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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1 TO
FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES
OF SMALL BUSINESS ISSUERS
Under Section 12(b) or (g) of the Securities Exchange Act of 1934
NUTRACEUTIX, INC.
(Name of Small Business Issuer in its charter)
Delaware 91-1689591
- ------------------------------ ----------------------------------
(State of other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
8340 154th Avenue Northeast, Redmond, Washington 98052
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(Address of principal executive offices) (zip code)
Issuer's telephone number, (425) 883-9518
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Securities to be registered under Section 12(b) of the Act:
Title of each class Name of each exchange on which
to be so registered each class is to be registered
- None - - None -
- ------------------------------ -------------------------------
- ------------------------------ -------------------------------
Securities to be registered under Section 12(g) of the Act:
Common Stock, $.001 par value
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(Title of class)
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
(a) BUSINESS DEVELOPMENT
Nutraceutix, Inc. (the "Company") was incorporated on October 12,
1994 in Delaware as Caddy Systems, Inc. ("CSI") to engage in the sports
equipment business. From its inception however, CSI had no material assets and
did not actively engage in business. CSI and Bio Techniques Laboratories, Inc.,
an unaffiliated Washington corporation ("BTL"), entered into an Agreement and
Plan of Share Exchange, dated as of February 28, 1995, (the "Agreement")
pursuant to which the shareholders of BTL on April 6, 1995 (the "Exchange Date")
were issued one share of common stock of CSI for each share of BTL. Prior to the
exchange, the authorized capital stock of BTL consisted of 30,000,000 shares of
common stock, par value $.01, of which 11,423,161 shares were issued and
outstanding and 5,000,000 shares of preferred stock, par value $.01, of which no
shares were outstanding. The holders of approximately 1% of BTL stock elected to
exercise their dissenters rights under the laws of the State of Washington and
were paid the fair value of their stock. As of the Exchange Date, BTL became a
wholly-owned subsidiary of Nutraceutix, Inc.
On the Exchange Date, the Company's Certificate of Incorporation was
amended to change its name to "Nutraceutix, Inc.", to increase its authorized
capital stock to 30,000,000 shares of common stock, par value $0.001, and
5,000,000 shares of preferred stock, par value $0.01, issuable as authorized by
the Board of Directors and to effect a one-for-five reverse split of the
Company's previously outstanding shares of 8,703,440 to 1,740,688 shares of
common stock. As a result of the exchange of BTL common stock for common stock
of the Company, the initial shareholders of CSI retained approximately 13% of
the outstanding shares of common stock of the Company and the former
shareholders of BTL received approximately 87% of the outstanding common stock
of the Company. As of the Exchange Date, four directors of BTL were appointed to
the Board of Directors of the Company and all the former CSI directors resigned.
The Company currently operates as Nutraceutix, Inc. dba Bio
Techniques Laboratories, Inc. Unless the context indicates otherwise, references
hereinafter to "the Company" includes both Nutraceutix, Inc. and Bio Techniques
Laboratories, Inc. The Company's principal place of business is 8340 154th
Avenue N.E., Redmond, Washington, 98052, and its telephone number at that
address is (425) 883-9518.
BTL was incorporated on May 11, 1983 as "Biotechnics, Inc.," and
conducted business under that name until October 29, 1984, when its name was
changed to "Bio Techniques Laboratories, Inc." Since its inception, BTL has been
a biotechnology company in the business of developing and producing
nutraceuticals, which are natural, nutritional, biologically active materials
formulated to provide specific health and productivity benefits to humans and
animals. BTL was initially capitalized with a private investment of $7 million,
which it used to construct a research and production facility, develop
experience in the research, production and sales of nutraceuticals and other
natural products, commence the development of nutraceuticals and obtain
intellectual property rights in many of these products. In 1987, BTL developed
its first nutraceutical, COBACTIN(R) microbial feed additive, a strain of the
bacteria Lactobacillus acidophilus, which promotes feed efficiency and the
natural growth of beef cattle in feedlots. In 1987, BTL received a $2.2 million
investment from Central Soya Corporation (now Consolidated Nutrition LC), which
was used to develop Lactobacillus acidophilus applications for swine and
poultry. In recent years BTL has begun to focus on the development, production
and sale of natural foods and nutritional food additives for human consumption.
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(b) BUSINESS OF THE COMPANY
GENERAL
Nutraceutix, Inc. is a developer and manufacturer of nutraceutical
based health supplements. Its branded products for the animal feed industry are
COBACTIN(R) microbial feed additives and BIOPOWER(R) silage inoculant. Its
branded human health supplement products are BIOPOWER(R) Health Supplements. The
Company also provides private label manufacturing of health supplements for
other health supplement product companies, "private label" and food ingredient
pre-mixes for food companies.
Nutraceuticals are biologically active materials, derived from plant,
microbial or animal sources, which are formulated to provide specific health and
productivity benefits for humans and animals including, but not limited to,
pharma foods, functional foods, fermented foods, phytochemicals, microbial feed
additives, probiotics, herbal products, vitamins and health supplements.
Prior to 1995, the Company focused solely on the manufacture and sale
of nutraceutical based products for the agricultural market. Since 1995, the
Company added nutraceutical based health supplements for the human health
market. In 1997, the Company installed a fully automated production line at its
encapsulating, tableting, bottling and labeling facility in Lafayette, Colorado
for the private label manufacture of health supplements and acquired a license
for the United States patent pertaining to the use of glucarate salts and their
derivatives for the nutritional support of the body's mechanism for ridding
itself of carcinogens. The Company has also acquired a license for formulas
which incorporate glucarate salts for lung, breast and prostate health.
Although many of the ingredients in the Company's products are
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 such as the glucarate salt, Calcium D-glucarate. While the Company
believes all of its products to be safe when taken as directed there is little
long-term experience with human consumption of certain of these innovative
product ingredients in concentrated form. Accordingly, no assurance can be given
that the Company's products, even when used as directed, will have the effects
intended. Although the Company tests the formulation and production of its
products to ensure that they are safe when consumed as directed, they have not
sponsored clinical studies on the long-term effect of human consumption.
PRINCIPAL PRODUCTS AND SERVICES
CALCIUM D-GLUCARATE
In July of 1997, the Company and BioChemix, Inc. ("BioChemix") an
unaffiliated privately held company, signed a definitive agreement for the
exclusive licensing to Nutraceutix of certain patent rights pertaining to the
use of glucarate salts and their derivatives in a sustained release form
specifically for the nutritional support of one of the body's major mechanisms
for ridding itself of carcinogens, a process referred to as glucuronidation. The
Company and BioChemix have also signed an agreement for the exclusive licensing
of certain formulas which contain vitamins, minerals, herbal extracts and
antioxidant formulations which incorporate Calcium D-glucarate for
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lung, breast and prostate health. In August of 1998, the Company and BioChemix
entered into agreements for the exclusive licensing by the Company of certain
formulas which incorporate Calcium D-glucarate for colon and liver health.
BioChemix is a technology transfer company whose principals developed and
patented the applications of glucarate salts at the Science Park of the
University of Texas, MD Anderson Cancer Center and these principals are now at
the AMC Cancer Center in Denver, Colorado.
Conjugation is one of the body's most important and natural
protective mechanisms for dealing with carcinogens. Conjugation with glucuronic
acid (i.e. glucuronidation) is a major conjugation pathway in the tissues of
vertebrates. The resulting conjugates can be readily excreted in the bile and
urine.
The conjugation of carcinogenic compounds with glucuronic acid is
referred to as glucuronidation. The reverse action is referred to as
de-glucuronidation and is mediated by the enzyme Beta glucuronidase. Glucarate
salts are potent inhibitors of Beta glucuronidase and the de-glucuronidation
reaction. An appropriate concentration of glucarate salts has been shown to
inhibit this reverse reaction, thus preventing the reactivation of conjugated
carcinogens due to de-glucuronidation. The inhibition of de-glucuronidation with
glucarate salts has been shown to significantly reduce cancer in animal models
exposed to chemical carcinogens. The specific glucarate salt to be developed
into a lung, breast and prostate health product is Calcium D-glucarate. There
have been no definitive clinical human trials proving the efficacy of Calcium
D-glucarate in cancer prevention in humans.
Glucuronic acid is found in low concentrations in humans and animals
which are natural constituents of certain fruits and vegetables, possibly
contributing to the documented association of fruit and vegetable intake with
reduced cancer risk. No toxic effects have been demonstrated with Calcium
D-glucarate. The FDA requires no extended approval for use as a nutritional
supplement.
The market for new health supplements containing Calcium
D-glucarate is difficult to estimate. The Company is targeting individuals at
higher than average risk of developing lung, breast and prostate cancer. Within
the U.S. alone, the American Cancer Society estimates there are 40 million
smokers, an equal number of ex-smokers and, that in 1998, 178,000 Americans
will die from lung cancer. Cigarette smoking and the use of other tobacco
products are major causes of cancers of the lung, oral cavity, larynx and
esophagus. These tobacco products are also contributing factors to the
development of cancers of the bladder, kidney and pancreas. In addition,
leukemia, breast and prostate cancers have been associated with the use of
tobacco products. Even though the users of tobacco products are at serious
cancer risk, there is no guarantee that these individuals will use glucarate
based products.
The Company believes that there is a market for Calcium D-glucarate
due to the concerns about cancer risks and recognition of the link between
smoking and lung cancer and women's concerns regarding breast cancer. Risk
factors for breast cancer such as family history, age of pregnancy and lifestyle
have been identified and are known in the general population; the Company
believes that women with these risk factors are potential consumers of these
products, but has no sales history with glucarate based products to substantiate
this belief.
The marketing, sales and distribution of the Company's health
supplements containing Calcium D-glucarate for ex-smokers and for breast health
products had been the responsibility of Weider Nutrition International, an
unaffiliated public company. On May 13, 1998, the Company and Rexall Showcase
International, Inc., a subsidiary of Rexall Sundown, an unaffiliated public
company, entered into a purchase requirements and exclusive sublicense agreement
for products containing glucarate for breast and prostate health and for the
distribution of these products in the multi-level sales market for an initial
term commencing May 13, 1998 through December 31, 1999, and renewable annually
thereafter. The agreement specifies that in the event Rexall Showcase and the
Company can not agree as to the minimum purchase requirement amount for the
period following the initial term or if Rexall Showcase can not meet the minimum
purchase requirements during the initial term, the sublicense shall cease to be
exclusive. The Company will also manufacture other non-glucarate products for
Rexall Showcase during the term of the agreement.
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The Company has entered into agreements with other sublicensees for
the non-exclusive right to distribute health supplements containing Calcium
D-glucarate in the retail distribution market. The Company anticipates adding
additional revenue and royalty generating agreements through future sublicenses.
The Company plans to provide Calcium D-glucarate on a selective
private label basis to other marketers of health supplements and directly to the
public via the Internet under the Company's BIOPOWER(TM) brand. As a nutritional
supplement, limited claims can be made as to results. The Company cannot
estimate the effect of these limitations on the sales potential of the product.
NUTRACEUTICAL BASED HEALTH SUPPLEMENTS FOR THE AGRICULTURAL MARKET
The Company has two primary agricultural product lines which it
manufactures and sells: (1) lactobacillus products which, independent field
trials demonstrate, enhance feed efficiency in feedlot cattle and (2) silage
inoculum which, independent field trials demonstrate preserves the nutritional
value of stored forages.
The Company's silage inoculants, which are offered on an original
equipment manufacturer ("O.E.M") basis and under the BIOPOWER(R) silage
inoculant brand, aid in the natural fermentation of cut forages for storage in
silos and bunkers, preserving nutrients by decreasing the occurrence of unwanted
spoilage organisms.
The Company's lactobacillus based microbial feed additive products
are marketed under Bio Techniques Laboratories in agriculture under the
following trademarks:
COBACTIN(R), COBACTIN(R) II, COBACTIN PLUS(R) microbial feed
additives for commercial feedlot cattle. These products have been
demonstrated in independent field trials to increase feed efficiency
in feedlot cattle.
COBACTIN(R), COBACTIN(R) II microbial feed additive for dairy cows
have been demonstrated in independent field trials to an increase
milk production.
COBACTIN(R) microbial feed additive for poultry has been demonstrated
in independent field trials to increase feed efficiency in poultry.
These COBACTIN products are the result of ten years of research by
Bio Techniques Laboratories, Inc. aimed at the development of
proprietary microbial feed supplements designed to enhance animal feed
efficiency. This product line is based on the premise that animal nutrition,
particularly in ruminant animals, requires the presence of positive bacteria in
the animal's digestive tract.
COBACTIN(R) microbial feed additive is a living Lactobacillus
acidophilus culture, preserved to provide a stable blend of genetically selected
lactic acid bacteria for feedlot and dairy cattle and poultry. Over the past ten
years, COBACTIN(R) for cattle has undergone over 22 independent university and
research institute field tests to determine its efficacy in cattle. These field
trials have repeatedly shown that COBACTIN(R) microbial feed additive increases
feed efficiency. Comparable results have been demonstrated for dairy cows and
poultry.
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The Company received two patents on the bacterial strain BT1389(TM)
of Lactobacillus acidophilus used in COBACTIN(R) II microbial feed additive. The
Company formulated COBACTIN(R) PLUS, which the Company believes offers numerous
product stabilization advantages. COBACTIN(R) PLUS is composed of BT1389(TM)
lactobacillus strain, with a stabilizer designed for extended shelf life.
COBACTIN PLUS(R) accounts for the majority of the Company's animal health sales.
The products use has been historically limited to large cattle feedlots and
large dairies which blend their own feed and have the equipment and expertise to
deliver COBACTIN into the feed daily. Even though COBACTIN has been shown
effective in poultry, difficulties with the daily blending of the product has
curtailed sales in the poultry industry.
In the cattle feedlot market, the Company has two primary
competitors, Biotal and Nutrition Physiology. The Company believes that it
derives a competitive advantage from its proprietary technology not available
from other suppliers, which proprietary technology includes the COBACTIN(R)
microbial feed additive. The Company's reputation for quality in the
agricultural market is an additional competitive factor because the Company's
trade names are well-known in the market place and are associated with quality.
NUTRACEUTICAL BASED HEALTH SUPPLEMENTS FOR THE HUMAN HEALTH MARKET
Specific nutraceuticals have been shown to affect bodily functions in
targeted ways, such as by reducing anxiety (St. John's Wort) or by lowering
cholesterol (soy extracts) and assisting in sleep (Valerian). The active
ingredients in nutraceuticals may include complex mixtures of organic molecules,
small molecules, oligosaccharides, lactic acid bacteria, fungi, minerals and
other microbial secondary metabolites. Lactobacillus acidophilus cultures are
classic nutraceuticals which have long been components of yogurt and fermented
food. Published literature has shown lactic acid bacteria to exert positive
gastrointestinal health benefits beyond their nutritional value. The Company
has developed a proprietary tableting technology for the delivery of lactic
acid bacteria in a health supplement form.
The Company believes that the market for nutraceuticals will continue
to grow because of an ever increasing, longer-lived aging population. Medical
challenges associated with aging such as chronic diseases, allergy,
inflammation, cancer, and thrombotic diseases, will most likely cause an even
greater emphasis on health care delivery. The development and identification of
new nutraceutical products and markets may require combining interdisciplinary
technologies, including plant science, microbiology, biochemistry and nutrition.
Among the non-proprietary health supplement products manufactured by the Company
are capsules, tablets and pre-mixes containing multi-vitamins and single
vitamins, such as Vitamin C and Vitamin E, herbs such as Ginseng, Ginkgo,
antioxidants, Echinacea, St. John's Wort and enzymes and positive lactic acid
bacteria.
MANUFACTURING
Animal Health Products
The Company manufactures microbial products for several companies on
a private label and O.E.M. basis at its fermentation plant located at its
corporate headquarters in Redmond, Washington as well as its own COBACTIN and
BIOPOWER branded products. These products include inoculum, feed and food
additives and microbial based supplements. The Company has over 12 years of
experience in microbial fermentation, and holds patents relating on a
proprietary strain of Lactobacillus acidophilus and preservation technologies
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Private Label Heath Supplement Manufacturing.
The Company manufactures capsules, tablets, powdered drink mixes and
microbial products for more than twenty companies which market these products
under their own brand names. Many of these are non-proprietary products.
The Company also manufactures products which incorporate its
proprietary technology. This would include health supplements which incorporate
Calcium D-glucarate, Lactobacillus acidophilus strains developed by the Company
or Lactobacillus acidophilus products manufactured employing the Company's
proprietary LIVEBAC(R) caplet process.
The LIVEBAC(R) process is a tableting technology which results in
extended shelf-life of tablets or caplets containing lactic acid bacteria.
Lactic acid bacteria such as Lactobacillus acidophilus must be alive to produce
a positive health effect. Caplets or tablets of Lactobacillus acidophilus made
using the LIVEBAC(R) process display a greater than 12 months viability and
shelf-life.
The Company manufactures private label health supplements at its
encapsulating, tableting, bottling and labeling facility in Lafayette, Colorado.
The principal markets in which the Company competes are competitive
and fragmented, with competitors in the private label market, the human health
supplements market and the cattle feedlot market. The Company's competitors in
the private label manufacture of health supplements include, Montana Naturals,
Chemins, and Pacific Nutritional.
The Company's competitors in the manufacture of lactic acid bacteria
for inclusion in silage inoculum and feed additives include Chris Hansen,
Rhone-Poulenc and Lallemand.
MARKETING, SALES AND DISTRIBUTION
Animal Health Products. The Company relies on independent sales
representatives to sell and service customers of its animal health products. The
Company also markets and sells O.E.M. and private label silage inoculum directly
to branded companies in agriculture. In June of 1998, the Company hired a sales
manager for agricultural products.
Human Health Products. The Company has four sales and
marketing/customer service personnel dedicated to selling the Company's services
and proprietary products and technologies to branded companies in the health
supplement industry. Customers such as Weider Nutrition International markets
the Company's ingredients such as Calcium D-glucarate and LIVEBAC(R)
Lactobacillus acidophilus in their private label products to health food and
mass merchant retail outlets.
The Company began the sale of its own branded health supplements
exclusively via the Internet under the BIOPOWER(R) health supplement brand. The
Company does not view the Internet as a substantial market today, and provides
these products primarily as a service to shareholders and employees as a source
of information pertaining to customer preferences.
The Company's primary businesses, health supplements and animal feed
additive manufacture, have a seasonality generally reflective in lower third
quarter product orders due to seasonal low retail health supplement sales and
reduced cattle in feedlots.
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STATUS OF PUBLICLY ANNOUNCED NEW PRODUCTS
Health supplements incorporating Calcium D-glucarate are being
marketed to the retail consumer by Weider Nutrition International, Inc., as
well as through other sublicensees. Weider Nutrition is marketing a Breast
Health formula under the SCHIFF(TM) label to health food stores and
Ex-Smokers formula and Breast Health formula under their NUSTART(TM) label to
the mass merchants. As of September 1998, the agreement with Weider was amended
to provide for a non-exclusive sublicense agreement in the mass merchant and
retail sales market. The Company has entered into agreements with other
sublicensees for the non-exclusive right to distribute health supplements
containing Calcium D-glucarate in the mass and retail distribution markets.
The Company first shipped glucarate based products to Rexall Showcase
in July, 1998.
In July of 1998, the Company and Temple University entered into an
exclusive license agreement pursuant to which the Company acquired the rights to
certain technologies under a pending patent application for the development of
the controlled delivery of vitamins and other health supplements to provide for
maximum bioavailability through a linear release of a single dose tablet. The
Company cannot estimate the sales potential of this product nor can it assure
the effectiveness of the product.
EFFECT OF UNFAVORABLE PUBLICITY
The Company believes the nutritional supplement market is affected by
national media attention regarding the consumption of nutritional supplements.
There can be no assurance that future scientific research or publicity will be
favorable to the nutritional supplement market of any particular product, or
consistent with earlier research or publicity. Future reports of research that
are perceived as less favorable or that question such earlier research could
have a material adverse effect on the Company. Because of the Company's
dependence upon consumer perceptions, adverse publicity associated with illness
or other adverse effects resulting from the consumption of the Company's
products or any similar products distributed by other companies could have a
material adverse impact on the Company. Such adverse publicity could arise even
if the adverse effects associated with such products resulted from failure to
consume such products as directed. In addition, the Company may not be able to
counter the effects of negative publicity concerning the efficacy of its
products.
DEPENDENCE ON NEW PRODUCTS
The Company believes its ability to grow in its existing markets is
partially dependent upon its ability to introduce new and innovative products
into such markets. Although the Company seeks to introduce additional products
each year in its existing markets, the success of new products is subject to a
number of conditions, including developing products that will appeal to
customers and comply with existing regulations at the time of introduction.
There can be no assurance that the Company's efforts to develop innovative new
products will be successful, that customers will accept new products, or that
the Company will obtain regulatory approvals of such new products, if required.
In addition, no assurance can be given that new products currently experiencing
strong popularity and rapid growth will maintain their sales over time.
COMPETITION
The principal markets in which the Company competes are competitive
and fragmented, with competitors in the private label market, the human health
supplements market and the cattle feedlot market. Increased competition could
have a material adverse effect on the Company, as competition may have far
greater financial and other resources available to them and possess extensive
manufacturing, distribution and marketing capabilities far greater than those of
the Company.
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The Company believes that its primary competitive advantage results
from its proprietary technology which is not available from other suppliers,
including LIVEBAC(R) caplets, Calcium D-Glucarate(TM), and Cobactin(R). This
proprietary technology is protected by two patents relating to microbial
products, two patents relating to the application and/or delivery of microbials
and an exclusive license to sell Calcium D-Glucarate(TM) in health supplements.
Additionally, the Company believes that other principal competitive factors in
the sale of health supplements for animal and human consumption are quality,
technical and manufacturing capability and timely delivery and service. The
Company believes that its strong and stable customer relationships evidence
that it competes favorably with respect to each of these factors.
Although all employees sign confidentiality agreements, there is no
guarantee either that trade secrets won't be shared with competitors or that the
Company could enforce these agreements. Such disclosures, if made, could
negatively affect the Company's competitiveness.
SOURCES AND AVAILABILITY OF RAW MATERIALS AND PRINCIPAL SUPPLIERS
The Company obtains all its raw materials for the manufacture of its
products from other sources. The Company generally does not have contracts with
any entities or persons committing such suppliers to provide the materials
required for the production of its products, with the exception of the glucarate
salt, Calcium D-glucarate. There can be no assurance that suppliers will provide
the raw materials needed by the Company in the quantities requested or at a
price the Company is willing to pay. Because the Company does not control the
actual production of these raw materials, it is also subject to delays caused by
interruption in production of materials based on conditions not wholly within
its control. The inability of the Company to obtain adequate supplies of raw
materials for its products at favorable prices, or at all, as a result of any of
the foregoing factors or otherwise, could have a material adverse effect on the
Company.
The Company has an agreement with BioChemix for the supply of Calcium
D-glucarate. Management expects BioChemix to be able to supply sufficient
glucarate for the health supplement market. However, Nutraceutix has no direct
control over BioChemix and any interruption in supply of glucarate could
adversely effect the revenues of the Company.
DEPENDENCE ON SIGNIFICANT CUSTOMERS
The Company was dependent on seven (7) companies for approximately
67% of its 1997 revenues. The Company's largest customers, Odwalla, Inc. and Bio
Sales, Inc. accounted for approximately 12% and 11% respectively, of net sales
in fiscal 1997 and 25% and 11% respectively, of net sales in fiscal 1996. The
Company has five other major customers, each of which produced sales of between
5% and 10% of the Company's net sales in fiscal 1997 and, collectively,
accounted for approximately 44% of net sales in fiscal 1997.
The loss of Odwalla or Bio Sales as a customer, the loss of a
significant number of other major customers, or a significant reduction in
purchase volume or financial difficulty of such customers, for any reason, could
have a material adverse effect on the Company's results of operations and its
financial condition. There can be no assurance that Odwalla and or Bio Sales
will continue as major customers of the Company .
INTELLECTUAL PROPERTY
The Company currently holds two U.S. and one Canadian patent
pertaining to COBACTIN(R) feed additives, two U.S. patents related to the
dispensing of microbial cultures and one licensed patent pertaining to Calcium
D-glucarate. These patents are listed below.
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<TABLE>
U.S. Patents Issued
<S> <C>
U.S. NO. 5,179,020 ANTIBIOTIC RESISTANT STRAIN OF LACTOBACILLUS ACIDOPHILUS
Issue Date: January 12, 1993
Strain: Bio Techniques No. BT1389
ATCC No. 55221
Inventor: R. E. Herman, D. R. Ware and J. E. Clarke
Expiration: September 19, 2011
U.S. NO. 5,256,425 ANTIBIOTIC RESISTANT STRAIN OF LACTOBACILLUS ACIDOPHILUS
Issue Date: October 26, 1993
Strain: Bio Techniques No. BT1389
ATCC No. 55221
Inventor: R. E. Herman, D. R. Ware and J. E. Clarke
Expiration: September 19, 2011
U.S. NO. 5,139,792 METHOD AND SYSTEM FOR DISPENSING LIVE BACTERIA INTO
ANIMAL FEED AND DRINKING WATER
Issue Date: August 18, 1992
Inventors: D. R. Ware, R. E. Herman and L. A. Walter
Expiration: September 9, 2010
U.S. NO. 5,358,145 DISPENSER FOR DELIVERING MICRO-INGREDIENTS FROM CARTRIDGES
Issue Date: October 25, 1994
Inventor: S. H. Smith, et al
Expiration: September 19, 2011
Foreign Patents Issued
CANADIAN NO. 1,298,799 STRAINS OF LACTOBACILLUS ACIDOPHILUS
Issue Date: April 14, 1992
Inventors: Manfredi, Eugene T., U.S.A.
Miller, Robert E., U.S.A.
Licensed to Nutraceutix, Inc. by BioChemix, Inc.
U.S. NO. 4,845,123 REDUCTION IN VIVO OF THE INAPPROPRIATE LEVELS OF
ENDOGENOUS AND ENVIRONMENTAL - DERIVED COMPOUNDS BY
SUSTAINED-RELEASE INHIBITORS OF B-GLUCURONIDASE.
Issue Date: July 4, 1989
Inventors: Zbigniew Walaszek, Malgorzata Hgnausek-Walaszek, Thomas
E. Webb and John P. Milton, all of Columbus, Ohio
</TABLE>
If challenged as to validity, there is no guarantee that the patents
will prove valid. In addition, the costs of defending a patent could
substantially affect the operating performance of the Company. While the Company
has patent protection insurance for the glucarate patent, the policy has a
twenty percent (20%) co-payment obligation for a total of $500,000 in coverage
per claim, and there is no guarantee that this amount would cover defense costs.
The Company relies on common law trademark rights to protect its
unregistered trademarks. Common law trademark rights do not provide the Company
with the same level of protection as afforded by a United States federal
registration of a trademark. In addition, common law trademark rights are
limited to the geographic area in which the trademark is actually used, while a
United States federal registration of a trademark enables the registrant to stop
the unauthorized use of the
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trademark by any third party anywhere in the United States even if the
registrant has never used the trademark in the geographic area wherein the
unauthorized use is being made (provided, however, that an unauthorized third
party user has not, prior to the registration date, perfected its common law
rights in the trademark in that geographic area). The Company also intends to
register its trademarks in certain foreign jurisdictions where the Company's
products are sold. However, the protection available in such jurisdictions may
not be as extensive as the protection available to the Company in the United
States.
As of November 30, 1998, the Company has approximately eight federal
trademark registrations and approximately two trademark applications pending
with the United States Patent and Trademark Office. The Company's policy is to
pursue registrations for all of the trademarks associated with its key products.
Following is a list of the Company's registered and pending trademarks.
<TABLE>
<CAPTION>
Trademark Name Country Reg. Number Expiration
- -------------- ------- ----------- ----------
<S> <C> <C> <C>
COBACTIN PLUS US 1,801,374 October 26, 2003
COBACTIN II US 1,711,123 September 1, 2002
COBACTIN US 1,402,806 July 29, 2006
COBACTIN Benelux 419,823 February 10, 2007
COBACTIN Canada 334,740 November 27, 2002
COBACTIN France 1,352,178 April 23, 2006
COBACTIN UK 1,480,950 February 3, 2000
COBACTIN UK 1,264,735 April 15, 2007
BIO TECHNIQUES Benelux 510,287 September 1, 2002
BIO TECHNIQUES France 92,407,893 February 27, 2002
BIO TECHNIQUES UK 1,492,393 February 28, 1999
BIO TECHNIQUES US 1,730,602 November 10, 2002
BIO TECHNIQUES US 1,392,081 May 6, 2006
BIO POWER US 1,375,452 December 17, 2005
BIO POWER Canada 332,557 October 2, 2002
BIO POWER UK B1,264,642 April 14, 2007
BIO POWER US 75/407,909 Pending
LIVE-BAC US 1,405,455 August 19, 2006
NUTRACEUTIX US 74/621,937 August 18, 2008
BT1386 US 75/364,594 November 24, 2008
NU-TRAX US 75/593,041 Pending
</TABLE>
The Company currently has four royalty agreements. One is with
Forage Products Limited Partnership, the financier of the original research for
the development of BIOPOWER(R) silage inoculant, pursuant to which the Company
pays royalties equal to 6% of net sales of BIOPOWER(R) silage inoculant to the
original partners until the earlier of acquisition of the Company, a public
offering of the Company's stock or payment of royalties of $3,300,000 aggregate.
Through December 31, 1997, the company has paid or incurred to Forage Product
Limited Partnership approximately $98,000 in royalties. Another royalty
agreement is with the former partners of Feed Additives Limited Partnership and
Feed Additives Joint Venture, the financier of the original research for the
11
<PAGE> 12
development of COBACTIN(R) microbial feed additive, pursuant to which the
Company pays royalties equal to 4% of net sales of COBACTIN(R) for beef and
dairy applications to the original partners through December 31, 2010. During
1997 and 1996, combined royalty payments for Forage and Feed Additives amounted
to $48,799 and $13,805, respectively. The Company pays 2% royalty on sales of
Cobactin(R) to the poultry market sales. To date, there have been no sales of
Cobactin(R) to the poultry market. The Company pays a 5.25% royalty on the net
revenue received from the use of certain formulas developed by BioChemix for the
delivery of glucarate in health supplements for breast, prostate and lung
health. Royalty expense for 1997 and 1996 was $7,000 and $0 respectively.
Lastly, in December of 1998, the Company will pay a non-refundable license fee
of $25,000 to Temple University pursuant to the terms of the license agreement.
The Company is obligated to pay an annual non-refundable maintenance license
fee of $10,000, which license maintenance fee payment may be credited against
royalties due under the license agreement to Temple University during the same
calendar year. The agreement does not provide for carry-over of unused credit
to subsequent years. As of November 30, no royalties have been paid or incurred
by the Company to Temple University.
GOVERNMENTAL REGULATIONS
Many of the Company's products are either G.R.A.S. (Generally
Regarded As Safe) listed by the FDA or do not currently require extended
regulatory approval. Recent legislation has resulted in a regulatory environment
which sets what the Company considers to be reasonable limitations and
guidelines on health claims and labeling for natural products. Thus the Company
believes that current and reasonably foreseeable governmental regulation will
have minimal impact on its business.
Statements of the Company and its customers regarding dietary
supplement products are subject to regulation by the FTC under the Federal Trade
Commission Act, which prohibits unfair or deceptive trade practices, including
false or misleading advertising. The FTC in recent years has brought a number of
actions challenging claims by companies.
The Company manufactures products for customers that the customer
distributes under their own or other trademarks. Such private label customers
are subject to governmental regulations in connection with their purchase,
marketing, distribution and sale of such products, and the Company is subject to
such regulations in connection with the manufacture of such products and its
delivery of services to such customers. However, the Company's private label
customers are independent companies, and their labeling, marketing and
distribution of such products is beyond the Company's control. Nevertheless, the
failure of these customers to comply with applicable laws or regulations could
have a material adverse effect of the Company.
In the future, the Company may be subject to additional laws or
regulations administered by the FDA or other federal, state or foreign
regulatory authorities, the repeal of laws or regulations which the Company
considers favorable, such as the DSHEA, or more stringent interpretations of
current laws or regulations. The Company is unable to predict the nature of such
future laws, regulations, interpretations or application, nor can it predict
what effect additional governmental regulations or administrative orders, when
and if promulgated, would have on its business in the future. They could,
however, require the reformulation of certain products to meet new standards,
the recall or discontinuance of certain products not able to be reformulated,
imposition of additional record keeping requirements, or expanded documentation
of the properties of certain products, expanded or different labeling and
scientific substantiation. Any or all of such requirements could have a material
adverse effect on the company's results of operations and financial condition.
RESEARCH & DEVELOPMENT
In 1997 and 1996, the Company spent $78,776 (approximately 2% of sales)
and $152,195 (approximately 4% of sales) respectively, on product research and
development. For the three months ended March 31, 1998 and 1997, research and
development expense was $36,140 and $15,079, respectively. Management
anticipates spending approximately the same percentage of sales on research and
development in 1998. The Company funds these activities internally.
12
<PAGE> 13
Microbial Product Development: The Company has conducted research
into the interaction of resident bacteria with health and the preservation and
delivery of live lactic acid bacteria in health supplements. This research has
also resulted in development of the LIVEBAC(R) Process for tableting lactic acid
bacteria. The LIVEBAC(R) Process has been shown to yield a tablet with a
shelf-life of one year. Shelf-life of lactic acid bacteria in supplement form
has historically been problematic. The Company is continuing research to extend
one year shelf life of lactic acid bacteria and develop new applications. There
is no assurance that this research and development effort will result in
marketable products or services.
Health Supplement Development: The Company develops products
requested by customers, and/or develops new product concepts which it licenses
to customers. The Company also actively seeks and reviews new nutraceutical
materials and delivery technologies developed by independent researchers. There
is no assurance that this research and development effort will result in
marketable products or services.
COMPLIANCE WITH ENVIRONMENTAL LAWS
The Company believes that it is in full compliance with all relevant
environmental laws. Due to the nature of the Company's operations, to date, the
cost of complying with environmental laws does not have a significant effect on
the Company's operations.
EMPLOYEES
As of November 30,1998, the Company employs 46 full time employees,
consisting of four executives, 29 production personnel, three sales and
marketing personnel, four quality control personnel and six administrative
personnel. None of the Company's employees are represented by labor unions. The
Company believes its relationship with employees is good.
The Company believes that its success depends to a significant extent
on the management and other skills of William St. John, its President and
Chairman; Steven Moger, the Vice President of Operations; Lyndon Johnson, the
Vice President of Sales and Marketing; and Patricia St. John, the Vice President
of Administration, as well as its ability to retain or attract other skilled
personnel. The loss or unavailability of the services of Mr. or Mrs. St. John,
Mr. Moger or Mr. Johnson could have a material adverse effect on the Company.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS AND PLAN OF OPERATION
The following discussion and analysis should be read in conjunction
with the financial statements of the Company and the accompanying notes
appearing subsequently under the caption "Financial Statements." The following
discussion and analysis contains forward-looking statements, which involve risks
and uncertainties in the forward-looking statements. The Company's actual
results may differ significantly from the results, expectations and plans
discussed in the forward-looking statements.
13
<PAGE> 14
In the past two years (1997 and 1996), the Company's growth has come
primarily from the private label manufacture of human health supplements and
supply of ingredients (nutraceutical based health supplements) for inclusion in
health supplements and foods. Prior to its strategic decision in 1995 to enter
the human health supplement industry, the Company operated solely in the animal
health industry. As a result, revenues grew to $4,306,768 in 1997 compared to
$3,731,630 in 1996. This pattern of growth closely correlates to increases in
the Company's health supplement manufacturing capacity and its development of
proprietary health supplement technologies. Accompanying this increased product
diversification, the Company's animal health products business has remained
constant, contributing approximately $1.5 million in sales annually.
In 1995, the Company acquired the assets of Integrity Products, in
Longmont, Colorado. By purchasing the assets of Integrity Products, a "cottage"
private label manufacturer of health supplements, Nutraceutix acquired some
manual manufacturing equipment, with which it established a full-scale health
supplement manufacturing facility. The Company relocated this equipment, along
with some newly purchased automated manufacturing equipment, to a new site in
Lafayette, Colorado in December 1995. The operation produced only nominal
revenues in 1995. Operations for private label manufacturing began in 1996 after
assembling a staff experienced in the health supplement industry, and having
begun efforts to supply microbials and other ingredients to manufacturers of
health supplements and natural foods.
In addition to private label manufacturing, the Company also
benefitted from its development of LIVEBAC(R) probiotic caplets and Calcium
D-glucarate, two new proprietary technologies. During the second half of 1996
and first half of 1997, the Company conducted extensive experimentation to
develop the trademarked LIVEBAC(R) process for the tableting of live
Lactobacillus acidophilus bacteria and other lactic acid bacteria with extended
shelf-life. Lactobacillus acidophilus is a live bacterial culture, which is a
standard health food supplement for maintaining gastrointestinal health. By
mid-1997, the Company had perfected a process for producing a tableted
Lactobacillus acidophilus with a one-year shelf-life. The Company began
production of Lactobacillus acidophilus using the LIVEBAC(R) process for several
companies in the fourth quarter of 1997.
Despite the revenue increase, the Company experienced a net loss of
$83,861 in 1996, compared to a net loss of $363,727 in 1995. The losses were
primarily the result of the high cost of sales from the Company's then heavy
reliance on temporary labor for what was then largely a manual process of
assembling and packaging health supplements. During 1996 and 1997, while
building a customer base and establishing its expertise in health supplement
manufacturing, the Company had very limited access to working capital that,
adversely affected product margins and rate of expansion. The Company funded the
bulk of its diversification into health supplement manufacturing through cash
flow from operations and an asset-backed credit line, on which the Company was
then paying a 23% annual interest rate, which also adversely affected its
financial results.
In an effort to contain anticipated losses in 1997, the Company
decreased its general and administrative costs to $974,552 from $1,110,921 in
1996; lowered its marketing expenses to $609,121 from $671,706 in 1996; and
decreased its research and development expenses to $78,776 in 1997 from $152,195
in 1996, through staff and expense reductions. In October 1997, the Company
secured a conventional bank line of credit at an interest rate of two plus
prime.
14
<PAGE> 15
Also contributing to increased revenues was the Company's acquisition
of a license for the patented health supplement material, Calcium D-glucarate in
July 1997. In September of 1997, the Company signed an agreement with Weider
Nutrition International for their exclusive marketing of glucarate based
products in retail stores. The specific terms of the agreement provides for
royalties, obligations of all parties, and the terms and conditions for
continuation into years 2002 and 2003 and beyond. As a result of this agreement,
the Company benefitted from guaranteed royalties in 1997, amounting to
approximately $130,000 and $100,000 for the first quarter of 1998. In 1997, the
Company received no manufacturing revenues from glucarate products because the
product formulation and packaging were not yet completed. In 1998, the Company
received $988,927 in revenues for the manufacturing of health supplements
containing Calcium D-glucarate.
Despite increasing diversity in revenue streams, gross profit margin
decreased to 42% in 1997 as compared to 52% in 1996, primarily due to limited
production capacity. In March 1997, the Company began upgrading its health
supplement facility with fully automated equipment, financed through an
equipment leasing arrangement. The upgraded facility became fully operational in
the fourth quarter of 1997. Limited production capacity and increases in the
Company's depreciation and amortization, interest and general expenses, resulted
in a loss of $59,901 in 1997, compared to a loss of $83,861 in 1996.
Total revenues increased in the first quarter of 1998 to $1,417,856
compared to $990,222 in the first quarter of 1997 primarily from private label
manufacturing and royalties from sublicense agreements. Net income for the first
quarter ended March 31, 1998 was $100,494 compared to $20,288 in the first
quarter of 1997.
Because of delays by Weider Nutrition International in preparing
labels and packaging, 1998 first quarter results include only one small shipment
of glucarate products. Shipments of glucarate based products began in April of
1998, which was accompanied by an advertising campaign in Weider Publications.
While the Company can make no guarantee that demand for glucarate products will
continue to increase, the Company expects continued growth in the sale of its
glucarate based products as the public awareness increases.
The Company's cost of sales increased in the first quarter of 1998 to
$768,624 from $500,728 in the first quarter of 1997, reflecting an increase in
personnel. General and administrative expenses increased in the first quarter of
1998 to $322,149 compared to $268,028 in the first quarter of 1997, reflecting
adjustments to payroll between departments. Research and development expenses
for the first quarter of 1998 increased to $36,140 from $15,079 in 1997,
resulting from further development of glucarate.
On May 13, 1998, the Company and Rexall Showcase International,
Inc., a subsidiary of Rexall Sundown, an unaffiliated public company, entered
into a purchase requirements and exclusive sublicense agreement for products
containing glucarate for breast and prostate health and for the distribution of
these products in the multi-level sales market for an initial term commencing
May 13, 1998 through December 31, 1999, and renewable annually thereafter. The
agreement specifies that in the event Rexall Showcase and the Company can not
agree as to the minimum purchase requirement amount for the period following
the initial term or if Rexall Showcase can not meet the minimum purchase
requirements during the initial term, the sublicense shall cease to be
exclusive. The Company will also manufacture other non-glucarate products for
Rexall Showcase during the term of the agreement.
While the Company believes that the aforementioned factors will
result in increased revenues in 1998 compared to 1997, there is no assurance
that any or all of the factors will benefit the
15
<PAGE> 16
Company. The Company believes that its profitability will continue to be
affected by expenses associated with the further expansion of its manufacturing
capability in 1998. The Company also believes that its profitability will be
affected by increases in administrative expense associated with the filing of
its Form 10-SB with the Securities and Exchange Commission, as well as the
incumbent reporting requirements that accompany the filing, and the development
of new proprietary technologies and products. The Company intends to continue
its strategy of developing proprietary products and expanding its manufacturing
capacity through 1999.
QUARTER ENDED MARCH 31, 1998 COMPARED TO THE QUARTER ENDED MARCH 31, 1997
Total revenues increased in the first quarter of 1998 to $1,417,856
from $990,222 in the first quarter of 1997. This increase in revenues resulted
primarily from the Company private label and OEM manufacturing sales.
Cost of Sales also increased in the first quarter of 1998 to $768,624
from $500,728 in the first quarter of 1997, an increase of $267,896. This
resulted from the increase in private label manufacturing sales.
Gross profit increased in the first quarter of 1998 to $649,232 from
$489,494 in the first quarter of 1997, an increase of $159,738. This resulted
from the increase in sales.
General and Administrative expenses increased in the first quarter of
1998 to $322,149 from $268,028 in the first quarter of 1997, an increase of
$54,121. This resulted from added personnel to support the current increase and
planning for future increases in revenues.
Research and Development expenses in the first quarter of 1998
increased to $36,140 from $15,079 in the first quarter of 1997. This was a
result of increased research in the human health area.
Net income for the first quarter ended March 31, 1998 was $100,494,
an increase of $80,206 as compared to net increase of $20,288 for the first
quarter of 1997 because of the factors cited above.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR ENDED DECEMBER 31, 1996
Total revenues increased in 1997 to $4,306,768 from $3,731,630 in
1996. This increase in revenues resulted primarily from the Company private
label and OEM manufacturing sales.
Cost of Sales also increased in 1997 to $2,493,731 from $1,797,754 in
1996, an increase of $695,977. This increase resulted from the expansion of the
Company's private label manufacturing plant.
Gross profit decreased in 1997 to $1,813,037 from $1,933,876 in 1996.
This decrease was due to the increased cost of sales due to the expansion of the
Company's private label manufacturing plant.
General and Administrative expenses decreased in 1997 to $974,552
from $1,110,921 in 1996, a decrease of $136,369. This decrease reflects more
overhead being allocated to cost of sales as the percentage of production
capacity increased.
16
<PAGE> 17
Marketing and selling expenses decreased in 1997 to $609,121 from
$671,706 in 1996, a decrease of $62,585. This was a result of diversification
into the human health market and implementation of some changes in the Company's
distribution and representation.
Research and development expenses decreased in 1997 to $78,776 from
$152,195, a decrease of $73,419. This was a result of a decrease in the
microbial research staff.
Depreciation and Amortization expense increased in 1997 to $281,327
from $234,586 in 1996, an increase of $46,741. This increase was a result of new
equipment purchased for the Colorado manufacturing facility.
Interest expense increased in 1997 to $217,447 from $109,817 in 1996,
an increase of $107,630. This increase was caused by leased equipment for
expansion on the Colorado facility and increased line of credit interest
expense.
Net loss for the year ended December 31, 1997 was $59,901, a decrease
of $23,960 as compared to a net loss of $83,861 for 1996 because of the factors
cited above.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO THE YEAR ENDED DECEMBER 31, 1995
Total revenues increased in 1996 to $3,731,630 from $2,737,766 in
1995. This increase in revenues resulted primarily from the Company private
label and OEM manufacturing sales.
Cost of Sales also increased in 1996 to $1,783,949 from $883,293 in
1995, an increase of $900,656. This increase resulted from the expansion of the
Company's private label manufacturing plant.
Gross Profit increased in 1996 to $1,933,876 from $1,854,473 in 1995.
This resulted primarily from increased sales from private label manufacturing.
General and Administrative expenses increased in 1996 to $1,110,921
from $772,513 in 1995, an increase of $338,408. This increase reflects increased
staff to handle the increase in business and expected future business.
Marketing and selling expenses decreased in 1996 to $685,511 from
$1,264,104 in 1995, a decrease of $578,593. This was a result of diversification
into the human health market and implementation of some changes in the Company's
distribution and representation. The largest contribution to this decrease was a
change in distribution of the Company's agricultural products.
Research and Development expenses increased to $152,195 in 1996 from
$151,038 in 1995, an increase of $1,157, no significant change.
Depreciation expense increased in 1996 to $234,586 from $179,000 in
1995, an increase of $55,586. This increase was a result of new equipment
purchased for the Colorado manufacturing facility.
17
<PAGE> 18
Net interest expense increased to $109,817 in 1996 from $51,576 in
1995, an increase of $58,241. This increase caused by leased equipment for
expansion of the Colorado facility.
Net loss for the year ended December 31, 1996 was $83,861, a decrease
of $279,866 as compared to a net loss of $363,727 for 1995. The decrease was
attributable primarily to increased sales of the Company in the human health
market and the significant decrease in marketing and selling expenses.
(LOSS) PER SHARE
Net loss per share in 1997 was ($.004), while net loss per share in
1996 was ($.006). It should be noted that these figures were somewhat impacted
by the issuance of additional shares in connection with the Company's offering
of common stock in 1997, resulting in more outstanding shares in 1997 than in
1996.
LIQUIDITY AND CAPITAL RESOURCES
Cash increased $68,546 at December 31, 1997 to $132,988 from $64,432
at December 31, 1996 at December 31, 1996. In 1997, the bank line of credit
increased to $600,000 and the Company received equity financing of $228,889. The
Company also received an advance royalty payment of $300,000 in 1997.
The Company, in May of 1998, entered into a secured a loan for
equipment lease financing to purchase additional production equipment primarily
for its Colorado facility under which $500,000 may be borrowed over the sixty
(60) month term of the loan. In November of 1998, the Company secured additional
equipment lease financing from the same lender under which an additional
$140,000 may be borrowed over a sixty (60) month term. Both loans are subject to
certain covenants and provide for a nominal buyout at the end of the terms of
the loans.
The Company has secured a revolving bank line of credit under which
$800,000 may be borrowed at an interest rate of one percent (1%) over the
bank's prime rate. Amounts borrowed under this line of credit are due on the
earlier of demand or September 30, 1999, and is renewable annually in September.
There is no guarantee that it will be renewed by the bank with terms acceptable
to the Company.
The Company believes that it has adequate cash resources to fund
current operations. There can be no assurance, however, that the Company's
actual capital needs will not exceed anticipated levels, or that the Company
will generate sufficient revenues to fund its operations in the absence of other
sources. To finance its growth plan in human health, the Company is considering
a number of alternatives, including additional equity financing and research and
development partnerships. There can be no assurance that any such transactions
will be available at terms acceptable to the Company or that the Company will
have sufficient working capital to fund its growth plan in human health markets.
YEAR 2000 IMPACT STATEMENT
The Company is not aware of any potential problems resulting from the
year 2000 with any of its computer, manufacturing systems, major vendors or
suppliers.
POTENTIAL SALES AND EARNING VOLATILITY
The Company's sales and earnings continue to be subject to potential
volatility based upon, among other things: (i) the adverse effect of
distributors' or the Company's failure, and allegations of their failure, to
comply with applicable regulations, which have in the past and could again in
the future result in the removal of certain products from sale in certain
countries, either temporarily or
18
<PAGE> 19
permanently; (ii) the negative impact of changes in or interpretations or
regulations that may limit or restrict the sale of certain of the Company's
products, the expansion of its operations into new markets and the introduction
of its products into each such market; (iii) the inability of the Company to
introduce new products or the introduction of more products by the Company's
competitors; (iv) general conditions in the nutritional supplement industry; and
(v) consumer perceptions of the Company's products and operations. In
particular, because the Company's products are ingested by consumers, the
Company is highly dependent upon consumers' perception of the safety and quality
of its products. As a result, substantial negative publicity concerning one or
more of the Company's products or other nutritional supplements similar to the
Company's products could adversely affect the Company results of operations or
financial condition.
ITEM 3. DESCRIPTION OF PROPERTY
The Company's corporate headquarters, including administrative
offices, production and research and development facilities are located
approximately fifteen miles northeast of Seattle at 8340 154th Avenue Northeast,
Redmond, Washington 98052. The property, consisting of 15,893 square feet, is
leased for a term of sixty (60) months with a lease termination date of
November 30, 2003. The production facility includes equipment for fermentation,
formulation, packaging and storage. The Company leases an additional building
consisting of 1,879 square feet for off-site storage and product blending,
located approximately one-half mile from the corporate headquarters at 14822 NE
95th Street, Redmond, Washington. The storage space is leased through July 31,
2000.
The Company's tableting and encapsulating facility is located
approximately 25 miles from Denver at 1400 and 1420 Overlook Drive, Lafayette,
Colorado 80026. The premises consist of two stand-alone buildings for a total
of 28,800 square feet. The main building is used primarily for manufacturing
and contains machinery for the blending and finishing of raw materials into
tablets or capsules and also contains some minimal office space. The second
building is warehouse space used for raw material storage. The premises had
been subject to four (4) separate lease agreements with the same lessor, all of
which had different lease termination dates. The leases were consolidated,
effective August 1, 1998, into one lease for a term of three (3) years. The
initial term of the consolidated lease expires on July 31, 2001. The Company
has an option to extend the lease for an additional term of two (2) years.
Each of the leases was negotiated at arm's length and entered into
by the Company, as tenant, with an unaffiliated third-party, as the lessor. The
Company believes all lease property is in good and satisfactory condition, and
is suitable for the Company's business needs for the term of the respective
leases.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of November 30, 1998, the Company had issued and outstanding
16,851,812 shares of its Common Stock. The following table sets forth, as of
November 30, 1998, certain information regarding beneficial ownership of the
Common Stock by those persons known by the Company to be beneficially holding
more than five percent of the Company's common stock.
(a) SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
<TABLE>
<CAPTION>
(1) (2) (3) (4)
TITLE NAME & ADDRESS AMOUNT & NATURE PERCENT
OF CLASS OF BENEFICIAL OWNER OF BENEFICIAL OWNER OF CLASS
-------- ------------------- ------------------- --------
<S> <C> <C> <C>
Common William St. John 1,355,978(1,2) 8.05
President/Director
8340 154th Avenue N.E.
Redmond, WA 98052
</TABLE>
19
<PAGE> 20
<TABLE>
<S> <C> <C> <C>
Common Patricia A. St. John 1,355,978(1,2) 8.05
V.P. of Administration
Secretary/Treasurer
8340 154th Avenue N.E.
Redmond, WA 98052
Common Consolidated Nutrition LC 1,920,000(3) 11.39
P.O. Box 2048
Omaha, NE 68103-2048
</TABLE>
(1) For purposes of the table, a person is considered to "beneficially own"
any shares with respect to which he/she directly or indirectly has or shares
voting or investment power or of which he or she has the right to acquire the
beneficial ownership within 60 days. Unless otherwise indicated and subject to
applicable community property law, voting power and investment power are
exercised solely by the person named above or shared with members of his or her
household.
(2) William St. John and Patricia St. John are husband and wife. All shares
held by each of them have been deemed to be beneficially owned by each of them.
Excludes the balance of stock options to purchase an additional 36,669 shares
vesting through January 29, 2001 owned by William St. John and the balance of
stock options to purchase an additional 28,335 shares vesting through January
29, 2001 owned by Patricia St. John.
(3) Consolidated Nutrition, LC is a Subsidiary of Archer Daniels Midland
Corporation. The Common Stock of the Company owned by Consolidated Nutrition LC
(Successor to Central Soya Company, Inc. and Premier Agra) pursuant to the
Exchange of shares with BTL (see "Business-Company History") is subject to a
voting agreement originally entered into between Central Soya Company, Inc. and
BTL pursuant to which, in the Elections of Directors (i) Consolidated Nutrition
LC is obligated to vote in favor for the candidates nominated by the then
current directors, (ii) Consolidated Nutrition LC is precluded from voting its
shares for the removal of any then current directors, and (iii) the Company is
not obligated to nominate for election to its Board of Directors one nominee
designated by Consolidated Nutrition LC See "Part 1, Item 8 Description of
Securities."
The following table sets forth, as of November 30, 1998, certain
information regarding beneficial ownership of the Common Stock by (i) the
Company's directors who beneficially own shares of the Common Stock, (ii) the
executive officers who beneficially own shares of the common stock and (iii) all
of the Company's directors and executive officers as a group.
(b) SECURITY OWNERSHIP OF MANAGEMENT AND DIRECTORS
<TABLE>
<CAPTION>
(1) (2) (3) (4)
TITLE NAME & ADDRESS AMOUNT & NATURE PERCENT
OF CLASS OF BENEFICIAL OWNER OF BENEFICIAL OWNER OF CLASS
-------- ------------------- ------------------- ---------
<S> <C> <C> <C>
Common William St. John 1,355,978(1,2,4) 8.05
President/Director
8340 154th Avenue N.E.
Redmond, WA 98052
Common Patricia A. St. John 1,355,978(1,2,4) 8.05
V.P. of Administration
Secretary/Treasurer
8340 154th Avenue N.E.
Redmond, WA 98052
Common Steven H. Moger 291,968(1,3,4) 1.73
V.P. of Operations
</TABLE>
20
<PAGE> 21
<TABLE>
<S> <C> <C> <C>
8340 154th Avenue N.E.
Redmond, WA 98052
Common Lyndon C. Johnson 0(4,5) 0
V.P. of Sales and Marketing
8340 154th Avenue N.E.
Redmond, WA 98052
Common Herbert L. Lucas 623,824(1) 3.70
Director
12011 San Vicente Blvd., #708
Los Angeles, CA 90049
Common Gilbert S. Omenn, M.D. Ph.D. 248,225(1)(6) 1.47
Director
University of Michigan
6008 Flemming, Administration Building
Ann Arbor, MI 48109-1340
Common Carl W. Schafer 235,000(1) 1.39
Director
66 Witherspoon St., Box 1100
Princeton, N.J. 08542
Common Daniel B. Ward 208,000(1) 1.23
Director
P.O. Box 356
Medina, WA 98039
Common All Directors and Executive 2,962,995 17.58
Officers as a group (8 persons)
</TABLE>
- ----------
(1) For purposes of the table, a person is considered to "beneficially own" any
shares with respect to which he/she directly or indirectly has or shares voting
or investment power or of which he or she has the right to acquire the
beneficial ownership within 60 days. Unless otherwise indicated and subject to
applicable community property law, voting power and investment power are
exercised solely by the person named above or shared with members of his or her
household.
(2) William St. John and Patricia St. John are husband and wife. All shares held
by each of them have been deemed to be beneficially owned by each of them.
Excludes the balance of stock options to purchase an additional 36,669 shares
vesting though January 29, 2001 owned by William St. John and the balance of
stock options to purchase an additional 28,335 shares vesting through January
29, 2001 owned by Patricia St. John.
(3) Excludes stock options to purchase an additional 31,668 shares vesting
through January 29, 2001.
(4) Executive Officers as a group have additional non-vested stock options to
purchase up to an additional 296,672 shares through August 31, 2001.
(5) Excludes a stock option to purchase 200,000 shares vesting through August
31, 2001.
(6) Gilbert S. Omenn resigned from the Board of Directors effective November
27, 1998.
(c) CHANGES IN CONTROL
Not Applicable
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
(a) EXECUTIVE OFFICERS AND DIRECTORS
All directors hold office for three years, with staggered terms. The
Company pays each of its non-employee directors $2,500 each fiscal quarter and
issues 10,000 shares of the common stock of the Company annually in compensation
for their services as directors. Directors are reimbursed for expenses actually
incurred in attending meetings of the Board of Directors and its committees.
Non-employee directors are eligible to receive options under the Company's Stock
Option Plan, which is described below.
21
<PAGE> 22
The executive officers will serve as officers of Nutraceutix, Inc.
until May 1999 or until their respective successors shall have been elected. The
directors and executive officers of the Company and their ages as of the date of
this document are as follows:
William D. St. John, age 47, President, Chairman of the Board since
1995 and President and Chairman of the Board of BTL for the past 15 years. Mr.
St. John was CEO for Ecova, Inc., a leader in Bioremediation. He was a Manager
of Northwest Bio-engineering, which developed proprietary enzymatic systems for
the conversion of organic waste streams into animal feed and fertilizers. He was
previously employed as a consultant to Tempa, Inc., an Alaska-based manufacturer
of animal feed concentrates, and as a scientist for both the Department of
Fisheries/Food Science, University of Washington and the Food and Drug
Administration. Mr. St. John was Division Director of Pro- Tec, Inc., a sporting
goods manufacturer. Mr. St. John received his B.S. from Seattle University in
1973, and M.S. in Micro/Molecular Biology from Ohio State University in 1975.
Patricia A. St. John, age 46, Vice President of Administration,
Secretary, Treasurer. Patricia St. John has served in various management
positions of BTL for the past 12 years, including the last ten years as Director
of Corporate Relations. In December of 1997, Mrs. St. John was promoted to Vice
President of Administration. From 1986 to 1988 Mrs. St. John was the Director of
Corporate Relations for Ecova, Inc. a leader in bio-remediation. Prior to these
positions, Mrs. St. John held administrative positions with the May's Drug Store
chain. She is the wife of William D. St. John.
Steven H. Moger, age 35, Vice President of Operations, has served in
various financial management positions for BTL for the past 11 years. For the
past four years Mr. Moger has served as the Controller/General Manager of the
Company. In December of 1997 Mr. Moger was promoted to Vice President of
Operations/General Manager. Mr. Moger received his B.A. in Accounting from
Western Washington University in 1986 and obtained his CPA in 1989.
Lyndon C. Johnson, age 42, Vice President of Sales and Marketing has
served in various management positions in the nutrition industry during the
last fifteen years. Mr. Johnson was named Vice President of Sales and Marketing
of the Company in August of 1998. Most recently, Mr. Johnson was with Olympian
Laboratories, Inc. from July of 1997 to August of 1998, as Vice President of
Sales and Marketing and, prior to that position was Vice President for Weider
Nutrition International, Mass Market Division and National Sales Manager of
Health Food and Private Label Division for Weider from 1991 to 1997. From 1982
to 1990, Mr. Johnson was the Area Director/General Manager of the western
regional market of Nutri/System Weight Loss Centers. Mr. Johnson attended the
University of Utah.
Herbert L. Lucas, age 71, Director has served as a member of the
Board of Directors since 1995 and of BTL since 1983. Mr. Lucas was with
Carnation International, a multinational food processing company, from 1963 to
1981 rising to the position of President and Director. From l957 to 1963, Mr.
Lucas was with Fry Consultants, Chicago. Mr. Lucas serves on the board of
several corporations and non-profit institutions, including the Wellington Trust
Company, Boston; The J. Paul Getty Trust, Los Angeles; and the Winrock
International Institute for Agricultural Development, Morrilton, Arkansas. Mr.
Lucas received his B.A. from Princeton University in 1950 and M.B.A. from the
Harvard University School of Business Administration in 1952.
Gilbert S. Omenn, age 56, Director has served as a member of the
Board of Directors since 1995 and of BTL since 1984. Dr. Omenn resigned from the
Board of Directors effective November 27, 1998. He is Executive Vice President
for Medical Affairs of the University of Michigan and Chief Executive Officer of
the University of Michigan Health System. Until 1997, he was the principal
investigator of Carotene and Retinol Efficacy Trial (CARET) to prevent lung
cancer at the Fred Hutchinson Cancer Research Center and Director of the Center
for Health Promotion in Older Adults at the University of Washington. He chaired
the presidential/congressional Commission on Risk Assessment and Risk
Management, and served on the National Commission on the Environment. He is a
member of the Institute of Medicine of the National Academy of Sciences, is a
director of Rohm & Haas and Amgen and has chaired the NAS/NRC/IOM Committee on
Science, Engineering and Public Policy. From 1977 to 1981, Dr. Omenn was
Associate Director of the Office of Science and Technology Policy, and Associate
22
<PAGE> 23
Director, Office of Management and Budget, in the Executive Office of the
President. He received his A.B. from Princeton University in 1961, M.D. from
Harvard Medical School in 1965, and Ph.D. in genetics from the University of
Washington in 1972.
Carl W. Schafer, age 62, Director, has served as a member of the
Board of Directors since 1995 and of BTL since 1985. He is President of the
Atlantic Foundation since 1990 and from 1987 to 1990 was a principal of
Rockefeller & Co., Inc. Prior thereto, he was the Financial Vice President,
Treasurer and Chief Financial Officer of Princeton University. Mr. Schafer was
also chairman of the Investment Advisory Committee of the Howard Hughes Medical
Institute from 1985 to 1992. Mr. Schafer joined Princeton in 1969 after serving
as a principal staff assistant to the Committee on Appropriations, U.S. House of
Representatives. From 1961 through 1968 he held increasingly responsible
positions with the U.S. Bureau of the Budget. Mr. Schafer serves as a director
and/or trustee of a number of corporations and foundations including Frontier
Oil Corporation, the Paine Webber and Guardian groups of mutual funds, Evans
Systems, Inc., Harbor Branch Institution, Electronic Clearing House, Inc.,
Roadway Express, Inc. and Base Ten Systems, Inc. Mr. Schafer is a Phi Beta Kappa
graduate in economics of the University of Rochester, 1958.
Daniel B. Ward, age 71, Director, has served as a member of the Board
of Directors since 1995 and of BTL since 1983. Since 1977 he has had his own
financial consulting firm which specializes in mergers and acquisitions. From
1976 to 1977, Mr. Ward was Vice President of Finance for Norfin, Inc., a
business machine manufacturer. From 1972 to 1975 he was Regional Director of the
Small Business Administration and from 1966 to 1972 was Director of the
Washington State Department of Commerce and Economic Development. Mr. Ward
received his B.A. from Princeton University in 1950.
The Board of Directors has established a Compensation and an Audit
Committee. The Compensation Committee establishes salaries, incentives and other
forms of compensation for directors, officers and other employees for the
Company, administers the Company's various incentive compensation and benefit
plans and recommends policies relating to such incentive compensation and
benefit plans. The Audit Committee reviews the need for internal auditing
procedures and the adequacy of internal controls and meets periodically with
management and independent auditors.
(b) OTHER SIGNIFICANT EMPLOYEES
Leslie A. Walter has been Production Manager for the Company since
1984. Before joining the Company, Mr. Walter was Operations Manager for Vivolac
Cultures/Moseley Laboratories, a dairy inoculum producer. At Moseley
Laboratories he held positions as Technical Director, Research Microbiologist
and Operations Manager. Mr. Walter received his B.S. degree in 1964 and M.S.
degree in 1968 in Dairy Microbiology from Oregon State University.
Mary Blunck has serves as Manager of the Colorado tableting and
encapsulating facility since 1997. Prior to Nutraceutix, Ms. Blunck was Manager
of Quality Control at 4-Health, Inc. from 1995 to 1996. From 1989 to 1993, Ms.
Blunck was Plant manager for Celestial Seasonings, Inc. From 1976 to 1979, Ms.
Blunck attended the University of Nebraska at Kearney. Areas of study include
mathematics, business administration and chemistry.
23
<PAGE> 24
(c) FAMILY RELATIONSHIPS
William D. St. John and Patricia A. St. John are husband and wife.
(d) INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS
Not applicable.
ITEM 6. EXECUTIVE COMPENSATION
(a) GENERAL
The following table shows all the cash compensation paid by the
Company as well as certain other compensation paid during the fiscal years
indicated, to the President and others who received total annual salary and
bonus in excess of $100,000 for such period in all capacities in which they
served. No Executive Officer other than William St. John received total annual
salary and bonus in excess of $100,000.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION
---------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
---------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g)
OTHER
NAME AND ANNUAL RESTRICTED
PRINCIPAL COMPEN- STOCK OPTIONS
POSITION YEAR SALARY($) BONUS($) SATION($) AWARDS($) SARS
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
St. John, 1998 50,000(3)
William D. 1997 119,000 8,000(2) 62,411(1) -0- -0-
President 1996 119,000 8,000(2) 51,757(1) -0- -0-
1995 119,000 -0- 17,475(1) -0- 148,000(4)
</TABLE>
(1) Mr. St. John received a commission on the Company's gross sales, as
follows:
.65% on all sales
Additional 2% over $150,000
(2) Premium paid by the Company for key man whole life insurance and term
insurance.
(3) Stock options granted in 1997 and 1998 for a term of ten years with a
vesting schedule of three years.
(4) These options were actually issued in varying amounts at various times
between 1988 and 1995. However, they were all assigned new issue dates
of April 6, 1995, concurrent with adoption of the BTL Exchange described
in Part I, Item 1 herein.
STOCK OPTION PLAN
The Company's Stock Option Plan (the "Option Plan") was adopted by
the Board of Directors and stockholders in 1995. An aggregate of 3,000,000
shares of the Company's Common Stock are reserved for issuance under the Option
Plan. The Option Plan is administered by a committee of the Board of Directors,
(the "Administrator").
The purpose of the Option Plan is to attract and retain the best
available personnel for positions of substantial responsibility in the Company,
to provide additional incentive to the
24
<PAGE> 25
employees and consultants of the Company and to promote the success of the
Company's business. The Option Plan provides for the granting to employees
(including officers and employee directors) of "qualified stock options" and to
non-employee directors, consultants and advisors of "non-qualified stock
options" within the meaning of Section 422 of the Internal Revenue Code of 1986,
as amended (the "Code"), and for the granting to employees and consultants of
non-statutory stock options.
The fair market value shall be determined by the Company's Board of
Directors in its discretion; provided, however, that where there is a public
market for the Common Stock the fair market value per share of Common Stock
shall not be less than the closing price in the over-the-counter market. Payment
of the exercise price may be made in cash, check or other consideration
determined by the Administrator. (See Note L of Notes to Financial Statements).
If the Company consolidates or merges with or into another
corporation, then each option may be assumed or an equivalent option substituted
by the successor corporation, unless the Administrator determines, in the
exercise of its sole discretion, that each option will accelerate in connection
with such transaction, in which case each option will be exercisable for 30 days
from notice of such acceleration. The Administrator has the authority to amend
or terminate the Option Plan as long as such action does not adversely affect
any outstanding option and provided that stockholder approval may be required to
the extent necessary for the Option Plan to be qualified under Rule 16b-3 of the
Securities Exchange Act of 1934 and certain provisions of the Code.
EMPLOYMENT CONTRACTS
The Company has a three year employment contract with its President,
William St. John, which commenced on April 1, 1998, and which is renewable for
an additional three-year period unless either party gives 180 days notice to the
other. The employment agreement provided for an initial base annual salary of
not less than $150,000 plus participation in the Company's medical and Stock
Option Plan. As of October 1, 1998, the base salary paid to Mr. St. John
increased from $150,000 to $175,000. Mr. St. John's participation in the sales
commission program was discontinued as of May 1, 1998.
The Company has a three year employment contract with Lyndon C.
Johnson as its Vice President of Sales and Marketing. The employment agreement
commenced on September 8, 1998. The employment agreement provides for an
initial base salary of $150,000 plus commissions and bonus not to exceed fifty
percent (50%) of the base salary provided certain sales levels, profitability
and other objectives are met as determined on an annual basis by the
Compensation Committee. Mr. Johnson is also entitled to participate in the
Company's Medical and Stock Option Plan.
The Company has no employment contracts with any other employees.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Except for the Company's employment agreement with Mr. St. John (see
Part I, Item 6), the Company has not engaged in "Related Transactions" within
the meaning of Item 404 of Regulation S-B during the last two years.
ITEM 8. DESCRIPTION OF SECURITIES
COMMON STOCK
The Company has authorized 30,000,000 shares of common stock, par
value $0.001. Each outstanding share of common stock is entitled to one vote,
either in person or by proxy, on all matters that may be voted upon by the
owners thereof at meetings of the stockholders.
The holders of Common Stock (i) have equal ratable rights to
dividends from funds legally available therefore, when, and if declared by the
Board of Directors of the Company; (ii) are entitle
25
<PAGE> 26
to Share ratably in all of the assets of the Company available for distribution
to holders of Common Stock upon liquidation, dissolution or winding up of the
affairs of the Company; (iii) do not have preemptive, subscription or conversion
rights, or redemption or sinking fund provisions applicable thereto; and (iv)
are entitled to one non-cumulative vote per share on all matters on which
stockholders may vote at all meetings of stockholders.
The Common Stock of the Company owned by Consolidated Nutrition LC
(successor to Central Soya Company, Inc.) pursuant to the BTL Exchange is
subject to a voting agreement originally entered into between Central Soya
Company, Inc. and BTL pursuant to which, in all elections of Directors (i)
Consolidated Nutrition LC is obligated to vote its shares for the candidates
nominated by the then-current directors, (ii) Consolidated Nutrition LC is
precluded from voting its shares for the removal of any then-current directors,
and (iii) the Company is not obligated to nominate for election to its Board of
Directors one nominee designated by Consolidated Nutrition LC.
PREFERRED STOCK
The Company has authorized 5,000,000 shares of preferred stock, par
value $0.01, with such rights and preferences as may be determined by the Board
of Directors. The Board of Directors of the Company has not declared any voting,
dividend, preemption or other rights or privileges of its preferred stock. No
preferred stock of Nutraceutix, Inc. is currently issued or outstanding.
26
<PAGE> 27
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
OTHER SHAREHOLDER MATTERS.
(a) MARKET INFORMATION
The Company's Common Stock, $.001 par value, is traded in the
over-the-counter market (OTC Bulletin Board Symbol: "NUTX").
The following table sets forth the range of high ask and low bid
prices for the Company's Common Stock on a quarterly basis for the past two full
years, as reported by the National Quotation Bureau (which reflect inter-dealer
prices, without retail mark-up, mark-down, or commission and may not necessarily
represent actual transactions). The foregoing and following information should
not be taken as an indication of the existence of an established public trading
market for the Company's Common Stock.
COMMON STOCK
<TABLE>
<CAPTION>
High Ask Low Bid
Period - Fiscal year 1996
<S> <C> <C>
First Quarter ending March 31, 1996 6 1/2 3
Second Quarter ending June 30, 1996 5 1/4 3 1/8
Third Quarter ending September 30, 1996 4 3/4 1 5/8
Fourth Quarter ending December 31, 1996 2 11/16
Period - Fiscal year 1997
First Quarter ending March 31, 1997 1 7/16 1/2
Second Quarter ending June 30, 1997 1 3/16 5/32
Third Quarter ending September 30, 1997 1 1/2 11/16
Fourth Quarter ending December 31, 1997 1 1/8 1/2
Period - Fiscal year 1998
First Quarter ending March 31, 1998 1 11/32 21/32
Second Quarter ending June 30, 1998 1 9/32 1/2
Third Quarter ending September 30, 1998 3 1/4 13/16
</TABLE>
(b) HOLDERS
The approximate number of record holders of the Company's Common
Stock as of November 30, 1998 was 1,376 inclusive of those brokerage firms
and/or clearing houses holding the Company's common shares for their clientele
(with each such brokerage house and/or clearing house being considered as one
holder). The aggregate number of shares of Common Stock outstanding as of
November 30, 1998 was 16,851,812 shares.
27
<PAGE> 28
(c) DIVIDENDS
The Company has not paid or declared any dividends upon its Common
Stock since its inception and, by reason of its present financial status and its
contemplated financial requirements, does not contemplate or anticipate paying
any dividends upon its Common Stock in the foreseeable future.
ITEM 2. LEGAL PROCEEDINGS
Except as described below, the Company is not presently a party to
any material litigation not in the regular course of its business, nor to the
Company's knowledge is such litigation threatened.
In February 1996, Bio Universal, Inc. ("Bio Universal") commenced an
action against BTL in the 251st District Court, Randall County, Texas, Case No.
42,377-C. The action arises out of a 1993 agreement between BTL and Bio
Universal pursuant to which Bio Universal was marketing and distributing BTL's
products. The Company believed that Bio Universal failed to perform its
obligations under that agreement. BioUniversal and BTL thus mutually agreed to
terminate the agreement. In this action Bio Universal alleges that it has been
damaged in that BTL (i) failed to pay Bio Universal money owed to Bio Universal,
(ii) wrongfully terminated the marketing and distribution agreement, (iii)
tortuously interfered with Bio Universal's customer contracts, (iv) slandered
and disparaged Bio Universal and (v) breached the marketing and distribution
agreement. Bio Universal is seeking compensatory and punitive damages in
unspecified amounts, exculpation from money owed BTL, termination of collateral
agreements and reimbursement of fees and costs associated with the litigation.
Discovery has yet to be completed and, accordingly, the Company's
counsel is unable to determine the outcome of the suit. The Company intends to
vigorously defend itself against this suit, and, in the opinion of management,
any defense, settlement, or judgment costs are, at this time, not expected to
have a material financial impact on the Company.
ITEM 3. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS
The Company has had no changes in or disagreements with accountants
on accounting or financial disclosure which fall within the scope of Item 304 of
Regulation S-B.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES
The following unregistered securities of the Company have been issued
in the period from June 15, 1995 through November 30, 1998:
<TABLE>
<CAPTION>
(a) (b) (c) (d)
Underwriter
Date, Amount, Title or Target Class Price Exemption
- ------------------- --------------- ----- ---------
<S> <C> <C> <C> <C>
9/27/95 12,000 Common Bill St. John $3,000 Exercise Section 4(2)
Stock Option of the 1933 Act
</TABLE>
28
<PAGE> 29
<TABLE>
<S> <C> <C> <C> <C>
10/23/95 479,363 Common Four unaffiliated Cancellation of Rule 504
persons $47,052 debt
12/19/95 23,274 Common Ronald T. Hirasawa License Fee for Section 4(2)
exclusive license of
TOUGH(TM) sports products
1/4/96 - 283,002 Common Seven unaffiliated Aggregate $460,000 Rule 504
7/18/96 persons
1/16/96 10,000 Common One non-affiliate Loan Fee Section 4(2)
8/1/96 & 6,666 Common One non-affiliate $6,333 Section 4(2)
12/19/96
11/26/96 375,000 Common Two unaffiliated Cancel debt of Rule 504
persons $150,000
1/8/97 40,000 Common One non-affiliate Promissory Note Section 4(2)
Extension
3/19/97 50,000 Common One non-affiliate Consulting Fee Rule 504
6/11/97 - 350,000 Common Three unaffiliated Aggregate $150,000 Rule 504
7/7/97 persons
6/28/97 5,000 Common Former employee $1,250.00 Stock Section 4(2)
Option Exercise
7/9/97 130,000 Common One non-affiliate Cancel debt of $40,000 Rule 504
9/5/97 200,000 Common Two unaffiliated Aggregate $100,000 Section 4(2)
persons
9/9/97 & 177,507 Common Two unaffiliated $44,377 Stock Section 4(2)
11/14/97 persons Option Exercise
9/12/97 4,000 Common One non-affiliate Services rendered Section 4(2)
9/12/97 35,500 Common BioChemix, Inc. Pre-paid Royalties Section 4(2)
12/5/97 2,500 Common One non-affiliate Escrow Fee of $1,000 Rule 504
1/23/98 100,000 Common Five unaffiliated $25,000 Aggregate Section 4(2)
persons
4/3/98 & 46,831 Common One non-affiliate Legal Services Rule 504
6/11/98
6/2/98 200,000 Common Two unaffiliated Aggregate $150,000 Rule 504
persons
6/17/98 1,000 Common Cathy Smith $250.00 Exercise Section 4(2)
Stock Option
7/15/98 825,000 Common Two unaffiliated Aggregate $618,750 Rule 504
persons
7/28/98 102,500 Common One non-affiliate Payment of brokerage Rule 504
commission fee
10/1/98 & 35,500 Common Bio Chemix, Inc. Pre-paid Royalties Section 4(2)
10/7/98
10/1/98 40,000 Common Four Outside Directors Compensation Section 4(2)
Directors
</TABLE>
On August 13, 1996, the Company entered into an investment banking agreement
with M.H. Meyerson & Co., Inc. ("Meyerson"), a registered broker-dealer,
pursuant to which Meyerson undertook to provide investment banking services for
the Company. Shortly thereafter, and before Meyerson rendered any of the
services to be provided by it, the Company sent Meyerson a letter
29
<PAGE> 30
canceling the agreement. The Meyerson agreement provided that the Company was to
issue to Meyerson warrants to purchase up to 600,000 shares of the Company's
common stock at a price of $3.00 per share; however, the warrants were never
issued by the Company. The Company believes that its cancellation letter to
Meyerson effectively terminated the Meyerson agreement, and that there is no
obligation to issue any warrants to Meyerson.
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Certificate of Incorporation and Bylaws of Nutraceutix, Inc.
contain provisions limiting or eliminating the liability of directors of
Nutraceutix, Inc. to Nutraceutix, Inc. or its shareholders to the fullest extent
permitted by the General Corporation Law of Delaware and indemnifying officers
and directors of Nutraceutix, Inc. to the fullest extent permitted by the
General Corporation Law of Delaware.
The Articles of Incorporation and Bylaws of Bio Techniques
Laboratories, Inc. contain provisions limiting or eliminating the liability of
directors of Bio Techniques Laboratories, Inc. to Bio Techniques Laboratories,
Inc. or its shareholders to the fullest extent permitted by the Washington
Business Corporation Act and indemnifying officers and directors of Bio
Techniques Laboratories, Inc. to the fullest extent permitted by the Washington
Business Corporation Act.
30
<PAGE> 31
PART F/S
31
<PAGE> 32
PART III
<TABLE>
<CAPTION>
ITEM 1. INDEX TO EXHIBITS
<S> <C>
Exhibit 3.1 Certificate of Incorporation and Amendment thereto
Exhibit 3.2 First Amended and Restated Bylaws
Exhibit 10.1 Central Soya Company Licensing Voting Agreement
Exhibit 10.2 Building Lease - 8340 154th Avenue NE, Redmond, WA
(Corporate headquarters/manufacturing facility)
Exhibit 10.3 Building Lease - 14810 NE 95th St., Redmond, WA
Exhibit 10.4 Building Lease - 1420 Overlook Drive, Lafayette, CO
(Tableting, encapsulating, bottling plant)
Exhibit 10.5 Building Lease - 1420 Overlook Drive,
Lafayette, CO (Remainder of building for
additional tableting, encapsulating, bottling and
warehouse)
Exhibit 10.6 Building Lease - 1400 Overlook Drive, Lafayette, CO
(Warehouse)
Exhibit 10.7 Employment Agreement with William D. St. John
Exhibit 10.8 Stock Option Plan
*Exhibit 10.9 Building Lease - 1400 and 1420 Overlook Drive, Lafayette, CO
(Tableting, encapsulating, bottling plant and warehouse)
(Supersedes Exhibits 10.4, 10.5 and 10.6)
*Exhibit 10.10 Employment Agreement with Lyndon Johnson
*Exhibit 10.11 Agreement with Rexall Showcase International, Inc.
* Filed with Amendment No. 1 herewith.
</TABLE>
ITEM 2. DESCRIPTION OF EXHIBITS
The exhibits listed in the Index to Exhibits above follow,
commencing with page E-1.
32
<PAGE> 33
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934, the
registrant caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized.
NUTRACEUTIX, INC.
--------------------------------------
(Registrant)
Date: March/25/99 By: /s/ WILLIAM D. ST. JOHN
----------------------------------
William D. St. John, President
33
<PAGE> 1
EXHIBIT 10.9
LEASE AGREEMENT
THIS LEASE AGREEMENT, made and entered effective the 1st day of August,
1998, by and between JUDITH SCHELL (hereinafter "Owner") and NUTRACEUTIX, INC.,
a Delaware corporation (hereinafter "Tenant");
For and in consideration of the covenants, terms, conditions, agreements
and payments as set forth in this Lease Agreement, the parties hereto agree as
follows:
1.0 PROPERTY - LEASE PREMISES:
Owner hereby leases to Tenant upon the terms and conditions hereof the
real property consisting of approximately 28,800 square feet in Owner's
buildings located at 1400 and 1420 Overlook Drive, Lafayette, Colorado, which
shall hereinafter be referred to as the "Premises".
2.0 TERM:
The term of this Lease shall commence at 12:01 A.M. August 1, 1998 and
unless terminated earlier as provided for herein, shall end at 12:00 midnight
July 31, 2001.
3.0 RENT:
Tenant shall pay to Owner, at the address of Owner set forth below, the
following as rent for the Premises:
3.01 BASE RENT:
Tenant shall pay to Owner, at the address of Owner set forth below,
the following as rent for the Premises:
3.01 BASE RENT:
The base rental for the full term hereof shall be Five Hundred
Seventy Five Thousand Seven Hundred and Fifty Seven and 00/100 Dollars
($575,757.00). Said rental shall be payable in monthly installments (basic
monthly rental) per the following schedule;
<TABLE>
<CAPTION>
YEAR RATE/SF/YEAR MONTHLY INSTALLMENT YEAR TOTAL
- ---- ------------ ------------------- ----------
<S> <C> <C> <C>
1 $6.50 $15,600.00 $187,200.00
2 $6.6625 $15,990.00 $191,880.00
3 $6.8291 $16,389.75 $196,677.00
-----------
Full term total $575,757.00
</TABLE>
in advance on the first day of each month commencing on the Commencement Date
and continuing monthly for the term hereof.
3.02 ADDITIONAL RENT:
3.02.01 REAL ESTATE TAXES:
Tenant agrees to pay Owner, as additional rent, its
prorata share of the real estate and advalorem taxes including
any and all special assessments which may be levied or assessed
by any lawful authority for each calendar year during the lease
term.
3.02.02 INSURANCE:
Tenant agrees to pay Owner, as additional rent, its
prorata share of the cost of insurance for fire and extended
perils coverage, public liability and property damage in
reasonable amounts as determined by Owner.
3.02.03 REPAIRS AND MAINTENANCE:
1
<PAGE> 2
(a) Owner, at Owner's sole cost, agrees to maintain, repair and
replace, when necessary or appropriate, the interior structural
portions and the exterior of the Premises, including, but not by way
of limitation, the roof; foundation; walls and floor of the Premises.
Owner shall further pay the cost of replacement of any heating, air
conditioning and ventilation units serving the Premises.
(b) Owner shall be responsible for repairs and maintenance of
the heating, air conditioning, ventilator, electrical and plumbing
facilities provided such shall be done at the sole cost and expense of
Tenant. Owner shall further maintain and repair the exterior and
grounds of the Premises, including lawn maintenance and snow and ice
removal from sidewalks and parking lots, all at the sole cost and
expense of Tenant.
(c) Except as provided hereinabove, Tenant shall be responsible,
at its sole cost and expense, for all other repair and maintenance of
the Premises. Tenant shall, at the end of the term hereof, return the
Premises to Owner in substantially as good condition as when received
except for usual or ordinary wear and tear.
3.02.04 PRORATA SHARE:
Owner shall notify Tenant from time to time of the amount which
Owner estimates will be Tenant's monthly prorata share of the taxes as
provided in 3.02.01 above, insurance as provided in 3.02.02 above, and
repairs and maintenance as provided in 3.02.03(b) above for the
calendar year or portion thereof and Tenant shall pay to Owner such
amount monthly in advance on or before the first day of each month for
the calendar year. Owner shall submit to Tenant annually a statement
showing the taxes, insurance, repairs and maintenance to be paid by
Tenant during the preceding calendar year, the amount thereof paid by
Tenant during the preceding calendar year, and the amount of the
resulting balance due thereon, or overpayment thereof, as the case may
be. Any overpayment or underpayment shall be considered by the Owner
in setting the estimate of the Tenant's prorata share of said costs
for the succeeding calendar year.
"Tenant's prorata share" means that fraction, the numerator of
which is the gross leasable area of the demised premises agreed to be
28,800 square feet and denominator of which is the gross leasable area
of the Owner's building (including the demised premises) which is
agreed to be 28,800 square feet.
4.0 SECURITY DEPOSIT:
The Tenant shall tender upon the execution of this Lease and keep on
deposit with the Owner at all times during the term of this Lease, the sum of
Fourteen Thousand Two Hundred Eighty Three and 34/100 Dollars ($14,283.34) as
security for the payments by the Tenant of the rent and any other sums due
under this lease and for the faithful performance of all the terms, conditions
and covenants of this Lease. If at any time during the term of this Lease the
Tenant shall be in default in the performance of any provision of this Lease,
the Owner may (but shall not be required to) use any such deposit, or so much
thereof as necessary, in payment of any rent or
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any other sums due under this Lease in default, in reimbursement of any expense
incurred by the Owner and in payment of the damages incurred by the Owner by
reason of the Tenant's default, or at the option of the Owner, the same may be
retained by the Owner as liquidated damages. In such event, the Tenant shall,
on written demand of the Owner, forthwith remit to the Owner a sufficient
amount in cash to restore such deposit to its original amount. If such deposit
has not been utilized as aforesaid, such deposit, or as much thereof as has not
been utilized for such purposes, shall be refunded to the Tenant upon full
performance of this Lease by the Tenant. Owner shall have the right to
commingle such deposit with other funds of the Owner, Owner shall deliver the
funds deposited herein by the Tenant to any purchaser of the Owner's interest
in the Premises in the event such interest be sold, and thereupon, the Owner
shall be discharged from further liability with respect to such deposit.
Notwithstanding the above provisions of this section, if claims of the Owner
exceed the deposit provided for therein, the Tenant shall remain liable for the
balance of such claims.
5.0 PERSONAL PROPERTY TAXES:
Tenant shall be responsible and pay for any and all taxes and assessments
levied on Tenant's furniture, fixtures, equipment and items of a similar nature
located on the Premises.
6.0 UTILITIES:
Tenant shall be solely responsible for and promptly pay all charges for
heat, gas, electric, sewer service and any other utility service used or
consumed by Tenant on the leased Premises. In no event shall Owner be liable
for any interruption or failure in the supply of any such utility to the leased
Premises.
7.0 ALTERATION -- CHANGES AND ADDITIONS -- RESPONSIBILITY:
7.01 The Owner agrees to provide the Tenant, at its sole expense, the
shell for the demised premises.
7.02 Subject to Owner's prior written approval, Tenant may, during the
term of this Lease, at Tenant's sole expense make other changes or alterations
as Tenant may desire. At the end of this Lease, all such fixtures, equipment,
additions and/or alterations (except trade fixtures installed by Tenant) shall
be and remain the property of Owner; provided, however, Owner shall have the
option to require Tenant to remove any or all such fixtures, equipment,
additions and/or alterations and restore the leased Premises to the condition
existing immediately prior to such change and/or installation, normal wear and
tear excepted, all at Tenant's cost and expense.
7.03 All work shall be done in a good and workmanlike manner and shall
consist of new materials unless agreed to otherwise by Owner. Any and all
repairs, changes and/or modifications thereto shall be the responsibility and
at the sole cost of Tenant. Owner may require adequate security from Tenant
assuring no mechanic's liens on account of work done on the Premises by Tenant.
8.0 SIGN APPROVAL:
Tenant shall not install, paint, display, inscribe, place or affix,
or otherwise attach, any sign, picture, advertisement, notice, lettering or
direction on the outside of the Premises for exterior view without the written
consent of the Owner, which consent shall not be unreasonably withheld.
9.0 OBSERVANCE OF LAW:
Tenant shall comply with all provisions of law, including without
limitation, federal, state, county and city laws, ordinances and regulations
and any other governmental, quasi-governmental
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or municipal regulations which relate to the partitioning, equipment operation,
alteration, occupancy and use of the Premises, and the making of any repairs,
replacements, alterations, additions, changes, substitutions or improvements of
or to the Premises. Moreover, Tenant shall comply with all police, fire, and
sanitary regulations imposed by any federal, state, county or municipal
authorities, or made by insurance underwriters, and to observe and obey all
governmental and municipal regulations and other requirements governing the
conduct of any business conducted in the Premises.
10.0 WASTE AND NUISANCE:
Tenant shall not commit, suffer or permit any waste or damage or
disfiguration or injury to the Premises or the fixtures and equipment located
therein or thereon, or permit or suffer any overloading of the floors,
sidewalks or paved areas on the Premises.
11.0 GLASS AND DOOR RESPONSIBILITY - TENANT:
All glass and doors on the leased Premises shall be the responsibility
of the Tenant. Any replacement or repair shall be promptly completed at the
expense of the Tenant.
12.0 USE OF PREMISES:
Tenants shall use lease Premises for processing, manufacturing,
blending, and packaging of health supplements, pharmaceuticals, nutraceuticals,
feed additives, natural materials, microbials, herbs and phytochemicals,
vitamins, organic and in-organic chemicals, amino acids, and extracts of
various origins. This list is not all inclusive in that the natural products
industry is rapidly developing new products, materials and processes. Any other
use requires written consent. Owners approval will not be unreasonably withheld.
13.0 INSURANCE:
13.01 RESPONSIBILITY OF TENANT:
Tenant shall procure, pay for and maintain comprehensive public
liability insurance and property damage insurance providing coverage from any
loss or damage occasioned by an accident or casualty, arising from use of the
Premises by Tenant, its employees, agents, guests and invitees in amounts not
less than One Million Dollars ($1,000,000) for bodily injury and One Million
Dollars ($1,000,000) for property damage. Certificates of such insurance naming
Owner as an additional insured shall be delivered to Owner and shall provide
that said coverage shall not be changed, modified, reduced or cancelled except
upon thirty (30) days prior written notice to Owner.
13.02 RESPONSIBILITY OF OWNER:
Owner agrees to maintain throughout the term of this Lease
Agreement, one or more policies of fire and standard extended coverage
insurance that shall include the demised premises (excluding Tenant's
leasehold improvements, fixtures, equipment, merchandise and other personal
property from time to time located on the demised premises) providing
protection against perils included within the standard form of all-risk
insurance policy issued by insurance companies in the State of Colorado. Upon
request, the Owner shall provide the Tenant with a Certificate of Insurance as
required herein.
14.0 DAMAGE TO LEASED PREMISES:
In the event the leased Premises and/or the improvements of which the
leased Premises are a part shall be totally destroyed by fire or other casualty
or so badly damaged that, in the opinion of the Owner or Tenant, it is not
feasible to repair or rebuild same, Owner or Tenant shall have
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the right to terminate this Lease upon written notice to the other. If the
leased Premises shall be partially untenantable thereby, as determined by
Owner, and appropriate reduction of the rent shall be allowed for the
unoccupied portion of the leased Premises until repair thereof shall be
substantially completed. If the leased Premises are rendered untenantable
thereby, except if caused by Tenant's negligence, Tenant may, at its election,
terminate this Lease as of the date of the damage. If Tenant elects not to
terminate the Lease, the rent shall abate in proportion to the loss of use of
the Premises by Tenant during such untenantability.
15.0 HAZARDOUS MATERIALS:
15.01 Tenant shall not cause or permit any Hazardous Material to be
brought upon, kept, or used in or about the Premises by Tenant, its agents,
employees, contractors, or invitees, except for such hazardous material as is
necessary or useful to Tenant's business.
15.02 Any Hazardous Material permitted on the Premises as provided herein
and all containers therefor, shall be used, kept, stored, and disposed of in a
manner that complies with all federal, state, and local laws or regulations
applicable to any such Hazardous Material.
15.03 Tenant shall not discharge, leak, or emit, or permit to be
discharged, leaked, or emitted, any material into the atmosphere, ground, sewer
system, or any body of water, if such material (as determined by the Owner or
any governmental authority) does or may pollute or contaminate the same, or may
adversely affect (a) the health, welfare, or safety of persons, whether located
on the Premises or elsewhere; or (b) the condition, use, or enjoyment of the
Premises.
15.04 As used herein, the term "Hazardous Material" means:
15.04.01 Any "hazardous waste" as defined by the Resource
Conservation and Recovery Act of 1976, as amended from time to time,
and regulations promulgated thereunder; and
15.04.02 Any "hazardous substance" as defined by the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as
amended from time to time, and regulations promulgated thereunder;
and
15.04.03 Any oil, petroleum products and their byproducts; and
15.04.04 Any substance which is or becomes regulated by any federal,
state, or local governmental authority.
15.05 Tenant agrees that it shall be fully liable for all costs and
expenses related to the use, storage, and disposal of Hazardous Material kept on
the Premises by the Tenant. Tenant shall defend, indemnify, and hold harmless
Owner and its agents from and against any claims, demands, penalties, fines,
liabilities, settlements, damages, costs, or expenses (including, without
limitation, attorneys' and consultant fees, court costs, and litigation
expenses) of whatever kind or nature, known or unknown, contingent or otherwise,
arising out of or in any way related to:
15.05.01 The presence, disposal, release, or threatened release of
any such Hazardous Material which affects soil, water, vegetation,
buildings, personal property, persons, animals, or otherwise;
15.05.02 Any personal injury (including wrongful death) or property
damage (real or personal) arising out of or related to such Hazardous
Material;
15.05.03 Any lawsuit brought or threatened, settlement reached, or
government order relating to such Hazardous Material; or
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15.05.04 Any violation of any laws applicable thereto. The
provisions of this paragraph shall be in addition to any other
obligations and liabilities Tenant may have to Owner at law or at
equity and shall survive the transactions contemplated herein and
shall survive the termination of this Lease.
16.0 INSPECTION AND RIGHT OF ENTRY TO PREMISES:
Owner and its agents shall have the right to enter the Premises at all
reasonable times for the purpose of examining or inspecting the same, to
supply any services to be provided by Owner to Tenant hereunder, to show the
same to prospective purchasers or tenants and to make such alterations,
repairs, improvements or additions, whether structural or otherwise, to the
Premises as Owner may deem necessary or desirable. Owner may enter by means of
a master key without liability to Tenant except for any failure to exercise due
care for Tenant's property and without affecting this Lease. Owner shall use
reasonable efforts on any such entry not to unreasonably interrupt or interfere
with Tenant's use and occupancy of the Premises and Owner shall notify Tenant
prior to entry except in cases of an emergency.
17.0 DEFAULT -- REMEDIES OF OWNER:
17.01 In an event of default in the terms hereof by Tenant and failure
of Tenant to cure such default within five (5) working days after written
notice of default from Owner, the Owner shall have the following rights and
remedies, in addition to all other remedies at law or equity, and none of the
following, whether or not exercised by the Owner, shall preclude the exercise
of any other right or remedy whether herein set forth or existing at law or
equity:
17.01.01 Owner shall have the right to terminate this Lease
by giving the Tenant notice in writing, and upon the giving of
such notice, this Lease and the term hereof as well as all the
right, title and interest of the Tenant under this Lease shall
wholly cease and expire in the same manner and with the same force
and effect on the date specified in such notice as if such date
were the expiration date of the term of this Lease, without the
necessity of re-entry or any other act on the Owner's part. Upon
termination, the Tenant shall quit and surrender to Owner the
Premises. If this Lease is so terminated by the Owner, the Owner
shall be entitled to recover from the Tenant as damages, in
addition to other costs, damages, charges or obligations under
this Lease, the worth at the time of such termination of the
excess, if any, of the amount of rent reserved in this Lease for
the balance of the term of this Lease (which shall be calculated
on the then current rent under this Lease) in excess of the then
reasonable rental value of the Premises for the same period plus
all costs and expenses of Owner caused by the Tenant's default.
17.01.02 Owner may, without demand, or notice, re-enter and
take possession of the Premises or any part thereof, repossess the
same and expel the Tenant and those claiming through or under the
Tenant, and remove the effect of any and all such persons
(forcibly, if necessary) without being deemed guilty of any manner
of trespass and without prejudice to any remedies for arrears of
rent or preceding breach of covenants. Should the Owner elect to
re-enter as provided in this Section 17.01, or should the Owner
take possession pursuant to legal proceedings or pursuant to any
notice provided for by the law, the Owner may, from time to time,
without terminating this Lease, relet the Premises or any part
thereof for such other conditions as the Owner may deem advisable,
with the right to make alterations and repairs to Premises. No
such re-entry or repossession of
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the Premises shall be construed as an election on the Owner's part
to terminate this Lease unless a written notice of termination is
given to the Tenant by the Owner. No such re-entry or repossession
of the Premises shall relieve the Tenant of its liability and
obligation under this Lease, all which shall survive such re-entry
or repossession. Upon the occurrence of such re-entry or
repossession, Owner shall be entitled to damages in the amount of
the monthly rent, and any other sums, which would be payable
hereunder if such re-entry or repossession had not occurred, less
the net proceeds, if any, of reletting of the Premises after
deducting all the Owner's expenses in connection with such
reletting, including, but without limitation, all repossession
costs, brokerage commissions, legal expenses, attorney's fees,
expenses of employees, alteration costs, and expenses of
preparation for such reletting. Tenant shall pay such liquidated
damages to the Owner on the days on which the rent or any other
sums due hereunder would have been payable if possession had not
been retaken. In no event shall the Tenant be entitled to receive
any excess, if any, of net rent collected by the Owner as a result
of such reletting over the sums payable by the Tenant to the Owner
hereunder.
17.01.03 No remedy herein or otherwise conferred upon or
reserved to Owner shall be considered exclusive of any other
remedy but shall be cumulative and shall be in addition to every
other remedy given hereunder or now or hereafter existing at law
or in equity or by Statute. Further, all powers and remedies
given by this Lease to Owner may be exercised, from time to time,
and as often as occasion may arise or as may be deemed expedient.
No delay or omission of Owner to exercise any right or power
arising from any default shall impair any such right or power or
shall be considered to be a waiver of such default or
acquiescence thereof. The acceptance of rental by Owner shall not
be deemed to be a waiver of any breach of any of the covenants
herein contained or of any of the rights of Owner to any remedies
herein given.
18.0 INDEMNIFICATION OF OWNER:
Tenant shall indemnify the Owner and save it harmless from and against
any and all loss (including loss of rentals payable by the Tenant in the event
of loss either directly or indirectly caused by commission or omission of
Tenant), claims, actions, damages, liability and expenses in connection with
loss of life, personal injury and damage to property arising from any
occurrence in, upon or at the Premises or any party thereof, or occasioned
wholly or in part by any act or omission of the Tenant, its agents,
contractors, employees, servants, licensees, or concessionaires or invitees or
by anyone permitted to be on the Premises by the Tenant. In case the Owner
shall, without fault on its part, be made a party to any litigation commenced
by or against the Tenant, then the Tenant shall protect and hold the Owner
harmless and shall pay all cost, expenses and reasonable attorneys' fees
incurred or paid by the Owner in connection with such litigation. All personal
property on the Premises shall be at the Tenant's sole risk, and Owner shall
not be liable for any damage done to or loss of such personal property, or for
damage or loss suffered by Tenant.
19.0 ASSIGNMENT OR SUBLETTING:
Tenant may not assign the Lease or sublet the leased Premises without
the consent of the Owner which consent shall not be unreasonably withheld.
20.0 QUIET ENJOYMENT:
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Owner agrees to warrant and defend Tenant in the quiet enjoyment and
possession of the Premises during the term of this Lease so long as Tenant is
not in default hereunder.
21.0 CONDEMNATION:
If more than twenty percent (20%) of the structural portion of the
Premises shall be taken by eminent domain, or by conveyance in lieu thereof,
and if such taking interferes substantially with the Tenant's use of the
Premises, then this Lease, at the option of either party evidenced by notice to
the other given within thirty (30) days from the taking or conveyance, shall
forthwith cease and terminate entirely. In the event of such termination of
this Lease, then rental shall be due and payable to the actual date of such
termination. If less than twenty percent (20%) of the Rentable Area of the
structural portion upon which the Premises is located, shall be taken, or if
more than twenty percent (20%) of the Premises is taken and neither party
terminates this Lease, this Lease shall cease and terminate as to that portion
of the Premises so taken as of the date of taking, and the rental thereafter
payable under this Lease shall be abated prorata from the date of such taking
in an amount by which that portion of the structural portion of the Premises so
taken shall bear to the structural portion of the Premises prior to such
taking. If any part of the building or real property shall be taken by eminent
domain, or by conveyance in lieu thereof, and if such taking substantially
interferes with the Owner's ownership or use of the building, the Owner, at its
option, may, upon thirty (30) days' notice to the Tenant, terminate this Lease
as of such taking. In any event, the Owner shall receive the entire award for
the land and improvements taken by condemnation.
22.0 SUBORDINATION:
This Lease shall be and is hereby made subordinate to any mortgage or
deed of trust which may now or hereafter encumber the building, and to all
renewals, modifications, consolidations, replacements and extensions thereof.
This clause shall be self-operative and no further instrument or subordination
need be required by any mortgagee. In confirmation of such subordination,
however, Tenant shall, at Owner's request, execute promptly any appropriate
certificate, subordination agreement or instrument that Owner may request.
23.0 OPTIONS:
23.01 OPTION TO EXTEND:
Upon full and complete performance of all the terms, covenants and
conditions herein contained by Tenant and payment of all rental due under the
terms hereof, Tenant shall be given the option to extend this Lease for an
additional two (2) year term. In the event Tenant desires to exercise said
option, Tenant shall give written notice of such fact to Owner not less than one
hundred twenty (120) days nor more than one hundred eighty (180) days prior to
the expiration of the then current term of this Lease. Upon the Owner's receipt
of the Tenant's notice of intent to exercise the option, the parties shall,
within thirty (30) days, negotiate the rental rate for the additional period.
If, within the thirty (30) days the parties are unable to agree on a rental rate
for the additional period, this Lease shall terminate upon its terms. If the
parties agree to a rental rate, this Lease Agreement shall be deemed to be
extended for the additional period.
25.0 INTEREST ON PAST DUE OBLIGATIONS:
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Any amount due to Owner not paid when due shall bear interest at one and
one-half percent (1 1/2%) per month from due date until paid. Payment of such
interest shall not excuse or cure any default by Tenant under this Lease.
26.0 LATE CHARGE:
The Owner shall have the right to collect from Tenant, in addition to
any amounts due above, a monthly collection service charge equal to five percent
(5%) of the payment for any payment due to Owner hereunder which is delinquent
ten days or longer.
27.0 MEMORANDUM OF LEASE-RECORDING:
The parties hereto agree this Lease shall not be recorded in the office
of the Clerk and Recorder of the county in which the leased Premises are
located. In order to effect public recordation, the parties hereto may, at the
time this Lease is executed, agree to execute a Memorandum of Lease
incorporating therein by reference the terms of this Lease, but deleting
therefrom any expressed statement or mention of the amount of rent herein
reserved, which instrument may be recorded by either party in the office of the
Clerk and Recorder of the court in which the leased Premises are located.
28.0 NOTICE:
All notices, demands, and requests which may or are required to be given
by either party to the other shall be in writing and shall be deemed to have
been properly given if served on Tenant or Owner by registered or certified
mail, postage prepaid, return receipt requested, addressed:
If to Tenant: NUTRACEUTIX, INC.
8340 154th Avenue, N.E.
Redmond, Washington 98052
If to Owner: Judith Schell
2100 South 120th Street
Lafayette, Colorado 80026
or at such other place as Tenant or Owner may from time to time designate in a
written notice to the other. Any notice given by mailing shall be effective as
of the second business day after mailing as shown by the receipt given therefor.
29.0 HOLDING OVER:
If after expiration of the term of this Lease, Tenant shall remain in
possession of the leased Premises and continue to pay rent without a written
agreement as to such possession, then Tenant shall be deemed a month-to-month
Tenant and the rental rate during such holdover tenancy shall be equivalent to
one hundred twenty five percent (125%) of the monthly rental paid for the last
month of tenancy under this Lease. No holding over by Tenant shall operate to
renew or extend this Lease without the written consent of Owner to such renewal
or extension having been first obtained.
30.0 MODIFICATIONS OR EXTENSIONS:
No modification or extension of this Lease shall be binding unless in
writing, signed by all parties hereto.
31.0 CONTROLLING LAW:
The Lease, and all terms hereof, shall be construed in accordance with
the laws of the State of Colorado.
32.0 BINDING UPON SUCCESSORS:
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The covenants and agreements herein contained shall bind and inure to the
benefit of Owner and Tenant and their respective successors. This Lease shall
be signed by the parties in duplicate, each of which shall be complete and
effective original Lease.
33.0 PARTIAL INVALIDITY:
If any term, covenant or condition of this Lease or the application
thereof to any person or circumstance shall, to any extent, be invalid or
unenforceable, the remainder of this Lease or the application of such term,
covenant or condition to persons and circumstances other than those to which it
has been held invalid or unenforceable, shall not be affected thereby, and each
term, covenant and condition of this Lease shall be valid and shall be enforced
to the fullest permitted by law.
IN WITNESS WHEREOF, the parties have executed this Lease as of the date
hereof.
OWNER: JUDITH SCHELL
-------------------------------
JUDITH SCHELL
TENANT: NUTRACEUTIX, INC., a Delaware
corporation
By: /s/ PATRICIA A. ST. JOHN
---------------------------
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LEASE TERMINATION AND RELEASE
For and in consideration of the parties execution of the Lease described
in Exhibit A hereto the undersigned hereby terminate the Lease(s) described in
Exhibit B hereto effective the 1st day of August, 1998 and mutually release
each other from any further rights or obligations under said Lease(s).
Nutraceutix, Inc.
/s/ PATRICIA A. ST. JOHN 8/4/98
------------------------- --------
By: Date
------------------------- --------
Judith Schell Date
<PAGE> 12
EXHIBIT A
LEASE DATE: August 1, 1998
PARTIES: Judith Schell (Owner) and Nutraceutix, Inc. (Tenant)
PREMISES: 28,800 square feet in buildings located at 1400 and 1420
Overlook Drive, Lafayette, Colorado.
TERM: Primary term commences at 12:01 A.M. August 1, 1998 and shall
end at 12:00 midnight on July 31, 2001.
<PAGE> 13
EXHIBIT B
LEASE #1
LEASE DATE: September 1, 1995
PARTIES: Judith Schell (Owner) and Nutraceutix, Inc. (Tenant)
PREMISES: 8,000 square feet in building located at 1420 Overlook Drive,
Lafayette, Colorado.
TERM: Primary term commences at 12:01 A.M. December 1, 1995 and shall
end at 12:00 midnight on November 30, 1998.
LEASE #2
LEASE DATE: December 1, 1995
PARTIES: Judith Schell (Owner) and Nutraceutix, Inc. (Tenant)
PREMISES: 6,400 square feet in building located at 1420 Overlook Drive,
Lafayette, Colorado.
TERM: Primary term commences at 12:01 A.M. February 1, 1996 and shall
end at 12:00 midnight on January 31, 1999.
LEASE #3
LEASE DATE: January 1, 1998
PARTIES: Judith Schell (Owner) and Nutraceutix, Inc. (Tenant)
PREMISES: 7,200 square feet in building located at 1400 Overlook Drive,
Lafayette, Colorado.
TERM: Primary term commences at 12:01 A.M. January 1, 1998 and shall
end at 12:00 midnight on January 31, 1999.
<PAGE> 1
EXHIBIT 10.10
EMPLOYMENT AGREEMENT
This Agreement, dated as of August 14, 1998, is made and entered into by
and between Nutraceutix, Inc. (the "Company") and Lyndon Johnson (the
"Executive or Lyndon Johnson"). For the definition of certain terms used in
this Agreement, see Section 6 below.
Upon the execution of this Agreement, all prior employment discussions,
whether written or oral, between the Executive and the Company, or any of its
parents, subsidiaries, affiliates, or predecessor constituent, are terminated
and are of no further force and effect.
SECTION 1 - CONTRACT
1.1 Engagement. The Company hereby employs Lyndon Johnson and Lyndon
Johnson hereby accepts employment with the Company as its Vice President of
Sales and Marketing during the Term, subject to and in accordance with the
provisions of this Agreement.
1.2 Duties. Lyndon Johnson will function in the capacity of Vice
President of Sales and Marketing and shall be responsible for all sales and
marketing by the Company. This will include but not limited to sales of private
label health supplement manufacturing, product sales, technology licensing, raw
ingredient sales and such other sales or other activities as may be assigned to
Lyndon Johnson by the President from time to time. The President and Board
of Directors reserves the right to extend or curtail the specific
responsibilities of Lyndon Johnson from time to time.
1.3 Extent of Service. During the Term Lyndon Johnson will devote his
full-time attention to the business of the Company, and will not, without the
Company's prior written consent, directly or indirectly engage in any
employment, consulting, contracting or other activity which would interfere or
conflict with the performance of Lyndon Johnson's obligations to the Company,
as described in this Agreement.
SECTION 2 - COMPENSATION
2.1 Base Salary. During the Term, the Company will pay Lyndon Johnson a
base salary of one hundred fifty thousand dollars ($150,000) per year. The base
salary will be payable in accordance with the customary payroll practices of
the Company (but in no event less frequently than semi-monthly) as the Board of
Directors of the Company may determine.
2.2 Commission and Bonus. Lyndon Johnson may receive commissions and
bonuses equal to up to fifty percent (50%) of his base salary. Such commissions
and bonuses will be based on certain levels, profitability and other corporate
objectives to be determined on an annual basis by the Compensation Committee of
the Board of Directors, and will be paid to Lyndon Johnson if he meets all
qualifications therefor established by the Compensation Committee of the Board
of Directors.
<PAGE> 2
2.3 Corporate Investment Opportunity. Lyndon Johnson will receive an
incentive stock option to purchase two hundred thousand (200,000) shares of
common stock of the Company at a price equal to their fair market value as of
the closing on the date of grant, vested over three (3) years and subject to
the Company's Stock Option Plan.
2.4 Benefits. Lyndon Johnson will be eligible to participate in such
employee fringe benefit programs as the Company makes available to its
employees from time to time (e.g., medical, dental, disability, 401(k) Plan) to
the same extent as other full-time employees of the Company.
2.5 Vacation. Lyndon Johnson will receive three (3) weeks paid vacation
during each year of the Term as well as such holidays and floating holidays as
the Company makes available to its other full time employees on an annual basis.
2.6 Expenses. The Company will reimburse Lyndon Johnson for his
out-of-pocket expenses directly and reasonably incurred in performance of
service for the Company under this Agreement (e.g., transportation, lodging
and food expenses while traveling on Company business) in accordance with the
Company's standard guidelines and requirements for such reimbursement.
2.7 Relocation Reimbursement. The Company will reimburse Lyndon Johnson
for his out-of-pocket expenses directly and reasonably incurred in moving
himself, his family and his possessions to the Redmond, Washington area, up to
a maximum of ten thousand dollars ($10,000.00). Such reimbursement will be in
accordance with the Company's standard guidelines and requirements for
reimbursement, including but not limited to furnishing of all receipts for such
costs and expenses.
SECTION 3 - TERM AND TERMINATION
3.1 Commencement. The Term will commence on September 8, 1998.
3.2 Termination. Lyndon Johnson's employment by the Company pursuant to
this Agreement will be employment at will. As such, the Term will terminate on
the earlier of (i) the three (3) year anniversary of the commencement date set
forth in paragraph 3.1 or (ii) upon the first of the following to occur: (a) the
Company's termination of this Agreement for any reason or no reason with ninety
(90) days notice; (b) Lyndon Johnson's termination of this Agreement for any
reason or no reason with ninety (90) days notice; (c) the death of Lyndon
Johnson; or (d) the disability of Lyndon Johnson resulting from injury, illness
or disease, whether of a mental or physical nature, which prevents him from, or
substantially impairs his ability to, satisfactorily perform his duties and
obligations under this Agreement for sixty (60) consecutive days.
3.3 Return of Company Property. Upon the Company's request, and in any
event promptly upon termination of the Term, Lyndon Johnson will deliver to the
Company any and all property of the Company in Lyndon Johnson's possession or
control (including, but not limited to, any and all Materials).
SECTION 4 - CONFIDENTIALITY
<PAGE> 3
4.1 Confidential Information. Lyndon Johnson will have access to certain
Confidential Information in the course of his employment by the Company. Lyndon
Johnson will use and disclose Confidential Information solely for the purposes
for which it is provided, and will take reasonable precautions to prevent any
unauthorized use or disclosure of the same. Lyndon Johnson will not use or
disclose any Confidential Information in any manner contrary to the best
interests of the Company.
4.2 Proprietary Information of Others. Lyndon Johnson will not, in the
course of his employment by the Company or at any other time, use, disclose or
otherwise make available to the Company, any information, documents or other
items which Lyndon Johnson may have received from any other person (e.g., a
prior employer) and which Lyndon Johnson is prohibited from so using,
disclosing or making available (e.g., by reason of any contract, court order,
law or obligation by which Lyndon Johnson is bound.)
4.3 Work Product. All Work Product which Lyndon Johnson develops or first
reduces to practice during the Term, either alone or with others, together with
any and all related Intellectual Property Rights will be the sole and exclusive
property of the Company. The foregoing applies to all Work Product which relates
to Lyndon Johnson's performance of services during the Term and/or with the use
of any equipment, supplies, facilities, personnel, Confidential Information or
other resource of the Company.
4.4 Disclosure and Protection of Work Products. Lyndon Johnson will
promptly disclose to the Company in writing all Work Products which Lyndon
Johnson develops or first reduces to practice during the Term, either alone or
with others. At the Company's request, Lyndon Johnson will assist the Company
or its designee in protecting such Work Products and securing or perfecting
all applicable rights therein. Such assistance may include, but is not
necessarily limited to, the following: (a) making application in the United
States and in foreign countries for patents or copyrights on any Work Products
specified by the Company; (b) executing documents of assignment to the Company
or its designee of all of Lyndon Johnson's right, title and interest in and to
any Work Product and related Intellectual Property Rights; and (c) taking such
additional action (including, but not limited to, the execution and delivery of
documents) as may be necessary or appropriate to perfect, evidence or vest in
the Company or its designee all right, title and interest in and to any Work
Product and any related Intellectual Property Right.
4.5 Materials. All Materials and related Intellectual Property Rights
will be the sole and exclusive property of the Company, whether or not such
Materials are marked with any Intellectual Property Right notice of the Company
or Lyndon Johnson. All such Materials authored, made, conceived or developed by
Lyndon Johnson or made available to Lyndon Johnson (or any copies or extracts
thereof) will be held by Lyndon Johnson in trust solely for the benefit of the
Company. Lyndon Johnson will use such materials only as required in the course
of his employment by the Company or as otherwise authorized in writing by the
Company.
SECTION 5 - NONSOLICITATION
5.1 Nonsolicitation. During the Term of this Agreement and for a period
of three (3) years after termination, Lyndon Johnson will not directly or
indirectly solicit or entice any of the
<PAGE> 4
following to cease, terminate or reduce any relationship with the Company or to
divert any business from the Company: (a) any executive, employee, consultant
or representative of the Company; (b) any contractor or supplier of the
Company; (c) any customer or client of the Company; or (d) any prospective
customer or client from whom Lyndon Johnson solicited business within the last
year of the Term. Further, Lyndon Johnson will not directly or indirectly
disclose the names, addresses, telephone numbers, compensation, or arrangements
between the Company and any person or entity described in (a), (b) or (c) above
to any competitor of the Company.
SECTION 6 -- DEFINITIONS
Whenever used in this Agreement with initial letters capitalized, the
following terms will have the following specified meanings:
6.1 "Board" means the Company's Board of Directors.
6.2 "Company's Field of Business" means any of the fields of the
Company's business. On the date of this Agreement, the Company's field of
business is natural product development, manufacturing, research and
consulting, and sourcing for the human health and animal health markets.
6.3 "Confidential Information" means any information that is
confidential, proprietary or trade secret information of the Company or any of
its customers or clients or any other information the use or disclosure of
which by the Company is prohibited or restricted (e.g., by reason of any
contract, court order, law or other obligation by which the Company is bound).
"Confidential Information" may include, but is not necessarily limited to,
technology, computer programs, business plans, marketing plans, information as
to existing or future products or services of the Company, financial
projections, unpublished works of original authorship, customer lists,
financial information, and trade secrets.
6.4 "Intellectual Property Right" means any patent, copyright, trade
secret, trade name, trademark or other intellectual property right.
6.5 "Materials" means software, programs, manuals, drawings, designs,
articles, writings, data, notes, memoranda, manuscripts, lab notebooks,
cultures, proposals, work plans, interim and final reports, project files,
client contract records and other tangible manifestations of any Confidential
Information or Work Products.
6.6 "President" means the Company's President.
6.7 "Term" means the term of Lyndon Johnson's Agreement with the
Company, as described in Section 3 of this Agreement.
6.8 "Work Product" means any invention, discovery, concept or idea
(including, but not necessarily limited to, software programs or processes,
techniques, know-how, methods, systems, improvements, proprietary formulations,
analytical reports, genetically engineered organisms, plasmids and other
developments).
<PAGE> 5
SECTION 7-MISCELLANEOUS
7.1 Compliance with Laws. In the performance of this Agreement, each
party will comply with all applicable laws, regulations, rules, orders and other
requirements of governmental authorities having jurisdiction.
7.2 Equitable Relief. Lyndon Johnson acknowledges that: (i) the
provisions of Sections 4 and 5 are essential to the company; (ii) the Company
would not enter into this Agreement if it did not include such provisions; (iii)
the damages which would be sustained by the Company as a result of any breach of
such provisions cannot be adequately remedied by damages; and, (iv) in addition
to any other right or remedy that the Company may have (e.g., under this
Agreement, by law or otherwise), the Company will be entitled to injunctive and
other equitable relief to prevent or curtail any breach of any such provisions.
7.3 Nonwaiver. The failure of either party to insist upon or enforce
strict performance by the other of any provision of this Agreement or to
exercise any right, remedy or provision of this Agreement will not be
interpreted or construed as a waiver or relinquishment to any extent of such
party's right to consent or rely upon the same in that or any other instance;
rather, the same will be and remain in full force and effect.
7.4 Notices. All notices permitted or required hereunder shall be in
writing and shall be deemed given upon personal delivery or mailing, postage
paid, certified mail, return receipt requested, to the following address: (i) if
to Lyndon Johnson, to his primary residence; (ii) if to the Company, to its
principal office.
7.5 Other Provisions of Employment. Lyndon Johnson's employment by
the Company pursuant to this Agreement will be subject to and in accordance with
the provisions of the Company's Employee Handbook, as the same may be modified
or amended from time to time; provided that to the extent that any provision of
this Agreement conflicts with any provision of the Company's Employee Handbook,
the provisions of this Agreement will control.
7.6 Unenforceable Provisions. The invalidity or unenforceability of any
provision of this Agreement will not affect the other provisions of this
Agreement, and this Agreement will be construed in all respects as if such
invalid or unenforceable provision were replaced with a valid and enforceable
provision containing terms as similar as possible to the provision replaced.
7.7 Entire Agreement. Except as stated in paragraph 7.5, this Agreement
constitutes the entire agreement, and supersedes any and all prior agreements,
between the Company and Lyndon Johnson. Sections 4 and 5, and any other
provision of this Agreement that may reasonably be construed as surviving the
termination of the Term, will survive the termination of the Term. No amendment,
modification or waiver of any of the provisions of this Agreement will be valid
unless set forth in a written instrument signed by the party to be bound
thereby.
<PAGE> 6
7.8 Applicable Law. This Agreement will be interpreted, construed and
enforced in all respects in accordance with the local laws of the State of
Washington, without reference to its choice of law rules.
THE COMPANY: NUTRACEUTIX, INC.
By: /s/ WILLIAM D. ST. JOHN
------------------------------------
William D. St. John
President
Date Signed: August 12, 1998
--------------------------
LYNDON JOHNSON:
/s/ LYNDON JOHNSON
---------------------------------------
Lyndon Johnson
Date Signed: August 14, 1998
--------------------------
<PAGE> 1
May 12, 1998
Ms. Deborah Shur Trinker Via Facsimile
Director of Regulatory Affairs
and Corporate Counsel
Rexall Sundown
901 Broken Sound Parkway NW
Boca Raton, FL 33487-3693
Re: Confirmation of Agreement Reached by Rexall Showcase International, Inc.
("Rexall") and Nutraceutix, Inc. ("Nutraceutix")
Dear Ms. Trinker:
This letter will confirm the basic terms of the agreement between Rexall and
Nutraceutix, Inc. for the purchase by Rexall from Nutraceutix of all of its
requirements for a hydrogen D-glucarate and/or calcium D-glucarate dietary
ingredient ("Ingredient"). This letter will further confirm that the parties
will enter into a License Agreement which shall set forth with specificity their
respective obligations on additional terms, including without limitation,
Nutraceutix's representations, warranties and indemnity obligations,
Nutraceutix's patent rights and Rexall's licensing thereof, confidentiality
agreement, permitted market, construction and execution, governing law,
jurisdiction and arbitration. Said license agreement shall include the terms
and conditions set forth in this letter.
The parties have agreed that during the period running from the date of this
letter through December 31, 1999, (the "Initial Term"), Rexall will purchase
all of its requirements for the Ingredient at the price of $120.00 per kilogram
plus a license fee of $40.00 per kilogram; provided that the price of the
Ingredient may be increased from time to time upon 60 days notice if
Nutraceutix's documented acquisition or production cost for glucarate
increases, said increase to be no greater than 110% of the increase in
Nutraceutix's acquisition or production cost. This purchase price and license
fee will apply both to purchases of the Ingredient by itself and to purchases
of products containing the Ingredient, and will apply to Rexall's initial
purchase under this agreement as well as all future purchases.
The Term may be extended on a year-by-year with the mutual agreement of both
parties. During the Initial Term, Rexall shall have a minimum initial purchase
requirement of 2,000 kilograms, 500 of which will be purchased within 30 days
of signing this agreement. Prior to Rexall's first purchase of Glucarate during
each year of the Term commencing on or after January 1, 2000, Rexall and
Nutraceutix will negotiate in good faith to determine the applicable minimum
quantity of the Ingredient to be purchased by Rexall during that year. Each
such minimum purchase
<PAGE> 2
Ms. Deborah Shur Trinker
May 12, 1998
Page 2
quantity will represent a reasonable increase over the minimum quantity
purchased by Rexall during the prior year based on consideration of all relevant
factors, including but not limited to Rexall's sales of products containing the
Ingredient during the previous year, the respective interests of the parties,
the applicable regulatory environment, the status of U.S. Patent 4,845,123 (the
"123 Patent") and the promotion of a mutually beneficial relationship between
the parties.
In meeting this initial minimum purchase requirement, Rexall may include all of
the following: 1) all purchases of the Ingredient by itself and its affiliates;
2) all purchases of the Ingredient contained in the prostate and breast dietary
supplements, manufactured under the 123 Patent; and 3) other products which may
be agreed to by the parties which would also be manufactured by Nutraceutix for
Rexall under the 123 Patent. In consideration of Rexall meeting its minimum
purchase requirement, Nutraceutix will not sell either the Ingredient, or any
nutraceuticals, nutritional and dietary supplements, foods, cosmetics and
over-the-counter pharmaceuticals containing the Ingredient, to any third party
for use with such third party's multi-level marketing program. Rexall and
affiliates shall not be permitted to distribute products containing the
Ingredient through traditional retail channels.
During the Initial term, the prostate dietary supplement will be supplied by
Nutraceutix to Rexall at a cost of $89.16 per 1,000 caplets and the breast
dietary supplement at the cost of $49.13 per 1,000 caplets with such costs being
inclusive of the purchase price and license fee for glucarate per the same
quantitative and qualitative formula developed by Rexall and agreed to by
Nutraceutix, attached hereto at Exhibit 1, provided, however, Rexall shall have
no minimum purchase requirements for such products. All products containing the
Ingredient will be manufactured either by Rexall or Nutraceutix, but not by any
third party; all of the Ingredient for products manufactured by either Rexall or
Nutraceutix will be supplied by Nutraceutix. A formula consistent with the
formula in Exhibit 1 including licensing fee will be used to price these other
products containing the Ingredient. Subject to the foregoing, products will be
priced based on good faith negotiation and consistent with competitive pricing
and compliance with Good Manufacturing Practices and Rexall's own quality
control standards. All deliveries will be FOB Nutraceutix's facility.
It is further understood that subject to Rexall seeking a renewal term and
meeting mutually agreed upon minimum annual purchase requirements for the
Ingredient, the parties will enter into subsequent renewal terms under which
Nutraceutix will continue to supply, on mutually agreed terms and conditions,
the Ingredient, the prostate and breast dietary supplements, and other products
including the Ingredient to Rexall. If Rexall does not meet its minimum purchase
requirement during the Initial Term, or if the parties are unable to reach an
agreement regarding the minimum purchase requirement for any subsequent year of
the Term, Nutraceutix will sell products containing the Ingredient to Rexall on
a non-exclusive basis pursuant to mutually agreeable terms and conditions.
<PAGE> 3
Ms. Deborah Shur Trinker
May 12, 1998
Page 3
The final agreement will state that the parties will keep confidential the terms
and conditions of this Agreement, but not the existence of the Agreement or the
transaction contemplated by it. The final agreement will also state that the
parties will negotiate in good faith to have Nutraceutix manufacture other
products not containing the Ingredient subject to Nutraceutix providing
competitive bids for such other products. All products manufactured by
Nutraceutix for Rexall, whether or not containing the Ingredient, will be
manufactured pursuant to Good Manufacturing Practices and Rexall's own quality
control standards.
Enclosed for your review is a first draft of the final agreement incorporating
the provisions set forth and referred to in this letter. However, I understand
that it may take some time to review and finalize the enclosed document, and I
know that Rexall is anxious to commence selling products containing the
Ingredient. Thus, please confirm below that the above letter accurately confirms
the terms of the agreement reached by the parties as noted above and pending
preparation and execution of said License Agreement, Rexall and Nutraceutix will
proceed pursuant to the Agreement set forth in this letter.
Sincerely,
William D. St. John
President
WDS:ls
AGREED TO AND ACCEPTED BY:
REXALL SHOWCASE INTERNATIONAL AND REXALL SUNDOWN, INC.
By: /s/ DEBORAH SHUR TRINKER 5-13-98
----------------------------------
Deborah Shur Trinker
Director of Regulatory Affairs
and Corporate Counsel
