1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
AMENDMENT NO. 2
Date of Report (Date of earliest event reported): November 3, 2000
BIOMUNE SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Nevada 0-11472 870380088
---------------------------- ------------- ---------------
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
6502 South Archer Road, Bedford Park, Illinois 60501
----------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (708) 563-9200
--------------------------------------------------------------
(Former name or former address, if changed since last report.)
2
The undersigned registrant hereby amends the following items, financial
statements, exhibits or other portions of its Report on Form 8-K dated December
4, 2000 as set forth in the pages attached hereto.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
The financial statements are amended by filing the following financial
statements and pro forma financial information:
(a) Financial Statements of Business Acquired.
Donlar Corporation and Subsidiaries Consolidated Financial
Statements as of December 31, 1998 and 1999, and September 30,
2000
Report of Independent Certified Public Accountants.............F1
Consolidated Balance Sheets as of December 31, 1998 and
1999, and September 30, 2000...................................F2
Consolidated Statements of Operations..........................F3
Consolidated Statements of Stockholders' Deficit as of
December 31, 1998 and 1999, and September 30, 2000.............F4
Consolidated Statements of Cash Flows..........................F5
Notes to Consolidated Financial Statements.....................F7
(b) Pro Forma Financial Information.
Unaudited Proforma Condensed Combined Statements of Operations
and Balance Sheets
Introduction to Unaudited Proforma
Condensed Combined Statements of Operations and Balance
Sheets........................................................F23
Unaudited Proforma Condensed Combined Balance Sheets..........F24
Unaudited Proforma Condensed Combined
Statements of Operations Nine Months ended September 30,
2000..........................................................F25
Unaudited Proforma Condensed Combined
Statements of Operations Twelve Months ended December 31,
2000..........................................................F26
Notes to Unaudited Proforma Condensed
Combined Statements of Operations and Balance Sheets..........F27
(c) Exhibits.
None
3
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Shareholders and Board of Directors
Donlar Corporation
We have audited the accompanying consolidated balance sheets of Donlar
Corporation (an Illinois corporation) and Subsidiaries as of December 31, 1998
and 1999, and the related consolidated statements of operations, stockholders'
deficit, 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 consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Donlar Corporation
and Subsidiaries as of December 31, 1998 and 1999, and the results of their
operations and their cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 2 to the financial
statements, the Company has suffered recurring losses from operations and has a
net capital deficiency that raises substantial doubt about the Company's ability
to continue as a going concern. Management plans with regard to this matter are
described In Note 2. These financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
Chicago, Illinois
November 10, 2000 (except for note 17, as to which
the date is January 19, 2001)
F-1
4
DONLAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of December 31, 1998 and 1999, and September 30, 2000
December 31, (Unaudited)
---------------------------- September 30,
ASSETS 1998 1999 2000
- ---------------------------------------------------------------- ----------- ------------
CURRENT ASSETS:
Cash and cash equivalents $ 2,812,577 $ 379,278 $ 3,424
Accounts receivable, net of allowance
for doubtful accounts of $32,408,
$23,125 and $23,141 at December
31, 1998 and 1999, and September
30, 2000, respectively 99,074 146,735 262,629
Inventories 5,247,091 2,927,488 2,699,547
Prepaid expenses and other
current assets 122,749 56,549 142,970
----------- ----------- -----------
Total current assets 8,281,491 3,510,050 3,108,570
----------- ----------- -----------
PROPERTY, PLANT AND EQUIPMENT, net 11,918,933 11,077,902 10,494,477
----------- ----------- -----------
INVESTMENT IN AFFILIATE - - 563,500
----------- ----------- -----------
OTHER ASSETS:
Deferred financing costs, net of
accumulated amortization of
$1,861,532, $0 and $0 at
December 31, 1998 and 1999,
and September 30, 2000,
respectively 541,867 10,000 10,000
Patents, net of accumulated
amortization of $412,305,
$562,800 and $685,314 at
December 31, 1998 and 1999,
and September 30, 2000,
respectively 1,746,843 1,812,888 1,859,580
Deposits 15,463 - -
----------- ----------- -----------
Total other assets 2,304,173 1,822,888 1,869,580
----------- ----------- -----------
$22,504,597 $16,410,840 $16,036,127
=========== =========== ===========
December 31, (Unaudited)
---------------------------- September 30,
LIABILITIES AND SHAREHOLDERS' DEFICIT 1998 1999 2000
- ---------------------------------------------------------------- ----------- -----------
CURRENT LIABILITIES:
Current portion of convertible debt $25,221,672 $ 343,620 $ 1,177,458
Current portion of royalty obligation 212,693 - -
Accounts payable 337,984 460,302 444,072
Accrued expenses 2,394,849 2,168,260 3,629,724
Short term notes payable 5,000,000 262,348 1,379,087
----------- ----------- -----------
Total current liabilities 33,167,198 3,234,530 6,630,341
----------- ----------- -----------
LONG-TERM LIABILITIES:
Note payable - 11,309,178 12,078,904
Convertible debt 12,313,926 15,626,340 16,787,369
Royalty obligation, net of current maturities 6,225,558 - -
----------- ----------- -----------
Total long-term liabilities 18,539,484 26,935,518 28,866,273
----------- ----------- -----------
Total liabilities 51,706,682 30,170,048 35,496,614
----------- ----------- -----------
COMMITMENTS AND CONTINGENCIES: - - -
SHAREHOLDERS' DEFICIT:
Common stock, no par value, 60,000,000 shares
authorized at December 31, 1998 and
1999, and September 30, 2000; 223,523,
2,848,735 and 4,190,819 shares
issued and outstanding as of
December 31, 1998 and 1999 and
September 30, 2000, respectively 61,457 2,066,017 3,099,422
Series A convertible preferred stock,
no par value, 38,000,000 shares
authorized at December 31, 1998 and
1999, and September 30, 2000, 18,239,482,
52,369,528 and 52,369,528 shares
issued and outstanding as of
December 31, 1998 and 1999, and
September 30, 2000, respectively 12,007,202 31,511,004 31,511,004
Series C preferred stock, no par value,
6,020,000 shares authorized at
December 31, 1998 and 1999, and
September 30, 2000; 6,019,530,
0 and 0 shares issued and outstanding
at December 31, 1998 and 1999, and
September 30, 2000, respectively 1,000 - -
Additional paid-in capital 8,671,386 15,171,106 16,390,366
Accumulated deficit (49,898,798) (62,048,500) (70,416,947)
Shareholder note receivable (44,332) (458,835) (44,332)
----------- ----------- -----------
Total shareholders' deficit (29,202,085) (13,759,208) (19,460,487)
----------- ----------- -----------
$22,504,597 $16,410,840 $16,036,127
=========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
5
DONLAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the
For the Years Ended Nine Months Ended
December 31, September 30,
------------------------------ ------------------
1998 1999 2000
------------ ------------ ------------------
NET REVENUES $ 1,241,247 $ 793,723 $ 980,000
PRODUCT COSTS (1,951,781) (3,634,861) (1,412,884)
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES (6,963,948) (3,153,153) (2,297,650)
RESEARCH AND
DEVELOPMENT (2,891,350) (1,743,371) (1,038,847)
------------ ------------ ------------
Loss from operations (10,565,832) (7,737,662) (3,769,381)
------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest income 92,368 31,716 6,316
Interest expense (4,712,810) (4,443,756) (4,605,382)
------------ ------------ ------------
Total other expense (4,620,442) (4,412,040) (4,599,066)
------------ ------------ ------------
LOSS BEFORE INCOME TAXES (15,186,274) (12,149,702) (8,368,447)
PROVISION FOR INCOME
TAXES -- -- --
------------ ------------ ------------
NET LOSS $(15,186,274) $(12,149,702) $ (8,368,447)
============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
6
DONLAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
For the Years Ended December 31, 1998 and 1999, and
For the Nine Months Ended September 30, 2000
Series A Series C
Common Stock Preferred Stock Preferred Stock Additional
---------------------- ----------------------------- ---------------------- Paid-In
Shares Amount Shares Amount Shares Amount Capital
-------- ---------- ----------- ------------- ---------- -------- -------------
BALANCE, January 1, 1998 213,095 $ 58,329 19,157,607 $16,946,358 6,019,530 $ 1,000 $ 7,630,365
Stock repurchase net of
issuance cost of $99,944 - - (918,125) (4,939,156) - - -
Exercise of stock options and
warrants 10,428 3,128 - - - - -
Repayment of note - - - - - - -
Vesting of stock options - - - - - - 490,021
Issuance of warrants - - - - - - 551,000
Net loss - - - - - - -
--------- ---------- ---------- ----------- ---------- ------- -----------
BALANCE, December 31, 1998 223,523 61,457 18,239,482 12,007,202 6,019,530 1,000 8,671,386
Issuance of common stock 2,610,012 2,000,000 - - - - -
Exercise of stock options
and warrants 15,200 4,560 160 70 - - -
Rights offering - - 13,617,473 2,889,321 - - -
Vesting of stock options and
warrants - - - - - - 479,311
Conversion of convertible - - 233,956 1,000,000 - - -
debt
Issuance of warrants - - - - - - 6,020,409
Litigation settlement - - 20,278,457 15,614,411 (6,019,530) (1,000) -
Net loss - - - - - - -
--------- ---------- ---------- ----------- ---------- ------- -----------
BALANCE, December 31, 1999 2,848,735 2,066,017 52,369,528 31,511,004 - - 15,171,106
(Unaudited)
Issuance of common stock 1,342,084 1,033,405 - - - - -
Vesting of stock options - - - - - - 22,680
Issuance of warrants - - - - - - 1,196,580
Repayment of shareholder
receivable - - - - - - -
Net loss - - - - - - -
--------- ---------- ---------- ----------- ---------- ------- -----------
Balance, September 30, 2000
(unaudited) 4,190,819 $3,099,422 52,369,528 $31,511,004 - $ - $16,390,366
========= ========== ========== =========== ========== ======= ===========
Shareholder Total
Accumulated Note Shareholders'
Deficit Receivable Deficit
------------- ----------- ---------------
BALANCE, January 1, 1998 $(34,712,524) $ (161,949) $(10,238,421)
Stock repurchase net of
issuance cost of $99,944 - - (4,939,156)
Exercise of stock options and
warrants - - 3,128
Repayment of note - 117,617 117,617
Vesting of stock options - - 490,021
Issuance of warrants - - 551,000
Net loss (15,186,274) - (15,186,274)
------------ ---------- ------------
BALANCE, December 31, 1998 (49,898,798) (44,332) (29,202,085)
Issuance of common stock - - 2,000,000
Exercise of stock options
and warrants - - 4,630
Rights offering - (414,503) 2,474,818
Vesting of stock options and
warrants - - 479,311
Conversion of convertible - - 1,000,000
debt
Issuance of warrants - - 6,020,409
Litigation settlement - - 15,613,411
Net loss (12,149,702) - (12,149,702)
------------ ---------- ------------
BALANCE, December 31, 1999 (62,048,500) (458,835) (13,759,208)
(Unaudited)
Issuance of common stock - - 1,033,405
Vesting of stock options - - 22,680
Issuance of warrants - - 1,196,580
Repayment of shareholder
receivable - 414,503 414,503
Net loss (8,368,447) - (8,368,447)
------------ ---------- ------------
Balance, September 30, 2000
(unaudited) $(70,416,947) $ (44,332) $(19,460,487)
============ ========== ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
7
DONLAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the
For the Years Ended Nine Months Ended
December 31, September 30,
--------------------------------- -----------------
1998 1999 2000
------------ ------------ -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(15,186,274) $(12,149,702) $(8,368,447)
Adjustments to reconcile net loss to net cash used in operating
activities-
Depreciation and amortization 582,799 1,570,516 773,755
Compensation expense related to stock options and warrants 490,020 479,311 22,680
Interest expense related to royalty obligation 1,485,750 1,175,161 -
Impairment loss related to long-lived assets 717,216 - -
Write down of inventory to market - 1,967,339 -
Changes in operating assets and liabilities-
Accounts receivable, net (27,380) (47,661) (115,894)
Inventories 542,756 352,263 227,942
Prepaid expenses and other current assets 13,780 76,977 (86,422)
Deposits (46,389) - -
Accounts payable (442,481) 122,317 (16,228)
Accrued expenses 2,964,864 1,060,908 3,317,340
------------ ------------ -----------
Net cash used in operating activities (8,905,339) (5,392,571) (4,245,274)
------------ ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (377,329) (42,435) (67,814)
Investments in patents (361,842) (216,538) (169,208)
Purchase of investment - - (563,500)
------------ ------------ -----------
Net cash used in investing activities (739,171) (258,973) (800,522)
------------ ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Deferred financing costs (3,750) - -
Proceeds from issuance of convertible notes 2,285,290 5,688,154 2,917,000
Proceeds from issuance of Series A preferred stock - 2,474,818 -
Proceeds from issuance of common stock - 2,000,000 1,033,405
Litigation Settlement - (8,000,000) -
Principal repayment of note payable - (5,000,000) -
Purchase of Series A preferred stock (6,600) - -
Proceeds from the exercise of stock options and warrants 3,128 4,630 -
Principal repayments of convertible debt - (80,864) (258,465)
Proceeds from repayment of shareholder loan 117,617 - -
Proceeds from subscriptions receivable - - 414,502
Proceeds from notes payable 5,000,000 6,131,507 563,500
------------ ------------ -----------
Net cash provided by financing activities 7,395,685 3,218,245 4,669,942
------------ ------------ -----------
DECREASE IN CASH AND CASH EQUIVALENTS (2,248,825) (2,433,299) (375,854)
CASH AND CASH EQUIVALENTS, beginning of period 5,061,402 2,812,577 379,278
------------ ------------ -----------
CASH AND CASH EQUIVALENTS, end of period $ 2,812,577 $ 379,278 $ 3,424
============ ============ ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
8
DONLAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
For the
Nine Months
For the Years Ended Ended
December 31, September 30,
-------------------------------- -------------
1998 1999 2000
-------------- ------------- -------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for-
Interest $ 385,046 $ 1,215,331 $ 1,313,321
============== ============= =============
Noncash financing activities-
Exchange of 915,000 shares of Series A preferred stock at $5.50 per
share, $5,000,000 note payable and related
$121,790 accrued interest (plus $1,400,000 cash) for
convertible note $ 10,154,290 $ - $ -
============== ============= =============
Noncash Settlement Agreement transaction-
Cancellation of royalty obligation $ - $ 7,613,411 $ -
============== ============= =============
Cancellation of 1,000 shares of Series C preferred stock $ - $ 1,000 $ -
============== ============= =============
Issuance of note payable $ - $ 9,000,000 $ -
============== ============= =============
Conversion of note payable, $25,000,000 face value, into
20,278,457 shares of Series A preferred stock $ - $ 15,614,411 $ -
============== ============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
9
DONLAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1999, and
September 30, 2000 (unaudited)
1. DESCRIPTION OF THE BUSINESS
Donlar Corporation, an Illinois corporation, and subsidiaries (the
"Company") are in the market development stage of a new family of
environmentally friendly biodegradable polymers, known as thermal
polyaspartates ("TPA"). During 1996, the Company began manufacturing
and distributing these polymers, in limited quantities, to agricultural
and industrial markets. In the agricultural market, the products
increase a plant's ability to absorb fertilizers more efficiently and
have been focused toward winter wheat, corn, cotton and vegetables. In
the industrial markets, the products replace nonbiodegradable
chemicals, such as polyacrylates, and have been focused toward the oil
production, water treatment and detergents and cleaners fields. The
Company markets its products to distributors and manufacturers
primarily in the United States and Europe.
2. RISKS AND UNCERTAINTIES
ABSENCE OF OPERATING PROFITS
The Company has incurred an expected net loss in each year since its
founding, primarily as a result of its research and development
endeavors and, as of December 31, 1999, has an accumulated deficit of
$62,048,500. The Company's net loss for the nine months ended September
30, 2000 was $8,368,447. The Company expects to incur additional
operating losses over the near term. The Company's ability to achieve
successful future operations and meet obligations as they become due
will depend on many factors including the Company's ability to develop,
manufacture, introduce and market commercially acceptable products and
obtain additional financing.
EARLY STAGES OF DEVELOPMENT OF THE COMPANY'S PRODUCTS
Currently, the Company is in the early stages of market development and
commercialization. As a result, the Company's TPA products have been
sold in limited test market quantities. In late 1997, the Company
completed construction of a new production plant in Peru, Illinois. The
Company plans to bring that plant on-line as sales volume and existing
inventory levels warrant the need for production.
FINANCING CONSIDERATIONS AND MANAGEMENT'S PLANS
The accompanying financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and
satisfaction of liabilities in the normal course of business. As shown
in the financial statements, during the years ended December 31, 1998
and 1999 and the nine months ended September 30, 2000, the Company
incurred losses of $15,186,274, $12,149,702 and $8,368,447,
respectively. The financial statements do not include any adjustments
relating to the recoverability and classification of asset carrying
amounts or the amount and classification of liabilities that might be
necessary should the Company be unable to continue as a going concern.
The Company's continuation as a going concern is dependent on its
ability to generate sufficient cash flows to meet its obligations on a
timely basis, obtain additional financing as may be required and
ultimately obtain profitability.
The Company intends to finance future operations with existing cash
balances and one or more of the following sources of capital:
additional capital contributions from existing shareholders, investment
by a strategic investor, private placement with a financial investor or
an initial public offering. Management believes that financing from
such sources, combined with cash provided by operations, will be
sufficient to operate for the next year.
F-7
10
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Donlar
and all entities over which the Company exercises unilateral control.
All significant intercompany balances and transactions have been
eliminated.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash in banks and investments
purchased with maturities of up to three months.
INVENTORIES
Inventories are stated at the lower of cost or market value, using the
first-in, first-out method. Inventories consisted of the following at
December 31, 1998 and 1999 and September 30, 2000:
December 31, (Unaudited)
------------------------- September 30,
1998 1999 2000
---------- ---------- ------------
Raw material $1,881,223 $1,125,905 $1,127,803
Finished goods 3,365,868 1,801,583 1,571,744
---------- ---------- ----------
$5,247,091 $2,927,488 $2,699,547
========== ========== ==========
During 1999, the Company recorded a $1,967,339 charge to product costs
to reflect an adjustment of inventory costs to estimated market value.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost less accumulated
depreciation and amortization. Major improvements are capitalized and
depreciated over their useful lives.
Repair and maintenance are charged to expense as incurred. Upon sale or
retirement, the related cost and accumulated depreciation are removed
from the accounts, and any gain or loss is recorded in the statement of
operations. Depreciation is determined using the straight-line method
for financial reporting purposes. Leasehold improvements are amortized
over the shorter of the life of the asset or the lease term.
DEFERRED FINANCING COSTS
Financial costs related to the issuance of convertible notes payable
have been capitalized and are being amortized over the period of the
debt. Amortization expense related to these costs was $1,082,389 and
$531,867 for the years ended December 31, 1998 and 1999, respectively,
$0 for the nine months ended September 30, 2000.
PATENTS
Costs incurred in patenting intellectual property consist of fees paid
to outside legal counsel. These costs are capitalized and amortized
over 15 years using the straight-line method. The Company periodically
evaluates the carrying value of patents for possible impairment based
upon expected future undiscounted operating cash flows.
F-8
11
INCOME TAXES
The Company provides for income taxes under the asset and liability
method. Under this method, deferred tax assets and liabilities are
recorded based on the differences between the financial statement
amounts and tax bases of assets and liabilities, considering the tax
rates in effect when these differences are expected to reverse.
REVENUE RECOGNITION
Revenues are recognized when product title and risk of ownership pass.
RESEARCH AND DEVELOPMENT
Costs associated with the research and development of new products are
expensed as incurred.
ACCOUNTING FOR STOCK-BASED COMPENSATION
In October, 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123 ("Statement 123"),
"Accounting for Stock-Based Compensation." The Company has adopted the
disclosure-only provisions of Statement 123 with respect to its
employees' and directors' noncompensatory stock options and warrants.
The expense associated with stock options and warrants issued to
nonemployees and nondirectors is reflected in the consolidated
financial statements in accordance with Statement 123. As permitted by
Statement 123, the intrinsic value of compensatory stock options is
reflected in the consolidated financial statements in accordance with
Accounting Principles Board Opinion No. 25.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America, requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates.
4. CONCENTRATION OF CREDIT RISK
The Company's financial instruments that are exposed to concentrations
of credit risk consist primarily of cash and cash equivalents,
short-term investments and trade accounts receivable.
The Company places its cash and short-term investments with high
quality financial institutions. At times, such investments may be in
excess of the Federal Deposit Insurance Corporation insurance limits.
The Company currently sells primarily to customers located in the
United States and Europe. The Company reviews a customer's credit
history before extending credit. In addition, the Company typically
reviews the financial strengths of its customers and, as a consequence,
believes that its trade accounts receivable risk is limited.
F-9
12
The Company had sales to certain customers that have accounted for at
least 10% of the Company's net revenues. Customer information is as
follows for the years ended December 31, 1998 and 1999 and the nine
months ended September 30, 2000:
Percentage of Net Revenues Percentage of Accounts Receivable
------------------------------------ ---------------------------------------------------
(Unaudited)
Nine Months
Ended (Unaudited)
September 30, December 31, December 31, September 30,
1998 1999 2000 1998 1999 2000
------- ------- ------------- --------------- --------------- ---------------
Life Sciences
Customer A 25.7% - - - - -
Customer B 13.2% 13.1% 20.2% - - 0.5%
BioPolymers
Customer C 14.2% - - 38.8% - -
Customer D - 21.2% 34.1% - 55.5% 33.4%
Customer E - 1.7% 11.9% - - 27.4%
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, along with corresponding estimated
useful lives, consisted of the following:
December 31, (Unaudited)
Useful ----------------------------- September 30,
Description Life 1998 1999 2000
--------------------------------- ------------ ----------- ----------- ------------
Land $ 566,782 $ 566,782 $ 566,782
Building 30 years 5,788,422 5,800,452 5,826,412
Laboratory and plant equipment 5-10 years 7,058,253 7,075,925 7,112,107
Furniture and fixtures 5-7 years 382,500 381,450 387,124
Leasehold improvements 1-4 years 132,343 132,342 54,826
----------- ----------- -----------
Total property, plant
and equipment 13,928,300 13,956,951 13,947,251
Less-Accumulated depreciation
and amortization 2,009,367 2,879,049 3,452,774
----------- ----------- -----------
Property, plant and
equipment, net $11,918,933 $11,077,902 $10,494,477
=========== =========== ===========
In 1998 management relocated the pilot plant activity to the new plant
in Peru, Illinois and discontinued use of the leased pilot plant
facilities. Accordingly, a 1998 pretax charge of $717,216 is included
in research and development in the consolidated statement of operations
to write down the related fixed assets to their realizable value.
F-10
13
6. DEBT
NOTES PAYABLE
Notes payable consisted of the following at December 31, 1998 and 1999
and September 30, 2000:
December 31, (Unaudited)
----------------------------- September 30,
1998 1999 2000
---------- ------------- -------------
Short-term notes payable-
Note payable, due September 22, 1999, bearing interest at prime plus
2%, collateralized by a royalty-free license to the Company's
patents, exclusively in Europe and nonexclusively worldwide $5,000,000 $ - $ -
Unsecured note payable to shareholder and director, due December 31,
2000, bearing interest at 10% per annum, net of unamortized debt
discount of $737,652 and $184,413 at December 31, 1999 and
September 30, 2000, respectively. - 262,348 815,587
Unsecured note payable, due December 31, 2000,
bearing interest at 10% per annum. - - 563,500
---------- ------------- ------------
$5,000,000 $ 262,348 $ 1,379,087
========== ============= ============
Long-term notes payable-
Notes payable to venture capital shareholders, $7,000,000 due June 2,
2006, and $2,000,000 due December 31, 2006, bearing interest at
10% per annum, payable quarterly in cash or in kind at the
Company's option, collateralized by a third lien on the Company's
patents and a second lien on all its other assets $ - $ 9,000,000 $ 9,000,000
Note payable to a shareholder and director, due September 30, 2002,
bearing interest at 11% per annum, collateralized by a second lien
on the Company's patents, net of unamortized debt discount of
$2,822,329 and $2,052,603 at December 31, 1999 and September 30,
2000, respectively. - 2,309,178 3,078,904
---------- ------------- ------------
$ - $ 11,309,178 $ 12,078,904
========== ============= ============
In August, 1998 the Company signed a license and supply agreement with
BASF Aktiengesellschaft under which the Company has granted to BASF the
right to market the Company's agricultural products in Europe. In order
to maintain exclusivity, BASF has agreed to purchase certain minimum
quantities of Donlar products at prescribed prices. In connection with
that agreement, the Company borrowed $5,000,000 from BASF. The note
required quarterly interest-only payments at prime plus 2%.
On October 8, 1999, the Company paid BASF the principal and accrued
interest on the note. The Company simultaneously borrowed $5,131,507
from Dr. Robert G. Martin, a Company director and shareholder, in
exchange for a $5,131,507, 11% note payable due on September 30, 2002.
The note requires quarterly interest only payments prior to the
lump-sum principal repayment in 2002. The note is collateralized by a
second lien on the Company's patents.
Dr. Martin has assigned a security interest in certain of his
undeveloped real estate and his personal guarantee to a commercial bank
which loaned him $5,131,507 on October 5, 1999, the proceeds of which
were used to ultimately retire the Company's note payable to BASF.
F-11
14
In connection with these transactions, the Company awarded Dr. Martin
seven-year warrants to purchase 12 million shares of Series A preferred
stock at $0.23 per share. The proceeds from issuance of the note and
warrants, $5,131,507, were allocated to the note ($2,052,603) and
paid-in capital ($3,078,904) based on the relative fair values of the
securities issued.
The loan from the commercial bank to Dr. Martin is supported by the
commitment of a group of insurance companies to purchase the applicable
note from the bank. The group of insurance companies is also committed
to purchase from the bank the $17,639,648 convertible note issued by
the Company to the bank in 1999.
As described in Note 13, Dr. Martin deposited into an escrow account $1
million which was paid to the Willis Stein group in connection with
closing the Settlement Agreement transaction on December 31, 1999. In
exchange for the $1,000,000, the Company issued to Dr. Martin a
one-year unsecured note, bearing interest at 10%, due on December 31,
2000. In addition, the Company issued to Dr. Martin seven-year warrants
to purchase 4,347,826 shares of Series A preferred stock at $0.23 per
share. The $1,000,000 proceeds were allocated to the note ($262,348 net
of debt discount) and paid-in capital for warrants ($737,652) based on
their relative fair values.
Included in notes payable above is $0, $11,571,526 and $12,894,491 at
December 31, 1998 and 1999, and September 30, 2000, respectively, in
notes which were issued to shareholders.
CONVERTIBLE DEBT
Convertible debt consisted of the following:
December 31, (Unaudited)
--------------------------------- September 30,
1998 1998 2000
---------- ---------- ------------
Unsecured notes payable, due August 26, 1999,
with a variable royalty payment in lieu of
interest (see Note 12), convertible into
6,083,648 shares of Series A and Series B
preferred stock at December 31, 1998, net
of unamortized debt discount of $778,328 at
December 31, 1998. $25,221,672 $ - $ -
Unsecured notes payable, due April 15, 2001,
bearing interest at 12%, convertible into a
variable number of shares of Series A
preferred stock at 90% of the per share
value of an initial public offering or
strategic investment, net of unamortized
debt discount of $413,000, $299,333 and
$96,172 at December 31, 1998 and 1999, and
September 30, 2000, respectively. 350,500 534,167 667,328
Note payable, collateralized by all the
Company's tangible assets, due April 1,
2003, bearing interest at 7.0%, convertible
into a variable number of shares of Series
A preferred stock at 85% of the per share
value of an initial public offering or
strategic investment, net of unamortized
debt discount of $68,931 at December 31,
1998. 11,963,426 - -
F-12
15
December 31, (Unaudited)
--------------------------------- September 30,
1998 1998 2000
---------- ---------- ------------
Note payable to bank, collateralized by all the
Company's tangible and intangible assets,
due January 1, 2005, bearing interest at
10% per annum, convertible into shares of
common stock at $1.01 per share, net of
unamortized debt discount of $2,203,855 and
$1,873,276 at December 31, 1999 and
September 30, 2000, respectively. $ - $15,435,793 $15,507,908
Unsecured notes payable, due on various dates
in 2005, bearing interest at 15%,
convertible into a variable number of
shares of Series A preferred stock at $1.01
per share, or $0.505 per share upon an
initial public offering, net of unamortized
debt discount of $396,360 at September 30,
2000. - - 1,370,640
Unsecured note payable, due July 17, 2005, bearing
interest at 12%, convertible into a
variable number of shares of Series A
preferred stock at $1.01 per share, or
$0.505 per share upon an initial public
offering. - - 150,000
Unsecured notes payable, due on various dates in
2005, bearing interest at 15%, convertible
into a variable number of shares of Series
A preferred stock at $0.77 per share, or
$0.385 per share upon an initial public
offering, net of unamortized debt discount
of $731,049 at September 30, 2000. - - 268,951
----------- ----------- -----------
$37,535,598 $15,969,960 $17,964,827
=========== =========== ===========
At December 31, 1999, the notes payable and convertible debt mature as follows:
2000 $ 1,392,681
2001 1,349,672
2002 5,778,532
2003 714,194
2004 788,367
2005 and beyond 23,511,209
------------
33,534,655
Less imputed interest 5,993,169
------------
$ 27,541,486
============
In August 1996, the Company received $26,000,000 in exchange for (a)
$26,000,000 unsecured notes payable which are convertible into shares
of Series A and B preferred stock, (b) Series C preferred stock, (c)
shares in one of the Company's subsidiaries, (d) warrants to purchase
common stock of the Company and (e) future royalty payments. The
proceeds were allocated to the equity instruments and liabilities based
upon estimated fair market value as follows. The fair value of the
expected stream of royalty payments was estimated to be $3,500,000 (see
Note 12). The Series C preferred stock's primary feature was voting
rights. The stock had no liquidation preference or redemption or
conversion features, nor did it provide for
F-13
16
dividends. Since this stock had only minimal value, a nominal $1,000
was estimated to be the fair market value. The shares of the Company's
subsidiary were assigned a value of $1,000, since the subsidiary had no
operations and the subsidiary was subsequently dissolved. The value of
the warrants was estimated to be zero since they were performance-based
warrants which management estimated would not be exercisable based on
projections (see Note 9). The face value of the convertible notes
payable was $26,000,000. A debt discount totaling $3,502,000 was
recorded and was amortized over the three-year period of the related
debt.
The notes contained an automatic conversion provision. In 1997 holders
of notes aggregating $4,000,000 (face amount) surrendered their notes
following a notice and request by the Company for conversion. The
holders of notes aggregating $22,000,000 (face amount) had not
surrendered or agreed to convert their notes. The matter of the
automatic conversion was in dispute between the Company and the note
holders and was included in the litigation discussed in Note 13. A
$1,000,000 note held by Dr. Martin was converted into 233,956 shares of
Series A preferred stock in 1999.
1998 SHAREHOLDER FINANCING
In 1998, the Company received $763,500 from certain shareholders in
exchange for (a) 12% three-year notes convertible into Series A
preferred stock at 90% of the per share value of an initial public
offering or a future equity investment in the Company of at least
$15,000,000; and (b) ten-year warrants for $763,500 in Series A
preferred stock, exercisable at the per share value of the next equity
investment in the Company of at least $15,000,000. A debt discount of
$551,000 recorded to reflect the value of the warrants is being
amortized over a 36-month period beginning April 15, 1998. The number
of shares into which the notes are convertible is subject to a minimum
such that, if necessary, at the time of an initial public offering or
the next equity investment in the Company of at least $15,000,000, the
value of participating shareholders' shares, options and warrants would
be at least 150% of the shareholders' $2,763,586 basis in these and
prior investments.
BANK FINANCING
During 1997, the Company borrowed $5 million from a commercial bank,
supported by the commitment of a group of insurance companies which
were shareholders of the Company to purchase the applicable note and
mortgage from the bank. The note bore interest at 9.77% and required
quarterly interest only payments in 1998 and quarterly interest and
principal payments based on a 15-year amortization schedule for the
next four years with the remaining balance due on January 1, 2003. The
loan was required to be repaid on completion of an initial public
offering with a 1% prepayment penalty if an offering were completed in
1998. The note was collateralized by a mortgage on the Company's Peru,
Illinois real estate and its equipment.
In 1998, the $5,000,000 note payable described in the preceding
paragraph and 915,000 shares of Series A preferred stock owned by the
group of insurance companies (referred to above) which was purchased by
the Company were restructured into a 7% five-year note convertible into
shares of common stock at $5.00 per share or 85% of the per share value
of a future public offering or strategic equity investment in the
Company of at least $15,000,000. Cash proceeds to the Company were
$1,400,000. Interest of $478,067 was recorded over the seven-month
period until the outstanding obligation equaled the face amount of the
note, $12,032,357, on February 1, 1999. Thereafter, the Company was
required to make quarterly principal and interest payments on a 15-year
amortization schedule and a final balloon payment on April 1, 2003. The
convertible note was collateralized by all the tangible assets of the
Company.
With the agreement of the note holder, the two $323,465 payments of
principal and interest scheduled for July 1 and October 1, 1999, were
deferred until December 30, 1999, at which time, the Company and the
noteholder restructured the note, accrued interest and late fees on the
note as well as an additional $5 million of cash proceeds to the
Company, into a new $17,639,648 convertible note. The amended and
restated note bears interest at 10% and requires quarterly interest and
principal payments based on a 15-year amortization schedule, with the
remaining balance due January 1, 2005. The note is convertible in whole
or in part into shares of the Company's Series A preferred stock at an
exercise price of $1.01 per share. The note is collateralized by all
the Company's tangible and intangible assets. In connection with the
issuance of the note, the Company granted the insurance companies a
7-year warrant for the purchase of 6,025,171 shares of the Company's
common stock at an exercise price of $0.01 per share. The value of the
F-14
17
warrant, $4,599,571, was recorded as debt discount on the note
($2,395,717) and paid-in capital ($2,203,854). The proceeds were
allocated to the note and warrant based on the relative fair value of
the securities issued.
2000 SHAREHOLDER FINANCING
During February 2000 through July 2000, the Company received $1,767,000
from various shareholders in exchange for (a) five year 15% notes
convertible into shares of Series A preferred stock at $1.01 per share,
or $0.505 per share in the event of an initial public offering, (b) and
five year warrants to purchase 773,062 shares of Series A preferred
stock at $0.01 per share.
From July 2000 through August 2000, Dr. Martin paid $1,000,000 for (a)
five year 15% notes convertible into shares of Series A preferred stock
at $0.77 per share, or $0.385 per share in the event of an initial
public offering, (b) five years warrants to purchase 4,069,262 shares
of Series A preferred stock of $0.01 per share, (c) 1% royalty on all
the Company's sales for the next ten years. The proceeds of the above
transactions were allocated to the notes, warrants and royalty
agreements based on the relative fair value of the securities and
agreements issued.
The Company also issued a $150,000 convertible note with a maturity
date of July 17, 2005. This note is convertible at $1.01 a share for
Series A preferred stock or $0.505 per share upon an initial public
offering.
These 2000 debt agreements contain beneficial conversion features,
should the Company enter into an initial public offering. These
beneficial conversion features would result in approximately $2,000,000
of additional interest expense in the event of an initial public
offering.
7. INCOME TAXES
At December 31, 1998 and 1999, and September 30, 2000, the Company had
federal tax net operating loss carryforwards of approximately
$39,000,000, $49,240,000 and $53,930,000 respectively, which begin to
expire in 2007. The provision for income taxes consisted of the
following:
(Unaudited)
Year Ended Nine Months Ended
December 31, September 30,
---------------------------------- -------------------
1998 1999 2000
-------------- --------------- -------------------
Current $ - $ - $ -
Federal - - -
State - - -
-------------- --------------- -------------------
Total current provision - - -
Deferred
Federal 5,128,000 3,504,000 2,209,000
State 699,000 478,000 299,000
-------------- --------------- -------------------
Total deferred provision 5,827,000 3,982,000 2,508,000
Valuation allowance (5,827,000) (3,982,000) (2,508,000)
-------------- --------------- ------------------
Total provision for
income taxes $ - $ - $ -
============== =============== ===================
F-15
18
A reconciliation of the statutory federal tax rate to the actual
effective income tax rate for the years ended December 31, 1998 and
1999, and the nine months ended September 30, 1999 and 2000, is as
follows:
(Unaudited)
Year Ended Nine Months Ended
December 31, September 30,
-------------- --- --------------- ----------------------
1998 1999 2000
-------------- --------------- ----------------------
Statutory rate 34.0% 34.0% 34.0%
State taxes, net of federal
benefit and state credits 4.6 4.6 4.6
Other - - (8.6)
Valuation allowance (38.6) (38.6) (30.0)
-------------- --------------- ----------------------
Effective rate 0% 0% 0%
============== =============== ======================
The components of the net deferred tax assets and liabilities are as
follows:
(Unaudited)
December 31, September 30,
----------------------------------- ----------------
1998 1999 2000
---------------- --------------- ----------------
Deferred tax assets-
Net tax operating loss carryforwards $ 15,070,000 $ 19,007,000 $ 20,313,000
Stock options, warrants, and other 3,095,000 3,305,000 223,000
Property and equipment 184,000 19,000 91,000
Other - - 222,000
---------------- --------------- ----------------
Total deferred tax assets 18,349,000 22,331,000 20,849,000
Deferred tax liabilities-
Valuation allowance (18,349,000) (22,331,000) (20,849,000)
---------------- --------------- ----------------
Net deferred taxes $ - $ - $ -
================ =============== ================
8. SHAREHOLDERS' EQUITY
Series A preferred stock is convertible into shares of common stock at
a rate of one to one, has voting privileges, a stated liquidation
preference amount of $2.25 per share and is entitled to noncumulative
dividends which are declared at the discretion of the Board of
Directors.
Series B and Series C preferred stock were retired in connection with
the 1999 Settlement Agreement transaction discussed in Note 13.
In accordance with the Shareholders' Agreement, the Company has the
right of first refusal on all dispositions of stock, except as
described below. All shareholders are required to give the Company 30
days' written notice of their intention to dispose of shares. The
written notice must include the terms and conditions of the proposed
disposition. The Company has 30 days to purchase all or a portion of
the shares. If the Company chooses not to purchase the shares, the
shareholder must execute the transaction with the proposed purchaser
within 90 days of the written notice. The Company does not have the
right of first refusal if the shares are being transferred to family
members, family trusts or charitable, educational, fraternal or
religious organizations. In addition, 10% shareholders (as defined) may
dispose of a portion of their ownership without consent of the Company,
as long as the fair market value of the shares or the consideration to
be received does not exceed $500,000, subject to certain restrictions.
Beginning in August 1998, 10% shareholders may transfer up to 25% of
their ownership without the Company's consent, as long as the
prospective purchaser is not a competitor.
1999 FINANCING
In September 1999, the Board of Directors approved a shareholder
preemptive rights offering under the terms of which holders of all the
outstanding Series A preferred stock and common stock of the Company
(other than Willis Stein and Partners and Star Polymers who under the
terms of the Settlement Agreement (Note 13) were protected from
dilution effects of the offering) were awarded the right to purchase
13,617,473 additional shares of the Company.
F-16
19
Proceeds from the offering were $2,889,321 including subscriptions
receivable of $414,503, or $0.21 per share.
2000 FINANCING
In June 2000, certain director/shareholders paid $320,000 for 415,584
shares of common stock. In July 2000 the group of insurance companies
which provided the 1999 financing described in Note 6, purchased
926,500 shares of common stock for $713,405.
9. STOCK OPTIONS AND WARRANTS
STOCK OPTIONS
In 1994, the Company adopted incentive and nonstatutory stock option
plans for employees and consultants and has reserved 3,000,000 shares
of common stock and 1,000,000 shares of Series A preferred stock for
issuance under such plans. The plans are administered by the Board of
Directors and provide for the issuance of options to purchase shares of
common stock and Series A preferred stock. Terms of each option,
including the exercise price and vesting period, are determined by the
Board of Directors, and in no event can the life of an option exceed
ten years from the date of grant. Generally, the options vest either
immediately or over a five-year period.
On October 3, 1997, the Company established a Long-Term Equity
Compensation Plan (the "1997 Plan"), which is effective as of the
completion of an initial public offering. The 1997 Plan permits the
grant of nonqualified stock options, incentive stock options, stock
appreciation rights, restricted stock, performance shares and
performance units. The Company reserved 1,000,000 shares of Series A
preferred stock for issuance under the 1997 Plan.
Activity of the stock option plans is as follows:
Shares Under Option
-------------------
Common Series A Preferred
-------------------------------------------- ------------------------------------------
Weighted Weighted
Average Number Average
Number of Exercise Exercise of Exercise Exercise
Shares Price Range Price Shares Price Range Price
------------ ------------ ------------ --------- -------------- -----------
Outstanding as of
January 1, 1998 2,448,946 $.23-5.50 $.29 630,226 $ .44-5.50 $4.43
Issued 224,300 .30-1.00 .97 14,000 5.00-5.50 5.11
Canceled (828,501) .23-.30 .25 (65,000) 3.00-5.50 4.42
Exercised (10,428) .30 .30 - - -
------------ ------------ ------------ --------- -------------- -----------
Outstanding as of
December 31, 1998 1,834,317 .30-5.50 .38 579,226 .44.-5.50 4.45
Issued 717,300 .30 .30 - - -
Canceled (90,090) .30-1.00 .69 (84,818) 3.00-5.50 5.05
Exercised (15,200) .30 .30 (160) .44 .44
------------ ------------ ------------ --------- -------------- -----------
Outstanding as of
December 31, 1999 2,446,327 $ 30-5.50 $.35 494,248 $3.00-5.50 $4.32
============ ============ ============ ========= ============== ===========
Outstanding as of
September 30, 2000
(unaudited) 2,446,327 $.30-5.50 $.35 494,248 $3.00-5.50 $4.32
============ ============ ============ ========= ============== ===========
Exercisable at
December 31, 1999 2,376,427 $.30-5.50 $.35 433,981 $3.00-5.50 $4.11
============ ============ ============ ========= ============== ===========
Exercisable at
September 30, 2000
(unaudited) 2,417,927 $.30-5.50 $.35 458,048 $3.00-5.50 $4.15
============ ============ ============ ========= ============== ===========
F-17
20
The fair value of each option granted in 1998 and 1999 was estimated on
the date of grant based on the Black-Scholes option pricing model
assuming among other things, no dividend yield, expected volatility of
55%, expected life of seven years and an average risk free interest
rate ranging from 6.0% to 6.4%.
The weighted average fair value of the options granted during 1998
under the Company's stock option plan was approximately $4.44 and $3.12
for common stock and Series A preferred stock, respectively. The
weighted average fair value of the common options granted during 1999
under the Company's stock option plan was approximately $0.66. As of
December 31, 1999 and September 30, 2000, the remaining contractual
life of all options was approximately 6.9 and 6.1 years, respectively.
WARRANTS
The Company issued 16,827,763 warrants during 1996 and 1,359,546
warrants during 1997 and 1,116,294 warrants during 1998 in connection
with the issuance of convertible notes payable due in 1999. The
warrants, if exercisable, would have permitted the holders to purchase
additional shares of common stock, which, when combined with shares
issued and to be issued upon conversion of the notes and other equity
instruments, would have equaled 49.92% of the then outstanding common
stock, preferred stock and all securities convertible into or
exercisable for common or preferred stock.
As described in Note 13, the Company was in litigation with certain of
the investors who provided the financing related to the warrants. As
described in Note 13, on December 31, 1999, the transactions described
in the Settlement Agreement closed and the warrants were surrendered
and canceled.
In 1998, the Company issued warrants to purchase 138,818 shares of
Series A preferred stock in connection with the $763,500 convertible
notes (Note 6). Management has assumed an exercise price of $5.50 per
share for these warrants.
As described in Note 6, the Company issued warrants to purchase
6,025,171 shares of common stock at an exercise price of $.01 per share
to the insurance companies in connection with the $17,639,648
convertible note restructured on December 30, 1999.
As described in Notes 6 and 13, Dr. Robert G. Martin, a director and
shareholder, pledged certain personal assets as collateral for the
Company's loan from BASF and, through a loan from a bank, loaned
$5,131,507 to the Company, which proceeds the Company, in turn, used to
retire the BASF note. In addition, Dr. Martin deposited into an escrow
account $1 million in marketable securities as part of the 1999
Settlement Agreement (Note 13). That $1 million was ultimately paid to
the Willis Stein group upon closing the Settlement Agreement
transaction on December 31, 1999.
In consideration of the above, the Company awarded Dr. Martin 7-year
warrants to purchase an aggregate of 16,347,826 shares of Series A
preferred stock at $.23 per share.
Shares Under Warrant
--------------------
Common
-------------------------------- -----------------
Number of Exercise Weighted Average
Shares Price Range Exercise Price
------------- -------------- -----------------
Outstanding as of January 1, 1998 271,617 $ .30 $.30
Issued - - -
Canceled - - -
Exercised - - -
------------- -------------- -----------------
Outstanding as of December 31, 1998 271,617 .30
.30
Issued 6,025,171 .01 .01
Canceled - - -
Exercised - - -
------------- -------------- -----------------
Outstanding as of December 31, 1999 6,296,788 $ .01-.30 $.02
============= ============== =================
Outstanding at September 30, 2000 (unaudited) 6,296,788 $ .01-.30 $.02
============= ============== =================
Exercisable at December 31, 1999 6,296,788 $.01-$.30 $.02
============= ============== =================
Exercisable at September 30, 2000 (unaudited) 6,296,788 $.01-$.30 $.02
============= ============== =================
F-18
21
Shares Under Warrant
--------------------
Series A Preferred
--------------------------------------------------------
Weighted
Number of Exercise Price Average
Shares Range Exercise Price
-------------- ------------------- ---------------
Outstanding as of January 1, 1998 19,814,572 $.00001-5.00 $ .21
Issued 1,255,113 $.00001-5.00 $ .55
Canceled - - -
Exercised - - -
-------------- ------------------- ---------------
-------------- ------------------- ---------------
Outstanding as of December 31, 1998 21,069,685 $.00001-5.00 $ .23
Issued 16,347,826 .23 .23
Canceled 19,303,603 .00001 .00001
Exercised - - -
-------------- ------------------- ---------------
Outstanding as of December 31, 1999 18,113,908 .01-5.00 .48
Issued 4,842,324 .01 .01
Canceled - - -
Exercised - - -
-------------- ------------------- ---------------
Outstanding at September 30, 2000 (unaudited) 22,956,232 $ .01-5.00 $ .38
============== =================== ===============
Exercisable at December 31, 1999 18,113,908 $ .01-5.00 $ .48
============== =================== ===============
Exercisable at September 30, 2000 (unaudited) 22,956,232 $ .01-5.00 $ .38
============== =================== ===============
The fair value of each warrant granted in 1998, 1999 and 2000 was
estimated on the date of grant based on the Black-Scholes option
pricing model assuming, among other things, no dividend yield, an
average risk-free interest rate of 6.0%, expected volatility of 55% and
expected life of seven years.
The weighted average fair value of the Series A preferred warrants
granted for the years ended December 31, 1998 and 1999, and the nine
months ended September 30, 2000, was approximately $.44, $.65 and $.76
respectively. As of December 31, 1999 and September 30, 2000, the
remaining contractual life of Series A warrants was approximately 6.9
and 5.9 years, respectively. As of December 31, 1999 and September 30,
2000, the remaining contractual life of the common warrants was
approximately 6.9 and 6.2 years, respectively.
PRO FORMA RESULTS
Had the Company accounted for its options in accordance with Statement
123, 1998 and 1999 pro forma net loss would have been approximately
$15,577,370 and $12,078,596, respectively. The pro forma loss for the
nine months ended September 30, 2000 would have been $ 8,695,977. The
pro forma disclosure is not likely to be indicative of pro forma
results which may be expected in future years because of the fact that
options vest over several years, compensation expense is recognized as
the options vest and additional awards may be granted.
10. BENEFIT PLANS
On January 1, 1996, the Company adopted a 401(k) savings plan.
Employees meeting certain eligibility requirements, as defined, may
contribute a percentage of pretax gross wages up to the legally defined
deferral limit. The Company may make discretionary contributions. As of
December 31, 1998 and 1999, and September 30, 2000, the Company has not
made any contributions to the plan.
F-19
22
11. OPERATING LEASES
The Company leases certain equipment and office space under operating
leases. Total rent expense was $441,072 and $314,452 for the years
ended December 31, 1998 and 1999, respectively, and $205,137 for the
nine months ended September 30, 2000.
Future minimum lease commitments of the Company under noncancelable
operating leases are as follows at December 31, 1999:
2000 $ 85,688
2001 74,750
2002 19,498
-----------
$179,936
===========
12. COMMITMENTS AND CONTINGENCIES
In 1994, the Company entered into a licensing agreement with a
shareholder for the use of patent rights. The licensing agreement
requires the Company to pay $7,500,000 in cumulative royalties. Annual
payments are based upon sales volume except that minimum annual
payments of $50,000 are required to be made beginning year 2000.
Royalty payments, as a percentage of sales, are 4% for the first
$2,000,000 in royalties, decreasing one percentage point to a floor of
1% for each $2,000,000 in royalties paid until $7,500,000 in cumulative
royalties is paid. Royalty expense relating to this agreement was
$40,305 and $16,664 for the years ended December 31, 1998 and 1999,
respectively, and $10,983 for the nine months ended September 30, 2000.
While royalties have been accrued based on 4% of agricultural sales,
royalties were first paid beginning July 1999.
During 1996, the Company entered into a royalty agreement with certain
convertible note holders in connection with the issuance of $26,000,000
(face value) in convertible debt and other equity instruments. The
agreement required annual royalty payments, equal to 7.28% of net sales
beginning with 1997 sales. The royalty payments would terminate on the
first to occur of (a) an acceptable sale or public offering as defined
in the agreement or (b) any date after December 31, 2000, as of which
the net present value of the sum of all royalty payments plus a
hypothetical final payment of $15,600,000, all discounted at a rate of
30%, equaled $15,600,000. The estimated fair value of this obligation,
plus imputed interest at 30%, was included in the accompanying
consolidated balance sheet at December 31, 1998, as a royalty
obligation. In 1999, imputed interest expense was recorded in an amount
necessary to reflect the value of the royalty obligation as a component
of the securities exchanged upon closing of the Settlement Agreement.
Imputed interest expense was $1,485,750 and $1,175,161 for the years
ended December 31, 1998 and 1999 respectively. The royalty obligation
was canceled upon closing the Settlement Agreement transactions
described in Note 13.
The Company maintains an employment agreement expiring on June 30,
2001, renewable for two additional years at the employee's option, with
a certain key employee providing for minimum aggregate annual payments
of $185,000 and severance in the event of termination. Under the
agreement, the employee is also eligible for cash and stock bonuses.
The Company has also agreed to provide $550,000 in life insurance
coverage for the employee.
The Company and Dr. Gerald Gleich, Vice President of Research of its
subsidiary, Donlar Pharmaceutical Corporation, entered into an
agreement in May, 1997, whereby the Company purchased certain patents
relating to the use of polyaspartates in a wide variety of allergic
conditions. In return for those patents, Dr. Gleich was granted a 10%
interest in Donlar Pharmaceutical Corporation and the right to receive
royalties on sales of products based on those patents at rates ranging
from 0.5% to 2.0%, to a maximum aggregate royalty of $10 million. No
value has been assigned to the acquired patents. The length of time
involved in realizing the value from a pharmaceutical patent makes such
a valuation not determinable.
F-20
23
13. LITIGATION
In October 1998, the Company filed a complaint for injunction relief,
declaratory judgement and actual and punitive damages in response to a
September, 1998, complaint for injunctive and other relief by Willis
Stein and Star Polymers which sought immediate exercisability of the
warrants issued in connection with the 1996 Agreement described in Note
6.
In 1999, the parties reached a settlement under the terms of which
their legal actions were terminated. Under the terms of the Settlement
Agreement (a) the Company paid at closing, on December 31, 1999, a
combined $8 million in cash and a $9 million in 10% seven-year notes to
Willis Stein and Star Polymers, (b) the warrants and royalties and
Series B and C preferred stock were cancelled, (c) the two
representatives of Willis Stein and Star Polymers resigned from the
Board of Directors, and (d) the notes were converted into a 20,278,456
shares of Series A preferred stock. Willis Stein and Star Polymers
combined are also entitled to receive one share of common or Series A
preferred stock for every three shares of common or Series A preferred
stock issued in the future as a result of the exercise or conversion of
options, warrants and convertible debt outstanding at December 31,
1999, with exercise or conversion prices greater that $1.00 per share.
14. RELATED-PARTY TRANSACTIONS
One of the Company's common shareholders was a distributor for the
Company. Sales to this customer totaled approximately $14,000 and $0
for the years ended December 31, 1998 and 1999, respectively, and $0
for the nine months ended September 30, 2000.
Engineering services for the Company's new manufacturing facility in
Peru, Illinois, amounting to approximately $24,000 and $0 for the years
ended December 31, 1998 and 1999, and $0 for the nine months ended
September 30, 2000, were provided by a holder of convertible notes and
preferred stock. Of these amounts, approximately $0 is included in
accounts payable as of December 31, 1998 and 1999, and September 30,
2000.
The Company incurred approximately $649,000 and $375,000 during 1998
and 1999, respectively, and $0 for the nine months ended September 30,
2000, in fees to a law firm which had options to purchase 12,500 shares
of Series A preferred stock of the Company.
Consulting services amounting to $7,500 and $0 for the years ended
December 31, 1998 and 1999, respectively, and $0 for the nine months
ended September 30, 2000, were provided by a company of which a
shareholder is a director and owner.
15. SEGMENT INFORMATION
The Company has two reportable segments: Life Sciences and BioPolymers.
Both are in the market development stage of operation. The Life
Sciences segment has derived its revenues to date from the agriculture
market in the United States, in which its product is used as a plant
nutrient absorption enhancer. The BioPolymers segment has derived its
revenues to date from the water technology and detergents industries in
Europe. The products perform as biodegradable scale and corrosion
inhibitors in water processing and as antiredeposition agents in
detergents.
Both segments rely on common manufacturing facilities in the United
States. Excess capacity costs associated with those facilities and the
write-down of raw material inventory to market value are charged to
cost of product, but are not allocated to segments. Unallocated costs
relating to corporate headquarters in the United States include legal,
accounting, administrative and certain general research costs. Costs
incurred outside the United States are not material. Long lived assets
and related depreciation as well as inventory are not separately
identifiable by segment. Interest income and expense is not allocated
by segment.
F-21
24
(Unaudited)
Years Ended Nine Months Ended
December 31, September 30,
------------------------------------ ------------------
1998 1999 2000
---------------- --------------- ------------------
Revenues
Life Sciences $ 972,414 $ 415,692 $ 259,803
BioPolymers 268,833 378,031 720,197
---------------- --------------- ------------------
Total $ 1,241,247 $793,723 $ 980,000
================ =============== ==================
Loss-
Life Sciences $ 4,907,839 $ 2,892,519 $1,213,848
BioPolymers 1,189,730 1,164,575 1,087,795
Unallocated Costs
Cost of product 1,462,068 3,309,681 945,618
Selling, general and
administrative 4,247,442 1,227,153 1,499,256
Other expenses 4,620,442 4,349,497 4,601,930
---------------- --------------- ------------------
Loss before income tax $ 15,186,274 $12,149,702 $8,368,447
================ =============== ==================
16. BUSINESS COMBINATION
On August 7, 2000, Donlar entered into an agreement with Biomune
Systems, Inc. ("Biomune") to buy 427,311 shares of Biomune's common
stock, approximately 19.9%, in exchange for a $1,115,025, 10% note
receivable, due December 31, 2000. A partial settlement of the note
receivable was made for $563,500, for 1,127,000 shares of Biomune's
common stock.
17. SUBSEQUENT EVENTS
In October 2000 the group of insurance companies which provided the
financing described in Note 6, purchased 926,500 shares of common stock
for $713,405.
On November 3, 2000, Biomune and Donlar amended their August 7, 2000
purchase agreement. The restructured transaction will take place in
three phases. Biomune announced a 1 for 5 reverse split of its common
stock. Biomune received $563,500 ($63,500 prior to the fiscal year end)
in cash as partial payment to the $1.1 million note and issued
1,127,000 shares of its common stock to Donlar.
Secondly, Donlar transferred the exclusive right to distribute and the
exclusive right to all future sales from Donlar's crop nutrition
management and oil field products to Biomune. Biomune also received
certain research and development activity and $1,850,000 in cash, in
exchange for issuing 40,152,520 additional shares of common stock, so
that Donlar now owns approximately 96% of Biomune's common stock. In
addition, Donlar cancelled the remaining portion of the $1.1 million
note payable to Biomune. Donlar now owns 41,279,520 shares of Biomune's
common stock.
In January 2001, the Company transferred all of its assets and
associated liabilities, excluding those related to Donlar's existing
patent rights and all intellectual property relating to its genetic
research activities, to Biomune as a capital contribution.
F-22
25
INTRODUCTION TO UNAUDITED PROFORMA CONDENSED COMBINED STATEMENTS
OF OPERATIONS AND BALANCE SHEETS
The following unaudited proforma condensed combined statements of operations and
balance sheets give effect to Donlar Corporation's ("Donlar") purchase of a 96%
interest in Biomune Systems Inc. ("Biomune"), pursuant to their November 3, 2000
purchase agreement and their January 2001 agreement to transfer substantially
all of Donlar's assets and associated liabilities to Biomune, and are based on
the estimates and assumptions set forth below and in the notes to such
statements which include pro forma adjustments. This proforma information has
been prepared utilizing the historical financial statements of Donlar and
Biomune as described below. This information should be read in conjunction with
the historical financial statements and notes thereto. The pro forma financial
data has been included as required by the rules and regulations of the SEC and
is provided for comparative purposes only. The pro forma financial data does
not purport to be indicative of the results which actually would have been
obtained if the purchase agreement had been effected on the date or dates
indicated or of those results which may be obtained in the future.
On November 3, 2000, Biomune agreed to buy the exclusive right to distribute
Donlar's crop nutrition management and oil field products and $2,413,500 in
exchange for issuing 41,279,520 shares of its common stock (96% ownership
interest) to Donlar. Since this represents a change in control of Biomune, the
transaction will be treated as a purchase of Biomune by Donlar. The purchase
price is considered to be the estimated fair value of 4% of Donlar's stock which
approximates 96% of the fair market value of Biomune's assets. The quoted market
price of Biomune's outstanding shares is not used as the purchase price since
these shares are unregistered and it is management's belief that the fair value
of 4% of Donlar's shares is more readily determinable than the fair value of the
shares outstanding.
The estimated fair value used in the pro forma financial statements are based on
available information as applied to the balance sheet of Donlar as of September
30, 2000. The eventual allocation could vary from the pro forma adjustments.
The pro forma financial statements are presented as of and for the 9 months and
12 months ending September 30, 2000 and December 31, 1999, respectively.
Donlar's and Biomune's fiscal year-ends are December 31, and September 30,
respectively.
F-23
26
DONLAR CORPORATION AND BIOMUNE SYSTEMS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEETS
September 30, September 30,
2000 2000 Pro Forma Pro Forma
Donlar Biomune Adjustments Combined
----------- ------------ ------------ -----------
ASSETS
Current assets
Cash $ (60,076) $ 1,780 $ - $ (58,296)
Receivables, net 262,629 91,214 353,843
Stock subscription receivable - 500,000 (1) (500,000) -
Inventories, net 2,699,547 168,040 - 2,867,587
Other current assets 142,970 25,000 - 167,970
----------- ------------ ------------ -----------
Total current assets 3,045,070 786,034 (500,000) 3,331,104
Equity securities - 864,434 - 864,434
Investment in affiliate 563,500 - (1) (563,500) -
Property, plant and equipment, net 10,494,477 70,089 (2) 55,000 10,619,566
(9) (1,859,580)
Intangibles, net 1,859,580 6,579 (6) 1,213,120 1,219,699
Other 10,000 6,657 (5) 340,000 356,657
----------- ------------ ------------ -----------
$15,972,627 $ 1,733,793 $ (1,314,960) $16,391,460
=========== ============ ============ ===========
Current liabilities
Accounts payable $ 444,072 $ 448,416 $ - $ 892,488
Accrued expenses 3,629,724 100,000 (5) 340,000 4,069,724
Current portion of notes payable 2,493,045 253,408 (1) (500,000) 2,246,453
----------- ------------ ------------ -----------
Total current liabilities 6,566,841 801,824 (160,000) 7,208,665
Long-term liabilities
Notes payable 12,078,904 - - 12,078,904
Convertible debt 16,787,369 - - 16,787,369
Commitments and contingencies - - - -
Shareholders' equity
(8) (3,095,530)
Common stock 3,099,422 971 (1) (563) 4,300
Preferred stock 31,511,004 195,172 (8) (31,511,004) 195,172
(8) (44,332)
(6) 1,268,120
(9) (1,859,580)
(3) (45,618,990)
(8) 31,511,004
(8) 3,095,530
Additional paid in capital 16,390,366 46,386,802 (1) (562,937) 50,565,983
Accumulated deficit (70,416,947) (45,618,990)(3) 45,618,990 (70,416,947)
Shareholder receivables (44,332) (31,986)(8) 44,332 (31,986)
----------- ------------ ------------ -----------
(19,460,487) 931,969 (1,154,960) (19,683,478)
----------- ------------ ------------ -----------
$15,972,627 1,733,793 $ (1,314,960) $16,391,460
=========== ============ ============ ===========
F-24
27
DONLAR CORPORATION AND BIOMUNE SYSTEMS, INC.
UNAUDITED PROFORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
Nine months ended September 30, 2000
Pro Forma Pro Forma
Donlar Biomune adjustments combined
----------- --------- ----------- ------------
Net sales $ 980,000 $ 511,514 $ - $ 1,491,514
Cost of goods sold 1,412,884 377,269 - 1,790,153
----------- ----------- ----------- ------------
Gross profit (loss) (432,884) 134,245 - (298,639)
Selling, research, general and (4) 13,500
administrative expenses 3,336,497 4,556,836 (7) 233,000 8,139,833
----------- ----------- ----------- ------------
Operating loss (3,769,381) (4,422,591) (246,500) (8,438,472)
Other (expense) income
Interest income 6,316 17,894 - 24,210
Interest expense (4,605,382) (212,080) - (4,817,462)
Loss on investment in affiliate - (450,377) - (450,377)
(Loss) gain on sale of equity securities - (692,792) - (692,792)
Gain on sale of product line - - - -
Other - 16,181 - 16,181
----------- ----------- ----------- ------------
Total other expenses (4,599,066) (1,321,174) - (5,920,240)
----------- ----------- ----------- ------------
Loss before income taxes (8,368,447) (5,743,765) (246,500) (14,358,712)
Income taxes - - - -
----------- ----------- ----------- ------------
NET LOSS $(8,368,447) $(5,743,765) $ (246,500) $(14,358,712)
=========== =========== ============ ============
F-25
28
DONLAR CORPORATION AND SUBSIDIARIES
UNAUDITED PROFORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
Twelve months ended December 31, 1999
Pro Forma Pro Forma
Donlar Biomune adjustments combined
--------------- --------------- --------------- ----------------
Net sales $ 793,723 $ 483,027 $ - $ 1,276,750
Cost of goods sold 3,634,861 443,455 - 4,078,316
--------------- --------------- --------------- ----------------
Gross profit (loss) (2,841,138) 39,572 - (2,801,566)
Selling, research, general and (4) 18,000
administrative expenses 4,896,524 1,008,916 (7) 310,500 6,233,940
--------------- --------------- --------------- ----------------
Operating loss (7,737,662) (969,344) (328,500) (9,035,506)
Other (expense) income
Interest income 31,716 70,385 - 102,101
Interest expense (4,443,756) (64,329) - (4,508,085)
Loss on investment in affiliate - (1,506,000) - (1,506,000)
(Loss) gain on sale of equity securities - 304,053 - 304,053
Gain on sale of product line - 301,775 - 301,775
Other - 9,840 - 9,840
--------------- --------------- --------------- ----------------
Total other expenses (4,412,040) (884,276) - (5,296,316)
--------------- --------------- --------------- ----------------
Loss before income taxes (12,149,702) (1,853,620) (328,500) (14,331,822)
Income taxes - - - -
--------------- --------------- --------------- ----------------
NET LOSS $(12,149,702) $(1,853,620) $(328,500) $(14,331,822)
=============== =============== =============== ================
F-26
29
NOTES TO UNAUDITED PRO FORMA CONDENSED STATEMENTS OF
OPERATIONS AND BALANCE SHEETS
The pro forma condensed combined financial statements do not purport to be
indicative of the results which could actually have been obtained if the
purchase agreement had been consummated on the date or dates indicated or which
may be obtained in the future.
(1) To eliminate the stock subscription receivable and investment in
subsidiary.
(2) To restate Biomune's property, plant and equipment to estimated fair
value and to reverse prior accumulated depreciation.
(3) To eliminate Biomune's accumulated losses.
(4) To increase depreciation expense on the assumed write-up of Biomune's
assets to estimated fair value.
(5) To accrue direct costs of the transaction.
(6) To set up goodwill associated with the purchase price.
(7) To amortize the goodwill and direct costs of the transaction over
five years.
(8) To eliminate the Donlar common stock, preferred stock and shareholder
receivable.
(9) To leave the patents and intellectual property outside the entity.
F-27
30
Item 9. CHANGE IN FISCAL YEAR
The Board of Directors of Biomune have elected to adopt a calendar year as
Biomune's fiscal year starting with the year 2000.
31
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registration has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
BIOMUNE SYSTEMS, INC.
By: /s/ Larry P. Koskan
-------------------------------
Its: President and Chief Executive Officer