bad debts 14,000
Valuation allowance (10,700,000)
---------------------
$ -
---------------------
</TABLE>
F-21
<PAGE>
BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
10. Income Taxes - Continued
The Company's valuation allowance was also reduced for the expiration of both
the investment tax credit carryforward and a portion of the net operating loss
carryforward.
As of September 30, 1999, the Company had net operating loss carryforwards
(NOLs) for federal income tax reporting purposes of approximately $31,400,000.
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.
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 $1,328,000 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:
<TABLE>
<CAPTION>
Year Generated Amount Year of Expiration
- --------------------------------------------------------------------------------
<S> <C> <C>
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 $ 1,328,000
-------------
</TABLE>
F-22
<PAGE>
BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
10. Income Taxes - Continued
The Company's NOLs that are not limited expire in the years and in the amounts
indicated below:
<TABLE>
<CAPTION>
Year Generated Amount Year of Expiration
- --------------------------------------------------------------------------------
<S> <C> <C>
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
1999 1,878,000 2019
--------------
Total $ 30,096,000
--------------
</TABLE>
11. 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.
12. Commitments
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, 1999, the Company had $19,406 royalties payable under terms
of the agreement.
F-23
<PAGE>
BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
12. Commitments - Continued
NiteBite
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, 1999, the Company had $110,466 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 March of 2006.
The license may 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.
Leases
The Company is contingently liable for the facilities of the Volu-Sol
lease should Volu-Sol not make the payment. (See Note 16).
F-24
<PAGE>
BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
13. Stock Options and Warrants
The Company has established certain 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. 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.
A summary of the stock option and warrant activity is as follows:
<TABLE>
<CAPTION>
Weighted
Number Average
of Exercise
Shares Price
---------------------------------------
<S> <C> <C>
Outstanding at October 1, 1998 124,220 $ 129.40
Exercised (41,260) 37.00
Canceled (31,587) 206.18
Granted 369,000 10.64
--------------------
Outstanding at September 30, 1999 420,373 229.20
Exercised (300,000) 2.00
Canceled (24,526) 156.81
Granted 650,000 1.00
--------------------
745,847$ 6.76
--------------------
Exercisable at September 30, 1999 745,847
--------------------
</TABLE>
F-25
<PAGE>
BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
13. 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:
<TABLE>
<CAPTION>
Years Ended
September 30,
-----------------------------------------
1999 1998
---------------------- -----------------
<S> <C> <C>
Net loss applicable to common
shares - as reported $ (2,076,093) $ (2,968,108)
Net loss applicable to common
shares - pro forma $ (2,350,487) $ (2,986,846)
Loss per common share - as reported $ (1.15) $ (4.52)
Loss per common share - pro forma $ (1.30) $ (4.55)
---------------------- -----------------
</TABLE>
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:
<TABLE>
<CAPTION>
September 30,
---------------------------------------
1999 1998
-------------------- -----------------
<S> <C> <C>
Expected dividend yield $ - $ -
Expected stock price volatility 80% 108%
Risk-free interest rate 5.25% 5%
Expected life of options 2 years 2 years
-------------------- -----------------
</TABLE>
The weighted average fair value of options granted during 1999 and 1998 are $.96
and $.29, respectively.
F-26
<PAGE>
BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
13. Stock Options and Warrants - Continued
The following table summarizes information about stock options and warrants
outstanding at September 30, 1999:
<TABLE>
<CAPTION>
Outstanding Exercisable
------------------------------- --------------------------------------------
Weighted
Average
Remaining Weighted Weighted
Number Contractual Average Number Average
Range of Outstanding Life Exercise Exercisable Exercise
Exercise Prices at (Years) Price at Price
- --------------------------------- --------------- ------------ ------------- ----------------
<S> <C> <C> <C> <C> <C>
$1.00 to 719,000 4.60 $ 1.93 719,000 $ 1.93
17.50
37.00 to 68.80 13,047 1.90 38.30 13,047 1.93
167.00 to 13,800 1.66 228.76 13,800 228.76
238.00
- --------------------------------- --------------- ------------ ------------- ----------------
$ 1.00 to 745,847 3.50 $ 6.76 745,847 $ 65.94
238.00
- --------------------------------- --------------- ------------ ------------- ----------------
</TABLE>
14. 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, 1999, 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-27
<PAGE>
BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
15. Related Party Transactions
Related party transactions consist of the following:
During the year ended September 30, 1999:
o The Company owns marketable equity securities in two companies which are
under common control. The carrying value of those marketable securities is
$1,977,026 at September 30, 1999.
o The Company has advances to and investments in an affiliate in the amount
of $450,377.
o The Company sold a note receivable of $402,051, including interest, to a
shareholder in exchange for marketable securities.
o The Company sold marketable securities of $675,000 to a shareholder in
exchange for $341,000 and transferred $570,553 of debt to a shareholder.
o The Company sold marketable securities for $73,125 to a trust in which a
relative of an officer is the trustee.
o The Company exchanged $828,200 of its common shares for marketable
securities from a shareholder.
o The Company owed an officer of the company $15,000 for a short-term note
which is due on demand, is unsecured, and accrues interest at 8%. (See note
10).
o The Company advanced to an entity controlled by a shareholder $1,893,233.
The entity repaid $1,586,593 in the form of marketable securities.
F-28
<PAGE>
BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
15. Related Party Transactions - Continued
In addition, the Company had the following transactions:
The Company has various notes receivable due from related parties (see
Note 6). Interest income recorded under the notes was approximately,
$9,000 and $102,000 during the years ended September 30, 1999 and 1998,
respectively.
The Company 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% through March 1999, 10% for April 1999
through December 31, 1999 and 45% after December 31, 1999 of the gross
revenues of the nutrition and medical food products. Total payments under
the agreement are approximately $396,000 and $18,000 for the years ended
September 30, 1999 and 1998, respectively.
During 1998 , the Company sold certain rights including royalty rights to
waste disposal technology for a gain of $400,000 to another company under
common control.
The Company paid $37,000 rent to the minority interest member for the year
ended September 30, 1998.
16. 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, 1999 and 1998, was approximately $100,000 and
$114,000, respectively. Future minimum lease commitments are as follows:
<TABLE>
<CAPTION>
Fiscal year Amount
---------------------
<S> <C> <C>
2000 $ 66,000
2001 16,000
---------------------
$ 82,000
---------------------
</TABLE>
F-29
<PAGE>
BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
16. Operating Leases - Continued
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.
17. 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.
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. This case has been settled and the lawsuit dismissed.
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.
F-30
<PAGE>
BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
18. Significant Source of Revenues
The Company had revenue from one customer in 1999 of approximately $164,000.
19. Subsequent Events
During December 1999 the Company converted its Series F preferred stock and 213
shares of its Series J preferred stock into common stock of the Company.
EXHIBIT 10.117
MARKETING AND CONSULTING SERVICES AGREEMENT
THIS MARKETING AND CONSULTING AGREEMENT (the "Agreement") is made as of
August 14, 1999, effective April 1, 1999, by and between Harrogate Marketing,
L.L.C. ("Harrogate") and Biomune Systems, Inc., a Nevada corporation
("Biomune").
R E C I T A L S :
A. WHEREAS, Harrogate and Biomune entered into a Marketing and Consulting
Services Agreement dated September 1, 1998 and Amended on December 10, 1998
("Services Agreements");
B. WHEREAS, Biomune desires to make certain changes to the terms of the
Services Agreements as follows: increase the time period to purchase Harrogate
and decrease the commission structure from 45% to 10%;
C. WHEREAS, Harrogate desires to make certain changes to the terms of the
Services Agreements as follows: further define the purchase price for Harrogate.
D. WHEREAS, Harrogate desires to payoff its debts to Biomune.
NOW, THEREFORE, in consideration of the mutual promises, representations,
warranties, covenants and conditions set forth in this Agreement, and for other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowleged, the Parties agree as follows:
1. Termination of all Previous Agreements. It is contemplated that this
Agreement replaces all previous Marketing and Consulting Agreements entered into
between Biomune and Harrogate. That all compensation and services rendered are
settled and that there is no further amounts owed to either party except as
outlined in this Agreement.
2. 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 the sale of nutraceutical products, subject to termination
as provided in Paragraph 10, below.
3. 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.
<PAGE>
(b) Harrogate has a sales force and agrees to maintain a
sufficient sales force to market all of Biomune's products.
(c) Harrogate agrees to pay for all advertising and
promotional expenses associated with the sale of the Biomune products.
(d) For purposes of this Agreement, the term "Services" shall
include the following:
(i) identifying vitamin and nutritional supplement
formulations for marketing by Biomune through its subsidiary Optim Nutrition,
Inc. (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 preparartion, design, content, style and production of all literature,
brochures, manuals, labels and other documentation relating to the Products;
(iv) monitoring and advising Biomune concerning al
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.
(e) Notwithstanding the definition of Services, any demands of
Harrogate by Biomune will be reasonable in terms of volume of sales, prior
notice and availability.
4. Compensation.
<PAGE>
(a) Fees. From April 1, 1999 through December 31, 1999, as
compemsation for all Services rendered under this Agreement, Biomune will pay
Harrogate a fee in an amount equal to ten percent (10%) of gross revenues from
the sale of the Products. After December 31, 1999, as compensation for all
Services rendered under this Agreement, Biomune will pay Harrogate a fee in an
amount equal to forty-five percent (45%) of gross revenues from the sale of the
Products. (Collectively this compensation is referred to as the "Marketing
Fee"). At its sole discretion and option, Biomune may pay part or all of such
fee in shares of its common stock that is freely tradeable.
(b) Additional Consideration. As additional consideration for
the Services to be provided by Harrogate under this Agreement, Biomune grants to
Harrogate the right to receive any consideration owed to it in common stock of
Biomune at a price equal to the fair market value.
(c) Timing. Biomune will pay the Marketing Fee monthly, based
on the sales reults 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.
5. Payment of Debt. As of September 30, 1999, Harrogate owed Biomune
$1,586,593. This debt will be paid in full by Harrogate paying Biomune 353,000
shares of Bioxide common stock.
6. 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
theProducts during the term hereof. In consideration of the grant of exclusive
rights to market the Products, Harrogate hereby grants to Biomune, after
December 31, 1999, the irrevocable right during the period of this agreement to
acquire 100% of Harrogate in exchange for a purchase price determined by taking
the last three months of gross Product sales, multiplying it by four to get an
annualized gross Product sales number, then multiplying that by two times to
arrive at total purchase price. For example, if the last three months totalled
$1,000,000, then you would multiply that by four to come up with annualized
sales which would be $4,000,000. You would then multiply annualized sales by two
and come up with the $8,000,000 purchase price.
7. 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;
<PAGE>
(iii) rightfully received by the receiving party from
a third party without obligation of confidence; or
(iv) released for disclosure by the dislcosing 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 al 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 ay 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.
8. 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 attorney's 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.
<PAGE>
9. 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) Preexisitng Works. In the event that something Harrogate
writes or develops while perfomring 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 preexisitng 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.
<PAGE>
10. Termination.
(a) By Either Party After June 30, 2005. After June 30, 2005,
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 reciept 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 Paragraphs 7, 8, and 9 could irreparably injure Biomune and Harrogate
could not remedy the damage caused Biomune simply by paying Biomune some amount
of money.
(d) Certain Rights of Harrogate. If Biomune breaches this
Agreement, Harrogate may (in addition to all of its other rights) require
Biomune to transfer over to Harrogate all of its rights and interests to the
Products being sold by Harrogate, except that Biomune would be entitled to a 5%
royalty fee on all gross sales of the Products. Biomune acknowledges that its
breach (or threatened breach) of Paragraph 4 could irreparably injure Harrogate
and Biomune could not remedy the damage caused Harrogate simply by paying
Harrogate some amount of money.
(e) Limitation of Damages. Other than for breaches of
Harrogate's obligations under Paragraphs 7, 8, and 9, and Biomune's obligations
under Paragraph 4, 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.
(f) Termination of Obligations. Upon termination of this
Agreement, all obligations of Biomune to pay Harrogate the compensation provided
for in Paragraph 4 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.
11. Dispute Resolution. Any disput 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.
<PAGE>
12. Non-competition. It is acknowledged and agreed by Harrogate that
the limitations imposed by Paragraphs 7 and 9 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.
13. Miscellaneous.
(a) Harrogate will continue to be bound by all obligations
described in Paragraphs 7, 8, and 9 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 supercedes 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 persoanl 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 or personal injury, death, and property
damages resulting from any act or omission by Biomune (including Biomune's
agents, employees, or subcotractors) 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.
<PAGE>
(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 unenforceability
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. 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 on the following page]
<PAGE>
ACKNOWLEDGED AND AGREED, this 13th day of August 1999.
BIOMUNE SYSTEMS, INC.
By: Michael G. Acton
Its: President and CEO
HARROGATE MARKETING L.L.C.
By: David G. Derrick
Its: Managing Member
EXHIBIT 23.1 Consent of Tanner + Co.
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
As independent public accountants, we hereby consent to the incorporation of our
report dated December __, 1999 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 ___, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> SEP-30-1999
<CASH> 0
<SECURITIES> 1,977,026
<RECEIVABLES> 498,995
<ALLOWANCES> 15,000
<INVENTORY> 255,922
<CURRENT-ASSETS> 1,046,625
<PP&E> 224,177
<DEPRECIATION> 141,372
<TOTAL-ASSETS> 4,156,351
<CURRENT-LIABILITIES> 1,063,230
<BONDS> 0
0
2,174,043
<COMMON> 252
<OTHER-SE> 918,826
<TOTAL-LIABILITY-AND-EQUITY> 4,156,351
<SALES> 1,501,406
<TOTAL-REVENUES> 1,501,406
<CGS> 883,140
<TOTAL-COSTS> 2,213,652
<OTHER-EXPENSES> 1,215,350
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<INCOME-CONTINUING> (2,126,093)
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<CHANGES> 0
<NET-INCOME> (2,126,093)
<EPS-BASIC> (1.18)
<EPS-DILUTED> (1.18)
</TABLE>
