AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 3, 2002
REGISTRATION STATEMENT NO. 333-90568
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AMENDMENT NO. 3
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
DONLAR CORPORATION
(Exact Name of Registrant as specified in its Charter)
<Table>
ILLINOIS 2891 36-3683785
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification No.)
</Table>
---------------------
6502 SOUTH ARCHER ROAD
BEDFORD PARK, ILLINOIS 60501
(708) 563-9200
(Address, Including Zip Code, and Telephone Number, Including
Area Code of Registrant's Principal Executive Offices)
LARRY P. KOSKAN
PRESIDENT AND CHIEF EXECUTIVE OFFICER
DONLAR CORPORATION
6502 SOUTH ARCHER ROAD
BEDFORD PARK, ILLINOIS 60501
(708) 563-9200
(Name, Address, Including Zip Code, and Telephone
Number, Including Area Code, of Agent for Service)
---------------------
COPIES TO:
STEPHEN J. GREENBERG, ESQ.
DUANE MORRIS LLP
ONE LIBERTY PLACE
PHILADELPHIA, PA 19103-7396
(215) 979-1223
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As soon as practicable after the registration statement is declared
effective and the satisfaction or waiver of all of the conditions to the
proposed merger of Donlar Biosyntrex Corporation with and into Donlar
Corporation, as is described in the enclosed information statement/prospectus.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
CALCULATION OF REGISTRATION FEE
<Table>
<Caption>
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITY TO BE REGISTERED REGISTERED(1) PER UNIT(2) OFFERING PRICE(2) REGISTRATION FEE(3)
- ---------------------------------------------------------------------------------------------------------------------------
Common stock, no par value per share... 20,793,360 $0.52 $10,812,547 $999
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
</Table>
(1) The number of common shares, no par value, of Donlar Corporation, an
Illinois corporation, to be registered is based upon the number of common
shares, with no par value, of Donlar Corporation to be issued as part of the
restructuring plan described in the attached information
statement/prospectus, including shares to be issued in the merger of Donlar
Biosyntrex Corporation with and into Donlar Corporation.
(2) Estimated solely for the purpose of determining the registration fee in
accordance with Rule 457(f) under the Securities Act of 1933, as amended.
The above calculation is based on the average of the bid and ask prices for
the common stock on Donlar Biosyntrex Corporation as reported on the NASD
over-the-counter bulletin board on June 11, 2002, and adjustment thereof
based on the ratio of the number of shares of Donlar Biosyntrex Corporation
to be cancelled or exchanged as part of the restructuring plan, including
the merger (48,816,662) to the number of shares of Donlar Corporation common
stock to be issued as part of the restructuring plan, including the merger
(20,793,360).
(3) $92 per $1,000,000 of aggregate offering price, pursuant to Section 6(b) of
the Securities Act of 1933.
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
INFORMATION STATEMENT/PROSPECTUS
<Table>
PROSPECTUS OF INFORMATION STATEMENT OF
DONLAR CORPORATION DONLAR BIOSYNTREX CORPORATION
</Table>
WE ARE REGISTERING 20,793,360 SHARES OF DONLAR COMMON STOCK, NO PAR VALUE.
NO PUBLIC MARKET CURRENTLY EXISTS FOR DONLAR COMMON STOCK. THE AVERAGE BID AND
ASK PRICE OF DONLAR BIOSYNTREX COMMON STOCK AS REPORTED ON THE NASD
OVER-THE-COUNTER BULLETIN BOARD ON SEPTEMBER 13, 2002, WAS $0.125.
The boards of directors of Donlar Corporation and Donlar Biosyntrex
Corporation have unanimously approved the merger of the two companies. The
holders of Donlar's common stock and preferred stock, except as otherwise
provided in this information statement/prospectus, will receive approximately
0.49 shares of combined company common stock for each share of Donlar common
stock or preferred stock that they own. The holders of Donlar Biosyntrex's
common stock (other than Donlar) and Series B preferred stock will receive
approximately 0.26 shares of combined company common stock for each share of
Donlar Biosyntrex stock that they own and the holders of Donlar Biosyntrex's
Series A preferred stock will receive one share of combined company common stock
for each originally issued share of Series A preferred stock that they own.
Donlar has adopted a 2002 Equity Incentive Plan as described in this information
statement/prospectus which, if approved by the companies' shareholders, will be
effective upon consummation of the merger.
Each of us will hold a meeting of our shareholders on October , 2002 to
consider and vote on the approval of the merger and the adoption of the equity
incentive plan. We are required to send Donlar Biosyntrex shareholders a copy of
this information statement/prospectus at least 20 calendar days prior to the
meeting date. The merger must be approved by a majority of the Donlar Biosyntrex
common and Series A preferred shareholders and by two-thirds of the Donlar
common shareholders. Because Donlar owns approximately 68% of the Donlar
Biosyntrex common stock and Dr. Kamal Modir, Peter LeDonne, Jr. and Kenneth
Hubbard, collectively owning or controlling a majority of the Donlar Biosyntrex
Series A preferred stock, and Dr. Robert Martin, the Willis Stein Group and
Donlar's executive officers, collectively owning or controlling approximately
84% of the voting interests in Donlar, have entered into agreements to vote for
the approval of the merger, Donlar and Donlar Biosyntrex can cause the merger to
occur without the affirmative vote of any other holder of shares. Donlar also
has sufficient votes to cause the approval of the adoption of the equity
incentive plan by the Donlar Biosyntrex shareholders without the affirmative
vote of any other shareholder.
WE ARE NOT ASKING YOU FOR A PROXY AND DO NOT SEND US A PROXY
Please read this information statement/prospectus carefully. YOU SHOULD
READ THE "RISK FACTORS" SECTION BEGINNING ON PAGE 10 FOR A DESCRIPTION OF
VARIOUS RISKS YOU SHOULD CONSIDER IN EVALUATING THE MERGER AND THE EQUITY
INCENTIVE PLAN. This document incorporates important business and financial
information about Donlar and Donlar Biosyntrex. See "Where You Can Find More
Information" on page 65.
/s/ LARRY P. KOSKAN
Larry P. Koskan,
President and Chief Executive Officer
Donlar Corporation and Donlar Biosyntrex Corporation
NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED
THE COMMON STOCK TO BE ISSUED UNDER THIS DOCUMENT OR PASSED UPON THE ADEQUACY OR
ACCURACY OF THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
This information statement/prospectus is dated , 2002, and is
intended to be first mailed to shareholders on or about , 2002.
REFERENCES TO ADDITIONAL INFORMATION
THIS INFORMATION STATEMENT/PROSPECTUS INCORPORATES IMPORTANT BUSINESS AND
FINANCIAL INFORMATION ABOUT DONLAR AND DONLAR BIOSYNTREX THAT IS NOT INCLUDED IN
OR DELIVERED WITH THIS DOCUMENT. THIS INFORMATION IS AVAILABLE WITHOUT CHARGE TO
YOU IF YOU CALL OR WRITE TO LARRY P. KOSKAN, PRESIDENT AND CHIEF EXECUTIVE
OFFICER OF DONLAR CORPORATION AND DONLAR BIOSYNTREX CORPORATION, 6502 SOUTH
ARCHER ROAD, BEDFORD PARK, ILLINOIS 60501 (708) 563-9200. IN ORDER TO OBTAIN
TIMELY DELIVERY OF DOCUMENTS IN ADVANCE OF THE SPECIAL MEETING, YOU SHOULD
REQUEST INFORMATION AS SOON AS POSSIBLE, BUT NO LATER THAN , 2002.
DONLAR BIOSYNTREX CORPORATION
6502 SOUTH ARCHER ROAD
BEDFORD PARK, ILLINOIS 60501
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
Donlar Biosyntrex Corporation will hold a special meeting of shareholders
at its offices at 6502 South Archer Road, Bedford Park, Illinois 60501 on
October , 2002 at 11:00 a.m. local time to consider and vote upon a proposal
to adopt the Amended and Restated Agreement and Plan of Merger, dated as of June
7, 2002, between Donlar Biosyntrex and Donlar Corporation, an Illinois
corporation and majority shareholder of Donlar Biosyntrex, and, in connection
with the merger, a proposal to approve the adoption of Donlar's 2002 Equity
Incentive Plan. Under the merger agreement, among other things:
- Donlar Biosyntrex will merge with Donlar, with Donlar being the surviving
corporation;
- the articles of incorporation of Donlar will be the articles of
incorporation of the combined company and will be amended to increase the
total number of authorized shares of capital stock from 60,000,000 shares
of common stock and 38,000,000 shares of preferred stock to 200,000,000
shares of common stock and 100,000,000 shares of preferred stock;
- the outstanding shares of Donlar Biosyntrex common stock (other than
those owned by Donlar) and Series A and Series B preferred stock will
convert into the right to receive approximately 4.0 million and 21,000
shares of common stock, respectively, of the combined company upon
completion of the merger which collectively will represent approximately
19.5% of the outstanding combined company common stock and 4.3 % on a
fully diluted basis;
- the shares of Donlar common stock and preferred stock owned by Dr. Robert
Martin, Willis Stein & Partners, L.P. and its affiliate, Star Polymers,
L.L.C., and the debt and other interests in Donlar and Donlar Biosyntrex
owned by them, will be exchanged for shares of the combined company
common and preferred stock in accordance with the restructuring plan
described in the information statement/prospectus. The shares of Donlar
common stock owned by TFIC, Inc. will be cancelled. All other outstanding
shares of Donlar common and preferred stock will convert into the right
to receive approximately 1.4 million and 7.3 million shares of combined
company common stock, respectively, upon completion of the merger,
collectively representing approximately 41.6% of the outstanding combined
company common stock and 9.2% on a fully diluted basis;
- all issued and outstanding shares of Donlar Biosyntrex owned by Donlar
will be cancelled;
- all outstanding warrants, options or rights of any kind to acquire any
shares of capital stock or other securities of any kind from Donlar or
Donlar Biosyntrex will be cancelled except for Donlar's and Donlar
Biosyntrex's principal lender's right to acquire shares of Donlar's
common stock upon conversion of certain loans as described in the
information statement/prospectus; and
- the board of directors of the combined company will consist of the
current members of the Donlar board (which is currently identical to the
Donlar Biosyntrex board).
The 2002 Equity Incentive Plan will be effective upon approval by the
shareholders and consummation of the merger. The equity incentive plan contains
essentially the same terms as the Donlar Biosyntrex 2001 Equity Incentive Plan.
It will authorize an aggregate of 5.0 million shares of combined company common
stock to be used for awards to directors, management, employees and consultants
of the combined company and its subsidiaries.
We describe the merger agreement and the equity incentive plan more fully
in the attached information statement/prospectus, which includes as Appendix A,
a copy of the merger agreement and as Appendix B a copy of the equity incentive
plan.
The affirmative vote of the holders of a majority of the outstanding shares
of Donlar Biosyntrex common stock and Series A preferred stock, on an as
converted basis, voting as a single class, is required to approve the merger
agreement and approve the adoption of the equity incentive plan. The merger must
also be approved by a majority of the outstanding shares of Series A preferred
stock voting as a separate class. Donlar Biosyntrex has written agreements with
the holders of a majority of the outstanding shares of Series A
preferred stock providing that such holders will (a) exchange their Series A
preferred stock for combined company common stock on the basis of one share of
combined company common stock for each share of originally issued Series A
preferred stock (i.e., excluding dividend shares) (totaling approximately 21,000
shares) and (b) vote for approval of the merger agreement and the related
transactions.
We have fixed the close of business on September 12, 2002 as the record
date for determining the shareholders of Donlar Biosyntrex entitled to vote at
the Donlar Biosyntrex special meeting and any adjournments or postponements of
the meeting. Only holders of record of Donlar Biosyntrex common stock and Series
A preferred stock at the close of business on that date are entitled to notice
of and to vote at the Donlar Biosyntrex special meeting. Because Donlar holds
68% of the outstanding common stock in Donlar Biosyntrex and has written
agreements with the holders of a majority of the outstanding Series A preferred
stock to vote for approval of the merger agreement and related transactions, it
can cause approval of the merger and the adoption of the equity incentive plan
without the affirmative vote of any other holder of shares.
The board of directors of Donlar Biosyntrex, in accordance with Nevada law,
unanimously recommends that you vote "FOR" approval of the merger agreement and
"FOR" approval of the adoption of the equity incentive plan.
Donlar Biosyntrex shareholders have the right to dissent from the merger
agreement and receive a payment in cash of the fair value of their Donlar
Biosyntrex shares by strictly complying with the requirements of Nevada law as
described in the attached information statement/prospectus and Appendix C
thereto.
WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A
PROXY.
Please read this information statement/prospectus carefully. In particular,
you should read the "Risk Factors" section for a description of various risks
you should consider in evaluating the merger.
By Order of the Board of Directors of
Donlar Biosyntrex Corporation
Larry P. Koskan
President and Chief Executive Officer
Bedford Park, Illinois
, 2002
TABLE OF CONTENTS
<Table>
QUESTIONS AND ANSWERS ABOUT THE MERGER...................... 1
SUMMARY..................................................... 5
THE COMPANIES............................................. 5
THE MERGER................................................ 5
Nature of the Merger................................... 5
Background of the Merger -- Restructuring Plan......... 5
What Donlar Biosyntrex Shareholders Will Receive as a
Result of the Merger.................................. 5
What Donlar Shareholders Will Receive as a Result of
the Merger............................................ 6
What Dr. Robert Martin, Willis Stein & Partners, L.P.
and Star Polymers, L.L.C. Will Receive as a Result of
the Restructuring Plan................................ 6
The Convertible Loans.................................. 6
The 1998 and 2000 Noteholders.......................... 7
Ownership of the Combined Company Following the
Completion of the Restructuring Plan, Including the
Merger................................................ 7
Inclusion of Shares of Donlar Common Stock for Trading
on the NASD Over-the-Counter Bulletin Board........... 7
It is not Anticipated that the Combined Company Will
Pay Dividends Following the Merger.................... 7
The Tax Consequences of the Merger Are Uncertain....... 7
There are no Material Federal or State Regulatory
Requirements Necessary to Consummate the Merger....... 7
Donlar Biosyntrex Shareholders Will Have Appraisal
Rights................................................ 7
Board of Directors and Management of the Combined
Company Following the Merger.......................... 8
Comparative Per Share Market Price Information......... 8
Determination of Exchange Ratios....................... 8
Accounting Treatment................................... 8
When We Expect the Merger to Close..................... 8
Our Reasons for the Merger and Adoption of Equity
Incentive Plan........................................ 8
We Recommend that Donlar Biosyntrex Shareholders
Approve the Agreement and Plan of Merger and Approve
the Adoption of the Donlar 2002 Equity Incentive
Plan.................................................. 9
The Donlar Biosyntrex Special Meeting.................. 9
RISK FACTORS................................................ 10
Donlar Biosyntrex And Donlar Both Have A History Of
Operating Losses And May Never Become Profitable....... 10
Donlar's And Donlar Biosyntrex's Recurring Losses Raise
Doubt About Their Ability To Continue As A Going
Concern................................................ 10
If The Combined Company Cannot Satisfy Its Substantial
Debt Obligations, It Will Negatively Effect The Value
Of Its Stock........................................... 10
The Restructuring Plan Involves Substantial Dilution To
Shareholders........................................... 10
If The Combined Company Sells Additional Equity
Securities, It May Result In Additional Shareholder
Dilution............................................... 11
The Trading Price Of The Combined Company's Common Stock
Is Likely To Be Volatile............................... 11
The Combined Company Is Unlikely To Pay Dividends......... 12
If The Combined Company Is Not Successful In
Commercializing Its Products, It Will Not Be Able To
Generate Enough Income To Cover Its Operating Expenses
And Debt Service....................................... 12
If The Combined Company's Agricultural Customers Do Not
Accept Its Products, It Will Negatively Affect
Revenues............................................... 12
</Table>
i
<Table>
If The Combined Company Cannot Protect Its Proprietary
Information, It May Lead To Increased Competition And
Expenses And Decreased Revenues........................ 12
The Combined Company May Not Be Able To Maintain Or
Increase Sales Revenues Due To Competition............. 13
The Combined Company's Limited Manufacturing Capacity and
Experience May Have A Material Adverse Effect On Its
Results Of Operations.................................. 14
If The Combined Company's Operation Of Its Manufacturing
Facility Is Materially Disrupted, It May Result In
Significant Increased Costs And Reduced Revenues....... 14
Failure By The Combined Company To Obtain Or Maintain
Regulatory Approval For The Distribution Of Its
Products In Key U.S. States Would Significantly Limit
Its Ability To Market Its Crop Nutrition Products...... 14
If The Technology Relied Upon By The Combined Company
Fails To Remain Competitive, It Will Not Be Able To
Increase Or Maintain Sales Revenues.................... 14
The Combined Company's Limited Experience In Marketing TPA
Products May Have A Negative Impact On Its Ability To
Increase Sales Revenues................................ 15
Loss of Key Personnel By The Combined Company Would Have A
Material Adverse Effect On Its Business Operations..... 15
Because The Combined Company Has A Relatively Small Group
Of Customers, The Loss Of Any Single Customer May Have
A Material Adverse Effect On Its Results Of Operations,
Financial Condition And Business....................... 15
Because The Combined Company's Crop Nutrition Business Is
Seasonal, Its Results Of Operations May Vary
Significantly From Quarter To Quarter.................. 15
New Environmental Or Other Regulations Could Increase The
Combined Company's Operating Costs..................... 16
Personal Injury Or Property Damage Claims Relating To The
Combined Company's Products Could Have A Material
Adverse Effect On Its Results of Operations And
Financial Condition.................................... 16
The Officers and Directors Of Donlar And Donlar Biosyntrex
Have Potential Conflicts Of Interest In The
Transaction............................................ 16
If The Restructuring Plan Constitutes A Change Of Control
Under The Change Of Control Agreements With The Two
Principal Executive Officers, Substantial Benefits
Could Be Payable Under Such Agreements At Some Time In
The Future............................................. 16
The Tax Consequences Of The Merger To Shareholders Are
Uncertain And Could Be Adverse......................... 17
THE DONLAR BIOSYNTREX SPECIAL MEETING....................... 18
When and Where the Donlar Biosyntrex Special Meeting Will
Be Held................................................ 18
What Will Be Voted on at the Donlar Biosyntrex Special
Meeting................................................ 18
Shareholders Entitled to Vote............................. 18
Vote Required to Adopt the Merger Agreement and Approve
the Adoption of the Equity Incentive Plan.............. 19
Voting Your Shares........................................ 19
Establishing a Quorum of Shareholders..................... 19
Independent Auditors to Be Present at the Special
Meeting................................................ 20
Approval and Recommendation By Donlar Biosyntrex Board.... 20
PROPOSAL 1 -- APPROVAL OF THE AGREEMENT AND PLAN OF
MERGER.................................................... 20
Background of the Merger -- Restructuring Plan............ 20
Determination of the Terms of the Merger and Restructuring
Plan................................................... 24
Additional Terms of Merger................................ 28
Exchange of Stock Certificates............................ 29
Representations and Warranties............................ 29
Conditions to Complete the Merger......................... 30
</Table>
ii
<Table>
Allocation of Costs and Expenses........................................................................... 30
Appraisal (Dissenter's) Rights............................................................................. 30
Interests of Certain Persons in the Merger................................................................. 33
Voting Securities of Donlar Beneficially Owned by Associates of Directors and Officers..................... 34
Voting Securities and Principal Holders Thereof............................................................ 34
Directors and Executive Officers of the Combined Company................................................... 36
Common Stock to be Issued as Part of the Restructuring Plan, Including the Merger.......................... 37
Material Differences between Shareholders Rights........................................................... 37
Accounting Treatment....................................................................................... 42
Material Federal Income Tax Consequences................................................................... 42
Comparison of Market Value of Donlar and Donlar Biosyntrex................................................. 43
Comparison of Percentage of Outstanding Shares Entitled to Vote Held by Directors, Executive Officers and
their Affiliates........................................................................................ 44
PRO FORMA FINANCIAL INFORMATION.............................................................................. 45
BUSINESS OF THE COMPANIES.................................................................................... 52
DONLAR CORPORATION......................................................................................... 52
Business................................................................................................ 52
Regulatory Matters...................................................................................... 52
Description of Properties............................................................................... 53
Legal Proceedings....................................................................................... 53
Market for Common Stock and Related Matters............................................................. 53
Management's Discussion and Analysis or Plan of Operation............................................... 54
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................... 57
DONLAR BIOSYNTREX CORPORATION.............................................................................. 57
PROPOSAL 2 -- APPROVAL OF ADOPTION OF THE DONLAR 2002 EQUITY INCENTIVE PLAN.................................. 57
OTHER MATTERS................................................................................................ 58
LEGAL MATTERS................................................................................................ 58
EXPERTS...................................................................................................... 58
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS.................................................... 58
WHERE YOU CAN FIND MORE INFORMATION.......................................................................... 59
DONLAR FINANCIAL STATEMENTS
Donlar and Subsidiaries Condensed Consolidated Financial Statements for the Six Months Ended June 30, 2002
(unaudited)............................................................................................. 61
Donlar and Subsidiaries Consolidated Financial Statements for the Year Ended December 31, 2001............. F-1
APPENDICES
Appendix A -- Amended and Restated Agreement and Plan of Merger............................................ A-1
Appendix B -- Donlar Corporation 2002 Equity Incentive Plan................................................ B-1
Appendix C -- Excerpts from Nevada Revised Statutes........................................................ C-1
</Table>
iii
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: WHY ARE THE TWO COMPANIES PROPOSING TO MERGE?
A: The board of directors of Donlar and Donlar Biosyntrex have adopted a
restructuring plan, which is fully described under "Proposal 1 -- Approval of
the Agreement and Plan of Merger -- Background of the Merger -- Restructuring
Plan" and "Proposal 1 -- Approval of the Agreement and Plan of Merger --
Determination of the Terms of the Merger and Restructuring Plan," that will
result in the companies' liabilities being reduced from approximately $47.83
million to approximately $23.15 million. Under this plan, Donlar and Donlar
Biosyntrex have entered into a Bridge and Consolidated Term Loan Agreement
with the companies' principal lender, Tennessee Farmers Life Insurance
Company. Tennessee Farmers, as a condition of making the bridge loan and
restructuring certain existing loans to Donlar and Donlar Biosyntrex under
the loan agreement, required that the merger be completed by July 7, 2002,
unless such date is extended by Tennessee Farmers. Tennessee Farmers has
extended the date for completion of the merger until October 31, 2002. If the
companies fail to complete the merger by October 31, 2002, and Tennessee
Farmers does not agree to extend the completion date, it would constitute a
default under the loan agreement that would permit the lender to accelerate
the loans, terminate any commitment to lend additional funds under the bridge
loan facility (currently with approximately $340,000 of borrowing capacity
remaining) and charge the default rate of interest. Tennessee Farmers is
requiring and the companies have agreed to use their best efforts to complete
the merger because it will simplify the companies' capital structure thereby
reducing accounting and legal costs and making the companies more attractive
to potential investors and lenders. In addition, since the bridge loan and
the restructuring of the existing Tennessee Farmers loans were necessary for
the companies to continue in operation, and Tennessee Farmers is requiring
the merger as a condition of those transactions, we believe that the merger
is in the best interests of the companies and their shareholders.
Q: WHAT WILL BE THE NAME OF THE COMBINED COMPANY?
A: The surviving corporation in the merger will be named Donlar Corporation.
Q: WILL THE COMBINED COMPANY HAVE A NEW SYMBOL ON THE NASD BULLETIN BOARD?
A: Yes. The combined company will apply for authorization to trade on the NASD
over-the-counter bulletin board and for a new symbol upon completion of the
merger.
Q: WHAT WILL DONLAR BIOSYNTREX SHAREHOLDERS RECEIVE FOR THEIR SHARES?
A: Donlar owns approximately 68% of the outstanding Donlar Biosyntrex common
stock and the other Donlar Biosyntrex shareholders own 32%. The holders of
Donlar Biosyntrex common stock (other than Donlar) and the holders of Donlar
Biosyntrex Series B preferred stock will receive approximately 0.26 shares of
common stock of the combined company for each share of Donlar Biosyntrex
common stock that they own. The holders of Donlar Biosyntrex Series A
preferred stock will receive one share of combined company common stock for
each share of originally issued Series A preferred stock (i.e., excluding
dividend shares). All of the issued and outstanding shares of Donlar
Biosyntrex owned by Donlar will be cancelled. The combined company will not
issue fractional shares in the merger. The total number of shares of the
combined company's common stock that each Donlar Biosyntrex shareholder will
receive in the merger will be rounded up to the nearest whole number if the
fractional share exceeds 0.5 and rounded down to the nearest whole number
otherwise. The Donlar Biosyntrex shareholders (other than Donlar), upon
completion of the merger and the other restructuring transactions, will own
approximately 19.5% of the outstanding combined company common stock and 4.3%
on a fully diluted basis.
Q: WHAT WILL DONLAR SHAREHOLDERS RECEIVE FOR THEIR SHARES?
A: Donlar owns approximately 68% of the outstanding Donlar Biosyntrex common
stock. The holders of Donlar's common stock and preferred stock (other than
TFIC, Inc., an affiliate of Tennessee Farmers, Willis Stein & Partners, L.P.
and its affiliate, Star Polymers, L.L.C., and Dr. Robert Martin) will receive
approximately 0.49 shares of common stock of the combined company for each
share of Donlar common stock or preferred stock that they own. The total
number of shares of the combined company's common
1
stock that each Donlar shareholder will receive in the merger will be rounded
up to the nearest whole number if the fractional share exceeds 0.5 and
rounded down to the nearest whole number otherwise. As a result of shares
issued in the merger, the Donlar shareholders (other than TFIC, Inc., Willis
Stein/Star Polymers and Dr. Robert Martin, and excluding the additional
shares to be issued to Tennessee Rural Health Improvement Association) will
own approximately 41.6% of the outstanding combined company common stock and
9.2% on a fully diluted basis.
Q: WHAT WILL WILLIS STEIN & PARTNERS, L.P., STAR POLYMERS, L.L.C. AND DR. ROBERT
MARTIN RECEIVE FOR THEIR DEBT, EQUITY AND CERTAIN OTHER INTERESTS IN DONLAR
AND DONLAR BIOSYNTREX?
A: Willis Stein & Partners, L.P. and its affiliate, Star Polymers, L.L.C., will
collectively receive senior convertible preferred stock of the combined
company with a stated liquidation value of $9.0 million and convertible into
approximately 13.23 million shares of common stock of the combined company in
exchange for $9.0 million of original principal amount of notes plus accrued
interest and will receive 1.0 million shares of common stock of the combined
company in exchange for approximately 20.3 million shares of Donlar preferred
stock. Dr. Martin will receive senior convertible preferred stock of the
combined company with a stated liquidation value of $9.0 million and
convertible into approximately 13.23 million shares of common stock of the
combined company in exchange for approximately $9.9 million of original
principal amount of notes plus accrued interest, will receive 5.0 million
shares of common stock of the combined company in exchange for the
relinquishment of his rights to receive royalty payments and for
approximately 16.6 million shares of Donlar common and preferred stock and
will receive a warrant to purchase 3.0 million shares of common stock of the
combined company for $0.68 per share in exchange for cancellation of existing
options and warrants to purchase approximately 38.4 million shares of Donlar
common and preferred stock.
Q: WHAT WILL THE COMPANIES' OTHER MAJOR CREDITORS HOLD AFTER THE RESTRUCTURING?
A: Donlar Biosyntrex and Donlar are borrowers under a term loan agreement with
Tennessee Farmers Life Insurance Company pursuant to which they obtained a
bridge loan facility and restated certain previously existing secured loans.
The bridge loan facility is for up to $2.127 million and will be convertible
into shares of the combined company common stock at a rate of one share per
$0.29 of outstanding principal amount of the loan. The restated loans are in
the total amount of $19.2 million and will be convertible into shares of the
combined company common stock at a rate of one share per $0.68 of outstanding
principal amount of the loans. The maximum number of shares issuable upon
conversion of the loans is approximately 35.5 million which after completion
of the restructuring including the merger would constitute approximately 38%
of the combined company common stock on a fully diluted basis. As part of the
restructuring, the combined company will issue approximately 1.6 million
shares of its common stock to Tennessee Rural Health Improvement Association
and approximately 3.85 million shares of Donlar common stock owned by TFIC,
Inc., an affiliate of Tennessee Farmers, will be cancelled with no shares
being issued in the merger. To further eliminate debt from the balance sheet
of Donlar and Donlar Biosyntrex, and after the merger, the combined company,
Donlar has reached agreements with all fifteen of the holders of notes issued
by Donlar in 1998 and 2000 in a total original principal amount of
approximately $1.9 million to exchange their notes for shares of senior
convertible preferred stock with an aggregate stated liquidation value equal
to the total amount of the notes and convertible into approximately 2.8
million shares of common stock of the combined company.
Q: HOW WERE THE MERGER EXCHANGE RATIOS DETERMINED?
A: The merger is a merger between Donlar Biosyntrex and Donlar, which is the
owner of approximately 68% of the outstanding common stock of Donlar
Biosyntrex. The merger is an integral part of the restructuring plan which
will result in the elimination of approximately $24.69 million of the
companies' liabilities. The companies' major creditors, namely Tennessee
Farmers, Willis Stein & Partners, Dr. Martin and the 1998 and 2000
noteholders, negotiated with the companies to receive convertible debt or
preferred stock and, in some cases, shares of common stock of the combined
company, as part of the restructuring transactions described above and at
"Proposal 1 -- Approval of the Agreement and Plan of Merger -- Background of
the Merger -- Restructuring Plan" and "Proposal 1 -- Approval of the
Agreement and Plan of Merger --
2
Determination of the Terms of the Merger and Restructuring Plan." These
creditors negotiated to receive in total approximately 80.6% of the combined
company common stock on a fully diluted basis and approximately 36.68% on an
outstanding basis. It was agreed that 5.34% of the combined company common
stock on a fully diluted basis would be reserved for issuance under an equity
incentive plan and 0.5% of the combined company common stock on a fully
diluted basis (2.24% on an outstanding basis) would be issued to certain
other creditors in exchange for claims against the companies. The remaining
13.5% of the combined company common stock on a fully diluted basis would be
issued in the merger to the Donlar and Donlar Biosyntrex shareholders (other
than Donlar, Willis Stein/Star Polymers, TFIC, Inc. and Dr. Martin). The
restructuring as negotiated contemplates that after completion there will be
a total of approximately 20.8 million shares of combined company common stock
outstanding and approximately 93.6 million shares on a fully diluted basis.
The total number of shares to be issued was selected as a means of achieving
the negotiated percentages.
To achieve the above stated percentages, 12.7 million shares of the combined
company common stock, representing approximately 61% of the common stock on
an outstanding basis and 13.5% on a fully diluted basis, will be issued in
the merger to the Donlar and Donlar Biosyntrex shareholders (other than
Donlar, Willis Stein/Star Polymers, TFIC, Inc. and Dr. Martin). The 12.7
million shares is being allocated between the Donlar and Donlar Biosyntrex
shareholders on the basis of the respective ownership of Donlar Biosyntrex
common stock by Donlar on the one hand (i.e., 68%) and all other shareholders
of Donlar Biosyntrex on the other hand. Therefore, the Donlar shareholders
will receive in the aggregate 68% of the 12.7 million shares, or 8.7 million
shares, and the Donlar Biosyntrex shareholders will receive in the aggregate
32% of the 12.7 million shares, or 4.05 million shares.
The following table reflects the allocation of the combined company common
stock as discussed above. A more detailed version of the table is contained
under "Proposal 1 -- Approval of the Agreement and Plan of
Merger -- Determination of the Terms of the Merger and Restructuring Plan."
<Table>
<Caption>
COMMON STOCK
OUTSTANDING AFTER
COMPLETION OF PERCENTAGE OF PERCENTAGE OF
RESTRUCTURING OUTSTANDING FULLY DILUTED
INCLUDING THE COMMON ADJUSTED FULLY COMMON
MERGER STOCK DILUTED STOCK
----------------- ------------- -------------- -------------
Tennessee Farmers, Dr. Martin,
Willis Stein & Partners and
1998 and 2000 Noteholders......... 7,626,308 36.68% 75,445,547 80.60%
Pre-Merger Donlar Shareholders...... 8,652,288 41.61% 8,652,288 9.24%
Pre-Merger Donlar Biosyntrex
Shareholders...................... 4,049,765 19.48% 4,049,765 4.33%
</Table>
Q: WHO WILL MANAGE THE COMBINED COMPANY?
A: The board of directors and executive officers of Donlar and Donlar Biosyntrex
are currently identical. The board of directors and executive officers of the
combined company will be the same as the board of directors and executive
officers of the companies immediately prior to the merger.
Q: WHAT DO I NEED TO DO NOW?
A: The affirmative vote of the holders of a majority of the outstanding shares
of Donlar Biosyntrex common stock and Series A preferred stock, on an as
converted basis, voting as a single class, is required to approve the merger
agreement and approve the adoption of the equity incentive plan. The merger
must also be approved by a majority of the outstanding shares of Series A
preferred stock, voting as a separate class.
Action by the Donlar Biosyntrex shareholders on the approval of the merger
agreement and the adoption of the equity incentive plan will be taken at the
Donlar Biosyntrex special meeting on October , 2002. Donlar Biosyntrex must
send you a copy of this information statement/prospectus at least 20 calendar
days before its special meeting.
3
Donlar Biosyntrex is not soliciting proxies and asks that you not send us a
proxy. Donlar Biosyntrex has written agreements with Dr. Kamal Modir, Peter
LeDonne, Jr. and Kenneth Hubbard, collectively owning or controlling a
majority of the outstanding shares of Series A preferred stock, providing
that such holders will (a) exchange their Series A preferred stock for
combined company common stock on the basis of one share of combined company
common stock for each share of originally issued Series A preferred stock
(i.e., excluding dividend shares) and (b) vote for approval of the merger
agreement and the related transactions. Donlar Biosyntrex has an agreement
with Donlar, the holder of a majority of the voting interest in Donlar
Biosyntrex, to vote its shares in Donlar Biosyntrex to approve the merger
agreement and the related transactions and in favor of approving the adoption
of the Donlar 2002 Equity Incentive Plan. Therefore, Donlar Biosyntrex can
obtain approval of the transactions without the vote of any other
shareholder. However, you should carefully read this document, may attend the
Donlar Biosyntrex special meeting and may vote in person or by proxy, as
provided below under "How do I vote?".
The merger agreement must also be approved by the affirmative vote of the
holders of two thirds of the outstanding shares of Donlar common and
preferred stock voting as a single class. Donlar has agreements with the
Willis Stein Group, Dr. Martin and its executive officers, collectively
holding in excess of two-thirds of the outstanding voting interests in
Donlar, to vote their shares in Donlar to approve the merger agreement.
Q: HOW DO I VOTE?
A: You can vote by attending the Donlar Biosyntrex special meeting on October
, 2002, in person or by arranging to have your shares voted by a duly
authorized proxy. However, Donlar Biosyntrex is not soliciting proxies and
asks that you not send us one. If you wish to vote by proxy, you must
properly designate a proxy in accordance with Nevada law and your proxy must
attend the meeting and vote your shares. Only record holders of shares or
their designated proxies will be permitted to vote at the meeting.
Q: SHOULD I SEND IN MY STOCK CERTIFICATES NOW?
A: No. You should not send in your stock certificates at this time. After the
merger, the certificates currently representing shares of Donlar and Donlar
Biosyntrex common stock and preferred stock will then represent the right to
receive a certain number of shares of common stock of the combined company.
Following the merger, the combined company will mail instructions to all
Donlar and former Donlar Biosyntrex shareholders for exchanging their stock
certificates.
Q: WHEN DO YOU EXPECT TO MERGE?
A: We expect to complete the merger shortly after receipt of the shareholder
approvals.
Q: WHOM SHOULD I CALL WITH QUESTIONS OR TO OBTAIN ADDITIONAL COPIES OF THIS
DOCUMENT?
A: Larry P. Koskan
President and Chief Executive Officer
Donlar Corporation and Donlar Biosyntrex Corporation
6502 South Archer Road
Bedford Park, Illinois 60501
(708) 563-9200
4
SUMMARY
This summary highlights selected information contained in this information
statement/prospectus. This summary does not contain all of the information that
is important to you and is qualified in its entirety by the more detailed
information appearing elsewhere in this document or that is incorporated by
reference. Page references are included in parentheses to direct you to a more
complete description of the items presented in this summary.
THE COMPANIES
DONLAR BIOSYNTREX CORPORATION
6502 South Archer Road
Bedford Park, Illinois 60501
(708) 563-9200
Donlar Biosyntrex, a Nevada corporation, is in the business of
manufacturing and distributing crop management and oil field products using a
protein technology with the potential to replace a generation of older,
non-biodegradable and potentially toxic chemicals. This new family of
biopolymers, known as thermal polyaspartates or TPA, is non-hazardous,
non-toxic, hypoallergenic, environmentally friendly and biodegradable. These
proteins are used in a broad range of industrial, agricultural and consumer
markets.
DONLAR CORPORATION
6502 South Archer Road
Bedford Park, Illinois 60501
(708) 563-9200
Donlar Corporation, an Illinois corporation, is a holding company that owns
approximately 68% of the outstanding common stock of Donlar Biosyntrex
Corporation and has no active operations.
THE MERGER
NATURE OF THE MERGER (SEE PAGE 29)
The merger will combine Donlar and Donlar Biosyntrex with Donlar being the
surviving corporation after the merger. Following the merger, the combined
company will operate under the Donlar Corporation name. We will accomplish the
merger through the statutory merger of Donlar Biosyntrex into Donlar and issue
shares of the combined company to the shareholders of both Donlar and Donlar
Biosyntrex.
BACKGROUND OF THE MERGER -- RESTRUCTURING PLAN (SEE PAGE 22)
The merger is part of a restructuring plan, described at "Proposal
1 -- Approval of Agreement and Plan of Merger -- Background of the
Merger -- Restructuring Plan" and "Proposal 1 -- Approval of Agreement and Plan
of Merger -- Determination of the Terms of the Merger and Restructuring Plan,"
that will result in the reduction of the companies' liabilities from
approximately $47.83 million to approximately $23.15 million.
WHAT DONLAR BIOSYNTREX SHAREHOLDERS WILL RECEIVE AS A RESULT OF THE MERGER (SEE
PAGES 26-29)
The holders of Donlar Biosyntrex common stock (excluding Donlar) own
approximately 32% of the outstanding Donlar Biosyntrex common stock and will
receive approximately 0.26 shares of common stock of the combined company for
each share of Donlar Biosyntrex common stock that they own. All issued and
outstanding shares of Donlar Biosyntrex owned by Donlar will be cancelled. The
holders of Donlar Biosyntrex Series B preferred stock will receive approximately
0.26 shares of common stock of the combined company for each share of Donlar
preferred stock that they own (totaling 449). Donlar Biosyntrex has reached
agreement with the holders of a majority of its outstanding shares of Series A
preferred stock providing that such holders will (a) exchange their Series A
preferred stock for combined company common stock on the basis of one
5
share of combined company common stock for each share of originally issued
Series A preferred stock (i.e., excluding dividend shares) and (b) vote for
approval of the merger agreement and the related transactions. The total number
of shares of the combined company's common stock that each Donlar Biosyntrex
shareholder will receive in the merger will be rounded up to the nearest whole
number if the fractional share exceeds 0.5 and rounded down to the nearest whole
number otherwise. The Donlar Biosyntrex shareholders (other than Donlar), upon
completion of the merger and the other restructuring transactions, will own
approximately 19.5% of the outstanding combined company common stock and 4.3% on
a fully diluted basis.
WHAT DONLAR SHAREHOLDERS WILL RECEIVE AS A RESULT OF THE MERGER (SEE PAGES
26-29)
Donlar owns approximately 68% of the outstanding Donlar Biosyntrex common
stock. The holders of Donlar's common stock and preferred stock (other than Dr.
Robert Martin and Willis Stein/Star Polymers, whose debt, equity and certain
other interests in Donlar and Donlar Biosyntrex will be exchanged for shares of
the combined company in accordance with the restructuring plan, and TFIC, Inc.
whose shares of Donlar stock will be cancelled) will receive approximately 0.49
shares of common stock of the combined company for each share of Donlar common
stock or preferred stock that they own. The combined company will not issue
fractional shares in the merger. The total number of shares of the combined
company's common stock that each Donlar shareholder will receive in the merger
will be rounded up to the nearest whole number if the fractional share exceeds
0.5 and rounded down to the nearest whole number otherwise. As a result of the
shares issued in the merger, the Donlar shareholders (other than TFIC, Inc.,
Willis Stein/Star Polymers and Dr. Robert Martin, and excluding the additional
1.6 million shares to be issued to Tennessee Rural Health Improvement
Association) will own approximately 41.6% of the outstanding combined company
common stock and 9.2% on a fully diluted basis.
WHAT DR. ROBERT MARTIN, WILLIS STEIN & PARTNERS, L.P. AND STAR POLYMERS, L.L.C.
WILL RECEIVE AS A RESULT OF THE RESTRUCTURING PLAN (SEE PAGES 24-28)
Willis Stein & Partners, L.P. and its affiliate, Star Polymers, L.L.C.,
will collectively receive senior convertible preferred stock of the combined
company with a stated liquidation value of $9.0 million and convertible into
approximately 13.23 million shares of common stock of the combined company in
exchange for $9.0 million of original principal amount of notes plus accrued
interest and will receive 1.0 million shares of common stock of the combined
company in exchange for approximately 20.3 million shares of Donlar preferred
stock. Dr. Martin will receive senior convertible preferred stock of the
combined company with a stated liquidation value of $9.0 million and convertible
into approximately 13.23 million shares of common stock of the combined company
in exchange for approximately $9.9 million of original principal amount of notes
plus accrued interest, will receive 5.0 million shares of common stock of the
combined company in exchange for the relinquishment of his rights to receive
royalty payments equal to one percent of all sales during a ten year period
beginning in 2000 and the cancellation of approximately 16.56 million shares of
Donlar common and preferred stock and will receive a warrant to purchase 3.0
million share of common stock of the combined company for $0.68 per share in
exchange for cancellation of existing options and warrants to purchase
approximately 38.4 million shares of Donlar common and preferred stock at
exercise prices ranging from $0.01 to $5.50.
THE CONVERTIBLE LOANS (SEE PAGES 22-25 AND 26-27)
Donlar Biosyntrex and Donlar are borrowers under a term loan agreement with
Tennessee Farmers Life Insurance Company pursuant to which they obtained a
bridge loan facility and restated certain previously existing secured loans. The
bridge loan facility is for up to $2.127 million and will be convertible into
shares of the combined company common stock at a rate of one share per $0.29 of
outstanding principal amount of the loan. The restated loans are in the total
amount of $19.2 million and will be convertible into shares of the combined
company common stock at a rate of one share per $0.68 of outstanding principal
amount of the loans. The maximum number of shares issuable upon conversion of
the loans is approximately 35.5 million which after completion of the
restructuring including the merger would constitute approximately 38% of the
6
combined company common stock on a fully diluted basis. As part of the
restructuring, the combined company will issue approximately 1.6 million shares
of its common stock to Tennessee Rural Health Improvement Association and
approximately 3.85 million shares of Donlar common stock owned by TFIC, Inc., an
affiliate of Tennessee Farmers, will be cancelled with no additional shares
being issued in the merger.
THE 1998 AND 2000 NOTEHOLDERS (SEE PAGES 25-28)
To further eliminate debt from the balance sheet of Donlar and Donlar
Biosyntrex, and after the merger, the combined company, Donlar has reached
agreements with the fifteen holders of approximately $1.9 million of original
principal amount of notes issued in 1998 and 2000 to exchange their notes for
shares of senior convertible preferred stock in an aggregate stated liquidation
value equal to the total amount of the notes and convertible into approximately
2.8 million shares of common stock of the combined company.
OWNERSHIP OF THE COMBINED COMPANY FOLLOWING THE COMPLETION OF THE RESTRUCTURING
PLAN, INCLUDING THE MERGER (SEE PAGE 26)
As a result of the restructuring plan, which includes the merger, the
pre-merger Donlar shareholders (other than TFIC, Inc., Dr. Martin, Willis
Stein/Star Polymers, and excluding the additional 1.6 million shares being
issued to Tennessee Rural Health) will own approximately 41.6% and the
pre-merger shareholders of Donlar Biosyntrex (other than Donlar) will own
approximately 19.5% of the outstanding common stock of the combined company. On
a fully diluted basis, assuming conversion or exercise of all notes, preferred
equity, warrants and other securities of the combined company that are
convertible into or exercisable for shares of common stock of the combined
company, the pre-merger Donlar shareholders (other than TFIC, Inc., Dr. Martin,
Willis Stein/Star Polymers, and excluding the additional 1.6 million shares
being issued to Tennessee Rural Health) will own approximately 9.2%, the former
shareholders of Donlar Biosyntrex (other than Donlar) will own approximately
4.3%, Tennessee Farmers will own approximately 38.0%, Willis Stein/Star Polymers
will own approximately 15.2% and Dr. Martin will own approximately 22.7% of the
combined company common stock.
INCLUSION OF SHARES OF DONLAR COMMON STOCK FOR TRADING ON THE NASD
OVER-THE-COUNTER BULLETIN BOARD
Following the merger, the combined company will seek authorization for its
common stock to be traded on the NASD over-the-counter bulletin board and a
stock symbol for such trading.
IT IS NOT ANTICIPATED THAT THE COMBINED COMPANY WILL PAY DIVIDENDS FOLLOWING THE
MERGER
Neither Donlar nor Donlar Biosyntrex has ever paid dividends on its common
stock. It is not anticipated that the combined company will pay dividends after
the merger.
THE TAX CONSEQUENCES OF THE MERGER ARE UNCERTAIN (SEE PAGE 45)
The companies have not received a tax opinion regarding the federal income
tax consequences of the merger. The range of possible tax consequences is
described in this information statement/prospectus under the heading "Material
Federal Income Tax Consequences."
THERE ARE NO MATERIAL FEDERAL OR STATE REGULATORY REQUIREMENTS NECESSARY TO
CONSUMMATE THE MERGER
There are no material federal or state regulatory requirements to be
complied with to consummate the merger. However, the merger will not be
effective until Donlar and Donlar Biosyntrex file articles of merger with the
Secretary of State of the State of Illinois and the State of Nevada.
DONLAR BIOSYNTREX SHAREHOLDERS WILL HAVE APPRAISAL RIGHTS (SEE PAGE 31)
Under the Nevada Revised Statutes, notwithstanding the approval of the
merger by the holders of the requisite number of shares of capital stock of
Donlar Biosyntrex, a Donlar Biosyntrex shareholder who, prior to the vote on the
merger, delivers a written notice to Donlar Biosyntrex of his or her intent to
demand payment
7
for his shares if the merger is effectuated, who does not vote his or her shares
in favor of the merger and who otherwise strictly complies with the requirements
of Nevada law may be able to demand payment from Donlar Biosyntrex for the fair
value of his shares.
BOARD OF DIRECTORS AND MANAGEMENT OF THE COMBINED COMPANY FOLLOWING THE MERGER
(SEE PAGE 39)
The boards of directors of Donlar and Donlar Biosyntrex are currently
identical. The companies' board of directors will continue as the board of
directors of the combined company.
Larry P. Koskan, currently serving as president, chief executive officer
and chairman of the board of both Donlar and Donlar Biosyntrex, will be
president, chief executive officer and chairman of the board of the combined
company. Joel H. Lurquin, currently serving as controller, treasurer and
secretary of both Donlar and Donlar Biosyntrex, will be controller, treasurer
and secretary of the combined company. Robert P. Pietrangelo, currently serving
as a vice president and the chief operating officer of both Donlar and Donlar
Biosyntrex, will be a vice president and the chief operating officer of the
combined company.
COMPARATIVE PER SHARE MARKET PRICE INFORMATION (SEE PAGE 47)
Shares of Donlar Biosyntrex common stock trade on the NASD over-the-counter
bulletin board on which bid and ask prices are quoted. Neither Donlar common
stock nor Donlar preferred stock is quoted or listed on any market or exchange.
DETERMINATION OF EXCHANGE RATIOS (SEE PAGES 26-29)
The merger is a merger between Donlar Biosyntrex and Donlar, which is the
owner of approximately 68% of the outstanding common stock of Donlar Biosyntrex.
As a result of the negotiation of the restructuring plan by the companies,
Tennessee Farmers, Willis Stein & Partners, Dr. Martin and the 1998 and 2000
noteholders, it was agreed that 12.7 million shares of the combined company
common stock, representing approximately 61% of the shares on an outstanding
basis and 13.5% on a fully diluted basis, would be issued in the merger to the
Donlar and Donlar Biosyntrex shareholders (other than Donlar, Willis Stein/Star
Polymers, TFIC, Inc. and Dr. Martin). The 12.7 million shares is being allocated
between the Donlar and Donlar Biosyntrex shareholders on the basis of the
respective ownership of Donlar Biosyntrex common stock by Donlar on the one hand
(i.e., 68%) and all other shareholders of Donlar Biosyntrex on the other hand
(i.e., 32%). Therefore, the Donlar shareholders will receive 68% of the 12.7
million shares, or 8.7 million shares, and the Donlar Biosyntrex shareholders
will receive 32% of the 12.7 million shares, or 4.05 million shares.
ACCOUNTING TREATMENT (SEE PAGE 45)
Donlar intends to account for the merger on the "purchase" method of
accounting in accordance with SFAS 141, "Business Combinations." The transaction
will be treated as a transfer under common control for Donlar's 68% ownership of
Donlar Biosyntrex and as a purchase of minority interest for the remaining 32%.
WHEN WE EXPECT THE MERGER TO CLOSE
We expect completion of the merger as soon as practicable following
approval of the merger by the shareholders of Donlar and Donlar Biosyntrex at
their respective special shareholders meetings and satisfaction of all other
conditions to the merger. Pursuant to an agreement entered into by Donlar and
Donlar Biosyntrex with their principal lender, Tennessee Farmers, they have
agreed to use their best efforts to complete the merger on or before July 7,
2002. Tennessee Farmers has agreed to extend the date for completion of the
merger until October 31, 2002.
OUR REASONS FOR THE MERGER AND ADOPTION OF EQUITY INCENTIVE PLAN (SEE PAGE 35)
The board of directors of Donlar and Donlar Biosyntrex have adopted a
restructuring plan which is fully described under "Proposal 1 -- Approval of the
Agreement and Plan of Merger -- Background of the
8
Merger -- Restructuring Plan" and "Proposal 1 -- Approval of the Agreement and
Plan of Merger -- Determination of the Terms of the Merger and Restructuring
Plan." Under this plan, Donlar and Donlar Biosyntrex have entered into a Bridge
and Consolidated Term Loan Agreement with the companies' principal lender,
Tennessee Farmers. Tennessee Farmers, as a condition of making the bridge loan
and restructuring certain existing loans to Donlar and Donlar Biosyntrex under
the loan agreement, required the merger be completed by July 7, 2002, unless
such date is extended by Tennessee Farmers. The date for completion of the
merger has been extended until October 31, 2002. Tennessee Farmers is requiring
the merger and the companies have agreed to use their best efforts to complete
the merger because it will simplify the companies' capital structure thereby
reducing accounting and legal costs and making the companies more attractive to
potential investors and lenders. In addition, since the bridge loan and the
restructuring of the existing Tennessee Farmers loans were necessary for the
companies to continue in operation, and Tennessee Farmers is requiring the
merger as a condition of those transactions, we believe that the merger is in
the best interests of the companies and their shareholders. In connection with
the merger, the boards of directors of Donlar and Donlar Biosyntrex believe that
Donlar should adopt, and the Donlar board of directors have adopted, an equity
incentive plan, which is fully described under "Proposal 2 -- Adoption of Donlar
2002 Equity Incentive Plan," to provide the combined company greater flexibility
in compensating persons who contribute in the future to the successful operation
and growth of the combined company.
WE RECOMMEND THAT DONLAR BIOSYNTREX SHAREHOLDERS APPROVE THE AGREEMENT AND PLAN
OF MERGER AND APPROVE THE ADOPTION OF THE DONLAR 2002 EQUITY INCENTIVE PLAN (SEE
PAGE 35)
The Donlar Biosyntrex board believes that the merger is fair to you and is
in your best interests, and, in accordance with Nevada law, unanimously
recommends that you vote FOR the proposal to approve the merger agreement.
Furthermore, the Donlar Biosyntrex board believes that the equity incentive plan
will provide the combined company greater flexibility in compensating persons
who contribute in the future to the successful operation and growth of the
combined company and, in accordance with Nevada law, unanimously recommends that
you vote FOR the proposal to approve the adoption of the Donlar 2002 Equity
Incentive Plan.
THE DONLAR BIOSYNTREX SPECIAL MEETING (SEE PAGE 19)
Donlar Biosyntrex will hold its special meeting of shareholders at its
offices at 6502 South Archer Road, Bedford Park, Illinois 60501 on October ,
2002 at 11:00 a.m. local time. Donlar Biosyntrex is required to send you a copy
of this information statement/prospectus at least 20 calendar days before its
special meeting.
9
RISK FACTORS
The short and long term success of the combined company is subject to
certain risks, many of which are substantial in nature. Because Donlar now has
no operations and serves only as a holding company for the Donlar Biosyntrex
common stock that it owns, the combined company will be subject to substantially
the same risks as Donlar Biosyntrex prior to the merger. You should consider
carefully the following factors, in addition to other information contained in
this information statement/prospectus.
Donlar Biosyntrex And Donlar Both Have A History Of Operating Losses And
May Never Become Profitable. Both Donlar Biosyntrex and Donlar have incurred
significant net operating losses since their formations. As of June 30, 2002,
Donlar, including the historical financial results of Donlar Biosyntrex, had a
shareholders' deficit of $34.6 million, a loss of approximately $5.3 million in
the second quarter of 2002 and accumulated losses of $141.7 million. The factors
contributing to these significant operating losses include:
- marketing expenditures;
- acquisition expenses and costs;
- expansion of research and development programs;
- costs associated with pre-clinical studies and clinical trials;
- nutritional studies;
- regulatory compliance requirements;
- trials for other products under development; and
- implementation of programs to market products ultimately approved for
distribution.
Donlar Biosyntrex's, and after the merger, the combined company's, future
success and ability to achieve profitability depends upon its ability to
successfully operate its businesses. Neither Donlar Biosyntrex nor the combined
company may ever achieve significant revenues or profitable operations.
Donlar's And Donlar Biosyntrex's Recurring Losses Raise Doubt About Their
Ability To Continue As A Going Concern. The consolidated financial statements
of Donlar and Donlar Biosyntrex have been prepared on the assumption that Donlar
and Donlar Biosyntrex will continue as a going concern. Donlar's and Donlar
Biosyntrex's independent public accountants have issued their reports dated
April 5, 2002 that include an explanatory paragraph stating that Donlar's and
Donlar Biosyntrex's recurring losses and accumulated deficit, among other
things, raise substantial doubt about their ability to continue as a going
concern. Donlar's and Donlar Biosyntrex's historical sales are limited and it
has been necessary to rely upon financing from debt and the sale of equity
securities to sustain operations.
If The Combined Company Cannot Satisfy Its Substantial Debt Obligations, It
Will Negatively Effect The Value Of Its Stock. Donlar and Donlar Biosyntrex are
co-obligors under a loan agreement which covers a bridge loan facility totaling
up to $2.127 million and two prior loans the terms of which were amended and
restated in the loan agreement in the amount of approximately $19.18 million.
Each of the loans made or restated pursuant to the loan agreement is subject to
acceleration and the application of higher default rates of interest in the
event the combined company defaults in the payment of principal or interest when
due, breaches any covenants contained in the loan agreement that are not
remedied within five calendar days or any other specified event of default
occurs. The combined company may not be able to comply with the covenants and
events of default in the loan agreement, some of which events of default are
entirely beyond its control. Even if there are no future defaults, principal and
interest in the amount of approximately $2.02 million on the loans made under
the bridge loan facility, are due and payable on March 18, 2003. In addition,
approximately $1.34 million is due in March 2003 on the restated loans. The
combined company must either pay these amounts or refinance them. The combined
company may not have the resources to pay this debt when it is due and the
holder of the loans or another source may not be willing to provide the
resources to refinance the debt.
The Restructuring Plan Involves Substantial Dilution To
Shareholders. Donlar currently owns 68% of the outstanding Donlar Biosyntrex
common stock and all other shareholders own 32% of the outstanding
10
Donlar Biosyntrex common stock. As part of the restructuring plan, 5.0 million,
1.0 million, approximately 1.6 million and 465,000 shares of the combined
company common stock will be issued to Dr. Martin, Willis Stein & Partners,
Tennessee Rural Health and collectively Messrs. Randy Olshen, Michael Acton,
Rudy Monnich and Charles Brodzki (each creditors of the companies),
respectively. In addition, a warrant will be issued to Dr. Martin for 3.0
million shares of the combined company common stock, shares of the combined
company convertible preferred stock which are convertible into approximately
29.3 million shares of combined company common stock will be issued to Dr.
Martin, Willis Stein/Star Polymers, and the 1998 and 2000 note holders,
Tennessee Farmers Life Insurance Company obtained notes in the aggregate amount
of in excess of $21.3 million that are convertible into approximately 35.6
million shares of the combined company common stock and 5.0 million shares of
combined company common stock will be reserved for issuance under the equity
incentive plan. As a result of the foregoing transactions and completion of the
merger, the pre-merger Donlar shareholders (other than Dr. Martin, Willis
Stein/Star Polymers, TFIC, Inc. and the additional shares being issued to
Tennessee Rural Health) will own approximately 41.6% and the pre-merger Donlar
Biosyntrex shareholders (other than Donlar) will own approximately 19.5% of the
outstanding combined company common stock. On a fully diluted basis, assuming
conversion or exercise of all notes, preferred equity, warrants and other
securities of the combined company that are convertible into or exercisable for
shares of common stock of the combined company, the pre-merger Donlar
shareholders (excluding Dr. Martin, Willis Stein/Star Polymers and the
additional 1.6 million shares being issued to Tennessee Rural Health) will own
approximately 9.2%, the pre-merger shareholders of Donlar Biosyntrex (other than
Donlar) will own approximately 4.3%, Tennessee Farmers will own approximately
38.0%, Willis Stein/Star Polymers will own approximately 15.2% and Dr. Martin
will own approximately 22.7% of the combined company common stock. The maximum
combined effect of the issuance of the shares of common stock, the exercise of
Dr. Martin's warrant, the conversion of the convertible preferred stock and the
conversion of the notes would be to increase the number of shares of combined
company common stock outstanding by approximately 79.91 million shares.
If The Combined Company Sells Additional Equity Securities, It May Result
In Additional Shareholder Dilution. The combined company may need to sell
additional equity securities or obtain other forms of financing to fund its
operations. The loan agreement prohibits the combined company from issuing
additional equity (except in accordance with the restructuring plan) or
incurring additional indebtedness (except indebtedness incurred under the loan
agreement, extensions or renewals of existing indebtedness as long as the
principal amount is not increased and capitalized leases not exceeded in the
aggregate $25,000) without the lender's approval. Absent such additional
financing, the combined company may find it necessary to postpone or cancel some
or all of its planned business activities. This postponement could adversely
affect the combined company's ability to conduct its business operations,
generate future revenues and introduce new products. Furthermore, additional
financing may not be available, or, if available, may not be available on
acceptable terms or in required amounts. If additional funds are raised by
issuing shares of common stock or securities convertible into common stock,
those sales or conversion could result in further and possibly substantial
dilution of the combined company's shareholders. Substantial dilution may make
it more difficult for investors to sell their shares or may result in a lower
price of the combined company's securities.
The Trading Price Of The Combined Company's Common Stock Is Likely To Be
Volatile. The trading price of Donlar Biosyntrex's common stock has been and,
in the future, of the combined company, is likely to continue to be subject to
wide fluctuations in response to the quarter to quarter variations in Donlar
Biosyntrex's, and, in the future, the combined company's operating results,
material announcements by Donlar Biosyntrex, the combined company or its
competitors, governmental regulatory action, conditions in the industries in
which they operate, or other events or factors, many of which are beyond Donlar
Biosyntrex's and the combined company's control. Since March 31, 2000, the
trading or high and low bid and ask price of Donlar Biosyntrex's common stock
has fluctuated from a high of $8.60 and a low of $0.05. The combined company's
operating results in future quarters may be below the expectations of investors.
In such event, the price of the common stock would likely decline, perhaps
substantially. In addition, the stock market has historically experienced
extreme price and volume fluctuations.
11
The Combined Company Is Unlikely To Pay Dividends. Neither Donlar nor
Donlar Biosyntrex has ever declared or paid cash dividends on its common stock
and it is not anticipated that any cash dividends will be declared on the
combined company's common stock in the foreseeable future.
If The Combined Company Is Not Successful In Commercializing Its Products,
It Will Not Be Able To Generate Enough Income To Cover Its Operating Expenses
And Debt Service. Donlar was founded in 1990 to develop, manufacture and market
an entirely new protein technology with the potential to replace a generation of
older, non-biodegradable and potentially toxic chemicals. This new family of
biopolymers, know as thermal polyaspartates or TPA, is non-hazardous, non-toxic,
hypoallergenic, environmentally friendly and biodegradable. These proteins are
used in a broad range of industrial, agricultural and consumer markets. TPA
products are beta proteins (biopolymers) manufactured from the common biological
amino acid, L-aspartic acid. TPA is a highly active biopolymer that is
completely soluble in water. By varying the manufacturing method, different
properties can be built into the biopolymer, tailoring it to a specific use.
Products are formulated and packaged into both powder and liquid forms.
Until 1996, Donlar was engaged principally in research and development
activities, and from 1996 through 2000, market development activities related to
several products utilizing TPA. These market development activities have been
continued by Donlar Biosyntrex since its acquisition of Donlar's businesses.
While marketing of the TPA products has commenced in the crop nutrition and oil
field service areas, the products have not achieved full commercialization, and
product applications are in various stages of commercialization. As a result,
the TPA products have been sold only in limited quantities and there can be no
assurance that a significant market will develop for such products with respect
to any of their potential applications. Donlar Biosyntrex's crop nutrition and
performance chemical products have been used commercially for only a short
period of time. Donlar Biosyntrex's current and the combined company's potential
customers in the agricultural, performance chemicals, and other fields in which
Donlar Biosyntrex's and, in the future, the combined company's products have
potential applications require predictable and consistent performance. Although
certain products incorporating the TPA technology have passed product
performance and reliability testing in both laboratory and commercial use, there
can be no assurance that they will continue to do so consistently in the future,
will meet future customer performance standards or will offer sufficient price
or performance advantages required to achieve commercial success. The combined
company's failure to develop, manufacture and commercialize TPA products on a
timely and cost effective basis will prevent it from generating enough revenues
to cover its operating expenses and debt service.
If The Combined Company's Agricultural Customers Do Not Accept Its
Products, It Will Negatively Affect Revenues. The combined company's future
success in agriculture depends largely on acceptance of the TPA technology by
agricultural customers and the ability of the combined company to educate those
customers about the proper methods and rates of application required to obtain
the levels of increased yield that the TPA products are capable of generating.
Traditionally, agricultural end users have been slow to adopt new technologies
until their consistent effectiveness and economic value have been evidenced over
several growing seasons. Successful introduction of the combined company's
products will also depend to a large extent on recommendations of prior users.
Although Donlar Biosyntrex's research data have shown that its crop nutrition
products result in increased yields, the level of such increase and, thus, the
economic return from use of such products, depends on the method and rate of
application, the type of crop and prevailing weather and soil conditions. There
can be no assurance that the combined company will be able to demonstrate that
the purchase of its crop nutrition products will be consistently cost effective
for the intended users.
If The Combined Company Cannot Protect Its Proprietary Information, It May
Lead To Increased Competition And Expenses And Decreased Revenues. The combined
company's success will depend, in part, on its ability to obtain patent
protection for the thermal polyaspartates processes, materials, and methods of
use, to preserve its trade secrets, and to operate without infringing the patent
or other proprietary rights of others. Donlar has been granted 48 United States
patents. Each time that Donlar filed a patent application in the United States,
it filed similar applications in foreign jurisdictions that Donlar believed were
important to its future business and that afford reasonable protection to
intellectual property rights. Donlar has been granted 92 foreign patents,
including patents granted by the European Community, South Africa, Israel,
12
Japan, Mexico, Russia and Egypt, and currently has numerous patent applications
pending in such jurisdictions. The patent applications filed by Donlar may not
result in issued patents and the scope and breadth of any claims allowed in any
patents issued to Donlar, Donlar Biosyntrex or the combined company may not
exclude competitors or provide competitive advantages to the combined company.
In addition, any patents issued to Donlar, Donlar Biosyntrex or the combined
company may not be held valid if subsequently challenged, others may claim
rights in the patents and other proprietary technology owned by the combined
company, and others may have developed or will develop similar products or
technologies without violating any of the combined company's proprietary rights.
The combined company's inability to obtain patent protection, preserve its
trade secrets or operate without infringing the proprietary rights of others, as
well as its loss of any rights to technology that it now has or acquires in the
future, could have a negative impact on its ability to maintain or increase
sales revenues. Litigation, which could result in substantial cost to, and
diversion of effort by, the combined company, may be necessary to enforce
patents owned by the combined company, to defend the combined company against
infringement claims made by others, or to determine the ownership, scope or
validity of the proprietary rights of the combined company and others. An
adverse outcome in any such litigation could subject the combined company to
significant liabilities to third parties, require it to seek licenses from third
parties, and/or require it to cease using certain technology, any of which could
increase its operating costs or negatively impact its ability to maintain or
increase sales.
The combined company may also become involved in interference proceedings
declared by the United States Patent and Trademark Office in connection with one
or more of Donlar's, Donlar Biosyntrex's or, in the future, the combined
company's patents or patent applications to determine priority of invention. Any
such proceeding could result in substantial cost to the combined company, as
well as a possible adverse decision as to priority of invention of the patent or
patent application involved. In addition, the combined company may become
involved in reissue or reexamination proceedings in the patent office in
connection with the scope or validity of its patents. Any such proceeding could
have a material adverse effect on its business, results of operations and
financial condition, and an adverse outcome in such proceeding could result in a
reduction of the scope of the claims of any such patents or such patents being
declared invalid. In addition, from time to time, to protect its competitive
position, the combined company may initiate reexamination proceedings in the
patent office with respect to patents owned by others. Such proceedings could
result in substantial cost to, and diversion of effort by, the combined company,
and an adverse decision in such proceedings could increase its operating costs
or negatively impact its ability to maintain or increase sales revenues.
Donlar Biosyntrex relies and, in the future, the combined company will
rely, on trade secrets and proprietary know how in the conduct of the its
operations. Donlar Biosyntrex uses employee and third party confidentiality and
non disclosure agreements to protect such trade secrets and know how. The
obligation to maintain the confidentiality of such trade secrets or proprietary
information may be breached by employees, consultants, advisors or others and
the combined company may not have adequate remedies for any breach. In addition,
the trade secrets or proprietary know how may otherwise become known or be
independently developed or discovered by third parties.
The Combined Company May Not Be Able To Maintain Or Increase Sales Revenues
Due To Competition. While Donlar Biosyntrex is not aware of any technology
directly competitive with its TPA products in the agricultural field, there are
numerous types of natural ingredients such as humates, alginates, heprins and
other amino acid extract products that act as fertilizers, plant growth
stimulants or immune system aids for which claims have been made regarding their
ability to increase plant yields. These products are marketed by numerous
regional distributors and sold to dealers, who, in turn, sell to farmers and
growers. In the performance chemicals field there is substantial competition by
other chemical products, principally water soluble polymers and similar products
manufactured by companies such as Rohm and Hass, BASF AG, Goodrich and others.
Bayer AG produces limited quantities of a technical grade, highly branched form
of a similar type product using production methods that are outside the scope of
Donlar's production patents. This product has applications that may be outside
the scope of Donlar's methods of use patents. All of these larger producers of
chemical products have substantially greater financial and technical resources,
larger research and development staffs, and greater manufacturing and marketing
capabilities than Donlar Biosyntrex and, in
13
the future, the combined company. There can be no assurance that Donlar
Biosyntrex's and, in the future, the combined company's, performance chemicals
products will compete effectively against products produced by such competitors.
The Combined Company's Limited Manufacturing Capacity and Experience May
Have A Material Adverse Effect On Its Results Of Operations. The combined
company's success will depend, in part, on its ability to manufacture its
products in significant quantities, with consistent quality, at acceptable costs
and on a timely basis. The combined company has limited experience in high
volume manufacturing.
If The Combined Company's Operation Of Its Manufacturing Facility Is
Materially Disrupted, It May Result In Significant Increased Costs And Reduced
Revenues. The Peru, Illinois plant is Donlar Biosyntrex's and will be the
combined company's sole manufacturing facility and the only facility capable of
producing their products in quantities sufficient to meet its projected needs.
While Donlar Biosyntrex maintains and, in the future, it is expected that the
combined company will maintain, business interruption insurance in the amount of
$15 million, any material disruption in the Peru plant's operations, whether due
to fire, natural disaster or otherwise, and whether or not covered by that
insurance, could significantly increase operating costs and reduce revenues.
Failure By The Combined Company To Obtain Or Maintain Regulatory Approval
For The Distribution Of Its Products In Key U.S. States Would Significantly
Limit Its Ability To Market Its Crop Nutrition Products. In each of the fifty
states, the respective departments of agriculture have various requirements for
the registration of different types of agricultural products to be used within
that state. Donlar Biosyntrex's products do not require registration in 26
states. In the remaining 24 states, the purpose for registration is to assure
consumers/growers that the products can be used safely and that they have
demonstrated a variety of benefits such as protection against insects or root
growth enhancement. The state departments of agriculture that require
registration publish guide lines for the submission of several different kinds
of data in order to make a determination for registration. These data include
laboratory, green house, university and field test results, as well as toxicity,
environmental and general safety information. Each state has its own
requirements which range from minimal information coupled with a small fee to
extensive data sets that cover several years of experience and may be very
expensive to comply with. The review process may include several resubmissions
of updated data or other kinds of information and may take years. States may
also give limited registration to products that cover only one or more kinds of
plants.
Donlar Biosyntrex's products have been registered in 20 of the 24 states
requiring registration, and the company is pursuing registration in the four
other states, South Dakota, Alabama, Mississippi and Pennsylvania. When the
department of agriculture of a specific state registers the products, those
products may then be sold with required information that is printed on the
product's label such as the plants/crops that the product can be used on,
instructions on how to safely apply the product, maximum quantities to use and a
variety of safety and toxicity handling precautions.
Donlar Biosyntrex's products are also subject to approval by foreign
regulatory authorities, but there are no federal regulatory approvals required
for distribution. A loss of a product registration in a key U.S. state would
significantly limit the combined company's ability to market its crop nutrition
products.
If The Technology Relied Upon By The Combined Company Fails To Remain
Competitive, It Will Not Be Able To Increase Or Maintain Sales
Revenues. Although Donlar has developed 50 patents covering manufacturing
processes, composition and methods of use, all of Donlar Biosyntrex's products
are based on its patented TPA technology. The earliest patent for the TPA
technology was issued in 1991 and will expire in 2008 and relates to the initial
manufacturing process. The latest patent was issued in 2002 and, under the new
patent law, will expire in 2022. The fields in which Donlar Biosyntrex, and in
the future, the combined company, intend to sell their products are highly
competitive and intensive research and development is always being undertaken by
governmental entities, educational institutions and private enterprises with
respect to products having practical effects such as those of certain of Donlar
Biosyntrex's products. Competitive products may be introduced by third parties
or competing materials based on different or new technologies may become
commercially available. The combined company's competitors may succeed in
developing or marketing materials, technologies or products that exhibit
superior performance or are more commercially
14
desirable or more cost effective than those developed and marketed by the
combined company. Any of the foregoing could have a negative affect on the
combined company's ability to maintain or increase sales revenues without
improving its products, developing new products or reducing costs.
The Combined Company's Limited Experience In Marketing TPA Products May
Have A Negative Impact On Its Ability To Increase Sales Revenues. While the
combined company's sales force has experience in marketing products to
agricultural and performance chemicals end users, the combined company has
limited experience in marketing and selling the thermal polyaspartates products.
To market its products effectively, the combined company will be required to
develop an expanded marketing and sales force that can effectively demonstrate
the advantages of, and recommended methods and rates of application for, the TPA
product applications. The crop nutrition products will also rely heavily on the
availability of recommendations of prior users. In the performance chemicals
field, Donlar Biosyntrex currently sells certain of its TPA products to
companies that typically blend its TPA products as an ingredient with their own
products and then sell the resulting blended product to other companies. The
combined company's future success will depend in part on the continued
relationships with distributors, its ability to enter into other similar
arrangements, the continuing interest of the existing distributors in current
and potential product applications and, eventually, the distributors' success in
marketing and willingness to purchase the combined company's products.
Currently, Donlar Biosyntrex has no formal purchasing arrangements or
contracts with customers or distributors. The ordering process for the company's
products begins with the customer submitting a purchase order to Donlar
Biosyntrex's customer service department. The purchase order states the terms of
the purchase, such as price, quantities, freight terms and shipping dates. When
the purchase order is approved by management, it is confirmed back to the
customer, and the order is filled.
Loss of Key Personnel By The Combined Company Would Have A Material Adverse
Effect On Its Business Operations. Donlar Biosyntrex's principal executive
officers, Larry Koskan and Robert Pietrangelo, have an average of over 25 years
of collective experience in chemicals research, development and sales. The loss
of the services of either one of these executive officers or other key
personnel, or the failure of the combined company to attract and retain other
skilled and experienced personnel on acceptable terms, would have a material
adverse effect on the combined company's business operations. There is no key
person insurance on either of these executive officers. Both of these executive
officers have employment agreements with the company. Mr. Koskan's contract
expires on July 1, 2003 and Mr. Pietrangelo's expires on September 7, 2003,
unless extended.
Because The Combined Company Has A Relatively Small Group Of Customers, The
Loss Of Any Single Customer May Have A Material Adverse Effect On Its Results Of
Operations, Financial Condition And Business. Donlar Biosyntrex began
commercial sales of its products in 1999. Donlar Biosyntrex sells its crop
nutrition products primarily to agricultural distributors and its performance
chemicals products to chemical service companies. While the combined company
expects to significantly increase its sales in these product lines and to focus
its sales efforts on a more specifically targeted group of agriculture and
chemical distributors, sales may continue to be concentrated among a relatively
small group of customers, though not necessarily those that represented the
largest portions of Donlar Biosyntrex's sales in the past. In 2001, Donlar
Biosyntrex's top three customers based on net sales revenues accounted for
23.6%, 21.6% and 12.7% of its net sales revenues, respectively. The loss of any
one of these customers would have a material adverse effect on the combined
company, its results of operations and its financial condition.
Because The Combined Company's Crop Nutrition Business Is Seasonal, Its
Results Of Operations May Vary Significantly From Quarter To Quarter. Demand
for Donlar Biosyntrex's crop nutrition products can be expected to be
significantly affected by agricultural conditions, which can be unpredictable
and volatile as a result of a number of factors. The most important factors are
weather conditions and patterns, current and projected grain stocks and prices,
and governmental agricultural policies, including those that directly or
indirectly influence the number of acres planted, the level of grain stocks, the
mix of crops planted, and crop prices. Because of its dependence on agricultural
markets, the crop nutrition business is seasonal and the combined company's
operating results may vary significantly from quarter to quarter.
15
New Environmental Or Other Regulations Could Increase The Combined
Company's Operating Costs. Like other manufacturers, Donlar Biosyntrex is
subject to a broad range of Federal, state, local and foreign laws and
requirements, including those governing discharges in the air and water, the
handling and disposal of solid and hazardous substances and wastes, the
remediation of contamination associated with the release of hazardous
substances, work place safety and equal employment opportunities. Donlar and
Donlar Biosyntrex have made expenditures to comply with such laws and
requirements. Donlar Biosyntrex believes, based on information currently
available to management, that it is in compliance with applicable environmental
and other legal requirements and that the combined company will not require
material capital expenditures to maintain compliance with such requirements in
the foreseeable future.
Governmental authorities have the power to enforce compliance with such
laws and regulations, and violators may be subject to penalties, injunctions or
both. Third parties may also have the right to enforce compliance with such laws
and regulations. As the combined company develops new formulations for thermal
polyaspartates products and combines TPA with other products, such as herbicides
and insecticides, those products may become subject to additional review and
approval requirements governing the sale and use of its products. Donlar
Biosyntrex's manufacturing processes do not currently result in the generation
of hazardous wastes. This may not always be the case and material costs or
liabilities may be incurred by the combined company in the future as a result of
the manufacturing operations. It is also possible that other developments, such
as additional or increasingly strict requirements of laws and regulations of
these types, or enforcement policies thereunder, could significantly increase
the combined company's costs of operations.
Personal Injury Or Property Damage Claims Relating To The Combined
Company's Products Could Have A Material Adverse Effect On Its Results of
Operations And Financial Condition. Products sold by the combined company may
expose it to potential liability for personal injury or property damage claims
relating to the use of those products, particularly if used in a manner not in
conformity with the combined company's instructions. Although product liability
claims historically have not had a material adverse effect on Donlar or Donlar
Biosyntrex, the combined company may be subject to or incur liability for such
claims in the future. Although Donlar Biosyntrex maintains and, in the future,
the combined company will maintain, product liability insurance in amounts that
management deems commercially reasonable, a significant claim that is uninsured
or partially insured could result in loss or deferral of revenues, diversion of
resources, or damage to the combined company's reputation, any of which could
have a material adverse effect on the combined company's business, operating
results, and financial condition.
The Officers and Directors Of Donlar And Donlar Biosyntrex Have Potential
Conflicts Of Interest In The Transaction. The officers and members of the
Boards of Directors of Donlar and Donlar Biosyntrex are identical. The officers
and members of the Boards of Directors of Donlar and Donlar Biosyntrex will
serve as the members of the Board of Directors of the combined company. Dr
Martin serves on both boards, will serve on the board of the combined company
and will receive interests in the combined company that are different from the
interests to be received by the Donlar and Donlar Biosyntrex shareholders
generally. In particular, Dr. Martin will receive senior convertible preferred
stock of the combined company with a stated liquidation value of $9.0 million
and convertible into approximately 13.23 million shares of common stock of the
combined company in exchange for approximately $9.9 million of original
principal amount of notes plus accrued interest, will receive 5.0 million shares
of common stock of the combined company in exchange for the relinquishment of
his rights to receive royalty payments and for approximately 16.5 million shares
of Donlar common and preferred stock and will receive a warrant to purchase 3.0
million shares of common stock of the combined company for $0.68 per share in
exchange for cancellation of existing options and warrants to purchase
approximately 38.4 million shares of Donlar common and preferred stock. Dr.
Martin will not receive any other shares or consideration in the merger. The
boards did not seek a fairness determination with respect to the merger and the
related transactions. You should be aware of these potential conflicts when
considering the approval of the merger agreement and the equity incentive plan
by the boards.
If The Restructuring Plan Constitutes A Change Of Control Under The Change
Of Control Agreements With The Two Principal Executive Officers, Substantial
Benefits Could Be Payable Under Such Agreements At Some Time In The
Future. Donlar has change of control agreements with its two principal
executive officers, Larry Koskan and Robert Pietrangelo, which provide that if
there is a change of control of Donlar and the
16
executive officer is subsequently terminated without cause or resigns for good
reason within the applicable time periods provided in the agreements, the
executive officer would be entitled to substantial severance benefits. Under the
agreements, the approval of a plan of merger by the Donlar shareholders may be
deemed to constitute a change of control. Mr. Koskan has waived any rights he
may have under his agreement as a result of the merger. Mr. Pietrangelo has
declined Donlar's request for a similar waiver. In the event the merger
constitutes a change of control and Mr. Pietrangelo is terminated without cause
or resigns for good reason within the applicable time periods provided for in
his change of control agreement, based on his current salary, Mr. Pietrangelo
would be entitled to benefits currently valued by Donlar at approximately
$670,000.
The Tax Consequences Of The Merger To Shareholders Are Uncertain And Could
Be Adverse. No tax opinion will be issued by Donlar Biosyntrex's tax advisors
prior to the consummation of the merger as to the material federal income tax
consequences of the merger. Donlar Biosyntrex has not yet filed its federal
income tax returns for the taxable years 2000 and 2001 and does not have
available the necessary information for its tax advisors to render an opinion on
the federal income tax consequences of the proposed merger. Once these tax
returns are filed and additional information is gathered, Donlar will seek an
opinion on the federal income tax consequences of the merger from its tax
advisors. If such an opinion is obtained, copies will be made available to
shareholders.
The material U.S. federal income tax consequences of the merger are
uncertain. There are two ways the merger transaction could be treated. First,
the merger could be treated as a "reorganization" under Section 368(a)(1)(A) of
the Code, in which case the federal income tax consequences to the Donlar
Biosyntrex common shareholders would be as follows:
(1) no gain or loss will be recognized by a holder of Donlar
Biosyntrex common stock upon the exchange of Donlar Biosyntrex common stock
solely for Donlar common stock;
(2) the basis of the Donlar common stock received by a holder of
Donlar Biosyntrex common stock pursuant to the merger will be the same as
the basis of the Donlar Biosyntrex common stock exchanged therefor; and
(3) the holding period of the Donlar common stock received by a holder
of Donlar Biosyntrex common stock pursuant to the merger will include the
holding period of the Donlar Biosyntrex common stock exchanged therefor,
provided the Donlar Biosyntrex common stock is held as a capital asset by
the shareholder at the effective time of the merger.
If the merger does not qualify as a reorganization, the exchange of Donlar
Biosyntrex common stock by a holder for Donlar common stock will be a taxable
exchange. In such a case, a holder will recognize gain (or loss) to the extent
that the fair market value of Donlar common stock received in exchange for
Donlar Biosyntrex stock held by that holder is greater than (or less than) the
holder's tax basis in the Donlar Biosyntrex stock. Any gain or loss recognized
will be capital gain or loss, provided the Donlar Biosyntrex common stock is
held as a capital asset by the shareholder at the effective time of the merger,
and will be long-term gain or loss if the stock has been held more than one year
at the effective time of the merger. For individuals, the maximum federal income
tax rate applicable to long-term capital gains is generally 20%. Deductions for
capital losses, whether short- or long-term, are subject to various limitations.
The discussion above does not purport to deal with all tax aspects of
federal income taxation that may affect particular holders of Donlar Biosyntrex
common stock in light of their individual circumstances, and is not intended for
holders subject to special treatment under the tax law (including dealers in
securities, financial institutions, insurance companies, tax-exempt
organizations, non-United States persons, holders who hold their stock as part
of a hedge, appreciated financial position, straddle or conversion transaction,
holders who do not hold their stock as capital assets and holders who acquired
their stock pursuant to the exercise of options or otherwise as compensation).
In addition, the discussion does not consider the effect of any applicable
state, local or foreign tax laws.
17
THE DONLAR BIOSYNTREX SPECIAL MEETING
WHEN AND WHERE THE DONLAR BIOSYNTREX SPECIAL MEETING WILL BE HELD
Donlar Biosyntrex will hold a special meeting of shareholders at its
offices at 6502 South Archer Road, Bedford Park, Illinois 60501 on October ,
2002 at 11:00 a.m. local time. Donlar Biosyntrex is required to send you a copy
of this information statement/prospectus at least 20 calendar days before its
special meeting.
WHAT WILL BE VOTED ON AT THE DONLAR BIOSYNTREX SPECIAL MEETING
Shareholders will consider and vote upon a proposal to approve the
Agreement and Plan of Merger dated as of June 7, 2002, between Donlar and Donlar
Biosyntrex and, in connection with the merger, a proposal to approve the
adoption of the Donlar 2002 Equity Incentive Plan. Under the merger agreement,
among other things:
- Donlar Biosyntrex will merge with Donlar, with Donlar being the surviving
corporation;
- the articles of incorporation of Donlar will be the articles of
incorporation of the combined company and will be amended to increase the
number of authorized shares of capital stock from 60,000,000 shares of
common stock and 38,000,000 shares of preferred stock to 200,000,000
shares of common stock and 100,000,000 shares of preferred stock;
- the outstanding shares of Donlar Biosyntrex common stock (other than
those owned by Donlar) and Series A and Series B preferred stock will
convert into the right to receive approximately 4.0 million and 21,000
shares of common stock, respectively, of the combined company upon
completion of the merger;
- the outstanding shares of Donlar common stock and preferred stock (other
than those owned by TFIC, Inc., Dr. Robert Martin, Willis-Stein &
Partners and its affiliate Star Polymers) will convert into the right to
receive approximately 1.4 million and 7.3 million shares of common stock,
respectively, of the combined company upon completion of the merger; and
- the board of directors of the combined company will consist of the
current members of the Donlar board.
The equity incentive plan will be effective upon approval by the
shareholders and consummation of the merger. The equity incentive plan contains
essentially the same terms as the Donlar Biosyntrex 2001 Equity Incentive Plan.
It will authorize an aggregate of 5.0 million shares of Donlar common stock to
be used for awards to directors, management, employees and consultants of the
combined company and its subsidiaries.
We may take action on the above matters at the Donlar Biosyntrex special
meeting on 2002, or any later date to which the special meeting is
postponed or adjourned.
The Donlar Biosyntrex board is unaware of other matters to be voted on at
the Donlar Biosyntrex special meeting.
SHAREHOLDERS ENTITLED TO VOTE
Donlar Biosyntrex has set September 12, 2002 as the record date to
determine which Donlar Biosyntrex shareholders will be entitled to vote at the
Donlar Biosyntrex special meeting. Only Donlar Biosyntrex shareholders at the
close of business on September 12, 2002, will be entitled to receive notice of
and to vote at the Donlar Biosyntrex special meeting. As of the record date
there were 48,816,622 issued and outstanding shares of Donlar Biosyntrex common
stock. In addition, Donlar Biosyntrex's records indicate that as of the record
date there were 39,124 issued and outstanding shares of Donlar Biosyntrex Series
A preferred stock convertible into 449 shares of Donlar Biosyntrex common stock.
Each holder of Donlar Biosyntrex's common stock on the record date is entitled
to one vote per share. Each holder of Donlar Biosyntrex Series A preferred stock
on the record date is entitled to one vote per share of common stock into which
such holder's Series A preferred stock is convertible. The holders of Donlar
Biosyntrex common stock and Series A preferred stock
18
vote together as a single class. Shareholders may cast their votes in person or
by properly executed proxy. However, Donlar Biosyntrex is not soliciting proxies
and asks that you not send us one. If you wish to vote by proxy, you must
properly designate a proxy in accordance with Nevada law and your proxy must
attend the meeting and vote your shares.
The holders of Donlar Biosyntrex Series A preferred stock are entitled to
vote as a separate class in connection with any merger of Donlar Biosyntrex
which would adversely affect the powers, preferences or rights of the Series A
preferred stock and therefore they are entitled to vote as a separate class on
the merger.
Donlar, which owns approximately 33,279,520 shares of Donlar Biosyntrex
common stock constituting approximately 68% of the issued and outstanding Donlar
Biosyntrex common stock and 68% of the voting interest in Donlar Biosyntrex, has
agreed that it will vote in favor of adoption of the merger agreement and the
approval of the adoption of the Equity Incentive Plan.
VOTE REQUIRED TO ADOPT THE MERGER AGREEMENT AND APPROVE THE ADOPTION OF THE
EQUITY INCENTIVE PLAN
The affirmative vote, either in person or by proxy, of a majority of the
issued and outstanding common stock and Series A preferred stock, on an as
converted basis, voting as a single class, is required to approve the merger
agreement and approve the adoption of the Equity Incentive Plan. The merger must
also be approved by a majority of the outstanding shares of Series A preferred
stock voting as a separate class. Donlar Biosyntrex has written agreements with
Dr. Kamal Modir, Peter LeDonne, Jr. and Kenneth Hubbard, collectively owning or
controlling a majority of the outstanding shares of Series A preferred stock,
providing that such holders will (a) exchange their Series A preferred stock for
combined company common stock on the basis of one share of combined company
common stock for each share of originally issued Series A preferred stock (i.e.,
excluding dividend shares) and (b) vote for approval of the merger agreement and
the related transactions.
Abstentions and broker non-votes on the proposal to adopt the merger
agreement and the proposal to approve the adoption of the equity incentive plan
will effectively count as votes against the proposals.
VOTING YOUR SHARES
The Donlar Biosyntrex board is not soliciting proxies from the Donlar
Biosyntrex common shareholders because Donlar owns 68% of the outstanding common
stock of Donlar Biosyntrex and Donlar Biosyntrex has reached agreements with the
holders of a majority of the outstanding Series A preferred stock to vote for
approval of the merger agreement and the related transactions. However, Donlar
Biosyntrex will hold a special meeting on October , 2002, at which you may
vote on the proposals to adopt the merger agreement and approve the adoption of
the equity incentive plan. In order to vote at the special meeting, you must
either attend in person or vote through a duly appointed proxy. If you do not
either vote by proxy or attend the special meeting and vote in person, your vote
will be counted as not present for quorum purposes and will effectively count as
a vote against the proposal to adopt the merger agreement and against the
proposal to approve the adoption of the equity incentive plan.
If you wish to vote by proxy, you must properly designate a proxy in
accordance with Nevada law and your proxy must attend the meeting and vote your
shares. If you attend the Donlar Biosyntrex special meeting in person, you may
vote your shares by completing a ballot at the meeting.
ESTABLISHING A QUORUM OF SHAREHOLDERS
If a majority of the total number of votes entitled to be cast at the
special meeting are present at the special meeting, either in person or by
proxy, the special meeting will have the quorum of shareholders required to
transact business.
19
INDEPENDENT AUDITORS TO BE PRESENT AT THE SPECIAL MEETING
Representatives of Grant Thornton LLP, Donlar Biosyntrex's independent
auditors, will be present at the Donlar Biosyntrex special meeting and will have
the opportunity to make a statement if they desire to do so and be available to
respond to appropriate questions.
APPROVAL AND RECOMMENDATION BY DONLAR BIOSYNTREX BOARD
The Donlar Biosyntrex board has unanimously approved the merger agreement,
the merger and the related matters including the adoption of the equity
incentive plan. The Donlar Biosyntrex board believes that the merger agreement,
the merger and the related matters are in the best interests of Donlar
Biosyntrex and, as required by Nevada law, recommends the Donlar Biosyntrex
shareholders vote "FOR" adoption of the merger agreement and "FOR" the approval
of the adoption of the Equity Incentive Plan. See "Proposal 1 -- Adoption of the
Merger Agreement -- Recommendation of the Donlar Biosyntrex Board and Donlar
Biosyntrex's Reasons for the Merger" and "Proposal 2 -- Approval of the Adoption
of the Donlar 2002 Equity Incentive Plan."
PROPOSAL 1 -- APPROVAL OF THE AGREEMENT AND PLAN OF MERGER
The following summary describes the material background and terms and
provisions of the Agreement and Plan of Merger and the merger. We have attached
a copy of the merger agreement to this information statement/prospectus as
Appendix A and we have incorporated it into this information
statement/prospectus by reference. We urge all shareholders to read the merger
agreement carefully in its entirety. We qualify this summary in its entirety by
reference to the merger agreement.
BACKGROUND OF THE MERGER -- RESTRUCTURING PLAN
In early 2001, as a result of anticipated difficulties in servicing debt
and obtaining necessary additional funding, management of Donlar and Donlar
Biosyntrex began to consider debt restructuring alternatives and sources of
additional funding. In May 2001, management of the companies met with Tennessee
Farmers Life Insurance Company, Willis Stein & Partners and Dr. Robert Martin,
the companies' three largest creditors, to discuss a restructuring plan. The
plan would have, in part, involved the merger of the companies to simplify the
corporate structure. In addition, the plan would have involved the conversion of
$27.0 million of the debt owed to the three creditors ($9.0 million each) in
exchange for preferred stock convertible into approximately 80% of the common
stock of the combined company.
Subsequent to the meeting in May 2001, management of the companies and the
three creditors engaged in protracted negotiations concerning the terms of the
restructuring. While these negotiations took place, management continued to
explore alternatives for raising additional capital. Management engaged the
services of an investment advisor to assist them in finding sources of private
equity financing and/or a merger partner. Ultimately, management was unable to
find any sources of private equity financing on acceptable terms or any
appropriate merger partner.
Because sources of private equity financing were not available on
acceptable terms, management sought additional debt financing from Tennessee
Farmers. As discussed in more detail below, Tennessee Farmers ultimately agreed
to provide $2.127 of bridge financing. However, such bridge financing was only
made available as part of the overall restructuring of the companies discussed
in detail below. Tennessee Farmers would not agree to convert any portion of its
debt into convertible preferred stock and, as a condition of the restructuring,
required the issuance of common stock to Tennessee Rural Health Improvement
Association. As discussed in detail below, the companies did reach agreement
with Willis Stein & Partners and Dr. Martin to exchange all of their debt
(exceeding $18.0 million) for convertible preferred stock plus shares of common
stock and, in the case of Dr. Martin, a warrant for the purchase of common
stock.
20
The specific terms of the restructuring plan include the following:
As part of the restructuring plan, on March 18, 2002, Donlar Biosyntrex and
Donlar entered into a Bridge and Consolidated Term Loan Agreement with Tennessee
Farmers Life Insurance Company. Pursuant to the terms of the loan agreement,
Donlar Biosyntrex and Donlar obtained a bridge loan facility in the amount of
approximately $2.127 million to be used to refinance certain short term debt,
provide working capital, pay certain accounts payable creditors and pay expenses
of the transaction. In addition, the terms of existing loans to Donlar in the
original principal amount of approximately $17.64 million were restated and made
the joint and several obligation of Donlar and Donlar Biosyntrex in the total
amount of $19.2 million reflecting the original amount of the loans and accrued,
unpaid interest thereon. Each of the loans is collateralized by substantially
all of the assets of Donlar Biosyntrex and Donlar.
Loans under the bridge loan facility bear interest at a rate of eleven
percent per annum with one half of such interest payable on a quarterly basis on
the last business day of March, June, September and December and the other half
payable at maturity on March 18, 2003.
The restated loans are divided into two loans. The first such loan is in
the principal amount of approximately $10.18 million, bears interest at a rate
of nine percent per annum until March 18, 2003, at which time such interest is
payable, and thereafter bears interest at eleven percent per annum payable on a
quarterly basis on the last business day of March, June, September and December.
The principal balance of the loan is payable in equal quarterly installments of
not less than $222,500 commencing on March 31, 2003 and thereafter on the last
business day of March, June, September and December. Any remaining unpaid
principal and interest is payable on March 31, 2007. The second such loan is in
the principal amount of $9.0 million, bears interest at a rate of one percent
per annum but neither interest nor principal are payable until the first to
occur of one of certain events described in the loan agreement, the latest of
which is March 18, 2005, after which time the interest that has accrued is
payable in full within thirty days and thereafter is payable quarterly on the
last business day of March, June, September and December together with principal
payments of not less than $222,500. Any remaining unpaid principal and interest
is payable on March 31, 2007.
As a condition of the loans and as part of the restructuring plan, the
combined company will issue approximately 1.6 million shares of common stock to
Tennessee Rural Health Improvement Association, which will represent
approximately 7.8% of the outstanding combined company common stock and 1.7% on
a fully diluted basis. These shares are in addition to the approximately 1.27
million shares of combined company common stock to be issued to Tennessee Rural
Health in the merger in exchange for the approximately 2.6 million shares of
Donlar common stock currently owned by it. Tennessee Rural Health is a provider
of health insurance and other health benefits. It is affiliated with Tennessee
Farm Bureau Federation which owns approximately 7.5% of Tennessee Farmers.
TFIC, Inc., an affiliate of Tennessee Farmers, will surrender for
cancellation in the merger, without issuance to it of any shares in the combined
company, approximately 3.85 million shares of Donlar common stock.
As part of the restructuring plan and as permitted by the loan agreement,
the combined company will issue 465,000 shares of common stock to four
creditors, Mr. Randy Olshen, Mr. Michael Acton, Mr. Rudy Monnich and Mr. Charles
Brodzki, in exchange for their forgiveness of all debts and claims by them
against either Donlar or Donlar Biosyntrex.
Mr. Olshen has a sales contract entitling him to a 20% commission on sales
of certain of Donlar Biosyntrex's products. Mr. Olshen has agreed to the
termination of that contract in exchange for 80,000 shares of combined company
common stock. While there is no current market for the combined company common
stock, based on the average of the bid and ask prices for the Donlar Biosyntex
common stock as reported on the NASD over-the-counter bulletin board on
September 13, 2002, 2002 ($0.125), the shares to be issued to Mr. Olshen are
estimated to be worth approximately $10,000. During 2001 and 2002, Mr. Olshen
was paid by Donlar Biosyntrex a total of $27,724 in commissions under his sales
contract.
21
Mr. Acton has a consulting contract entitling him to a consulting fee of
approximately $123,000. Mr. Acton has agreed to exchange the approximately
$94,000 remaining due under that contract for 200,000 shares of combined company
common stock.
Mr. Monnich has an outstanding account payable of approximately $11,000 and
Mr. Brodzki has an outstanding note payable of approximately $50,000. They have
agreed to forgive these amounts in exchange for 60,000 and 125,000 shares of
combined company common stock, respectively. Each of the foregoing agreements
was reached as a result of individual negotiations. The market value of the
shares to be issued cannot be determined at this time because no market
currently exists for them.
As a further condition of the loans, Donlar Biosyntrex and Donlar have
agreed to use their best efforts to complete the merger on or before July 7,
2002. At the request of the companies, Tennessee Farmers has agreed to extend
the date for completion of the merger to October 31, 2002. Failure to complete
the merger by October 31, 2002, or such later date as agreed to by Tennessee
Farmers, is an event of default which gives Tennessee Farmers the right to
declare the indebtedness under the loan agreement immediately due and payable.
Donlar Biosyntrex and Donlar made numerous representations, warranties and
covenants in the loan agreement. Among the covenants, Donlar Biosyntrex and
Donlar agreed to limit their ability to incur additional indebtedness, make any
investments or loans, pay dividends, purchase, redeem or issue capital stock or
sell or encumber assets. Each of the loans made or restated pursuant to the loan
agreement is subject to acceleration and the application of higher default rates
of interest in the event Donlar Biosyntrex or Donlar defaults in the payment of
principal or interest when due, breaches any covenants contained in the loan
agreement that are not remedied within five calendar days or any other specified
event of default occurs.
Each of the loans under the loan agreement is convertible at the option of
the lender at any time prior to repayment into common stock of Donlar Biosyntrex
and, subsequent to the merger, common stock of the combined company. Loans made
under the bridge loan facility convert at a rate of one share per $0.29 of
outstanding principal amount of the loans. The restated loans convert at a rate
of one share per $0.68 of outstanding principal amount of the loans. The maximum
number of shares of combined company common stock issuable upon conversion of
the loans is approximately 35.50 million. The conversion rates are subject to
antidilution protection. The holders of the loans have certain registration
rights with respect to the shares issuable upon conversion.
As part of the restructuring plan, Donlar has also reached agreements with
Willis Stein & Partners and its affiliate Star Polymers to (i) exchange $9.0
million of original principal amount of notes plus accrued interest for shares
of a new series of senior convertible preferred stock of the combined company
with a stated liquidation value of $9.0 million and convertible into
approximately 13.23 million shares of common stock of the combined company and
(ii) exchange all of the Donlar equity securities held by Willis Stein/Star
Polymers, equaling approximately 20.28 million shares of Donlar common and
preferred stock, for 1.0 million shares of common stock of the combined company.
Willis Stein/Star Polymers will not receive any other common stock of the
combined company as a result of the merger. The obligation of Willis Stein/Star
Polymers to complete the foregoing exchanges is subject to the conditions that
Donlar amend its certificate of incorporation to contain the terms of the senior
convertible preferred, Donlar and Donlar Biosyntrex obtain the requisite
consents and approvals for the exchanges and the amendment to Donlar's
certificate of incorporation, Dr. Martin complete the exchanges described below
and the 1998 and 2000 note holders complete the exchanges described below.
Willis Stein & Partners agreed to vote its shares of voting stock of Donlar in
favor of the merger.
Donlar has also reached agreement with Dr. Robert Martin, a director of
Donlar and Donlar Biosyntrex, to (i) exchange approximately $9.9 million of
original principal amount of notes plus accrued interest for shares of senior
convertible preferred stock with a stated liquidation value of $9.0 million and
convertible into approximately 13.23 million shares of the combined company's
common stock, (ii) relinquish rights to receive royalty payments from Donlar and
Donlar Biosyntrex equal to one percent of all sales during a ten year period
beginning in 2000 and surrender for cancellation all of the Donlar common and
preferred stock held by him, equaling approximately 16.56 million shares, in
exchange for 5.0 million shares of the common stock of the
22
combined company and (iii) surrender for cancellation options and warrants to
purchase over 38 million shares of Donlar common and preferred stock at exercise
prices ranging from $0.01 to $5.50 for a warrant to purchase 3.0 million shares
of the common stock of the combined company for $0.68 per share. Dr. Martin will
not receive any other common stock of the combined company as a result of the
merger. Dr. Martin also agreed to vote his shares of voting stock of Donlar in
favor of the merger.
Dr. Martin's right to receive royalties is contained in a management
consulting agreement with Donlar. The agreement provides that Dr. Martin will
provide consulting services to Donlar, not to exceed 60 hours without his
consent in any 12 month period, in return for royalties of one percent of all
sales of products during the term of the agreement. The agreement commenced on
April 1, 2000 and expires April 15, 2010. Royalty payments are to be made on
April 15 of each year during the term. Royalties of $46,219 accrued under the
agreement through June 30, 2002, but to date no royalties have been paid.
To further eliminate debt from the balance sheet of Donlar and Donlar
Biosyntrex, and after the merger, the combined company, Donlar has reached
agreements with all fifteen holders of approximately $1.9 million of original
principal amount of notes issued in 1998 and 2000 to exchange their notes for
shares of senior convertible preferred stock in an aggregate stated liquidation
value equal to the total amount of the notes and convertible into approximately
2.8 million shares of common stock of the combined company. For additional
information about the restructuring plan, see "Determination of Terms of the
Merger and Restructuring Plan" immediately below and "Pro Forma Financial
Information."
The companies as of June 30, 2002, had approximately $47.83 million of
liabilities. The restructuring including the merger will eliminate approximately
$24.69 million of liabilities, substituting for it approximately $20 million of
senior convertible preferred stock and 465,000 shares of common stock. It is
expected that the combined company will have approximately $23.15 million of
liabilities after completion of the merger and related transactions.
23
DETERMINATION OF THE TERMS OF THE MERGER AND RESTRUCTURING PLAN
The tables below show the capitalization of Donlar and Donlar Biosyntrex as
of June 30, 2002, on an outstanding basis and of the combined company following
the merger on a outstanding and fully diluted basis assuming conversion into
common stock of all outstanding convertible debt and preferred stock of the
combined company and exercise of all outstanding warrants and options to
purchase common stock of the combined company.
CONSOLIDATED CAPITALIZATION TABLE
DONLAR CORPORATION/DONLAR BIOSYNTREX CORPORATION
JUNE 30, 2002
<Table>
<Caption>
CONSOLIDATED DEBT
- -----------------
Tennessee Farmers
Bridge Loan........................... $ 1,785,972(1)
Performing Debt....................... 10,184,134(2)
Nonperforming Debt.................... 9,000,000(2)
-----------
Tenn. Farmers Sub-Total............... 20,970,106
-----------
Dr. Robert Martin....................... 250,000(3)
25,000(3)
500,000(3)
500,000(3)
500,000(3)
5,131,507
3,000,000
-----------
Dr. Robert Martin Sub-Total........... 9,906,507
-----------
Willis-Stein & Partners and Star
Polymers.............................. 9,000,000
1998 Noteholders........................ 763,500(4)
2000 Noteholders (excluding Dr.
Martin)............................... 1,142,000(3)
Other Debt.............................. 121,000(5)
-----------
Total Debt......................... $41,903,113
===========
</Table>
<Table>
<Caption>
DONLAR BIOSYNTREX
DONLAR CORPORATION CORPORATION
-------------------------- ------------------------
EQUITY COMMON PREFERRED COMMON PREFERRED
- ------ ----------- ---------- ---------- ---------
Dr. Robert Martin....................... 16,414,596 142,873(6) -- --
Willis-Stein & Partners and Star
Polymers.............................. -- 20,278,457(7) -- --
Tennessee Farmers....................... 6,459,389(8) -- -- --
Donlar.................................. -- -- 33,279,520 --
Others.................................. 2,957,065 17,578,670 15,537,220 39,573
----------- ---------- ---------- ------
Total.............................. 25,831,050 38,000,000 48,816,740 39,573
=========== ========== ========== ======
</Table>
<Table>
<Caption>
OPTIONS AND WARRANTS
- --------------------
Dr. Robert Martin....................... 19,765,837(9) 16,575,198(10) -- --
Willis-Stein & Partners and Star
Polymers.............................. -- -- -- --
Tennessee Farmers....................... 6,025,171(11) -- -- --
Donlar.................................. -- -- -- --
Others.................................. 1,980,316(12) 2,447,456(13) 2,106,509(14) --
----------- ---------- ---------- ------
Total.............................. 27,771,324 19,022,654 2,106,509 --
=========== ========== ========== ======
</Table>
24
- ---------------
(1)Represents draw downs of the $2,127,000 bridge facility. Convertible at the
option of the holder at any time prior to repayment into common stock of
Donlar Biosyntrex and, subsequent to the Merger, into common stock of the
combined company at a rate of one share per $0.29 of outstanding principal
amount of the loans.
(2)Convertible at the option of the holder at any time prior to repayment into
common stock of Donlar Biosyntrex and, subsequent to the Merger, into common
stock of the combined company at a rate of one share per $0.68 of
outstanding principal amount of the loans.
(3)Convertible into shares of Donlar Series A preferred stock at $1.01 per
share or $0.505 per share upon an initial public offering.
(4)Convertible into shares of Donlar Series A preferred stock at 90% of the per
share value of an initial public offering or strategic investment.
(5)Represents $71,000 in notes payable to Dr. Martin by Optim Nutrition, Inc.,
a subsidiary of Donlar Biosyntrex, and a $50,000 note payable to Charles
Brodzki, an independent third party lender, which note is being exchanged in
the restructuring for 125,000 shares of combined company common stock, see
"Proposal 1 -- Approval of Agreement and Plan of Merger -- Background of the
Merger -- Restructuring Plan."
(6)Does not include 1,098,841 shares of preferred stock held in the name of
RGM/BVM Limited Partnership, of which Dr. Martin is a partner.
(7)Represents 2,433,415 shares owned by Star Polymers and 17,845,042 shares
owned by Willis Stein.
(8)Represents 2,610,012 shares owned by Tennessee Rural Health Improvement
Association and 3,849,377 shares of owned by TFIC, Inc.
(9)Represents options to purchase 102,500 shares and warrants to purchase
19,663,337 shares, with exercise prices ranging from $0.30 to $5.00.
(10)Represents options to purchase 14,000 shares and warrants to purchase
16,561,198 shares, with exercise prices ranging from $0.30 to $5.00.
(11)Represents warrants to purchase 6,025,171 shares held by Tennessee Farmers
Life Insurance Company with an exercise price of $0.30.
(12)Represents options to purchase 1,813,716 shares and warrants to purchase
166,600 shares, with exercise prices ranging from $0.30 to $5.00.
(13)Represents options to purchase 400,248 shares and warrants to purchase
2,047,208 shares, with exercise prices ranging from $0.30 to $5.00.
(14)Represents options to purchase 1,374,509 shares with exercise prices ranging
from $0.20 to $1,190.00 and warrants to purchase 732,000 shares with
exercise prices ranging from $0.10 to $2.50.
25
POST-MERGER COMBINED COMPANY CAPITALIZATION TABLE
<Table>
<Caption>
OUTSTANDING
AFTER ADJUSTED FULLY PERCENTAGE
COMPLETION OF PERCENTAGE OF DILUTED OF FULLY
RESTRUCTURING OUTSTANDING ASSUMING FULL DILUTED
INCLUDING THE COMMON CONVERSION CONVERSION INTO COMMON
MERGER STOCK RATE COMMON STOCK STOCK
-------------- ------------- ---------- --------------- ----------
CONVERTIBLE DEBT:
Tennessee Farmers
Bridge Loan(1)................ $ 2,127,000.00 0.29 7,334,483 7.83%
Performing Debt............... 10,184,134.66 0.68 14,976,669 16.00
Nonperforming Debt............ 9,000,000.00 0.68 13,235,294 14.14
-------------- ---------- ------
Total Convertible Debt........ $21,311,134.66 35,546,445 38.00%
============== ========== ======
OTHER DEBT:........................ $ 71,000.00
==============
TOTAL DEBT:........................ $21,382,134.66
==============
CAPITAL STOCK, OPTIONS AND
WARRANTS:
Senior Convertible Preferred
Stock
Dr. Robert Martin............. $ 9,000,000.00 0.68 13,235,294 14.14%
Willis Stein & Partners and
Star Polymers............... 9,000,000.00 0.68 13,235,294 14.14
1998 Noteholders.............. 763,500.00 0.68 1,122,794 1.20
2000 Noteholders (excl. Dr.
Martin)..................... 1,142,000.00 0.68 1,679,412 1.79
-------------- ---------- ------
Total Senior Conv.
Preferred................... $19,905,000.00 29,272,794 31.27%
============== ========== ======
Common Stock
Shares Outstanding
Pre-Merger Donlar
Shareholders(2)............. 8,652,288 41.61% 8,652,288 9.24%
Pre-Merger Donlar Biosyntrex
Shareholders(3)............. 4,049,765 19.48 4,049,765 4.33
Dr. Robert Martin............. 5,000,000 24.05 5,000,000 5.34
Willis Stein & Partners....... 1,000,000 4.81 1,000,000 1.07
Tennessee Rural Health(4)..... 1,626,308 7.82 1,626,308 1.74
Shares Issued to Creditors to
Satisfy Certain Payables.... 465,000 2.24 465,000 0.50
-------------- ------ ---------- ------
Total Shares Outstanding...... 20,793,360 100.00% 20,793,360 22.21%
============== ====== ========== ======
Options and Warrants
Equity Incentive Plan(5)...... 5,000,000 5.34%
Dr. Martin Warrant............ 3,000,000 3.20
---------- ------
Total Options and Warrants.... 8,000,000 8.55
---------- ------
TOTAL.............................. 20,793,360 93,612,600 100.00%
============== ========== ======
</Table>
- ---------------
(1) As of June 30, 2002, $1,785,972 of the available bridge loan facility had
been drawn down.
(2) Excludes Dr. Martin, Willis Stein/Star Polymers, TFIC, Inc. and the
approximately 1.6 million additional shares being issued to Tennessee Rural
Health Improvement Association.
26
(3) Excludes shares owned by Donlar. Includes Series A preferred stock -39,124
shares outstanding, to be converted into approximately 21,000 shares of
combined company common stock; and Series B preferred stock -449 shares
outstanding, to be converted into approximately 117 shares of combined
company common stock.
(4) Excludes 1,278,906 shares to be issued to Tennessee Rural Health in the
merger in exchange for its Donlar common stock.
(5)No options will be issued under the equity incentive plan until after the
completion of the merger and such issuances will be made in accordance with
the plan.
As stated above, the terms of the merger and restructuring plan were
developed through negotiation beginning in May 2001 with Donlar's principal
lenders: Tennessee Farmers Life Insurance Company, Dr. Robert Martin and Willis
Stein & Partners. It was agreed that Tennessee Farmers would restructure
Donlar's indebtedness to it, as described above, and that the restructured
indebtedness would be convertible into common stock of the combined company
following the merger at the rate of $0.68 per share, which represented the
approximate market value of the common stock of Donlar Biosyntrex in late June
2001, when an initial understanding was reached on the terms of the
restructuring plan. As part of the plan, Dr. Martin and Willis Stein/Star
Polymers agreed to exchange their debt in Donlar in the respective principal
amounts of $9.9 million and $9.0 million plus accrued interest for combined
company senior convertible preferred stock, which is convertible at the rate of
$0.68 per share into combined company common stock. It was further understood
that as a result of the foregoing transactions, Tennessee Farmers, Dr. Martin
and Willis Stein/Star Polymers would own, on a fully diluted basis, in the
aggregate approximately eighty percent of the common equity of the combined
company. The remaining twenty percent would be issued to the holders of Donlar's
1998 and 2000 Notes and the holders of the preferred and common stock of Donlar
and Donlar Biosyntrex.
Subsequent discussions with the principal lenders resulted in the following
modifications to the reorganization plan:
- Tennessee Farmers agreed to make the bridge loan, which is convertible
into combined company common stock at the rate of $0.29 per share, the
approximate market value of the Donlar Biosyntrex common stock at the
time the bridge loan was made in March 2002. As part of that transaction,
it was agreed that, upon the effectiveness of the merger, Tennessee Rural
Health, would be issued 1,626,308 shares of common stock of the combined
company and that the 3,849,377 shares of common stock of Donlar owned by
TFIC, Inc., an affiliate of Tennessee Farmers, would be cancelled in the
merger without the issuance to TFIC of any shares in the combined company
as a result of such cancellation.
- Dr. Martin agreed to the following in return for the issuance to him of
5.0 million shares of the combined company common stock and a warrant to
purchase 3.0 million shares of the combined company common stock for
$0.68 per share: (i) the relinquishment of the right to receive royalty
payments equal to one percent of all sales by Donlar or Donlar Biosyntrex
during a ten year period beginning in 2000; (ii) the surrender for
cancellation in the merger of 16,557,469 shares of Donlar common and
preferred stock without the issuance of any shares in the combined
company as the result of the merger; and (iii) the surrender for
cancellation of options and warrants to purchase 38,407,063 shares of
Donlar preferred and common stock at prices ranging from $0.01 to $5.50
per share.
- Willis Stein & Partners agreed that, upon the effectiveness of the
merger, it would be issued 1.0 million shares of the combined company
common stock and that the 20,278,457 shares of Donlar preferred stock
owned by Willis Stein/Star Polymers would be cancelled in the merger
without the issuance to them of any shares in the combined company as a
result of such cancellation.
- Certain creditors agreed to accept 465,000 shares of the combined company
common stock in the satisfaction of contractual and accounts payable
obligations.
- 5 million shares of common stock would be reserved for issuance under the
combined company's equity incentive plan.
- All other options, warrants and rights to acquire Donlar or Donlar
Biosyntrex stock would be cancelled.
27
The 15 holders of the 1998 and 2000 Notes of Donlar, in the principal
amount of approximately $1.9 million, agreed to exchange their notes for an
equal amount of the combined company senior convertible preferred stock.
As a result of the foregoing agreements, 12.7 million shares of the
combined company common stock, representing 61.09% on an outstanding basis and
13.57% on a fully diluted basis, will be issued in the merger to the holders of
preferred and common stock of Donlar and Donlar Biosyntrex (other than TFIC,
Inc., Dr. Martin, Willis Stein/Star Polymers, who are treated as specified
above, and excluding the approximately 1.6 million additional shares to be
issued to Tennessee Rural Health). That amount is being allocated between the
Donlar and the Donlar Biosyntrex shareholders on the basis of the respective
ownership of Donlar Biosyntrex common stock by Donlar on the one hand, and all
other shareholders of Donlar Biosyntrex, on the other hand.
Accordingly, 68% of the 12.7 million shares of combined company common
stock, or 8.7 million shares, is being allocated to the Donlar shareholders
(other than TFIC, Inc., Dr. Martin, Willis Stein/Star Polymers, who are treated
as specified above, and excluding the approximately 1.6 million additional
shares to be issued to Tennessee Rural Health) and 32%, or 4.05 million shares,
is being allocated to the Donlar Biosyntrex shareholders (other than Donlar,
whose shares are being cancelled). As a result, and taking into account the
cancellation of certain shares as described above, in the merger each holder of
Donlar preferred and common stock (other than the holders of cancelled shares)
will receive approximately 0.49 shares of the combined company common stock for
each share of Donlar stock the holder owns, each holder of Donlar Biosyntrex
common and Series B preferred stock (other than Donlar) will receive 0.26 shares
of combined company common stock for each share of Donlar Biosyntrex stock the
holder owns and each holder of Donlar Biosyntrex Series A preferred stock will
receive one share of the combined company common stock for each originally
issued share of Series A preferred stock the holder owns (excluding dividend
shares). As is indicated in the table above, following completion of the merger,
the former shareholders of Donlar (other than holders of cancelled shares and
excluding the approximately 1.6 million additional shares to be issued to
Tennessee Rural Health) will own 41.61% (9.24% on a fully diluted basis) of the
combined company common stock, and the former shareholders of Donlar Biosyntrex
(other than Donlar) will own 19.48% (4.33% on a fully diluted basis) of such
common stock.
ADDITIONAL TERMS OF MERGER
We expect to complete the merger in the fourth quarter of 2002. The name of
the combined company will be Donlar Corporation.
Under the merger agreement,
- Donlar Biosyntrex will merge with and into Donlar,
- the separate corporate existence of Donlar Biosyntrex will cease,
- Donlar will survive and continue its corporate existence under the laws
of the State of Illinois under the name Donlar Corporation,
- subject to the satisfaction or waiver of conditions set forth in the
merger agreement and described in "Conditions to Complete the Merger,"
the merger will become effective on the date and at the time specified in
the articles of merger to be filed with the Secretary of State of the
States of Illinois and Nevada.
At the effective time, the Donlar articles of incorporation, as amended,
will be further amended to authorize the issuance of additional shares of common
stock and preferred stock. The articles of incorporation, as so amended, and the
bylaws of Donlar will be the articles of incorporation and bylaws of the
combined company upon completion of the merger.
28
EXCHANGE OF STOCK CERTIFICATES
Immediately following the effective time of the merger, the combined
company shall mail to the Donlar and Donlar Biosyntrex holders of record of a
certificate or certificates that immediately prior to the effective time
represented issued and outstanding shares of Donlar or Donlar Biosyntrex capital
stock a letter of transmittal to surrender the certificates to the combined
company for cancellation. Upon the surrender and cancellation of each
certificate, the combined company shall mail to such holders the common stock of
the combined company to which they are entitled under the merger agreement.
Until properly surrendered, each unsurrendered certificate shall only
represent the right to receive common stock of the combined company to the
extent provided under the merger agreement. Holders of unsurrendered
certificates of Donlar and Donlar Biosyntrex capital stock will not be entitled
to receive any dividends or distributions with respect to the combined company's
capital stock.
Holders of Donlar and Donlar Biosyntrex capital stock should not send in
certificates until they receive transmittal materials from the combined company.
REPRESENTATIONS AND WARRANTIES
The merger agreement contains the following representations and warranties
by Donlar:
- Donlar is duly organized and good standing under the laws of Illinois;
- Donlar's capitalization is as set forth in the merger agreement, all
issued and outstanding shares of capital stock are validly authorized and
issued and there are no pre-emptive rights with respect to the issuance
or sale of its capital stock;
- Donlar has the corporate power and authority to carry on its business,
own or lease properties and enter into the merger agreement and
consummate the transactions contemplated thereby; and
- the merger agreement is a valid and binding obligation of Donlar
enforceable in accordance with its terms, the execution and delivery of
the merger agreement will not conflict with or violate any organizational
documents, agreements or governmental orders and no filing or approval is
required to consummate the merger except the filing of articles of merger
and this information statement/prospectus.
The merger agreement contains the following representations and warranties
by Donlar Biosyntrex:
- Donlar Biosyntrex is duly organized and good standing under the laws of
Nevada;
- Donlar Biosyntrex's capitalization is as set forth in the merger
agreement, all issued and outstanding shares of capital stock are validly
authorized and issued and there are no pre-emptive rights with respect to
the issuance or sale of its capital stock;
- Donlar Biosyntrex has the corporate power and authority to carry on its
business, own or lease properties and enter into the merger agreement and
consummate the transactions contemplated thereby; and
- the merger agreement is a valid and binding obligation of Donlar
Biosyntrex enforceable in accordance with its terms, the execution and
delivery of the merger agreement will not conflict with or violate any
organizational documents, agreements or governmental orders and no filing
or approval is required to consummate the merger except the filing of
articles of merger and this information statement/ prospectus.
29
CONDITIONS TO COMPLETE THE MERGER
The obligations of each of Donlar and Donlar Biosyntrex to complete the
merger are subject to the satisfaction or waiver, subject to compliance with
applicable law, of conditions, including:
- Obtaining the requisite votes of approval from the respective
shareholders of Donlar and Donlar Biosyntrex which in the case of Donlar
is two thirds of the outstanding shares of Donlar common and preferred
stock voting as a single class and in the case of Donlar Biosyntrex is a
majority of the outstanding shares of Donlar Biosyntrex common stock and
Series A preferred stock, on an as converted basis, voting as a single
class. If the merger is deemed to adversely affect the powers,
preferences or rights of the Series A preferred stock, the merger must be
approved by a majority of the outstanding shares of Series A preferred
stock.
- The absence of injunctions, decrees, orders, laws, statutes or
regulations prohibiting the consummation of the merger and the absence of
any proceeding that has a reasonable probability of resulting in such
effect.
- All authorizations, consents and approvals required to be obtained prior
to consummation of the merger shall have been obtained. The companies are
not aware of any such requirements accept for the shareholder approval
requirement discussed above.
- The representations and warranties of the other party in the merger
agreement are to be true and correct in all material respects at and as
of the date of the merger agreement and the effective time of the merger.
- All of the obligations of the other party to be performed on or prior to
the effective time of the merger have been performed in all material
respects.
ALLOCATION OF COSTS AND EXPENSES
The merger agreement provides that each party to the merger agreement will
be responsible for paying its own expenses, including, without limitation, all
attorneys' fees and costs and all accountants' fees and costs.
APPRAISAL (DISSENTER'S) RIGHTS
Under the Nevada Revised Statutes, notwithstanding the approval of the
merger by the holders of the requisite number of shares of capital stock of
Donlar Biosyntrex, a Donlar Biosyntrex shareholder can refuse the merger
consideration and exercise his or her appraisal rights and obtain payment for
the fair value of his or her capital stock by strictly following the
requirements of the applicable law. A copy of the relevant sections the Nevada
Revised Statutes is attached as Appendix C. You are urged to review the
applicable statute carefully as failure to comply may result in the loss of your
appraisal rights. DONLAR SHAREHOLDERS' APPRAISAL RIGHTS ARE NOT DISCUSSED IN
THIS INFORMATION STATEMENT/PROSPECTUS. WE RECOMMEND THAT DONLAR SHAREHOLDERS
CONSULT WITH THEIR LEGAL ADVISERS TO DETERMINE IF APPRAISAL RIGHTS ARE AVAILABLE
AND THE PROCEDURES THAT MUST BE COMPLIED WITH TO EXERCISE AND MAINTAIN THOSE
RIGHTS. FAILURE TO STRICTLY COMPLY WITH APPLICABLE LAW MAY RESULT IN A
FORFEITURE OF APPRAISAL RIGHTS.
A beneficial shareholder of Donlar Biosyntrex stock may assert dissenters'
rights as to shares held on the shareholder's behalf only if the shareholder
submits to Donlar Biosyntrex the written consent of the shareholder of record to
the dissent not later than the time the beneficial shareholder asserts
dissenters' rights and the beneficial shareholder does so with respect to all
shares of which he is the beneficial shareholder or over which he has the power
to direct the vote.
Shareholders who wish to assert dissenters' rights: (i) must deliver to
Donlar Biosyntrex, before the vote is taken, a written notice of the
shareholder's intent to demand payment for his or her shares if the merger is
effectuated and (ii) must not vote his or her shares in favor of merger.
30
If the merger is authorized by the shareholders, Donlar Biosyntrex will
send a written dissenters' notice to all shareholders who provided timely notice
of their intent to demand payment for their shares and who did not vote their
shares in favor of the merger, within 10 days after effectuation of the merger.
The notice will:
(a) state where the demand for payment must be sent and where and when
certificates for Donlar Biosyntrex's shares are to be deposited;
(b) supply a form for demanding payment;
(c) set a date by which Donlar Biosyntrex must receive the demand for
payment, which may not be less than 30 nor more than 60 days after the date
the notice is delivered; and
(d) be accompanied by a copy of Sections 92A.300 through 92A.500 of
the Nevada Revised Statutes.
A shareholder to whom a dissenter's notice is sent must, by the date set
forth in the dissenter's notice:
(a) demand payment;
(b) certify whether the shareholder acquired beneficial ownership of
the shares before the date of the first announcement to the news media or
to the shareholders of the proposed terms of the merger; and
(c) deposit his or her certificates in accordance with the terms of
the dissenter's notice.
Shareholders who do not demand payment or deposit their certificates where
required, each by the date set forth in the dissenter's notice, will not be
entitled to demand payment for dissenters' rights under Nevada law.
Within 30 days after receipt a valid demand for payment, Donlar Biosyntrex
will pay each dissenter who complied with the procedures described by the Nevada
dissenters' rights statute the amount Donlar Biosyntrex estimates to be the fair
value of the shares, plus accrued interest. The payment will be accompanied by:
(a) Donlar Biosyntrex's balance sheet as of the end of a fiscal year
ending not more than 16 months before the date of payment, a statement of
income for that fiscal year, a statement of changes in shareholders' equity
for that fiscal year and the latest available interim financial statements,
if any;
(b) a statement of Donlar Biosyntrex's estimate of the fair value of
the shares;
(c) an explanation of how the interest was calculated;
(d) a statement of the dissenters' rights to demand payment under
Section 92A.480 of the Nevada Revised Statutes; and
(e) a copy of Sections 92A.300 through 92A.500 of the Nevada Revised
Statutes.
Donlar Biosyntrex may elect to withhold payment from a dissenting
shareholder if such shareholder became the beneficial owner of the shares on or
after the date of the first announcement to the news media or to the
shareholders of the proposed terms of the merger. To the extent Donlar
Biosyntrex elects to withhold payment, after effectuating the merger, it will
estimate the fair value of the shares, plus accrued interest, and will offer to
pay this amount to each dissenter who agrees to accept it in full satisfaction
of the shareholder's demand. Donlar Biosyntrex will send with its offer:
(a) a statement of Donlar Biosyntrex's estimate of the fair value of
the shares;
(b) an explanation of how the interest was calculated; and
(c) a statement of the dissenters' rights to demand payment pursuant
to Section 92A.480 of the Nevada Revised Statutes.
A dissenter may notify Donlar Biosyntrex in writing of the dissenter's own
estimate of the fair value of the shares and interest due, and demand payment of
his or her estimate, less Donlar Biosyntrex's fair value payment or offer for
payment, or reject the offer for payment made by Donlar Biosyntrex and demand
payment of the dissenter's shares and interest due if the dissenter believes
that the amount paid or offered is
31
less than the fair value of the dissenter's shares or that the interest due is
incorrectly calculated. A dissenter waives his right to demand such payment
unless the dissenter notifies Donlar Biosyntrex of his demand in writing within
30 days after Donlar Biosyntrex made or offered for payment for the dissenter's
shares.
If a demand for payment remains unsettled, Donlar Biosyntrex will commence
a proceeding within 60 days after receiving the demand for payment and petition
the court to determine the fair value of the shares and accrued interest. If
Donlar Biosyntrex does not commence the proceeding within the 60-day period, it
will be required to pay each dissenting stockholder whose demand remains
unsettled the amount demanded.
Each dissenter who is made a party to the proceeding is entitled to a
judgment:
(a) for the amount, if any, by which the court finds the fair value of
the dissenter's shares, plus interest, exceeds the amount paid by Donlar
Biosyntrex; or
(b) for the fair value, plus accrued interest, of the dissenter's
after-acquired shares for which Donlar Biosyntrex elected to withhold
payment pursuant to Nevada law.
The court will determine all of the costs of the proceeding, including the
reasonable compensation and expenses of any appraisers appointed by the court.
The court will assess the costs against Donlar Biosyntrex, except that the court
may assess costs against all or some of the dissenters, in the amounts the court
finds equitable, to the extent that the court finds the dissenters acted
arbitrarily, vexatiously or not in good faith in demanding payment. The court
may also assess the fees and expenses of the counsel and experts for the
respective parties, in amounts the court finds equitable:
(a) against Donlar Biosyntrex and in favor of all dissenters if the
court finds Donlar Biosyntrex did not substantially comply with the Nevada
dissenters' rights statute; or
(b) against either Donlar Biosyntrex or a dissenter in favor of any
other party, if the court finds that the party against whom the fees and
expenses are assessed acted arbitrarily, vexatiously or not in good faith
with respect to the dissenters' rights provided under the Nevada
dissenters' rights statute.
If the court find that the services of counsel for any dissenter were of
substantial benefit to other dissenters similarly situated, and that the fees
for those services should not be assessed against Donlar Biosyntrex, the court
may award to those counsel reasonable fees to be paid out of the amounts awarded
to the dissenters who were benefited.
If a proceeding is commenced because Donlar Biosyntrex did not pay each
dissenter who complied with the procedures described by the Nevada dissenters'
rights statute the amount Donlar Biosyntrex estimated to be the fair value of
the shares, plus accrued interest within 30 days after receipt a valid demand
for payment, the court may assess costs against Donlar Biosyntrex, except that
the court may assess costs against all or some of the dissenters who are parties
to the proceeding, in amounts the court finds equitable, to the extent the court
finds that such parties did not act in good faith in instituting the proceeding.
The foregoing summary of the rights of dissenting shareholders of Donlar
and Donlar Biosyntrex does not purport to be a complete statement of the
procedures to be followed by shareholders desiring to exercise any available
dissenters' rights. The preservation and exercise of dissenters' rights require
strict adherence to the applicable provisions of Nevada law, a copy of which is
attached hereto as Appendix C.
After completion of the merger, we will notify you of the date on which the
merger was completed.
RECOMMENDATION OF THE DONLAR BIOSYNTREX BOARD AND DONLAR BIOSYNTREX'S REASONS
FOR THE MERGER
The Donlar Biosyntrex board of directors has adopted the merger agreement
and has determined that the merger of Donlar Biosyntrex and Donlar is in the
best interests of Donlar Biosyntrex and its shareholders. The Donlar Biosyntrex
board, in accordance with Nevada law, unanimously recommends that you vote to
approve the merger agreement.
Tennessee Farmers Life Insurance Company, as a condition of making a $2.127
million bridge loan facility available to the Donlar and Donlar Biosyntrex and
of amending and restating the terms of existing
32
loans in the amount of approximately $19.2 million, has required Donlar and
Donlar Biosyntrex to merge. Under the terms of the Bridge and Consolidated Term
Loan Agreement with Tennessee Farmers, the merger must be completed by July 7,
2002, or such later date as agreed by Tennessee Farmers. Tennessee Farmers has
extended the date for completion of the merger until October 31, 2002. The
Tennessee Farmers' loans and the merger are part of an overall restructuring
plan that will also involve the elimination of approximately $24.69 million of
the companies' liabilities.
In reaching its decision to recommend the merger, the Donlar Biosyntrex
board of directors considered a variety of positive and negative factors. The
material positive factors considered by the board of directors were:
- The bridge loan and the restructuring of the existing Tennessee Farmers'
loans were necessary in order for Donlar Biosyntrex's continuance in
operation, and Tennessee Farmers has required the merger as a condition
of those transactions and can accelerate the loans if the merger does not
occur by October 31, 2002.
- Approximately $24.69 million of liabilities is being eliminated as part
of the restructuring transactions.
- The merger will simplify the two companies' capital structure thereby
reducing accounting and legal costs and making the companies more
attractive to potential investors and lenders.
- The overlap of management between the companies and the absence of a
separate Donlar business should make for a seamless transition.
The material negative factors considered by the board of directors were:
- The restructuring would have a dilutive effect on the existing Donlar
Biosyntrex shareholders.
- There would be significant legal, accounting and printing costs in
completing the restructuring.
The alternatives to the restructuring plan (including the merger)
considered were obtaining additional private equity financing and merging the
companies' operations with a non-affiliate, but no private equity financing on
acceptable terms and in an adequate amount were located and no suitable
non-affiliated merger partners were found.
The discussion in this section of the information and factors considered by
the Donlar Biosyntrex board is not intended to be exhaustive but includes all
material factors considered by the board. In reaching its determination to
approve and recommend the merger agreement and the merger, the Donlar Biosyntrex
board did not assign any relative or specific weights to the factors considered.
Individual directors may have given differing weights to different factors. The
Donlar Biosyntrex board unanimously approved the merger agreement and the other
transactions contemplated by the merger agreement as being in the best interests
of Donlar Biosyntrex and its shareholders.
Accordingly, the board of directors of Donlar Biosyntrex, in accordance
with Nevada law, unanimously recommends that holders of its common and Series A
preferred stock vote "FOR" approval of the merger agreement.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendations of the Donlar Biosyntrex board with
respect to the merger, Donlar Biosyntrex shareholders should be aware that
officers and directors of Donlar and Donlar Biosyntrex have interests in the
merger.
The executive officers and directors of Donlar and Donlar Biosyntrex, who
are identical, will serve as executive officers and directors of the combined
company following the merger. In addition, as of June 7, 2002, the directors and
executive officers of Donlar owned an aggregate of approximately 19,042,029
shares of Donlar common stock, 6,661,797 shares of Donlar preferred stock and
held options to purchase an aggregate of approximately 311,389 shares of Donlar
common stock at an exercise price ranging from approximately $0.30 to $5.50 and
87,000 shares of Donlar preferred stock at an exercise price ranging from
approximately $3.00 to $5.50. Under the terms of the merger agreement, Donlar's
directors (other than Dr. Robert Martin)
33
and executive officers will receive the same consideration for their shares of
Donlar common and preferred stock as the other Donlar shareholders and all
options will be cancelled. As of June 7, 2002, the directors and executive
officers of Donlar Biosyntrex owned no shares of Donlar Biosyntrex capital stock
and held options to purchase an aggregate of approximately 1,150,000 shares of
Donlar Biosyntrex common stock at a weighted average exercise price of
approximately $0.20. Under the terms of the merger agreement, all options to
purchase Donlar Biosyntrex stock will be cancelled.
Donlar has reached agreement with Dr. Robert Martin, who serves as a
director of both Donlar and Donlar Biosyntrex and will serve as a director of
the combined company, to (i) exchange approximately $9.9 million of original
principal amount of Donlar notes plus accrued interest for shares of the
combined company senior convertible preferred stock with a stated liquidation
value of $9.0 million and convertible into approximately 13.23 million shares of
the combined company's common stock, (ii) relinquish rights to receive royalty
payments from Donlar and Donlar Biosyntrex and surrender for cancellation all of
the Donlar common and preferred stock held by him, equaling approximately 10.56
million shares, in exchange for 5.0 million shares of the combined company's
common stock and (iii) surrender for cancellation options and warrants to
purchase over 38 million shares of Donlar stock for a warrant to purchase 3.0
million shares of the combined company's common stock for $0.68 per share. Dr.
Martin will not receive any other stock of the combined company as a result of
the merger. Dr. Martin agreed to vote his shares of voting stock of Donlar in
favor of the merger.
Donlar owns approximately 33.28 million shares of common stock of Donlar
Biosyntrex which will be cancelled in the merger. The restructuring plan,
including the merger, involves the restructuring of the debt and capital
structure of both Donlar and Donlar Biosyntrex. See "Proposal 1 -- Approval of
Agreement and Plan of Merger -- Background of the Merger -- Restructuring Plan"
for further information.
Immediately after completion of the restructuring plan, including the
merger, Dr. Martin will own approximately 24.1% of the outstanding combined
company common stock and 8.5% on a fully diluted basis (i.e., assuming all
convertible or exchangeable securities including notes are converted or
exchanged), Willis Stein/Star Polymers will own approximately 4.8% of the
outstanding combined company common stock and 15.2% on a fully diluted basis,
Tennessee Farmers will own none of the outstanding combined company common stock
and 38.0% on a fully diluted basis and Tennessee Rural Health will own
approximately 7.8% of the outstanding combined company common stock and 1.7% on
a fully diluted basis.
VOTING SECURITIES BENEFICIALLY OWNED BY ASSOCIATES OF DIRECTORS AND OFFICERS
<Table>
<Caption>
NAME SHARES(1) PERCENT(1)
- ---- --------- ----------
Jerilyn Koskan(1)........................................... 2,938,359 4.6%
RGM/BVM Limited Partnership(2).............................. 1,098,841 1.7%
</Table>
- ---------------
(1) Represents 2,888,729 shares of Donlar preferred stock, options to purchase
30,000 shares of Donlar common stock, options to purchase 3,000 shares of
Donlar preferred stock and a warrant to purchase 16,630 shares of Donlar
preferred stock. Jerilyn Koskan is the wife of the companies' president and
chief executive officer, Larry Koskan.
(2) Represents 1,098,841 shares of Donlar preferred stock. The sole partners in
RGM/BVM Limited Partnership are Dr. Robert Martin, a director of the
companies, and his wife, Bearnice Martin.
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
Donlar. There are 25,831,050 shares of common stock and 38,000,000 shares
of preferred stock outstanding as of June 7, 2002. Each share of common stock
and preferred stock is entitled to one vote at the Donlar special meeting to be
held to vote on the Merger and the common stock and the preferred stock vote
together as a single class.
34
Donlar Biosyntrex. There are 48,816,622 shares of common stock and 39,124
shares of Series A preferred stock outstanding as of June 7, 2002, entitled to
cast a total of 48,816,854 votes at the Donlar Biosyntrex special meeting.
To Donlar's knowledge, the following table sets forth information regarding
ownership of Donlar's outstanding capital stock on June 7, 2002, assuming
exercise of all outstanding warrants, options and convertible securities, by:
(1) all persons known by Donlar to be the beneficial owner of more than 5% of
Donlar's issued shares; (2) each director of Donlar; (3) each of the "named
executive officers" of Donlar, as defined under the rules and regulations of the
Securities Act 1933; and (4) all directors and named executive officers of
Donlar as a group (6 persons).
<Table>
<Caption>
SHARES BENEFICIALLY PERCENT OF TOTAL
NAME OWNERSHIP(1) VOTING INTEREST(1)
- ---- ------------------- ------------------
Larry P. Koskan(2).......................................... 3,214,301 4.9%
Robert W. Cooper(3)......................................... 39,478 *
Dr. Robert G. Martin(4)..................................... 56,063,373 55.48%
Dean R. Kleckner............................................ -- --
Robert Pietrangelo(5)....................................... 17,588 *
Joel Lurquin................................................ -- --
Tennessee Farmers Life Insurance Company(6)................. 23,101,849 26.6%
Willis Stein & Partners, L.P.(7)............................ 17,845,042 28.0%
TFIC, Inc.(8)............................................... 3,849,377 6.0%
All executive officers and directors as a group............. 59,317,152 60.53%
</Table>
- ---------------
(1) Based on 25,831,050 shares of common stock and 38,000,000 shares of
preferred stock outstanding at the close of business on June 7, 2002.
(2) Represents 2,484,560 shares of common stock, 142,873 shares of preferred
stock, options to purchase 176,389 shares of common stock, options to
purchase 65,000 shares of preferred stock, a warrant to purchase 105,875
shares of preferred stock and notes convertible into 239,604 shares of
common stock. This does not include: 3,636 shares of preferred stock held in
the name of Brett Koskan; 2,000,000 shares of preferred stock held in the
name of the Koskan Children Trust; 9,480 shares of preferred stock held in
the name of Christine R. Koskan; 13,480 shares of preferred stock held in
the name of Elizabeth P. Koskan; 2,888,729 shares of preferred stock,
options to purchase 30,000 shares of common stock, options to purchase 3,000
shares of preferred stock and a warrant to purchase 16,630 shares of
preferred stock held in the name of Jerilyn Koskan; 3,636 shares of
preferred stock held in the name of Kayleigh Koskan; 11,480 shares of
preferred stock held in the name of Margaret K. Brody; 3,636 shares of
preferred stock held in the name of Mikayla Koskan-Brody; and 9,480 shares
of preferred stock held in the name of Patrick D. Koskan.
(3) Represents 19,840 shares of preferred stock, options to purchase 2,500
shares of common stock, options to purchase 5,000 shares of preferred stock,
a warrant to purchase 2,400 shares of common stock, a warrant to purchase
960 shares of preferred stock and 8,778 shares of preferred stock held in
the name of the Robert Cooper Trust. This does not include 2,000 shares of
preferred stock held in the name of Dawn M. Cooper and 4,084 shares of
preferred stock held in the name of Robert A. Cooper, Jr.
(4) Represents: 16,414,596 shares of common stock; 142,873 shares of preferred
stock; options to purchase 102,500 shares of common stock; options to
purchase 14,000 shares of preferred stock; warrants to purchase 19,663,337
shares of common stock; warrants to purchase 16,561,198 shares of preferred
stock; notes convertible into 2,066,028 shares of common stock; and
1,098,841 shares of preferred stock held in the name of RGM/BVM Limited
Partnership. This does not include: 99,664 shares of preferred stock held in
the name of Jonathan G. Martin; 6,395 shares of preferred stock held in the
name of Johnny M. Martin; 6,395 shares of preferred stock held in the name
of Kathie P. Martin; 6,395 shares of preferred stock held in the name of
Kaye T. Martin; 6,395 shares of preferred stock held in the name of Lonnie
Dale Martin;
35
99,664 shares of preferred stock held in the name of Robert M. Martin;
99,664 shares of preferred stock held in the name of Ryan A. Martin Trust;
and 99,664 shares of preferred stock held in the name of Ann E. Throneburg.
(5) Represents: 17,588 shares of preferred stock.
(6) Represents warrants to purchase 6,025,171 shares of common stock and notes
convertible into 17,076,678 shares of common stock. Does not include
3,849,377 shares of common stock owned by TFIC, Inc. or 2,610,012 shares of
common stock owned by Tennessee Rural Health Improvement Association.
Tennessee Farmers Life Insurance Company is 46% owned by Tennessee Farmers
Mutual Insurance Company, 7.5% owned by Tennessee Farm Bureau Federation and
the remainder owned by approximately 3,000 other shareholders none of which
owns 5% or more. TFIC is 100% owned by Tennessee Farmers Mutual Insurance
Company. Tennessee Rural Health is a provider of health insurance and other
health benefits and is affiliated with Tennessee Farm Bureau Federation.
(7) Represents 17,845,042 shares of preferred stock. The natural persons
controlling the shares held of record by Willis Stein & Partners are John R.
Willis and Avy H. Stein. Messrs. John R. Willis and Avy H. Stein are
Managers of the general partner of Willis Stein & Partners and, as a result,
may be deemed to have beneficial ownership with respect to the shares held
by and deemed to be beneficially owned by Willis Stein & Partners. Each
disclaims beneficial ownership of such shares held by and deemed to be
beneficially owned by Willis Stein & Partners. Does not include 2,433,415
shares of preferred stock owned by Star Polymers, L.L.C.
(8) Represents 3,849,377 shares of common stock. Does not include Tennessee
Farmers Life Insurance Company's warrants to purchase 6,025,171 shares of
common stock and notes convertible into 17,076,678 shares of common stock.
* Less than 1%.
Certain information regarding the ownership of Donlar Biosyntrex common
stock by certain beneficial owners and by management is incorporated herein by
reference to the Donlar Biosyntrex annual report on Form 10-KSB for 2001.
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMBINED COMPANY
Donlar and Donlar Biosyntrex have a complete overlap of directors and
executive officers. These individuals will continue as the directors and
executive officers of the combined company in their same capacities. Information
concerning the identity and compensation of the directors and executive officers
and certain relationships and related transactions is contained in Donlar
Biosyntrex's annual report on form 10-KSB for 2001 which is incorporated in this
information statement/prospectus by reference.
In addition to the transactions described in the Donlar Biosyntrex annual
report on Form 10-KSB for 2001, Donlar entered into change of control agreements
in 1998 with Larry Koskan, its President and Chief Executive Officer, and with
Robert Pietrangelo, its Chief Operating Officer. The change of control
agreements are for five year terms. They provide, among other things, that the
executive officer shall be paid severance benefits in an amount equal to 2.9
times his annual salary in the event he is terminated without cause (as defined
in the agreements) within twelve months before a change of control of Donlar (as
defined in the agreements) or within thirty-six months after a change of control
or the executive officer resigns for good reason (as defined in the agreements)
within two years a change of control. If an executive officer is entitled to
severance benefits, he shall also receive continuing health, disability and life
insurance coverage in accordance with plans maintained by Donlar for a period of
one year from the date his employment terminates. In addition, the agreements
provide for the acceleration of the vesting of any options to acquire Donlar
securities in the event of a change of control of Donlar or if the executive
officer resigns for good reason.
The merger may constitute a change of control under the change of control
agreements. Larry Koskan has waived any rights he may have under his change of
control agreement as a result of the merger. In the event the merger constitutes
a change of control and Robert Pietrangelo is terminated without cause or
resigns for good reason within the applicable time periods provided for in his
change of control agreement, based on
36
his current salary, the company estimates that Robert Pietrangelo would be
entitled to $464,000 in salary, $115,000 in bonus, plus the other benefits
described above valued at $89,278.
COMMON STOCK TO BE ISSUED AS PART OF THE RESTRUCTURING PLAN, INCLUDING THE
MERGER
The common stock of the combined company to be issued in the restructuring
plan, including the merger, has no par value, no preemptive right, no special
dividend rights and one vote per share on all matters on which the shareholders
of the combined company are entitled to vote. In the event that the combined
company declares or pays any dividends upon its common stock (whether payable in
cash, securities or other property) other than dividends payable solely in
shares of its common stock, the combined company shall also declare and pay to
the holders of its senior convertible preferred stock the dividends which would
have been declared and paid with respect to its common stock issuable upon
conversion of its senior convertible preferred stock had all of the outstanding
senior convertible preferred stock been converted immediately prior to
declaration of such dividend upon its common stock.
MATERIAL DIFFERENCES BETWEEN SHAREHOLDERS RIGHTS
Upon completion of the merger, the shareholders of Donlar Biosyntrex will
become shareholders of Donlar, which will be the surviving corporation in the
merger. The rights of Donlar Biosyntrex shareholders are presently governed by
Nevada law, the Donlar Biosyntrex articles of incorporation, as amended, and the
Donlar Biosyntrex bylaws, as amended. Upon consummation of the merger, the
rights of former Donlar Biosyntrex shareholders will be governed by Illinois
law, the Donlar articles of incorporation, as amended, and the Donlar bylaws, as
amended. The following chart summarizes the material differences between the
rights of holders of Donlar Biosyntrex shareholders prior to and after
completion of the merger. This summary does not purport to be complete and we
qualify the summary in its entirety by reference to the Donlar Biosyntrex
articles of incorporation, as amended, the Donlar Biosyntrex bylaws, as amended,
the Donlar articles of incorporation, as amended, the Donlar bylaws, as amended,
as well as the relevant provisions of Nevada and Illinois law. You can obtain
copies of the governing corporate instruments of Donlar and Donlar Biosyntrex,
without charge, by following the instructions listed under "Where You Can Find
More Information."
<Table>
<Caption>
ILLINOIS (DONLAR NEVADA (DONLAR BIOSYNTREX
SHAREHOLDERS' RIGHTS) SHAREHOLDERS' RIGHTS)
------------------------------- ------------------------------------------
CALL OF SPECIAL SHAREHOLDERS Special meetings of Unless otherwise provided in the articles
MEETINGS shareholders may be called by of incorporation or by-laws, the entire
holders of not less than board of directors, any two directors or
one-fifth of the outstanding the president may call special meetings of
shares entitled to vote on the the shareholders. Donlar Biosyntrex's
matter for which the meeting is by-laws provide that special shareholders'
called, which is also provided meetings may be called by the board of
for in Donlar's by-laws. directors subject to its articles of
incorporation. Donlar Biosyntrex's
articles of incorporation provide that
special meetings of shareholders may only
be called by the board of directors
pursuant to a resolution adopted by a
majority of the authorized number of
directors.
</Table>
37
<Table>
<Caption>
ILLINOIS (DONLAR NEVADA (DONLAR BIOSYNTREX
SHAREHOLDERS' RIGHTS) SHAREHOLDERS' RIGHTS)
------------------------------- ------------------------------------------
ACTION BY SHAREHOLDER CONSENT Shareholder action may be taken Unless otherwise provided in the articles
without a meeting and without a of incorporation or the by-laws,
vote if a written consent shareholder action may be taken without a
setting forth the action taken meeting if, before and after the action, a
is signed by the shareholders written consent is signed by a
holding the minimum number of shareholders holding at least a majority
votes necessary to authorize or of the voting power, except that if a
take such action at a meeting different proportion is required, then
of shareholders. The by-laws of that proportion of voting power. Donlar
Donlar also provide for action Biosyntrex's articles of incorporation and
by shareholder consent. by-laws require unanimous written consent
of all of the shareholders for shareholder
action to be taken without a meeting.
CHARTER AMENDMENTS Unless otherwise provided in Unless otherwise provided in the articles
the articles of incorporation, of incorporation, a proposed amendment to
a proposed amendment to the the articles of incorporation is adopted
articles of incorporation is upon approval by a majority of the voting
adopted upon receiving the power entitled to vote upon the amendment
affirmative vote of at least and, under certain circumstances, a
two-thirds of the votes majority of the outstanding stock of each
entitled to vote on such class entitled to vote thereon. Donlar
amendment. Donlar's articles of Biosyntrex's articles of incorporation
incorporation do not provide generally require the affirmative vote of
otherwise. a majority of the voting power entitled to
vote upon the amendment but the articles
of incorporation require at least
two-thirds of the voting power of all of
the then outstanding shares of any class
or series of capital stock entitled to
vote generally in the election of
directors in order to amend Article V
(relating to directors), Article VII
(relating to elimination of liability and
indemnification), Article X (relating to
unanimous consent and meeting of
shareholders) and Article XIII (relating
to amendments to articles of
incorporation).
BY-LAW AMENDMENTS Donlar's by-laws provide that Donlar Biosyntrex's by-laws provide that
unless reserved to the the by-laws may be amended by the
shareholders in the articles of shareholders and the board of directors.
incorporation, the by-laws may Donlar Biosyntrex's articles of
only be amended by the board of incorporation also provide for the
directors. Donlar's articles of amendment of the by-laws by the board of
incorporation do not reserve directors.
the right to amend the by-laws
to the shareholders.
</Table>
38
<Table>
<Caption>
ILLINOIS (DONLAR NEVADA (DONLAR BIOSYNTREX
SHAREHOLDERS' RIGHTS) SHAREHOLDERS' RIGHTS)
------------------------------- ------------------------------------------
CLASS VOTING Holders of a particular class Holders of a particular class of shares
of shares are entitled to vote are entitled to vote as a separate class
as a separate class if the if the rights of such class are affected
rights of such class are in certain respects by mergers,
affected in certain respects by consolidations, share exchanges or
mergers, consolidations or amendments to the articles of
amendments to the articles of incorporation.
incorporation.
CUMULATIVE VOTING Shareholders have cumulative Shareholders may have cumulative voting
voting rights in the election rights in the election of directors if
of directors unless such right such right is provided for in the articles
is limited or eliminated in the of incorporation. Donlar Biosyntrex's
articles of incorporation. articles of incorporation do not provide
Donlar's articles of for cumulative voting rights.
incorporation eliminate
cumulative voting rights in the
election of directors.
DIRECTOR VACANCY As permitted under Illinois Unless otherwise provided in the articles
law, Donlar's by-laws provide of incorporation, vacancies in the board
that vacancies in the board of of directors may be filled by the
directors may be filled by the remaining directors until the next meeting
remaining directors when of shareholders at which directors are
vacancies arise between elected. Donlar Biosyntrex's articles of
meetings of the shareholders. A incorporation do not provide otherwise.
director so appointed serves
only until the next meeting of
shareholders at which directors
are elected.
DIRECTOR REMOVAL Directors may be removed, with Directors may be removed by the vote of
or without cause, by the shareholders representing not less than
affirmative vote of a majority two-thirds of the voting power of the
of the outstanding shares issued and outstanding stock entitled to
entitled to vote at an election vote unless the articles of incorporation
of directors unless the board supercede the two-thirds vote requirement
of directors is classified and by specifying any larger vote
the articles of incorporation requirements. Donlar Biosyntrex's articles
provide that directors may be of incorporation do not supercede the
removed only for cause. two-thirds voting requirement.
Donlar's articles of
incorporation do not provide
for a classified board of
directors
</Table>
39
<Table>
<Caption>
ILLINOIS (DONLAR NEVADA (DONLAR BIOSYNTREX
SHAREHOLDERS' RIGHTS) SHAREHOLDERS' RIGHTS)
------------------------------- ------------------------------------------
SUPERMAJORITY VOTE REQUIREMENTS The affirmative vote of the The affirmative vote of the holders of at
holders of at least two-thirds least two-thirds of the voting power of
of outstanding shares entitled the issued and outstanding stock entitled
to vote is required to to vote is required to remove directors
effectuate certain mergers, unless the articles of incorporation
consolidations, mandatory share supercede the two-thirds vote requirement
exchanges, sales of by specifying any larger vote requirement.
substantially all of the assets Donlar Biosyntrex's articles of
and charter amendments unless incorporation do not supercede the
the articles of incorporation two-thirds voting requirement. Donlar
supercede the two-thirds vote Biosyntrex's articles of incorporation
requirement by specifying any require at least two-thirds of the voting
smaller or larger vote power of all of the then outstanding
requirement. Donlar's articles shares of any class or series of capital
of incorporation do not stock entitled to vote generally in the
supercede the two-thirds vote election of directors in order to amend
requirement. Article V (relating to directors), Article
VII (relating to elimination of liability
and indemnification), Article X (relating
to unanimous consent and meeting of
shareholders) and Article XIII (relating
to amendments to articles of
incorporation) of its articles of
incorporation.
PREEMPTIVE RIGHTS Shareholders of a corporation Shareholders of a corporation organized on
organized on or after January or after October 1, 1991 do not have a
1, 1982, have no preemptive preemptive right to acquire the
rights to acquire unissued corporation's unissued shares except to
shares, or securities the extent the articles of incorporation
convertible into or carrying a so provide. Donlar Biosyntrex's articles
right to subscribe to or of incorporation also provide that no
acquire shares, except to the shareholders, by reason of holding any
extent, if any, that such right shares of any class of capital stock, have
is provided for in the articles any preemptive or preferential rights to
of incorporation. Donlar's acquire or subscribe for any treasury or
articles of incorporation do unissued shares authorized or thereafter
not provide for preemptive authorized, or any notes, debentures,
rights. bonds or other securities convertible into
or carrying any right, option or warrant
to subscribe for or acquire shares of any
class of capital stock authorized or
thereafter authorized.
</Table>
40
<Table>
<Caption>
ILLINOIS (DONLAR NEVADA (DONLAR BIOSYNTREX
SHAREHOLDERS' RIGHTS) SHAREHOLDERS' RIGHTS)
------------------------------- ------------------------------------------
PREFERRED SHARES As permitted under Illinois As permitted under Nevada law, Donlar
law, Donlar's articles of Biosyntrex's articles of incorporation
incorporation provide for the provide for the issuance of preferred
issuance of preferred shares in shares in one or more series with such
one or more series with such distinctive preference upon distribution
distinctive designations, of assets, rates of dividends, premiums of
preferences, designations, redemption, conversion rights and other
voting rights, amounts of variations, if any, the qualifications,
qualifications, limitations, limitations or restrictions, if any, as
restrictions and special or fixed by the board of directors.
relative rights of the shares
as fixed by the board of
directors.
DISSENTERS' RIGHTS Shareholders are entitled to Shareholders are generally entitled to
dissent from, and obtain dissent from, and obtain payment of the
payment for their shares in the fair value of their shares in the event of
event of any of the following any of the following corporate actions:
corporate actions: (1) (1) consummation of a plan of merger to
consummation of certain plans which the domestic corporation is a
of merger or consolidation or a constituent entity: (i) if approval by the
plan of share exchange to which shareholders is required for the merger by
the corporation is a party; (2) Nevada law or the articles of
consummation of a sale, lease incorporation, regardless of whether the
or exchange of all, or shareholder is entitled to vote on the
substantially all, of the plan of merger or (ii) if the domestic
property and assets of the corporation is a subsidiary and is merged
corporation other than in the with its parent pursuant to Section
usual and regular course of 92A.180 of the Nevada Revised Statutes;
business; (3) an amendment of (2) consummation of a plan of exchange to
the articles of incorporation which the domestic corporation is a
that materially and adversely constituent entity as the corporation
affects rights in respect of a whose subject owner's interests will be
dissenter's shares because it: acquired, if their shares are to be
(i) alters or abolishes a acquired in the plan of exchange; or (3)
preferential right of such any corporate action taken pursuant to a
shares; (ii) alters or vote of the shareholders to the extent
abolishes a right in respect of that the articles of incorporation, bylaws
redemption, including a or a resolution of the board of directors
provision respecting a sinking provides that voting or nonvoting
fund for the redemption or shareholders are entitled to dissent and
repurchase, of such shares; obtain payment for their shares. Donlar
(iii) in the case of a Biosyntrex's articles of incorporation and
corporation incorporated prior by-laws do not provide for additional
to January 1, 1982, limits or dissenters' rights.
eliminates cumulative voting
rights with respect to such
shares; or (4) any other
corporate action taken pursuant
to a shareholder vote if the
articles of incorporation, by-
laws or a resolution of the
board of directors provide that
shareholders are entitled to
dissent and obtain payment for
their shares. Donlar's articles
of incorporation and by-laws do
not provide for additional
dissenters' rights.
</Table>
41
ACCOUNTING TREATMENT
Donlar intends to account for the merger on the "purchase" method of
accounting, in accordance with SFAS 141, "Business Combinations." The
transaction will be treated as a transfer under common control for Donlar's 68%
ownership in Donlar Biosyntrex and as a purchase of minority interest for the
remaining 32%.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following discussion is a summary of the material U.S. federal income
tax consequences of the merger to the common shareholders of Donlar Biosyntrex
who receive Donlar common stock in exchange for their Donlar Biosyntrex common
stock pursuant to the merger. The discussion below is based upon the Internal
Revenue Code of 1986, as amended (the "Code"), Treasury Regulations thereunder
and administrative rulings and court decisions as of the date of this
information statement/prospectus.
No rulings have been, or will be, requested from the Internal Revenue
Service as to the federal income tax consequences of the merger. In addition,
there can be no assurance that the Internal Revenue Service will not take a
position contrary to one or more positions reflected below or that the positions
reflected below will be upheld by the courts if challenged by the Internal
Revenue Service. Future legislative, judicial or administrative changes or
interpretations could alter or modify the statements and conclusions set forth
below, and any such changes or interpretations could be retroactive and could
affect the tax consequences to the holders of Donlar Biosyntrex common stock.
No tax opinion will be issued by Donlar Biosyntrex's tax advisors prior to
the consummation of the merger as to the material federal income tax
consequences of the merger. Donlar Biosyntrex has not yet filed its federal
income tax returns for the taxable years 2000 and 2001 and does not have
available the necessary information for its tax advisors to render an opinion on
the federal income tax consequences of the proposed merger. Once these tax
returns are filed and additional information is gathered, the combined company
will seek an opinion on the federal income tax consequences of the merger from
its tax advisors. If such an opinion is obtained, copies will be made available
to shareholders.
The material U.S. federal income tax consequences of the merger are
uncertain. There are two ways the merger transaction could be treated. First,
the merger could be treated as a "reorganization" under Section 368(a)(1)(A) of
the Code, in which case the federal income tax consequences to the Donlar
Biosyntrex common shareholders would be as follows:
(1) no gain or loss will be recognized by a holder of Donlar
Biosyntrex common stock upon the exchange of Donlar Biosyntrex common stock
solely for Donlar common stock;
(2) the basis of the Donlar common stock received by a holder of
Donlar Biosyntrex common stock pursuant to the merger will be the same as
the basis of the Donlar Biosyntrex common stock exchanged therefor; and
(3) the holding period of the Donlar common stock received by a holder
of Donlar Biosyntrex common stock pursuant to the merger will include the
holding period of the Donlar Biosyntrex common stock exchanged therefor,
provided the Donlar Biosyntrex common stock is held as a capital asset by
the shareholder at the effective time of the merger.
If the merger does not qualify as a reorganization, the exchange of Donlar
Biosyntrex common stock by a holder for Donlar common stock will be a taxable
exchange. In such a case, a holder will recognize gain (or loss) to the extent
that the fair market value of Donlar common stock received in exchange for
Donlar Biosyntrex stock held by that holder is greater than (or less than) the
holder's tax basis in the Donlar Biosyntrex stock. Any gain or loss recognized
will be capital gain or loss, provided the Donlar Biosyntrex common stock is
held as a capital asset by the shareholder at the effective time of the merger,
and will be long-term gain or loss if the stock has been held more than one year
at the effective time of the merger. For individuals, the maximum federal income
tax rate applicable to long-term capital gains is generally 20%. Deductions for
capital losses, whether short- or long-term, are subject to various limitations.
42
The discussion above does not purport to deal with all tax aspects of
federal income taxation that may affect particular holders of Donlar Biosyntrex
common stock in light of their individual circumstances, and is not intended for
holders subject to special treatment under the tax law (including dealers in
securities, financial institutions, insurance companies, tax-exempt
organizations, non-United States persons, holders who hold their stock as part
of a hedge, appreciated financial position, straddle or conversion transaction,
holders who do not hold their stock as capital assets and holders who acquired
their stock pursuant to the exercise of options or otherwise as compensation).
In addition, the discussion does not consider the effect of any applicable
state, local or foreign tax laws.
EACH HOLDER OF DONLAR BIOSYNTREX COMMON STOCK IS URGED TO CONSULT ITS TAX
ADVISOR AS TO THE PARTICULAR TAX CONSEQUENCES TO THE SHAREHOLDER OF THE MERGER,
INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX LAWS,
AND OF CHANGES IN APPLICABLE TAX LAWS.
COMPARISON OF MARKET VALUE OF DONLAR AND DONLAR BIOSYNTREX
Shares of Donlar Biosyntrex common stock trade on the NASD over-the-counter
bulletin board on which bid and ask prices are quoted. Neither Donlar common
stock nor Donlar preferred stock is quoted or listed on any market or exchange.
Donlar Biosyntrex's common stock was listed on the National Association of
Securities Dealers Automated Quotation ("Nasdaq") SmallCap Market under the
primary symbol "BIME." On November 27, 2000, Donlar Biosyntrex's common stock
was delisted from the Nasdaq SmallCap Market. Biosyntrex's stock is currently
quoted on the NASD over-the-counter bulletin board under the symbol "DBSY.OB."
The following table contains information about the range of high and low bid
prices for the common stock for each full quarterly period within the two most
recent fiscal years and the two most recent fiscal quarters giving effect to all
stock splits occurring during such period or prior to the issuance of this
information statement/prospectus:
<Table>
<Caption>
QUARTER ENDED HIGH(1) LOW(1)
- ------------- ------- ------
June 30, 2002............................................... $0.27 $0.10
March 31, 2002.............................................. $0.50 $0.18
December 31, 2001........................................... $0.57 $0.05
September 30, 2001.......................................... $0.50 $0.05
June 30, 2001............................................... $1.42 $0.46
March 31, 2001.............................................. $1.50 $0.75
December 31, 2000........................................... $1.04 $0.79
September 30, 2000.......................................... $2.35 $2.04
June 30, 2000............................................... $4.07 $3.29
March 31, 2000.............................................. $8.60 $7.50
</Table>
- ---------------
(1) The source of these high and low prices through November 26, 2000 was
Nasdaq, and subsequent to November 26, 2000 was the NASD over-the-counter
bulletin board. The Nasdaq quotations reflect inter-dealer prices, without
retail mark-up, mark-down or commission, may not represent actual
transactions, and have been rounded up to the next highest two decimal
places. Subsequent to November 26, 2000, the high represents the best
(highest) price a prospective buyer is prepared to pay and the low
represents the best (lowest) price at which someone who owns the security
offers to sell it.
The range of high and low bid prices for the common stock on April 9, 2002,
the day before the public announcement of the merger, was 0.22 to 0.19 based
upon bid and ask prices quoted on the NASD over-the-counter bulletin board.
43
COMPARISON OF PERCENTAGE OF OUTSTANDING SHARES ENTITLED TO VOTE HELD BY
DIRECTORS, EXECUTIVE OFFICERS AND THEIR AFFILIATES
As of June 7, 2002, directors and officers of Donlar and their affiliates
beneficially owned approximately 60.53% of the outstanding shares of the Donlar
stock entitled to vote on the proposals. The affirmative vote of the holders of
two-thirds of the outstanding shares of Donlar common and preferred stock
entitled to vote and voting as a single class is required to approve the merger
agreement and approve the adoption of the equity incentive plan.
As of June 7, 2002, directors and officers of Donlar Biosyntrex and their
affiliates beneficially owned none of the outstanding shares of the Donlar
Biosyntrex stock entitled to vote on the proposals; however, Donlar holds
approximately 68% of the outstanding shares of Donlar Biosyntrex common stock.
The affirmative vote of the holders of a majority of the outstanding shares of
Donlar Biosyntrex stock entitled to vote is required to adopt the merger
agreement and approve the adoption of the equity incentive plan.
44
PRO FORMA FINANCIAL INFORMATION
INTRODUCTION TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The unaudited pro forma condensed consolidated financial information
presented below has been derived from the audited and unaudited historical
financial statements of Donlar Corporation ("Donlar") and subsidiaries
collectively "the Combined Company," and reflects management's present estimate
of pro forma adjustments to give effect to the contemplated merger (the
"Merger") of Donlar and its 68% owned subsidiary, Donlar Biosyntrex Corporation
("Donlar Biosyntrex") and the debt and capital restructuring coincident with the
Merger. The unaudited pro forma condensed statements of operations give effect
to the Merger as if the transaction had been consummated as of the beginning of
each period presented. This information should be read in conjunction with the
historical financial statements and notes thereto. The pro forma financial data
have been included as required by the rules and regulations of the Securities
and Exchange Commission and are provided for comparative purposes only. This pro
forma presentation does not purport to represent what the financial position or
results of operations would actually have been if such transactions and events
had in fact occurred on those dates or to project results of operations for any
future period.
Donlar's condensed consolidated financial information included in these pro
forma financial statements is derived from its audited December 31, 2001
consolidated financial statements and its June 30, 2002 unaudited condensed
consolidated financial statements.
45
DONLAR CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 2002
<Table>
<Caption>
DONLAR PRO FORMA COMBINED
CORPORATION ADJUSTMENTS COMPANY
------------- ------------ -------------
ASSETS
Cash and cash equivalents........ $ 50,378 $ -- $ 50,378
Accounts receivable, net......... 475,285 -- 475,285
Inventories...................... 1,265,410 -- 1,265,410
Prepaid expenses and other
current assets................. 142,208 -- 142,208
------------- ------------ -------------
Total current assets............. 1,933,281 -- 1,933,281
------------- ------------ -------------
Property and equipment, net...... 9,131,943 -- 9,131,943
Other assets
Deferred financing costs....... 162,810 -- 162,810
Goodwill....................... -- 1,336,500(7) 1,336,500
Patents........................ 1,996,763 -- 1,996,763
------------- ------------ -------------
Total other assets............... 2,159,573 1,336,500 3,496,073
------------- ------------ -------------
Total assets..................... $ 13,224,797 $ 1,336,500 $ 14,561,297
============= ============ =============
CURRENT LIABILITIES
Accounts payable and accrued
expenses.................... $ 7,052,569 $ (2,246,000)(2) $ 2,156,519
(1,889,000)(3)
(11,050)(8)
(750,000)(6)
Convertible debt, current
portion..................... 2,549,472 (763,500)(6) 1,785,972
Notes payable, current
portion..................... 7,995,932 (7,874,932)(3) 71,000
(50,000)(8)
------------- ------------ -------------
Total current liabilities........ 17,597,973 (13,584,482) 4,013,491
Long-term liabilities
Convertible debt, net of
current liabilities......... 21,236,419(a),(b) (1,048,329)(3) 19,134,135
(1,053,955)(6)
Notes payable, net of current
liabilities................. 9,000,000 (9,000,000)(2) --
Total liabilities................ 47,834,392 (24,686,766) 23,147,626
------------- ------------ -------------
Shareholders' deficit
Common stock................... -- -- --
Preferred stock................ -- 9,000,000(2) 18,000,000
9,000,000(3)
Additional paid in capital..... 107,123,348(a) 536,682(1) 117,726,141
2,246,000(2)
1,812,261(3)
1,650,000(4)
300,445(5)
2,567,455(6)
1,336,500(7)
153,450(8)
Accumulated deficit............ (141,700,956) (2,579,527)(1),(4),(5),(8) (144,280,483)
Shareholder note receivable.... (31,987) -- (31,987)
------------- ------------ -------------
Total shareholders' deficit...... -- 26,023,266 (8,586,329)
------------- ------------ -------------
Total liabilities and
shareholders' deficit.......... $ 47,834,392 $ 1,336,500 $ 49,170,892
============= ============ =============
</Table>
46
DONLAR CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2001
<Table>
<Caption>
DONLAR PRO FORMA COMBINED
CORPORATION ADJUSTMENTS COMPANY
------------ ----------- ------------
Revenue.......................................... $ 2,352,834 $ -- $ 2,352,834
Cost of revenue.................................. 2,639,022 -- 2,639,022
Research and development......................... 821,414 -- 821,414
Selling, general and administrative.............. 7,054,783 -- 7,054,783
------------ ---------- ------------
Total operating expenses......................... 10,515,219 -- 10,515,219
------------ ---------- ------------
Loss from operations............................. (8,162,385) -- (8,162,385)
------------ ---------- ------------
Other expenses
Interest expense............................... (7,078,494) 900,000(2) (5,110,435)
1,089,000(3)
(235,086)(3)
(48,775)(6)
262,920(6)
Writedown of investments to market............. (864,434) -- (864,434)
Debt conversion expense........................ --
------------ ---------- ------------
Total other expenses............................. (7,942,928) -- (5,974,869)
Loss before income taxes......................... (16,105,313) -- (14,137,254)
------------ ---------- ------------
Provision for income taxes....................... --
Net loss......................................... $(16,105,313) $1,968,059 $(14,137,254)
============ ========== ============
</Table>
47
DONLAR CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX-MONTHS ENDED JUNE 30, 2002
<Table>
<Caption>
DONLAR PRO FORMA COMBINED
CORPORATION ADJUSTMENTS COMPANY
----------- ----------- -----------
Revenue.............................................. $ 1,892,087 $ -- $ 1,892,087
Cost of revenue...................................... 1,610,059 -- 1,610,059
Research and development............................. 270,152 -- 270,152
Selling, general and administrative.................. 1,029,543 -- 1,029,543
----------- --------- -----------
Total operating expenses............................. 2,909,754 -- 2,909,754
----------- --------- -----------
Loss from operations................................. (1,017,667) -- (1,017,667)
----------- --------- -----------
Other income (expense)
Interest expense................................... (2,977,436) 450,000(2) (1,992,650)
544,500(3)
(116,922)(3)
(24,252)(6)
131,460(6)
Other.............................................. 160,743 -- 160,743
Gain on disposal of fixed assets................... 74,478 -- 74,478
Debt conversion expense............................ (289,655) (289,655)
----------- --------- -----------
Total other expenses................................. (3,031,870) (2,047,084)
Loss before income taxes............................. (4,049,537) (3,064,751)
----------- --------- -----------
Provision for income taxes........................... --
Net loss before extraordinary item................... (4,049,537) -- (3,064,751)
Extraordinary loss on retirement of debt............. (1,212,120) -- (1,212,120)
----------- --------- -----------
Net Loss............................................. $(5,261,657) $ -- $(4,276,871)
=========== ========= ===========
</Table>
48
NOTES TO THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL INFORMATION
PRO FORMA ADJUSTMENTS
The following pro forma adjustments have been made to the unaudited
condensed consolidated pro forma financial statements for the year ended
December 31, 2001 and as of and for the six-months ended June 30, 2002.
1. To record the issuance of 1,626,308 shares of common stock of the
combined company to Tennessee Rural Health, a 6% shareholder of Donlar and
holder of approximately $21.3 million of the debt of Donlar and Donlar
Biosyntrex. Because these shares are to be issued as part of the
restructuring plan, the expense (fair value of $0.33 per share at date of
measurement, March 18, 2002) associated with these shares is treated as
additional debt conversion inducement expenses. The entire expense was
recognized at March 18, 2002. The pro forma adjustment is non-recurring and
only included on the pro forma balance sheet.
2. To record the exchange with Willis Stein/Star Polymers of
$9,000,000 in notes plus accrued interest of approximately $2,246,000 for
shares of a new series of senior convertible preferred stock of the
combined company with a stated liquidation value of $9,000,000, convertible
into 13,235,294 shares of common stock of the combined company. No
dividends may be paid on the senior convertible preferred stock until all
Tennessee Farmers Life Insurance Company debt has been repaid. This
transaction has been treated as a conversion of debt with no beneficial
conversion features and the accrued interest has been treated as additional
paid in capital. The number of common shares that the $9 million of
preferred stock can be converted into is determined by the loan agreement
and the terms of the preferred stock. There is no beneficial conversion
feature as the conversion rate is not in the money. The interest that would
have been accrued during the periods presented is shown as a pro forma
adjustment to the statement of operations.
3. To record the exchange with Dr. Martin of $9,900,000 in notes plus
accrued interest of ========= approximately $1,889,000 and less related
debt discount of $983,000 for shares of senior convertible preferred stock
with a stated liquidation value of $9,000,000 and convertible into
13,235,294 shares of common stock of the combined company. No dividends may
be paid on the senior convertible preferred stock until all Tennessee
Farmers debt has been repaid. This transaction has been treated as a
conversion of debt with no beneficial conversion features and the accrued
interest has been treated as additional paid in capital. The number of
common shares that the $9 million of preferred stock can be converted into
is determined by the Tennessee Farmers' loan agreement and the terms of the
preferred stock. There is no beneficial conversion feature as the
conversion rate is not in the money. The interest and amortization that
would have been accrued during the periods presented are shown as pro forma
adjustment to the statements of operations.
4. To record the issuance of 5,000,000 shares of common stock of the
combined company to Dr. Martin in relinquishment of rights to receive
royalty payments from Donlar and for the cancellation of approximately
16.56 million shares of Donlar common and preferred stock. This transaction
has been treated as additional conversion expense in an amount equal to the
fair value of the shares issued ($0.33 per share). This is a non-recurring
event and as such is only included on the pro forma balance sheet.
5. To record the issuance to Dr. Martin of a warrant to purchase
3,000,000 shares of the combined company common stock for $0.68 per share,
in exchange for the cancellation of all previously held options and
warrants to purchase shares of Donlar stock held by Dr. Martin. The fair
value of the previously held options and warrants is equal to $29,555. The
fair value of the new warrant is $330,000. This transaction has been
treated as additional conversion expense equal to the difference of the
fair values of the old warrants and options and the new warrant. This is a
non-recurring event and as such is only included on the pro forma balance
sheet.
6. To record the exchange of the 1998 and 2000 Notes of approximately
$1,900,000 plus accrued interest of $750,000 and less related debt discount
of $138,000 for shares of senior convertible preferred
49
NOTES TO THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL INFORMATION -- (CONTINUED)
stock with a stated liquidation value equal to the amount of the Notes and
convertible into 2,800,000 shares of common stock of the combined company.
Because the common stock of the combined company has no par value, the
entire balance has been treated as additional paid in capital. The interest
and amortization that would have been accrued during the periods presented
are shown as pro forma adjustments to the statement of operations.
7. To record the conversion in the merger of Donlar Biosyntrex stock
(except shares held by Donlar) into shares of the combined company at an
exchange rate of 0.26 shares of common stock of the combined company for
each share owned by the minority shareholders of Donlar Biosyntrex. These
minority owned shares of Donlar Biosyntrex consist of 15,537,142 shares of
common stock, 39,124 shares of Series A preferred stock and 449 shares of
Series B preferred stock. These shares will be converted in the merger into
4,049,765 shares of common shares of the combined company. This transaction
constitutes a step acquisition of the minority interests resulting in an
acquisition price of approximately $1,336,500. This amount has been
reflected as goodwill in a preliminary purchase price allocation. The
purchase price adjustment to goodwill was calculated by taking the number
of shares converted into by the $0.33 share value at the agreement date.
8. To record the issuance of 465,000 shares to pay certain claims. In
connection with the restructuring plan, Donlar and Donlar Biosyntrex have
reached agreements to issue 465,000 shares of common stock of the combined
company to accounts payable and other creditors as payment for open
payables and claims against either Donlar or Donlar Biosyntrex. The
issuances will result in an adjustment to debt conversion expense of
$92,400. The issuances of the shares are contingent upon the completion of
the merger. The creditors consist of four individuals. Two of these
creditors had outstanding accounts payable of $61,050. The other two
creditors had an outstanding sales contract and consulting contract which
were bought out by these issuances. This is a non-recurring event and as
such is only recorded in the pro forma balance sheet.
The following matters took place prior to June 30, 2002 and have been
reflected in the Donlar Corporation financial statements for the six months then
ended.
a. Includes the beneficial conversion feature associated with the
$2,127,000 bridge loan. The bridge loan is convertible into common stock of
the combined company at the rate of $0.29 per share, an aggregate of
7,334,483 shares of common stock. This may be done at any time, at the
option of the lender. The pro forma adjustment is non-recurring and only
included on the pro forma balance sheet. As of the date of the loan
agreement, March 18, 2002, the price of Donlar Biosyntrex common stock was
$0.33 per share. Therefore, a beneficial conversion feature is associated
with the conversion of these shares, which is the $0.04 difference between
the share price and the conversion price, resulting in an adjustment of
$289,655. Since the term of the loan is one year, this expense was
recognized as of the date of the loan agreement, March 18, 2002.
b. Reflects the changed terms of outstanding loans to Donlar as of
March 18, 2002 whereby the principal balance of $17.64 million was restated
and made the joint and several obligation of Donlar and Donlar Biosyntrex
in the total amount of $19.2 million, reflecting the original amount of the
loans and accrued interest. The restated loans are convertible at a rate of
$0.68 into common stock of the combined company. The original loans were
also convertible into common stock of Donlar at a rate of $1.01. Because
there were significant changes in the terms of the restated loans, there is
no induced conversion associated with these restated loans and they have
been treated as new debt. This reclassification was recognized as of March
18, 2002.
The following transactions did not result in adjustments to the pro forma
financial statements:
- The conversion in the merger of Donlar stock (except shares owned by
TFIC, Inc., Willis Stein/Star Polymers and Dr. Martin) into the common
stock of the combined company at an exchange rate of
50
NOTES TO THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL INFORMATION -- (CONTINUED)
0.49 shares of common stock of the combined company for each share of Donlar
stock. These pre-merger shares of Donlar consist of 14,908,335 preferred shares
and 2,848,735 common shares. These shares will be converted in the merger
into 8,652,288 shares of common stock of the combined company.
- The cancellation of all outstanding employee options to acquire shares of
Donlar or Donlar Biosyntrex. Because none of these securities were in the
money, there is no compensation expense associated with them.
- The exchange of all of the equity securities held by Willis Stein/Star
Polymers for 1,000,000 shares of the combined company common stock.
Willis Stein/Star Polymers owns 20,278,457 shares of Donlar preferred
stock, with a stated liquidation value of $15,614,311. These shares will
be exchanged for 1,000,000 shares of common stock of the combined company
with no par value. This transaction will be recorded as additional paid
in capital.
- The conversion features of the bridge loan and the restated loans. The
bridge loan is convertible at the rate of one share of the combined
company common stock per $0.29 of outstanding principal. The restated
loans are convertible at a rate of $0.68 of outstanding principal. These
loans are convertible at the option of the loan holder.
The following is a summary of the shares, warrants and options of the
combined company on a fully diluted basis after the effect of all components of
the merger transaction referenced in the previously discussed pro forma matters.
Also, see tables under "Proposal 1 -- Approval of Agreement and Plan of
Merger -- Determination of the Terms of the Merger and Restructuring Plan."
SUMMARY OF SHARES OUTSTANDING IN THE COMBINED COMPANY
<Table>
<Caption>
COMBINED COMPANY NOTE NUMBER
COMBINED SHARES OR LETTER
---------------- -----------
Issuance of stock to Tennessee Rural Health................. 1,626,308 1
Assumed conversion of the Willis Stein preferred stock...... 13,235,294 2
Assumed conversion of the Dr. Martin preferred stock........ 13,235,294 3
Issuance of shares for relinquishment of Dr. Martin's
rights.................................................... 5,000,000 4
Issuance of warrants to purchase shares for Dr. Martin...... 3,000,000 5
Assumed conversion of the 1998 Noteholders.................. 1,122,794 6
Assumed conversion of the 2000 Noteholders.................. 1,679,412 6
Assumed conversion of pre-merger Donlar Biosyntrex
shareholders.............................................. 4,049,765 7
Issuance of shares in satisfaction of various payables...... 465,000 8
Assumed conversion of the Tennessee Farmers Bridge Loan..... 7,334,483 a
Assumed conversion of the remaining Tennessee Farmers
Notes..................................................... 28,211,962 b
Assumed conversion of remaining pre-merger Donlar
Corporation shareholders.................................. 8,652,288 *
Assumed conversion of Willis Stein/Star Polymers shares..... 1,000,000 *
Shares authorized to be issued under the Equity Incentive
Plan...................................................... 5,000,000
93,612,600
</Table>
- ---------------
* Information comes from discussion following the pro forma adjustments
discussion
51
BUSINESS OF THE COMPANIES
DONLAR CORPORATION
BUSINESS
Donlar Corporation was organized in 1990 to develop, manufacture and market
an entirely new protein technology with the potential to replace a generation of
older, non biodegradable and potentially toxic chemicals. This new family of
biopolymers, known as thermal polyaspartates or TPA, is non hazardous, non
toxic, hypoallergenic, environmentally friendly and biodegradable. These
proteins are used in a broad range of industrial, agricultural and consumer
markets. Donlar has 140 global patents that protect its technology, products and
marketplace. The U.S. Government recognized the environmental benefits of this
technology in 1996 when it awarded Donlar the first Presidential Green Challenge
Chemistry Award.
TPA products are beta proteins (biopolymers) manufactured from the common
biological amino acid, L-aspartic acid. TPA is a highly active biopolymer that
is completely soluble in water. By varying the manufacturing method, different
properties can be built into the biopolymer, tailoring it to a specific use.
Products are formulated and packaged into both powder and liquid forms.
In transactions closing in November 2000 and January 2001, Donlar
Biosyntrex, then known as Biomune Systems, Inc., acquired from Donlar in
exchange for 41,279,520 shares of Donlar Biosyntrex's common stock, representing
approximately 96% of Donlar Biosyntrex's shares then outstanding on a fully
diluted basis, substantially all of Donlar's businesses and assets plus cash
consideration. Donlar also transferred to Donlar Biosyntrex all technology, know
how and patents for the crop management and oil field businesses created after
November 3, 2000, as well as all technology resulting from Donlar pharmaceutical
research and development activities after November 3, 2000. Although Donlar
Biosyntrex was the surviving corporation in this transaction, Donlar owned 96%
of the Donlar Biosynrex common stock after the transaction and was, therefore,
treated as the acquiring company for accounting purposes. Purchase accounting
was used for this transaction because it represented a change of control of
Donlar Biosyntrex and a portion of the purchase price was paid in cash. Since
the closing of the foregoing transactions, Donlar has had no substantial
business operations and has been a holding company for Donlar Biosyntrex.
Donlar's ownership interest in Donlar Biosyntrex has decreased since the above
described transaction as a result of transfers of common stock by Donlar and
issuances of additional common stock by Donlar Biosyntrex.
Since the closing of the foregoing transactions, Donlar's percentage
ownership of Donlar Biosyntrex's common stock has decreased to approximately 68%
as a result of issuances of common stock by Donlar Biosyntrex and the
cancellation of 8.0 million of the shares held by Donlar.
REGULATORY MATTERS
The marketing of certain of Donlar Biosyntrex's products is subject to
regulatory oversight in certain jurisdictions. In each of the fifty states, the
respective departments of agriculture have various requirements for the
registration of different types of agricultural products to be used within that
state. Donlar Biosyntrex's products do not require registration in 26 states. In
the remaining 24 states, the purpose for registration is to assure
consumers/growers that the products can be used safely and that they have
demonstrated a variety of benefits such as protection against insects or root
growth enhancement. The state departments of agriculture that require
registration publish guide lines for the submission of several different kinds
of data in order to make a determination for registration. These data include
laboratory, green house, university and field test results, as well as toxicity,
environmental and general safety information. Each state has its own
requirements which range from minimal information coupled with a small fee to
extensive data sets that cover several years of experience and may be very
expensive to comply with. The review process may include several resubmissions
of updated data or other kinds of information and may take years. States may
also give limited registration to products that cover only one or more kinds of
plants.
Donlar Biosyntrex's products have been registered in 20 of the 24 states
requiring registration, and the company is pursuing registration in the four
other states, South Dakota, Alabama, Mississippi and
52
Pennsylvania. When the department of agriculture of a specific state registers
the products, those products may then be sold with required information that is
printed on the product's label such as the plants/crops that the product can be
used on, instructions on how to safely apply the product, maximum quantities to
use and a variety of safety and toxicity handling precautions.
Donlar Biosyntrex's products are also subject to approval by foreign
regulatory authorities, but there are no federal regulatory approvals required
for distribution. A loss of a product registration in a key U.S. state would
significantly limit the combined company's ability to market its crop nutrition
products.
DESCRIPTION OF PROPERTIES
Donlar constructed a TPA manufacturing facility in Peru, Illinois on a 40
acre parcel purchased by Donlar in 1996. This 50,000 square foot facility
currently contains two chemical reactors, the larger of which is designed to
produce nominally, 30 million pounds of TPA products annually. The facility is
large enough to accommodate additional reactors and may be expanded modularly
without substantial engineering or technical expenses or delays. The Peru
facility is strategically located near barge, rail and road transportation
facilities. Donlar Biosyntrex, Donlar's majority owned subsidiary, conducts its
manufacturing operations in the Peru, Illinois plant. The Peru facility is
subject to a mortgage under a Bridge and Consolidated Term Loan Agreement with
Tennessee Farmers Life Insurance Company.
Donlar shares administrative office space with Donlar Biosyntrex in an
approximately 6,700 square foot office and laboratory space in Bedford Park,
Illinois which is leased from the Illinois Institute of Technology. The lease is
currently on a month-to-month basis. The monthly lease obligation is $9,000.
LEGAL PROCEEDINGS
None.
MARKET FOR COMMON STOCK AND RELATED MATTERS
Market Information. There is no public trading market for Donlar's common
or preferred stock. Upon consummation of the Restructuring Plan, including the
Merger, it is expected that the combined company will have outstanding
approximately 20.8 million shares of common stock, approximately $21.3 million
of long-term debt convertible into approximately 35.5 million shares of common
stock, approximately $19.9 million stated liquidation value of senior
convertible preferred stock convertible into approximately 29.3 million shares
of common stock, a warrant to purchase 3.0 million shares of common stock and an
employee stock option plan for which 5.0 million shares of common stock shall be
reserved.
Holders of Common Stock. As of June 7, 2002, there were approximately 337
holders of record of Donlar's common and preferred stock. Immediately following
the completion of the restructuring plan, including the merger, it is expected
that there will be approximately 420 holders of record of Donlar common stock
(assuming no Donlar and Donlar Biosyntrex shareholders exercise their
dissenters' rights).
Dividends. Donlar has not declared any cash dividends on its common stock
in the last two fiscal years or at any time thereafter. Pursuant to the terms of
the loan agreement, Donlar is prohibited from paying any dividends without the
approval of its lender. In the event that the combined company declares or pays
any dividends upon its common stock (whether payable in cash, securities or
other property) other than dividends payable solely in shares of its common
stock, the combined company shall also declare and pay to the holders of its
senior convertible preferred stock the dividends which would have been declared
and paid with respect to its common stock issuable upon conversion of its senior
convertible preferred stock had all of the outstanding senior convertible
preferred stock been converted immediately prior to declaration of such dividend
upon its common stock.
53
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion and analysis of Donlar's financial condition and
results of operations should be read in conjunction with the consolidated
financial statements and the notes thereto appearing elsewhere in this
information statement/prospectus.
OVERVIEW
From 1997 until November of 2000, Donlar's subsidiary, Donlar Biosyntrex,
was primarily engaged in the distribution and sale of nutritional and
nutraceutical products. Donlar Biosyntrex's principal products were biologic
nutraceutical supplements and sports and nutrition bars. As a result of the
transactions that were completed in 2000 and in early 2001, all of the
operational activities of Donlar are now conducted by its subsidiary, Donlar
Biosyntrex. The former Donlar businesses are now Donlar Biosyntrex's principal
businesses and Donlar Biosyntrex is phasing out its nutritional and
nutraceutical business. Donlar Biosyntrex's marketing, sales, distribution and
administrative operations are conducted from Donlar's headquarters in Bedford
Park, Illinois, and its manufacturing operations are conducted from Donlar's
Peru, Illinois facility.
Donlar Biosyntrex's reorganized businesses are conducted through three
product lines:
- BioPolymers, consisting of the performance chemicals business acquired
from Donlar;
- AgriSciences, consisting of the agricultural business acquired from
Donlar; and
- Optim Nutrition, consisting of Donlar Biosyntrex's nutritional and
nutraceuticals business (being phased out).
Donlar Biosyntrex current business is the production and marketing of
products initially developed by Donlar. Historically, Donlar began as a research
and development company to exploit the possibilities of developing,
manufacturing and marketing a new family of biodegradable polymers known as
thermal polyaspartates (TPA). Although there was no market at the time of
Donlar's inception for a new so-called "green chemistry," Donlar concluded that
a market would develop if the technology and products were available. It also
determined that the development of this technology and market would also require
substantial capital.
It took about ten years and the use of extensive capital to reach the point
of commercialization whereby Donlar Biosyntrex's products and markets are
protected by a global intellectual property portfolio of patents. The products
are manufactured in a modern plant capable of producing high quality products at
low cost and are sold in a marketplace where Donlar Biosyntrex's TPA products
can compete on a cost/performance basis with conventional chemicals.
As a result of this historical development, Donlar Biosyntrex' revenues
from the sale of its products increased from $1.4 million in 2000 to $2.4
million in 2001. Commercialization of the products began approximately two years
ago focusing on the building of three market's in oil production, agriculture
and detergents.
YEAR-END RESULTS OF OPERATIONS
2001 Compared to 2000
During the year ended December 31, 2001, Donlar had revenues of $2,352,834,
compared to $1,381,994 for the year ended December 31, 2000. The increase in
revenues was due to growth in the BioPolymers product line from both new and
existing customers and new products. Approximately $17,000 is related to new
customers, approximately $104,000 is related to new products and approximately
$818,000 is related to additional business from the established customer base.
These increases are offset by a slight decrease in sales of agricultural
products.
Cost of revenue was $2,639,022 in 2001, compared to cost of revenue of
$2,097,189 in 2000. This increase was due to the increased sales in 2001, offset
by decreased staff in the manufacturing area, as well as other cost reductions
at the manufacturing facility in Peru, Illinois for plant supplies, plant
repairs and equipment rental.
54
Research and development cost decreased from $1,121,749 in 2000 to $821,414
in 2001 due to a reduction in research projects undertaken and a related
reduction in staffing levels for research.
Selling, general and administrative expenses increased from $3,689,944 in
2000 to $7,054,783 in 2001. This increase in 2001 was the result of a $1.45
million increase in the amortization of goodwill and $3.17 million in non-cash
expenditures incurred in 2001. The non-cash expenditures were in the nature of
the issuances of common stock and warrants exercisable for common stock to
service providers in return for consulting services. The increases were offset
by a $440,000 reduction in employee expenses due to staff reductions, a $75,000
reduction in travel expenses, a $98,000 reduction in consulting fees paid in
cash, a $110,000 reduction in professional fees and $124,000 reduction in
advertising expenses. The non-cash expenditures for consulting services
represent payments for these services in the Donlar Biosyntrex common stock.
Other expense increased from $7,136,982 in 2000 to $7,942,928 in 2001 as a
result of an $864,434 write down of investments in 2001 partially offset by a
reduction in interest expense from $7.24 million in 2002 to $7.08 million in
2001. In addition, in 2000 Donlar Biosyntrex realized a gain of $100,000 on the
sale of a product line.
As a result of the foregoing, the net loss increased from $12,663,870 in
2000 to $16,105,313 in 2001.
2000 Compared to 1999
During the year ended December 31, 2000, Donlar had revenues of $1,381,994,
compared to $793,723 for the year ended December 31, 1999. The increase in
revenues was due to growth in the BioPolymers segment from new customers and new
products.
Cost of revenues was $2,097,189 in 2000, compared to cost of revenues of
$3,634,861 in 1999. This decrease was due to a large inventory write down in
1999 to reduce the inventory to lower of cost or market value.
Operating expenses were $4,811,693 for 2000, compared to $4,896,524 in
1999. This slight decrease was due cost reduction initiatives implemented by
Donlar, partially offset by costs associated with the acquisition of Donlar
Biosyntrex.
Interest expense increased from $4,443,756 in 1999 to $7,236,982 in 2000.
This increase was due to increases in borrowings and in the amortization of debt
discount.
As a result of the foregoing, the net loss increased from $12,149,702 in
1999 to $12,663,870 in 2000.
YEAR-END LIQUIDITY AND CAPITAL RESOURCES
Historically, Donlar has been unable to finance its operations from cash
flows from operating activities. As a result of the recent agreement with
certain creditors to restructure principal and interest payments, Donlar was
able to pay current operating expenses in the fourth quarter of 2001 and the
first quarter of 2002. As of December 31, 2001, Donlar had cash of $3,746. In
March of 2002, Donlar obtained additional bridge financing in connection with
the restructuring of its debt, but has no other plans for its continued
financing. Donlar believes based on its current budget and sales that it will be
able to pay its expenses for the next year other than payments under its bridge
financing from Tennessee Farmers due in March 2003 and it plans to enter into
additional negotiations with Tennessee Farmers regarding such payments. The
payments due Tennessee Farmers in March 2003 consist of $1,120,255 in interest
and $222,500 in principal due on the restated loans and $188,771 in interest and
$1,827,000 in principal due on the bridge financing. The total of the payments
due in March 2003 is $3,358,526.
Donlar Biosynstrex reduced its cash flows used in operations from
$6,616,679 in 2000 to $1,672,494 in 2001, due to the continued effort to reduce
costs and the increased revenue during 2001. Donlar Biosyntrex has been able to
decrease its inventory levels by approximately $850,000 from 2000. In addition,
it has increased its accrued liabilities by approximately $3.2 million,
primarily as a result of accrued interest.
55
Cash flows used in investing activities decreased to $156,536 in 2001 from
$423,670 during 2000. This is due to Donlar Biosyntrex limiting its capital
expenditures during 2001 and the fact that the costs associated with the reverse
merger transaction with Donlar Biosyntrex were incurred in 2000.
Cash flows provided by financing activities decreased from $7,537,506
during 2000 to $956,341 during 2001. The cash from financing activities in 2000
resulted from the sale of convertible debt and the exercise of warrants.
The audited consolidated financial statements of Donlar for 2001 have been
prepared on the assumption that it will continue as a going concern. Donlar's
independent public accountants have issued their report dated April 5, 2002,
that includes an explanatory paragraph stating that Donlar's recurring losses,
among other things, raise substantial doubt about Donlar's ability to continue
as a going concern.
SECOND-QUARTER RESULTS OF OPERATIONS
Comparison of the six months ended June 30, 2002 with the six months ended
June 30, 2001.
During the six months ended June 30, 2002, Donlar had revenues of
$1,892,087, compared to $1,232,520 for the comparable six-month period in 2001.
The increase in sales was due to growth in sales of the Donlar Biosyntrex's
products, principally in the oil field market.
Cost of revenues was $1,610,059 for the six months ended June 30, 2002,
compared to $1,418,154 for the same period in 2001. This increase in cost of
revenues is related to increased sales offset by decreased staff in the
manufacturing area, as well as other cost reductions at Donlar's manufacturing
facility in Peru, Illinois.
Operating expenses were $2,909,754 for the six-month period ended June 30,
2002, compared to $5,931,926 for the six month period ended June 30, 2001. This
decrease is due to decreased staff, as well as other cost reductions related to
consulting, outside research products, professional fees and travel expenses.
Interest expense decreased from $4,049,433 for the first six months of 2001
to $2,977,696 for the first six months of 2002. This decrease was due to a
decrease in the amortization of debt discount.
During the six months ended June 30, 2002, Donlar had a net loss of
$5,261,657 compared to a net loss of $8,739,885 for the six months ended June
30, 2001. This decrease in the net loss was attributable primarily to the
decrease in interest expense and increased sales offset by the acceleration of
debt discount amortization related to the debt restructuring, which is shown as
extraordinary loss.
SECOND-QUARTER LIQUIDITY AND CAPITAL RESOURCES
Historically, Donlar has been unable to finance its operations from cash
flows from operating activities. As of June 30, 2002, it had cash of $50,378. As
a result of the recent agreement with its creditors, principally Tennessee
Farmers Life Insurance Company, Willis Stein, Dr. Martin and the 1998 and 2000
noteholders, to restructure principal and interest payments, Donlar was able to
pay current operating expenses in the fourth quarter of 2001 and the first and
second quarter of 2002. In March of 2002, Donlar obtained additional bridge
financing in connection with the restructuring of its debt, but has no other
plans for its continued financing. Donlar, under its bridge financing, has a
quarterly interest payment of approximately $21,000 due on the last business day
of each quarter. Donlar intends to carefully control its use of cash for the
balance of 2002. As a long-term matter, Donlar will require additional financing
to maintain operations. Donlar believes based on its current budget and sales
that it will be able to pay its expenses for the next year other than payments
under its bridge financing and other loans from Tennessee Farmers due in March
2003, approximately $3.36 million, and it plans to enter into additional
negotiations with Tennessee Farmers regarding such payments.
In the first six months of 2002, Donlar had a net increase in cash and cash
equivalents of $46,632, compared to a net decrease in cash and cash equivalents
in the same period of 2001 of $871,688. The increase in cash was the result of
increased sales and reduced operating costs.
56
Donlar increased its cash flows used in operations from $1,459,948 in the
first six months of 2001 to $3,275,080 in the same period in 2002, due to the
use of loan proceeds to reduce accounts payable and accrued expenses in the 2002
period.
Cash flows used in investing activities decreased to $14,028 in the first
six months of 2002 from $89,835 in the same period in 2001. This is due to
Donlar limiting its capital expenditures.
Cash flows provided by financing activities increased from $678,095 during
the first six months of 2001 to $3,335,740 in the same period in 2002. The cash
from financing activities in 2002 resulted from borrowing activities in the 2002
period.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
DONLAR BIOSYNTREX CORPORATION
This information statement/prospectus is accompanied by a copy of Donlar
Biosyntrex's annual report on Form 10-KSB for the fiscal year ended 2001 and
quarterly report on Form 10-QSB for the fiscal quarter ended June 30, 2002.
PROPOSAL 2 -- APPROVAL OF ADOPTION
OF THE DONLAR 2002 EQUITY INCENTIVE PLAN
The board of directors of Donlar and Donlar Biosyntrex have adopted the
Donlar 2002 Equity Incentive Plan, attached hereto as Appendix B, to be
effective as an equity incentive plan of the combined company upon approval by
the shareholders and consummation of the merger. Under the equity incentive
plan, the combined company may grant options to eligible participants for the
purchase of up to an aggregate of 5.0 million shares of the combined company's
common stock. Other than the number of shares issuable under the plan which was
increased from 2.0 million to 5.0 million, the equity incentive plan is
essentially identical to the Donlar Biosyntrex 2001 Equity Incentive Plan which
was adopted by the Donlar Biosyntrex board of directors and approved by the
Donlar Biosyntrex shareholders in 2001.
Key provisions of the equity incentive plan include the following:
- The definition of persons eligible to participate in the Equity Incentive
Plan includes employees and directors of the combined company, as well as
consultants and other persons who contribute to the business of the
combined company as selected at the discretion of the committee
administering the plan.
- The committee will be comprised of the combined company's compensation
committee. The committee has broad authority to select persons to receive
awards under the plan and to establish the terms and conditions
applicable to the exercise of such awards and the duration of the awards.
- Total number of shares issuable upon exercise of grants under the equity
incentive plan is 5.0 million shares of common stock.
- Awards under the plan will be made in the form of incentive and
nonqualified stock options to purchase common stock of the combined
company at prices and on terms consistent with the terms of the plan, as
established by the committee.
- The purchase price of the common stock subject to an incentive stock
option may be not less than 100% of the fair market value of such stock
on the date the option is granted, as determined by the committee. The
purchase price of the common stock subject to a nonqualified stock option
may be not less than 85% of the fair market value of the common stock on
the date the option is granted, as determined by the committee.
57
- The period within which the option shall vest and may be exercised shall
determined by the committee; however no option shall be exercisable after
ten years from the date of grant.
- No incentive stock options may be granted to any employee if at the time
the option is granted such employee owns stock possessing more than 10%
of the total combined voting power of all classes of stock of the
combined company or its parent or its subsidiaries unless at the time
such option is granted the option price is at least 110% of the fair
market value of the stock subject to the option and, by its terms, the
option is not exercisable after the expiration of five years from the
date of grant.
The Donlar Biosyntrex board of directors believes that the equity incentive
plan will provide the combined company with flexibility in compensating persons
who contribute in the future to the successful operation and growth of the
combined company.
The Donlar Biosyntrex board of directors recommends a vote FOR the approval
of the adoption of the equity incentive plan.
OTHER MATTERS
Donlar Biosyntrex does not intend to hold a 2002 annual meeting prior to
the scheduled completion of the merger. If the merger is not completed and
Donlar Biosyntrex does hold a 2002 annual meeting, Donlar Biosyntrex will notify
you of such meeting, including the date on which shareholder proposals must be
received at Donlar Biosyntrex's executive offices in order to be considered for
inclusion in the proxy materials relating to such meeting.
LEGAL MATTERS
The validity of the issuance of the shares of common stock registered
hereby will be passed upon for Donlar by Duane Morris LLP, Philadelphia,
Pennsylvania.
EXPERTS
The consolidated financial statements of Donlar Biosyntrex incorporated in
this information statement/prospectus by reference from Donlar Biosyntrex's
annual report on Form 10-KSB for 2001 and the consolidated financial statements
of Donlar for 2001 included in this information statement/prospectus have been
audited by Grant Thornton LLP, independent auditors, as stated in their reports
which are incorporated herein by reference, and have been so incorporated in
reliance upon the reports of such firm given upon their authority as experts in
accounting and auditing.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Donlar and Donlar Biosyntrex have used and incorporated by reference
"forward-looking statements" in this document. Words such as "will permit,"
"will afford," "believes," "expects," "may," "should," "projected,"
"contemplates," or "anticipates" may constitute forward-looking statements.
These statements are within the meaning of Section 27A of the Securities Act of
1933 and Section 21E of the Securities Exchange Act of 1934 and are subject to
risks and uncertainties that could cause our actual results to differ
materially. Donlar and Donlar Biosyntrex have used these statements to describe
our expectations and estimates in various sections of this document, including:
- Summary -- Our Reasons for the Merger;
- The Merger -- Background of the Merger -- Restructuring Plan;
- The Merger -- Recommendation of the Donlar Biosyntrex Board and Donlar
Biosyntrex's Reasons for the Merger;
- Unaudited Pro Forma Condensed Consolidated Financial Statements.
58
- Factors that might cause such differences include, but are not limited
to:
- economic conditions, either nationally or locally in areas in which
Donlar Biosyntrex conducts its operations, being less favorable than
expected;
- the cost and effort required to integrate aspects of the operations of
the companies being greater than expected;
- expected cost savings from the merger not being fully realized or
realized within the expected time frame; and
- legislation or regulatory changes which adversely affect the ability of
the combined company to conduct its current and future operations.
Donlar and Donlar Biosyntrex disclaim any obligation to update any such
factors or to publicly announce the result of any revisions to any of the
forward-looking statements included in this document to reflect future events or
developments, except as required by the federal securities laws. Donlar's actual
results could differ materially from those set forth in the forward-looking
statements because of many reasons, including the factors listed in this
paragraph. This list may not be exhaustive.
WHERE YOU CAN FIND MORE INFORMATION
Donlar Biosyntrex files annual, quarterly and special reports, proxy
statements and other information with the SEC. You may read and copy any
reports, statements or other information Donlar Biosyntrex files at the SEC's
public reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. Please
call the SEC at 1-800-SEC-0330 for further information on the public reference
rooms. The Donlar Biosyntrex SEC filings are also available to the public from
commercial document retrieval services and at the web site maintained by the SEC
at http://www.sec.gov.
Donlar has filed a registration statement on Form S-4 to register with the
SEC the Donlar common stock to be issued to the holders of Donlar Biosyntrex and
Donlar capital stock in the merger. This document is a part of that registration
statement and constitutes a prospectus of Donlar in addition to being an
information statement of Donlar Biosyntrex for the Donlar Biosyntrex special
meeting. As allowed by SEC rules, this document does not contain all the
information you can find in the registration statement or the exhibits to the
registration statement.
The SEC allows us to "incorporate by reference" information into this
document, which means that we can disclose important information to you by
referring you to another document filed separately with the SEC. The information
incorporated by reference is deemed to be part of this document, except for any
information superseded by information in this document. This document
incorporates by reference the documents set forth below that Donlar Biosyntrex
has previously filed with the SEC. These documents contain important information
about Donlar Biosyntrex, its finances and its capital stock.
DONLAR BIOSYNTREX CORPORATION SEC FILINGS
- annual report on Form 10-KSB for 2001; and
- quarterly report on Form 10-QSB for the quarter ended June 30, 2002;
If you are a Donlar Biosyntrex shareholder, Donlar Biosyntrex may have sent
you some of the documents incorporated by reference, but you can obtain any of
them through Donlar Biosyntrex or the SEC. You can obtain documents incorporated
by reference from Donlar Biosyntrex without charge, excluding all exhibits
unless we have specifically incorporated by reference an exhibit in this
document. Shareholders may obtain
59
documents incorporated by reference in this document by requesting them in
writing or by telephone at the following address:
Donlar Biosyntrex Corporation
6502 South Archer Road
Bedford Park, Illinois 60501
Attention: Larry P. Koskan
Tel: (607) 337-6520
If you would like to request documents from us, please do so by ,
2002 to receive them prior to the Donlar Biosyntrex special meeting.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY
REFERENCE IN THIS DOCUMENT TO VOTE ON THE APPROVAL OF THE MERGER AGREEMENT AND
THE TRANSACTIONS CONTEMPLATED THEREBY. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE
YOU WITH INFORMATION THAT IS DIFFERENT FROM WHAT IS CONTAINED IN THIS DOCUMENT.
THIS DOCUMENT IS DATED [ ]. YOU SHOULD NOT ASSUME THAT THE INFORMATION
CONTAINED IN THIS DOCUMENT IS ACCURATE AS OF ANY DATE OTHER THAN SUCH DATE, AND
NEITHER THE MAILING OF THIS DOCUMENT TO SHAREHOLDERS NOR THE ISSUANCE OF SHARES
OF DONLAR COMMON STOCK IN THE MERGER SHALL CREATE ANY IMPLICATION TO THE
CONTRARY.
60
DONLAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<Table>
<Caption>
JUNE 30, 2002
-------------
ASSETS
Current assets
Cash...................................................... $ 50,378
Receivables, less allowance for doubtful accounts of
$16,997................................................ 475,285
Inventories............................................... 1,265,410
Prepaid expenses.......................................... 142,208
-------------
Total current assets.............................. 1,933,281
Property and equipment...................................... 9,131,943
Other assets................................................ 2,159,573
-------------
$ 13,224,797
=============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities
Current portion of convertible debt....................... $ 2,549,472
Short term notes payable.................................. 7,995,932
Accounts payable.......................................... 495,482
Accrued expenses.......................................... 6,557,087
-------------
Total current liabilities......................... 17,597,973
Notes payable............................................... 9,000,000
Convertible debt............................................ 21,236,419
Shareholders' deficit
Preferred stock, $.0001 par value......................... --
Common stock, $.0001 par value............................ --
Additional paid-in capital................................ 107,123,348
Stock subscriptions receivable............................ (31,987)
Accumulated deficit....................................... (141,700,956)
-------------
Total shareholders' deficit....................... (34,609,595)
-------------
$ 13,224,797
=============
</Table>
The accompanying notes are an integral part of this unaudited
condensed consolidated balance sheet.
61
DONLAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<Table>
<Caption>
SIX MONTHS ENDED JUNE 30,
-------------------------
2002 2001
----------- -----------
Revenues.................................................... $ 1,892,087 $ 1,232,520
Cost of revenue............................................. 1,610,059 1,418,154
Research and development.................................... 270,152 479,648
Selling, general and administrative......................... 1,029,543 4,034,124
----------- -----------
Total operating expenses.......................... 2,909,754 5,931,926
----------- -----------
Loss from operations........................................ (1,017,667) (4,699,406)
Other income (expense)
Interest income........................................... 260 8,954
Interest expense.......................................... (2,977,696) (4,049,433)
Debt conversion expense................................... (289,655) --
Gain on disposal of fixed assets.......................... 74,478 --
Other..................................................... 160,743 --
----------- -----------
Total other expense............................... (3,031,870) (4,040,479)
----------- -----------
Loss before income taxes.................................... (4,049,537) (8,739,885)
Provision for income taxes.................................. -- --
----------- -----------
Net loss before extraordinary item................ (4,049,537) (8,739,885)
Extraordinary loss on retirement of debt.................. (1,212,120) --
----------- -----------
Net loss.......................................... $(5,261,657) $(8,739,885)
=========== ===========
Per common share:
Basic:
Net loss.................................................. $ (0.08) $ (0.15)
Diluted:
Net loss.................................................. $ (0.08) $ (0.15)
Weighted average shares of common stock outstanding:
Basic..................................................... 63,831,050 58,774,656
Diluted................................................... 63,831,050 58,774,656
</Table>
The accompanying notes are an integral part of these unaudited
condensed consolidated statement of operations.
62
DONLAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' DEFICIT
SIX MONTHS ENDED JUNE 30, 2002
<Table>
<Caption>
SERIES A PREFERRED
STOCK ISSUED IN
EXCESS OF SERIES A
COMMON STOCK AUTHORIZED SHARES PREFERRED STOCK ADDITIONAL
------------------- -------------------- ------------------- PAID-IN STOCK
SHARES AMOUNT SHARES* AMOUNT SHARES AMOUNT CAPITAL SUBSCRIPTION
---------- ------ ----------- ------ ---------- ------ ------------ ------------
Beginning balance.... 11,461,522 $-- 14,369,528 $-- 38,000,000 $-- $106,175,447 $(31,987)
Issuance of capital
stock.............. -- -- -- -- -- -- 1,015,208 --
Debt conversion
expenses........... -- -- -- -- -- -- 289,655 --
Cancellation of stock
options............ -- -- -- -- -- -- (356,962) --
Net loss............. -- -- -- -- -- -- -- --
---------- -- ----------- -- ---------- -- ------------ --------
Ending balance....... 11,461,522 $-- $14,369,528 $-- 38,000,000 $-- $107,123,348 $(31,987)
========== == =========== == ========== == ============ ========
<Caption>
ACCUMULATED
DEFICIT TOTAL
------------- ------------
Beginning balance.... $(136,441,923) $(30,298,463)
Issuance of capital
stock.............. -- 1,015,208
Debt conversion
expenses........... -- 289,655
Cancellation of stock
options............ -- (356,962)
Net loss............. (5,259,033) (5,259,033)
------------- ------------
Ending balance....... $(141,700,956) $(34,609,595)
============= ============
</Table>
- ---------------
* These excess preferred shares were exchanged for Donlar common stock on a one
for one basis on June 4, 2002.
The accompanying notes are an integral part of this unaudited condensed
consolidated statement.
63
DONLAR BIOSYNTREX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<Table>
<Caption>
SIX MONTHS ENDED JUNE 30,
--------------------------
2002 2001
------------ -----------
Cash flows from operating activities
Net loss.................................................. $ (5,261,657) $(8,739,885)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation and amortization.......................... 542,343 693,375
Issuance of common stock for services.................. 27,536 --
Compensation expense related to options and warrants... -- 2,040,020
Interest expense related to amortization of debt
discount.............................................. 2,007,544 2,224,500
Debt conversion expense................................ 289,655 --
Gain on disposal of fixed assets....................... (74,478) (360)
Change in assets and liabilities
Receivables.......................................... 29,628 (155,761)
Inventories.......................................... 576,834 403,252
Prepaid expenses and other assets.................... (9,594) 272,324
Accounts payable..................................... (1,002,911) 625,280
Accrued expenses..................................... (399,980) 1,177,307
------------ -----------
Net cash provided by (used in) operating
activities..................................... (3,275,080) (1,459,948)
Cash flows from investing activities
Proceeds from sale of property and equipment.............. 103,942 4,278
Purchase of property and equipment........................ (117,970) (94,113)
------------ -----------
Net cash used in investing activities............. (14,028) (89,835)
Cash flows from financing activities
Principal repayments of convertible notes................. (17,111,948) (135,498)
Proceeds from issuance of convertible notes............... 20,970,107 50,000
Principal repayments of notes payable..................... (263,000) --
Proceeds from notes payable............................... 11,000 --
Issuance of common stock.................................. -- 714,593
Proceeds from exercise of stock options and warrants...... -- 49,000
Deferred financing costs.................................. (270,419) --
------------ -----------
Net cash provided by financing activities......... 3,335,740 678,095
------------ -----------
Net increase (decrease) in cash and cash equivalents........ 46,632 (871,688)
Cash and cash equivalents at beginning of period............ 3,746 876,434
------------ -----------
Cash and cash equivalents at end of period.................. $ 50,378 $ 4,746
============ ===========
Supplemental disclosure of cash flow information:
Interest paid............................................. $ 28,184 $ 643,571
Income tax paid........................................... -- --
</Table>
The accompanying notes are an integral part of these unaudited condensed
consolidated statements.
64
DONLAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited condensed consolidated financial statements of
Donlar Corporation ("Donlar") and subsidiaries (the "Company") for the six
months ended June 30, 2002, do not include all information and footnotes
necessary for a fair presentation of financial position, results of operations
and cash flows in conformity with accounting principles generally accepted in
the United States of America. For further information refer to the Consolidated
Financial Statements and footnotes of Donlar Corporation and subsidiaries for
the year ended December 31, 2001 contained elsewhere in this information
statement/ prospectus.
In management's opinion, the unaudited condensed consolidated financial
statements include all adjustments, consisting only of normal recurring
adjustments except as discussed below, which the Company considers necessary for
a fair presentation of the results for the period. Operating results for the
period presented are not necessarily indicative of the results that may be
expected for the entire year.
The accompanying unaudited condensed consolidated financial statements have
been prepared assuming that the Company will continue as a going concern. As of
June 30, 2002, the Company had an accumulated deficit of $141,700,956, a
shareholders' deficit of $34,609,595 and has had substantial recurring losses.
The consolidated operations of the Company have not achieved profitability and
the Company has relied upon financing from the sale of its equity securities,
liquidation of assets and debt financing to satisfy its obligations. These
conditions raise substantial doubt about the ability of the Company to continue
as a going concern. The unaudited condensed consolidated financial statements do
not include any adjustments that might result from the outcome of these
uncertainties.
The Company's ability to continue as a going concern is subject to the
attainment of profitable operations or obtaining necessary funding from outside
sources. Management's plan with respect to this uncertainty includes
reorganizing the Company and converting debt to equity, increasing sales of
existing products to attempt to maintain a positive cashflow, evaluating new
products and markets, and minimizing overhead and other costs. However, there
can be no assurance that management will be successful.
EQUITY TRANSACTIONS
In January 2001, Donlar sold 1,500,000 shares of its common stock to an
investor for $714,593.
In January 2001, the Company entered into an agreement with a media
relations firm. This agreement was for a period of one year, and the Company
issued the firm a warrant to purchase 1,250,000 shares of common stock of the
Company's subsidiary, Donlar Biosyntrex Corporation ("Donlar Biosyntrex"), at an
exercise price of $0.01 per share. This warrant could only be exercised if, in
the Company's opinion, the media relations firm satisfied its obligations under
the agreement. This agreement and the warrant were cancelled in April 2001 when
the Company entered into a new agreement effective January 20, 2001 with the
same media relations firm. The term of the new agreement is one year and the
Company issued 500,000 shares of Donlar Biosyntrex common stock to the media
relations firm in connection with the execution of the agreement. The Company
recorded $468,750 of general and administrative expenses upon the execution of
the agreement, which is the fair value of the stock issued as of that date.
Additionally, in April 2001, the Company issued the media relations firm 750,000
shares of Donlar Biosyntrex common stock which are being held in an escrow
account by the media relations firm until satisfaction of the terms of the
agreement. The fair value of these 750,000 shares was recorded as deferred
expense in the amount of $703,125, representing the fair market value of the
shares as of the date of the agreement, January 20, 2001. This amount was being
amortized over one year, the life of the agreement, as adjusted for changes in
fair value over the term of the agreement. The Company believes that the
conditions for release of the 750,000 shares from escrow have not been satisfied
by the media relations firm and the Company has requested return of the shares.
65
DONLAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In March 2001, an investment advisor exercised a warrant to purchase
400,000 shares of Donlar Biosyntrex common stock for $0.01 a share, pursuant to
its August 2000 agreement with the Company.
In March 2002, the Company issued 2,000,000 shares of Donlar Biosyntrex
common stock to the same investment advisor in satisfaction of a two year
agreement, under which the advisor was entitled to $15,000 per month for 24
months. This agreement was terminated after fifteen months, and in lieu of
additional payments under the agreement, the Company issued to the investment
advisor 2,000,000 shares of Donlar Biosyntrex common stock in full satisfaction
of the Company's obligations to the advisor under the agreement. The fair value
assigned to the shares was $0.40 per share, the closing price of the shares at
the date of the agreement, for consulting expense of $800,000.
In February 2002, the Company issued a total of 1,000,000 shares of Donlar
Biosyntrex common stock to two investor relations firms as payment for services
rendered pursuant to agreements with these firms. The fair value assigned to the
shares was $0.40 per share, the closing price of the shares at the date of the
agreement, for consulting expense of $400,000.
Prior to January 1, 2000, Donlar issued 18,717,354 shares of Series A
Preferred stock in excess of the authorized shares of that class of stock. To
eliminate the over-issuance, in June 2002, two shareholders of the Company who
are directors agreed to exchange 18,717,354 shares of Series A Preferred stock
of Donlar owned by them for an equal number of shares of common stock of Donlar.
The shares were exchanged on a one for one basis.
DEBT TRANSACTIONS
In the first quarter of 2002, the Company began implementing a plan which
is intended to significantly restructure its debt and capital structures in
order to eliminate a substantial portion of its debt and to ultimately result in
the merger of Donlar and Donlar Biosyntrex (the "Restructuring Plan"). The
Restructuring Plan is scheduled to be completed in October 2002.
As part of the Restructuring Plan, on March 18, 2002, the Company entered
into a Bridge and Consolidated Term Loan Agreement with Tennessee Farmers Life
Insurance Company (the "Loan Agreement"). Pursuant to the terms of the Loan
Agreement, the Company obtained a bridge loan facility in the amount of
$2,127,000 to be used to refinance certain short term debt, provide working
capital, pay certain accounts payable creditors and pay expenses of the
transaction.
In addition, the terms of existing loans to the Company in the original
principal amount of approximately $17.64 million were restated to the total
amount of $19.20 million, reflecting the original amount of the loans and
accrued, unpaid interest thereon (the "Restated Loans"). Each of the loans is
collateralized by substantially all of the assets of the Company.
Loans under the bridge loan facility bear interest at a rate of eleven
percent (11%) per annum with one half of such interest payable on a quarterly
basis on the last business day of March, June, September and December and the
other half payable at maturity on March 18, 2003.
The Restated Loans are divided into two loans. The first such loan is in
the principal amount of approximately $10.18 million, bears interest at a rate
of nine percent (9%) per annum until March 18, 2003, at which time such interest
is payable, and thereafter bears interest at eleven percent (11%) per annum
payable on a quarterly basis on the last business day of March, June, September
and December. The principal balance of the loan is payable in equal quarterly
installments of not less than $222,500 commencing on March 31, 2003 and
thereafter on the last business day of March, June, September and December. Any
remaining unpaid principal and interest is payable on March 31, 2007. The second
such loan is in the principal amount of $9.0 million, bears interest at a rate
of one percent (1%) per annum, but neither interest nor principal is payable
until the first to occur of one of certain events described in the Loan
Agreement, the latest of which is
66
DONLAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
March 18, 2005, after which time the interest that has accrued is payable in
full within thirty (30) days and thereafter is payable quarterly on the last
business day of March, June, September and December together with principal
payments of not less than $222,500. Any remaining unpaid principal and interest
is payable on March 31, 2007.
As a condition of the loans and as part of the Restructuring Plan, Donlar
and Donlar Biosyntrex have agreed to use their best efforts to merge on or
before July 7, 2002 (the "Merger"). The date for completion of the Merger has
been extended to October 31, 2002. The merged company is referred to as the
Combined Company. In the Merger, each share of Donlar Biosyntrex common stock
other than shares owned by Donlar will be exchanged for 0.26 shares of the
common stock of the Combined Company. As a result of the Merger and related
transactions described herein, Donlar Biosyntrex's shareholders (other than
Donlar) will collectively receive approximately 4.04 million shares of the
Combined Company common stock representing approximately 19.44% of the shares of
common stock of the Combined Company outstanding following the Merger and
approximately 4.32% of the shares of common stock on a fully diluted basis. The
Merger requires the approval of a majority of the respective shareholders of
Donlar and Donlar Biosyntrex.
The Company also made numerous representations, warranties and covenants in
the Loan Agreement. Among the covenants, the Company agreed to limit its ability
to incur additional indebtedness, make any investments or loans, pay dividends,
purchase, redeem or issue capital stock or sell or encumber assets. In addition,
the Company agreed to sell or discontinue the nutritional and nutraceuticals
business on or before March 18, 2003.
There can be no assurance that the Company will be able to comply with the
covenants and events of default in the Loan Agreement, some of which events of
default are entirely beyond its control. Each of the loans made or restated
pursuant to the Loan Agreement is subject to acceleration and the application of
higher default rates of interest in the event the Company defaults in the
payment of principal or interest when due, breaches any covenants contained in
the Loan Agreement that are not remedied within five calendar days or any other
specified event of default occurs.
Each of the loans is convertible at the option of the holder at any time
prior to repayment into common stock of Donlar Biosyntrex and, subsequent to the
Merger, into common stock of the Combined Company. Loans made under the bridge
loan facility convert into the Combined Company common stock at a rate of one
share per $0.29 of outstanding principal amount of the loans. The Restated Loans
convert into the Combined Company common stock at a rate of one share per $0.68
of outstanding principal amount of the loans. The conversion rates are subject
to antidilution protection. The holders of the loans have certain registration
rights with respect to the shares issuable upon conversion.
In the first quarter of 2002, the Company also reached agreements with
Willis Stein and Partners, L.P. and Star Polymers, L.L.C. (collectively the
"Willis Stein Group") to (i) exchange $9.0 million of original principal amount
of notes plus accrued interest for shares of a new series of senior convertible
preferred stock with a stated liquidation value of $9.0 million and convertible
into approximately 13.23 million shares of the Combined Company common stock and
(ii) exchange all of the equity securities held by the Willis Stein Group in
Donlar for 1.0 million shares of the Combined Company common stock. The
foregoing exchanges are subject to the satisfaction of certain conditions
precedent. The Willis Stein Group also agreed to vote its shares of voting stock
of Donlar in favor of the Merger.
The Company also reached an agreement in 2002 with Dr. Robert Gale Martin
("Martin"), a director of the Company, to (i) exchange approximately $9.9
million of original principal amount of notes plus accrued interest for shares
of senior convertible preferred stock with a stated liquidation value of $9.0
million and convertible into approximately 13.23 million shares of the Combined
Company common stock, (ii) relinquish rights to receive royalty payments from
the Company and all of his equity securities in the Company in exchange for 5.0
million shares of the Combined Company common stock and (iii) surrender for
cancellation
67
DONLAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
any warrants to purchase shares of Donlar common stock for a warrant to purchase
3.0 million shares of the Combined Company common stock at an exercise price of
$0.68 per share. Martin also agreed to vote his shares of voting stock of Donlar
in favor of the Merger.
To further eliminate debt from the Company's balance sheet, the Company has
reached agreement with the holders of convertible notes issued in 1998 and 2000
in the approximate principal amount of $1.9 million, to exchange those notes for
shares of senior convertible preferred stock with a stated liquidation value
equal to the total principal amount of the notes. The senior convertible
preferred are convertible into approximately 2.8 million shares of the Combined
Company common stock.
In the first quarter of 2002, the Company recorded a debt conversion
expense of $289,655 in connection with the bridge loan transaction. This debt
conversion expense was incurred as a result of the price for converting the
bridge loan into Donlar Biosyntrex common stock of $0.29 per share being below
the market price of the Donlar Biosyntrex common stock as of the date of the
loan agreement, which was $0.33 per share.
The Restated Loans are convertible at a rate of $0.68 per share into common
stock of the Combined Company. The Restated Loans meet the criteria for new
debt. Because there are no induced conversion features associated with the
transaction, no beneficial conversion expense was recorded.
68
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Shareholders
Donlar Corporation
We have audited the consolidated balance sheet of Donlar Corporation and
Subsidiaries as of December 31, 2001, and the related consolidated statements of
operations, shareholders' deficit and cash flows for the years ended December
31, 2001 and 2000. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with 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
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Donlar Corporation and Subsidiaries as of December 31, 2001, and the
consolidated results of their operations, shareholders' deficit and cash flows
for the years ended December 31, 2001 and 2000, in conformity with accounting
principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in note
B to the consolidated financial statements, the Company has had substantial
recurring losses from operations, liquidation of assets and debt financing and
has relied upon financing from the sale of its equity securities to satisfy its
obligations. These conditions raise substantial doubt about the ability of the
Company to continue as a going concern. Management's plans in regard to this
matter are also described in note B. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
As discussed in note R, the accompanying consolidated financial statements
for the year ended December 30, 2000, have been restated.
GRANT THORNTON LLP
Chicago, Illinois
April 5, 2002
F-1
DONLAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<Table>
<Caption>
DECEMBER 31,
2001
-------------
ASSETS
Current assets
Cash...................................................... $ 3,746
Receivables, less allowance for doubtful accounts of
$16,997................................................ 504,915
Inventories, net.......................................... 1,842,244
Prepaid expenses.......................................... 93,274
Other current assets...................................... 39,335
-------------
Total current assets................................. 2,483,514
Property, plant and equipment, net........................ 9,569,100
Patents................................................... 1,895,836
Other assets.............................................. 40,908
-------------
$ 13,989,358
=============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities
Short-term notes payable.................................. $ 7,734,782
Current portion of convertible debt....................... 1,751,027
Payables and accrued expenses............................. 9,088,793
-------------
Total current liabilities............................ 18,574,602
Notes payable............................................... 9,000,000
Convertible debt............................................ 16,713,219
Minority interest........................................... --
Shareholders' deficit
Preferred stock, $.00 par value........................... --
Preferred stock issued in excess of authorized shares,
$.00 par value......................................... --
Common stock, $.00 par value.............................. --
Additional paid-in capital................................ 106,175,447
Stock subscriptions receivable............................ (31,987)
Accumulated deficit....................................... (136,441,923)
-------------
Total shareholders' deficit.......................... (30,298,463)
-------------
$ 13,989,358
=============
</Table>
The accompanying notes are an integral part of these statements.
F-2
DONLAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
---------------------------
2001 2000
------------ ------------
(RESTATED)
Revenues.................................................... $ 2,352,834 $ 1,381,994
Cost of revenue............................................. 2,639,022 2,097,189
Research and development.................................... 821,414 1,121,749
Selling, general and administrative......................... 5,864,860 3,689,944
Impairment Expense.......................................... 1,189,923 --
------------ ------------
Total operating expenses............................. 10,515,219 6,908,882
------------ ------------
Loss from operations........................................ (8,162,385) (5,526,888)
Other income (expense)
Interest expense.......................................... (7,078,494) (7,236,982)
Write down of investments to market....................... (864,434) --
Gain on sale of product line.............................. -- 100,000
------------ ------------
Total other expense.................................. (7,942,928) (7,136,982)
------------ ------------
Loss before income taxes.................................... (16,105,313) (12,663,870)
Provision for income taxes.................................. -- --
------------ ------------
Net loss............................................. (16,105,313) (12,663,870)
Preferred stock dividends and beneficial conversion
premium................................................... -- (2,625)
------------ ------------
Net loss applicable to common shares................. $(16,105,313) $(12,666,495)
============ ============
Per common share
Basic
Net loss............................................... $ (0.26) $ (0.22)
Diluted
Net loss............................................... $ (0.26) $ (0.22)
Weighted average shares of common stock outstanding
Basic..................................................... 63,081,050 58,774,656
Diluted................................................... 63,081,050 58,774,656
</Table>
The accompanying notes are an integral part of these statements.
F-3
DONLAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' DEFICIT
TWO YEARS ENDED DECEMBER 31, 2001
<Table>
<Caption>
SERIES A
PREFERRED STOCK
ISSUED IN EXCESS OF SERIES A SERIES B
COMMON STOCK AUTHORIZED SHARES PREFERRED STOCK PREFERRED STOCK ADDITIONAL
------------------- ------------------- ------------------- --------------- PAID-IN
SHARES AMOUNT SHARES* AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
---------- ------ ---------- ------ ---------- ------ ------ ------ ------------
Balance at January 1,
2000.................... 2,848,735 $ -- 14,369,528 -- 38,000,000 $ -- -- $ -- $ 97,709,825
Issuance of capital
stock................... 2,764,961 -- -- -- -- -- -- -- 1,776,614
Exercise of stock options
and warrants............ 4,347,826 -- -- -- -- -- -- -- 1,000,000
Vesting of stock
options................. -- -- -- -- -- -- -- -- 22,680
Issuance of warrants...... -- -- -- -- -- -- -- -- 3,692,782
Royalty obligation related
to convertible debt..... -- -- -- -- -- -- -- -- 244,341
Issuance of shareholder
receivable.............. -- -- -- -- -- -- -- -- --
Reduction in investment in
subsidiary.............. -- -- -- -- -- -- -- -- 8,000,000
Repayment of shareholder
receivable.............. -- -- -- -- -- -- -- -- --
Preferred stock
dividends............... -- -- -- -- -- -- -- -- --
Recording of goodwill..... -- -- -- -- -- -- -- -- 1,213,120
Net Loss.................. -- -- -- -- -- -- -- -- --
---------- ----- ---------- ----- ---------- ----- ---- ----- ------------
Balance at December 31,
2000 (Restated)......... 9,961,522 -- 14,369,528 -- 38,000,000 -- -- -- 113,659,362
Issuance of capital
stock................... 1,500,000 -- -- -- -- -- -- -- 714,593
Vesting of stock
options................. -- -- -- -- -- -- -- -- 1,880
Issuance of options for
services................ -- -- -- -- -- -- -- -- (703,125)
Amortization of deferred
compensation............ -- -- -- -- -- -- -- -- 870,625
Cancellations of stock
options................. -- -- -- -- -- -- -- -- (367,888)
Net Loss.................. -- -- -- -- -- -- -- -- --
---------- ----- ---------- ----- ---------- ----- ---- ----- ------------
Balance at December 31,
2001.................... 11,461,522 $ -- 14,369,528 $ -- 38,000,000 $ -- -- $ -- $114,175,447
========== ===== ========== ===== ========== ===== ==== ===== ============
<Caption>
SHAREHOLDER
NOTE DEFERRED ACCUMULATED
RECEIVABLE COMPENSATION DEFICIT TOTAL
----------- ------------ ------------- ------------
Balance at January 1,
2000.................... $ (490,822) $ -- $(107,670,115) $(10,451,112)
Issuance of capital
stock................... -- -- -- 1,776,614
Exercise of stock options
and warrants............ -- -- -- 1,000,000
Vesting of stock
options................. -- -- -- 22,680
Issuance of warrants...... -- -- -- 3,692,782
Royalty obligation related
to convertible debt..... -- -- -- 244,341
Issuance of shareholder
receivable.............. (8,000,000) (8,000,000)
Reduction in investment in
subsidiary.............. -- -- -- 8,000,000
Repayment of shareholder
receivable.............. 414,503 -- -- 414,503
Preferred stock
dividends............... -- -- (2,625) (2,625)
Recording of goodwill..... -- -- -- 1,213,120
Net Loss.................. -- -- (12,663,870) (12,663,870)
----------- ----- ------------- ------------
Balance at December 31,
2000 (Restated)......... (8,076,319) -- (120,336,610) (14,753,567)
Issuance of capital
stock................... -- -- -- 714,593
Vesting of stock
options................. -- -- -- 1,880
Issuance of options for
services................ (703,125)
Amortization of deferred
compensation............ 870,625
Cancellations of stock
options................. 44,332 -- -- (323,556)
Net Loss.................. -- -- (16,105,313) (16,105,313)
----------- ----- ------------- ------------
Balance at December 31,
2001.................... $(8,031,987) $ -- $(136,441,923) $(30,298,463)
=========== ===== ============= ============
</Table>
- ---------------
*These excess preferred shares were exchanged for Donlar common stock on a one
for one basis on June 4, 2002.
The accompanying notes are an integral part of these statements.
F-4
DONLAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
---------------------------
2001 2000
------------ ------------
(RESTATED)
Cash flows from operating activities
Net loss.................................................. $(16,105,313) $(12,663,870)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation and amortization.......................... 2,565,440 934,939
Compensation expense related to options and warrants... 2,848,353 267,680
Gain on sale of product line........................... -- (100,000)
Interest expense related to amortization of debt
discount............................................. 3,414,664 3,431,547
Write-down of investment to market..................... 864,434 --
Change in assets and liabilities
Receivables.......................................... (310,621) (30,984)
Inventories.......................................... 848,769 404,516
Prepaid expenses and other assets.................... 226,972 (135,292)
Payable and accrued expenses......................... 3,974,808 1,274,785
------------ ------------
Net cash used in operating activities............. (1,672,494) (6,616,679)
Cash flows from investing activities
Purchase of patents....................................... (156,536) (84,717)
Acquisition costs......................................... -- (338,953)
------------ ------------
Net cash used in investing activities............. (156,536) (423,670)
Cash flows from financing activities
Principal repayments of convertible notes................. (135,498) (392,203)
Deferred financing costs.................................. (44,754) --
Proceeds from notes payable............................... 418,000 3,000,000
Issuance of common stock.................................. 714,593 1,776,614
Proceeds from exercise of warrants........................ 49,000 1,000,000
Payments received on stock subscription receivable........ -- 414,503
Principal repayment of notes payable...................... (45,000) (1,253,408)
Proceeds from issuance of convertible notes............... -- 2,917,000
Borrowings on line of credit.............................. -- 75,000
------------ ------------
Net cash provided by financing activities......... 956,341 7,537,506
------------ ------------
Net (decrease) increase in cash and cash equivalents........ (872,689) 497,157
Cash at beginning of year................................... 876,435 379,278
------------ ------------
Cash at end of year......................................... $ 3,746 $ 876,435
============ ============
Supplemental disclosure of cash flow information
Interest paid............................................. $ 655,457 $ 1,925,137
Income tax paid........................................... -- --
Other non-cash transactions
In 2001, the Company was forgiven its liability on its
line of credit of $75,000 in exchange for related-party
notes receivable with a book value of $74,639.
</Table>
The accompanying notes are an integral part of these statements.
F-5
DONLAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
NOTE A -- ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Donlar Corporation ("Donlar") and subsidiaries (collectively the "Company")
are in the early commercialization stage of a new family of environmentally
friendly biodegradable polymers, known as thermal polyaspartates ("TPA"). The
Company manufactures and markets these polymers to agricultural, industrial and
consumer markets. In the agricultural market, the products increase a plant's
ability to absorb nutrients more efficiently. In the industrial and consumer
markets, the products replace nonbiodegradable chemicals, and have been focused
toward the oil field production, water treatment, detergents and cleaners, and
personal care fields. The Company markets these products to service companies
and distributors in the United States of America and Europe.
The Company also is engaged in the distribution and sale of biologic
nutraceutical supplements. Certain of the nutraceutical supplements incorporate
a patented whey protein technology licensed by the Company and designed to
provide or increase protective immunities to disease and to provide nutritional
supplementation. Nutraceutical products are food supplements that are derived
from a food base and are marketed as a beneficial source of nutrients to promote
good health. The Company sells these products primarily to nutritional companies
located in the United States of America. The Company has discontinued these
nutraceutical operations during 2002. Revenues generated from nutraceutical
products were approximately $300,000 and $180,000 during 2001 and 2000,
respectively.
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Donlar's
68%-owned subsidiaries, Donlar Biosyntrex Corporation ("Donlar Biosyntrex") and
Optim Nutrition, Inc. and Donlar's 90%-owned subsidiary, Donlar Pharmaceutical
Corporation. All significant intercompany balances and transactions have been
eliminated. Minority interest in the majority owned subsidiaries is not shown,
as the entities have negative equity balances.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
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 those
estimates.
INVESTMENT IN EQUITY SECURITIES
The Company's investment in equity securities is carried in the financial
statements at the lower of cost or fair market value. Realized gains and losses,
determined using the specific identification method, are included in earnings.
At December 31, 2001, the Company wrote down to fair market value certain equity
security investments. The write down amounted to $864,434 and was due to a
decline in fair value considered to be other than temporary.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company estimates that the fair value of all financial instruments at
December 31, 2001, does not differ materially from the aggregate carrying values
of its financial instruments recorded in the accompanying balance sheet. The
estimated fair value amounts have been determined by the Company using available
market information and appropriate valuation methodologies. Considerable
judgment is required in
F-6
DONLAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
interpreting market data to develop the estimates of fair value and,
accordingly, the estimates are not necessarily indicative of the amounts that
the Company could realize in a current market exchange.
INVENTORIES
Inventories are stated at the lower of cost or market value, using the
first-in, first-out method.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost less accumulated
depreciation. Depreciation and amortization are determined using the
straight-line method over the estimated useful lives of the assets. Expenditures
for maintenance and repairs are expensed when incurred and betterments are
capitalized. Gains and losses on sale of property and equipment are reflected in
operations.
The Company assesses the recoverability of its property, plant and
equipment whenever adverse events or changes in circumstances or business
climate indicate that expected future undiscounted cash flows or the fair value
may not be sufficient to support recorded property, plant and equipment. If
impairment exists, the carrying amount of property, plant and equipment will be
reduced by the shortfall.
PATENTS AND OTHER ASSETS
Patents are stated at cost less amortization computed on the straight-line
method, principally over 10 years. The amount capitalized as patents was
approximately $2,807,000 at December 31, 2001. Accumulated amortization related
to patents and other assets was $911,000, at December 31, 2001.
EARNINGS PER COMMON, COMMON EQUIVALENT AND REVERSE STOCK SPLITS
The computation of basic earnings per common share is based on the weighted
average number of common shares outstanding during the year.
The computation of diluted earnings per common share is based on the
weighted average number of common shares outstanding during the year plus common
stock equivalents, which would arise from the exercise of stock options and
warrants outstanding using the treasury stock method and the average market
price per share during the year. Common stock equivalents are not included in
the diluted earnings per share calculation when their effect is anti-dilutive.
Preferred stock dividends and the impact of beneficial conversion premiums
increase the net loss attributable to common shareholders for purposes of
computing the net loss per common share.
10,278,000 potentially dilutive shares were excluded from the diluted per
share calculation because their effect was anti-dilutive.
REVENUE RECOGNITION
In accordance with SAB 101, sales of product are recognized upon shipment
of the product, which is when title transfers to the customer. The Company
maintains reserves for potential losses on receivables from its customers, and
such losses have generally not exceeded management's expectations. The Company
maintains reserves for returns and allowances from its customers, and such
amounts have not exceeded management's expectations. Revenue by product type for
the year ended December 31, 2001 was: Agricultural -- $238,935;
Biopolymer -- $1,812,331; and Nutriceutical -- $301,568.
F-7
DONLAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses include amounts paid to third-party and
related-party consultants related to the Company's product research and
development activities. Costs associated with research and development of new
products are expensed as incurred.
ADVERTISING
The Company expenses the cost of advertising when the advertising occurs.
For the years ended December 31, 2001 and 2000, advertising expenses totaled
approximately $92,000 and $216,000, respectively, and are included in other
general and administrative expenses in the accompanying statements of
operations.
INCOME TAXES
The Company recognizes deferred income tax assets or liabilities for the
expected future tax consequences of events that have been recognized in the
financial statements or tax returns. Under this method, deferred income tax
assets or liabilities are determined based upon the difference between the
financial statement and income tax bases of assets and liabilities using enacted
tax rates expected to apply when differences are expected to be settled or
realized.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion No.
25 ("APB 25"), "Accounting for Stock Issued to Employees," in accounting for its
employee stock options. The Company has adopted the disclosure-only provisions
of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for
Stock-based Compensation." Under APB 25, because the exercise price of the
Company's employee stock options approximates the market price of the underlying
stock on the date of grant, no compensation expense is recognized. The expense
associated with stock options and warrants issued to non-employees and
non-directors is reflected in the consolidated financial statements in
accordance with SFAS 123. As permitted by SFAS 123, the intrinsic value of
compensatory options is reflected in the consolidated financial statements in
accordance with APB 25.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentration of credit risk consist primarily of receivables. In the normal
course of business, the Company provides credit terms to its customers.
Accordingly, the Company performs ongoing credit evaluations of its customers
and maintains allowances for possible losses which, when realized, have been
within the range of management's expectations.
The Company maintains its cash in bank deposit accounts, which may, at
times, exceed federally insured limits. The Company has not experienced any
losses in such accounts and believes it is not exposed to any significant credit
risk on cash and cash equivalents.
NEW ACCOUNTING PRONOUNCEMENTS
SFAS 141 "Business Combinations" and SFAS 142 "Goodwill and Other
Intangible Assets" -- On June 29, 2001, the Financial Accounting Standards Board
("FASB") approved for issuance SFAS 141, "Business Combinations," and SFAS 142,
"Goodwill and Other Intangible Assets." The FASB issued these Statements on July
20, 2001. Major provisions of these Statements include the following:
- All business combinations initiated after June 30, 2001, must use the
purchase method of accounting. The pooling method of accounting is
prohibited except for transactions initiated before July 1, 2001.
F-8
DONLAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
- Intangible assets acquired in a business combination must be recorded
separately from goodwill if they meet explicit criteria in SFAS 141.
- Any negative goodwill remaining after reducing the carrying value of
certain acquired assets to zero is recognized as an extraordinary gain.
- SFAS 141 provisions relating to the initial measurement and recording of
goodwill and intangible assets, as well as financial statement
disclosures, are effective for purchase business combinations completed
after June 30, 2001.
- Goodwill and those intangible assets that have indefinite lives are not
amortized but are tested for impairment annually and whenever there is an
impairment indicator. In certain circumstances, goodwill impairment
testing need not be done annually. All acquired goodwill must be assigned
to reporting units for purposes of impairment testing.
- SFAS 142 is effective for fiscal years beginning after December 15, 2001.
Early adoption is permitted for companies with fiscal years beginning
after March 15, 2001, but only if they have not issued their first
quarter financial statements prior to adoption. Regardless of the full
adoption date, the nonamortization provisions of SFAS 142 are effective
for business combinations and other transactions completed after June 30,
2001.
- The Statements also include guidance on financial statement presentation
and disclosures.
Management does not expect these pronouncements will have an impact on the
2002 financial statements.
SFAS 143 "Accounting for Asset Retirement Obligations" -- SFAS 143 states
that a liability for an asset retirement obligation should be recognized if the
obligation meets the definition of a liability in the FASB Concepts Statement 6,
"Element of Financial Statements," and if the amount of the liability can be
reasonably estimated. Consequently, an entity should recognize a liability for
an asset retirement obligation if (a) the entity has a duty or responsibility to
settle an asset retirement obligation, (b) the entity has little or no
discretion to avoid the future transfer or use of assets, and (c) the
transaction or other events obligating the entity has occurred. When a
retirement obligation is initially recognized, the asset retirement cost is
capitalized by increasing the carrying amount of the related long-lived asset by
an amount equal to the liability.
The initial asset retirement obligation should be recorded at fair value.
Subsequent to the initial measurement, an entity should recognize changes in the
amount of the liability resulting from both the passage of time and revisions to
either the timing or amount of the estimated cash flows.
SFAS 143 is effective for financial statements issued for fiscal years
beginning after June 15, 2002.
Management does not expect this pronouncement will have an impact on the
2002 financial statements.
SFAS 144 "Impairment or Disposal of Long-Lived Assets" -- was issued to
address significant implementation issues related to SFAS 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of," and to develop a single accounting model to account for long-lived assets
to be disposed of. SFAS 144 supersedes SFAS 121 as well as the provisions of
Opinion 30, Reporting the Results of Operations -- Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions, that address the disposal of a segment of a
business. SFAS 144 also amends ARD 51, Consolidated Financial Statements, to
eliminate the exception to consolidate a subsidiary for which control is likely
to be temporary.
SFAS 144 carries over the recognition and measurement provisions in SFAS
121. Accordingly, an entity should recognize an impairment loss if the carrying
amount of a long-lived asset or asset group (a) is not
F-9
DONLAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
recoverable, and (b) exceeds its fair value. SFAS 144 requires an entity to test
an asset or asset group for impairment whenever events or changes in
circumstances indicate that its carrying amount may not be recoverable. SFAS 144
also provides guidance on using the probability-weighted approach or the best-
estimate approach in developing estimated future cash flows to test
recoverability.
Unlike SFAS 121, SFAS 144 includes criteria that have to be met for an
entity to classify a long-lived asset or asset group as held for sale. If the
criteria to classify an asset as held for sale are met after the balance sheet
date but before issuance of the financial statements, the asset group would
continue to be classified as held and used in those financial statements when
issued. The measurement of a long-lived asset or asset group classified as held
for sale is at the lower of its carrying amount or fair value less cost to sell.
Expected future losses associated with the operations of a long-lived asset or
asset group classified as held for sale are excluded from that measurement.
SFAS 144 is effective for financial statements issued for fiscal years
beginning after December 15, 2001, and interim periods within those fiscal
years.
Management does not expect this pronouncement will have an impact on the
2002 financial statements.
NOTE B -- GOING CONCERN
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As of December 31,
2001, the Company had an accumulated deficit of $136,441,923, a shareholders'
deficit of $30,298,463 and has had substantial recurring losses. The
consolidated operations of the Company have not achieved profitability and the
Company has relied upon financing from the sale of its equity securities,
liquidation of assets and debt financing to satisfy its obligations. These
conditions raise substantial doubt about the ability of the Company to continue
as a going concern. The consolidated financial statements do not include any
adjustments that might result from the outcome of these uncertainties.
The Company's ability to continue as a going concern is subject to the
attainment of profitable operations or obtaining necessary funding from outside
sources. Management's plan with respect to this uncertainty includes
reorganizing the Company and converting debt to equity, increasing sales of
existing products to attempt to maintain a positive cash flow, evaluating new
products and markets, and minimizing overhead and other costs. However, there
can be no assurance that management will be successful.
NOTE C -- ACQUISITION
On August 7, 2000, Donlar entered into an agreement with Donlar Biosyntrex
to purchase 427,311 shares of Donlar Biosyntrex common stock, approximately
19.9% of the outstanding shares, in exchange for a $1,115,025, 10% note due
December 31, 2000. On November 3, 2000, Donlar and Donlar Biosyntrex amended
this agreement. The restructured transaction took place in three phases. First,
Donlar Biosyntrex completed a 1 for 5 reverse split of its common stock.
Secondly, Donlar paid $563,500 in cash as a partial payment on the $1,115,025
note and received 1,127,000 shares of Donlar Biosyntrex common stock.
Thirdly, 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 Donlar Biosyntrex. Donlar Biosyntrex also received the
rights to certain research and development activities of Donlar and $1,850,000
in cash in exchange for issuing 40,152,520 additional shares of Donlar
Biosyntrex common stock to Donlar, so that upon completion of these
transactions, Donlar owned 96% of Donlar Biosyntrex common stock. Donlar also
agreed to transfer to Donlar Biosyntrex the balance of its assets and related
liabilities, except for Donlar's existing patent rights and all intellectual
property relating to Donlar's genetic research activities.
F-10
DONLAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Since the foregoing transactions represent a change in control of Donlar
Biosyntrex, they were accounted for as a reverse acquisition and a purchase of
Donlar Biosyntrex by Donlar. For the year ended December 31, 2000, the financial
statements include the activity of Donlar, and also include the activity of
Donlar Biosyntrex subsequent to the date of acquisition, (November 3, 2000
through December 31, 2000). The purchase price of Donlar Biosyntrex is
considered to be the estimated fair value of 4% of Donlar's stock, or
$1,700,000, plus acquisition costs incurred of $338,953. In determining the fair
value assigned to Donlar Corporation shares in the purchase price, the starting
point used was a value of $0.77 per share for the common and preferred shares.
This is the price that the shares had been issued to independent parties in 2000
and also the price at which much of the debt was convertible. As of the date of
the acquisition, Donlar had approximately 56,500,000 shares outstanding,
resulting in approximately $43,550,000 in market capitalization. Since Donlar
shareholders gave up a 4% interest in substantially all of Donlar's assets, the
purchase price would be $43,550,000 * 4%, resulting in a purchase price of
approximately $1,700,000, the fair value used in the acquisition. The
acquisition price was allocated as follows:
<Table>
Cash........................................................ $ 1,780
Accounts receivable......................................... 91,214
Inventory................................................... 168,040
Investments................................................. 864,434
Other assets................................................ 38,236
Fixed assets................................................ 125,000
Goodwill.................................................... 1,552,073
Liabilities assumed......................................... (1,140,777)
-----------
$ 1,700,000
===========
</Table>
The acquisition was accounted for by the purchase method and the excess of
the acquisition price over the fair value of the assets acquired is accounted
for as goodwill and is being amortized over five years.
Following is the summarized unaudited pro forma combined results of
operations for the year ended December 31, 2000, assuming the acquisition had
taken place at the beginning of the year. The unaudited pro forma results are
not necessarily indicative of future results or results that would have been
reported had the acquisition been completed when assumed.
<Table>
Net sales................................................... $ 1,893,508
Net loss.................................................... (19,704,238)
Basic loss per share........................................ (2.38)
</Table>
During 2001, the Company determined its goodwill was impaired. This was due
to negative cash flows from the above-mentioned acquisition and the decrease in
revenue from the product lines included in the purchase. This impairment was
$1,189,923 for the year ended December 31, 2001, and goodwill was reduced to
zero.
F-11
DONLAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE D -- DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS
<Table>
Inventories
Finished goods............................................ $ 1,215,697
Raw materials............................................. 1,843,876
Reserve for obsolescence.................................. (1,217,329)
-----------
$ 1,842,244
===========
Payables and accrued expenses
Trade payables............................................ $ 1,498,394
Accrued interest.......................................... 5,188,538
Accrued other............................................. 2,401,861
-----------
$ 9,088,793
===========
</Table>
NOTE E -- PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, along with corresponding estimated useful
lives, consisted of the following:
<Table>
<Caption>
USEFUL LIFE AMOUNT
----------- -----------
Land........................................................ $ 566,782
Building.................................................... 30 years 5,820,273
Laboratory and plant equipment.............................. 5-10 years 7,467,403
Furniture and fixtures...................................... 5-7 years 205,151
Leasehold improvements...................................... 1-4 years 56,008
-----------
Total property, plant and equipment....................... 14,115,617
Less accumulated depreciation and amortization.............. 4,546,517
-----------
Property, plant and equipment, net........................ $ 9,569,100
===========
</Table>
NOTE F -- NOTES PAYABLE
Notes payable consisted of the following:
SHORT-TERM NOTES PAYABLE
<Table>
Unsecured note payable to shareholder and director of the
Company, due October 31, 2002, bearing interest at prime
plus 2%, net of unamortized debt discount of $-0- at
December 31, 2001......................................... $3,000,000
Unsecured note payable to shareholder and director of the
Company, due December 31, 2001, bearing interest at prime
plus 2%................................................... 50,000
Unsecured note payable to shareholder and director of the
Company, due September 6, 2002, with no stated interest
rate...................................................... 21,000
Demand note payable to shareholder of the Company, bearing
interest at 11%, collateralized by a stock pledge
agreement covering all of the shares of Donlar Biosyntrex
common stock currently held by Donlar..................... 252,000
Unsecured note payable to shareholder of the Company due
July 17, 2002, bearing interest at prime plus 2%.......... 50,000
</Table>
F-12
DONLAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
Unsecured note payable to a shareholder and director of the
Company, due September 30, 2002, bearing interest at 11%
per annum, collateralized by a second lien on the patents
held by Donlar, net of unamortized debt discount of
$769,725 at December 31, 2001............................. 4,361,782
----------
$7,734,782
==========
</Table>
LONG-TERM NOTES PAYABLE
<Table>
Notes payable to venture capital shareholders of the
Company, $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 Donlar's option,
collateralized by a third lien on patents held by Donlar
and a second lien on all assets of Donlar Biosyntrex...... $9,000,000
----------
$9,000,000
==========
</Table>
In 2000, the Company issued a note to Dr. Robert G. Martin, a director and
shareholder, in the amount of $3,000,000. This note bears interest at prime plus
2% (6.75% at December 31, 2001) and had a maturity date of April 30, 2001. The
note was amended and now has a maturity date of October 31, 2002. In connection
with that transaction, Donlar issued Dr. Martin a warrant to purchase shares of
its common stock at $0.01 a share. The total number of shares subject to the
warrant is equal to 15% of the total common stock of Donlar (19,558,320 shares)
and will be increased to 30% of the total common stock if the note is not paid
in full at the maturity date. This warrant has an expiration date of December
31, 2006. The value of the warrant on the date of issuance was $14,864,323,
computed using the Black-Scholes option pricing method. The $3,000,000 proceeds
were allocated to the note ($503,798) and paid-in capital for the warrant
($2,496,202) based on the relative fair value of securities issued. The related
debt discount associated with the warrant is being amortized over the life of
the Note, and recognized as interest expense.
In 1996, Donlar received $26,000,000 from the venture capital shareholders
in exchange for (a) unsecured notes payable, which are convertible into shares
of Donlar Series A and B preferred stock, (b) Series C preferred stock of
Donlar, (c) shares in one of the Donlar's subsidiaries, (d) warrants to purchase
common stock of Donlar 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. 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 dividends. Since this stock had
only minimal value, a nominal $1,000 was estimated to be the fair market value.
The shares of Donlar's subsidiary were assigned a value of $1,000, since the
subsidiary had no operations and 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. The
face amount of the convertible notes 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 convertible notes contained an automatic conversion provision. In 1997,
holders of convertible notes aggregating $4,000,000 (face amount) surrendered
their notes following a notice and request by Donlar for conversion. In 1999,
the holders of the notes aggregating $22,000,000 entered into a settlement
agreement with Donlar, under the terms of which (a) Donlar paid the note holders
$8 million in cash and $9 million in 10% seven-year notes, (b) the warrants,
royalty rights and Donlar's Series B and C preferred stock held by the note
holders were cancelled, and (c) the convertible notes were converted into
20,278,456 shares of Donlar Series A preferred stock. These convertible note
holders are entitled to receive one share of Donlar's common or Series A
preferred stock for every three shares of common or Series A preferred stock
issued by Donlar in
F-13
DONLAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the future as a result of the exercise or conversion of options, warrants and
convertible debt of Donlar outstanding at December 31, 1999, with exercise or
conversion prices greater than $1.00 per share.
Dr. Martin deposited into an escrow account $1,000,000, which was paid to
holders of convertible notes in connection with the 1999 settlement described
above. In exchange for the $1,000,000, Donlar issued to Dr. Martin a one-year
unsecured note, bearing interest at 10%, due on December 31, 2000, and a
seven-year warrant to purchase 4,347,826 shares of Donlar Series A preferred
stock at $0.23 per share. The value of the warrant at the time of issuance was
$2,811,739, computed using the Black-Scholes option pricing method. The
$1,000,000 proceeds were allocated to the note ($262,348 net of debt discount)
and paid-in capital ($737,652) for the warrant based on the relative fair value
of the securities issued. The note was paid in full in 2000.
In 1999, Donlar borrowed $5,131,507 from Dr. Martin, 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 patents held by Donlar.
These interest payments were not made in 2001. In connection with this
transaction, Donlar issued Dr. Martin seven-year warrants to purchase 12,000,000
shares of Donlar 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.
Convertible debt consisted of the following:
<Table>
Unsecured notes payable, due April 15, 2001, bearing
interest at 12%, convertible into a variable number of
shares of Donlar Series A preferred stock at 90% of the
per share value of an initial public offering of Donlar or
strategic investment, net of unamortized debt discount of
$-0- at December 31, 2001................................. $ 763,500
Note payable, collateralized by all the Company's tangible
and intangible assets, due January 1, 2005, bearing
interest at 10% per annum, convertible into shares of
Donlar common stock at $1.01 per share, net of unamortized
debt discount of $1,322,352 at December 31, 2001.......... 15,789,636
Unsecured notes payable, due on various dates in 2005,
bearing interest at 15%, convertible into a variable
number of shares of Donlar Series A preferred stock at
$1.01 per share, or $0.505 per share upon an initial
public offering of Donlar, net of unamortized debt
discount of $290,498 at December 31, 2001................. 1,476,464
Unsecured note payable, due July 17, 2005, bearing interest
at 12%, convertible into a variable number of shares of
Donlar Series A preferred stock at $1.01 per share, or
$0.505 per share upon an initial public offering of
Donlar.................................................... 150,000
Unsecured notes payable to a shareholder/director of Donlar,
due on various dates in 2005, bearing interest at 15%,
convertible into a variable number of shares of Donlar
Series A preferred stock at $0.77 per share, or $0.385 per
share upon an initial public offering of Donlar, net of
unamortized debt discount of $715,354 at December 31,
2001...................................................... 284,646
-----------
18,464,246
Less current portion........................................ 1,751,027
-----------
$16,713,219
===========
</Table>
In 1998, Donlar received $763,500 from certain shareholders in exchange for
(a) 12% three-year notes convertible into Donlar Series A preferred stock at 90%
of the per share value of an initial public offering or a future equity
investment in Donlar of at least $15,000,000; and (b) ten-year warrants for
$763,500 in Donlar Series A preferred stock, exercisable at the per share value
of the next equity investment in Donlar of at least $15,000,000. A debt discount
of $551,000 recorded to reflect the value of the warrants is being amortized
over
F-14
DONLAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 Donlar 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.
During 1997, Donlar borrowed $5,000,000 from a commercial bank
collateralized by a mortgage on Donlar's Peru, Illinois plant and equipment.
This transaction was supported by the commitment of a group of insurance
companies, which were shareholders of Donlar, to purchase the $5,000,000 note
and related 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.
In 1998, the $5,000,000 note described in the preceding paragraph and
915,000 shares of Donlar Series A preferred stock owned by the group of
insurance companies (referred to above) were purchased by Donlar and
restructured into a 7% five-year note convertible into shares of Donlar common
stock at $5.00 per share or 85% of the per share value of a future public
offering or strategic equity investment in Donlar of at least $15,000,000. Cash
proceeds to Donlar 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, Donlar 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 holders referred to in the preceding
paragraph, 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, Donlar and the note holder restructured the note, accrued interest and
late fees on the note as well as an additional $5,000,000 of cash proceeds to
Donlar, 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 Donlar 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, Donlar granted
the insurance companies a 7-year warrant for the purchase of 6,025,171 shares of
Donlar common stock at an exercise price of $0.01 per share. The $5,000,000
proceeds were allocated to the note ($2,796,146) and paid-in capital
($2,203,854) based on the relative fair value of the securities issued.
In 2000, Donlar received $1,767,000 from certain shareholders in exchange
for (a) five year 15% notes convertible into shares of Donlar Series A preferred
stock at $1.01 per share, or $0.505 per share in the event of an initial public
offering, and (b) five year warrants to purchase 773,062 shares of Donlar Series
A preferred stock at $0.01 per share. The cash proceeds were allocated to the
note and warrant based on the relative fair value of the securities issued. The
value of the warrants at the time of issuance was $587,527 calculated using the
Black Scholes option pricing model. The $1,767,000 proceeds were allocated to
the note ($1,326,079) and paid-in-capital for the warrants ($440,921) based on
the relative fair value of securities issued.
In 2000, Dr. Martin paid $1,000,000 for (a) five year 15% note convertible
into shares of Donlar Series A preferred stock at $0.77 per share, or $0.385 per
share in the event of in initial public offering and (b) five year warrant to
purchase 4,069,262 shares of Donlar Series A stock at $0.01 per share. Dr.
Martin was also granted a 1% royalty on all Donlar sales for ten years. The cash
proceeds were allocated to the note, warrant and royalty obligation based on the
relative fair value of the securities issued and the present value of the
projected revenue stream. The value of the warrant at the time of issuance was
$3,092,639 calculated using the Black Scholes option pricing model. The
$1,000,000 proceeds were allocated to the note ($244,341) and paid-in-
F-15
DONLAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
capital for the warrant ($755,659) based on the relative fair value of
securities issued. An additional debt discount was recorded on this note because
of its beneficial conversion factor. This additional discount left the book
value of the note at $-0-.
Another investor purchased for $150,000 a five year 12% note convertible
into shares of Donlar Series A preferred stock at $1.01 per share, or $.505 per
share in the event of an initial public offering.
DEBT MATURITIES
At December 31, 2001, the notes payable and convertible debt mature as
follows:
<Table>
2002........................................................ $10,255,536
2003........................................................ 711,287
2004........................................................ 785,128
2005........................................................ 17,545,006
2006........................................................ 9,000,000
-----------
38,296,957
Less imputed interest....................................... 3,097,929
-----------
$35,199,028
===========
</Table>
NOTE G -- INCOME TAXES
The benefit for income taxes is different than amounts, which would be
provided by applying the statutory Federal income tax rate to loss before
benefit for income taxes for the following reasons:
<Table>
<Caption>
YEARS ENDED
DECEMBER 31,
-------------
2001 2000
----- -----
Federal income tax benefit at statutory rate................ 34.0% 34.0%
State income tax benefit.................................... 4.6 4.6
Permanent differences....................................... (13.2) (5.5)
Valuation allowance......................................... (25.4) (33.1)
----- -----
Federal income tax benefit at statutory rate................ 00.0% 00.0%
===== =====
</Table>
Deferred tax assets are comprised of the following:
<Table>
Net operating loss carryforwards............................ $ 21,152,000
Write-down of assets........................................ 663,000
Allowance for bad debts..................................... 5,000
Inventory................................................... 87,000
Other accounts.............................................. 30,000
Valuation allowance......................................... (21,937,000)
------------
$ --
============
</Table>
The Company's net operating loss carryforward benefit and valuation
allowance were reduced for the expiration of both the investment tax credit
carryforward and a portion of the net operating loss carryforward.
As of December 31, 2000, the Company had net operating loss carryforwards
("NOL's") for Federal income tax reporting purposes of approximately
$55,000,000. These NOL's will expire over time between 2001
F-16
DONLAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
through 2020. There can be no assurance that all of these NOL's will be
available to offset future taxable income, if any. An NOL generated in a
particular year will expire for Federal income tax purposes if not utilized
within 15 to 20 years, depending on when the NOL's were generated. Additionally,
the Internal Revenue Code contains other provisions, which could reduce or limit
the availability and utilization of these NOL's. For example, limitations are
imposed on the utilization of NOL's if certain ownership changes have taken
place. In accordance with SFAS No. 109, a valuation allowance is provided when
it is more likely than not that some portion of the deferred income tax asset
will not be realized. Due to the uncertainty with respect to the ultimate
realization of the NOL's, the Company has established a valuation allowance for
all of its deferred income tax assets.
The Company could be subject to alternative minimum tax, which the NOL's
cannot be used to offset; however, an assessment has not yet been determined.
NOTE H -- GAIN ON SALE OF PRODUCT LINE
In 2000, the Company's subsidiary sold its Nite Bite product line for
$1,482,000. A retention reserve of 10% was established in the amount of
$148,200. The retention reserve had an allowance booked against it at the date
Donlar Biosyntrex was acquired by Donlar. In 2001, the Company received the full
retention reserve, and a gain of $100,000 was recorded.
NOTE I -- COMMON AND PREFERRED STOCK
Donlar's authorized common and preferred stock as of December 31, 2001 was
60,000,000 shares of common stock with no par value, and 38,000,000 shares of
preferred stock with no par value.
NOTE J -- EQUITY TRANSACTIONS
In January 2001, Donlar sold 1,500,000 shares of its common stock to an
investor for $714,593. These shares were issued for cash.
In January 2001, the Company entered into an agreement with a media
relations firm. This agreement was for a period of one year. The Company issued
the firm a warrant to purchase 1,250,000 shares of Donlar Biosyntrex common
stock at an exercise price of $0.01 per share. This warrant could only be
exercised if, in the Company's opinion, the media relations firm satisfied its
obligations under the agreement. This agreement and the warrant were cancelled
in April 2001 when the Company entered into a new agreement effective January
20, 2001 with the same media relations firm. The term of the new agreement was
one year and the Company issued 500,000 shares of Donlar Biosyntrex common stock
to the media relations firm in connection with the execution of the agreement.
The Company recorded $468,750 of general and administrative expenses which is
the fair value of the stock issued. These shares were issued in exchange for
services rendered. Additionally, the Company issued the media relations firm
750,000 shares of Donlar Biosyntrex common stock which are being held in an
escrow account by the media relations firm until satisfaction of the terms of
the agreement. The fair value of these 750,000 shares were recorded as deferred
compensation in the amount of $703,125. This amount was amortized over one year,
the life of the agreement, as adjusted for changes in fair value over the term
of the agreement. The Company believes that the conditions for the release of
the 750,000 shares to the media relations firm from escrow were not satisfied
and the Company has requested return of the shares.
In March 2001, an investment advisor exercised a warrant to purchase
400,000 shares of Donlar Biosyntrex common stock for $0.01 a share, pursuant to
its August 2000 agreement with the Company. These shares were issued for cash.
In April 2001, the Company entered into a management services agreement
with an investment advisor. In exchange for the services performed relating to
potential acquisitions, the Company issued 1,000,000 shares
F-17
DONLAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of Donlar Biosyntrex common stock to the investment advisor. The Company
recorded $1,230,000 in general and administrative expenses during April 2001
equal to the fair value of these shares. These shares were issued for services
rendered.
On May 11, 2001, the Company issued a warrant to purchase 500,000 shares of
common stock at $2.50 a share to the investment advisor referred to above. In
connection with this transaction, the Company recorded $403,900 of general and
administrative expenses, which is the fair value of the warrant issued. The fair
value of the warrant is estimated using the Black-Scholes pricing model, with an
expected volatility of 145%, a risk-free interest rate of 5% and 0% dividend
yield. On June 6, 2001, this investment advisor partially exercised the warrant
to purchase 18,000 shares. This warrant was issued for services rendered and the
partial exercise of the warrant was done in cash.
In November 2000, Donlar Biosyntrex issued and delivered 8,000,000 shares
of its common stock, representing approximately 17% of Donlar Biosyntrex, to a
shareholder and former director of Donlar so that he could pledge that stock to
a commercial bank as collateral for a loan. Donlar agreed to the surrender for
cancellation of 8,000,000 shares of Donlar Biosyntrex common stock held by
Donlar. The issuance of 8,000,000 shares by Donlar Biosyntrex and the surrender
by Donlar of 8,000,000 shares, together with other unrelated stock issuances by
Donlar Biosyntrex, increased the minority interest from 4% to 32%. No accounting
recognition was given to the transaction. Donlar recognized a receivable from
the former director and shareholder in connection with the transfer of 8,000,000
shares in its subsidiary, Donlar Biosyntrex; however, the receivable was
recorded at no value because Donlar's carrying value of the subsidiary was
negative due to Donlar Biosyntrex's shareholders' deficit. In June 2002, the
former director and shareholder agreed to cancel 4,289,816 shares of Donlar
stock held by him in satisfaction of the receivable.
Prior to January 1, 2000, Donlar in various transactions issued 14,369,528
shares of Series A Preferred stock in excess of the authorized shares of that
class of stock. To eliminate the over-issuance, two shareholders of the Company
who are directors agreed in 2002 to exchange 14,369,528 shares of Series A
Preferred stock of Donlar owned by them for an equal number of shares of common
stock of Donlar.
NOTE K -- STOCK OPTIONS AND WARRANTS
Donlar has established a Stock Incentive Plan (the "Plan"), which allows
for the granting of incentive stock options, nonqualified stock options, stock
appreciation rights and the award of common stock to certain individuals,
including employees, officers, directors consultants, and others as designated
by the Board of Directors. Under the terms of the Plan, the exercise prices for
incentive stock options shall not be less than the fair market value at the date
of grant.
The exercise price for nonqualified stock options shall not be less than
the lesser of:
(1) the book value per share of common stock as of the end of the year
of Donlar immediately preceding the date of grant, or
(2) 50% of the fair market value per share of Donlar common stock on
the date of grant.
Options are exercisable within periods determined by the Board of Directors
but may not exceed ten years from the date of grant.
F-18
DONLAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of Donlar stock option activity is as follows:
<Table>
<Caption>
WEIGHTED
NUMBER OF EXERCISE AVERAGE
COMMON STOCK SHARES PRICE RANGE EXERCISE PRICE
- ------------ --------- ------------ --------------
Outstanding at January 1, 2000.................. 2,446,327 $0.30 - 5.50 $0.35
Granted....................................... -- -- --
Exercised..................................... -- -- --
Cancelled..................................... -- -- --
--------- ------------ -----
Outstanding at December 31, 2000................ 2,446,327 0.30 - 5.50 0.35
Granted....................................... -- -- --
Exercised..................................... -- -- --
Cancelled..................................... (246,111) 0.30 - 1.00 0.40
--------- ------------ -----
Outstanding at December 31, 2001................ 2,200,216 .30 - 5.50 .34
=========
Exercisable at December 31, 2001................ 2,190,216 $ .30 - 5.50 $ .42
========= ============ =====
</Table>
<Table>
<Caption>
WEIGHTED
NUMBER OF EXERCISE AVERAGE
SERIES A PREFERRED STOCK SHARES PRICE RANGE EXERCISE PRICE
- ------------------------ --------- ------------ --------------
Outstanding at January 1, 2000.................. 494,248 $3.00 - 5.50 $4.32
Granted....................................... -- -- --
Exercised..................................... -- -- --
Cancelled..................................... -- -- --
------- ------------ -----
Outstanding at December 31, 2000................ 494,248 3.00 - 5.50 4.32
Granted....................................... -- -- --
Exercised..................................... -- -- --
Cancelled..................................... (37,000) 5.00 - 5.50 5.27
------- ------------ -----
Outstanding at December 31, 2001................ 457,248 3.00 - 5.50 4.25
=======
Exercisable at December 31, 2001................ 445,248 $3.00 - 5.50 $
======= ============ =====
</Table>
When accounting for the issuance of stock options and warrants, financial
accounting standards allow entities the choice between adopting a fair value
method or an intrinsic value method with footnote disclosures of the pro forma
effects if the fair value method had been adopted. Donlar has opted for the
latter approach. Had Donlar options and warrants been determined based on the
fair value method, the results of operations would have been reduced to the pro
forma amounts indicated below:
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
---------------------------
2001 2000
------------ ------------
Net loss applicable to common shares -- as reported...... $(16,105,313) $(12,663,870)
Net loss applicable to common shares -- pro forma........ (16,133,199) (13,023,339)
</Table>
F-19
DONLAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following assumptions:
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
------------------------
2001 2000
--------- ---------
Expected dividend yield..................................... $ -- $ --
Expected stock price volatility............................. 55% 55%
Risk-free interest rate..................................... 5.8% 5.8%
Expected life of options.................................... 7 years 7 years
</Table>
A summary of Donlar warrant activity is as follows:
<Table>
<Caption>
WEIGHTED
NUMBER OF EXERCISE AVERAGE
COMMON STOCK SHARES PRICE RANGE EXERCISE PRICE
- ------------ ---------- ------------ --------------
Outstanding at January 1, 2000................. 6,296,788 $0.01 - 0.30 $
Granted...................................... 19,558,320 .01 .01
Exercised.................................... -- -- --
Cancelled.................................... -- -- --
---------- ------------ -----
Outstanding at December 31, 2000............... 25,855,108 $0.01 - 0.30 0.01
Granted...................................... -- -- --
Exercised.................................... -- -- --
Cancelled.................................... -- -- --
---------- ------------ -----
Outstanding at December 31, 2001............... 25,855,108 $0.01 - 0.30 $0.01
========== ============ =====
</Table>
<Table>
<Caption>
WEIGHTED
NUMBER OF EXERCISE AVERAGE
SERIES A PREFERRED STOCK SHARES PRICE RANGE EXERCISE PRICE
- ------------------------ ---------- ------------ --------------
Outstanding at January 1, 2000................. 18,113,908 $0.01 - 5.00 $ .48
Granted...................................... 4,842,324 .01 .01
Exercised.................................... (4,347,826) .23 .23
Cancelled.................................... -- -- --
---------- ------------ -----
Outstanding at December 31, 2000............... 18,608,406 $0.01 - 5.00 0.41
Granted...................................... -- -- --
Exercised.................................... -- -- --
Cancelled.................................... -- -- --
---------- ------------ -----
Outstanding at December 31, 2001............... 18,608,406 $0.01 - 5.00 $
========== ============ =====
</Table>
NOTE L -- BENEFIT PLANS
In 1996, Donlar 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. Donlar may make
discretionary contributions. As of December 31, 2001 and 2000, Donlar has not
made any contributions to the plan.
F-20
DONLAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE M -- RELATED-PARTY TRANSACTIONS
During 2000, Donlar entered into a management consulting agreement with a
shareholder and director of Donlar. The agreement provides that in consideration
of the services provided by the consultant, a consulting fee will be earned,
equivalent to 1% of all sales of polymer products that occur during each year of
the term of the agreement. The initial payment is to be made on or before April
15, 2001, and a final payment on or before April 15, 2010. The amount accrued at
December 31, 2001, was approximately $28,500.
During 2000, Donlar entered into a one-year consulting agreement with the
former president of Donlar Biosyntrex for a consulting fee of $125,000 payable
on equal monthly installments. The entire fee was paid during 2001 through the
issuance of shares of Donlar Biosyntrex stock.
NOTE N -- OPERATING LEASES
The Company leases its facilities related to continuing operations under
noncancellable operating leases, which expire through February 2006. Lease
expense for years ended December 31, 2001 and 2000, was approximately $226,763
and $51,000, respectively. Future minimum lease commitments are as follows:
<Table>
<Caption>
FISCAL YEAR AMOUNT
- ----------- -------
2002........................................................ $21,416
2003........................................................ 11,460
2004........................................................ 11,460
2005........................................................ 8,982
2006........................................................ 594
-------
$53,912
=======
</Table>
NOTE O -- 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 $9,557 and $10,874 for
the years ended December 31, 2001 and 2000, respectively. The amount accrued at
December 31, 2001, was approximately $163,000.
The Company has an employment agreement with the President expiring on June
30, 2003, providing for minimum aggregate annual payments of $185,000 and
severance in the event of termination. Under the agreement, the President is
also eligible for cash and stock bonuses.
The Company has an employment agreement with its chief operating officer
expiring on September 7, 2003, renewing for three additional years if certain
sales goals are met and providing for minimum aggregate annual payments of
$160,000 plus an automobile allowance and severance in the event of termination.
Under the agreement, the chief operating officer is also eligible for incentive
cash and stock bonuses.
Donlar and the Vice President of Research of its subsidiary, Donlar
Pharmaceutical Corporation, entered into an agreement in May 1997, whereby
Donlar purchased certain patents relating to the use of polyaspartates in a wide
variety of allergic conditions. In return for those patents, the Vice President
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
F-21
DONLAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
LITIGATION
Because of the nature of its activities, the Company is subject to legal
actions, which arise in the normal course of business. In the opinion of
management, the disposition of any such matters would not have a material effect
on the consolidated financial position of the Company.
NOTE P -- SIGNIFICANT SOURCE OF REVENUES
The Company had sales to certain customers that have accounted for at least
10% of the Company's net revenue. Revenues from external foreign customers
totaled $1,791,911 during 2001. Customer information is as follows for the years
ended December 31, 2001 and 2000:
<Table>
<Caption>
PERCENTAGE OF
PERCENTAGE OF ACCOUNTS
NET REVENUES RECEIVABLE
-------------- -------------
2001 2000 2001
----- ----- -------------
Customer A................................................ 12.7% 29.1% 0.0%
Customer B................................................ 23.6 10.3 38.5
Customer C................................................ 21.6 4.1 20.1
</Table>
NOTE Q -- SUBSEQUENT EVENTS
On March 18, 2002, the Company entered into a bridge loan of $2.127
million. The loan agreement states proceeds are to be used to pay down certain
accounts payable and certain short-term debt, provide working capital and pay
for expenses related to the restructuring of the Company. The bridge loan bears
interest at 11% and has a maturity date of March 18, 2003. As a condition to
this new loan, the Company had to obtain approval of a debt restructuring from
some of its other noteholders.
In addition, the terms of existing loans to the Company are expected to be
renegotiated to make the obligation total approximately $19,200,000, which will
reflect the original loans and accrued interest. The restated loans will be
divided into two loans. The first loan will have a principal balance of
$10,180,000, bears interest at 9%, until March 18, 2003, at which time interest
will be payable. Principal payments are to be made at $222,500 per quarter. Any
unpaid principal and interest will be due on March 31, 2007. The second loan
will have a principal balance of $9,000,000 and bear interest at 1%, no payments
of which will be required until March 31, 2005. Any unpaid principal and
interest will be due on March 31, 2007.
Each of the loans will be convertible at the option of the holder into
common stock of Donlar Biosyntrex. The restated loans will convert at a rate of
one share per $0.68 of outstanding principal of the loans.
In addition, two major debt holders will exchange approximately $18,800,000
of notes payable into convertible preferred stock.
The restructuring plan calls for Donlar Biosyntrex to be merged into Donlar
during 2002. The shareholders of Donlar Biosyntrex will receive 0.26 shares of
Donlar common stock for each share of Donlar Biosyntrex.
In connection with the restructuring plan, the Company has reached
agreements to issue 465,000 share of common stock of Donlar after the merger to
accounts payable and other creditors as payment for open payables and claims
against either Donlar or Donlar Biosyntrex. The issuances will result in an
adjustment to debt conversion expense of $92,400. The issuances of the shares
are contingent upon the merger.
F-22
DONLAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE R -- RESTATEMENT
At December 31, 2000, debt discount, interest expense, net loss and per
share amounts have been adjusted from previously reported amounts to reverse
repayment of Donlar Corporation debt in the amount of $3,000,000 and the
exercise of warrants to purchase 19,559,432 common shares and 16,408,324
preferred shares of Donlar Corporation stock for a total exercise price of
$3,000,000. The transaction could not be completed due to the lack of authorized
shares. The financial statements have been corrected to reflect the unwinding of
the transaction. Net loss for 2000 was increased by $1,050,103 ($0.03 per
share).
F-23
APPENDIX A
AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER
THIS AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER (this "Agreement"),
dated as of June 7, 2002, is made by and among Donlar Corporation, an Illinois
corporation ("Donlar") and Donlar Biosyntrex Corporation, a Nevada corporation
and Donlar's majority owned subsidiary ("Donlar Bio").
WHEREAS, Donlar owns 33,279,520 shares of Donlar Bio (formerly Biomune
Systems, Inc.) comprising approximately 68% of the outstanding shares of Donlar
Bio;
WHEREAS, Donlar and Donlar Bio together have entered into a bridge loan
agreement dated March 18, 2002, (the "Loan Agreement") with Tennessee Farmers
Life Insurance Company, a Tennessee corporation licensed to sell life insurance
in Tennessee, and its affiliates ("Tennessee Farmers");
WHEREAS, in consideration for Tennessee Farmers entering into the Loan
Agreement, Donlar and Donlar Bio have agreed to use their best efforts to merge
on or before July 7, 2002 or such later date as agreed by Tennessee Farmers (the
"Completion Date");
WHEREAS, Tennessee Farmers has extended the date for completion of the
merger to September 1, 2002;
WHEREAS, the merger of Donlar and Donlar Bio is subject to the approval of
the shareholders of Donlar and Donlar Bio.;
WHEREAS, the Loan Agreement provides that it is an event of default
thereunder if Donlar and Donlar Bio fail to merge on or before the Completion
Date; and
WHEREAS, the boards of directors of Donlar Bio and Donlar have each
approved this Agreement and the merger of Donlar Bio with and into Donlar, and
deem it advisable and in the best interests of their respective shareholders to
consummate the merger of Donlar Bio and Donlar upon the terms and subject to the
conditions set forth herein.
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth herein, the
parties hereto agree as follows:
ARTICLE 1
THE MERGER
1.1 The Merger. Donlar Bio shall be merged with and into Donlar (the
"Merger"), and the separate corporate existence of Donlar Bio shall cease. After
the Merger, Donlar shall continue as the surviving corporation (sometimes
hereinafter referred to as the "Surviving Corporation"). The Merger shall have
the effect as provided in the applicable provisions of the Nevada Private
Corporations Act and the Business Corporation Act of the State of Illinois.
Without limiting the generality of the foregoing, upon the Merger, all the
rights, privileges, immunities, powers and franchises of Donlar and Donlar Bio
shall vest in the Surviving Corporation, and all obligations, duties, debts and
liabilities of Donlar and Donlar Bio shall be the obligations, duties, debts and
liabilities of the Surviving Corporation.
1.2 Approval of the Merger. Donlar agrees: (i) to vote all of its shares
of common stock of Donlar Bio in favor of the approval of this Agreement and the
transactions contemplated hereby; and (ii) to use its best efforts to obtain the
vote of the holders of its capital stock in favor of the approval of this
Agreement and the transactions contemplated hereby.
1.3 Effective Time. Subject to the terms and conditions hereof, as soon as
practicable, Donlar Bio and Donlar will cause an Information Statement and a
Form S-4 Registration Statement for use in connection with the Merger to be
prepared and filed with the Securities and Exchange Commission (the "SEC"), in
such
A-1
form and executed as provided in the Securities Act of 1933, as amended (the
"Securities Act"), and the Securities and Exchange Act of 1934, as amended (the
"Exchange Act"). Upon the effectiveness of the Form S-4 Registration Statement,
Donlar and Donlar Bio will distribute the Information Statement to their
shareholders for use in connection with the meetings of shareholders of Donlar
and Donlar Bio to approve the Merger. The meetings of these shareholders shall
be held no later than thirty (30) days after the effectiveness of the Form S-4
Registration Statement, unless otherwise agreed to by Tennessee Farmers. The
Merger shall become effective on the date the Articles of Merger ("Articles of
Merger") are filed with the Secretaries of State of Illinois and Nevada, which
shall be the date on which the Merger is approved by the shareholders of both
Donlar and Donlar Bio, or at such other time as is agreed upon by Donlar, Donlar
Bio and Tennessee Farmers, and such date or time, as applicable, is hereinafter
referred to as the "Effective Time." In no event shall the Effective Time be
later than September 1, 2002, or such later date as is agreed by Tennessee
Farmers.
1.4 Directors and Officers of the Surviving Corporation.
(a) The directors of Donlar immediately prior to the Effective Time shall,
from and after the Effective Time, remain directors of the Surviving
Corporation.
(b) The officers of Donlar immediately prior to the Effective Time shall,
from and after the Effective Time, remain officers of the Surviving Corporation.
1.5 Articles of Incorporation and Bylaws.
(a) As of the Effective Time, the articles of incorporation of Surviving
Corporation shall be the amended and restated articles of incorporation of
Donlar, attached hereto as Exhibit A.
(b) As of the Effective Time, the bylaws of the Surviving Corporation shall
be the amended and restated bylaws of Donlar, attached hereto as Exhibit B.
ARTICLE 2
CONVERSION OF SHARES
2.1 Conversion of Capital Stock. As of the Effective Time, by virtue of
the Merger and without any further action on the part of the holders of the
capital stock of Donlar and Donlar Bio, the holders of the capital stock of
Donlar and Donlar Bio shall have their shares of capital stock converted into
the right to receive shares of the common stock of the Surviving Company as
follows:
(a) All issued and outstanding shares of Donlar Bio common stock owned
by Donlar (33,279,520 shares) shall be canceled.
(b) All issued and outstanding shares of Donlar Bio common stock owned
by the shareholders of Donlar Bio other than Donlar (15,537,142 shares)
shall be converted into the right to receive in the aggregate, Four Million
Thirty Nine Thousand Four Hundred Seventy-Six (4,039,476 shares) fully paid
and nonassessable shares of common stock of the Surviving Corporation at
the rate of .25998836 shares of the Surviving Corporation common stock for
each share of Donlar Bio common stock.
(c) All issued and outstanding shares of Donlar Bio Series A Preferred
stock (39,124 shares) shall be converted into the right to receive in the
aggregate, Twenty-One Thousand (21,000 shares) fully paid and nonassessable
shares of common stock of the Surviving Corporation at the rate of one
share of the Surviving Corporation common stock for each originally issued
share of Donlar Bio Series A Preferred stock (i.e., excluding dividend
shares).
(d) All issued and outstanding shares of Donlar Bio Series B Preferred
stock (449 shares) shall be converted into the right to receive in the
aggregate, One Hundred Seventeen (117 shares) fully paid and nonassessable
shares of common stock of the Surviving Corporation at the rate of
.25998836 shares of the Surviving Corporation common stock for each share
of Donlar Bio Series B Preferred stock.
A-2
(e) All issued and outstanding shares of Donlar Preferred stock
(14,908,335 shares) shall be converted into the right to receive in the
aggregate, Seven Million Two Hundred Sixty Four Thousand Two Hundred
Eighteen (7,264,218 shares) fully paid and nonassessable shares of common
stock of the Surviving Corporation at the rate of .48725820 shares of the
Surviving Corporation common stock for each share of Donlar Preferred
stock.
(f) All issued and outstanding shares of Donlar common stock
(2,848,735 shares) shall be converted into the right to receive in the
aggregate, One Million Three Hundred Eighty Eight Thousand Sixty-Nine
(1,388,069 shares) fully paid and nonassessable shares of common stock of
the Surviving Corporation at the rate of .48725820 shares of the Surviving
Corporation common stock for each share of Donlar common stock.
(g) Except for Tennessee Farmers right to acquire senior convertible
preferred shares of Donlar pursuant to the Loan Agreement, all outstanding
warrants, options or rights of any kind to acquire from Donlar any shares
of its capital stock or securities of any kind, shall be canceled without
further consideration.
(h) All outstanding warrants, options or rights of any kind to acquire
from Donlar Bio any shares of its capital stock or securities of any kind,
shall be canceled without further consideration.
2.2 No Fractional Shares. No fractional shares shall be issued by the
Surviving Corporation in the Merger. Each shareholder of Donlar and Donlar Bio
who otherwise would be entitled to a fractional interest in a share of the
Surviving Corporation's common stock shall be entitled to an additional share of
the Surviving Corporation's common stock only if such fractional interest is
greater than .5 of a share of the Surviving Corporation common stock. All other
fractional interests shall be canceled.
2.3 Exchange of Certificates. Immediately following the Effective Time,
the parties shall mail to each of their respective holders of record of a
certificate or certificates that immediately prior to the Effective Time
represented issued and outstanding shares of Donlar or Donlar Bio capital stock
(the "Certificates") a letter of transmittal to surrender the Certificates to
Donlar for cancellation. Upon the surrender and cancellation of each
Certificate, Donlar shall deliver each such cancelled Certificate to the
Secretary of Donlar Bio or Donlar and shall mail to such holders the common
stock of the Surviving Corporation to which they are entitled under Section 2.1
and 2.2.
2.4 Rights of Shareholders Pending Surrender of Certificate. From and
after the Effective Time, except as provided under the laws of Illinois and
Nevada with respect to the rights of the dissenting shareholders, each holder of
shares of capital stock of Donlar or Donlar Bio shall be entitled only, on
surrender of their Certificates to the Surviving Corporation, to receive shares
of common stock of the Surviving Corporation as provided in Sections 2.1 and
2.2. Until so surrendered, each Certificate shall be deemed to represent only
the right to receive common stock of the Surviving Corporation to the extent
provided in Section 2.1 and 2.2. The stock transfer books of Donlar and Donlar
Bio shall be closed as of the Effective Time and the date of the Effective Time
shall be the record date for determining the shareholders entitled to receive
common stock of the Surviving Corporation. No transfers of capital stock of
Donlar and Donlar Bio shall thereafter be made.
2.5 Certificates Not Surrendered. If Certificates are not surrendered and
exchanged for shares of common stock of the Surviving Corporation prior to one
(1) year from the Effective Time, the number of shares of common stock of the
Surviving Corporation into and for which such Certificates are exchangeable
shall become the property of the Surviving Corporation (and, to the extent not
in its possession shall be paid over to it), free and clear of all claims or
interest of any other person previously entitled thereto and the holders of such
Certificates shall cease to have any rights to receive shares of common stock of
the Surviving Corporation or any other consideration in connection with the
Merger.
A-3
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF DONLAR
Donlar hereby represents and warrants to Donlar Bio as follows:
3.1 Organization, Power and Authority of Donlar. Donlar is a corporation
duly organized and legally existing in good standing under the laws of Illinois,
and has full corporate power and authority to enter into this Agreement and
authority and all licenses and permits necessary to own or lease its properties
and to carry on its business as it is now being conducted. The execution,
delivery and performance of this Agreement and the consummation of the
transactions contemplated hereby have been duly authorized by all necessary
corporate action of Donlar.
3.2 Capital Stock of Donlar. The authorized capital stock of Donlar
consists solely of 60,000,000 shares of common stock, 21,483,224 shares of which
are issued and outstanding and 38,000,000 preferred shares, all of which are
outstanding. All voting rights in Donlar are vested exclusively in its shares of
common stock and preferred stock, and, to its knowledge, there are no voting
trusts, proxies or other agreements or understandings with respect to the voting
of the capital stock of Donlar. All of the issued and outstanding shares of
capital stock of Donlar are validly authorized and issued, fully paid and
non-assessable. There are no pre-emptive rights with respect to the issuance or
sale of shares of capital stock of Donlar.
3.3 Binding Obligation; Noncontravention. This Agreement has been duly
authorized, executed and delivered by Donlar and is a valid and binding
obligation of Donlar, enforceable in accordance with its terms. Neither the
execution and delivery of this Agreement by Donlar nor the consummation of the
transactions contemplated hereby will: (i) conflict with or violate any
provisions of the articles of incorporation or bylaws of Donlar or of any decree
or order of any court or administrative or other governmental body which is
either applicable to, binding upon or enforceable against Donlar; or (ii) result
in a breach of, constitute a default under, result in the acceleration of,
create in any party the right to accelerate, terminate, modify or cancel, or
require any notice under, any mortgage, contract, agreement, indenture or other
instrument which is either binding upon or enforceable against Donlar. Except
for the filing of the Articles of Merger, the Form S-4 Registration Statement
and the Information Statement, no permit, consent, approval or authorization of,
or declaration to or filing with, any regulatory or other governmental authority
is required in connection with the execution and delivery of this Agreement by
Donlar and the consummation of the transactions contemplated hereby.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF DONLAR BIO
Donlar Bio hereby represents and warrants to Donlar as follows:
4.1 Organization, Power and Authority of Donlar Bio. Donlar Bio is a
corporation duly organized and legally existing in good standing under the laws
of Nevada, and has full corporate power and authority and all licenses and
permits necessary to own or lease its properties and to carry on its business as
it is now being conducted. The execution, delivery and performance of this
Agreement and the consummation of the transactions contemplated hereby have been
duly authorized by all necessary corporate action of Donlar Bio.
4.2 Capital Stock of Donlar Bio. The authorized capital stock of Donlar
Bio consists of: (a) 500,000,000 shares of common stock, par value $0.0001 per
share, 48,816,622 shares of which are issued and outstanding and none of which
are issued and held in its treasury; and (b) 50,000,000 preferred shares, par
value $0.0001 per share, of which Donlar Bio's corporate records show 39,124
shares of Series A 10% Cumulative Convertible Preferred Stock and 449 shares of
Series B 10% Cumulative Convertible Preferred Stock are outstanding. All voting
rights in Donlar Bio are vested exclusively in its shares of common stock and
preferred stock, and, to its knowledge, there are no voting trusts, proxies or
other agreements or understandings with respect to the voting of the capital
stock of Donlar Bio. All of the issued and outstanding shares of capital stock
of Donlar Bio are validly authorized and issued, fully paid and non-assessable.
There are no pre-emptive rights with respect to the issuance or sale of shares
of capital stock of Donlar Bio.
A-4
4.3 Binding Obligation; Noncontravention. This Agreement has been duly
authorized, executed and delivered by Donlar Bio and is a valid and binding
obligation of Donlar Bio, enforceable in accordance with its terms. Neither the
execution and delivery of this Agreement by Donlar Bio nor the consummation of
the transactions contemplated hereby will: (i) conflict with or violate any
provisions of the articles of incorporation or bylaws of Donlar Bio or of any
decree or order of any court or administrative or other governmental body which
is either applicable to, binding upon or enforceable against Donlar Bio; or (ii)
result in a breach of, constitute a default under, result in the acceleration
of, create in any party the right to accelerate, terminate, modify or cancel, or
require any notice under, any mortgage, contract, agreement, indenture or other
instrument which is either binding upon or enforceable against Donlar Bio.
Except for the filing of the Articles of Merger, the Form S-4 Registration
Statement and the Information Statement, no permit, consent, approval or
authorization of, or declaration to or filing with, any regulatory or other
governmental authority is required in connection with the execution and delivery
of this Agreement by Donlar Bio and the consummation of the transactions
contemplated hereby.
ARTICLE 5
COVENANTS
5.1 Further Action; Reasonable Efforts. The parties agree to execute and
deliver any and all further instruments, certificates and documents and to take
such further action as may be reasonably necessary to more fully carry out the
intent and the purposes of this Agreement.
5.2 Notification of Certain Matters. Donlar shall give prompt notice to
Donlar Bio and to Tennessee Farmers, and Donlar Bio shall give prompt notice to
Donlar and to Tennessee Farmers, of the occurrence or nonoccurrence of any event
the occurrence or nonoccurrence of which would cause any representation or
warranty of Donlar or Donlar Bio contained in this Agreement to be untrue or
inaccurate in any material respect at the Effective Time and any material
failure of Donlar or Donlar Bio to comply with or satisfy any covenant,
condition or agreement to be complied with or satisfied by it hereunder.
5.3 Shareholder Approval; Form S-4 Registration Statement and Information
Statement. As soon as practicable after the execution of this Agreement, Donlar
and Donlar Bio shall: (i) duly call and cause to be held, meetings of their
respective shareholders for the purpose of approving this Agreement and the
transactions contemplated hereby; and (ii) Donlar Bio will prepare and file with
the SEC a Form S-4 Registration Statement and Information Statement for use in
connection with the meeting of the Donlar Bio shareholders. The Form S-4
Registration Statement and Information Statement shall comply with the
provisions of the Securities Act, the Exchange Act and the rules and regulations
promulgated thereunder.
ARTICLE 6
CONDITIONS
6.1 Conditions to Each Party's Obligations to Effect the Merger. The
respective obligation of each party to effect the Merger shall be subject to the
satisfaction at or prior to the Effective Time of each of the following
conditions, any or all of which may be waived by each of the parties hereto in
writing, in whole or in part, to the extent permitted by applicable law:
(a) No statute, rule, regulation, order, decree or injunction shall
have been enacted, entered, promulgated or enforced by a governmental
entity that prohibits the consummation of the Merger, and no proceeding
that has a reasonable probability of resulting in such effect shall be
pending;
(b) This Agreement and the transactions contemplated hereby, including
the Merger, shall have been approved by such number of shareholders of
Donlar and Donlar Bio as is required by Nevada and Illinois law
respectively; and
(c) Other than filing the Articles of Merger, all authorizations,
consents and approvals required to be obtained prior to consummation of the
Merger shall have been obtained.
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6.2 Conditions to the Obligation of Donlar to Effect the Merger. The
obligation of Donlar to effect the Merger is further subject to the satisfaction
or waiver at or prior to the Effective Time of the following conditions:
(a) The representations and warranties of Donlar Bio contained in this
Agreement shall be true and correct in all material respects at and as of
the date hereof and at and as of the Effective Time, as if made at and as
of such time;
(b) Donlar Bio shall have performed in all material respects its
obligations under this Agreement required to be performed by it at or prior
to the Effective Time pursuant to the terms hereof; and
(c) Donlar Bio shall have delivered or caused to be delivered to
Donlar a Secretary's Certificate, duly executed by the Secretary of Donlar
Bio, certifying a copy of resolutions duly adopted by the board of
directors and shareholders of Donlar Bio, authorizing the execution,
delivery and performance of this Agreement and all related agreements,
documents and certificates.
6.3 Conditions to the Obligation of Donlar Bio to Effect the Merger. The
obligation of Donlar Bio to effect the Merger is further subject to the
satisfaction or waiver at or prior to the Effective Time of the following
conditions:
(a) The representations and warranties of Donlar contained in this
Agreement shall be true and correct in all material respects at and as of
the date hereof and at and as of the Effective Time, as if made at and as
of such time;
(b) Donlar shall have performed in all material respects its
obligations under this Agreement required to be performed by it at or prior
to the Effective Time pursuant to the terms hereof; and
(c) Donlar shall have delivered or caused to be delivered to Donlar
Bio a Secretary's Certificate, duly executed by the Secretary of Donlar,
certifying a copy of resolutions duly adopted by the board of directors and
shareholders of Donlar, authorizing the execution, delivery and performance
of this Agreement and all related agreements, documents and certificates.
ARTICLE 7
MISCELLANEOUS
7.1 Costs and Expenses. Each party shall be responsible for all costs and
expenses incurred by each such party in connection with this Agreement and the
consummation of the transactions contemplated hereby (including, without
limitation, all attorneys' fees and costs and all accountants' fees and costs).
7.2 Amendment; Waiver; Termination.
(a) No amendment to this Agreement may be made by the parties hereto
without the approval of the board of directors of each of Donlar and Donlar Bio
and then only by an instrument in writing signed on behalf of each of Donlar,
Donlar Bio and Tennessee Farmers.
(b) At any time prior to the Effective Time, the parties may, with the
consent of Tennessee Farmers: (i) extend the time for the performance of any of
the obligations or other acts of the other parties hereto; (ii) waive any
inaccuracies in the representations and warranties of the other parties
contained herein or in any document, certificate or writing delivered pursuant
hereto; or (iii) waive compliance with any of the agreements or conditions of
the other parties hereto contained herein. Any agreement on the part of any
party to any such extension or waiver shall be valid only if set forth in an
instrument in writing signed on behalf of such party. Any such waiver shall
constitute a waiver only with respect to the specific matter described in such
writing and shall in no way impair the rights of the party granting such waiver
in any other respect or at any other time. Neither the waiver by any of the
parties hereto of a breach of or a default under any of the provisions of this
Agreement, nor the failure by any of the parties, on one or more occasions, to
enforce any of the provisions of this Agreement or to exercise any right or
privilege hereunder, shall be construed as a waiver
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of any other breach or default of a similar nature, or as a waiver of any of
such provisions, rights or privileges hereunder.
(c) The rights and remedies herein provided are cumulative and none is
exclusive of any other, or of any rights or remedies that any party may
otherwise have at law or in equity.
7.3 Interpretation. When a reference is made herein to Sections, such
reference shall be to a Section of this Agreement unless otherwise indicated.
Whenever the word "include" or some derivation thereof is used in this
Agreement, it shall be deemed to be followed by the words "without limitation".
7.4 Headings. The headings contained in this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation of
this Agreement.
7.5 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original but all of which
together shall be considered one and the same agreement.
7.6 Entire Agreement; Third Party Beneficiaries; Ownership Rights. Except
for any rights of, or obligations to, Tennessee Farmers under the Agreement to
Merge dated March 18, 2002, this Agreement (including the documents and the
instruments referred to herein): (i) constitutes the entire agreement and
supersedes all prior agreements and understandings, both written and oral,
between the parties with respect to the subject matter hereof; and (ii) is not
intended to confer upon any person other than the parties hereto any rights or
remedies hereunder.
7.7 Severability. If any term, provision, covenant or restriction of this
Agreement is held by a court of competent jurisdiction or other authority to be
invalid, void, unenforceable or against its regulatory policy, the remainder of
the terms, provisions, covenants and restrictions of this Agreement shall remain
in full force and effect and shall in no way be affected, impaired or
invalidated.
7.8 Governing Law. This Agreement shall be governed, construed and
enforced in accordance with the laws of the State of Illinois without giving
effect to the principles of conflicts of law thereof.
7.9 Assignment. Neither this Agreement nor any of the rights, interests or
obligations hereunder shall be assigned by any of the parties hereto (whether by
operation of law or otherwise) without the prior written consent of the other
parties. Subject to the first sentence of this Section 7.9, this Agreement will
be binding upon, inure to the benefit of and be enforceable by, the parties
hereto and their respective successors and assigns.
[Signature Page Follows]
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IN WITNESS WHEREOF, Donlar Bio and Donlar have caused this Agreement to be
signed by their respective officers thereunto duly authorized as of the date
first written above.
DONLAR CORPORATION
By:
------------------------------------
Name: Larry P. Koskan
Title: President and CEO
DONLAR BIOSYNTREX CORPORATION
By:
------------------------------------
Name: Larry P. Koskan
Title: President and CEO
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APPENDIX B
DONLAR CORPORATION
2002 EQUITY INCENTIVE PLAN
1. PURPOSE.
The purpose of the Donlar Corporation 2002 Equity Incentive Plan (the
"Plan") is to enhance the ability of Donlar Corporation (the "Company") and any
subsidiaries to attract and retain the best available personnel for positions of
substantial responsibility, to provide additional incentive to such personnel
and to promote the success of the Company. To accomplish these purposes, the
Plan provides a means whereby employees, directors and consultants of the
Company and any of its subsidiaries may receive stock options to purchase shares
of the Company's Common Stock ("Options").
2. ADMINISTRATION.
(a) Composition of the Committee. The Plan shall be administered by a
committee (the "Committee"), which shall be appointed by and serve at the
pleasure of the Company's Board of Directors (the "Board"). The Committee shall
be comprised of two or more members of the Board. In the event that the Company
registers any class of equity securities pursuant to Section 12 of the
Securities Exchange Act of 1934 (the "Exchange Act"), each member of the
Committee shall be (i) a "non-employee director" within the meaning of Rule
16b-3 under the Exchange Act, and (ii) an "outside director" within the meaning
of Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code").
Subject to the foregoing, from time to time the Board may increase or decrease
the size of the Committee, appoint additional members thereof, remove members
(with or without cause), appoint new members in substitution therefor, fill
vacancies or remove all members of the Committee and thereafter directly
administer the Plan.
(b) Authority of the Committee. The Committee shall have full and final
authority, in its sole discretion, to interpret the provisions of the Plan and
to decide all questions of fact arising in its application; to determine the
employees, directors and consultants to whom awards shall be made and the type,
amount, size and terms of each such award; to determine the time when awards
shall be granted; and to make all other determinations necessary or advisable
for the administration of the Plan. The Committee shall have the authority to
adopt, amend and rescind such rules, regulations and procedures as, in its
opinion, may be advisable in the administration of the Plan, including, without
limitation, rules, regulations and procedures that: (i) deal with satisfaction
of an optionee's tax withholding obligations pursuant to Section 13 hereof, (ii)
include arrangements to facilitate an optionee's ability to borrow funds for the
payment of the exercise price of an Option, if applicable, from securities'
brokers and dealers, and (iii) include arrangements that provide for the payment
of some or all of an Option's exercise price by delivery of previously owned
shares of Common Stock or other property and/or by withholding some of the
shares of Common Stock being acquired upon exercise of an Option. All decisions,
determinations and interpretations of the Committee shall be final and binding
on all optionees and all other holders of Options granted under the Plan.
(c) Authority of the Board. Notwithstanding anything to the contrary set
forth in the Plan, all authority granted hereunder to the Committee may be
exercised at any time and from time to time by the Board. All decisions,
determinations and interpretations of the Board shall be final and binding on
all optionees and all other holders of Options granted under the Plan.
3. STOCK SUBJECT TO THE PLAN.
Subject to Section 16 hereof, the shares that may be issued under the Plan
shall not exceed in the aggregate 5,000,000 shares of Common Stock of the
Company (the "Common Stock"). Such shares may be authorized and unissued shares
or shares issued and subsequently reacquired by the Company. Except as otherwise
provided herein, any shares subject to an Option that for any reason expires or
is terminated unexercised as to such shares shall again be available under the
Plan.
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4. ELIGIBILITY TO RECEIVE OPTIONS.
Persons eligible to receive stock options under the Plan shall be limited
to those consultants to and those officers, directors and other employees of the
Company and any subsidiary (as defined in Section 425 of the Code or any
amendment or substitute thereto) who are in positions in which their decisions,
actions and counsel significantly impact upon the profitability and success of
the Company and/or a subsidiary. Moreover, consultants and directors who are not
also employees shall not be eligible to be awarded Incentive Stock Options (as
defined in Section 5 hereof).
5. TYPES OF OPTIONS.
Grants may be made at any time and from time to time by the Committee in
the form of stock options to purchase shares of Common Stock. Options granted
hereunder may be Options that are intended to qualify as incentive stock options
within the meaning of Section 422 of the Code or any amendment or substitute
thereto ("Incentive Stock Options") or Options that are not intended to so
qualify ("Nonqualified Stock Options").
6. STOCK OPTIONS.
Each Option for the purchase of Common Stock shall be evidenced by a
written option agreement in such form not inconsistent with the Plan as the
Committee shall approve from time to time. The Options granted hereunder may be
evidenced by a single agreement or by multiple agreements, as determined by the
Committee in its sole discretion. Each option agreement shall contain in
substance the following terms and conditions:
(a) Type of Option. Each option agreement shall identify the Options
represented thereby as Incentive Stock Options or Nonqualified Stock
Options, as the case may be.
(b) Option Price. Each option agreement shall set forth the purchase
price of the Common Stock purchasable upon the exercise of the Option
evidenced thereby. Subject to the limitation set forth in Section 6(d)(ii),
the purchase price of the Common Stock subject to an Incentive Stock Option
shall be not less than 100% of the Fair Market Value of such stock on the
date the Option is granted, as determined by the Committee, but in no event
less than the par value of such stock. The purchase price of the Common
Stock subject to a Nonqualified Stock Option shall be not less than 85% of
the Fair Market Value of the Common Stock on the date the Option is
granted, as determined by the Committee. The Fair Market Value on any date
shall mean the closing price of the Common Stock, as reported in The Wall
Street Journal (or if not so reported, as otherwise reported by the
National Association of Securities Dealers Automated Quotation ("Nasdaq")
System), or if the Common Stock is not reported by Nasdaq, the fair market
value shall be as determined by the Committee in accordance with Section
422 of the Code.
(c) Exercise Term. Each option agreement shall state the period or
periods of time within which the Option shall vest and may be exercised, in
whole or in part, which shall be such a period or periods of time as may be
determined by the Committee, provided that no Option shall be exercisable
after ten years from the date of grant thereof. Subject to the requirements
set forth in the Plan, the Committee shall have the power to permit: (i)
the exercise of unvested Options, or portions thereof, for the purchase of
shares of restricted Common Stock subject to a repurchase right in favor of
the Company, with the repurchase price being equal to the lesser of (x) the
original purchase price or (y) the Fair Market Value of the shares on the
date of repurchase, or to any other restrictions as the Committee deems to
be appropriate, and (ii) the acceleration of previously established
exercise terms, in each case upon such circumstances and subject to such
terms and conditions as the Committee shall determine.
(d) Incentive Stock Options. In the case of an Incentive Stock
Option, each option agreement shall contain such other terms, conditions
and provisions as the Committee determines necessary or desirable in order
to qualify the Option granted thereunder as a tax-favored Option (within
the meaning of Section 422 of the Code or any amendment or substitute
thereto or regulation thereunder) including without limitation, each of the
following, except that any of these provisions may be omitted or modified
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if it is no longer required in order to have an Option qualify as a
tax-favored Option within the meaning of Section 422 of the Code or any
substitute therefor:
(i) The aggregate Fair Market Value (determined as of the date the
Option is granted) of the Common Stock with respect to which Incentive
Stock Options are first exercisable by any employee during any calendar
year (under all plans of the Company) shall not exceed $100,000.
(ii) No Incentive Stock Options shall be granted to any employee if
at the time the Option is granted such employee owns stock possessing
more than 10% of the total combined voting power of all classes of stock
of the Company or its parent or its subsidiaries unless at the time such
Option is granted the Option price is at least 110% of the fair market
value of the stock subject to the Option and, by its terms, the Option
is not exercisable after the expiration of five years from the date of
grant.
(e) Substitution of Options. Options may be granted under the Plan
from time to time in substitution for stock options held by employees of
other corporations who are about to become, and who do concurrently with
the grant of such options become, employees of the Company or a subsidiary
as a result of a merger or consolidation of the employing corporation with
the Company or a subsidiary, or the acquisition by the Company or a
subsidiary of the assets of the employing corporation, or the acquisition
by the Company or a subsidiary of stock of the subsidiary. The terms and
conditions of the substitute Options so granted may vary from the terms and
conditions set forth in this Section 6 to such extent as the Committee at
the time of grant may deem appropriate to conform, in whole or in part, to
the provisions of the stock options in substitution for which they are
granted.
7. DATE OF GRANT.
The date on which an Option shall be deemed to have been granted under the
Plan shall be the date of the Committee's authorization of the Option or such
later date as may be determined by the Committee at the time the Option is
authorized. Notice of the determination shall be given to each individual to
whom an Option is so granted within a reasonable time after the date of such
grant.
8. EXERCISE AND PAYMENT FOR SHARES.
Options may be exercised in whole or in part, from time to time, when
permitted by the respective option agreement, by giving written notice of
exercise to the Secretary of the Company, specifying the number of shares to be
purchased. The purchase price of the shares with respect to which an Option is
exercised shall be payable in full with the notice of exercise in cash, Common
Stock at Fair Market Value, or a combination thereof, as the Committee may
determine from time to time and subject to such terms and conditions as may be
prescribed by the Committee for such purpose. The Committee may also, in its
discretion and subject to prior notification to the Company by an optionee,
permit an optionee to enter into an agreement with the Company's transfer agent
or a brokerage firm of national standing whereby the optionee will
simultaneously exercise the Option and sell the shares acquired thereby through
the Company's transfer agent or such a brokerage firm and either the Company's
transfer agent or the brokerage firm executing the sale will remit the Company
from the proceeds of sale the exercise price of the shares as to which the
Option has been exercised.
9. RIGHTS UPON TERMINATION OF SERVICE.
In the event that an optionee ceases to be an employee or consultant of the
Company or any subsidiary for any reason other than death, retirement, as
hereinafter defined, or disability (within the meaning of Section 72(m)(7) of
the Code or any substitute therefor), the optionee shall have the right to
exercise the Option during its term within a period of three months after such
termination to the extent that the Option was vested and exercisable at the time
of termination, or within such other period and subject to such terms and
conditions as may be specified by the Committee; provided, however, that the
period during which an Incentive Stock Option may be exercised may not exceed
three months after the date of such termination. In the event that an optionee
dies, retires or becomes disabled prior to the expiration of his Option and
without having fully exercised his Option, the optionee or his successor shall
have the right to exercise the Option to
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the extent vested at the time he ceases to be an employee of the Company, during
its term within a period of one year after termination of employment due to
death, retirement or disability to the extent that the Option was exercisable at
the time of termination, or within such other period and subject to such terms
and conditions as may be specified by the Committee. As used in this Section 9,
"retirement" shall apply only to employees and not to consultants and means a
termination of employment by reason of an optionee's retirement at or after his
earliest permissible retirement date pursuant to and in accordance with his
employer's regular retirement plan or personnel practices.
10. GENERAL RESTRICTIONS.
Each Option granted under the Plan shall be subject to the requirement that
if at any time the Committee shall determine that (i) the listing, registration
or qualification of the shares of Common Stock subject or related thereto upon
any securities exchange or under any state or federal law, or (ii) the consent
or approval of any government regulatory body, or (iii) an agreement by the
recipient of an Option with respect to the disposition of shares of Common Stock
is necessary or desirable as a condition of or in connection with the granting
of such Option or the issuance or purchase of shares of Common Stock thereunder,
such Option shall not be consummated in whole or in part unless such listing,
registration, qualification, consent, approval or agreement shall have been
effected or obtained free of any conditions not acceptable to the Committee.
11. RIGHTS OF A SHAREHOLDER.
The recipient of any Option under the Plan, unless otherwise provided by
the Plan, shall have no rights as a shareholder unless and until a certificate
for shares of Common Stock is issued and delivered to him.
12. RIGHT TO TERMINATE SERVICE.
Nothing contained in the Plan or in any agreement entered into pursuant to
the Plan shall confer upon any optionee the right to continue in the service of
the Company or any subsidiary as an employee or a consultant or affect any right
that the Company or any subsidiary may have to terminate the employment or
consulting relationship of such optionee.
13. WITHHOLDING.
Whenever the Company proposes or is required to issue or transfer shares of
Common Stock under the Plan, the Company shall have the right to require the
recipient to remit to the Company an amount sufficient to satisfy any federal,
state or local withholding tax requirements prior to the delivery of any
certificate or certificates for such shares. If and to the extent authorized by
the Committee, in its sole discretion, an optionee may make an election, by
means of a form of election to be prescribed by the Committee, to have shares of
Common Stock that are acquired upon exercise of an Option withheld by the
Company or to tender other shares of Common Stock or other securities of the
Company owned by the optionee to the Company at the time of exercise of an
Option to pay the amount of tax that would otherwise be required by law to be
withheld by the Company as a result of any exercise of an Option from amounts
payable to such optionee. Any such election shall be irrevocable and shall be
subject to the disapproval of the Committee at any time. Any securities so
withheld or tendered will be valued by the Committee as of the date of exercise.
14. NON-ASSIGNABILITY.
No Option under the Plan shall be assignable or transferable by the
recipient thereof except by will or by the laws of descent and distribution or
by such other means as the Committee may approve. During the life of the
recipient such Option shall be exercisable only by such person or by such
person's guardian or legal representative.
15. NON-UNIFORM DETERMINATIONS.
The Committee's determinations under the Plan (including without limitation
determinations of the persons to receive Options, the form, amount and timing of
such grants, the terms and provisions of Options,
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and the agreements evidencing same) need not be uniform and may be made
selectively among persons who receive, or are eligible to receive, grants of
Options under the Plan whether or not such persons are similarly situated.
16. ADJUSTMENTS.
(a) Changes in Capitalization. Subject to any required action by the
shareholders of the Company, the number of shares of Common Stock covered by
each outstanding Option and the number of shares of Common Stock that have been
authorized for issuance under the Plan but as to which no Options have yet been
granted or which have been returned to the Plan upon cancellation or expiration
of an Option, as well as the price per share of Common Stock covered by each
such outstanding Option, shall be proportionately adjusted for any increase or
decrease in the number of issued shares of Common Stock resulting from a stock
split, reverse stock split, stock dividend, combination or reclassification of
the Common Stock, or any other increase or decrease in the number of issued
shares of Common Stock effected without receipt of consideration by the Company;
provided, however, that conversion of any convertible securities of the Company
shall not be deemed to have been "effected without receipt of consideration."
Such adjustment shall be made by the Committee, whose determination in that
respect shall be final, binding and conclusive. Except as expressly provided
herein, no issuance by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class, shall affect, and no
adjustment by reason thereof shall be made with respect to, the number or price
of shares of Common Stock subject to an Option.
(b) Dissolution or Liquidation. In the event of the proposed dissolution
or liquidation of the Company, all outstanding Options will terminate
immediately prior to the consummation of such proposed action, unless otherwise
provided by the Committee. The Committee may, in the exercise of its sole
discretion in such instances, declare that any Option shall terminate as of a
date fixed by the Committee and give each Option holder the right to exercise
his Option as to all or any part of the shares of Common Stock covered by the
Option, including shares as to which the Option would not otherwise be
exercisable.
(c) Sale or Merger. In the event of a proposed sale of all or
substantially all of the assets of the Company, or the merger of the Company
with or into another corporation, the Committee, in the exercise of its sole
discretion, may take such action as it deems desirable, including, but, not
limited to: (i) causing an Option to be assumed or an equivalent option to be
substituted by such successor corporation or a parent or subsidiary of such
successor corporation, (ii) providing that an Option holder shall have the right
to exercise his Option as to all of the shares of Common Stock covered by the
Option, including shares as to which the Option would not otherwise be vested or
exercisable, or (iii) declare that an Option shall terminate at a date fixed by
the Committee provided that the Option holder is given notice and opportunity
prior to such date to exercise that portion of his Option that is currently
vested and exercisable.
17. AMENDMENT.
The Board may terminate or amend the Plan at any time with respect to
shares as to which Options have not been granted, subject to any required
shareholder approval or any shareholder approval that the Board may deem to be
advisable for any reason, such as for the purpose of obtaining or retaining any
statutory or regulatory benefits under tax, securities or other laws or
satisfying any applicable stock exchange listing requirements. Neither the Board
nor the Committee may, without the consent of the holder of an Option, alter or
impair any Option previously granted under the Plan, except as specifically
authorized herein.
18. CONDITIONS UPON ISSUANCE OF SHARES.
(a) Compliance with Securities Laws. Shares of the Company's Common Stock
shall not be issued pursuant to the exercise of an Option unless the exercise of
such Option and the issuance and delivery of such shares pursuant thereto shall
comply with all relevant provisions of law, including, without limitation, the
Securities Act of 1933, as amended, the Exchange Act, the rules and regulations
promulgated thereunder, and the requirements of any stock exchange upon which
the Common Stock of the Company may then be listed, and shall be further subject
to the approval of counsel for the Company with respect to such compliance.
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(b) Investment Representations. As a condition to the exercise of an
Option, the Company may require the person exercising such Option to represent
and warrant at the time of any such exercise that the shares of Common Stock are
being purchased only for investment and without any present intention to sell or
distribute such shares if, in the opinion of counsel for the Company, such
representation is required by any of the aforementioned relevant provisions of
law.
19. RESERVATION OF SHARES.
The Company, during the term of the Plan, will at all times reserve and
keep available such number of shares as shall be sufficient to satisfy the
requirements of the Plan. Inability of the Company to obtain authority from any
regulatory body having jurisdiction, which authority is deemed by the Company's
counsel to be necessary to the lawful issuance and sale of any shares hereunder,
shall relieve the Company of any liability in respect of the failure to issue or
sell such shares as to which such requisite authority shall not have been
obtained.
20. EFFECT ON OTHER PLANS.
Participation in the Plan shall not affect an employee's eligibility to
participate in any other benefit or incentive plan of the Company or any
subsidiary. Any Options granted pursuant to the Plan shall not be used in
determining the benefits provided under any other plan of the Company or any
subsidiary unless specifically provided.
21. DURATION OF THE PLAN.
The Plan shall remain in effect until all Options granted under the Plan
have been satisfied by the issuance of shares, but no Option shall be granted
more than ten years after the earlier of the date the Plan is adopted by the
Board or is approved by the Company's shareholders.
22. FORFEITURE FOR DISHONESTY.
Notwithstanding anything to the contrary in the Plan, if the Committee
finds, by a majority vote, after full consideration of the facts presented on
behalf of both the Company and any optionee, that the optionee has been engaged
in fraud, embezzlement, theft, commission of a felony or dishonest conduct in
the course of his employment or retention by the Company or any subsidiary that
damaged the Company or any subsidiary or that the optionee has disclosed trade
secrets of the Company or any subsidiary, the optionee shall forfeit all
unexercised Options and all exercised Options with respect to which the Company
has not yet delivered the certificates. The decision of the Committee in
interpreting and applying the provisions of this Section 22 shall be final. No
decision of the Committee shall affect the finality of the discharge or
termination of such optionee by the Company or any subsidiary in any manner.
23. NO PROHIBITION ON CORPORATE ACTION.
No provision of the Plan shall be construed to prevent the Company or any
officer or director thereof from taking any corporate action deemed by the
Company or such officer or director to be appropriate or in the Company's best
interest, whether or not such action could have an adverse effect on the Plan or
any Options granted hereunder, and no optionee or optionee's estate, personal
representative or beneficiary shall have any claim against the Company or any
officer or director thereof as a result of the taking of such action.
24. INDEMNIFICATION.
With respect to the administration of the Plan, the Company shall indemnify
each present and future member of the Committee and/or the Board against, and
each member of the Committee and the Board shall be entitled without further
action on his part to indemnity from the Company for all expenses (including the
amount of judgments and the amount of approved settlements made with a view to
the curtailment of costs of litigation, other than amounts paid to the Company
itself) reasonably incurred by him in connection with or arising out of, any
action, suit or proceeding in which he may be involved by reason of his being or
having been
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a member of the Committee and/or the Board, whether or not he continues to be
such member at the time of incurring such expenses; provided, however, that such
indemnity shall not include any expenses incurred by any such member of the
Committee and/or the Board (i) in respect of matters as to which he shall be
finally adjudged in any such action, suit or proceeding to have been guilty of
gross negligence or willful misconduct in the performance of his duty as such
member of the Committee and/or the Board; or (ii) in respect of any matter in
which any settlement is effected for an amount in excess of the amount approved
by the Company on the advice of its legal counsel; and provided further that no
right of indemnification under the provisions set forth herein shall be
available to or enforceable by any such member of the Committee and/or the Board
unless, within 60 days after institution of any such action, suit or proceeding,
he shall have offered the Company in writing the opportunity to handle and
defend same at its own expense. The foregoing right of indemnification shall
inure to the benefit of the heirs, executors or administrators of each such
member of the Committee and the Board and shall be in addition to all other
rights to which such member may be entitled as a matter of law, contract or
otherwise.
25. MISCELLANEOUS PROVISIONS.
(a) Compliance with Plan Provisions. No optionee or other person shall
have any right with respect to the Plan, the Common Stock reserved for issuance
under the Plan or any Option until a written Option agreement shall have been
executed by the Company and the optionee and all the terms, conditions and
provisions of the Plan and the Option applicable to such optionee (and each
person claiming under or through him) have been met.
(b) Approval of Counsel. In the discretion of the Committee, no shares of
Common Stock, other securities or property of the Company, or other forms of
payment shall be issued hereunder with respect to any Option unless counsel for
the Company shall be satisfied that such issuance will be in compliance with
applicable federal, state, local and foreign legal, securities exchange and
other applicable requirements.
(c) Compliance with Rule 16b-3. To the extent that Rule 16b-3 under the
Exchange Act applies to Options granted under the Plan, it is the intent of the
Company that the Plan comply in all respects with the requirements of Rule
16b-3, that any ambiguities or inconsistencies in construction of the Plan be
interpreted to give effect to such intention and that if the Plan shall not so
comply, whether on the date of adoption or by reason of any later amendment to
or interpretation of Rule 16b-3, the provisions of the Plan shall be deemed to
be automatically amended so as to bring them into full compliance with such
rule.
(d) Unfunded Plan. The Plan shall be unfunded. The Company shall not be
required to establish any special or separate fund or to make any other
segregation of assets under the Plan.
(e) Effects of Acceptance of Option. By accepting any Option or other
benefit under the Plan, each optionee and each person claiming under or through
him shall be conclusively deemed to have indicated his acceptance and
ratification of, and consent to, any action taken under the Plan by the Company,
the Board and/or the Committee or its delegates.
(f) Construction. The masculine pronoun shall include the feminine and
neuter, and the singular shall include the plural, where the context so
indicates.
26. SHAREHOLDER APPROVAL.
The Company shall submit the Plan to the shareholders entitled to vote
hereon for approval within twelve months after the date of adoption by the Board
in order to meet the requirements of Section 422 of the Code and the regulations
thereunder. The exercise of any Option granted under the Plan shall be subject
to the approval of the Plan by the shareholders.
Date of Adoption of Plan by Board of Directors -- , 2002.
Date of Approval of Plan by Shareholders -- , 2002.
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APPENDIX C
RIGHTS OF DISSENTING OWNERS
UNDER THE NEVADA REVISED STATUTES
SECTION 92A.300. DEFINITIONS.
As used in NRS 92A.300 to 92A.500, inclusive, unless the context otherwise
requires, the words and terms defined in NRS 92A.305 to 92A.335, inclusive, have
the meanings ascribed to them in those sections.
SECTION 92A.305. "BENEFICIAL STOCKHOLDER" DEFINED.
"Beneficial stockholder" means a person who is a beneficial owner of shares
held in a voting trust or by a nominee as the stockholder of record.
SECTION 92A.310. "CORPORATE ACTION" DEFINED.
"Corporate action" means the action of a domestic corporation.
SECTION 92A.315. "DISSENTER" DEFINED.
"Dissenter" means a stockholder who is entitled to dissent from a domestic
corporation's action under NRS 92A.380 and who exercises that right when and in
the manner required by NRS 92A.400 to 92A.480, inclusive.
SECTION 92A.320. "FAIR VALUE" DEFINED.
"Fair value," with respect to a dissenter's shares, means the value of the
shares immediately before the effectuation of the corporate action to which he
objects, excluding any appreciation or depreciation in anticipation of the
corporate action unless exclusion would be inequitable.
SECTION 92A.325. "STOCKHOLDER" DEFINED.
"Stockholder" means a stockholder of record or a beneficial stockholder of
a domestic corporation.
SECTION 92A.330. "STOCKHOLDER OF RECORD" DEFINED.
"Stockholder of record" means the person in whose name shares are
registered in the records of a domestic corporation or the beneficial owner of
shares to the extent of the rights granted by a nominee's certificate on file
with the domestic corporation.
SECTION 92A.335. "SUBJECT CORPORATION" DEFINED.
"Subject corporation" means the domestic corporation which is the issuer of
the shares held by a dissenter before the corporate action creating the
dissenter's rights becomes effective or the surviving or acquiring entity of
that issuer after the corporate action becomes effective.
SECTION 92A.340. COMPUTATION OF INTEREST.
Interest payable pursuant to NRS 92A.300 to 92A.500, inclusive, must be
computed from the effective date of the action until the date of payment, at the
average rate currently paid by the entity on its principal bank loans or, if it
has no bank loans, at a rate that is fair and equitable under all of the
circumstances.
SECTION 92A.350. RIGHTS OF DISSENTING PARTNER OF DOMESTIC LIMITED PARTNERSHIP.
A partnership agreement of a domestic limited partnership or, unless
otherwise provided in the partnership agreement, an agreement of merger or
exchange, may provide that contractual rights with respect to the partnership
interest of a dissenting general or limited partner of a domestic limited
partnership are
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available for any class or group of partnership interests in connection with any
merger or exchange in which the domestic limited partnership is a constituent
entity.
SECTION 92A.360. RIGHTS OF DISSENTING MEMBER OF DOMESTIC LIMITED-LIABILITY
COMPANY.
The articles of organization or operating agreement of a domestic
limited-liability company or, unless otherwise provided in the articles of
organization or operating agreement, an agreement of merger or exchange, may
provide that contractual rights with respect to the interest of a dissenting
member are available in connection with any merger or exchange in which the
domestic limited-liability company is a constituent entity.
SECTION 92A.370. RIGHTS OF DISSENTING MEMBER OF DOMESTIC NONPROFIT CORPORATION.
1. Except as otherwise provided in subsection 2, and unless otherwise
provided in the articles or bylaws, any member of any constituent domestic
nonprofit corporation who voted against the merger may, without prior notice,
but within 30 days after the effective date of the merger, resign from
membership and is thereby excused from all contractual obligations to the
constituent or surviving corporations which did not occur before his resignation
and is thereby entitled to those rights, if any, which would have existed if
there had been no merger and the membership had been terminated or the member
had been expelled.
2. Unless otherwise provided in its articles of incorporation or bylaws,
no member of a domestic nonprofit corporation, including, but not limited to, a
cooperative corporation, which supplies services described in chapter 704 of NRS
to its members only, and no person who is a member of a domestic nonprofit
corporation as a condition of or by reason of the ownership of an interest in
real property, may resign and dissent pursuant to subsection 1.
SECTION 92A.380. RIGHT OF STOCKHOLDER TO DISSENT FROM CERTAIN CORPORATE ACTIONS
AND TO OBTAIN PAYMENT FOR SHARES.
1. Except as otherwise provided in NRS 92A.370 and 92A.390, a stockholder
is entitled to dissent from, and obtain payment of the fair value of his shares
in the event of any of the following corporate actions:
(a) Consummation of a plan of merger to which the domestic corporation
is a constituent entity:
(1) If approval by the stockholders is required for the merger by
NRS 92A.120 to 92A.160, inclusive, or the articles of incorporation,
regardless of whether the stockholder is entitled to vote on the plan of
merger; or
(2) If the domestic corporation is a subsidiary and is merged with
its parent pursuant to NRS 92A.180.
(b) Consummation of a plan of exchange to which the domestic
corporation is a constituent entity as the corporation whose subject
owner's interests will be acquired, if his shares are to be acquired in the
plan of exchange.
(c) Any corporate action taken pursuant to a vote of the stockholders
to the event that the articles of incorporation, bylaws or a resolution of
the board of directors provides that voting or nonvoting stockholders are
entitled to dissent and obtain payment for their shares.
3. A stockholder who is entitled to dissent and obtain payment pursuant to
NRS 92A.300 to 92A.500, inclusive, may not challenge the corporate action
creating his entitlement unless the action is unlawful or fraudulent with
respect to him or the domestic corporation.
SECTION 92A.390. LIMITATIONS ON RIGHT OF DISSENT: STOCKHOLDERS OF CERTAIN
CLASSES OR SERIES; ACTION OF STOCKHOLDERS NOT REQUIRED FOR
PLAN OF MERGER.
1. There is no right of dissent with respect to a plan of merger or
exchange in favor of stockholders of any class or series which, at the record
date fixed to determine the stockholders entitled to receive notice of
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and to vote at the meeting at which the plan of merger or exchange is to be
acted on, were either listed on a national securities exchange, included in the
national market system by the National Association of Securities Dealers, Inc.,
or held by at least 2,000 stockholders of record, unless:
(a) The articles of incorporation of the corporation issuing the
shares provide otherwise; or
(b) The holders of the class or series are required under the plan of
merger or exchange to accept for the shares anything except:
(1) Cash, owner's interests or owner's interests and cash in lieu
of fractional owner's interests of:
(I) The surviving or acquiring entity; or
(II) Any other entity which, at the effective date of the plan
of merger or exchange, were either listed on a national securities
exchange, included in the national market system by the National
Association of Securities Dealers, Inc., or held of record by a least
2,000 holders of owner's interests of record; or
(2) A combination of cash and owner's interests of the kind described
in sub-subparagraphs (I) and (II) of subparagraph (1) of paragraph (b).
2. There is no right of dissent for any holders of stock of the surviving
domestic corporation if the plan of merger does not require action of the
stockholders of the surviving domestic corporation under NRS 92A.130.
SECTION 92A.400. LIMITATIONS ON RIGHT OF DISSENT: ASSERTION AS TO PORTIONS ONLY
TO SHARES REGISTERED TO STOCKHOLDER; ASSERTION BY BENEFICIAL
STOCKHOLDER.
1. A stockholder of record may assert dissenter's rights as to fewer than
all of the shares registered in his name only if he dissents with respect to all
shares beneficially owned by any one person and notifies the subject corporation
in writing of the name and address of each person on whose behalf he asserts
dissenter's rights. The rights of a partial dissenter under this subsection are
determined as if the shares as to which he dissents and his other shares were
registered in the names of different stockholders.
2. A beneficial stockholder may assert dissenter's rights as to shares
held on his behalf only if:
(a) He submits to the subject corporation the written consent of the
stockholder of record to the dissent not later than the time the beneficial
stockholder asserts dissenter's rights; and
(b) He does so with respect to all shares of which he is the
beneficial stockholder or over which he has power to direct the vote.
SECTION 92A.410. NOTIFICATION OF STOCKHOLDERS REGARDING RIGHT OF DISSENT.
1. If a proposed corporate action creating dissenters' rights is submitted
to a vote at a stockholders' meeting, the notice of the meeting must state that
stockholders are or may be entitled to assert dissenters' rights under NRS
92A.300 to 92A.500, inclusive, and be accompanied by a copy of those sections.
2. If the corporate action creating dissenters' rights is taken by written
consent of the stockholders or without a vote of the stockholders, the domestic
corporation shall notify in writing all stockholders entitled to assert
dissenters' rights that the action was taken and send them the dissenter's
notice described in NRS 92A.430.
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SECTION 92A.420. PREREQUISITES TO DEMAND FOR PAYMENT FOR SHARES.
1. If a proposed corporate action creating dissenters' rights is submitted
to a vote at a stockholders' meeting, a stockholder who wishes to assert
dissenter's rights:
(a) Must deliver to the subject corporation, before the vote is taken,
written notice of his intent to demand payment for his shares if the
proposed action is effectuated; and
(b) Must not vote his shares in favor of the proposed action.
2. A stockholder who does not satisfy the requirements of subsection 1 and
NRS 92A.400 is not entitled to payment for his shares under this chapter.
SECTION 92A.430. DISSENTER'S NOTICE: DELIVERY TO STOCKHOLDERS ENTITLED TO
ASSERT RIGHTS; CONTENTS.
1. If a proposed corporate action creating dissenters' rights is
authorized at a stockholders' meeting, the subject corporation shall deliver a
written dissenter's notice to all stockholders who satisfied the requirements to
assert those rights.
2. The dissenter's notice must be sent no later than 10 days after the
effectuation of the corporate action, and must:
(a) State where the demand for payment must be sent and where and when
certificates, if any, for shares must be deposited;
(b) Inform the holders of shares not represented by certificates to
what extent the transfer of the shares will be restricted after the demand
for payment is received;
(c) Supply a form for demanding payment that includes the date of the
first announcement to the news media or to the stockholders of the terms of
the proposed action and requires that the person asserting dissenter's
rights certify whether or not he acquired beneficial ownership of the
shares before that date;
(d) Set a date by which the subject corporation must receive the
demand for payment, which may not be less than 30 nor more than 60 days
after the date the notice is delivered; and
(e) Be accompanied by a copy of NRS 92A.300 to 92A.500, inclusive.
SECTION 92A.440. DEMAND FOR PAYMENT AND DEPOSIT OF CERTIFICATES; RETENTION OF
RIGHTS OF STOCKHOLDER.
1. A stockholder to whom a dissenter's notice is sent must:
(a) Demand payment;
(b) Certify whether he acquired beneficial ownership of the shares
before the date required to be set forth in the dissenter's notice for this
certification; and
(c) Deposit his certificates, if any, in accordance with the terms of
the notice.
2. The stockholder who demands payment and deposits his certificates, if
any, before the proposed corporate action is taken retains all other rights of a
stockholder until those rights are canceled or modified by the taking of the
proposed corporate action.
3. The stockholder who does not demand payment or deposit his certificates
where required, each by the date set forth in the dissenter's notice, is not
entitled to payment for his shares under this chapter.
SECTION 92A.450. UNCERTIFICATED SHARES: AUTHORITY TO RESTRICT TRANSFER AFTER
DEMAND FOR PAYMENT; RETENTION OF RIGHTS OF STOCKHOLDER.
1. The subject corporation may restrict the transfer of shares not
represented by a certificate from the date the demand for their payment is
received.
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2. The person for whom dissenter's rights are asserted as to shares not
represented by a certificate retains all other rights of a stockholder until
those rights are canceled or modified by the taking of the proposed corporate
action.
SECTION 92A.460. PAYMENT FOR SHARES: GENERAL REQUIREMENTS.
1. Except as otherwise provided in NRS 92A.470, within 30 days after
receipt of a demand for payment, the subject corporation shall pay each
dissenter who complied with NRS 92A.440 the amount the subject corporation
estimates to be the fair value of his shares, plus accrued interest. The
obligation of the subject corporation under this subsection may be enforced by
the district court:
(a) Of the county where the corporation's registered office is
located; or
(b) At the election of any dissenter residing or having its registered
office in this state, of the county where the dissenter resides or has its
registered office. The court shall dispose of the complaint promptly.
2. The payment must be accompanied by:
(a) The subject corporation's balance sheet as of the end of a fiscal
year ending not more than 16 months before the date of payment, a statement
of income for that year, a statement of changes in the stockholders' equity
for that year and the latest available interim financial statements, if
any;
(b) A statement of the subject corporation's estimate of the fair
value of the shares;
(c) An explanation of how the interest was calculated;
(d) A statement of the dissenter's rights to demand payment under NRS
92A.480; and
(e) A copy of NRS 92A.300 to 92A.500, inclusive.
SECTION 92A.470. PAYMENT FOR SHARES: SHARES ACQUIRED ON OR AFTER DATE OF
DISSENTER'S NOTICE.
1. A subject corporation may elect to withhold payment from a dissenter
unless he was the beneficial owner of the shares before the date set forth in
the dissenter's notice as the date of the first announcement to the news media
or to the stockholders of the terms of the proposed action.
2. To the extent the subject corporation elects to withhold payment, after
taking the proposed action, it shall estimate the fair value of the shares, plus
accrued interest, and shall offer to pay this amount to each dissenter who
agrees to accept it in full satisfaction of his demand. The subject corporation
shall send with its offer a statement of its estimate of the fair value of the
shares, an explanation of how the interest was calculated, and a statement of
the dissenters' right to demand payment pursuant to NRS 92A.480.
SECTION 92A.480. DISSENTER'S ESTIMATE OF FAIR VALUE: NOTIFICATION OF SUBJECT
CORPORATION; DEMAND FOR PAYMENT OF ESTIMATE.
1. A dissenter may notify the subject corporation in writing of his own
estimate of the fair value of his shares and the amount of interest due, and
demand payment of his estimate, less any payment pursuant to NRS 92A.460, or
reject the offer pursuant to NRS 92A.470 and demand payment of the fair value of
his shares and interest due, if he believes that the amount paid pursuant to NRS
92A.460 or offered pursuant to NRS 92A.470 is less than the fair value of his
shares or that the interest due is incorrectly calculated.
2. A dissenter waives his right to demand payment pursuant to this section
unless he notifies the subject corporation of his demand in writing within 30
days after the subject corporation made or offered payment for his shares.
SECTION 92A.490. LEGAL PROCEEDING TO DETERMINE FAIR VALUE: DUTIES OF SUBJECT
CORPORATION; POWERS OF COURT; RIGHTS OF DISSENTER.
1. If a demand for payment remains unsettled, the subject corporation
shall commence a proceeding within 60 days after receiving the demand and
petition the court to determine the fair value of the shares and
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accrued interest. If the subject corporation does not commence the proceeding
within the 60-day period, it shall pay each dissenter whose demand remains
unsettled the amount demanded.
2. A subject corporation shall commence the proceeding in the district
court of the county where its registered office is located. If the subject
corporation is a foreign entity without a resident agent in the state, it shall
commence the proceeding in the county where the registered office of the
domestic corporation merged with or whose shares were acquired by the foreign
entity was located.
3. The subject corporation shall make all dissenters, whether or not
residents of Nevada, whose demands remain unsettled, parties to the proceeding
as in an action against their shares. All parties must be served with a copy of
the petition. Nonresidents may be served by registered or certified mail or by
publication as provided by law.
4. The jurisdiction of the court in which the proceeding is commenced
under subsection 2 is plenary and exclusive. The court may appoint one or more
persons as appraisers to receive evidence and recommend a decision on the
question of fair value. The appraisers have the powers described in the order
appointing them, or any amendment thereto. The dissenters are entitled to the
same discovery rights as parties in other civil proceedings.
5. Each dissenter who is made a party to the proceeding is entitled to a
judgment:
(a) For the amount, if any, by which the court finds the fair value of
his shares, plus interest, exceeds the amount paid by the subject
corporation; or
(b) For the fair value, plus accrued interest, of his after-acquired
shares for which the subject corporation elected to withhold payment
pursuant to NRS 92A.470.
SECTION 92A.500. LEGAL PROCEEDING TO DETERMINE FAIR VALUE: ASSESSMENT OF COSTS
AND FEES.
1. The court in a proceeding to determine fair value shall determine all
of the costs of the proceeding, including the reasonable compensation and
expenses of any appraisers appointed by the court. The court shall assess the
costs against the subject corporation, except that the court may assess costs
against all or some of the dissenters, in amounts the court finds equitable, to
the extent the court finds the dissenters acted arbitrarily, vexatiously or not
in good faith in demanding payment.
2. The court may also assess the fees and expenses of the counsel and
experts for the respective parties, in amounts the court finds equitable:
(a) Against the subject corporation and in favor of all dissenters if
the court finds the subject corporation did not substantially comply with
the requirements of NRS 92A.300 to 92A.500, inclusive; or
(b) Against either the subject corporation or a dissenter in favor of
any other party, if the court finds that the party against whom the fees
and expenses are assessed acted arbitrarily, vexatiously or not in good
faith with respect to the rights provided by NRS 92A.300 to 92A.500,
inclusive.
3. If the court finds that the services of counsel for any dissenter were
of substantial benefit to other dissenters similarly situated, and that the fees
for those services should not be assessed against the subject corporation, the
court may award to those counsel reasonable fees to be paid out of the amounts
awarded to the dissenters who were benefited.
4. In a proceeding commenced pursuant to NRS 92A.460, the court may assess
the costs against the subject corporation, except that the court may assess
costs against all or some of the dissenters who are parties to the proceeding,
in amounts the court finds equitable, to the extent the court finds that such
parties did not act in good faith in instituting the proceeding.
5. This section does not preclude any party in a proceeding commenced
pursuant to NRS 92A.460 or 92A.490 from applying the provisions of N.R.C.P. 68
or NRS 17.115.
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PART II: INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 8.75 of the Illinois Business Corporation Act of 1983 provides as
follows:
(a) A corporation may indemnify any person who was or is a party, or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that he or she is or was a director, officer, employee or agent of the
corporation, or who is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by such person in connection with such action, suit or proceeding, if
such person acted in good faith and in a manner he or she reasonably believed to
be in, or not opposed to the best interests of the corporation, and, with
respect to any criminal action or proceeding, had no reasonable cause to believe
his or her conduct was unlawful. The termination of any action, suit or
proceeding by judgment, order, settlement, conviction, or upon a plea of nolo
contendere or its equivalent, shall not, of itself, create a presumption that
the person did not act in good faith and in a manner which he or she reasonably
believed to be in or not opposed to the best interests of the corporation or,
with respect to any criminal action or proceeding, that the person had
reasonable cause to believe that his or her conduct was unlawful.
(b) A corporation may indemnify any person who was or is a party, or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the corporation to procure a judgment in its favor by
reason of the fact that such person is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against expenses (including attorneys'
fees) actually and reasonably incurred by such person in connection with the
defense or settlement of such action or suit, if such person acted in good faith
and in a manner he or she reasonably believed to be in, or not opposed to, the
best interests of the corporation, provided that no indemnification shall be
made with respect to any claim, issue, or matter as to which such person has
been adjudged to have been liable to the corporation, unless, and only to the
extent that the court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability, but in view of all
the circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses as the court shall deem proper.
(c) To the extent that a present or former director, officer or employee of
a corporation has been successful, on the merits or otherwise, in the defense of
any action, suit or proceeding referred to in subsections (a) and (b), or in
defense of any claim, issue or matter therein, such person shall be indemnified
against expenses (including attorneys' fees) actually and reasonably incurred by
such person in connection therewith, if the person acted in good faith and in a
manner he or she reasonably believed to be in, or not opposed to, the best
interests of the corporation.
(d) Any indemnification under subsections (a) and (b) (unless ordered by a
court) shall be made by the corporation only as authorized in the specific case,
upon a determination that indemnification of the present or former director,
officer, employee or agent is proper in the circumstances because he or she has
met the applicable standard of conduct set forth in subsections (a) or (b). Such
determination shall be made with respect to a person who is a director or
officer at the time of the determination: (1) by the majority vote of the
directors who are not parties to such action, suit or proceeding, even though
less than a quorum, (2) by a committee of the directors designated by a majority
vote of the directors, even though less than a quorum, (3) if there are no such
directors, or if the directors so direct, by independent legal counsel in a
written opinion, or (4) by the shareholders.
(e) Expenses (including attorney's fees) incurred by an officer or director
in defending a civil or criminal action, suit or proceeding may be paid by the
corporation in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of the director or
officer to repay such amount if it shall ultimately be determined that such
person is not entitled to be indemnified by the corporation as
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authorized in this Section. Such expenses (including attorney's fees) incurred
by former directors and officers or other employees and agents may be so paid on
such terms and conditions, if any, as the corporation deems appropriate.
(f) The indemnification and advancement of expenses provided by or granted
under the other subsections of this Section shall not be deemed exclusive of any
other rights to which those seeking indemnification or advancement of expenses
may be entitled under any by-law, agreement, vote of shareholders or
disinterested directors, or otherwise, both as to action in his or her official
capacity and as to action in another capacity while holding such office.
(g) A corporation may purchase and maintain insurance on behalf of any
person who is or was a director, officer, employee or agent of the corporation,
or who is or was serving at the request of the corporation as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, against any liability asserted against such person
and incurred by such person in any such capacity, or arising out of his or her
status as such, whether or not the corporation would have the power to indemnify
such person against such liability under the provisions of this Section.
(h) If a corporation indemnifies or advances expenses to a director or
officer under subsection (b) of this Section, the corporation shall report the
indemnification or advance in writing to the shareholders with or before the
notice of the next shareholders meeting.
(i) For purposes of this Section, references to "the corporation" shall
include, in addition to the surviving corporation, any merging corporation
(including any corporation having merged with a merging corporation) absorbed in
a merger which, if its separate existence had continued, would have had the
power and authority to indemnify its directors, officers, and employees or
agents, so that any person who was a director, officer, employee or agent of
such merging corporation, or was serving at the request of such merging
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, shall stand in the same
position under the provisions of this Section with respect to the surviving
corporation as such person would have with respect to such merging corporation
if its separate existence had continued.
(j) For purposes of this Section, references to "other enterprises" shall
include employee benefit plans; references to "fines" shall include any excise
taxes assessed on a person with respect to an employee benefit plan; and
references to "serving at the request of the corporation" shall include any
service as a director, officer, employee or agent of the corporation which
imposes duties on, or involves services by such director, officer, employee, or
agent with respect to an employee benefit plan, its participants, or
beneficiaries. A person who acted in good faith and in a manner he or she
reasonably believed to be in the best interests of the participants and
beneficiaries of an employee benefit plan shall be deemed to have acted in a
manner "not opposed to the best interest of the corporation" as referred to in
this Section.
(k) The indemnification and advancement of expenses provided by or granted
under this Section shall, unless otherwise provided when authorized or ratified,
continue as to a person who has ceased to be a director, officer, employee, or
agent and shall inure to the benefit of the heirs, executors, and administrators
of that person.
The Donlar Amended and Restated Bylaws provide that Donlar shall, to the
fullest extent to which it is empowered to do so by the Illinois Business
Corporation Act of 1983 or any other applicable law, as may from time to time be
in effect, indemnify any person who was or is threatened to be made a party to
any threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, by reason of the fact that he is or
was a director or officer of Donlar, or is or was serving at the request of
Donlar as a director or officer of another corporation, partnership, joint
venture, trust or other enterprise, against all expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding.
The Amended and Restated Bylaws also provide that Donlar shall have the
power to purchase and maintain insurance on behalf of any person who is or was a
director, officer, employee or agent of Donlar or is or was serving at the
request of Donlar as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against any
liability asserted against him and incurred by
II-2
him in any such capacity or arising out of his status as such whether or not
Donlar would have the power to indemnify him against such liability under the
provisions of the Amended and Restated Bylaws.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) The following exhibits are filed as part of this registration
statement:
<Table>
<Caption>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
2.1 Amended and Restated Agreement and Plan of Merger by and
between Donlar Corporation and Donlar Biosyntrex
Corporation, dated as of June 7, 2002, (included as appendix
A in the Information Statement/Prospectus included in this
Registration Statement)
3.1 Amended and Restated Articles of Incorporation of Donlar
Corporation
3.2 Amended and Restated Bylaws of Donlar Corporation
4.1 Bridge and Consolidated Term Loan Agreement dated March 18,
2002, among Donlar Corporation, Donlar Biosyntrex
Corporation and Tennessee Farmers Life Insurance Company
4.2 Amendment dated May 31, 2002, to Bridge and Consolidated
Term Loan Agreement dated March 18, 2002, among Donlar
Corporation, Donlar Biosyntrex Corporation and Tennessee
Farmers Life Insurance Company
4.3 Letter Agreement dated March 18, 2002, among Donlar
Corporation, Willis Stein & Partners, L.P. and Star
Polymers, L.L.C.
4.4 Letter Agreement dated February 25, 2002, between Donlar
Corporation and Dr. Robert Gale Martin
4.5 Form of Letter Agreement between Donlar Corporation and
Holders 1998 and 2002 Notes
4.6 Certificate of Designations for Donlar Senior Convertible
Preferred Stock
4.7 Second Limited Consent and Waiver to Bridge and Consolidated
Term Loan Agreement By Tennessee Farmers Life Insurance
Company
4.8 Letter Agreement dated August 15, 2002, between Kamal Modir
M.D. and Donlar Biosyntrex
4.9 Letter Agreement dated August 15, 2002, between Kenneth A.
Hubbard and Donlar Biosyntrex
4.10 Letter Agreement dated August 23, 2002, between Peter
LeDonne and Donlar Biosyntrex
5.1 Opinion of Duane Morris LLP regarding legality of shares
being registered
10.1 Change of Control Agreement dated December 24, 1998 between
Donlar Corporation and Larry Koskan
10.2 Change of Control Agreement dated December 24, 1998 between
Donlar Corporation and Robert Pietrangelo
10.3 Office Lease Agreement made as of August 1, 1992 between
Donlar Corporation and Illinois Institute of Technology
10.4 Management Consulting Agreement entered into as of April 1,
2000 between Donlar Corporation and Dr. Robert G. Martin
13.1 2001 Annual Report of Donlar Biosyntrex on Form 10-KSB
(incorporated by reference in the Information
Statement/Prospectus included in Part I of this Registration
Statement)
13.2 June 30, 2002 Quarterly Report of Donlar Biosyntrex on Form
10-QSB (incorporated by reference in the Information
Statement/Prospectus included in Part I of this Registration
Statement)
21.1 List of subsidiaries of Donlar Corporation
23.1 Consent of Grant Thornton LLP
23.2 Consent of Duane Morris LLP (included as part of Exhibit
5.1)
</Table>
(b) The following financial statement schedules are filed as part of this
registration statement.
None.
II-3
ITEM 22. UNDERTAKINGS.
The undersigned registrant hereby undertakes as follows:
(1) that insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the provisions described
under Item 20 above, or otherwise, the registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in
the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to
a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
(2) to respond to requests for information that is incorporated by
reference into the registration statement pursuant to Items 4, 10(b), 11 or
13 of Form S-4, within one business day of receipt of such request, and to
send the incorporated documents by first class mail or other equally prompt
means. This includes information contained in documents filed subsequent to
the effective date of the registration statement through the date of
responding to the request.
(3) to supply by means of a post-effective amendment all information
concerning the Merger and related transactions and Donlar Biosyntrex that
was not the subject of and included in the registration statement when it
became effective.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Bedford Park, Illinois York on this
3rd day of October, 2002.
DONLAR CORPORATION
By: /s/ LARRY P. KOSKAN
--------------------------------------
Larry P. Koskan
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE CAPACITY DATE
--------- -------- ----
/s/ LARRY P. KOSKAN Chief Executive Officer, October 3, 2002
- ------------------------------------------------ President
Larry P. Koskan and Chairman of the Board
/s/ JOEL H. LURQUIN Controller and Treasurer October 3, 2002
- ------------------------------------------------
Joel H. Lurquin
/s/ ROBERT W. COOPER Director October 3, 2002
- ------------------------------------------------
Robert W. Cooper
/s/ DR. ROBERT G. MARTIN Director October 3, 2002
- ------------------------------------------------
Dr. Robert G. Martin
/s/ DEAN R. KLECKNER Director October 3, 2002
- ------------------------------------------------
Dean R. Kleckner
</Table>
II-5
EXHIBIT INDEX
<Table>
<Caption>
EXHIBIT
NO. EXHIBIT DESCRIPTION
- ------- -------------------
2.1 Amended and Restated Agreement and Plan of Merger by and
between Donlar Corporation and Donlar Biosyntrex
Corporation, dated as of June 7, 2002, (included as Appendix
A in the Information Statement/Prospectus included in this
Registration Statement)
3.1 Amended and Restated Articles of Incorporation of Donlar
Corporation
3.2 Amended and Restated Bylaws of Donlar Corporation
4.1 Bridge and Consolidated Term Loan Agreement dated March 18,
2002, among Donlar Corporation, Donlar Biosyntrex
Corporation and Tennessee Farmers Life Insurance Company
4.2 Amendment dated May 31, 2002, to Bridge and Consolidated
Term Loan Agreement dated March 18, 2002, among Donlar
Corporation, Donlar Biosyntrex Corporation and Tennessee
Farmers Life Insurance Company
4.3 Letter Agreement dated March 18, 2002, among Donlar
Corporation, Willis Stein & Partners, L.P. and Star
Polymers, L.L.C.
4.4 Letter Agreement dated February 25, 2002, between Donlar
Corporation and Dr. Robert Gale Martin
4.5 Form of Letter Agreement between Donlar Corporation and
Holders 1998 and 2002 Notes
4.6 Certificate of Designations for Donlar Senior Convertible
Preferred Stock
4.7 Second Limited Consent and Waiver to Bridge and Consolidated
Term Loan Agreement By Tennessee Farmers Life Insurance
Company
4.8 Letter Agreement dated August 15, 2002, between Kamal Modir
M.D. and Donlar Biosyntrex
4.9 Letter Agreement dated August 15, 2002, between Kenneth A.
Hubbard and Donlar Biosyntrex
4.10 Letter Agreement dated August 23, 2002, between Peter
LeDonne and Donlar Biosyntrex
5.1 Opinion of Duane Morris LLP regarding legality of shares
being registered
10.1 Change of Control Agreement dated December 24, 1998 between
Donlar Corporation and Larry Koskan
10.2 Change of Control Agreement dated December 24, 1998 between
Donlar Corporation and Robert Pietrangelo
10.3 Office Lease Agreement made as of August 1, 1992 between
Donlar Corporation and Illinois Institute of Technology
10.4 Management Consulting Agreement entered into as of April 1,
2000 between Donlar Corporation and Dr. Robert G. Martin
13.1 2001 Annual Report of Donlar Biosyntrex on Form 10-KSB
(incorporated by reference in the Information
Statement/Prospectus included in Part I of this Registration
Statement)
13.2 June 30, 2002 Quarterly Report of Donlar Biosyntrex on Form
10-QSB (incorporated by reference in the Information
Statement/Prospectus included in Part I of this Registration
Statement)
21.1 List of subsidiaries of Donlar Corporation
23.1 Consent of Grant Thornton LLP
23.2 Consent of Duane Morris LLP (included as part of Exhibit
5.1)
</Table>