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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NUMBER 000-24693
NUTRACEUTIX, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
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DELAWARE 91-1689591
(STATE OF INCORPORATION) (IRS EMPLOYER IDENTIFICATION NO.)
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8340 154TH AVENUE NE, REDMOND, WASHINGTON 98052
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
ISSUER'S TELEPHONE NUMBER: (425) 883-9518
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TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
COMMON STOCK, $.001 PAR VALUE NONE
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SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT: NONE
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB. [ ]
The issuer's revenues for the fiscal year ended December 31, 1999 were
$10,272,417.
The aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and ask price of such stock, as of March 21, 2000 was approximately
$9,084,232.
As of March 15, 1999, there were 17,486,812 shares outstanding of the
issuer's common stock.
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DOCUMENTS INCORPORATED BY REFERENCE
The Registrant has incorporated into Part III of this Form 10-KSB by
reference portions of its Proxy Statement for the 2000 Annual Meeting of
Shareholders.
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TABLE OF CONTENTS
NUTRACEUTIX, INC.
FORM 10-KSB
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Item 1. Description of Business..................................... 3
Item 2. Description of Property..................................... 10
Item 3. Legal Proceedings........................................... 11
Item 4. Submission of Matters to a Vote of Security Holders......... 11
Item 5. Market for Common Equity and Related Stockholder Matters.... 12
Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 13
Item 7. Financial Statements........................................ 18
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 18
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16 (a) of the Exchange
Act......................................................... 19
Item 10. Executive Compensation...................................... 19
Item 11. Security Ownership of Certain Beneficial Owners and
Management.................................................. 19
Item 12. Certain Relationships and Related Transactions.............. 19
Item 13. Exhibits and Reports on Form 8-K............................ 19
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
The following discussion includes certain forward-looking statements.
Actual results could differ materially. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Forward-Looking
Statements and Associated Risks" contained in Item 6.
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 were issued one share of common stock of CSI for
each share of BTL, and BTL became a wholly-owned subsidiary of CSI. The
corporate name of CSI was changed to Nutraceutix, Inc. in April 1995.
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.
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. The Company also
developed LIVEBAC caplet technology for the manufacture of probiotic health
supplements and acquired licenses from BioChemix, Inc. for the United States
patent pertaining to the use of glucarate salts and Calcium D-glucarate for
lung, breast and prostate health supplement formulas. In 1998, the Company
licensed additional formulas for colon and liver health, and in 1998, BioChemix
expanded the license to allow sales of glucarate beyond the designated uses
listed above. Additionally in 1998, the Company acquired from Temple University,
an exclusive worldwide license for a patent pending tableting and compression
technology for the controlled delivery of health supplements.
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.
BUSINESS OF THE COMPANY
Nutraceutix, Inc. is a developer and manufacturer of nutraceutical based
health supplements for both the animal and human markets. The Company provides
private label manufacturing of health supplements for other health supplement
product companies and manufactures and markets probiotics, as well as,
manufactures food ingredient pre-mixes. Its branded products for the animal feed
industry are COBACTIN microbial feed additives and BIOPOWER silage inoculant.
Its branded human health supplement products are BIOPOWER health supplements.
Nutraceuticals are biologically active materials, either derived from
plant, microbial or animal sources or synthesized, which are formulated to
provide specific health and productivity benefits for humans and animals.
Nutraceuticals include, but are not limited to, pharma foods, functional foods,
fermented foods, phytochemicals, microbial feed additives, probiotics, herbal
products, vitamins and health supplements.
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PRINCIPAL PRODUCTS AND SERVICES
Calcium D-Glucarate
In July of 1997, the Company and BioChemix, Inc. ("BioChemix") an
unaffiliated privately held company, entered into 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
agreement provided for the exclusive licensing of certain formulas, which
contain vitamins, minerals, herbal extracts and antioxidants that incorporate
the glucarate salt, Calcium D-glucarate for lung, breast and prostate health. In
August of 1998, the Company and BioChemix entered into agreements for the
exclusive licensing to 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.
These principals are now at the AMC Cancer Center in Denver, Colorado.
Conjugation, which is the combining of carcinogens with an inert molecule,
is one of the body's most important and natural protective mechanisms for
dealing with carcinogens. Glucuronidation is the conjugation of carcinogens with
glucuronic acid. Glucuronic acid is a derivative of glucarate salts, Calcium
D-glucarate. The resulting conjugates can be readily excreted in the bile and
urine. The reverse reaction is referred to as de-glucuronidation and is mediated
by the enzyme Beta glucuronidase. Glucarate salt derivatives 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.
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 which has been developed into a lung, breast, colon,
liver 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, a derivative, is found in low concentrations in humans and
animals and is a natural constituent of certain fruits and vegetables. At this
time, no toxic effects have been demonstrated with Calcium D-glucarate and the
FDA requires no extended approval for its use as a nutritional supplement.
As of December 31, 1999, the Company has sublicensed Calcium D-glucarate to
30 companies for products marketed as preventative supplements, some of them
with antioxidants. To date, sales histories for these companies are limited with
the exception of Rexall Showcase. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" contained in Item 6.
Nutraceutical Based Health Supplements for the Agricultural Market
The Company has two primary agricultural product lines which it
manufactures and sells: (1) Lactobacillus sp. 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 inoculant, which is offered on an original equipment
manufacturer ("OEM") basis and under the BIOPOWER 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 sp. based microbial feed additive products are
marketed under the following trademarks:
COBACTIN, COBACTIN II, COBACTIN PLUS microbial feed additives for
commercial feedlot cattle. These products have been demonstrated in independent
field trials to increase feed efficiency in feedlot cattle.
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COBACTIN, COBACTIN II microbial feed additive for dairy cows have been
demonstrated in independent field trials to increase milk production.
COBACTIN 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 the
Company 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 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 for cattle has undergone approximately 22 independent university and
research institute field tests to determine its efficacy in cattle. These field
trials have repeatedly shown that COBACTIN microbial feed additive increases
feed efficiency. Comparable results have been demonstrated for dairy cows and
poultry.
The Company holds two patents on the bacterial strain BT1389 of
Lactobacillus acidophilus used in COBACTIN II microbial feed additive. The
Company formulated COBACTIN PLUS, which the Company believes offers numerous
product stabilization advantages. COBACTIN PLUS is composed of BT1389
Lactobacillus acidophilus, with a stabilizer designed for extended shelf life.
COBACTIN PLUS accounts for the majority of the Company's animal health sales.
Use of the product 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 have
curtailed sales in the poultry industry.
In September 1999, Nutraceutix and Biotal, Inc. announced the formation of
an alliance to offer microbial feed additives to cattle feedlots. Prior to this
agreement, Nutraceutix and Biotal were competitors. Biotal has marketed their
MICRO-CELL direct feed microbials since 1994, and recently successfully
introduced a phase-feeding microbial program. As part of the agreement, Biotal
will conduct the marketing, sales and technical support for MICRO-CELL and
COBACTIN beef products and Nutraceutix will continue to manufacture COBACTIN and
a portion of Biotal's MICRO-CELL products. Nutraceutix, in addition to the
revenues generated from the manufacture of MICRO-CELL and COBACTIN, will receive
royalties on both of these products. This collaboration is expected to produce
technologically superior products, extended customer service and market
leadership.
In the cattle feedlot market, the Company has one primary competitor,
Nutrition Physiology. The Company believes that it derives a competitive
advantage from its proprietary technology not available from other suppliers,
and its alliance with Biotal.
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 trademarked, LIVE-BAC(R) probiotic caplets.
The Company believes that the market for nutraceuticals will continue to
grow because of the continued identification of diseases coupled with a
longer-lived aging population. 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
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vitamins, (such as Vitamin C and Vitamin E), herbs (such as Ginseng, Ginkgo,
Echinacea and St. John's Wort), antioxidants, enzymes and positive lactic acid
bacteria.
CONTROLLED DELIVERY TECHNOLOGY
In December 1998, the Company and Temple University signed a definitive
agreement for the exclusive licensing to Nutraceutix of a patent pending
technology pertaining to the manufacture of controlled delivery health
supplement tablets and capsules. Subsequent to the acquisition of this license,
Nutraceutix trademarked the technology as CDT controlled delivery technology.
The Company considers the technology to be unique for its ability to program
individual release patterns for each health supplement contained in a single
tablet or capsule at a relatively low cost of manufacture and its applicability
to a wide range of health supplements. Through use of the technology, health
supplement ingredients can be individually programmed to release in either a
continuous or pulsed delivery.
Controlled delivery technologies are common in the pharmaceutical industry,
while relatively rare in the health supplement industry. In the pharmaceutical
industry, controlled delivery technologies have been shown to optimize the
therapeutic performance of drugs, improve compliance with dosing schedules,
minimize side effects and offer added convenience by reducing the frequency of
dosing. The Company believes the technology will offer similar benefits for
health supplements.
The controlled delivery technology was developed at Temple University for
chronic drug administration of calcium-channel blockers nifedipine, diltiazem
and verapamil in the management of angina and hypertension. The physiochemical
properties and intrinsic characteristics of these drugs, such as high or low
solubility, limited absorption, or presystemic metabolism, necessitated the
development of a highly controlled delivery technology to provide continuous
active ingredient release with zero-order linear kinetics and precise and
consistent performance. This technology is based on hydrophilic swellable
polymeric matrices, which allow the controlled diffusion of health supplements
from the matrix through the tablets progressive swelling, dissolution and/or
erosion. The controlled delivery tablets or capsules employ combinations of
hydrophilic polymers specific to each health supplement. Depending on the matrix
composition, various release rates and patterns can be accomplished.
One of the most difficult challenges for a controlled delivery technology
is to produce a continuous release with linear zero-order kinetics of a highly
soluble material for up to twenty-four hours. Linear zero-order kinetics means
that a precise quantity is released in each limit of time over the entire course
of the release pattern until one hundred percent of the material is released.
There are no burst or lag phases of release. After obtaining the license for the
technology from Temple University, the Company, in collaboration with Temple
University, successfully developed continuous, linear, zero-order kinetics
release Vitamin C tablets. Vitamin C was considered a substantial technological
challenge due to its high water solubility. Following the Vitamin C project, the
Company and Temple University developed individual continuous release, linear,
zero-order kinetic tablets of HMB, glucosamine, Calcium D-glucarate, and several
Androstenes and diet formulas. Based on the joint research and development by
the Company and Temple University, the Company has developed several tableted
products containing multiple health supplements for the sports industry with
individual release patterns for each supplement. The Company believes that the
health supplement industry offers a variety of opportunities to apply this
technology.
In December 1998, the Company entered into an exclusive marketing agreement
with MET-Rx USA, Inc. (MET-Rx) of Irvine, California granting MET-Rx exclusive
marketing rights for sports supplement products incorporating controlled
delivery technology, excluding multilevel sales. The Company contracted with
Temple University to develop controlled delivery technology tablets and capsules
for the programmed release of prohormones androstenedione, androstenediol,
norandrostenedione and norandrostenediol. The application of the technology to
these prohormones necessitated the development of MDT molecular dispersion
technology which was also licensed to MET-Rx and incorporated into these
products. MET-Rx sells products primarily for bodybuilding. On a non-exclusive
basis, a controlled delivery technology weight loss product was developed for
the MET-Rx brand. The MET-Rx sports supplements and weight loss products were
released in April 1999. Initial sales of these products through year end 1999
were promising.
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See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" contained in Item 6.
In 1999, the Company licensed the right from Temple University to apply the
controlled delivery technology in the manufacture of OTC (over-the counter)
pharmaceuticals. No products were manufactured using this license during 1999.
Nutraceutix manufactures all controlled delivery technology products in its
Colorado facility. As the manufacturing technology is further developed and
refined, other companies may be licensed by Nutraceutix to manufacture
controlled delivery products.
MANUFACTURING
Animal Health Products
In addition to its own COBACTIN and BIOPOWER brand products, the Company
manufactures microbial products for several companies on a private label and OEM
basis at its fermentation plant located at its corporate headquarters in
Redmond, Washington. These products include microbial inoculum, feed and food
additives and microbial based supplements. The Company has over 12 years of
experience in microbial fermentation, and holds patents relating to a
proprietary strain of Lactobacillus acidophilus and preservation technologies.
In December 1999, the Company announced the opening of a second
fermentation facility in Redmond, Washington in response to increased demand for
probiotic products. The two facilities will produce over twenty six (26) species
of beneficial bacteria regularly used in inoculum, feed, food additives, health
supplements and the proprietary LIVEBAC probiotic. The new facility will
increase manufacturing capacity by 100%.
Private Label Health Supplement Manufacturing
The Company manufactures private label health supplements at its
encapsulating, tableting, bottling and labeling facility in Lafayette, Colorado.
The Company manufactures capsules, tablets, powdered drink mixes and blended
products for companies that market these products under their own brand names.
The majority of these products incorporate one of the Company's proprietary
technologies. This includes health supplements that incorporate Calcium
D-glucarate, Lactobacillus acidophilus strains developed by the Company or
Lactobacillus acidophilus products manufactured employing the Company's
proprietary LIVEBAC caplet process and products incorporating CDT controlled
delivery technology.
The LIVEBAC process is a tableting technology that results in extended
shelf life of tablets or caplets containing lactic acid bacteria. Caplets of
Lactobacillus acidophilus made using the LIVEBAC process have demonstrated
superior viability and shelf life over conventional capsules.
MARKETING, SALES AND DISTRIBUTION
The Company relies on a sales manager, Biotal, Inc. and independent sales
representatives to sell and service customers of its animal health products. The
Company also markets and sells OEM and private label silage inoculum directly to
branded companies in agriculture. Biotal, Inc. markets, sells and provides
technical support of COBACTIN microbial beef additives for feedlot cattle. The
Company's sales manager and sales representatives are responsible for all other
sales related to the agricultural industry including OEM and private label
silage inoculums, BIOPOWER silage inoculum, private label feed additives and
COBACTIN microbial dairy feed additives.
In the human supplement market, the Company relies on a Vice President of
Sales and support sales and marketing staff. In 1999, the Company expanded its
marketing efforts in public relations and customer service through the addition
of personnel.
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The Company sells its own branded health supplements exclusively via the
internet under the BIOPOWER health supplement brand. The Company provides these
products primarily as a service to shareholders and employees. Other than the
website posting of BIOPOWER health supplements, the Company does not actively
promote internet sales.
To date, the Company has limited sales history of its health supplement
products and therefore has not fully identified the effect of seasonality. In
agricultural sales, seasonality is primarily related to the number of cattle in
production which is usually reduced in the winter months.
COMPETITION
The principal markets which the Company services are competitive and
fragmented. There are competitors in manufacturing and product development in
both the human and animal health supplement markets. Increased competition could
have a material adverse effect on the Company, as competitors may have far
greater financial and other resources available to them and may possess
manufacturing, distribution and marketing capabilities more extensive than those
of the Company. The Company's competitors in the microbial products market who
manufacture lactic acid bacteria for inclusion in animal and human supplements
include Chris Hansen, Rhodia, Lallemand and Roselle.
The Company believes that its primary competitive advantage results from
its proprietary technologies which is not available from other suppliers,
including LIVEBAC caplets, Calcium D-glucarate, CDT controlled delivery and
COBACTIN microbial feed additive technology. In the feed additive market, the
formation of an alliance with Biotal, Inc. in September, 1999 has diminished one
of the competitors in the direct feed microbial feed additive market for beef
cattle. The Company believes this alliance will help maintain sales in the beef
market. Additionally, the Company believes that other principal competitive
factors in the sale of health supplements are quality, technology,
manufacturing, timely delivery of product and service. In the private label
business, the Company has competitors with more resources than the Company.
However, the Company believes its proprietary technologies offer some
competitive advantage with regards to these competitors.
SOURCES AND AVAILABILITY OF RAW MATERIALS AND PRINCIPAL SUPPLIERS
The Company obtains all its raw materials for the manufacture of its
products from outside 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. 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 revenue of the Company.
DEPENDENCE ON SIGNIFICANT CUSTOMERS
In 1999, the Company received approximately 62% of its revenues from four
customers: MET-Rx, (40%), Rexall Showcase (10%), Rexall Sundown (7%) and Odwalla
(5%). Rexall Showcase is a wholly-owned subsidiary of Rexall Sundown. In the
fourth quarter of 1999, Rexall Sundown acquired MET-Rx. With the acquisition of
MET-Rx, the Company's three largest customers accounting for approximately 57%
percent of the total revenues in 1999 are owned by a single entity, Rexall
Sundown. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Outlook -- Issues and Uncertainties", both contained
in Item 6.
INTELLECTUAL PROPERTY
The Company currently holds two U.S. and one Canadian patent pertaining to
COBACTIN feed additives, two U.S. patents related to the dispensing of microbial
cultures, one licensed patent pertaining to Calcium D-glucarate and one licensed
patent pending pertaining to the CDT controlled delivery technology.
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The licensed Calcium D-glucarate patent expires in 2006; the Canadian patent
expires in 2009 and the other U.S. patents pertaining to COBACTIN feed additive
expire in 2010 and 2011.
As of December 31, 1999, the Company had approximately eight federal
trademark registrations and seven 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:
COBACTIN, COBACTIN PLUS, COBACTIN II, BIO TECHNIQUES, BIO POWER, LIVEBAC,
NUTRACEUTIX, BT1386, NU-TRAX, CDT, MOLECULAR STRENGTH, BACCINE, S.E.T., COOL-TAB
and BIOTRACT.
The Company has a license agreement with BioChemix for delivery of
glucarate in certain health supplements which required the Company to purchase
all Calcium D-glucarate from BioChemix, Inc. The Company paid 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, lung,
colon and liver health until 1998, when the agreement between the Company and
BioChemix was amended to eliminate royalty payments on the sale of products
containing Calcium D-glucarate.
The Company pays certain royalties to the original developers of certain of
its agricultural products. See "Note J of Notes to Financial Statements"
contained in Item 7.
The Company has a license agreement with Temple University for the
controlled delivery technology (CDT). In December of 1998, the Company paid 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 a royalty of $0.30 per
1000 tablets or capsules produced using the technology. The Company is obligated
to pay an annual non-refundable license maintenance fee of $10,000, which
license maintenance fee payment may be credited against royalties due during the
same calendar year. The agreement does not provide for carry-over of unused
credit to subsequent years. During 1999, royalty payments totaled $9,629 which
was applied against the maintenance fee.
In June 1999, the Company and Temple University signed a definitive
agreement for the exclusive licensing of controlled delivery technology
pertaining to the manufacture of OTC (over-the-counter) pharmaceuticals. The
Company is obligated to pay a royalty of $0.40 per 1000 tablets or capsules
produced using the technology. The Company is also obligated to pay an annual
non-refundable license maintenance fee of $10,000, which license maintenance fee
payment may be credited against royalties due during the same calendar year. The
agreement does not provide for carry-over of unused credit to subsequent years.
The Company has developed no OTC products to date with the technology, but the
Company continues to seek partners in this area.
GOVERNMENTAL REGULATION
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
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and distribution of such products are beyond the Company's control.
Nevertheless, the failure of these customers to comply with applicable laws or
regulations could have a material adverse effect on the Company.
RESEARCH AND DEVELOPMENT
In 1999 and 1998, the Company spent $295,979 (approximately 3% of revenues)
and $224,785 (approximately 4% of revenues), respectively, on product research
and development. The Company funds research and development internally.
MICROBIAL PRODUCT DEVELOPMENT
The Company has conducted research into the role of resident bacteria that
are normally found in the gastrointestinal tract with human health and the
delivery of live lactic acid bacteria in supplemental form. This research has
also resulted in development of the LIVEBAC Process for tableting lactic acid
bacteria. The LIVEBAC Process has been shown to yield a tablet with a superior
shelf life. Shelf life of lactic acid bacteria in supplement form has
historically been problematic. The Company is continuing research to extend the
shelf life of lactic acid bacteria and develop new applications. The Company has
also developed proprietary strains of bacteria which, in laboratory conditions,
are inhibitory to certain pathogens. BACCINE , a proprietary strain of
Lactococcus lactis, is inhibitory to the organisms responsible for listeria food
poisoning. The Company intends to continue microbial product development
research in 2000.
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 (such as Calcium D-glucarate) and
delivery technologies (such as controlled delivery) developed by independent
researchers. The Company sublicenses these technologies to customers. The
Company intends to continue to emphasize development of delivery technology in
year 2000.
COMPLIANCE WITH ENVIRONMENT LAWS
The Company believes that it is in compliance with all relevant
environmental laws. Due to the nature of the Company's operations, to date, the
cost of complying with environmental laws has not had a significant effect on
the Company's operations.
EMPLOYEES
As of December 31, 1999, the Company employed 58 full time employees,
consisting of four executives, 33 production personnel, four sales and marketing
personnel, two research and development personnel, eight quality control
personnel and seven administrative personnel. None of the Company's employees
are represented by labor unions. The Company believes its relationship with
employees is good.
ITEM 2. 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.
In November 1999, a third property of 9,620 square feet located at 9625 153rd
Avenue SE, Redmond, Washington was leased for a term of sixty (60) months with a
lease termination date of December 31, 2004. The space will duplicate the
fermentation facility located at 8340 154th Avenue Northeast. The Company
believes the new facility will double production capacity.
10
<PAGE> 11
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 and packaging 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 lease 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 leased properties are in good and satisfactory condition, and are suitable
for the Company's business needs for the term of the respective leases.
ITEM 3. 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 Bio Techniques Laboratories, Inc. (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. BTL believed that Bio Universal
failed to perform its obligations under that agreement. In this action Bio
Universal alleged 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 was 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.
The Company and Bio Universal, Inc. negotiated a settlement whereby the
Company agreed to pay Bio Universal, Inc. the amount of $180,000 in thirty six
(36) monthly installments of $5,000 beginning in April 2000. See "Note L of
Notes to Financial Statements" contained in item 7.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to the Company's shareholders during the quarter
ended December 31, 1999.
11
<PAGE> 12
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
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>
PERIOD -- FISCAL YEAR 1999 HIGH ASK LOW BID
-------------------------- -------- -------
<S> <C> <C>
First Quarter ending March 31, 1999...................... 29/32 14/32
Second Quarter ending June 30, 1999...................... 5/8 3/8
Third Quarter ending September 30, 1999.................. 29/32 3/8
Fourth Quarter ending December 31, 1999.................. 19/32 7/32
</TABLE>
<TABLE>
<CAPTION>
PERIOD -- FISCAL YEAR 1998 HIGH ASK LOW BID
-------------------------- -------- -------
<S> <C> <C>
First Quarter ending March 31, 1998...................... 1 11/32 21/32
Second Quarter ending June 30, 1998...................... 1 9/32 8/16
Third Quarter ending September 30, 1998.................. 3 1/4 13/16
Fourth Quarter ending December 31, 1998.................. 1 5/16 9/16
</TABLE>
The approximate number of record holders of the Company's Common Stock as
of December 31, 1999 was 1,425 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 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.
12
<PAGE> 13
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
The following discussion and analysis should be read in conjunction with
the Financial Statements, including the notes thereto, appearing in this Form
10-KSB. Except for the historical information contained herein, the matters
discussed in this report contain forward-looking statements that are based on
management's beliefs and assumptions, current expectations, estimates and
projections. Statements that are not historical facts, including without
limitation, statements which are preceded by, followed by or include the words
"believes," "anticipates," "plans," "expects," "may," "should," or similar
expressions are forward-looking statements. Many of the factors that will
determine the Company's future results are beyond the ability of the Company to
control or predict. These statements are subject to risks and uncertainties and,
therefore, actual results may differ materially. The Company disclaims any
obligation to update any forward-looking statements whether as a result of the
new information, future events or otherwise.
Important factors that may affect future results include, but are not
limited to, the impact of competitive products and pricing, product development,
changes in law and regulations, customer demand, litigation, availability of
future financing, uncertainty of market acceptance of new products, and other
risks detailed from time to time in the Company's SEC reports, copies of which
are available upon request from the Company's Investor Relations Department. See
"Outlook -- Issues and Uncertainties" below.
RESULTS OF REVENUE GENERATING PROFIT CENTERS
The Company operates four primary revenue-generating profit centers:
1. Proprietary Technology -- The Company's proprietary technologies
include Calcium D-glucarate, LIVEBAC caplets, molecular dispersion
technology and controlled delivery technology. Revenues are realized from
the sales of glucarate as a raw material to other manufacturers for
incorporation into sublicensed customer's private label products,
manufacturing by the Company for sublicensed customer's private label
products containing Calcium D-glucarate, sales of LIVEBAC caplets and
manufacture of health supplements incorporating CDT control delivery
technology and molecular dispersion technology.
2. Private Label Manufacturing of Health Supplements -- In Lafayette,
Colorado, the Company manufactures health supplements for private label
customers. Revenues are realized from bottling, labeling and manufacture of
tablets, capsules, herbal pre-blends and health supplement pre-blends for
inclusion into food products and bulk packaged products.
3. Fermentation -- The Company manufactures and realizes revenues from
the sale of viable (live) freeze dried bacteria for companies on a private
label and OEM basis at its fermentation plant located in Redmond, WA.
4. COBACTIN microbial feed additive -- COBACTIN for feedlot cattle,
dairy cows and poultry is a viable (live) Lactobacillus acidophilus that
provides a stable blend of lactic acid bacteria on a daily basis. Revenues
are realized from the sale of COBACTIN brand proprietary products and
royalties resulting from the microbial feed additive alliance with Biotal,
Inc.
PROPRIETARY TECHNOLOGY
Revenues from proprietary technology were $4,673,974 for 1999 compared to
$2,764,582 in 1998. The increase is attributed to the sale of controlled
delivery and molecular dispersion products to MET-Rx, Inc. totaling $2,622,124
in 1999. MET-Rx had an exclusive sublicense for products containing controlled
delivery and molecular dispersion technologies in the North American sports
nutrition market through all trade channels excluding multilevel through March
31, 2000. On March 6, 2000, MET-Rx signed an exclusive Product Sales and
Sublicense Agreement for controlled delivery and molecular dispersion technology
products for the term of one year beginning April 1, 2000. MET-Rx was acquired
by Rexall Sundown in the fourth quarter of 1999. The future sales of controlled
delivery and molecular dispersion products to MET-Rx are
13
<PAGE> 14
uncertain due to the transition of MET-Rx to Rexall Sundown ownership. See
"Outlook -- Issues and Uncertainties" set forth on page 14.
Royalty revenues from Weider Nutrition decreased to $2,166 in 1999 from
$375,782 in 1998. This was a result of the termination of Weider's exclusive
license to sell retail products containing Calcium D-glucarate. As of December
31, 1999, of the thirty (30) health supplement companies who have signed
sublicense agreements for the purchase of Calcium D-glucarate, only Rexall
Showcase had significant sales. In 1999, the Company received revenues of
$275,000 from sales of Calcium D-glucarate to Rexall Showcase.
PRIVATE LABEL MANUFACTURING OF HEALTH SUPPLEMENTS
Sales of private label manufacturing of health supplements increased in
1999 to $3,021,497 compared to $1,402,223 in 1998. The increase was primarily
due to the sales of non-proprietary products to MET-Rx totaling $1,462,220 in
1999, of which $826,775 were powder fill products produced as an interim service
for MET-Rx. The Company does not expect to continue the powder fill business in
2000.
FERMENTATION
Sales of fermentation products in 1999 increased to $1,393,235 from
$810,985 in 1998. This increase is due to the addition of new customers and the
alliance with Biotal, Inc. for the manufacture of their MICRO-CELL product. Per
this agreement, Nutraceutix will realize an increase in fermentation sales and a
corresponding decrease in COBACTIN sales, as well as, a decrease in marketing
and sales costs for COBACTIN products. To date, this agreement has resulted in a
slight increase in profit contribution from microbial feed additive sales. In
the year 2000, Nutraceutix, Inc. will double its fermentation capacity by adding
a second manufacturing facility which is expected to be operational by year end
2000. The current facility is operating at 100% capacity.
COBACTIN
The Company's sales of COBACTIN microbial feed additives decreased to
$1,183,711 in 1999 from $1,351,816 in 1998. This decrease resulted from the
September 1, 1999 alliance with Biotal which reduced COBACTIN'S sales price, and
correspondingly decreased sales and marketing expenses while increasing
fermentation sales through the manufacture of Biotal's MICRO-CELL product.
REVENUES FOR FISCAL 1999 COMPARED TO FISCAL 1998
Revenues for the fiscal year ended December 31, 1999 were $10,272,417; an
increase of 62% compared to $6,329,606 in the fiscal year ended December 31,
1998. This increase was primarily due to the manufacturing of private label and
proprietary products for MET-Rx and Rexall Sundown.
COST OF REVENUES
Cost of revenues as a percentage of total revenues in fiscal 1999 was 76%
compared to 61% in fiscal 1998. This increase was a result of the product mix
along with adjustments of inventories in the fourth quarter totaling
approximately $176,000. Sales fluctuations throughout the year also affected the
efficiencies of the Colorado manufacturing facility which adversely affected
margins.
RESEARCH AND DEVELOPMENT EXPENSES
Research and Development expenses increased to $295,979 in fiscal 1999
compared to $224,785 in 1998.
SELLING EXPENSES
Selling expenses remained constant at $786,564 in 1999 compared to $786,286
in 1998.
14
<PAGE> 15
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased to $1,513,072 or 15% of
revenues in 1999 from $1,282,446 or 20% of revenue in fiscal 1998. The increase
is primarily due to building the infrastructure of the Company to support the
sales growth.
INTEREST EXPENSE
Interest expense increased in fiscal 1999 to $242,912 in fiscal 1999 from
$157,448 in fiscal 1998. The increase was due to the addition of equipment
leases in 1999 and an increase in borrowing under the line of credit.
NET EARNINGS
Net earnings decreased in fiscal 1999 to a loss of $584,217 as compared to
earnings of $6,809 in 1998. While the Company experienced a loss of $584,217 in
1999, this is not completely reflective of the overall Company performance. Two
non-recurring expenses accounted for the majority of the loss which includes an
expense of $180,000 related to the settlement of litigation with BioUniversal to
be paid over the next three years, and non-cash inventory adjustments totaling
approximately $176,000.
EARNINGS PER SHARE
Net loss per share in 1999 was ($0.034), while earnings per share in 1998
were $0.0004.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations and capital requirements primarily
through borrowing, raising equity capital and operations. As of December 31,
1999 the Company had working capital of $369,397 as compared to working capital
of $724,657 at December 31, 1998. The decrease is primarily due to the net loss
in fiscal 1999. In May 1999, the Company's bank line credit was increased by
$400,000 to $1,200,000. As of December 31, 1999, the Company had an available
balance of $309,800 to borrow from the Company's bank line of credit which the
Company believes to be adequate capital based on the presumption of a
continuation of the bank line of credit.
One of the Company's business strategies is to pursue acquisition of
proprietary technologies that complement its existing products and expand its
distribution channels compatible with its business philosophy and strategic
goals. The Company regularly evaluates potential technologies and may hold
discussions regarding such potential acquisitions of technologies. As a general
rule, the Company will publicly announce such acquisitions of technologies only
after a definitive agreement has been signed. Future acquisitions of
technologies and development of new products, if any, could be financed by
current cash on hand, bank borrowings, public offerings or private placements of
equity or debt securities, or a combination of the foregoing. There can be no
assurance that such additional financing will be available on terms acceptable
to the Company or at all. The failure to raise the funds necessary to finance
its future cash requirements or consummate future acquisitions could adversely
affect the Company's ability to pursue its strategy and could negatively affect
its operations in future periods.
YEAR 2000 IMPACT STATEMENT
In 1999, the Company conducted a comprehensive review of its internal
computer systems and its products to identify the systems that could be affected
by the Y2K issue. While no potential material problems in its infrastructure and
facilities were found, the Company, as a further precaution, updated its
operational software to Windows 98 to ensure Y2K compliance. The incremental
costs of this upgrade were not material.
Based on responses the Company received to its questionnaires, the Company
determined that current material vendors and suppliers were either compliant or
would be Y2K complaint in a timely manner. To date, the Company has seen no
evidence of the Y2K issue having any adverse consequence on its business.
15
<PAGE> 16
OUTLOOK -- ISSUES AND UNCERTAINTIES
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 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
acquisition, consolidation or sale of key customers (iv) the inability of the
Company to introduce new products or the introduction of more products by the
Company's competitors; (v) general conditions in the nutritional supplement
industry; (vi) consumer perceptions of the Company's products and operations and
(vii) the general condition and viability of key customers' businesses which may
be unrelated to any relationship between the Company and the key customer. In
particular, because consumers ingest the Company's products, 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's results of operations or financial
condition.
DEPENDENCE ON CUSTOMERS
In 1999, the Company received approximately 57% of its total revenues from
three customers: MET-Rx (40%), Rexall Showcase (10%) and Rexall Sundown (7%).
Rexall Showcase is a wholly-owned subsidiary of Rexall Sundown and Rexall
Sundown acquired MET-Rx during the fourth quarter of 1999. On March 6, 2000,
MET-Rx executed an exclusive sublicense agreement with the Company for sports
supplement products incorporating controlled delivery and molecular dispersion
technology, excluding multilevel, effective April 1, 2000 for a one year term.
This sublicense agreement is on an exclusive basis provided MET-Rx maintains
certain minimum purchase amounts. The Company is unable to predict whether
MET-Rx will meet these requirements and is unable to predict the impact of the
consolidation of its three largest customers on its revenues or business in the
future. The consolidation of these three customers under common ownership may
reduce revenues to the Company and could have a material adverse effect on the
results of operations or financial condition.
DEPENDENCE ON KEY PERSONNEL
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 and Patricia St. John, the Vice
President of Administration, Secretary and Treasurer, 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 or Mr. Moger could have a material adverse
effect on the Company.
ABSENCE OF CLINICAL STUDIES
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.
16
<PAGE> 17
REGULATORY RISKS
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 or interpretations, nor can it predict what effect additional
governmental regulations or administrative orders, when and if promulgated,
would have on its business. 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, expanded documentation of the properties of certain products, or
expanded or different labeling, or scientific substantiation. Any or all of such
requirements could have a material adverse effect on the Company's results of
operations and financial condition.
POTENTIAL 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.
DEPENDENCE ON SUPPLIERS
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.
DEPENDENCE ON LICENSEES
The Company believes its ability to grow in its existing market is
partially dependent on the success of the companies which sub-license the
Company's technologies. The Company has no control over the business of
licensees. Adverse events in their businesses could negatively affect the
Company.
17
<PAGE> 18
ITEM 7. FINANCIAL STATEMENTS
See "Financial Statements and Notes to Financial Statements" set forth on
pages F-1 through F-14 of this Annual Report on Form 10-KSB.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
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.
18
<PAGE> 19
PART III
ITEM 9.DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
The Company will file a definitive proxy statement ("Proxy Statement")
relating to its 2000 Annual Meeting of Shareholders pursuant to and in
accordance with section 240.14a-101 within 120 days after the end of the fiscal
year covered by this form. The information required by this item is incorporated
by reference to the Proxy Statement under the headings "Directors and Executive
Officers" and "Section 16(a) Beneficial Ownership Reporting Compliance."
ITEM 10. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
Proxy Statement under the heading "Executive Compensation" and "Director
Compensation."
ITEM 11.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the
Proxy Statement under the heading "Security Ownership of Certain Beneficial
Owners and Management."
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
Proxy Statement under the heading "Certain Relationships and Related
Transactions."
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: The following exhibits are filed as part of this report:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
3.1 Certificate of Incorporation and Amendment thereto(1)
3.2 First Amended and Restated Bylaws(1)
3.3 Amendment to Bylaws
10.1 Central Soya Company Licensing Voting Agreement(1)
10.2 Building Lease -- 8340 154th Avenue NE, Redmond, WA
(Corporate headquarters/ manufacturing facility)(1)
10.3 Building Lease -- 14810 NE 95th St., Redmond, WA(1)
10.4 Building Lease -- 1420 Overlook Drive, Lafayette, CO
(Tableting encapsulating, bottling plant)(1)
10.5 Building Lease -- 1420 Overlook Drive, Lafayette, CO
(Remainder of building for additional tableting,
encapsulating, bottling and warehouse)(1)
10.6 Building Lease -- 1400 Overlook Drive, Lafayette, CO
(Warehouse)(1)
10.7 Employment Agreement with William D. St. John(1)
10.8 Stock Option Plan(1)
10.9 Building Lease -- 1400 and 1420 Overlook Drive, Lafayette,
CO (Tableting, encapsulation, bottling plant and warehouse)
(Supersedes Exhibits 10.4, 10.5 and 10.6)(2)
10.10 Employment Agreement with Lyndon Johnson (2)
10.11 Rexall Showcase Agreement(2)
10.12 Building Lease -- 9625 153rd Avenue NE, Redmond, WA
(Manufacturing Facility)
10.13 MET-Rx Agreement
</TABLE>
19
<PAGE> 20
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
23.1 Consent of Grant Thornton LLP, Independent Certified Public
Accountants
24.1 Power of Attorney of Herbert L. Lucas
24.2 Power of Attorney of Arthur S. Pearson
24.3 Power of Attorney of Carl W. Schafer
24.4 Power of Attorney of Daniel B. Ward
27.1 Financial Data Schedule for the Fiscal Year Ended December
31, 1999
</TABLE>
- ---------------
(1) Incorporated by reference to the Registration Statement on Form 10-SB (Reg.
No. 000-24693) filed by the Company on July 27, 1998.
(2) Incorporated by reference to Amendment No. 1 to the Registration Statement
on Form 10-SB (Reg. No. 000-24693) filed by the Company on March 25, 1999.
(b) Reports on Form 8-K.
None.
20
<PAGE> 21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed by the undersigned thereunto
duly authorized.
NUTRACEUTIX, INC.
March 30, 2000 By: /s/ WILLIAM D. ST. JOHN
------------------------------------
William D. St. John
President, Chairman of the Board
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated:
<TABLE>
<S> <C> <C>
By: /s/ WILLIAM D. ST. JOHN President, Chairman of the March 30, 2000
---------------------------------------------------- Board (Principal Executive
William D. St. John Officer)
By: /s/ STEVEN H. MOGER Vice President of Operations March 30, 2000
---------------------------------------------------- (Principal Financial and
Steven H. Moger Accounting Officer)
By: /s/ *HERBERT L. LUCAS Director March 30, 2000
----------------------------------------------------
Herbert L. Lucas
By: /s/ *ARTHUR S. PEARSON Director March 30, 2000
----------------------------------------------------
Arthur S. Pearson
By: /s/ *CARL W. SCHAFER Director March 30, 2000
----------------------------------------------------
Carl W. Schafer
By: /s/ *DANIEL B. WARD Director March 30, 2000
----------------------------------------------------
Daniel B. Ward
By: /s/ *WILLIAM D. ST. JOHN March 30, 2000
----------------------------------------------------
William D. St. John,
Attorney-in-Fact
</TABLE>
21
<PAGE> 22
CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Certified Public Accountants.......... 2
Financial Statements
Balance Sheets............................................ 3
Statements of Operations.................................. 4
Statement of Stockholders' Equity......................... 5
Statements of Cash Flows.................................. 6
Notes to Financial Statements............................. 7
</TABLE>
F-1
<PAGE> 23
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Nutraceutix, Inc.
We have audited the accompanying balance sheets of Nutraceutix, Inc. (a
Delaware Corporation) as of December 31, 1999 and 1998, and the related
statements of operations, stockholders' equity and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above, present fairly,
in all material respects, the financial position of Nutraceutix, Inc. as of
December 31, 1999 and 1998, and the results of its operations and its cash flows
for the years then ended, in conformity with generally accepted accounting
principles.
GRANT THORNTON LLP
Seattle, Washington
February 11, 2000 (except for note L,
as to which the date is February 29, 2000)
F-2
<PAGE> 24
NUTRACEUTIX, INC.
BALANCE SHEETS
DECEMBER 31,
ASSETS
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Current assets
Cash...................................................... $ 149,321 $ 93,440
Accounts receivable, less allowance for doubtful accounts
of $0 and $57,407, respectively........................ 936,627 737,916
Inventories............................................... 1,746,474 824,293
Prepaid expenses.......................................... 112,021 201,188
----------- -----------
Total current assets.............................. 2,944,443 1,856,837
Equipment and furniture -- net.............................. 1,461,324 1,327,257
Other assets -- net......................................... 795,019 935,005
----------- -----------
$ 5,200,786 $ 4,119,099
=========== ===========
LIABILITIES
Current liabilities
Line of credit............................................ $ 839,500 $ 411,500
Current maturities of long-term obligations............... 203,998 194,390
Current maturities of capital lease obligations........... 217,394 135,794
Accounts payable -- trade................................. 550,900 281,719
Accounts payable -- MET-Rx................................ 662,841 --
Accrued liabilities....................................... 84,952 97,259
Deferred revenue.......................................... 15,461 11,518
----------- -----------
Total current liabilities......................... 2,575,046 1,132,180
Long-term obligations, less current maturities.............. 533,730 465,892
Capital lease obligations, less current maturities.......... 248,148 249,198
Commitments and contingencies............................... -- --
Stockholders' equity
Preferred stock authorized, 5,000,000 shares $.01 par
value.................................................. -- --
Common stock authorized, 30,000,000 shares $.001 par
value.................................................. 17,489 16,864
Additional contributed capital............................ 11,725,754 11,570,129
Accumulated deficit....................................... (9,899,381) (9,315,164)
----------- -----------
Total stockholders' equity........................ 1,843,862 2,271,829
----------- -----------
$ 5,200,786 $ 4,119,099
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE> 25
NUTRACEUTIX, INC.
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1999 1998
----------- ----------
<S> <C> <C>
Net revenues................................................ $10,272,417 $6,329,606
Cost of revenues............................................ 7,805,440 3,880,880
----------- ----------
Gross profit........................................... 2,466,977 2,448,726
Operating expenses
Marketing and selling..................................... 786,564 786,286
Research and development.................................. 295,979 224,785
General and administrative................................ 1,513,072 1,282,446
----------- ----------
2,595,615 2,293,517
----------- ----------
Operating profit (loss)................................ (128,638) 155,209
Other income (expense)
Interest expense.......................................... (242,912) (157,448)
Settlement expense........................................ (180,000) --
Other..................................................... (32,667) 9,048
----------- ----------
(455,579) (148,400)
----------- ----------
Earnings (loss) before income taxes.................... (584,217) 6,809
Income taxes................................................ -- --
----------- ----------
Net earnings (loss).................................. $ (584,217) $ 6,809
=========== ==========
Net earnings (loss) per share........................ $ (.034) $ 0.0004
=========== ==========
Net earnings (loss) per share assuming dilution...... $ (.034) $ 0.0004
=========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 26
NUTRACEUTIX, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
-------------------- CONTRIBUTED ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
---------- ------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1998................. 15,500,981 $15,501 $10,624,992 $(9,321,973) $1,318,520
Issuance of common stock through 504
offering, net of expenses of $76,875..... 1,127,500 1,128 767,622 -- 768,750
Exercise of stock options.................. 101,000 102 25,149 -- 25,251
Issuance of common stock for services at
fair value............................... 46,831 47 33,090 -- 33,137
Issuance of common stock to prepay
royalties................................ 35,500 36 29,964 -- 30,000
Granted stock options for services at fair
value.................................... -- -- 50,000 -- 50,000
Issuance of common stock to board of
directors for compensation............... 50,000 50 39,312 -- 39,362
Net earnings for the year.................. -- -- -- 6,809 6,809
---------- ------- ----------- ----------- ----------
Balance at December 31, 1998............... 16,861,812 16,864 11,570,129 (9,315,164) 2,271,829
Issuance of common stock through
subscription agreement................... 625,000 625 155,625 -- 156,250
Net loss for the year...................... -- -- -- (584,217) (584,217)
---------- ------- ----------- ----------- ----------
Balance at December 31, 1999............... 17,486,812 $17,489 $11,725,754 $(9,899,381) $1,843,862
========== ======= =========== =========== ==========
</TABLE>
The accompanying notes are an integral part of this statement.
F-5
<PAGE> 27
NUTRACEUTIX, INC.
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1999 1998
--------- ----------
<S> <C> <C>
Increase (Decrease) in Cash
Cash flows from operating activities:
Net earnings (loss)....................................... $(584,217) $ 6,809
Adjustments to reconcile net earnings (loss) to net cash
used in operating activities
Depreciation and amortization.......................... 379,045 328,154
Issuance of common stock for finance charges and
consulting services................................... -- 122,499
Write-off of start-up costs............................ 50,266 --
Legal settlement entered into under long-term
obligation............................................ 180,000 --
Changes in assets and liabilities
Accounts receivable.................................. (198,711) (193,744)
Inventories.......................................... (922,181) (180,442)
Prepaid expenses..................................... 89,167 (42,679)
Accounts payable..................................... 932,022 (125,671)
Accrued liabilities and deferred revenue............. (8,364) (156,428)
--------- ----------
Net cash used in operating activities............. (82,973) (241,502)
--------- ----------
Cash flows from investing activities:
Purchase of equipment..................................... (155,785) (771,226)
Patent expenditures....................................... (54,083) (52,107)
--------- ----------
Net cash used in investing activities............. (209,868) (823,333)
--------- ----------
Cash flows from financing activities:
Payments on long-term and capital lease obligations....... (397,067) (292,107)
Proceeds from long-term obligations....................... 161,539 599,903
Net borrowings (payments) on line of credit............... 428,000 (76,500)
Net proceeds from issuance of common stock................ 156,250 794,001
--------- ----------
Net cash provided by financing activities......... 348,722 1,025,297
--------- ----------
Net increase (decrease) in cash............................. 55,881 (39,538)
Cash at beginning of year................................... 93,440 132,978
--------- ----------
Cash at end of year......................................... $ 149,321 $ 93,440
========= ==========
Cash paid during the year for:
Interest.................................................. $ 242,912 $ 157,448
========= ==========
Noncash investing and financing activities:
Purchase of equipment under capital lease obligations..... $ 213,524 $ 223,079
Issuance of common stock to prepay royalties.............. $ -- $ 30,000
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE> 28
NUTRACEUTIX, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nutraceutix, Inc. (the Company) is a manufacturer of branded and private
label nutritional supplements for human health, animal and food applications.
The Company is also engaged in the research and development of microbial,
nutritional and plant based products.
A summary of the Company's significant accounting policies consistently
applied in the preparation of the accompanying financial statements follows.
1. Accounts Receivable
In 1999, the Company considered accounts receivable to be fully
collectible; accordingly, no allowance for doubtful accounts was required.
2. Inventories
Inventories are stated at the lower of cost or market; cost is determined
using the first-in, first-out method.
3. Equipment and Furniture
Equipment and furniture are stated at cost, less accumulated depreciation
and amortization. Depreciation and amortization are provided for in amounts
sufficient to relate the cost of depreciable assets to operations over their
estimated service lives. Leasehold improvements are amortized over the lives of
the respective leases or the service lives of the improvements, whichever is
shorter. Leased property under capital leases is amortized over the service
lives of the assets as the leases substantially transfer ownership and have
bargain purchase options. The straight-line method of depreciation is followed
for substantially all assets for financial reporting purposes. The estimated
useful lives in determining depreciation and amortization are as follows:
<TABLE>
<S> <C>
Furniture and fixtures...................................... 3-5 years
Machinery and equipment..................................... 3-10 years
Leasehold improvements...................................... 3 years
Machinery and equipment under capital leases................ 3-10 years
</TABLE>
4. Other Assets
Other assets include capitalized technical and product rights, patents and
trademarks and start-up costs. Technical and product rights and patents and
trademarks are stated at cost and amortized to operations over their estimated
useful lives or statutory lives, whichever is shorter. The Company evaluates its
technical and product rights and patents and trademarks annually to determine
potential impairment by comparing the carrying amount to the undiscounted
estimated future cash flows of the related assets.
5. Research and Development Costs
All expenditures for research and development are expensed in the year
incurred.
6. Use of Estimates
In preparing the Company's financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
F-7
<PAGE> 29
NUTRACEUTIX, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
7. Reclassifications
Certain reclassifications have been made to the 1998 presentation to
conform to the 1999 presentation.
8. Recently Issued Accounting Standards
In July 1998, the Accounting Standards Executive Committee (AcSEC) issued
Statement of Position (SOP) 98-5, "Reporting on the costs of Start-Up
Activities." This statement provides guidance on the financial reporting of
start-up costs and organization costs. It requires costs of start-up activities
and organization costs to be expensed as incurred. The statement is effective
for the Company's financial statements for the year ending December 31, 1999.
The Company implemented SOP 98-5 for the year ending December 31, 1999 by
writing off the remaining balance of start-up costs totaling $50,266 in the
first quarter of 1999.
NOTE B -- INVENTORIES
Inventories consist of the following at December 31:
<TABLE>
<CAPTION>
1999 1998
---------- --------
<S> <C> <C>
Raw materials........................................ $1,122,128 $387,625
Work in progress..................................... 589,720 374,584
Finished goods....................................... 34,626 62,084
---------- --------
$1,746,474 $824,293
========== ========
</TABLE>
NOTE C -- EQUIPMENT AND FURNITURE
Equipment and furniture consist of the following at December 31:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Furniture and fixtures.............................. $ 74,192 $ 74,192
Machinery and equipment............................. 1,613,449 1,483,893
Leasehold improvements.............................. 35,267 29,177
Machinery and equipment under capital leases........ 967,109 733,448
---------- ----------
2,690,017 2,320,710
Less accumulated depreciation and amortization...... 933,864 801,931
Less accumulated amortization of machinery and
equipment under capital leases.................... 294,829 191,522
---------- ----------
$1,461,324 $1,327,257
========== ==========
</TABLE>
NOTE D -- OTHER ASSETS
Other assets consist of the following at December 31:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Technical and product rights........................ $2,237,444 $2,237,444
Patents and trademarks.............................. 366,906 312,825
Start-up costs...................................... -- 124,739
---------- ----------
2,604,350 2,675,008
Less accumulated amortization....................... 1,809,331 1,740,003
---------- ----------
$ 795,019 $ 935,005
========== ==========
</TABLE>
F-8
<PAGE> 30
NUTRACEUTIX, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
NOTE E -- LINE OF CREDIT
The Company has a line of credit with a bank collateralized by accounts
receivable, inventory and equipment which expires April 30, 2000. Under the
terms of the line of credit, the Company can borrow up to $1,200,000 at prime
plus 1% (9.5% at December 31, 1999). The Company complied with all covenants at
December 31, 1999.
NOTE F -- LONG-TERM OBLIGATIONS
Long-term obligations consist of the following at December 31:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Notes payable for equipment; with monthly installments
totaling $13,801, including 16.4% interest; collateralized
by production equipment; due in 2003...................... $445,733 $532,563
Note payable to a third party for payment of legal
settlement; payable in 36 monthly installments of $5,000
beginning April 3, 2000; no stated interest rate (note
L)........................................................ 180,000 --
Note payable to a third party; with monthly installments of
$1,643, including interest at 12.7%; collateralized by
equipment; due in 2004.................................... 67,328 --
Notes payable to a third party; with monthly installments of
$6,643, including interest at 12.3%; collateralized by
equipment; due in 2000.................................... 25,985 96,297
Notes payable to third parties; no stated interest rate;
uncollateralized; due on demand........................... 10,000 10,000
Other notes payable......................................... 8,682 21,422
-------- --------
737,728 660,282
Less current maturities..................................... 203,998 194,390
-------- --------
$533,730 $465,892
======== ========
</TABLE>
Aggregate maturities of long-term obligations are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
2000................................................. $203,998
2001................................................. 190,746
2002................................................. 212,727
2003................................................. 122,792
2004................................................. 7,465
--------
$737,728
========
</TABLE>
NOTE G -- LEASE OBLIGATIONS
The Company conducts a substantial portion of its operations utilizing
leased manufacturing and office facilities, expiring in 2004. Some of the
operating leases provide that the Company pay taxes, maintenance, insurance and
other occupancy expense applicable to leased premises. The Company also leases
machinery and equipment under capital leases expiring in 2004.
F-9
<PAGE> 31
NUTRACEUTIX, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
The following is a schedule by years of future minimum lease payments
together with the present value of the minimum payments under operating and
capital leases as of December 31, 1999:
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDING DECEMBER 31, LEASES LEASES
------------------------ -------- ----------
<S> <C> <C>
2000................................................... $217,394 $ 531,300
2001................................................... 173,965 439,100
2002................................................... 109,800 330,600
2003................................................... 73,309 309,600
2004................................................... 32,607 89,600
-------- ----------
Future minimum lease payments............................. 607,075 $1,700,200
==========
Less amount representing interest......................... 141,533
--------
Present value of minimum lease payments................... $465,542
========
Current maturities........................................ $217,394
Long-term maturities...................................... 248,148
--------
$465,542
========
</TABLE>
In January 2000, the Company entered into an operating lease agreement for
a new facility in Redmond, Washington. The future minimum lease payments of such
lease are included in the above schedule.
Rent expense for leased facilities and equipment was $502,781 and $432,876
for the years ended December 31, 1999 and 1998, respectively.
NOTE H -- INCOME TAXES
The Company accounts for income taxes using the liability method as
prescribed by Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes".
The income tax provision reconciled to the tax computed at the statutory
federal rate was as follows at December 31:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Tax expense (benefit) at statutory rate........... $ (198,600) $ 2,300
Permanent differences............................. 5,700 6,400
Tax credits....................................... 26,800 --
Change in valuation allowance..................... 166,100 (8,700)
----------- -----------
$ -- $ --
=========== ===========
</TABLE>
F-10
<PAGE> 32
NUTRACEUTIX, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
Deferred tax assets and liabilities consist of the following at December
31:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Current
Book expenses deductible for tax purposes in
future periods............................... $ 18,661 $ 33,342
Less valuation allowance........................ (18,661) (33,342)
----------- -----------
$ -- $ --
=========== ===========
Long-term
Net operating loss carry forwards............... $ 2,684,645 $ 2,451,836
Depreciation and amortization................... (273,208) (249,403)
Other tax credits............................... 134,265 162,509
Less valuation allowance........................ (2,545,702) (2,364,942)
----------- -----------
$ -- $ --
=========== ===========
</TABLE>
The Company has established a valuation allowance of $2,564,363 and
$2,398,284 as of December 31, 1999 and 1998, respectively, due to the
uncertainty of future utilization of net operating loss carryforwards and
realization of other deferred tax assets. The valuation allowance was increased
by approximately $166,100 during the year ended December 31, 1999. If ownership
changes should occur, there may be certain limitations on the use of these
carryforwards, as defined by Internal Revenue Code Section 382.
At December 31, 1999, an operating loss carryforward of approximately
$7,885,000 expiring through 2018 is available to offset future taxable income.
Investment tax credits and research and experimentation tax credits of $43,443
and $90,822 respectively, expiring in 2000 through 2003, are also available.
NOTE I -- MET-RX LICENSE AGREEMENTS
The Company has entered into exclusive license agreements with MET-Rx, USA,
Inc. ("MET-Rx") to sell products containing Controlled Delivery Technology
("CDT") and to sell products containing Molecular Dispersion Technology ("MDT")
in the North American sports nutrition market through all trade channels except
multilevel through March 31, 2000. If MET-Rx does not meet the purchase volume
requirements, the licenses will continue on a non-exclusive basis. Both of these
agreements have been extended through March 31, 2001. The agreement also states
that MET-Rx will pay the Company a development fee of $6,000 for each MDT
product developed by the Company.
In conjunction with the above agreements, the Company purchases raw
materials from MET-Rx to fulfill some of the orders for CDT and MDT products.
For the year ended December 31, 1999, purchases from MET-Rx totaled
approximately $2,580,300. The Company also had accounts payable totaling
approximately $663,000 and accounts receivable totaling approximately $90,600
from MET-Rx.
NOTE J -- TECHNICAL RIGHTS AND ROYALTY AGREEMENTS
In December 1998, the Company entered into an agreement with Temple
University (Temple) to obtain an exclusive worldwide license of a licensed
product, with the right to sublicense. Under the agreement, the Company is
required to make royalty payments to Temple. During 1999, royalty payments
totaled $9,629.
Under a technical and product rights agreement, from a limited partnership
which has now been dissolved, the Company has full and exclusive rights, title
and interest to use and market products developed from the Feed Additives
agreement. Under the Feed Additives agreement, the Company is required to make
royalty payments to the former partners of the Feed partnership on sales of Feed
Additives until December 31,
F-11
<PAGE> 33
NUTRACEUTIX, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
2010. During 1999 and 1998, royalty payments for Feed Additives amounted to
$39,834 and $46,464, respectively.
The Company has exclusive rights to use D-glucarate salts (Patented
Materials) with BioChemix. In August 1998, the Company and BioChemix entered
into agreements for the exclusive licensing of glucarate for colon and liver
applications, which required the Company to pay royalty payments on sales of
certain licensed products. Sublicense and development agreements do not expire
as long as the Company continues to sell the Patented Materials. As of September
28, 1998, BioChemix and Nutraceutix mutually agreed to terminate the requirement
that Nutraceutix pay BioChemix royalties on Glucarate sales. Royalty expense was
$48,530 for the year ended December 31, 1998.
NOTE K -- RETIREMENT PLAN
The Company has a defined contribution 401(k) retirement plan (the Plan)
which covers all employees. The Company will match 25% of employee
contributions, up to 4% of employee contributions. The Company contributed
$7,625 and $7,169 to the Plan for 1999 and 1998, respectively.
NOTE L -- CONTINGENCIES
The Company entered into a ten-year, renewable marketing and distribution
agreement with Bio Universal, Inc. during 1993, for the purpose of marketing and
distributing the Company's COBACTIN products and BIOPOWER. In November 1995, the
Company ended the relationship with Bio Universal and began to sell these
products directly to third party customers. Bio Universal filed suit against the
Company for unspecified damages related to the termination of this agreement. As
of February 29, 2000, the Company reached a settlement with Bio Universal,
whereby the Company agreed to pay Bio Universal the amount of $180,000, in 36
monthly installments of $5,000 with no stated interest.
NOTE M -- STOCK OPTIONS
Under the terms of the Company's 1995 Stock Option Plan, officers,
directors, employees and others related to the Company may be granted incentive
stock options or nonqualified stock options to purchase up to an authorized
3,000,000 shares of common stock. The options are generally granted at exercise
prices equal to the market value of the Company's common stock on the date of
the grant. The options generally vest over three years and expire ten years from
date of grant.
The Company has adopted the disclosure only provisions of Financial
Accounting Standard No. 123, "Accounting for Stock-Based Compensation" (SFAS
123). The Company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and related Interpretations in accounting for its plans and
generally does not recognize compensation expense for its stock-based
compensation plans. If the Company had elected to recognize compensation expense
based upon the fair value at the grant date for awards under these plans
consistent with the methodology prescribed by SFAS 123, the Company's net
earnings (loss) would change to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1999 1998
--------- --------
<S> <C> <C>
Net earnings (loss)
As reported........................................... $(584,217) $ 6,809
Pro forma............................................. $(650,670) $(56,947)
Net earnings (loss) per share
As reported........................................... $ (0.034) $ 0.0004
Pro forma............................................. $ (0.038) $ (0.004)
</TABLE>
F-12
<PAGE> 34
NUTRACEUTIX, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
The fair value of option grants is estimated using the Black-Scholes
option-pricing model with the following weighted-average assumptions for the
years ended December 31:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Expected volatility.................................... 69% 50%
Expected dividend yield................................ -- --
Risk-free interest rate................................ 6.5% 5.0%
Expected life.......................................... 7.0 years 7.0 years
</TABLE>
A summary of the Company's stock option plan's activity is as follows:
<TABLE>
<CAPTION>
1999 1998
----------------------------- -----------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
--------- ---------------- --------- ----------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year...... 2,314,098 $0.75 1,697,200 $0.67
Granted............................... 270,652 0.53 633,898 0.97
Exercised............................. -- -- (1,000) 0.25
Forfeited............................. (148,698) 0.96 (16,000) 0.81
--------- ----- --------- -----
Outstanding at end of year............ 2,436,052 $0.71 2,314,098 $0.75
========= ===== ========= =====
Options exercisable at end of year.... 1,846,812 $0.72 1,386,413 $0.80
========= ===== ========= =====
Weighted-average fair value of options
granted during the year............. $0.19 $0.54
===== =====
</TABLE>
The following is a summary of stock options outstanding at December 31,
1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------------------------------
WEIGHTED-AVERAGE
NUMBER REMAINING NUMBER OF OPTIONS
EXERCISE PRICE OUTSTANDING CONTRACTUAL LIFE EXERCISABLE
-------------- ----------- ---------------- -------------------
<S> <C> <C> <C>
$0.25 - $0.78.......................... 990,552 6.85 years 650,445
$0.80 - $1.25.......................... 1,445,500 5.68 years 1,196,367
</TABLE>
The Company has issued stock options to consultants outside of the 1995
Stock Option Plan. Shares totaling 66,666 and 133,332 were outstanding and
exercisable at December 31, 1999 and 1998, respectively. The weighted average
exercise price of the shares was $0.50 as of December 31, 1999 and 1998, and the
average remaining contractual life was .25 and .75 years, respectively. The
events effecting these options in 1999 and 1998 are as follows: in 1999, 66,666
shares were forfeited at an exercise price of $.50 and in 1998, 100,000 shares
were exercised at an exercise price of $.25.
NOTE N -- EARNINGS (LOSS) PER SHARE
Earnings (loss) per share is based on the weighted average number of shares
outstanding during each period and income (loss) available to common
shareholders. Earnings per share assuming dilution is based on the assumption
that outstanding stock options were exercised.
The table below presents the information used to compute loss per common
share for the year ended December 31, 1999:
<TABLE>
<CAPTION>
NET LOSS SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
Earnings per shares
Income available to common stockholders...... $(584,217) 17,335,702 $(0.034)
</TABLE>
F-13
<PAGE> 35
NUTRACEUTIX, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
The computation for loss per share assuming dilution for the year ended
December 31, 1999 was anti-dilutive; and therefore, is not included.
The table below presents the information used to compute earnings per
common share, with and without dilution for the year ended December 31, 1998:
<TABLE>
<CAPTION>
NET EARNINGS SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------ ------------- ---------
<S> <C> <C> <C>
Earnings per share
Income available to common stockholders...... $6,809 16,188,672 $0.0004
Effect of dilutive securities
Stock options................................ -- 644,255 --
------ ---------- -------
Earnings per common share assuming dilution
Earnings available to common stockholders and
effect of assumed conversions............. $6,809 16,832,927 $0.0004
====== ========== =======
</TABLE>
NOTE O -- MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK
In 1999, the Company had sales to two customers which accounted for
approximately 40% and 10% of net revenues. In 1998, sales to two customers
accounted for approximately 14% and 12% of net revenues.
NOTE P -- FOURTH QUARTER ADJUSTMENTS
In the fourth quarter of 1999, the Company incurred adjustments to
inventory and cost of sales related to the disposal of inventory and allocation
of overhead to inventory and cost of sales. The adjustments resulted in a net
decrease to inventory and earnings of approximately $176,000 and an increase to
cost of sales and a decrease to general and administrative costs of
approximately $336,000.
F-14
<PAGE> 1
EXHIBIT 3.3
AMENDMENT TO BYLAWS
OF
NUTRACEUTIX, INC.
1. The first sentence of Section 3.2 of the Bylaws is hereby amended to
provide as follows:
"The Board shall be composed of not less than four (4) and not
more than twelve (12) directors, the specific number to be established
by resolution adopted by the Board of Directors."
2. Section 2.3 of the Bylaws is hereby deleted in its entirety.
3. The first sentence of Section 2.1 of the Bylaws is hereby amended to
provide as follows:
"The annual meeting of the shareholders shall be held each year
on a date designated by the Board of Directors for the purpose of
electing directors and transacting such other business as may properly
come before the meeting."
<PAGE> 1
EXHIBIT 10.12
AMENDMENT TO COMMERCIAL LEASE
THIS AMENDMENT TO COMMERCIAL LEASE is made this 10th day of March, 2000, by and
between DAVID H. VEBLEN/MORTENSEN TRUST, (hereinafter "Landlord") and
NUTRACEUTIX, INC., (hereinafter "Tenant").
WHEREAS, "Landlord" and "Tenant" entered into a Commercial Lease ("Lease")
dated, November 3, 1999 for the lease of certain real estate; and
WHEREAS, "Tenant desires to receive $148,500.00 towards leasehold improvements.
WHEREAS, the parties desire to amend the Lease in the specific respects
hereinafter set forth:
NOW, THEREFORE, in consideration of the mutual agreements and covenants
contained herein and other good and valuable consideration, receipt of which is
hereby acknowledged, the parties have this date agreed that the Lease shall be
amended as follows:
1. Item #5. RENT: Replace paragraph with the following:
RENT. Without prior notice or demand, Tenant agrees to pay to Landlord
as monthly rent for the Premises the sum of $6,982 for months 1-3,
$10,677.22 for months 4-36, $11,165.22 for months 37-60, on or before
the first day of the first full calendar month of the term hereof and a
like sum on or before the first day of each and every successive
calendar month thereafter during the term hereof. Rent for any period
during the term hereof which is for less than one (1) month shall be
prorated portion of the monthly installment herein, based upon a thirty
(30) day month. Rent shall be paid to Landlord at the address to which
notices to Landlord are to be given without deduction of offset in
lawful money of the United States of America, or to such other person or
at such other place as Landlord may from time to time designate in
writing.
2. The parties hereby ratify, affirm, and acknowledge the Lease.
3. Except as amended herein, the terms and provisions of the Lease
shall remain in full force and effect.
AGREED to this 13 day of MARCH, 2000.
LANDLORD: TENANT: NUTRACEUTIX, INC.
by /s/ David H. Veblen by /s/ William D. St. John
- --------------------------------------------------------------------------------
David H.Veblen/Mortensen Trust
Its: President
<PAGE> 2
STATE OF WASHINGTON
) ss.
COUNTY OF KING
On this dav personally appeared before me DAVID H. VEBLEN to me known to
be the individual described in and who executed the within and foregoing
instrument, and acknowledged that, he signed the same as his free and voluntary
act and deed, for the uses and purposes therein mentioned. -
IN WITNESS WHEREOF, I have hereunto subscribed my hand and affixed my
official seal this 14th day of March, 2000.
NOTARY PUBLIC in and for the State of
Washington, residing at Kirkland, WA
NOTARY PUBLIC My commission expires:
15 June 2002
STATE OF WASHINGTON
JANEY S. ANDRES
MY APPOINTMENT Expires June 15, 2002
STATE OF WASHINGTON
ss.
COUNTY OF KING
On this day personally appeared before me WILLIAM D. ST. JOHN to me
known to be President of NUTRACEUTIX, INC., the corporation that
executed the within and foregoing instrument, and acknowledged said
instrument to be the free and voluntary act and deed of said
corporation, for the uses and purposes therein mentioned, and on oath
stated that he was authorized to execute said instrument.
IN WITNESS WHEREOF, I have hereunto subscribed my hand and
affixed my official seal this 13th day of March, 2000.
NOTARY PUBLIC in and for the State of
Washington, residing at Renton
My commission expires
10-6-01
<PAGE> 3
STANDARD FORM
MULTI-TENANT, TRIPLE NET LEASE
1. PARTIES. This lease is made this(date)November 3, 1999 between David
Veblen/Mortensen Trust Tenants in Common hereafter called Landlord, and
Nutraceutix,Inc. hereafter called Tenant.
2. PREMISES. Landlord agrees to lease to Tenant "the Premises" described in
Exhibit A and consisting of approximately 9,620. The Premises are a part
of the "Building," which Building is located on the real property
described in Exhibit B (the "Property"). As used herein, the term
"Building" includes all Buildings located on the Property. The Premises,
Building, and Property are a part of Willows East. Tenant understands
that square footage used in this Lease is approximate and is calculated
from the outside face of the exterior walls of the structure including
overhangs to tile centerline of any interior demizing walls. Tenant and
Landlord mutually hold each other harmless for any discrepancies in the
square footage calculation after execution of the Lease.
3. TERM. The term of this lease shall be 60 months and 0 days commencing
the 1st day of January 2000 and terminating on the 31st day of December,
2004 unless sooner terminated as provided herein; or extended pursuant
to Paragraph 22 herein.
4. POSSESSION.
a) lf the Landlord, for any reason whatsoever, cannot deliver
possession of the Premises to the Tenant at the commencement
date of the term hereof, this Lease shall not be void or
voidable, nor shall Landlord be liable to Tenant for any loss or
damage resulting therefrom, but in that event, all rent shall be
abated during tile period between the commencement of said term
and the time when Landlord delivers possession.
b) If Landlord permits Tenant to occupy the Premises prior to the
commencement date of the term, such occupancy shall be subject
to all the provisions of this Lease and shall not advance the
termination date of this Lease. Tenant's Share of Common Costs
and Expenses shall be due and payable from the date of tenant's
occupancy of the Premises.
c) If Tenant should cause any delay in Landlord's completion of the
Premises, thereby delaying Tenant's occupancy of the Premises
beyond the commencement date of this Lease, then the Landlord
may at its option require the Tenant to commence payment of rent
on the stated commencement date as specified herein.
5. RENT. Without prior notice or demand, Tenant agrees to pay to Landlord
as monthly rent for the Premises the sum of $6,982 month 1-36, $7,470
months 37-60, on or before the first day of the first full calendar
month of the term hereof and a like sum on or before the first day of
each and every successive calendar month thereafter during the term
hereof. Rent for any period during the term hereof which is for less
than one (1) month shall be a prorated portion of the monthly
installment herein, based upon a thirty (30) day month. Rent shall be
paid to Landlord at the address to which notices to Landlord are to be
given without deduction or offset in lawful money of the United States
of America, or to such other person or at such other place as Landlord
may from time to time designate in writing.
<PAGE> 4
P.O. Box 3277, Redmond, WA 98073
6. PREPAID RENT AND TENANT DEPOSIT. Upon execution of Lease, Tenant shall
deposit with Landlord $7,500 (the "Deposit") as prepaid rent and Tenant
deposit. The monies shall be allocated as follows:
a) Prepaid Rent.
$N/A of the Deposit shall be applied to monthly rent due for the
N/A month of the Lease term.
b) Tenant Deposit.
$7,500 of the Deposit shall be applied to the Tenant deposit for the
performance by Tenant of the provisions of the Lease. If Tenant is in
default, Landlord can use the Tenant deposit, or any portion of it, to
cure the default or to compensate Landlord for all damage sustained by
it resulting from Tenant's default. Tenant shall on demand immediately
pay to Landlord the sum necessary to replenish the Tenant deposit to
that initially deposited with Landlord. If Tenant is not in default at
the expiration or termination of this Lease, Landlord shall return the
Tenant deposit to Tenant, less any amounts necessary to return the
Premises to their original condition, reasonable wear and tear excepted.
Landlord's obligations with respect to the Tenant it deposit are those
of a debtor and not a trustee. Landlord may maintain the Tenant deposit
separate and apart from Landlord's general funds or may commingle that
Tenant deposit with Landlord's general and other funds. Landlord shall
not be required to pay Tenant interest on the Tenant deposit. In the
event that this Lease is terminated before the end of full term for any
reason, any rent paid for any period beyond the actual termination date
shall be considered an additional Tenant deposit.
7. USE. Tenant shall use the Premises for Office/production/warehousing and
incidental uses and hereby agrees that it has determined to its
satisfaction that the Premises can be used for those purposes. Tenant
waives any right to terminate this lease in the event the Premises
cannot be used for such purposes during the Lease term. The premises may
not be used for any other purpose without Landlord's written consent.
Tenant shall not do or permit anything to be done in or about the
Premises or bring or keep anything therein which will in any way
increase the existing rate of or affect any fire or other insurance upon
the Building or any of its contents, or cause cancellation of insurance
policy covering the Building or any part thereof or any way obstruct or
interfere with the rights of other tenants or occupants of the Building
or injure or annoy them or use or allow the Premises to be used for any
improper, immoral, unlawful or objectionable purpose. Tenant shall not
commit or suffer to be committed any waste in or upon the Premises.
Tenant shall not place upon or install in windows or other openings or
exterior sides of doors or walls of the Premises any signs, symbols,
drapes or other materials without written consent of Landlord.
Tenant shall not, without Landlord's prior written consent, keep any
substances designated as, or containing components designated as,
hazardous, dangerous, toxic, or harmful, and/or subject to regulation
under any federal, state, or local law, regulation, or ordinance on or
around the Premises, common area, or property, except office supplies,
ordinary cleaning products and the like, normally found in general
business offices, which Tenant shall use, store and dispose of in
accordance with manufacturer's and suppliers' recommendations and all
applicable laws. Tenant shall be fully and completely liable to Landlord
for any and all cleanup costs and any and all other charges, fees, fines
expenses and penalties relating to the use, storage,
46
<PAGE> 5
disposal, transportation, generation or sale by Tenant (or its
employees, agents, contractors or invitees) of hazardous substances on
the Premises.
Landlord gives Tenant and its employees, authorized representatives, and
business invitees a nonexclusive right to the reasonable use and
enjoyment of the Common Areas, subject to Landlord's rights set forth
herein.
8. TENANT'S SHARE OF COMMON COSTS AND EXPENSES. Tenant shall pay to
Landlord, as additional rent, an amount estimated by Landlord to be
Tenant's Share of Common Costs and Expenses ("Tenant's Share"). Tenant's
Share shall be payable on or before the first day of the first full
calendar month of the term hereof or upon Tenant's occupancy, whichever
first occurs, and on the first day of each and every successive calendar
month thereafter during the term hereof. Tenant's Share for any period
less than one month shall be paid by the Tenant on a per diem basis,
based on a thirty (30) day month.
Tenant's Share shall be equal to 16.6% of the total Common Costs and
Expenses; which percentage is determined by dividing the square footage
of the Premises by the total rentable square footage of the Building.
Should the total rentable square footage of the Building change for any
reason whatsoever, the percentage set forth herein shall be subject to
adjustment accordingly. Tenant's Share is estimated to be equal to
$0.155 for each square foot of the Premises per month for the first
accounting period of the Lease term which is then estimated to equal
$1,491.10 per month for the first accounting period of the Lease term.
An accounting period is a calendar year except the first accounting
period shall commence on the date the Lease term or Tenants occupancy
commences, as the case may be, and the last accounting period shall end
on the date the Lease term expires. The first accounting period of the
Lease term shall be the first full calendar year in which the Lease term
or Tenant's occupancy, as the case may be, commences. Landlord can
adjust the Estimated Common Costs and Expenses at the commencement of
each new accounting period throughout the Lease term, whereupon Tenant's
Share shall be adjusted accordingly. If, at any time during any
accounting period, Landlord determines that the actual Common Costs and
Expenses for such accounting period will vary by more than five percent
(5%) from Landlord's original estimate, Landlord may, by written notice
to Tenant, adjust the Common Costs and Expenses for the remainder of
such accounting period, and accordingly, Tenant's Share to be paid
hereunder. Landlord shall furnish to Tenant, after each accounting
period, a statement showing the actual total Common Costs and Expenses,
the actual Tenant's Share, and the payments made by Tenant as part of
its Tenant's Share during such accounting period. After Landlord
supplies Tenant with a Common Area Costs and Expense Statement for the
previous year, Tenant shall have sixty (60) days to request an audit of
Landlord's books, with respect to this Lease, by an independent
accounting firm acceptable to Tenant and Landlord. The cost of audit
shall be the Tenant's unless the audit discovers an overcharge of more
than 5% in which case Landlord shall pay for audit and pay Tenant the
amount overcharged. If an audit discovers Landlord undercharged the
Tenant, the Tenant shall pay to Landlord additional Common Area costs,
and pay any costs related to the audit. If Tenant does not exercise it's
right to audit within the 60 (sixty) days after receiving the Common
Area Statement, Tenant has accepted Common Area Statement as correct and
waives all rights in the future to audit the year in question. If the
actual Tenant's Share exceeds Tenant's payments, Tenant shall pay to
Landlord the deficiency within thirty (30) days of Tenant's receipt of
such statement. If Tenant's payments made during tile accounting period
exceed the actual Tenant's Share, Landlord may, at Landlord's sole
election pay the excess to Tenant at the time Landlord furnishes said
statement, or credit the excess
<PAGE> 6
toward Tenant's payments of Tenant's Share in the next succeeding
accounting period.
Common Costs and Expenses shall include the "Property Taxes" and
"Operating Expenses." "Property Taxes" shall include, without
limitation, all real and personal property taxes, charges and
assessments imposed on the Premises, Building, Property or Common Areas;
and any other taxes, charges or assessments assessed against the
Landlord, Premises, Building, Property, or Common Areas in connection
with the use or occupancy of the Premises at any time during tile term
of this Lease. "Operating Expenses" shall mean the annual Operating
Expenses which include, without limitation, all operating costs incurred
by Landlord or on behalf of the Premises in maintaining, operating and
providing services to and for the Building, Property, Common Areas and
the Corporate Park, including, without limitation, the costs of
utilities, supplies, insurance, independent contractors, minor roof
repair, property managers, other suppliers, compensation of all persons
who perform regular and recurring duties connected with the Building,
Property, and Common Areas, its equipment, utilities, sprinkler systems,
and parking facilities including a fund to seal coat and restripe,
thereto, and allowance to Landlord or Landlord's agent for supervision
of such maintenance, operation, services and repair of the Building,
Property, and Common Areas and any and all assessments charged to
Landlord or the Property by or through the Owners Association of the
Corporate Park, if any, in connection with the operation, repair and
maintenance of the Common Areas or the Corporate Park.
9. REPAIR RESPONSIBILITY.
a) By taking possession of the Premises, Tenant shall be deemed to
have accepted the Premises as being in good, sanitary order,
condition and repair. Tenant shall, when and if needed, at
Tenant's sole expense, make repairs to the Premises and every
part thereof, including without limitation the heating,
ventilating and air conditioning system (if any) serving tile
Premises. Tenant shall Surrender the Premises to Landlord in
good condition upon the expiration or sooner termination of this
Lease; provided, however, that Tenant shall not be held
responsible for damage to the Premises from causes beyond the
reasonable control of Tenant, to the extent covered by
Landlord's fire and extended coverage insurance policy, or for
ordinary wear and tear. Except as specifically provided in an
addendum, if any, to this Lease, Landlord shall have no
obligation whatsoever to alter, remodel, improve, repair,
decorate or paint the Premises or any part thereof and the
parties hereto affirm that Landlord has made no representations
to Tenant respecting the condition of the Premises or the
Building except as specifically herein set forth. Truck doors in
Tenant Premises shall be maintained in good condition by
Tenant.
b) Tenant is responsible for maintenance and repair of HVAC
equipment and shall contract to have scheduled maintenance
performed, or Landlord at its option may engage a maintenance
firm to maintain the heating, ventilating and air conditioning
system (if any) servicing the Premises. Tenant shall pay to
Landlord, or, at Landlord's election, directly to the
maintenance firm, Tenant's share of the cost of such
maintenance.
c) Except as provided herein, Tenant shall, at its expense, clean,
maintain and keep in good repair throughout the term of this
Lease the entire Premises and appurtenances, including without
limitation, signs, windows, doors, skylights, light fixtures,
and trade fixtures.
<PAGE> 7
d) Notwithstanding the provisions of Article 9.a. herein above, but
subject to the provisions of Paragraph 15, Landlord shall repair
and maintain the structural portions of the Building, including
tile, basic plumbing, air conditioning, heating, and electrical
systems, installed or furnished by Landlord only in so far as
such heating, air conditioning and electrical systems provide
service to the entire Building, unless such maintenance and
repairs are caused in part or in whole by the act, neglect,
fault or omission of any duty by the Tenant, its agents,
servants, employees or invitees, in which case Tenant shall pay
to Landlord the reasonable costs of such maintenance and
repairs. Landlord shall not be liable for any failure to make
any such repairs or to perform any maintenance unless Such
failure shall persist for an unreasonable time after written
notice of the need of such repairs or maintenance is given to
Landlord by Tenant. Except as provided in Articles 14 and 15
hereof, there shall be no abatement of rent and no liability of
Landlord by reason of any injury to or interference with
Tenant's business arising from (the making of any repairs,
alterations or improvements in or to any portion of the Building
or (the Premises or to fixtures, appurtenances and equipment
therein. Tenant waives the right to make repairs at Landlord's
expense under any law, statute or ordinance now or hereafter in
effect.
10. MAINTENANCE AND MANAGEMENT
a) Landlord shall maintain the Common Areas in good condition at
all times. Landlord shall have the right to:
1. Establish and enforce reasonable written rules and
regulations applicable to all tenants concerning the
maintenance, management, use and operation of the Common
Areas.
2. Make reasonable changes to the Common Areas including,
without limitation, changes in the location of
driveways, entrances, exits, vehicular parking spaces,
parking area, or the direction of the flow of traffic.
b) Common Areas, as defined in this Lease, mean all parts of the
Building, and related land areas and facilities outside the
individual Premises but constituting a part of the Property.
Common areas include, without limitation:
1. The property upon which the Premises are located,
pedestrian walkways and patios, landscaped areas,
sidewalks, loading areas, parking areas and roads
located oil the Property.
2. The structural parts of the Building and other
improvements in which the Premises are located, which
structural parts include only (lie foundation, bearing
and exterior walls (excluding glass and doors),
sub-flooring, and roof (excluding skylights).
3. The unexposed electrical, plumbing, and sewage systems
lying outside the Premises.
4. Window frames, gutters, and downspouts on the Building
in which the Premises are located.
5. Those certain open areas, landscaped areas, and
roadways, utility systems and facilities located outside
tile Premises, Property and Building but constituting a
part of the Corporate Park.
c) Landlord shall not be liable, nor shall the rent be abated
because of interruption of services caused by accident, strikes,
necessity for repairs, or for any other reason beyond its
control.
<PAGE> 8
11. UTILITIES. Tenant shall pay prior to delinquency for heat, light, water
and other utility services supplied to the premises and will pay any
required deposits. Water sewer and other utility charges for which
separate billings are not available shall be prorated by Landlord based
on the ratio for the number of square feet in the building; provided,
however, that Landlord may increase Tenant's pro rata portion of any
such charges to reflect unusual or excessive utility system demands.
Separate charges may be made to reflect unusual or excessive utility
system demands where not separately metered.
12. ALTERATIONS AND ADDITIONS BY TENANT. Tenant may make, at its sole
expense, such additional improvements or alterations to the Premises
which it may deem necessary or desirable. However, any repairs or new
construction by Tenant shall be done in conformity with plans and
specifications approved by Landlord. All work performed shall be done in
a workmanlike manner and with materials (where not specifically
described in the specifications) of tile quality and appearance standard
in the Building and shall become the property of the Landlord. Landlord
may require Tenant to remove any improvements or alterations at the
expiration of tile term, such removal to occur at Tenant's sole cost and
expense.
LIENS. Tenant shall keep the Premises and the property in which the
Premises are situated free from any liens arising out of any work
performed, materials furnished or obligations incurred by Tenant.
Landlord may require, at Landlord's sole option, that Tenant shall
provide to Landlord, at Tenant's sole cost and expense, a lien and
completion bond in an amount equal to one and one-half(1-1/2) times any
and all estimated cost of any improvements, additions, or alterations in
the Premises, to insure Landlord against any liability for mechanics'
and materialmen's liens and to insure completion of the work.
13. INSURANCE. Landlord shall procure throughout the term of the Lease fire
and extended coverage insurance in the amount of the full insurable
value of the Building containing the Premises. Tenant assumes the risk
of loss of its furnishings, trade fixtures, equipment and supplies which
shall not be insured under the above policy. Tenant agrees to procure
and maintain throughout the term of the Lease, at Tenant's sole cost and
expense, liability insurance underwritten by a firm satisfactory to
Landlord covering all persons and property on the Premises in connection
with Tenant's business in the following amounts:
a. $1,000,000 combined Single Limit for Bodily Injury and Property
Damage, or
b. $ 1,000,000 each occurrence for Bodily Injury and $500,000 each
occurrence for Property Damage.
The Landlord and the Property Management Company shall be named as an
additional insured and shall be furnished with a certificate of
insurance. Such coverage shall be primary and noncontributing with any
insurance carried by the Landlord. The liability insurance policy shall
contain endorsements requiring 30 days notice to Landlord prior to any
cancellation or any reduction in amount of the coverage. Tenant, as a
material part of the consideration to be rendered to Landlord, hereby
agrees to defend, indemnify and hold harmless Landlord against any and
ail claims, costs and liabilities, including reasonable attorney's fees,
arising from Tenant's use of the Premises, or from the conduct of
Tenant's business, or from any activity, work or things done, permitted
or suffered by Tenant or any of Tenant's agents, contractors or
employees.
<PAGE> 9
14. DESTRUCTION. If the Premises of the Building is destroyed or damaged by
fire, earthquake or other casualty to the extent that they are
untenantable in whole or in part, then Landlord may, at Landlord's
option, proceed with reasonable diligence to rebuild and restore the
Premises or such part thereof, provided that within thirty (30) days
after such destruction or injury Landlord shall in writing notify Tenant
of Landlord's intention to do so. During the period from destruction or
damage until restoration, the rent shall be abated in the same ratio as
that portion of the Premises which Landlord determines is unfit for
occupancy shall bear to the whole Premises. If damage is due to the
fault or neglect of Tenant or its agents, employees, invitees or
licensees there shall be no abatement of rent. If Landlord shall fail to
notify Tenant, then this Lease shall, and the expiration of the time for
the giving of notice as herein provided, be deemed terminated and at an
end.
15. CONDEMNATION. If any part of the Premises are take under power of
eminent domain, or sold Linder the threat the exercise of said power,
this Lease shall terminate as to the part so taken as of the date the
condemning authority takes possession. If more than 25% of the floor
area of Premises is taken by condemnation, Tenant may, by a written
notice within ten (10) days after notice of such taking (or absent of
such notice, within ten (IO) days after the condemning authority takes
possession) terminate this Lease as of the date the condemning authority
takes possession. If Tenant does not so terminate, this Lease shall
remain in effect as to the portion of the Premises remaining except that
the rent shall be reduced in the proportion that the floor area taken
bears to the original total floor area; provided that if circumstances
making abatement based on floor are unreasonable, the rent shall abate
by a reasonable amount to be determined by Landlord. In the event that
Tenant elects not to terminate the Lease with respect to any part of the
Premises remaining after condemnation, Landlord shall have no
responsibility to restore such part of the Premises to its condition
prior to condemnation. Any award for the taking of all or part of the
Premises tinder the power of eminent domain, including payment made
under threat of the exercise of such power, shall be the property of
Landlord, whether made as compensation for diminution in value of the
leasehold or for the taking of the fee or as severance damages;
provided, that Tenant shall be entitled to such compensation as may be
separately awarded or recoverable by Tenant in Tenant's own right for
the loss of or damage to Tenant's trade fixtures and removable personal
property. Landlord shall not be liable to Tenant for tile loss of the
use of all or any part of the Premises taken by condemnation.
16. ASSIGNMENT AND SUBLETTING. Tenant shall not assign, let or sublet this
Lease or any part thereof, either by operation of law or otherwise, or
permit any other party to occupy all or any part of the Premises,
without first obtaining the written consent of Landlord. This Lease
shall not be assignable by operation of law. Landlord reserves the right
to recapture the Premises, or applicable portion thereof, in lieu of
giving its consent by notice given to Tenant within twenty (20) days
after receipt of Tenant's written request for assignment or subletting.
Such recapture shall terminate this Leases to the applicable space
effective on the prospective date of assignment or subletting, which
shall be the last day of a calendar month and not earlier than sixty
(60) days after receipt of Tenant's request. If Landlord elects not to
recapture and thereafter gives its consent, Landlord and Tenant agree
that Landlord may charge Tenant a reasonable sum to reimburse Landlord
for legal and administrative costs incurred in connection with such
consent; and that from tile date of such assignment, let, or sublease of
this Lease, Landlord and Tenant shall share equally in any rental and
other proceeds paid to Tenant in excess of the rent to be paid to
Landlord under the terms of this Lease. If Tenant is a corporation, any
transfer of this Lease from Tenant by merger, consolidation or
liquidation or
<PAGE> 10
any change in the ownership, or power to vote the majority of the
outstanding voting stock of Tenant shall constitute an assignment for
the purpose of this section. If Tenant is a partnership, any change in
the individuals or entities of which the partnership is composed shall
constitute an assignment for purposes of this section. Subject to the
provisions above, this Lease shall be binding upon and inure to the
benefit of the parties, heirs and successors and assigns.
17. DEFAULT.
a. The occurrence of any one or more of the following events shall
constitute a material default and breach of the Lease by Tenant:
1. Vacation or abandonment of all or any portion of the
Premises.
2. Failure by Tenant to make any payment required as and
when due, where such failure shall continue after three
(3) days written notice from Landlord.
3. Failure by Tenant to observe or perform any of the
covenants, conditions or provisions of this Lease, other
than the making of any payment, where such failure shall
continue for a period of thirty (30) days after written
notice from Landlord.
4. (i) The making by Tenant of any general assignment or
general arrangement for the benefit of creditors;(ii)
the filing by or against Tenant a petition in
bankruptcy, including reorganization or arrangement,
unless, in the case of a petition filed against Tenant,
the same is dismissed with in thirty(30) days;(iii) the
appointment of a trustee or receiver to take possession
of substantially all of tenant's assets located at
Premises or of tenant's interest in this Lease; (iv) the
seizure by any department of any government or any
office thereof of the business or property of tenant;
and (v) adjudication that Tenant is bankrupt.
b. Notice by Tenant of Default. Tenant shall notify Landlord
promptly of any default not by its nature necessarily known to
Landlord.
c. Default by Landlord. Landlord shall not be in default unless
Landlord fails to perform its obligations within thirty (30)
days after notice by Tenant specifying wherein Landlord has
failed to perform; provided that if the nature of Landlord's
obligation is such that more than thirty (30) days are required
for performance, Landlord shall not be in default if Landlord
commences performance within thirty (30) days of Tenant's notice
and thereafter completes Landlord's performance within a
reasonable time.
18. REMEDIES IN DEFAULT. In the event of any default or breach, Landlord
may, at any time without waiving or limiting any other right or remedy,
reenter and take possession of the premises or terminate the Lease, or
pursue any remedy allowed by law or equity. Tenant agrees to pay
Landlord the cost of recovering possession of the Premises, the expenses
of reletting, and any other costs of damages arising out of Tenant's
default, including, without limitation, the costs of removing persons
and property from the Premises, the costs of preparing or altering the
Premises for reletting broker's commissions and legal fees.
Notwithstanding any reentry or termination, the liability of tenant for
the rent provided for herein shall not be extinguished for the balance
of the term of this Lease, and Tenant covenants and agrees to make good
to the Landlord any deficiency arising from reletting the Premises at a
lesser rent than herein agreed to. Tenant shall pay such deficiency each
month as the amount thereof is ascertained by the Landlord.
<PAGE> 11
19. ACCESS. Tenant shall permit Landlord to enter the Premises at reasonable
times for (lie purpose of inspecting, altering and repairing the
Premises and ascertaining compliance with the provisions hereof by any
Tenant, but nothing herein shall be construed as imposing any obligation
on Landlord to perform any such work or duties. Landlord may also show
the Premises to prospective purchasers or tenants at reasonable times,
provided that Landlord shall not unreasonably interfere with Tenant's
business operation.
20. WAIVER OF SUBROGATION. Tenant and Landlord each releases and relieves
the other and waives its entire right of recovery against the other for
loss or damage arising out of or incident to the perils covered by fire
and extended coverage, and liability insurance endorsements approved for
use in Washington which occur in, on or about the Premises, whether
caused by the negligence of either party, their agents, employees, or
otherwise. Each party shall obtain from its insurer(s) provisions
permitting waiver of any claim against the other party for loss or
damage within the scope of the above insurance. The release and waiver
of recovery contained herein shall be limited by, and shall be
coextensive with, the waiver provisions of the insurance policies
procured and maintained by the parties pursuant to this Lease. Lf either
Landlord or Tenant is unable to obtain its insurer's permission to
waiver of any claim against the other party, such party shall promptly
notify the other party of such inability.
21. HOLD-OVER TENANCY. lf (without execution of a new lease or
written extension) Tenant shall hold over after the expiration of the
term of this Lease with Landlord's written consent, Tenant shall be
deemed to be occupying the Premises as a Tenant from month to month,
which tenancy may be terminated as provided by law. If Tenant shall hold
over after expiration of the term of this Lease without Landlord's
written consent, Tenant's rent payable hereunder shall be increased by
fifty percent (50%) over Tenant's rent required in the last month of the
term of this lease. During any such tenancy, Tenant agrees to be bound
by all of the terms, covenants and conditions as specified, insofar as
applicable.
22. COMPLIANCE WITHIN LAW. Tenant shall not use the Premises or permit
anything to be done in or about the Premises which will in any way
conflict with any law, statute, ordinance or governmental rule or
regulation now in force or which may hereafter be enacted or
promulgated. Tenant shall, at its sole cost and expense, promptly comply
with all laws, statutes, ordinances and governmental rules, regulations
or requirements now in force or which may hereafter be in force and with
the requirements of a board of fire insurance underwriters or other
similar bodies now or hereafter constituted, relating to, or affecting
the conditions, use or occupancy of the premises, excluding structural
changes not related to or affected by Tenant's improvements or acts. The
judgment of any court of competent jurisdiction of the admission of
Tenant in any action against Tenant, whether Landlord be a part thereto
or not, that Tenant has violated any law, statute, ordinance or
governmental rule, regulation or requirement, shall be conclusive of the
fact as between the Landlord and Tenant.
<PAGE> 12
23. RULES AND REGULATIONS*. Tenant shall faithfully observe and comply with
tile rules and regulations that Landlord shall from time to time
promulgate. Landlord reserves the right from TIME to time to make ail
reasonable modifications to said rules. The additions and modifications
to those rules shall be binding upon Tenant upon delivery of a copy of
them to Tenant. Landlord shall not be responsible to Tenant for the
nonperformance of any said rules by any other tenants or occupants.
*See Exhibit C.
24. PARKING. Tenant shall have the right to use, in common with other
tenants and occupants of the Building, the parking facilities of the
Building subject to the rules and regulations, and any charges of
Landlord for such parking facilities which may be established or altered
by Landlord at any time or from time to time during the term hereof.
25. MORTGAGES, DEEDS OF TRUST, PURCHASERS (ESTOPPEL STATEMENT). It is
understood and agreed that Landlord may sell, mortgage, or grant deeds
of trust with respect to the Premises, the Building or the Property.
Tenant agrees to execute and return, within fifteen (15) days following
Landlord's request, such reasonable certificates as may be required by a
mortgagee or trust deed beneficiary stating that the Lease is in full
force and effect and tile dates to which the rent and charges have been
paid. If Tenant does not return Estoppel Certificate within this period
of time, landlord shall send an Estoppel Certificate to Tenant by
Certified Mail. If Tenant has not responded within Fifteen (15) days
after delivery by Certified Mail of the Estoppel Certificate to Tenant,
it will constitute admission that all information presented on tile
Estoppel Certificate is correct. Tenant shall be responsible for all
costs incurred by landlord for handling Estoppel Certificates after the
initial fifteen (15) day period. Upon a foreclosure or conveyance in
lieu of foreclosure, and a demand by Landlord's successor, Tenant shall
attorn to and recognize such successor as Landlord under this Lease.
26. SUBORDINATION. Tenant agrees that this Lease shall be subordinate to
the lien of any mortgage or deeds of trust now or hereafter placed
against the Property or Building of which the premises comprise a part,
and to all renewals and modifications, supplements, consolidations and
extensions thereof, provided, however, in the event that any mortgagee
or beneficiary shall so elect, Landlord reserves the right to
subordinate said mortgage lien to this case upon tile terms required by
such mortgagee or beneficiary. Notwithstanding the above, so long as
Tenant is not in default herein, this lease shall remain in full force
and effect for the full term hereof.
27. TENANT'S PROPERTY. Furnishings, trade fixtures and equipment installed
by Tenant shall be tile property of tenant. On termination of the Lease,
Tenant shall remove any such property. Tenant shall repair or reimburse
Landlord for the cost of repairing any damage to the Premises resulting
the installment or removal of such properly.
28. REMOVAL OF PROPERTY. All personal property of tenant remaining on the
Premises after reentry or termination of this Lease shall conclusively
be deemed abandoned and may be removed by Landlord. Landlord may store
such property in any place selected by Landlord, including but not
limited to a public warehouse, at the expense and risk of the owner
thereof, with tile right to sell such stored property without notice to
Tenant. The proceeds of such sale shall be applied first to the cost of
such sale, second to the payment of the cost of removal and storage, if
any, and third to the payment of any other sums of
<PAGE> 13
money which may then be due from Tenant to Landlord under any of the
terms hereof, and the balance, if any, to be paid to Tenant.
29. PERSONAL PROPERTY TAXES. Tenant shall pay, or cause to be paid, before
delinquency, any and all personal property taxes levied or assessed and
which become payable during the term hereof upon Tenant's leasehold
improvements, equipment, furniture, fixtures and personal property
located in the Premises. In the event any or all of the Tenant's
leasehold improvements, equipment, furniture, fixtures and personal
property shall be assessed and taxed with the Building, Tenant shall pay
to Landlord its share of such taxes within ten (10) days after delivery
to Tenant by Landlord of a statement in writing setting forth the amount
of such taxes applicable to Tenant's personal property.
30. NOTICES. All notices under this Lease shall be in writing and shall be
effective when mailed by certified mail or delivered to Landlord, c/o
The Allan Jones Company, P.O. Box 3277 Redmond, WA 98073 or to Tenant at
the following address, or to such other address as either party may
designate to the other in writing from time lo time:
Tenant Mailing address
8340 154th Ave. NE
Redmond, WA 98052
31. GENERAL PROVISIONS.
a. Plats and Riders. Clauses, plats and riders, if any, signed by
tile Landlord and the Tenant and endorsed on or affixed to this
Lease are a part thereof
b. Waiver. The waiver by either party of any term, covenant or
consolidation herein contained shall not be deemed to be a
waiver of such term, covenant or condition on any subsequent
breach of the same or any other term, covenant or condition
herein contained. The subsequent acceptance of rent hereunder by
Landlord shall not be deemed to be a waiver of any preceding
breach by Tenant of any term, covenant or condition of this
Lease, other than the failure of the Tenant to pay the
particular rental so accepted, regardless of Landlord's
knowledge of such preceding breach at the time of acceptance of
such rent. No covenant, term, or condition of this Lease shall
be deemed to have been waived by Landlord unless such waiver
shall be in writing and signed by Landlord's duty authorized
representatives.
c. Joint Obligation. If there be more than one Tenant, the
obligations hereunder imposed upon Tenants shall be joint and
several.
d. Marginal Headings. The marginal headings and Section titles in
the Sections of this Lease are not a part of this Lease and
shall have no effect upon the construction or interpretation of
any part hereof.
c. Time. Time is of the essence of this lease and each and all of
its provisions in which performance is a factor.
Recordation. Tenant shall not record this Lease or a short form
memorandum hereof without the prior written consent of Landlord.
g. Late Charges. Tenant acknowledges that late payment by tenant to
Landlord of rent or other Sums due hereunder will cause Landlord
to incur costs not contemplated by this lease, the exact amount
of which would be extremely difficult and impractical to
ascertain. Such costs include, but are not limited to,
processing and accounting charges, and late charges which may be
imposed on Landlord by the terms of any mortgage or trust deed
covering the Premises;
<PAGE> 14
therefore, in the event Tenant should fail to pay any
installment of rent or any other sum due hereunder within
ten(10) days after such amount is due Tenant shall pay to
Landlord as additional rent a late charge equal to 5% of each
installment. A $20.00 charge will be paid by Tenant to Landlord
for each returned check. In addition, any sum due and payable to
Landlord tinder the terms of this lease which is not paid when
due shall bear interest at the rate of 2% plus the published
prime rate of interest of Seattle First National Bank, Main
Office, in effect as of the first day of the calendar month of
such default (and adjusted accordingly as said prime rate of
interest is adjusted) from the date the same becomes due and
payable until paid.
h. Prior Agreements. This Lease contains all of the agreements of
the parties hereto with respect to any matter covered or
mentioned in this Lease, and no prior agreements or
understanding pertaining to any such matters shall be effective
for any purpose. No provision of this Lease may be amended or
added to except by an agreement in writing signed by the parties
hereto or their respected successors in interest. This Lease
shall not be effective or binding on any party until fully
executed by both parties hereto.
i. Inability to Perform. This Lease and the obligations of the
Tenant hereunder shall not be affected or impaired because the
Landlord is unable to fulfill any of its obligations hereunder
or is delayed in doing so, if such inability is caused by reason
of strike, labor trouble, acts of God, or any other cause beyond
the reasonable control of the Landlord.
j. Attorney's Fees. In the event either party requires the services
of an attorney in connection with enforcing the terms of this
Lease, or in the event suit is brought for the recovery of any
rent due tinder this Lease, or for the breach of any covenant or
condition of the Lease, or for the restitution of said Premises
to Landlord and/or eviction of Tenant during said term or after
the expiration thereof, the prevailing party will be entitled to
a reasonable sum for attorney's fees, witness fees and court
costs, including costs of appeal.
k. In the event of any sale of the Building or Property, or any
assignment of this lease by Landlord, Landlord shall be and is
hereby entirely freed and relieved of all liability under any
and all of its covenants and obligations contained in or derived
from this Lease arising out of any act, occurrence, or omission
occurring after the consummation of such sale or assignment; and
the purchaser or assignee at such sale or assignment or any
subsequent sale or assignment of Lease, the Property or
Building, shall be deemed, without any further agreement between
the parties or their successors in interest or between the
parties and any SUCH purchaser or assignee to have assumed and
agreed to carry out any and all of the covenants and obligations
of the Landlord under this Lease.
l. Name. Tenant shall not use the name of the Building or of the
development in which the Building is situated for any purpose
other than as an address of the business to be conducted by the
Tenant in the Premises.
<PAGE> 15
m. Severability. Any provision of this Lease which shall be found
to be invalid, void or illegal by a court of competent
jurisdiction shall in no way affect, impair or invalidate any
other provision hereof and such other provision shall remain in
full force and effect.
n. Cumulative Remedies. No remedy or election hereunder shall be
deemed exclusive but shall, wherever possible, be cumulative
with all other remedies at law or in equity.
o. Choice of Law. This Lease shall be governed by the laws of the
State in which the Premises are located.
p. Light, Air and View. Landlord does not guarantee the continued
present status of light, air, or view over any improvements
adjoining or in the vicinity of the Building.
q. Interpretation. This Lease has been submitted to the scrutiny of
all parties hereto and their counsel, if desired, and shall be
given a fair and reasonable interpretation in accordance with
tile words hereof, without consideration or weight being given
to its having been drafted by any party hereto or its counsel.
r. Keys. Upon termination of this Lease, Tenant shall surrender all
keys to the Premises to Landlord at the place then fixed for
payment of rent and shall inform Landlord of all combination
locks, safes, and vaults, if any, in the Premises.
32. SIGNS. The sign criteria for the Premises is set forth in Exhibit D.
33. AUTHORITY OF PARTIES.
a. Corporate Authority. If Tenant is a corporation, each individual
executing this Lease on behalf of said corporation represents
and warrants that he is duly authorized to execute and deliver
this Lease on behalf of said corporation, in accordance with a
duly adopted resolution of the board of directors of said
corporation or in accordance with the by-laws of said
corporation, and that this Lease is binding upon said
corporation in accordance with its terms.
b. Limited Partnerships. If the Landlord herein is a limited
partnership, it is understood and agreed that any claims by
Tenant on Landlord shall be limited to the assets of the limited
partnership, and furthermore, Tenant expressly waives any and
all rights to proceed against the individual partners or the
officers, directors or shareholders of any corporate partner,
except to the extent of their interest in said limited
partnership.
35. COMMISSIONS. Willows East Management shall pay a commission or fee to CB
Richard Ellis in the amount of per agreement. Each party represents that
it has not had dealings with any other real estate broker or salesman
with respect to this Lease, and each party shall defend, indemnify and
hold harmless tile other party from all costs and liabilities including
reasonable attorney's fees resulting from any claims to the contrary.
THIS LEASE IS SUBJECT TO ACCEPTANCE BY LANDLORD.
<PAGE> 16
IN WITNESS WHEREOF, the parties hereto have executed this lease the date
and year above written.
EXECUTED BY LANDLORD, this 3rd day of November, 1999.
By /s/ David H. Veblen
---------------------------------
Its
EXECUTED BY TENANT, this 29th day of October, 1999.
By /s/ William D. St. John
---------------------------------
Title President
This Lease is personally guaranteed by:
<PAGE> 17
STATE OF WASHINGTON
COUNTY OF KING
I certify that I know or have satisfactory evidence that William D. St. John is
the person who appeared before me, and said person acknowledged that (he/she)
signed this instrument, on oath stated that (he/she) was authorized to execute
the instrument and acknowledged it as the President of Nutraceutix, Inc. to be
the free and voluntary act of such person for the uses and purposes mentioned in
the instrument.
Dated 10/29/99
NOTARY PUBLIC in and for the State
of Washington, residing at Seattle
My commission expires: 11/22/2000
STATE OF WASHINGTON
COUNTY OF KING
I certify that I know or have satisfactory evidence that is the person
who appeared before me, and said person acknowledged that (he/she)
signed this instrument, on oath stated that (he/she) was authorized to
execute the instrument and acknowledged it as the of to be the free and
voluntary act of such party for the uses and purposes mentioned in the
instrument.
Dated
NOTARY PUBLIC in and for the State
of Washington, residing at
My commission expires:
STATE OF WASHINGTON
COUNTY OF KING
I certify that I know or have satisfactory evidence that is the person
who appeared before me, and said person acknowledged that (He/she)
signed this instrument, on oath stated that (he/she) was authorized to
execute the instrument and acknowledged it as the of to be the free and
voluntary act of such party for the uses and purposes mentioned in the
instrument.
Dated
NOTARY PUBLIC in and for the State
of Washington, residing at
My commission expires:
<PAGE> 18
EXHIBIT C
Attached to and made a part of Lease bearing the
Lease Reference Date of _______________, 1999 between
David Veblen/Mortensen Trust, as Landlord and
Nutraceutix, Inc. as Tenant.
RULES AND REGULATIONS
1. The sidewalks, entrances, passages, courts, vestibules, stairways,
corridors or flails shall not be obstructed or used for any purpose
other than ingress and egress.
2. No awning or other projection shall be attached to the outside walls of
the Entire Premises without the proper written consent of the Landlord.
No curtains, blinds, shades or screens shall be attached to or hung in,
or used in connection with, any window or door of the Premises, without
the prior written consent of the Landlord. All electrical ceiling
fixtures hung in offices or spaces along the Premises must be approved
by Landlord.
3. No sign, advertisement or notice shall be exhibited, painted, or affixed
by ally Tenant on any part of, or so as to be seen from the outside of,
the Premises or the Entire Premises without the prior written consent of
the Landlord (See Exhibit D - Signage Criteria). In the event of the
violation of tile foregoing by any Tenant, Landlord may remove same
without any liability, and may charge this expense incurred in such
removal to the Tenant violating this rule.
4. The toilets and wash basins and other plumbing fixtures shall not be
used for any purpose other than those for which they were constructed,
and no sweepings, rubbish, rags or other substances shall be thrown
therein. All damage resulting from any misuse of such fixtures shall be
home by the Tenant who, or whose servants, employees, agents, visitors
or licensees shall have caused same.
5. No Tenant shall mark, paint, drill into, or in any way deface any part
of the Premises or the Entire Premises. No boring, cutting or stringing
of wires or laying of linoleum or other similar floor coverings shall be
permitted except with) prior written consent of the landlord as the
Landlord may direct.
6. No Tenant shall cause or permit any unusual or objectionable odors to
escape from the Premises.
7. No Tenant shall occupy or permit any portion of his Premises to be
occupied for the manufacture of liquor, narcotics, or tobacco in any
form, or as a medical office, or as a barber shop or manicure shop. No
Tenant shall engage or pay any employees on the Premises except those
actually working for such Tenant on the Premises. The Premises shall
not be used for lodging or sleeping or for any immoral or illegal
purposes.
8. No Tenant shall make, or permit to be made, any unseemly or disturbing
noises or disturb or interfere with occupants of this or neighboring
buildings or premises or persons having business with them whether by
the use of any musical instrument, radio, phonograph, unusual noise, or
in any other way.
9. No Tenant shall throw anything out of doors or down the passageways.
<PAGE> 19
10. No Tenant shall at any time bring or keep upon the Premises any
inflammable, combustible or explosive fluid, chemical or substance which
is not in conformance with all governmental regulations.
11. No additional locks or bolts of any kind shall be placed upon any of the
doors or windows by any Tenant, nor shall any changes be made in
existing locks or the mechanism thereof without Landlord's prior written
approval. Each Tenant must, upon the termination of its tenancy, restore
to the Landlord all keys of stores, offices, and toilet rooms either
furnished to, or Otherwise procured by, such Tenant, and in the event
of the loss of any keys so furnished, such Tenant shall pay to the
Landlord the cost of replacing the same or of changing the lock or locks
opened by such lost key if Landlord shall deem it necessary to make such
change.
12. All removals, or the carrying in or out of any freight, furniture, or
bulky matter of any description other than that which is part of
Tenant's normal business must take place during the hours which the
Landlord may determine from time to time. The moving of said fixtures or
bulky matter of any kind must be made upon previous notice to the
manager of the Entire Premises and under his/her supervision, and tile
person employed by any Tenant for such work must be acceptable to tile
Landlord. The Landlord reserves the right to inspect all freight or
other bulky articles to be brought into the Entire Premises and to
exclude from the Entire Premises all freight or other bulky articles
which violate any of these Rules and Regulations or the Lease of which
these Rules and Regulations are a part. The Landlord reserves the right
to prohibit or impose conditions upon the installation of the Premises
of heavy objects which might overload the building floors.
13. The Landlord shall have the right to prohibit any advertising by any
Tenant which, in Landlord's opinion tends to impair the reputation of
the entire building or its desirability as a building for its intended
use and upon written notice from Landlord any Tenant shall refrain from
or discontinue such advertising.
14. Any persons employed by any Tenant to do janitor work shall, while in
the Entire Premises but outside of the Premises, be subject to and under
tile control of said manager or of tile Landlord, and Tenant shall be
responsible for all acts of such persons.
15. Canvassing, soliciting and peddling within the Entire Premises are
prohibited and each Tenant shall cooperate to prevent same.
16. All office equipment of any electrical or mechanical nature shall be
placed by Tenants in the Premises in settings designed to absorb or
prevent any vibration, noise or annoyance.
17. No air conditioning unit or other similar apparatus shall be installed
or used by Tenant without the written consent of Landlord.
18. All business identification sign designs shall be submitted to the
Landlord for approval prior to fabrication, in the form of an accurately
scaled drawing showing location, size, letter style and color. Submit
two copies. One will be returned to tile Tenant with either comments or
signed approval.
19. No pets of any kind will be allowed.
<PAGE> 20
EXHIBIT D
SIGNAGE CRITERIA
All proposed tenant signage list to be submitted for review and approval.
Willows East Management
P.O. Box 3277
Redmond, WA 98073
This signage criteria applies to all tenants.
Tenants shall use a licensed sign contractor. Sign shall be approved by
Landlord and Permitted by local jurisdiction.
<PAGE> 21
ADDENDUM "A" TO LEASE
DAVID VEBLEN/MORTENSEN TRUST AND NUTRACEUTIX, INC.
The following items shall be incorporated into this Lease:
1. Tenant shall have the right to occupy premises (after Lease execution)
prior to commencement date.
2. Tenant, at its expense, is permitted to make any improvements to the
property in accordance with all government authorities and obtaining
prior written approval of Landlord which shall not be unreasonably
withheld.
3. Tenant shall have two (2) three-year Options to Renew at the then
prevailing market rate. Tenant shall provide Landlord six (6) months
written notice of its intent to renew.
4. Tenant shall have the right to sublease or assign the space with
Landlord's written consent, which shall not be unreasonably withheld.
5. Tenant, at its sole expense, shall be permitted building signage,
subject to City of Redmond and Landlord approval.
6. Landlord shall provide the following for improvements: $3,500 allowance
for new carpet
- - $3,000 allowance for new ceiling tiles
- - Warrant electrical and plumbing in good working order
- - Have Merit Mechanical inspect HVAC and do any repairs required to insure
units are in good working order
- - Broom clean warehouse.
- - Remove any and all extraneous electric, furniture and debris from
premises
- - Clean/replace/repair mini-blinds in office portion of space.
7. Parking shall be provided free of charge for the term of the Lease and
any Lease extension(s).
/s/ David Veblen /s/ William D. St. John
- ------------------------------------ ------------------------------------
Landlord Tenant
<PAGE> 1
EXHIBIT 10.13
PRODUCT SALES AND SUBLICENSE AGREEMENT
FOR
CONTROLLED DELIVERY TECHNOLOGY AND
MOLECULAR DISPERSION TECHNOLOGY PRODUCTS
This Agreement, dated as of March 6, 2000, is made and entered into by
and between Nutraceutix, Inc. ("Nutraceutix") and MET-Rx, USA, Inc. ("MET-Rx").
Nutraceutix has the exclusive worldwide license, with right to sublicense, (i)
the controlled delivery technology described in U.S. Patent Application
08/958,470 filed October 27, 1997 and any foreign counterpart thereof, and any
continuations, continuations-in-part, divisions, re-issues, additions, renewals
or extensions thereof, and any patents issuing therefrom ("CDT") and (ii) the
molecular dispersion technology currently applied to MET-Rx's Androgen-based
products ("MDT"). MET-Rx wishes to obtain the right to purchase from Nutraceutix
and market under MET-Rx's labels health supplement products and sports nutrition
products which incorporate CDT, MDT or both (hereinafter referred to
collectively as "Licensed Products") and bearing Nutraceutix's trademark for the
CDT and/or MDT, as applicable, as described in the attached Exhibit A (the
"Trademarks"). Therefore, in consideration of the mutual covenants set forth
herein, Nutraceutix and MET-Rx agree as follows:
Section 1. Sublicense.
1.1 Sublicense. Nutraceutix hereby grants MET-Rx a sublicense (the
"Sublicense") from April 1, 2000 through March 31, 2001 to (i) sell products
containing CDT and/or MDT in the North American health supplement market and the
North American sports nutrition market through all trade channels except
multilevel, (ii) use the Trademarks in connection with such marketing and (iii)
use Nutraceutix's research data regarding CDT and MDT (hereinafter referred to
collectively as the "Technology") for such marketing, all on the terms and
conditions set forth herein. In addition, Nutraceutix hereby grants MET-Rx an
option to extend the Sublicense from April 1, 2001 through March 31, 2002,
provided that this option shall be null and void if MET-Rx does not meet the
requirements set forth in paragraph 1.2 below. If MET-Rx does meet the
requirements set forth in paragraph 1.2 below, the Sublicense shall be
automatically extended from April 1, 2001 through March 31, 2002 unless MET-Rx
gives Nutraceutix sixty (60 days prior written notice that it does not wish to
extend the Sublicense. Nutraceutix shall have and at all times retain the right
to produce, market and otherwise distribute other products containing the
Technology and to use the Technology as it sees fit, provided the same does not
violate the terms of the exclusive Sublicense granted by this Agreement.
1.2 Exclusivity. The Sublicense shall be nonexclusive with respect to
sales of Licensed Products in the health supplement market. The Sublicense shall
be exclusive with respect to sales of Licensed Products in the sports nutrition
market so long as MET-Rx meets or exceeds the following requirements:
PAGE 1
<PAGE> 2
(i) MET-Rx shall purchase (both order and pay for) at least
$4,000,000 of finished Licensed Products from Nutraceutix from April 1,
2000 through March 31, 2001, with no less than $700,000 purchased per
calendar quarter.
(ii) MET-Rx shall introduce at least four new Licensed Products
incorporating either CDT or MDT, or both CDT and MDT, by June 1, 2000.
(iii) If the Sublicense is extended pursuant to the option
described in paragraph 1.1 above, MET-Rx will: (a) purchase (both order
and pay for) finished Licensed Products from Nutraceutix during the
period from April 1, 2001 to March 31, 2002, and in each calendar
quarter of said period, in such amounts as MET-Rx and Nutraceutix shall
agree to in writing prior to April 1, 2001; provided that if MET-Rx and
Nutraceutix cannot reach such an agreement prior to April 1, 2001, these
product purchase requirements shall be 120% of the product purchase
requirements set forth in paragraph 1.2 (i) above; and (b) introduce
into the North American sports nutrition market at least four new
Licensed Products incorporating either CDT or MDT, or both CDT and MDT
(in addition to the new products referred to in paragraph 1.2 (ii)
above), by June 1, 2001.
If MET-Rx does not meet or exceed the purchase volume and new product
introduction requirements set forth in parts (i), (ii) and (iii) of this
paragraph 1.2, the Sublicense shall continue in all respects except that it
shall become non-exclusive for the sports nutrition market; provided that MET-Rx
can retain the exclusive rights for the sports nutrition market set forth in the
Sublicense if it cures the purchase volume shortfall within the first fifteen
(15) days of the following calendar quarter. If Nutraceutix is incapable of
delivering Licensed Products as necessary to enable MET-Rx to meet the
requirements set forth in parts (i), (ii) and (iii) of this paragraph 1.2, those
requirements shall be equitably adjusted as necessary to give MET-Rx a realistic
opportunity to comply with them. If MET-Rx fails to meet or exceed the
requirements set forth in parts (i), (ii) and (iii) of this paragraph 1.2,
Nutraceutix's only remedies shall be as set forth in paragraph 1.1 and this
paragraph 1.2, and Nutraceutix shall not be entitled to monetary compensation
for such failure.
1.3 Termination. Nutraceutix shall have the right to terminate the
Sublicense at any time if MET-Rx (i) ceases marketing all Licensed Products for
a period of three (3) or more consecutive months or (ii) breaches this Agreement
(other than failure to meet or exceed the requirements set forth in parts (i),
(ii) and (iii) of paragraph 1.2) and said breach is not cured in accordance with
this paragraph 1.3. If Nutraceutix wishes to terminate the Sublicense because of
such breach by MET-Rx, Nutraceutix shall deliver to MET-Rx a written notice of
termination specifying the breach in question. Thereupon the Sublicense shall
automatically terminate thirty (30) days after the date of such notice unless
MET-Rx cures the breach within said thirty (30) day period; provided that if the
breach cannot reasonably be cured within said thirty (30) day period, the
Sublicense shall not be terminated so long as MET-Rx commences the cure within
said thirty (30) day period and thereafter diligently prosecutes the same to
completion. MET-Rx may terminate the Sublicense at any time upon sixty (60) days
advance written notice to Nutraceutix.
PAGE 2
<PAGE> 3
1.4 Protection of Proprietary Rights. MET-Rx acknowledges that the
Technology and the Trademark involve valuable trademarks, trade secrets and
other proprietary rights of Nutraceutix and Temple University - Of The
Commonwealth System of Higher Education ("Temple"), which is the owner and
Nutraceutix's licensor of the Technology. Nutraceutix and Temple reserve all
such trademarks, trade secrets and other proprietary rights. MET-Rx shall not
infringe or violate, and shall take appropriate precautions for the protection
of, such rights. Without limiting the generality of the foregoing, MET-Rx shall
not reverse engineer or otherwise attempt to discover the Technology, and shall
not apply for or attempt to obtain any proprietary rights in the Technology, the
Trademark, Nutraceutix's or Temple's research data regarding the Technology, or
any other item licensed pursuant to the Sublicense. No title to or ownership of
any item licensed pursuant to the Sublicense is transferred by virtue of the
Sublicense, manufacture of any Licensed Product, or any use by MET-Rx of the
Sublicense, a Licensed Product or any such item.
Section 2. Product Purchases and Sales.
2.1 Exclusive Supplier. Nutraceutix shall manufacture all Licensed
Products. MET-Rx shall, and shall ensure that each sublicensee, contractor or
agent of MET-Rx shall, acquire Licensed Products exclusively from Nutraceutix
pursuant to this Agreement. MET-Rx shall not, and shall ensure that each
sublicensee, contractor or agent of MET-Rx shall not, purchase or otherwise
acquire Licensed Products or any purported substitute therefor from any person
or entity other than Nutraceutix. If Nutraceutix is incapable of manufacturing
Licensed Products in quantities reasonably sufficient to enable MET-Rx to meet
its requirements, Nutraceutix shall supply bulk CDT/MDT caplets or capsules as
necessary for bottling by other manufacturers, who shall be approved in advance
by MET-Rx.
2.2 Sales and Delivery to MET-Rx. Nutraceutix shall produce and deliver
to MET-Rx, FOB Nutraceutix's manufacturing facility, such quantity of Licensed
Products as MET-Rx orders during the term of this Agreement described in
paragraph 1.1 above (the "Term") pursuant to purchase orders accepted by
Nutraceutix. MET-Rx's purchase orders shall specify type, quantity and the
delivery dates for the products ordered, which delivery dates shall be at least
forty five (45) days after the date the purchase order in question is delivered
to Nutraceutix. On or before the last day of each month of the Term, MET-Rx
shall provide Nutraceutix in writing a non-binding projection setting forth by
product type, volume and purchase date MET-Rx's projected purchases of Licensed
Products during the ensuing three months.
2.3 Purchase Price. MET-Rx's purchase prices for Licensed Products shall
be Nutraceutix's standard prices for products incorporating the Technology,
which prices depend on the formula and product type in question, except that
special pricing shall apply to special packaging such as floor displays, wing
racks and PDQ's. MET-Rx shall pay for all Licensed Products based on
Nutraceutix's standard terms, i.e., net thirty (30) days upon approval of
credit, except the first order of any new Licensed Product shall be paid fifty
percent (50%) when placed and fifty percent (50%) upon delivery. Any amount
which is not paid when due shall bear interest at the rate of one percent (1%)
per month, computed and compounded monthly, from the date due until the date
paid.
PAGE 3
<PAGE> 4
2.4 Development Fee. MET-Rx shall pay Nutraceutix a development fee of
six thousand dollars ($6,000) for each Licensed Product developed by
Nutraceutix, which fee shall be applied toward payment of MET-Rx's initial order
of the Licensed Product in question.
2.5 Packaging, Labels and Promotional Items. MET-Rx shall provide all
labels and boxes for products purchased from Nutraceutix. All packaging, labels
and promotional items for Licensed Products shall comply with the labeling
provisions set forth on the attached Exhibit A. MET-Rx shall be solely
responsible and liable for any other or additional language or items set forth
on packaging, labels and promotional items. MET-Rx shall obtain Nutraceutix's
prior written approval of all packaging, labels and promotional items in advance
of their use in commerce, which approval shall (i) relate solely to proper use
of the Trademark and provisions protecting the Trademark, and (ii) not be
unreasonably withheld or delayed.
2.6 Sales by MET-Rx. MET-Rx shall be solely responsible for all sales
and distribution of Licensed Products following delivery thereof by Nutraceutix
to MET-Rx. Subject to the provisions of paragraph 2.4, MET-Rx may package and
sell Licensed Product under such brands, trademarks and names and for such
prices as it deems appropriate.
Section 3. Representations, Warranties, Indemnities and Insurance.
3.1 Representations and Warranties.
3.1.1 Of Nutraceutix. Nutraceutix hereby represents and warrants
to MET-Rx that (i) Nutraceutix is entitled to use the Technology in North
America and grant the Sublicense contemplated hereunder to MET-Rx; (ii) the
Technology does not constitute an infringement of any existing intellectual
property rights when used on the Licensed Products; (iii) the Licensed Products
when delivered to MET-Rx will be free of manufacturing defects, will be
manufactured in compliance with any and all applicable requirements of the
Federal Food, Drug and Cosmetic Act (the "FFDCA") and the rules and regulations
promulgated thereunder, conform to the description of the Licensed Products set
forth on the applicable purchase orders therefor, and not be adulterated or
misbranded within the meaning of the FFDCA or any state of local laws, the
adulteration and misbranding provisions of which are essentially similar to
those in the FFDCA; provided, however, Nutraceutix does not warrant against the
Licensed Products becoming adulterated or misbranded within the meaning of the
FFDCA or said laws after delivery of the Licensed Products to MET-Rx; (iv) the
Licensed Products will meet the controlled release and enhanced bioavailability
characteristics claimed by the sublicensed Technology; (v) Nutraceutix has the
full power, capacity and right to enter into this Agreement, including but not
limited to the ability and wherewithal to provide for the manufacture of the
Licensed Products in compliance with the quality and quantity standards
contemplated by this Agreement; (vi) Nutraceutix has not licensed the Technology
or any aspect thereof in any manner inconsistent with the Sublicense granted
hereunder; (vii) neither the execution and delivery of this Agreement nor
compliance with the obligations of Nutraceutix hereunder will violate any law or
regulation, or any order or decree of any applicable court or governmental
agency, or will conflict with, or result in the breach of, or constitute a
default under, any contract, agreement, instrument or judgment to which
Nutraceutix or any officer, director, employee or controlling person of
Nutraceutix is a party, or which is binding upon Nutraceutix or any of the
foregoing persons; and
PAGE 4
<PAGE> 5
(viii) the Licensed Product will not infringe on any United States patent,
trademark, trade dress or other intellectual property right of any third party.
Notwithstanding anything to the contrary in this paragraph 3.1.1, Nutraceutix
makes no representation or warranty regarding, and shall not be liable or
responsible for any product or infringement claim arising out of, any formula,
know-how, trademark, trade dress, indicia or other specification, or materials
including raw materials and components, provided or requested by MET-Rx.
Nutraceutix makes no other representation or warranty with respect to Licensed
Products, the Technology or the Trademark.
3.1.2 Of MET-Rx. MET-Rx hereby represents and warrants to
Nutraceutix that (i) it has the full power, capacity and right to enter into
this Agreement; (ii) it knows of no pending or threatened action in law or in
equity which could adversely threaten the rights granted herein; (iii) neither
the execution and delivery of this Agreement nor compliance with the obligations
of MET-Rx hereunder will violate any law or regulation, or any order or decree
of any applicable court or governmental agency, or will conflict with, or result
in the breach of, or constitute a default under, any contract, agreement,
instrument or judgment to which MET-Rx or any officer, director, employee or
controlling person of Nutraceutix is a party, or which is binding upon MET-Rx or
any of the foregoing persons; and (iv) no action, approval or consent, including
but not limited to any action, approval or consent by any federal, state,
municipal or other governmental agency, commission, board, bureau or
instrumentality is necessary in order to constitute this agreement as a valid,
binding and enforceable obligation of MET-Rx in accordance with its terms.
3.2 Product Remedy of MET-Rx. If any Licensed Product when delivered to
MET-Rx fails to meet the warranties set forth in paragraph 3.1.1(iii) and (iv),
Nutraceutix shall replace the same at Nutraceutix's cost.
3.3 Infringement Indemnity of MET-Rx. Nutraceutix shall defend MET-Rx at
Nutraceutix's expense against any judicial proceeding based upon infringement by
the Technology or the Trademark of any proprietary right of any third party;
provided that (a) the infringement was not caused by MET-Rx's breach of the
Sublicense or by any formula, know-how, trademark, trade dress, indicia or other
specification, or materials including raw materials and components, provided or
requested by MET-Rx, (b) MET-Rx notifies Nutraceutix of such proceeding soon
enough after it is commenced that Nutraceutix has a reasonable opportunity to
respond before a default is granted, a waiver is incurred or a litigation
position is established, and (c) MET-Rx provides such assistance in the
proceeding as Nutraceutix may reasonably request. Nutraceutix shall have
exclusive control over any such proceeding, and MET-Rx shall comply with any
settlement or court order made in connection with such proceeding.
3.4. Product Indemnity of MET-Rx. Nutraceutix releases and shall defend,
indemnify and hold harmless MET-Rx from and against any and all claims, losses,
costs, harm, liabilities, damages (direct and consequential) and expenses
(including but not limited to attorneys' fees) arising out of the failure of a
Licensed Product to comply with the warranty set forth in paragraph 3.1.1(iii)
and (iv), provided that the failure was not caused by any formula, know-how,
trademark, trade dress, indicia or other specification, or materials including
raw materials and components, provided or requested by MET-Rx. Notwithstanding
the foregoing, Nutraceutix shall not be required to so defend, indemnify or hold
harmless MET-Rx from any claims, losses,
PAGE 5
<PAGE> 6
costs, harm, liabilities, damages or expenses arising out of injury to any
person or damage to any property to the extent and in the percentage the same is
caused by or results from the fault or negligence of MET-Rx.
3.5 Waiver. MET-RX WAIVES AND RELEASES ALL RIGHTS AND REMEDIES OF MET-RX,
AND ALL WARRANTIES, OBLIGATIONS AND LIABILITIES OF NUTRACEUTIX, EXPRESS OR
IMPLIED, EXCEPT THOSE SPECIFICALLY SET FORTH IN THIS SECTION 3, INCLUDING BUT
NOT LIMITED TO ANY IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE, IMPLIED WARRANTY ARISING FROM COURSE OF PERFORMANCE, COURSE
OF DEALING OR USAGE OF TRADE AND CLAIM FOR ANY CONSEQUENTIAL DAMAGES.
3.6 Indemnity of Nutraceutix. MET-Rx releases and shall defend,
indemnify and hold harmless Nutraceutix and Temple (the "Indemnitees") from and
against any and all claims, losses, costs, harm, liabilities, damages (direct
and consequential) and expenses (including but not limited to attorneys' fees)
arising out of or in connection with marketing, distribution or use of any
Licensed Product or other product, MET-Rx's formulation for any Licensed Product
or other product, and any packaging, label or promotional item connected
therewith, manufactured, marketed or distributed by or through MET-Rx or any
sublicensee, contractor, employee, agent, representative, customer, or person or
entity affiliated with or who obtained the Licensed Product or other product
from or through MET-Rx. Notwithstanding the foregoing, MET-Rx shall not be
required to so defend, indemnify or hold harmless an Indemnitee from any claims,
losses, costs, harm, liabilities, damages or expenses arising out of (i) injury
to any person or damage to any property to the extent and in the percentage the
same is caused by or results from failure of a Licensed Product to comply with
the warranties set forth in paragraph 3.1.1(iii) or (iv), or other fault or
negligence of such Indemnitee or (ii) infringement of a third party's
proprietary rights by the Technology or the Trademark.
3.7 Insurance of Nutraceutix. Nutraceutix shall maintain in full force
and effect throughout the Term product liability insurance with limits of not
less than two million dollars ($2,000,000) per occurrence, two million dollars
($2,000,000) aggregate and deleting the repackaging and relabeling exclusion.
Such insurance shall name MET-Rx as an additional insured, shall have broad form
vendor's coverage, and shall be placed with an insurance company which has a
most recent rating given by Best's Key Rating Guide of at least A (Excellent) or
VII or above, or in such other companies as MET-Rx may approve, which approval
shall not be unreasonably withheld or delayed. Nutraceutix shall promptly
deliver to MET-Rx certificates of said insurance, and shall notify MET-Rx
immediately in the event such insurance policy is amended or terminated.
3.8 Insurance of MET-Rx. MET-Rx shall maintain in full force and effect
throughout the Term product liability insurance with limits of not less than two
million dollars ($2,000,000) per occurrence, two million dollars ($2,000,000)
aggregate and deleting the repackaging and relabeling exclusion. Such insurance
shall name Nutraceutix as an additional insured, shall have broad form contract
coverage, and shall be placed with an insurance company which has a most recent
rating given by Best's Key Rating Guide of at least A (Excellent) or VII or
above, or in such other companies as Nutraceutix may approve, which approval
shall not be unreasonably
PAGE 6
<PAGE> 7
withheld or delayed. MET-Rx shall promptly deliver to Nutraceutix certificates
of said insurance, and shall notify Nutraceutix immediately in the event such
insurance policy is amended or terminated.
Section 4. Miscellaneous.
4.1 Access to Research Results. Each party shall provide the other
access to all of such party's research results regarding the performance of
Licensed Products promptly after those results are obtained.
4.2 Ownership and Sale of MET-Rx's Formulations. Except as provided to
the contrary in paragraph 1.4, MET-Rx shall have all right, title and interest
in product formulations developed by MET-Rx. Nutraceutix shall not sell to any
third party Licensed Products whose formulations were developed by MET-Rx.
4.3 Excused Performance. Nutraceutix shall not be liable for, or be
considered to be in breach of this Agreement on account of, any delay or failure
to perform as required by this Agreement as a result of any cause beyond
Nutraceutix's reasonable control (including but not limited to: fire, casualty,
acts of God or the elements; court orders; acts, delays and failures to act by
civil, military or other governmental authority; labor disputes, sabotage and
war; breakdown or destruction of, or damage or casualty to, any equipment,
facilities or other property; unavailability of ingredients, equipment,
personnel or other necessary items; disruption of utilities; and acts or
omissions of persons or entities other than Nutraceutix).
4.4 Assignment. This Agreement shall be fully binding upon, inure to the
benefit of and be enforced by the parties hereto and their respective successors
and assigns; provided that MET-Rx may not assign this Agreement or sublicense
any Sublicense rights to any third party without the prior written consent of
Nutraceutix, which consent shall not be unreasonably withheld. Without limiting
the generality of the foregoing, the Sublicense is granted solely to MET-Rx, and
not to any entity which controls, is controlled by or is under common control
with MET-Rx, and thus Sublicense rights may not be sublicensed or otherwise
transferred to any such entity without the prior written consent of Nutraceutix.
4.5 Entire Agreement. This Agreement constitutes the entire agreement
between Nutraceutix and MET-Rx, and supersedes any and all prior agreements,
with respect to Licensed Products and licensing of Technology during the Term;
provided that this Agreement is in addition to the license agreement between
Nutraceutix and MET-Rx with respect to licensing of CDT dated December 16, 1998,
as amended by letter agreement dated March 16, 1999, and the license agreement
between Nutraceutix and MET-Rx with respect to licensing of MDT dated March 16,
1999, both of which agreements are hereby reaffirmed to the extent that they
apply to periods prior to April 1, 2000 (but are superseded by this agreement to
the extent that they apply to periods within the Term); and provided further
that this Agreement is in addition to the license agreement between Nutraceutix
and MET-Rx dated June 25, 1999 with respect to licensing of MET-Rx's graphic
design for identification of CDT, which agreement remains in full force and
effect. No amendment, modification or waiver of any of the provisions of this
Agreement shall be valid unless set forth in a written instrument signed by the
party to be bound thereby.
PAGE 7
<PAGE> 8
Nutraceutix shall not be bound by, and specifically objects to, any term,
condition or other provision which is different from or in addition to the
provisions of this Agreement (whether or not it would materially alter this
Agreement) which is proffered by MET-Rx in any purchase order, receipt,
acceptance, confirmation, correspondence or otherwise, unless Nutraceutix
specifically agrees to such provision in a written instrument signed by
Nutraceutix.
4.6 No Partnership. This Agreement, or acquisition, marketing or other
use by MET-Rx of Licensed Products or the Trademark does not create an
association, joint venture or partnership between the parties or impose any
partnership obligation or liability upon either party. Neither party is an agent
of the other.
4.7 Press Releases. Nutraceutix and MET-Rx may issue press releases
regarding this Agreement with the prior written consent of the other party.
4.8 Applicable Law. This Agreement shall be interpreted, construed and
enforced in all respects in accordance with the laws of the State of Washington.
Any action arising out of this Agreement shall be brought in the courts located
in Washington, and the parties hereby irrevocably consent to the jurisdiction of
said courts. The prevailing party in any dispute under this Agreement shall be
entitled to recover from other party its reasonable attorney's fees and costs.
4.9 Counterparts. This Agreement may be executed in two or more
counterparts, all of which shall constitute one and the same Agreement.
Nutraceutix: MET-Rx:
Nutraceutix, Inc. MET-Rx USA, Inc.
By: /s/ William D. St. John By: /s/ J. Kelly Michols
------------------------------- -------------------------------
William D. St. John J. Kelly Michols
President President
PAGE 8
<PAGE> 9
EXHIBIT A
TO
PRODUCT SALES AND SUBLICENSE AGREEMENT
FOR
CONTROLLED DELIVERY TECHNOLOGY AND
MOLECULAR DISPERSION TECHNOLOGY PRODUCTS
1. The Trademarks are:
(i) CDT:
(ii) MDT:
2. Labeling provisions referred to in paragraph 2.5 are as follows:
(i) all packaging, labels and promotional items for Licensed Products
shall have the following prominently displayed thereon:
(ii) packaging, labels and promotional items for Licensed Products may
have the following displayed thereon:
Nutraceutix: MET-Rx:
Nutraceutix, Inc. MET-Rx USA, Inc.
By: /s/ William D. St. John By: /s/ J. Kelly Michols
------------------------------- -------------------------------
William D. St. John J. Kelly Michols
President President
PAGE 9
<PAGE> 1
EXHIBIT 23.1
Consent of Independent Certified Public Accountants
We have issued our report dated February 11, 2000, accompanying the financial
statements included in the Annual Report of Nutraceutix, Inc. on Form 10-KSB for
the year ended December 31, 1999. We hereby consent to the incorporation by
reference of said report in the Registration Statement of Nutraceutix, Inc. on
Form S-8 (File No. 333-79343, effective May 26, 1999).
GRANT THORNTON LLP
Seattle, Washington
March 22, 2000
<PAGE> 1
EXHIBIT 24.1
POWER OF ATTORNEY
HERBERT L. LUCAS
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, Herbert L. Lucas
constitutes and appoints Steven H. Moger or William D. St. John his true and
lawful attorney-in-fact and agent, for him and his name, place and stead, in any
and all capacities, to sign the Form 10-KSB of Nutraceutix, Inc., a Delaware
corporation, for the fiscal year ended December 31, 1999, and any amendments or
supplements thereto, and to file this Power of Attorney and the Form 10-KSB with
all exhibits thereto, and to the documents in connection therewith, with the
Securities and Exchange Commission and the NASDAQ National Market System,
granting unto said attorney-in-fact and agent full power and authority to do and
perform each requisite and necessary to be done in and about the premises, as
fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorney-in-fact and agent, may do or
cause to be done by virtue hereof.
Dated this 24th day of March, 2000.
Signature:
/s/ Herbert L. Lucas
- -----------------------------------
Herbert L. Lucas
<PAGE> 1
EXHIBIT 24.2
POWER OF ATTORNEY
ARTHUR S. PEARSON
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, Arthur S. Pearson
constitutes and appoints Steven H. Moger or William D. St. John his true and
lawful attorney-in-fact and agent, for him and his name, place and stead, in any
and all capacities, to sign the Form 10-KSB of Nutraceutix, Inc., a Delaware
corporation, for the fiscal year ended December 31, 1999, and any amendments or
supplements thereto, and to file this Power of Attorney and the Form 10-KSB with
all exhibits thereto, and to the documents in connection therewith, with the
Securities and Exchange Commission and the NASDAQ National Market System,
granting unto said attorney-in-fact and agent full power and authority to do and
perform each requisite and necessary to be done in and about the premises, as
fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorney-in-fact and agent, may do or
cause to be done by virtue hereof.
Dated this 24th day of March, 2000.
Signature:
/s/ Arthur S. Pearson
- -----------------------------------
Arthur S. Pearson
<PAGE> 1
EXHIBIT 24.3
POWER OF ATTORNEY
CARL W. SCHAFER
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, Carl W. Schafer
constitutes and appoints Steven H. Moger or William D. St. John his true and
lawful attorney-in-fact and agent, for him and his name, place and stead, in any
and all capacities, to sign the Form 10-KSB of Nutraceutix, Inc., a Delaware
corporation, for the fiscal year ended December 31, 1999, and any amendments or
supplements thereto, and to file this Power of Attorney and the Form 10-KSB with
all exhibits thereto, and to the documents in connection therewith, with the
Securities and Exchange Commission and the NASDAQ National Market System,
granting unto said attorney-in-fact and agent full power and authority to do and
perform each requisite and necessary to be done in and about the premises, as
fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorney-in-fact and agent, may do or
cause to be done by virtue hereof.
Dated this 25th day of March, 2000.
Signature:
/s/ Carl W. Schafer
- -----------------------------------
Carl W. Schafer
<PAGE> 1
EXHIBIT 24.4
POWER OF ATTORNEY
DANIEL B. WARD
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, Daniel B. Ward
constitutes and appoints Steven H. Moger or William D. St. John his true and
lawful attorney-in-fact and agent, for him and his name, place and stead, in any
and all capacities, to sign the Form 10-KSB of Nutraceutix, Inc., a Delaware
corporation, for the fiscal year ended December 31, 1999, and any amendments or
supplements thereto, and to file this Power of Attorney and the Form 10-KSB with
all exhibits thereto, and to the documents in connection therewith, with the
Securities and Exchange Commission and the NASDAQ National Market System,
granting unto said attorney-in-fact and agent full power and authority to do and
perform each requisite and necessary to be done in and about the premises, as
fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorney-in-fact and agent, may do or
cause to be done by virtue hereof.
Dated this 27th day of March, 2000.
Signature:
/s/ Daniel B. Ward
- -----------------------------------
Daniel B. Ward
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET OF NUTRACEUTIX, INC. AS OF DECEMBER 31, 1999 AND THE RELATED STATEMENT OF
OPERATIONS FOUND ON THE FORM 10-KSB FOR THE ANNUAL PERIOD ENDED DECEMBER 31,
1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 149,321
<SECURITIES> 0
<RECEIVABLES> 936,627
<ALLOWANCES> 0
<INVENTORY> 1,746,474
<CURRENT-ASSETS> 2,944,443
<PP&E> 2,690,017
<DEPRECIATION> (1,228,693)
<TOTAL-ASSETS> 5,200,786
<CURRENT-LIABILITIES> 2,575,046
<BONDS> 781,878
0
0
<COMMON> 17,489
<OTHER-SE> 1,826,373
<TOTAL-LIABILITY-AND-EQUITY> 5,200,786
<SALES> 10,272,417
<TOTAL-REVENUES> 10,272,417
<CGS> (7,805,440)
<TOTAL-COSTS> (2,595,615)
<OTHER-EXPENSES> (212,667)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (242,912)
<INCOME-PRETAX> (584,217)
<INCOME-TAX> 0
<INCOME-CONTINUING> (584,217)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (584,217)
<EPS-BASIC> (.034)
<EPS-DILUTED> (.034)
</TABLE>
