<PAGE> 1
1998
Nutraceutix, Inc.
ANNUAL REPORT
<PAGE> 2
[COMPANY LETTERHEAD]
SHAREHOLDER LETTER
In 1998 my top priority as President of Nutraceutix, Inc. was to continue to
build a company with core strengths in proprietary technology and manufacturing.
Much has been accomplished, setting the stage for 1999 where we can aggressively
use our strengths for the manufacture of value-added health supplements for
leading brands in the health supplement industry. It is my belief that continued
development of our technology and manufacturing capabilities is our surest path
to building long term shareholder value.
With a forty seven percent increase in revenues, a profit and a healthy
improvement in our balance sheet, the Company executed a disciplined five-part
strategy in 1998, which focused on:
1. Acquisition and development of proprietary technologies.
2. Development of manufacturing capabilities.
3. Establishment of strategic alliances.
4. Filing of the Form 10-SB registration.
5. Improved Balance Sheet.
The Company's technology development efforts focused on the identification of
appropriate drug delivery technologies which could be applicable to a wide range
of health supplements. It is my belief that the ability to transform existing
health supplements through the application of new delivery systems is a key
opportunity for the Company. All things being equal, remodeling an existing
product means an enhanced product with shortened development time.
For branded health supplement companies (our customers), remodeling of existing
products can translate into competitive advantage through product
differentiation on crowded retail shelves. For Nutraceutix, it would mean a
continual pipeline of new products. Most importantly for the consumer, it can
mean enhanced product performance and ultimately better health. Our search for
new delivery technologies led us to Temple University. We were able to obtain an
exclusive worldwide license for certain technologies for the manufacture of
controlled delivery tablets and capsules. What is unique about this technology
is the ability to individually program the release of each ingredient included
in a single capsule or tablet. The Company trademarked the technology, CDT(TM)
Controlled Delivery Technology.
<PAGE> 3
At Temple University, not only did we gain valuable technology, but a very
positive research relationship. Together we developed a number of CDT
applications, and jointly developed MDT(TM) Molecular Dispersion Technology to
increase the bioavailability of certain insoluble health supplements. Products
incorporating CDT and MDT technologies are expected to be shipped in April 1999.
As the year developed, the Company's tableting expertise began to produce more
proprietary results with improvement of the Company's LIVEBAC(R) Probiotic
Caplets and the development of PURETAB Organic Tableting technologies.
The Company primarily profits from its technology through the manufacture of
value-added products. In 1998, the Company expanded its manufacturing
capabilities and is today prepared to accommodate anticipated demand for CDT
related products.
Nutraceutix is in the lead in quality improvement which has proven to be a
tremendous asset in securing relationships with industry leaders. Our staff
deserves credit for maintaining a constant level of quality manufacturing while
building new capabilities and programs.
Building strategic alliances has been one of Nutraceutix' operating principles
since its inception. We began 1998 with essentially two strategic alliances:
Weider Nutrition International (retail) and Rexall Showcase (multi-level) which
focused on the marketing of our proprietary compound, Calcium D-GLCUARATE(TM).
In September of 1998, our exclusive marketing retail relationship with Weider
Nutrition ended, and the Company signed sub-licensing agreements for Glucarate
with five additional retail health supplement companies. The Company believes a
broad customer base will generate more awareness for Glucarate. A broader
approach also adds to the Company's stability and the potential of all its
technologies. Partnering works best when both partners hold similar values. The
Company's alliance with MET-Rx USA, Inc., for the marketing of sports and
fitness supplements incorporating CDT and MDT technologies, is an example of
good partnering. MET-Rx holds a similar commitment to science which is expected
to result in some of the most technologically advanced sports supplement
products on the market.
In 1998, we successfully transitioned into full SEC reporting status through the
filing of the Company's first Form 10-SB. This was an expensive exercise.
Despite the costs, the step is considered a prerequisite of building future
shareholder value and securing the capital necessary for continued growth. Along
these lines, the Company also dramatically improved its balance sheet. I would
encourage shareholders to review the comparison of the 1997 to the 1998 balance
sheet. This improvement was, in part, a result of a deliberate plan to expand
while maintaining the Company's animal products and fermentation business. The
management of such a complex strategy with limited resources can be a daunting
task at times. I would like to thank my partners in this task, including all our
managers, for their extraordinary effort toward successfully executing this
plan.
<PAGE> 4
With the acquisition of key technologies, added manufacturing capabilities, and
establishment of new strategic relationships, 1998 marked an important step in
our transition to a fully integrated technology Company.
In 1999, the Company will focus on a very aggressive five-point strategy:
1. Application of CDT Controlled Delivery Technologies in the sports and
general supplement market.
2. Establishments of strategic alliances in the health supplement industry.
3. Maintaining disciplined and cost effective growth.
4. Enhancing the senior management team.
5. Continued technology acquisition and development.
This is a challenging list. I believe it can be accomplished, primarily as a
result of what we accomplished in 1998. The demand for proprietary technology is
expected to increase as competitiveness between retail brands grows. Our
delivery technologies represent a powerful method for major brands to address
competitiveness.
We continue to believe that if we focus on building the value of the Company
through the continued establishment of strong alliances and technological
leadership, the Company will be in a position to attract management talent,
customers and investors.
I want to thank my customers, fellow shareholders, employees and Board of
Directors for your continued vision and support for "what we may yet
accomplish." Even though our strategies may evolve, our commitment to the
public's health and our commitment to our shareholders will be a constant today
and into the next millennium.
Sincerely,
/s/ William D. St. John
William D. St. John
President and Chairman of the Board
