SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
(Amendment No. 2)
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14a-6(e)(2))
|_| Definitive Proxy Statement
|_| Definitive Additional Materials
|_| Solicitation Material Pursuant to Rule 14a-11(c) or rule 14a-12
Millennium Biotechnologies Group, Inc.
(Name of Registrant as Specified in its Charter)
------------------------------------------------------------------------
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Preliminary Copy
MILLENNIUM BIOTECHNOLOGIES GROUP, INC
665 Martinsville Road, Suite 219
Basking Ridge, NJ 07920
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON February 13, 2007
To the Stockholders of Millennium Biotechnologies Group, Inc.:
You are cordially invited to attend the Annual Meeting of
Stockholders of Millennium Biotechnologies Group, Inc. (the "Company"), a
Delaware corporation, to be held at The Somerset Hills Hotel, located at 20
Liberty Corner Road, Warren, NJ 07059 on the 13th day of February, 2007, at 8:00
a.m. local time, for the following purposes:
1. To authorize the sale by Millennium Biotechnology, Inc. (the
"Subsidiary"), the Company's wholly-owned subsidiary, of its
nutraceuticals business, which sale will constitute substantially
all of the Company's and the Subsidiary's assets under Delaware law,
pursuant to an Asset Purchase Agreement among the Company, the
Subsidiary, RAC Nutrition Corporation and RAC Nutrition Holdings
LLC;
2. To amend the Certificate of Incorporation of the Company to increase
the number of authorized shares of the Company's common stock from
200,000,000 to 400,000,000;
3. To ratify and approve Bagell, Josephs Levine & Company, L.L.C., as
our independent registered public accountants, to audit our
financial statements for the fiscal year ending December 31, 2006;
and
4. To transact such other matters as may properly come before the
meeting or any adjournment thereof.
Only stockholders of record at the close of business on January 10,
2007 are entitled to notice of and to vote at the meeting.
A proxy statement and proxy are enclosed. If you are unable to
attend the meeting in person you are urged to sign, date and return the enclosed
proxy promptly in the self addressed stamped envelope provided. If you attend
the meeting in person, you may withdraw your proxy and vote your shares.
By Order of the Board of Directors,
Frank Guarino, Secretary
Basking Ridge, New Jersey
January , 2007
----------
YOUR VOTE IS IMPORTANT
We urge you to promptly vote your shares
by completing, signing, dating and returning
your proxy card in the enclosed envelope.
----------
TABLE OF CONTENTS
Page
----
INTRODUCTION............................................................ 2
SUMMARY OF ASSET SALE................................................... 2
The Parties to the Asset Sale........................................... 2
Assets to be Sold to RAC Corp. by Subsidiary............................ 2
Liabilities to be Assumed by RAC Corp. ................................. 2
Sale Price; No Cash Proceeds............................................ 2
RAC Nutrition Corporation............................................... 2
RAC Nutrition Holdings LLC.............................................. 2
Common Stock Purchase Warrants of RAC Corp. ............................ 3
RAC Corp. Funding....................................................... 3
Series A Convertible Preferred Stock of RAC Corp. ...................... 3
Ancillary Agreements.................................................... 3
Private Placement of Securities of the Company.......................... 4
New Series E Convertible Preferred Stock of the Company ................ 4
New Series F Convertible Preferred Stock of the Company ................ 5
Board of Directors of the Company Following the Asset Sale and
Private Placement..................................................... 5
Recommendation of the Company's Board and Reasons for Asset Sale........ 5
Conduct of Business Following the Asset Sale and Private Placement...... 5
Conditions to Completion of Asset Sale; Votes Required to Authorize
Asset Sale............................................................ 6
Expenses and Termination Fees........................................... 6
No Appraisal Rights..................................................... 6
QUESTIONS AND ANSWERS ABOUT THE ASSET SALE AND THE ANNUAL MEETING....... 6
Why did I receive this proxy statement?................................. 6
What am I being asked to vote on at the annual meeting?................. 6
Why are the Company's stockholders being asked to authorize the sale
of substantially all the assets of its Subsidiary's assets?........... 7
What are the estimated proceeds of the Asset Sale?...................... 7
What business will the Company conduct after the Asset Sale?............ 7
What will happen if the Asset Sale is not authorized by the Company's
stockholders? ........................................................ 8
When is the Asset Sale expected to be completed?........................ 8
Am I entitled to appraisal rights in connection with the Asset Sale?.... 8
What will happen to my shares of the Company if the Asset Sale is
authorized?........................................................... 8
Why is the Company seeking to increase the number of shares of common
stock that it is authorized to issue?................................. 8
i
How will the increase in authorized shares of common stock affect my
ownership of Company's common stock?.................................. 9
How does the Company's board of directors recommend that I vote on
the proposal to be presented at the annual meeting?................... 9
How do I vote? ......................................................... 9
Can I change my vote? .................................................. 9
How many votes do I have?............................................... 9
What vote is required to approve the proposals? ........................ 9
What happens if I abstain or withhold authority to vote? ............... 10
How will voting on any other business be conducted? .................... 10
How may the annual meeting be adjourned?................................ 10
Who will bear the cost of this solicitation? ........................... 11
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS............... 11
PROPOSAL TO STOCKHOLDERS................................................ 11
Proposal 1 - The Asset Sale............................................. 11
Background of the Asset Sale............................................ 11
Recommendation of the Company's Board of Directors; Reasons for the
Asset Sale; Vote Required............................................. 12
Fairness Opinion of Berwin Capital...................................... 13
Certain Interested Persons.............................................. 15
Sale Price; No Cash Proceeds............................................ 18
Conduct of Business Following the Asset Sale............................ 18
Financial Statements.................................................... 18
Selected Financial Data................................................. 19
Selected Pro-Forma Financial Data....................................... 20
Accounting Treatment.................................................... 23
Certain Income Tax Consequences......................................... 23
THE ASSET SALE.......................................................... 23
The Parties to the Asset Sale........................................... 23
The Effective Time...................................................... 23
Assets to be Sold by the Subsidiary..................................... 23
Assets to be Retained by Subsidiary..................................... 23
Liabilities to be Assumed by RAC Corp. ................................. 24
Liabilities to be Retained by Subsidiary................................ 24
Sale Price; No Cash Proceeds............................................ 24
RAC Nutrition Corporation............................................... 24
Common Stock Purchase Warrants of RAC Corp. ............................ 24
ii
Series A Convertible Preferred Stock of RAC Corp. ...................... 24
RAC Nutrition Holdings LLC.............................................. 25
Representations and Warranties.......................................... 25
Covenants............................................................... 26
Closing Conditions...................................................... 26
Termination; Expenses; Termination Fees................................. 27
Indemnification......................................................... 27
Agreements Related to the Asset Sale.................................... 27
PRIVATE PLACEMENT....................................................... 28
Securities Purchase Agreement........................................... 28
Series E Preferred Stock................................................ 29
Series F Preferred Stock................................................ 29
Warrants................................................................ 30
Additional Investment Rights............................................ 30
Registration Rights Agreement........................................... 30
Proposal 2 - Amendment to Certificate of Incorporation to Increase
the Number of Authorized Shares of Common Stock....................... 30
Reasons for the Change to the Company's Common Stock.................... 30
General Effect of the Changes to the Company's Common Stock............. 31
Proposal 3 - Ratification of Selection of Independent Registered
Public Accountants.................................................... 32
PRINCIPAL STOCKHOLDERS.................................................. 34
AVAILABLE INFORMATION................................................... 35
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE......................... 35
STOCKHOLDER PROPOSALS FOR 2006 ANNUAL MEETING........................... 35
OTHER BUSINESS.......................................................... 35
ANNEX I - Asset Purchase Agreement, among the Company, the Subsidiary, RAC
Nutrition Corporation and RAC Nutrition Holdings LLC, dated October
25, 2006.
ANNEX II - Fairness opinion of Berwyn Capital dated November 1, 2006.
EXHIBIT A - Amendment to the Company's Certificate of Incorporation.
iii
EXHIBIT B - The Company's Quarterly Report on Form 10-QSB for the quarter
Ended September 30, 2006
EXHIBIT C - The Company's Annual Report on Form 10-KSB for the year ended
December 31, 2005
iv
Preliminary Copy
PROXY STATEMENT
MILLENNIUM BIOTECHNOLOGIES GROUP, INC.
665 Martinsville Road, Suite 219
Basking Ridge, NJ 07920
INTRODUCTION
This proxy statement is furnished in connection with the solicitation of
proxies for use at an annual meeting of stockholders of Millennium
Biotechnologies Group, Inc. (the "Company") to be held at The Somerset Hills
Hotel, located at 20 Liberty Corner Road, Warren, NJ 07059 on the 13th day of
February, 2007, at 8:00 a.m. local time, and at any adjournments. The
accompanying proxy is solicited by the Board of Directors of the Company and is
revocable by the stockholder by notifying the Company's Secretary, Frank
Guarino, at any time before it is voted, or by voting in person at the annual
meeting. This proxy statement and accompanying proxy will be distributed to
stockholders beginning on or about January 19, 2007. The principal executive
offices of the Company are located at 665 Martinsville Road, Suite 219, Basking
Ridge, NJ 07920, telephone (908) 604-2500.
Stockholders are to consider and vote upon the following matters, which
are more fully described in this proxy statement:
1. Authorization of the sale by Millennium Biotechnology, Inc. (the
"Subsidiary"), the Company's wholly-owned subsidiary, of its
nutraceuticals business (the "Asset Sale"), which sale will constitute
substantially all of the Company's and the Subsidiary's assets under
Delaware law, pursuant to an Asset Purchase Agreement to be entered into
among the Company, the Subsidiary, RAC Nutrition Corporation and RAC
Nutrition Holdings LLC;
2. Authorization to amend the Company's certificate of incorporation
to increase the number of authorized shares of common stock from
200,000,000 to 400,000,000;
3. Ratification and approval of Bagell, Josephs Levine & Company,
L.L.C., as our independent registered public accountants, to audit our
financial statements for the fiscal year ending December 31, 2006; and
4. Transaction of such other matters as may properly come before the
meeting or any adjournment thereof.
Only stockholders of record at the close of business on January 10, 2007,
the record date, are entitled to receive notice of, and vote at the annual
meeting. As of the record date, the number and class of stock outstanding and
entitled to vote at the meeting was 69,498,680 shares of common stock, par value
$.001 per share. Each share of common stock is entitled to one vote on all
matters. No other class of securities will be entitled to vote at the meeting.
There are no cumulative voting rights. The required quorum for the transaction
of business at the annual meeting is a majority of the shares of common stock
entitled to vote at the annual meeting, in person or by proxy. Abstentions and
broker "non-votes" are counted for purposes of determining a quorum. An
abstention is a properly signed proxy card that is marked "abstain." A broker
"non-vote" occurs when a nominee holding shares for a beneficial owner does not
vote on a particular proposal because the nominee does not have discretionary
voting power for that particular item and has not received voting instructions
from the beneficial owner.
Stockholders are encouraged to vote their shares, either by voting in
person at the meeting or by granting a proxy. If a stockholder executes the
attached proxy card, the individuals designated on that card will vote the
stockholder's shares according to the stockholder's instructions. If any matter
other than proposals 1 through 3 above is properly presented at the meeting, the
designated individuals will have the authority to vote all proxies on such
matters in their discretion in the manner they perceive to be in the best
interests of the Company.
If a stockholder executes the enclosed proxy card but does not give
instructions, the proxy will be voted as follows: (1) FOR the authorization of
the Asset Sale; (2) FOR the authorization to amend the certificate of
incorporation to increase the number of authorized shares of common stock; (3)
FOR the ratification of the appointment of Bagell, Josephs Levine & Company,
L.L.C. as the Company's independent registered public accountants; and (4) in
accordance with the best judgment of the persons appointed as proxies with
respect to any other matters which properly come before the Annual Meeting.
Information on how a stockholder may vote at the Annual Meeting (such as
granting a proxy that directs how such stockholder's shares should be voted or
attending the meeting in person), as well as how a stockholder can revoke a
proxy, is contained in this proxy statement below under the heading QUESTIONS
AND ANSWERS ABOUT THE ASSET SALE AND THE ANNUAL MEETING. The cost of this proxy
statement and of solicitation of proxies will be borne by the Company.
SUMMARY TERMS OF THE ASSET SALE
This summary highlights selected information contained in this proxy
statement and the asset purchase agreement, dated as of October 25, 2006, among
us, our wholly owned subsidiary, Millennium Biotechnologies, Inc., RAC Nutrition
Corporation ("RAC Corp.") and RAC Nutrition Holdings LLC ("RAC LLC") (the "Asset
Purchase Agreement") concerning the sale of our Subsidiary's nutraceuticals
business, its principal asset. To understand the Asset Sale fully and for a more
complete description of the terms of the Asset Sale, please carefully read this
proxy statement, the Asset Purchase Agreement, which is attached hereto as Annex
I, and the other documents described herein.
The Parties to the Asset Sale (page 23)
o Us, our wholly owned subsidiary, Millennium Biotechnologies, Inc.,
RAC Nutrition Corporation and RAC Nutrition Holdings LLC.
Assets to be Sold to RAC Corp. by the Subsidiary (page 23)
o Substantially all of its assets related to its nutraceuticals
business.
Liabilities to be Assumed by RAC Corp. (page 24)
o Certain liabilities related to the operation of the business to be
acquired not to exceed $500,000.
Sale Price For Assets; No Cash Proceeds (page 24)
o RAC Corp. will issue up to 10,000,000 shares of its common stock in
exchange for our assets. The number of shares of common stock to be
issued by RAC Corp. shall be reduced by one share per $1.00 of
liabilities assumed by RAC Corp. in excess of $300,000. RAC Corp.
also will issue performance vesting warrants to purchase up to 2.5
million shares of its common stock. These securities will be issued
to the Subsidiary and immediately distributed to RAC LLC, a limited
liability company whose sole member will be us as our designee,
pursuant to the liquidation of the Subsidiary in connection with
these transactions. Neither we nor our Subsidiary will receive any
cash proceeds from the Asset Sale.
Tax Treatment (page 23)
RAC Nutrition Corporation (page 24)
o RAC Nutrition Corporation, a newly formed Delaware corporation that,
at the closing of the Asset Sale, will acquire our Subsidiary's
assets and will be funded with $15 million.
RAC Nutrition Holdings LLC (page 25)
o RAC Nutrition Holdings LLC, a newly formed Delaware limited
liability company ("RAC LLC"), whose sole member will be us and
which will be the holder of the RAC Corp. shares and warrants to be
issued for the Subsidiary's assets and that will be RAC LLC as our
designee, pursuant to the liquidation of the Subsidiary.
2
o Pursuant to the operating agreement of RAC LLC, the manager of RAC
LLC will be RAC Corp. Subject to certain limitations requiring the
consent of the members of RAC LLC, the manager will be responsible
for the day-to-day management of RAC LLC.
o RAC Corp. will have the right to purchase all of the membership
interest in RAC LLC from us at their fair value if we are not in
compliance with the Investment Company Act of 1940 or if our cash
losses for each of two consecutive quarters exceeds four times our
cash on hand at the end of such quarters.
Common Stock Purchase Warrants of RAC Corp. (page 24)
o The Warrants will have the following terms:
o Exercisable. If and when RAC Corp. meets certain financial
benchmarks.
o Term. Five years.
o Exercise Price. $1.00 per share.
RAC Corp. Funding (page 24)
o Pursuant to a Series A Preferred Stock Purchase Agreement, among RAC
Corp., Aisling Capital II, LP ("Aisling"), Menemsha Capital
Partners, Ltd. ("Menemsha") and us, RAC Corp. will be initially
funded by the sale of 15,000,000 shares of its Series A Convertible
Preferred Stock, par value $0.001 per share (the "Series A Preferred
Stock") at an aggregate purchase price of $15 million.
o At any time prior to the second anniversary of the closing, Aisling
and Menemsha will have the option to purchase up to an additional
$12 million of the Series A Preferred Stock. At that time, we will
have the option to participate up to $2 million in such subsequent
funding.
Series A Convertible Preferred Stock of RAC Corp. (page 24)
o The RAC Corp. Series A Preferred Stock will have the following
terms:
o Voting. With the common stock on an as converted to common
stock basis.
o Conversion Price. The original purchase price of $1.00 plus
accrued but unpaid dividends is convertible at the rate of
$1.00 per share, subject to adjustment for anti-dilution.
o Anti-Dilution. If RAC Corp. issues shares at a price below the
then conversion price, during the first 36 months after
closing, the conversion price will be reduced to such
subsequent issue price. Thereafter the conversion price will
be reduced based on a weighted-average formula.
o Liquidation Preference. Over all other equity securities to
the extent of $1.00 per share, plus accrued but unpaid
dividends.
o Dividends. Accrued at the rate of $0.10 per year. Any earned
but unpaid dividend will be compounded at a rate of 10% per
annum.
o Election of Directors. The right to elect, as a separate
class, three of the five members of RAC Corp.'s board of
directors and to elect, together with the holders of common
stock, one member of RAC Corp.'s board of directors.
o Protective Provisions. The consent of a majority of the
holders of the Series A Preferred Stock will be required for a
number of actions related to issuing securities; amending RAC
Corp.'s certificate of incorporation; selling or licensing RAC
Corp.'s assets; payment of dividends; materially changing RAC
Corp.'s business; changing the size of the board of directors;
granting registration rights; incurring indebtedness;
acquiring another entity; or merger or similar transactions.
Ancillary Agreements (page 27)
o In connection with the Asset Sale, we also will enter into the
following agreements:
o Co-Sale and First Refusal Agreement. (page 27) The Co-Sale and
First Refusal Agreement among RAC Corp., the holders of the
Series A Preferred Stock and the holders of RAC Corp.'s common
stock, provides the following terms:
o Subject to certain limitations, the holders of RAC
Corp.'s common stock, including RAC LLC, may not sell,
assign, pledge or transfer their shares of common stock
unless such holder first offers to RAC Corp. and the
holders of Series A Preferred Stock the right to
purchase such shares upon the same terms as being
offered by the proposed transferee.
3
o If RAC Corp. and/or the holders of Series A Preferred
stock do not elect to purchase all of the shares being
offered by such holder of common stock, the
non-participating holders of Series A Preferred Stock
will have the option to sell a proportionate number of
shares of common stock to the proposed transferee upon
the same terms and conditions as being sold by such
holder of common stock.
o Voting Agreement. (page 27) The Voting Agreement among RAC
Corp., the holders of the Series A Preferred Stock and the
holders of RAC Corp.'s common stock, provides the parties will
vote all of their shares of RAC Corp. to elect:
o three directors nominated by Aisling Capital II, LP;
o one director nominated by RAC LLC so long as RAC LLC is
the holder of not less than 50% of common stock held by
it at the closing of the Asset Sale;
o one director designated by all of the directors, which
director may not be an employee of RAC Corp., in the
event RAC LLC is no longer the holder of at least 50% of
common stock held by it at the closing of the Asset
Sale; and
o one director who shall be the Chief Executive Officer of
RAC Corp.
o Investor Rights Agreement. (page 28) The Investor Rights
Agreement among RAC Corp., the holders of the Series A
Preferred Stock and the holders of RAC Corp.'s common stock,
grants to the holders of the Series A Preferred Stock demand
and piggyback registration rights and to RAC LLC piggy back
registration rights. The Investor Rights Agreement also
provides holders of Series A Preferred Stock preemptive rights
with respect to future stock issuances.
Private Placement of Securities of the Company (page 28)
o In August 2006, we entered into a purchase agreement for the private
placement of 13,000 Units for anticipated gross proceeds of $2.6
million.
o Each Unit consists of
o one share of a new Series E Senior Convertible Preferred
Stock,
o five-year warrants to acquire 800 shares of common stock at an
exercise price of $0.25 per share, and
o an additional investment right to acquire one additional share
of Series E Preferred Stock and five-year warrants to acquire
800 shares of common stock at an exercise price of $0.25 per
share.
o The lead investor, Iroquois Master Fund, Ltd., agreed to purchase
100 shares of a new Series F Senior Convertible Preferred Stock for
$100.
o The Purchase Agreement contemplates the issuance of
o approximately 14,630 additional Units to convert not less than
$2.926 million of our existing indebtedness by the holders of
such indebtedness, and
o 2,000 additional Units upon the same terms as set forth in the
Purchase Agreement.
o The private placement is scheduled to close simultaneously with the
Asset Sale and is contingent upon
o the conversion of indebtedness discussed above, and
o the issuance of 2,000 additional Units as discussed above,
o We have agreed to register the shares of common stock issuable upon
conversion of the preferred stock and exercise of the warrants
discussed above for public resale.
New Series E Convertible Preferred Stock of the Company (page 29)
o Each share of Series E Preferred Stock will have the following
terms:
o Stated Value. $200.
4
o Voting. With the common stock on an as converted to common
stock basis, subject to certain conversion limitations, on all
matters other than the election of directors.
o Dividends. At the rate of 10% per annum, payable quarterly in
cash or, subject to certain conditions, our common stock.
o Conversion Price. The stated value price plus accrued but
unpaid dividends is convertible at the rate of $0.25 per
share, subject to adjustment for anti-dilution.
o Liquidation Preference. Over all other equity securities to
the extent of the stated value price plus accrued but unpaid
dividends.
o Redemption.
o At the option of the holder at a price equal to the
stated value price plus accrued but unpaid dividends
o on and after three years, and
o upon the happening of certain triggering events
such as bankruptcy or breaches by us of certain
covenants or representations.
o Mandatory on the fifth anniversary at a price equal to
the stated value price plus accrued but unpaid
dividends.
New Series F Convertible Preferred Stock of the Company (page 29)
o Each share of Series F Preferred Stock will have the following
terms:
o Stated Value. $1.00.
o Voting.
o With the common stock on an as converted to common stock
basis, subject to certain conversion limitations, on all
matters other than the election of directors, and
o as a separate class, to elect three of the five members
of our board of directors.
o Dividends. None.
o Conversion Price. On a one-for-one basis, subject to
adjustment for anti-dilution.
o Liquidation Preference. Over all other equity securities other
than Series E Convertible Preferred Stock to the extent of the
stated value.
o Redemption. At the option of the holder at a price equal to
the stated value upon the happening of certain triggering
events such as bankruptcy or breaches by us of certain
covenants or representations.
Board of Directors of the Company Following the Asset Sale and Private Placement
(page 29)
o Three to Five Directors. If the Private Placement closes, Proposal
No. 1 passes and the Asset Sale is consummated, the Lead Investor
will have the right to elect three directors. If, as is anticipated,
the Lead Investor chooses to elect three directors, one of the
Company's then current directors will resign. The Lead Investor has
not determined, as of the date hereof, who the three directors will
be (see "Private Placement" below).
Recommendation of the Company's Board of Directors and Reasons for Asset Sale
(page 12)
o Vote FOR the proposal to authorize the Asset Sale. The Board
believes that the Asset Sale is in the best interest of the Company
because, among other things, it would align the Company with a major
biotechnology fund with a successful track record, provide funding
for the nutraceuticals business from one source, result in new
experienced management to accelerate the growth opportunity of the
Resurgex products and enable the Company the ability to pay off all
its liabilities from the proceeds of the $2.6 million private
placement of Series E Preferred Stock and related warrants and
additional investment rights scheduled to close simultaneously with
the Asset Sale.
Conduct of Business Following the Asset Sale and Private Placement (page 18)
o The Subsidiary will liquidate and the Company will have
approximately 40% beneficial ownership interest in the outstanding
capital stock of RAC Corp. and approximately $700,000 in cash and
will seek to acquire a new business and, possibly, make a further
investment in RAC Corp. through the exercise of the Warrants (if the
performance conditions to their vesting are met) or exercise of its
options to purchase the Series A Preferred Stock. There can be no
assurance that the Company will be able to locate or consummate
appropriate acquisition opportunities or that such acquisitions will
be profitable. In addition, future issuance of capital stock by RAC
Corp. may occur, reducing the percentage of our beneficial ownership
of RAC Corp.
5
Conditions to Completion of the Asset Sale, Vote Required to Authorize the Asset
Sale (page 26)
o In addition to customary closing conditions,
o Approval by Company stockholders,
o Consummation of a private placement of at least $15 million by
RAC Corp.,
o Execution of employment, confidentiality and other relevant
agreements with senior management and employees,
o Termination of royalty agreements between us and certain
individuals,
o Repayment, conversion or release of all our indebtedness, and
o Receipt of fairness and solvency opinions.
o Stockholder approval requires a majority of the votes entitled to be
cast by stockholders at the meeting.
o The Company's Board members and executive officers, who
collectively own approximately 8.5% shares of the Company's
common stock have indicated that they intend to vote for the
Asset Sale.
Expenses and Termination Fees (page 27)
o Each party is responsible for its own expenses.
o If RAC Corp. terminates the Asset Purchase Agreement due to material
breach by the Company of any of its representations, warranties or
covenants, the closing not occurring by February 15, 2007, the
failure to obtain stockholder approval of the Asset Sale, the
Company's Board of Directors withdrawing or modifying its approval
of the Asset Sale or the Company failing to have operating revenues
for the fourth quarter 2006 of at least $175,000, the Company will
be responsible for reimbursement of RAC Corp.'s expenses in
connection with the Asset Purchase Agreement in an amount up to
$350,000.
No Appraisal Rights (page 8)
o Company stockholders do not have appraisal rights in connection with
the Asset Sale under Delaware law or the Company's Certificate of
Incorporation or Bylaws.
QUESTIONS AND ANSWERS ABOUT THE ASSET SALE AND THE ANNUAL MEETING
Following are some commonly asked questions that may be raised by stockholders
and answers to each of those questions.
Why did I receive this proxy statement?
This proxy statement and the enclosed proxy card have been sent to
the Company's stockholders as of the record date for the annual meeting, because
the Company's Board of Directors is soliciting their vote at the annual meeting.
This proxy statement summarizes the information stockholders need to vote in an
informed manner on the proposals to be considered at the meeting. However,
stockholders do not need to attend the meeting to vote their shares. Instead
stockholders may simply complete, sign and return the enclosed proxy card.
What am I being asked to vote on at the Annual Meeting?
The Company's stockholders will consider and vote upon the following
proposals:
o Authorization of the sale by the Subsidiary of its
nutraceuticals business, which sale will constitute
substantially all of the Company's and the Subsidiary's
assets under Delaware law;
6
o Amendment to the Company's Certificate of Incorporation
to increase the number of authorized shares of its
common stock from 200,000,000 to 400,000,000;
o Ratification and approval of Bagell, Josephs Levine &
Company, L.L.C., as our independent registered public
accountants, to audit our financial statements for the
fiscal year ending December 31, 2006; and
o Transaction of such other matters as may properly come
before the meeting or any adjournment thereof.
Why are the Company's stockholders being asked to authorize the sale of
substantially all of its Subsidiary's assets?
Under Delaware law, the sale of substantially all of the
Subsidiary's assets constitutes the sale of substantially all of the Company's
assets and, therefore, requires the authorization of the Company's stockholders.
What are the estimated proceeds of the Asset Sale?
Following the closing of the Asset Sale and payment, or
establishment of a reserve for payment, of Subsidiary's retained liabilities and
other estimated expenses and costs incurred in connection with the Asset Sale
and making the other assumptions set forth in the unaudited Selected Pro-Forma
Financial Data below, the Company will receive beneficial ownership of
10,000,000 shares of common stock of RAC Corp which will be initially valued at
$10,000,000 based on the initial capitalization and valuation of RAC Corp. The
acquisition of the 10,000,000 shares of common stock in RAC Corp. which will be
acquired in exchange for the Subsidiary's Assets should qualify as a tax-free
reorganization under Section 368(a) of the Internal Revenue Service Code of 1986
as amended. In the event that the Internal Revenue Service makes a determination
that the transaction does not qualify as a tax-free reorganization under Code
Section 368(a), the maximum combined federal and state tax exposure should be
below $1,000,000. This estimate does not include current year losses from
operations that may be available to reduce this exposure.
Although the Company will not receive any funds from the Asset Sale,
it anticipates simultaneously (i) closing the Private Placement of Units
discussed below in "Private Placement" for gross proceeds of approximately $3.0
million and (ii) converting approximately $2.9 million of its indebtedness into
the Units. The closing of the Private Placement is contingent upon the
consummation of the Asset Sale; however, the closing of the Asset Sale is not
contingent upon the closing of the sale of the Private Placement. Nevertheless,
we are unable to satisfy our closing conditions to the Asset Sale without
receipt of the proceeds of the Private Placement.
What business will the Company conduct after the Asset Sale?
If the Asset Sale is authorized by the Company's stockholders, the
Subsidiary will sell substantially all of its assets to RAC Corp. under the
terms of the Asset Purchase Agreement. Following the Asset Sale, the Company
will have approximately 40% beneficial ownership interest in RAC Corp. and
performance vesting warrants to purchase up to an additional 2.5 million shares
of RAC Corp. common stock through RAC LLC, and the Subsidiary will completely
liquidate. Neither the Company nor the Subsidiary will have any active business.
The actual percentage retained and subsequently owned will depend on certain
factors including (i) whether the Company participates in subsequent rounds of
Series A Preferred Stock issuances anticipated during the two years after
closing and (ii) whether the RAC Corp. Warrants to be issued upon closing of the
Asset Sale are exercised.
Although no specific acquisition opportunities have been identified,
the Company anticipates that it will explore and consider using its available
liquid assets, including the net proceeds, if any, received by the Company from
the Private Placement, for business acquisition opportunities. There can be no
assurance that the Company will be able to locate or consummate one or more
appropriate acquisition opportunities, will have sufficient funds to acquire a
business or that such acquisitions will be profitable.
7
What will happen if the Asset Sale is not authorized by the Company's
stockholders?
If the Asset Sale is not authorized by the Company's stockholders,
the Subsidiary will not sell its assets to RAC Corp. and the Company and the
Subsidiary will continue to conduct their business in the ordinary course and
continue to evaluate all available strategic alternatives. In addition, pursuant
to the Asset Purchase Agreement, the Company will be required to reimburse RAC
Corp.'s expenses in an amount up to $350,000.
In addition, if the Asset Sale is not authorized by the Company's
stockholders, it will not be able to consummate the Private Placement of the
Units.
In either event, the Company will be in need of significant funds.
If it is unable to raise significant funds on acceptable terms, its financial
condition will be materially adversely affected and it may need to limit or
curtail operations.
When is the Asset Sale expected to be completed?
It is expected that the Asset Sale will be completed as soon as
practicable after it is authorized at the annual meeting, subject to the
satisfaction or waiver of the other conditions to be contained in the Asset
Purchase Agreement. It is currently expected that all such conditions will be
satisfied soon after the annual meeting.
Am I entitled to appraisal rights in connection with the Asset Sale?
No. The holders of the Company's common stock and preferred stock
are not entitled to appraisal rights in connection with the Asset Sale under the
Delaware General Corporation Law, the Company's Certificate of Incorporation or
the Company's Bylaws.
What will happen to my shares of the Company if the Asset Sale is authorized?
Except as discussed in the next paragraph, the Asset Sale will not
alter the rights, privileges or nature of the Company's common stock or
preferred stock. A stockholder who owns shares of the Company's common stock or
preferred stock immediately prior to the closing of the Asset Sale will continue
to hold the same number of shares immediately thereafter.
The closing of the Private Placement is contingent upon the Asset
Sale. In the event the Private Placement is consummated, the Series E Preferred
Stock and the Series F Preferred Stock grants to the holders thereof liquidation
preferences senior to those of the holders of the common stock. In addition, the
holders of Series F Preferred Stock will be entitled to elect three of the five
members of the Company's Board of Directors.
Why is the Company seeking to increase the number of shares of common stock that
it is authorized to issue?
Only approximately 74,000,000 shares of the Company's authorized
shares of common stock have not been issued or reserved for issuance under
presently outstanding options and warrants and pursuant to the amendments to
employment agreements and the terminations of the royalty agreements discussed
below (see "Certain Interested Persons"). In the event all of the Preferred
Shares and related Warrants to be issued in connection with the Private
Placement are converted or exercised, the Company will issue approximately
97,000,000 shares of its common stock. Should the Company issue the 97,000,000
shares of its common stock it would receive total aggregate cash in the amount
of $24,250,000 under the current terms of the Private Placement. Accordingly,
the increase in the number of its authorized common stock is required in order
for the Company to fulfill its obligations under the terms of the Private
Placement.
In addition, the Company believes that an increase in the number of
authorized shares of common stock will benefit the Company by providing
flexibility to issue common stock for a variety of business and financial
objectives in the future without the necessity of delaying such activities for
further stockholder approval. These objectives include, but are not limited to,
raising additional capital for business and asset acquisitions, current and
future employee compensation and benefits and other corporate purposes. The
Company anticipates that it may be issuing shares and/or options in the near
future to raise additional needed capital, and/or compensate employees and
officers. As of the date hereof, the Company is actively seeking to raise
additional funds through the sale of equity or convertible debt securities that
would require utilizing authorized but unissued/unreserved shares.. However,
other than the Private Placement, it has no definitive plans at this time. Aside
from the foregoing, the Company has no current plans to issue any of the shares
that would be authorized should this proposal be approved by our stockholders.
8
How will the increase in authorized shares of common stock affect my ownership
of Company common stock?
You will not realize any dilution in your percentage of ownership of
the Company or your voting rights as a result of the foregoing change. However,
issuances of significant numbers of additional shares of common stock in the
future (i) will dilute your percentage ownership of the Company and, (ii) if
such shares are issued at prices below what you paid for your shares, may dilute
the value of your shares.
How does the Company's Board of Directors recommend that I vote on the proposals
to be presented at the annual meeting?
The Company's Board of Directors recommends that you vote FOR the
proposal (i) to authorize the Asset Sale, (ii) to amend the Company's
Certificate of Incorporation to increase the number of authorized shares of the
Company's common stock from 200,000,000 to 400,000,000, (iii) to elect all three
of management's nominees to the Company's board of directors, and (iv) to ratify
the appointment of Bagell, Josephs Levine & Company, L.L.C. as the Company's
independent registered public accountants.
How do I vote?
Sign and date each proxy card you receive and return it in the
enclosed envelope prior to the annual meeting.
You also may vote in person by attending the annual meeting at The
Somerset Hills Hotel, located at 20 Liberty Corner Road, Warren, NJ 07059 on the
13th day of February, 2007, at 8:00 a.m. The Company will give you a ballot when
you arrive. However, if your shares are held in the name of your broker, bank or
other nominee, you must bring a power of attorney executed by the broker, bank
or other nominee that owns the shares of record for your benefit, authorizing
you to vote the shares.
Can I change my vote?
Yes. You may change your proxy instructions at any time before your
proxy is voted at the annual meeting. Proxies may be revoked by taking any of
the following actions:
o by filing, with the Secretary of the Company at its
principal offices, 665 Martinsville Road, Suite 219,
Basking Ridge, NJ 07920, a written notice of revocation
or a duly executed proxy bearing a later date; or
o by attending the annual meeting and voting in person
(although attendance at the meeting will not, by itself,
revoke a proxy).
How many votes do I have?
Stockholders who owned the Company's common stock at the close of
business on January 10, 2007 are entitled to vote on all matters properly
brought before the annual meeting. Each share of common stock is entitled to one
vote per share.
What vote is required to approve the proposals?
The Asset Sale
The affirmative vote of a majority of the votes entitled to be cast
by the holders of the outstanding shares of common stock on the record date is
required to authorize the sale of substantially all the assets of the
Subsidiary, which sale will also constitute a sale of substantially all of the
Company' s assets.
9
Amendment to the Certificate of Incorporation
The affirmative vote of a majority of the votes entitled to be cast
by the holders of the outstanding shares of common stock on the record date is
required to authorize the amendment to the Certificate of Incorporation to
increase the number of authorized common stock from 200,000,000 to 400,000,000.
Ratification of the Independent Registered Public Accountants
Ratification of the appointment of Bagell, Josephs Levine & Company,
L.L.C. as the Company's independent registered public accountants for the year
ended December 31, 2006 requires the affirmative vote of a majority of the
shares present and entitled to vote at the annual meeting.
Members of the Company's Board and the Company's executive officers,
who collectively own 5,846,901 shares of the Company's common stock, or
approximately 8.5% of the total votes, have indicated that they intend to vote
for (i) the Asset Sale; (ii) amendment of the Company's Certificate of
Incorporation to increase the number of authorized shares of the Company's
common stock from 200,000,000 to 400,000,000, (iii) the election of all of the
management's nominees to the board of directors; and (iv) the approval of the
appointment of the independent registered public accountants.
What happens if I abstain or withhold authority to vote?
Proxies marked "abstain" will be counted as shares present for the
purpose of determining the presence of a quorum. For purposes of determining the
outcome of a proposal, abstentions will have the same effect as a vote against
the proposal (other than the election of directors).
Broker "non-votes" occur when a nominee holding shares for a
beneficial owner does not vote on a particular proposal because the nominee does
not have discretionary voting power for that particular item and has not
received voting instructions from the beneficial owner. Broker "non-votes" will
be counted as shares present for purposes of determining the presence of a
quorum. However, broker "non-votes" will not be counted for purposes of
determining the number of votes cast with respect to the particular proposal on
which the broker has expressly not voted. Where a proposal, such as approval of
the Asset Sale and of the amendment to our Certificate of Incorporation,
requires the vote of a majority of the shares entitled to vote rather than a
majority of the votes present and voting at a meeting, the general effect of a
broker "non-vote" is a vote against the proposal.
How will voting on any other business be conducted?
Although the Company does not know of any other business to be
considered at the annual meeting, if any other business is properly presented at
the annual meeting, the proxy holders named on the proxy card, have the
authority to vote on such matters at their discretion such shares for which a
signed proxy card has been received.
How may the annual meeting be adjourned?
The chair of the meeting may adjourn the meeting from time to time
to reconvene at the same or some other time, date and place. The proxy holder
may vote your shares to adjourn the meeting from time to time and will be
authorized to vote your shares at any adjournment or postponement of the
meeting. Notice need not be given of any such adjournment meeting if the time,
date and place thereof are announced at the meeting at which the adjournment is
taken. If the time, date and place of the adjournment meeting are not announced
at the meeting which the adjournment is taken, then the Secretary of the Company
will give written notice of the time, date and place of the adjournment meeting
not less than ten (10) days prior to the date of the adjournment meeting. Notice
of the adjournment meeting also shall be given if the meeting is adjourned in a
single adjournment to a date more than thirty(30) days or in successive
adjournments to a date more than 120 days after the original date fixed for the
meeting.
10
Who will bear the cost of this solicitation?
The Company will pay the entire cost of preparing, assembling,
printing, mailing and distributing these proxy materials. The Company will
provide copies of these proxy materials to banks, brokerages, fiduciaries and
custodians holding in their names shares of common stock beneficially owned by
others so that they may forward these proxy materials to the beneficial owners.
The Company may solicit proxies by personal interview, mail, telephone and
electronic communications. The Company has not retained a proxy solicitor to
assist with the solicitation of proxies for the annual meeting. The Company's
directors, officers and employees (acting without additional compensation) may
assist in soliciting proxies. The Company will reimburse brokerage firms and
other persons representing beneficial owners of shares for their expenses in
forwarding solicitation materials to the beneficial owners.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Those statements herein that involve expectations or intentions
(including those related to the closing of the transactions contemplated by the
Asset Sale and the Company's plans or intentions following such closing, if any)
are forward-looking statements within the meaning of the U.S. securities laws,
involving risks and uncertainties, and are not guarantees of future performance.
You are cautioned that these statements are only predictions and that
forward-looking statements are subject to a number of risks, assumptions and
uncertainties that could cause actual results to differ materially from those
projected in such forward-looking statements. These risks, assumptions and
uncertainties include, but are not limited to, future decisions by the
Securities and Exchange Commission (the "SEC") or other governmental or
regulatory bodies; the vote of the Company's stockholders on the Asset Sale;
business disruptions resulting from the announcement of the Asset Sale;
uncertainties related to litigation; economic and political conditions in the
U.S. and abroad; and other risks outlined in the Company's filings with the SEC.
All forward-looking statements are effective only as of the date they are made
and the Company disclaims any intention or obligation to update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
PROPOSAL TO STOCKHOLDERS
PROPOSAL 1
THE ASSET SALE
Background of the Asset Sale
Historically, we have had insufficient funds to operate our business
and have continuously looked for sources of capital to meet our financial needs.
We have obtained funds to finance operations from the sale of our securities and
from the proceeds of convertible loans.
In early September 2004, while searching for a source of financing,
Jerry E. Swon, our Chief Executive Officer, was introduced to a New York based
private equity fund ("the Private Equity Fund"), a biotechnology fund and a
predecessor of Aisling Capital II, LP ("Aisling").
On September 21, 2004, Mr. Swon and Carl Germano, our Executive Vice
President of Research and Product Development, first met with the Private Equity
Fund to discuss a possible investment in the Company. Between October 2004 and
July 2005, we continued to have further discussions in person and by telephone
with the Private Equity Fund, regarding a potential investment in the Company by
the Private Equity Fund in the form of preferred stock. However, in early July
2005, the Private Equity Fund decided not to proceed with the potential
investment and all further discussions ceased.
On August 11, 2005, Messrs Swon and Germano met with a large
pharmaceutical company to discuss whether the pharmaceutical company had an
interest in our Company or business. On October 5, 2005, our management met with
the Private Equity Fund in their New York office to get advice on the then
pending negotiations with the large pharmaceutical company. During this meeting,
we discussed with the Private Equity Fund our new product line. The new product
line was well received, and the Private Equity Fund renewed their interest in
investing in the Company. In mid-January 2006, the large pharmaceutical company
decided not to move forward with any transaction with the Company.
11
After additional discussions between our management and Aisling, on
March 10, 2006, we received a draft term sheet from Aisling proposing the
exchange of our nutraceuticals business for an equity interest in a new private
company to be funded by Aisling and others with $15 million. Following
negotiations between our management, Aisling, and our respective counsels, the
term sheet was finalized and executed on April 5, 2006.
Thereafter, a financial and legal due diligence review of the
Company was conducted by Aisling and its legal counsel. The parties, with
assistance of their respective legal counsels, began preparing and negotiating
the definitive asset purchase agreement and other ancillary agreements. During
this period the "no shop" provision in the term sheet was due to expire and the
parties determined that the term sheet needed to be amended. On August 24, 2006,
after additional negotiation, the term sheet was amended to: (i) extend the "no
shop" period through December 1, 2006; (ii) clarify the anti-dilution provisions
of the Preferred Stock of RAC Corp; and (iii) increase the dividends on the
Preferred Stock to 10%.
On October 23, 2006, our Board unanimously approved the Asset Sale,
giving management authority to finalize the Asset Purchase Agreement and related
documents, including any changes to the terms set forth in the term sheet as
amended, and recommended to our stockholders that the sale be approved.
On October 25, 2006, after additional negotiation, the term sheet
was amended so that the dividends on the Preferred Stock were compounding and to
change the Company's rights to participate with the investors in RAC Corp.
Initially, the Company had the right to purchase up to $2 million of Preferred
Stock in the initial issuance by RAC Corp. which required the Company to invest
up to $5 million in a subsequent issuance or be penalized. As amended, the
Company has no right to participate in the initial issuance, but has the right
to purchase up to $2 million of Preferred Stock in the subsequent issuance
without any penalty.
On October 25, 2006, the Asset Purchase Agreement was executed by
the relevant parties.
Between September 2004 and October 23, 2006, Mr. Swon and other
members of management had numerous discussions, in person and by telephone,
about the proposed transactions with the Private Equity Fund/Aisling. The Board
noted that the Company had reviewed a number of possible convertible debt
financings and had determined not to proceed with any of them because they were
too expensive, too dilutive to stockholders and, possibly, too disruptive to the
trading market of the Company's common stock. The board members believed that a
possible transaction with the Private Equity Fund/Aisling was a better option
for the reasons discussed below in "Recommendation of the Company's Board;
Reasons for the Asset Sale, Vote Required." In a telephonic meeting on April 3,
2006, the board discussed retaining a firm to value the proposed Aisling
transaction and to deliver a valuation report and fairness opinion. Mr. Martin
suggested Berwyn Capital. Mr. Martin forwarded a contract from Berwyn Capital to
Jerry Swon on April 19, 2006 and, shortly thereafter Frank Guarino contacted
Berwyn Capital and retained them to provide the foregoing services.
Recommendation of the Company's Board; Reasons for the Asset Sale, Vote Required
The Company's Board of Directors has considered the financial and
business aspects of the Asset Sale and believes that the Asset Sale is in the
best interest of the Company and its stockholders.
In making its determination, the Company's Board considered the
following factors:
o All other available options for obtaining financing for the
Company's business were unacceptable because they were too
expensive, too dilutive to stockholders and, possibly, too
disruptive to the trading market of the Company's common stock.
o The Asset Sale would align the Company with a major biotechnology
fund with a successful track record.
o The Asset Sale would provide funding for the nutraceuticals business
from one source.
12
o The Asset Sale would result in new experienced management to
accelerate the growth opportunity of the Resurgex products.
o After reviewing the valuation report of Berwyn Capital, the
consideration to be received by the Company for the nutraceuticals
business was determined to be fair.
o As a result of the Asset Sale, the Company will have the ability to
pay off all its liabilities from the proceeds of the $2.6 million
private placement of Series E Preferred Stock and warrants scheduled
to close simultaneously with the Asset Sale.
After taking into consideration all of the factors set forth above,
the Board unanimously determined that the Asset Sale was in the best interests
of the Company and its stockholders, and that the Company should consummate the
Asset Sale.
The foregoing discussion of the information and factors considered
by the Company's Board is not intended to be exhaustive, but includes all
material factors considered by the Company's Board. In view of the wide variety
of factors considered in connection with its evaluation of the Asset Sale, the
Company's Board did not find it practicable to assign relative weights to the
factors considered in reaching its decision. In addition, individual directors
may have given different weights to different factors and may have viewed some
factors more positively or negatively than others.
Based on the foregoing, the Company's Board recommends that
stockholders vote FOR the proposal to authorize the Asset Sale.
If the Company fails to obtain the requisite stockholders'
authorization for the Asset Sale, the Subsidiary will not be able to consummate
the Asset Sale. The holders of the Company's common stock are not entitled to
appraisal rights in connection with the Asset Sale under the Delaware General
Corporation Law, the Company's Certificate of Incorporation or the Company's
Bylaws.
Members of the Company's Board and the Company's executive officers,
who collectively own 5,846,901 shares of the Company's common stock, or
approximately 8.5% of the total votes, have indicated that they intend to vote
in favor of the Asset Sale.
Fairness Opinion of Berwyn Capital
In a telephonic meeting of April 3, 2006, the board discussed
retaining a firm to value the proposed Aisling transaction. During the call,
Michael Martin, one of the independent board members, suggested Berwyn Capital.
Mr. Martin thereafter contacted and forwarded a proposed retainer to Jerry Swon,
our Chief Executive Officer, on April 19, 2006. Shortly thereafter, Frank
Guarino, our Chief Financial Officer, contacted Berwyn Capital and retained them
to issue a fairness opinion. Curtis Financial Group, LLC was also considered as
a candidate to render the fairness opinion. The Board of Directors elected to
retain Berwyn Capital due to the increased cost effectiveness and efficiency
advantages Berwyn Capital offered as compared to Curtis Financial Group, LLC,
without compromising the quality of the opinion.
The principals of Berwyn Capital, Jack McAleer and Conrad Huss, have
over 50 years of investment banking experience.
No material relationship existed during the past two years nor is a
material relationship mutually understood to be contemplated between the Company
and/or its affiliates and Berwyn Capital and/or its affiliates.
The Company paid an aggregate fee of $47,500 for delivery of the
fairness opinion. No portion of the fee is contingent upon the closing of the
Asset Sale.
Berwyn Capital delivered a written opinion dated November 1, 2006 to
our Board to the effect that, based upon the assumptions made, matters
considered and limits of the review undertaken, the Asset Sale from a financial
point of view is fair to the Company's stockholders. Berwyn Capital did not
recommend or determine the consideration to be paid with respect to the Asset
Sale. A copy of the opinion letter is attached as Appendix II and is
incorporated herein by reference. Berwyn Capital's opinion should be read in its
entirety by the stockholders of the Company for information with respect to
assumptions made and matters considered.
13
In arriving at its opinion, Berwyn Capital reviewed (a) the Asset
Purchase Agreement and other transaction documents; (b) the Company's audited
financial statements for the years ended December 31, 2004 and December 31, 2005
and unaudited financial statements for the periods ended March 31, 2006 and June
30, 2006, (c) internal operating and financial information, including
projections, provided to Berwyn Capital by the Company, (d) historical stock
prices and reported events of the Company and (e) publicly available data and
stock performance data of public companies Berwyn Capital deemed comparable to
the Company. Berwyn Capital also held discussions with members of the Company's
management regarding the Company's operations, historical financial results and
future prospects. In rendering its opinion, Berwyn Capital relied upon the
accuracy and completeness of all of the financial and other information
reviewed.
The following is a summary of the financial analysis performed by
Berwyn Capital in arriving at its opinion regarding the Asset Sale.
The information is presented in both tabular and text summary. One
must consider, not only, the analysis, methodologies and assumptions underlining
the analysis, but also information presented by management to get a better
understanding of the analyses. Without considering all information presented,
including management discussion, it could create an incomplete view of the
financial analyses.
Income Approach
In reviewing a discounted cash flow analysis, it was determined that
a high-growth model was more appropriate. This model takes into consideration
rapid revenue growth, periods of negative earnings and equity capital
investments, to estimate the enterprise value.
Based on various studies, where growth rates are expected to exceed
10% per year, discounts of 22.5% - 30% are applied. The revenue projections
provided by management were reviewed based on the infusion of $15 million new
capital. Expense projections where reviewed which assumed reasonable increases
in gross margin which would result in moderate increases in net margins. As
mentioned, any model used assumes that the Company achieves forecasted targets.
The model reflects an expected debt to capital ratio of 20% debt to 80% equity,
and an average cost of borrowing consistent with capital structures other public
companies looked at.
Based on these assumptions and forecasts presented by management,
the following ranges for the enterprise value has been estimated:
Low $50.25 million
Mid $57.75 million
High $66.0 million
Quoted Market Method
Based on market price over the last year, the 52-week high of $0.51
and 52-week low of $0.27, the market valuation has fluctuated from:
Low $17.8 million
Mid $25.8 million
High $33.7 million
In reviewing the proposed transactions, the following factors had to
be considered for valuing RAC Corp.:
o RAC Corp. will own all the Resurgex Technology (Technology
transfer equal value)
o RAC Corp. will have new Senior Management and New Board of
Directors
o RAC Corp. will have $15 million new capital and a reduction of
debt
14
A conservative market approach could give a 20% premium for the new
investment. Based on these assumptions, it was determined that the following
ranges for the enterprise value of RAC Corp. are:
Low $53.5 million
Mid $63. million
High $72.5 million
Taking into consideration that the Investors may make additional $12
million additional working contributions, and with no premium value, the
following ranges of enterprise value were determined:
Low $56.5 million
Mid $64.4 million
High $72.4 million
The range of enterprise value would be supported by the total
consideration set forth for the transaction described.
A market approach method is to compare other similar public
companies to use as a guideline based upon actual and projected revenues. Berwyn
focused on those companies that either had market caps and sales under $100
million and/or were not yet profitable. The market cap to sales multiple ranges
for those companies was 1x - 6.9x eliminating the high and low multiples
adjusted the forward-looking range to 2.5x -3.1x with a medium of 2.68 x.
Reliance on forward revenue multiples assumes that the Company achieves its
forecasted targets. For the purpose of valuation, Berwyn used this range of
trading multiples and applied them to the corresponding forecasted financials
and estimated revenues for the first full complete operations after RAC Corp.
transaction is complete.
Based on the foregoing, the following ranges for the enterprise
value has been estimated:
Low $33.8 million
Mid $60.4 million
High $69.8 million
Several companies were looked at that fit the above criteria even
though some data points were eliminated, the enterprise value estimate still had
a fairly wide range. These estimates may have limited reliability, due to
factors unknown to us for each of the companies looked at, but provide a range
that is fairly consistent with the other methods used above.
Black Scholes Option Pricing Model
Does not apply at all as options cannot be written on "penny stocks"
trading on the Bulletin Board.
Remarks & Conclusions
An opinion as to what may be fair from a financial point of view to
the stockholders of the Company has to rely on both a realistic business
approach as well as on specific financial/economic models.
The plan proposed offers in our opinion, several positive business
factors that would benefit the stockholders and far outweigh the negative
factors. In addition, the proposed transaction includes the consideration that
the Company will have the opportunity to pursue other potential situations.
Even with the existing stockholders having additional dilution
resulting from the transaction, the value would be potentially enhanced by RAC
Corp. that will have capital and the ability for growth in sales and profits.
It is Berwyn's opinion that, as of the present date, this proposed
transaction based on information presented and various assumptions, is fair from
a financial point of view, to the Millennium stockholders.
Certain Interested Persons
Consulting Agreement
In connection with the Asset Sale, Jerry E. Swon, our Chief
Executive Officer and Chairman of the Board, will enter into a consulting
agreement with RAC Corp. Pursuant to the consulting agreement, Mr. Swon will
agree to provide such consulting services as may be requested by RAC Corp. and
will be compensated $150,000 annually (payable monthly) for his services. In
addition, he will be entitled to participate in medical coverage on
substantially the same basis such coverage is provided to officers of RAC Corp.
15
Amendments to Employment Agreement
Pursuant to the terms of employment agreements with various
employees of the Company, such employees were entitled to certain benefits and
payments upon a change of control of the Company and/or termination of their
employments. The consummation of the Asset Sale and the private placement of our
Series E and Series F Preferred Stock would have triggered such provisions.
Accordingly, the Company entered into amendments to the employment agreements as
described below.
Jerry E. Swon
The employment agreement between the Company and Mr. Swon had
provided that Mr. Swon will continue as an employee of the Company until
December 31, 2010, at an annual salary of $300,000. In the event Mr. Swon's
employment is terminated by the Company without cause, he was entitled to
receive certain termination benefits including a payment of 2.5 times his base
salary. In addition, options to purchase 5,000,000 shares of Common Stock at an
exercise of $.50 per share was to vest automatically upon, among other things, a
change of control.
Pursuant to the amendment to his employment agreement, upon the
closing of the Asset Sale and the private placement, Mr. Swon's employment term
will be reduced to one year from the date of such closing, and his salary will
be reduced to $100,000 per year. The 5,000,000 options referred above will
automatically vest upon the closing and the exercise price thereof will be
reduced to $.25 per share. In addition, Mr. Swon was granted warrants to
purchase 2,000,000 shares of Common Stock, exercisable for a period of five
years commencing January 1, 2007 at an exercise price of $.25 per share. Mr.
Swon further agreed not to sell, assign or transfer any such options or warrants
and not to sell, assign or transfer the underlying shares of Common Stock for a
period of one year after exercise thereof.
Frank Guarino
The employment agreement between the Company and Frank Guarino (our
Chief Financial Officer) had provided that Mr. Guarino will continue as an
employee of the Company until December 31, 2010, at an annual starting salary of
$98,000, subject to certain increases. In the event Mr. Guarino's employment was
terminated by the Company without cause, he was entitled to receive certain
termination benefits, including payment of his salary through the normal
expiration date of this employment term. In addition, options to purchase
200,000 shares of Common Stock at an exercise of $.01 per share was to vest
automatically upon, among other things, a change of control.
Pursuant to the amendment to his employment agreement, upon the
closing of the Asset Sale and the private placement, Mr. Guarino's employment
term will be reduced to one year from the date of such closing at a salary of
$150,000 per year, less any amounts to be paid to him by the purchaser of the
Company's nutraceutical business for consulting services, if any. The 200,000
options referred above will automatically vest upon the closing and the exercise
price of 334,000 options which had previously vested will be reduced from $.37
per share to $.25 per share. In addition, Mr. Guarino was granted warrants to
purchase 1,200,000 shares of Common Stock, exercisable for a period of five
years commencing January 1, 2007 at an exercise price of $.25 per share. Mr.
Guarino further agreed not to sell, assign or transfer the 200,000 options or
1,200,000 warrants and not to sell, assign or transfer the underlying shares of
Common Stock for a period of one year after exercise thereof.
John Swon
The employment agreement between the Company and John Swon (the son
of our Chief Executive Officer) had provided that Mr. Swon will continue as an
employee of the Company until December 31, 2010. In the event Mr. Swon's
employment was terminated by the Company without cause, he was entitled to
receive certain termination benefits, including 2.5 times his base salary. In
addition, options to purchase 200,000 shares of Common Stock at an exercise of
$.01 per share was to vest automatically upon, among other things, a change of
control.
16
Pursuant to the amendment to his employment agreement, in the event
Mr. Swon is employed by RAC Corp. following the closing of the Asset Sale, Mr.
Swon's employment term will terminate, and he shall not be entitled to any
termination benefits other than his accrued but unpaid salary. The 200,000
options referred above will automatically vest upon such closing. Mr. Swon
further agreed not to sell, assign or transfer such options and not to sell,
assign or transfer the underlying shares of Common Stock for a period of one
year after exercise thereof.
Jerry T. Swon
The employment agreement between the Company and Jerry T. Swon (a
son of our Chief Executive Officer) had provided that Mr. Swon will continue as
an employee of the Company until December 31, 2010. In the event Mr. Swon's
employment was terminated by the Company without cause, he was entitled to
receive certain termination benefits, including 2.5 times his base salary. In
addition, options to purchase 200,000 shares of Common Stock at an exercise of
$.01 per share was to vest automatically upon, among other things, a change of
control.
Pursuant to the amendment to his employment agreement, in the event
Mr. Swon is employed by RAC Corp. following the closing of the Asset Sale, Mr.
Swon's employment term will terminate, and he shall not be entitled to any
termination benefits other than his accrued but unpaid salary. The 200,000
options referred above will automatically vest upon such closing. Mr. Swon
further agreed not to sell, assign or transfer such options and not to sell,
assign or transfer the underlying shares of Common Stock for a period of one
year after exercise thereof.
Christopher Swon
The employment agreement between the Company and Christopher Swon (a
son of our Chief Executive Officer) had provided that Mr. Swon will continue as
an employee of the Company until December 31, 2010. In the event Mr. Swon's
employment was terminated by the Company without cause, he was entitled to
receive certain termination benefits, including payment of his salary through
the normal expiration date of this employment term. In addition, options to
purchase 100,000 shares of Common Stock at an exercise of $.01 per share was to
vest automatically upon, among other things, a change of control.
Pursuant to the amendment to his employment agreement, in the event
Mr. Swon is employed by RAC Corp. following the closing of the Asset Sale, Mr.
Swon's employment term will terminate, and he shall not be entitled to any
termination benefits other than his accrued but unpaid salary. The 100,000
options referred above will automatically vest upon such closing. Mr. Swon
further agreed not to sell, assign or transfer such options and not to sell,
assign or transfer the underlying shares of Common Stock for a period of one
year after exercise thereof.
Carl Germano
The employment agreement between the Company and Carl Germano (our
Executive Vice President of Research and Product Development) had provided that
Mr. Germano will continue as an employee of the Company until May 18, 2011. In
the event Mr. Germano's employment was terminated by the Company without cause,
he was entitled to receive certain termination benefits, including payment of
his salary for twelve months.
Pursuant to the amendment to his employment agreement, in the event
Mr. Germano is employed by RAC Corp. following the closing of the Asset Sale,
Mr. Germano's employment term will terminate, and he shall not be entitled to
any termination benefits other than his accrued but unpaid salary.
Cancellation of Royalty Agreements
Pursuant to Investment Agreements between the Subsidiary and certain
stockholders, consisting of P. Elayne Wisart, Jane Swon (our Chief Executive
Officer's spouse), Jerry T. Swon, John Swon, David Miller and Carl Germano, such
stockholders agreed to assign to the Subsidiary all formulations, patents,
copyrights and technology invented or developed by such stockholder with respect
to nutraceutical supplements, including Resurgex in exchange for, among other
things, the right to receive royalty payments based upon the gross sales of
Resurgex and gross profits of any additional products of the Subsidiary. One of
the conditions to RAC Corp.'s obligation to consummate the Asset Sale is the
termination of such royalty payment obligations of the Subsidiary. Accordingly,
the Company and the Subsidiary plan to enter into Exchange Agreements with each
such stockholder whereby such stockholders will agree to forever release and
waive all rights to any past, present or future royalty payments in exchange for
4,655,000 shares of the Company's common stock in the aggregate. The Asset
Purchase Agreement provides RAC the right to close with a percentage of the
royalty agreements still in place solely at RAC's discretion.
17
Sale Price; No Cash Proceeds
Neither the Company nor the Subsidiary will receive any cash
proceeds from the Asset Sale. Instead, RAC Corp. will issue up to 10 million
shares of its common stock. The number of shares of common stock to be issued by
RAC Corp. shall be reduced by one share per $1.00 of liabilities assumed by RAC
Corp. in excess of $300,000. It also will issue performance vesting warrants to
purchase up to 2.5 million shares of its common stock. These shares and warrants
will be issued to RAC LLC, a limited liability company whose sole member will be
us. The Company will have the right to have the common stock that it
beneficially owns included in any registration statement that RAC Corp. files
with the SEC to register its common stock, subject to limitations in connection
with an underwritten public offering.
Conduct of Business Following the Asset Sale
If the Asset Sale is authorized by the Company's stockholders, the
Subsidiary will sell substantially all of its assets to RAC Corp. under the
terms of the Asset Purchase Agreement. Following the Asset Sale, The Subsidiary
will liquidate and the Company will have approximately 40% beneficial ownership
interest in the outstanding capital stock of RAC Corp. and warrants to purchase
up to an additional 2.5 million shares of RAC Corp. common stock through RAC LLC
but neither the Company nor the Subsidiary will have any active business. The
actual percentage retained and subsequently owned will depend on certain factors
including (i) whether the Company exercises its right to purchase up to $2.0
million of RAC Corp. Series A Preferred Stock in subsequent rounds of Series A
Preferred Stock issuances anticipated during the two years after closing; (ii)
whether the RAC Corp. Warrants to be issued upon closing of the Asset Sale (if
the performance conditions to their vesting are met) are exercised; and (iii)
whether RAC Corp. issues additional capital stock in the future transactions.
Following the Asset Sale, the Company anticipates that it will
explore business acquisition opportunities. No specific acquisition
opportunities have been identified at this time. The Company anticipates that it
will fund any acquisition from the net proceeds, if any, of the Private
Placement. The Private Placement is scheduled to close upon the consummation of
the Asset Sale (see "Private Placement" below). As of December 31, 2006, the
Company's consolidated cash and cash equivalents and marketable securities were
approximately $50,000. The Company anticipates approximately $500,000 in net
proceeds from the Private Placement following the payment of existing
liabilities of the Subsidiary.
There can be no assurance that the Company will be able to locate or
consummate one or more appropriate acquisition opportunities, have the funds to
acquire a business or that such acquisitions will be profitable.
If the Company is unable to acquire and/or commence substantive
business operations other than its investment in RAC Corp. within one year of
the closing of the Asset Sale, it most likely will be deemed to be an investment
company under the Investment Company Act of 1940. Upon the sale of the Assets,
the value of the securities of RAC Corp. to be owned by the Company will exceed
40% of the value of the Company's total assets. Under the Investment Company
Act, an issuer, such as the Company, that owns investment securities with a
value in excess of 40% of its total assets, is an investment company, unless it
has a bona fide intent to be engaged primarily, as soon as is reasonably
possible (in any event within one year), in a business other than that of
investing, reinvesting, owning, holding or trading in securities. As noted
above, the Company is exploring business acquisition opportunities for after the
closing of the Asset Sale. However, if the Company is deemed to be an investment
company, it would be subject to costly and burdensome compliance requirements,
including registration under that Act and compliance with reporting, record
keeping, voting, proxy and disclosure requirements and other rules and
regulations. In addition, its activities, including consummation of any business
acquisition, issuance of securities and types of investments, would be
restricted.
Financial Statements
Please see the Company's unaudited financial statements as of and
for the nine months ended September 30, 2006 contained in the Company's
Quarterly Report on Form 10-QSB for the quarter ended September 30, 2006
attached hereto as Exhibit B and the Company's audited financial statements as
of and for the year ended December 31, 2005 contained in the Company's Annual
Report on Form 10-KSB for the year ended December 31, 2005 attached hereto as
Exhibit C.
18
Selected Financial Data
Please reference the attached Exhibits referenced immediately below
and attached hereto as Exhibits B and C:
EXHIBIT B - The Company's Quarterly Report on Form 10-QSB for the quarter Ended
September 30, 2006
EXHIBIT C - The Company's Annual Report on Form 10-KSB for the year ended
December 31, 2005
19
Selected Pro-Forma Financial Data
MILLENNIUM BIOTECHNOLOGIES GROUP, INC. AND SUBSIDIARY
PRO-FORMA
CONSOLIDATED BALANCE SHEET
The following unaudited pro forma combined balance sheet, and
statement of operations as of September 30, 2006, is based on the historical
financial statements of the Company and the Subsidiary and gives effect to the
pro forma adjustments described herein as though the Asset Sale and the Private
Placement had been consummated at September 30, 2006.
The unaudited pro forma combined balance sheet should be read in
conjunction with the notes thereto and with the historical financial statements
of the Company, as filed in its annual report on Form 10-KSB for the year ended
December 31, 2005 and in its quarterly report on Form 10-QSB for the quarter
ended September 30, 2006 included in Exhibits B and C attached hereto. The
unaudited pro forma combined balance sheet is not necessarily indicative of the
Company's combined financial position that would have been achieved had the
Asset Sale and Private Placement been consummated at September 30, 2006.
Priv.Plcmt Priv.Plcmt Sale Pay-off Conv.Debt
13,000 2,000 "F" Settlement Asset Liab 14,981 Pro-Forma
30-Sep-06 units units shs Royalties Sale Liabilities units Balance
------------- ------------ ---------- ---- ---------- ----------- ----------- ------------ ------------
Cash $ 45,193 $ 2,392,000(a) $ 400,000 $100 ($2,300,000) $ 537,293
Accts Rec $ 186,690 ($186,690) $ 0
Inventories $ 553,025 ($553,025) $ 0
PPd expenses $ 83,462 ($83,462) $ 0
Misc
receivables $ 105,131 ($105,131) $ 0
------------- -------------
Total current
assets $ 973,501 $ 537,293
PPE $ 13,672 ($13,672) $ 0
Patents $ 8,542 ($8,542) $ 0
Deposits $ 18,352 ($18,352) $ 0
Securities $ 0 $10,000,000 $ 10,000,000
------------- -------------
Total Assets $ 1,014,067 $ 10,537,293
============= =============
Accts Pay /Accr $ 3,249,212 ($134,323) ($2,300,000) $ 814,889
ST Debt $ 4,106,267 ($2,946,267) $ 1,160,000
Currt Mat of LT
Debt $ 50,000 ($50,000) $ 0
------------- -------------
Tot crrt
liabilities $ 7,405,479 $ 1,974,889
Accr roy lT
portion $ 16,250 ($17,500) ($1,250)
------------- -------------
Total
liabilities $ 7,421,729 $ 1,973,639
Pref stck B $ 130,283 $ 130,283
Pref stck C $ 64,762 $ 64,762
Pref stck E,
par $1 $ 13,000 $ 2,000 $ 14,981 $ 29,981
Pref stck F,
par $1 $100 $ 100
Common stck $ 68,618 $ 4,655 $ 73,273
APIC $ 26,646,819 $ 2,587,000 $ 398,000 $ 147,168 $ 2,981,286 $ 32,760,273
Dec Comp ($26,094) ($26,094)
Accum Deficit ($33,292,050) ($208,000) $ 9,031,126 ($24,468,924)
------------- -------------
Stockh equity ($6,407,662) $ 8,563,654
Tot liabil &
stckh equity $ 1,014,067 $ 10,537,293
============= =============
ctrl $ 0 $ 0
Comm Sh Equiv
(b) 67,959,000 10,400,000 1,600,000 400 4,655,000 11,985,068 96,599,468
(a) net of 8% Finders Fee
(b) no consideration for investment rights or warrants
20
Notes to Pro-Forma Balance Sheet for Millennium Biotechnologies Group and
Subsidiary
Assets
All of the Company's assets except for cash will be transferred in exchange for
10,000,000 shares of common stock in RAC Nutrition Corp. which will be initially
valued at $1.00 per share at closing of the Asset Sale pursuant to the terms of
the Asset Purchase Agreement signed on October 25, 2006 between Aisling Capital,
LLC and the Company.
Liabilities
The Company is required to satisfy all outstanding liabilities prior to the
closing of the Asset Sale, the Company plans on converting existing convertible
notes to retire existing debt and use the funds acquired from the Private
Placement Agreement which was entered into on August 16, 2006 whereby the
Company will sell Series E Preferred Stock.
Stockholders Equity
The changes to the Stockholders Equity section of the Balance Sheet provide for
the addition and issuance of Series E and F preferred stock as contemplated in
the Private Placement Purchase Agreement.
21
MILLENNIUM BIOTECHNOLOGIES GROUP, INC. AND SUBSIDIARY
PRO FORMA
CONSOLIDATED INCOME STATEMENT
9 Months Ended 9 Months Ended
September 30, Pro-Forma Pro-Forma
2006 Adjustments Balances
-------------- ----------- --------------
(Unaudited)
Net Sales ....................... $ 658,632 0 658,632
Cost of goods sold .............. 477,392 0 477,392
------------ ---------- ----------
Gross Profit .................... 181,240 0 181,240
Research and development costs .. 51,917 0 51,917
Selling, general and
administrative expenses ....... 8,081,575 0 8,081,575
------------ ---------- ----------
Profit (Loss) from Operations ... (7,952,252) 0 (7,952,252)
Other Income (Expense)
Extraordinary Gain from Asset
Sale .......................... 9,031,126 9,031,126
Interest expense .............. (2,500,661) 0 (2,500,661)
Miscell Expense ............... (2,395) 0 (2,395)
------------ ---------- ----------
Total Other Income (Expense) .... (2,503,056) 9,031,126 6,528,070
Prov income tax ................. 2,351 0 2,351
------------ ---------- ----------
Total Net Profit (Loss) ......... $(10,457,659) 9,031,126 (1,426,533)
============ ========== ==========
Net Gain (Loss) per share ....... $ (0.16) 0.32 (0.01)
============ ========== ==========
Weighted average number
of common shares outstanding .. 65,465,851 28,640,468 96,599,468
22
Accounting Treatment
The Company is taking the position that the acquisition of the Company's assets
by RAC Nutrition Corporation should qualify as a tax-free reorganization and
therefore recognizing the net proceeds associated with the reorganization of
$9,031,126 as extraordinary income. The Company will not accrue for income taxes
related to this extraordinary income pursuant to Section 368(a) of the Internal
Revenue Code of 1986, as amended.
Certain Income Tax Consequences
The acquisition of Millennium's assets by RAC Nutrition Corporation should
qualify as a tax-free reorganization under Section 368(a) of the Internal
Revenue Code of 1986, as amended.
In the event that the Internal Revenue Service makes a determination that the
transaction does not qualify as a tax-free reorganization under Code Section
368(a), the maximum combined federal and state tax exposure should be below
$1,000,000. This estimate does not include current year losses from operations
that may be available to reduce this exposure.
THE ASSET SALE
The Parties to the Asset Sale
The parties to the Asset Sale will be the Company, its wholly owned
subsidiary, Millennium Biotechnologies, Inc., RAC Corp. and RAC LLC.
The Effective Time
The Asset Sale will become effective as promptly as practicable
following the authorization of the Asset Sale by the stockholders of the Company
and upon the satisfaction or waiver, where permissible, of the other conditions
to consummation of the Asset Sale.
Assets to be Sold by the Subsidiary
Subject to the terms and conditions to be set forth in the Asset
Purchase Agreement, the Asset Purchase Agreement provides that the Subsidiary
will sell to RAC Corp. substantially all of its assets related to its
nutraceuticals business, including the following:
o All rights, title and interest in contracts, agreements, commitments
and purchase orders with customers, distributors, resellers, service
providers and manufacturers relating to its nutraceuticals business;
o All inventory;
o Marketing and sales material relating to its nutraceuticals
business;
o All licenses, permits, certificates and registrations relating to
its nutraceuticals business ;
o All rights, title and interest in patents, trademarks, trade names,
service marks, brand marks and names, copy rights and trade secrets;
o Machinery, equipment, fixtures and tangible personal property
relating to its nutraceuticals business;
o All leases of equipment, machinery and tangible personal property;
and
o All accounts receivables.
Assets to be Retained by the Subsidiary
The Asset Purchase Agreement provides that the Subsidiary will
retain all of its assets not sold to RAC Corp., including the following:
o All property and assets not related to its nutraceuticals business;
23
o All cash, cash equivalents, bank accounts and marketable securities;
and
o All tax credits and refunds.
Liabilities to be Assumed by RAC Corp.
The closing of the Private Placement is contingent upon the
Company's ability to have the holders of $2.926 million of the Company's
indebtedness convert such indebtedness into Units in the Private Placement. The
Asset Purchase Agreement provides that RAC Corp. will assume liabilities related
to the Subsidiary's business, including the following:
o Obligations under contracts, agreements and licenses which are part
of the assets being purchased; and
o Other obligations and liabilities up to $500,000; provided, subject
to certain exceptions, the number of shares of RAC Corp. common
stock to be issued to the Subsidiary and immediately distributed to
RAC LLC is reduced by one share for each $1.00 of such obligation or
liability in excess of $300,000.
Liabilities to be Retained by the Subsidiary
The Asset Purchase Agreement provides that RAC Corp. will not assume
any liabilities other than as described in the immediately preceding paragraph,
including the following:
o Any indebtedness which is convertible into equity interest;
o Any obligations and liabilities arising out of a breach of contract,
breach of warranty, tort, infringement or violation of law;
o Any liabilities with respect to taxes;
o All liabilities and obligations arising out of royalty agreements
between the Subsidiary and certain individuals; and
o Any liabilities and obligations for severance pay or employee
benefits.
Sale Price; No Cash Proceeds
Neither the Company nor the Subsidiary will receive any cash
proceeds from the Asset Sale. Instead, RAC Corp. will issue up to 10,000,000
shares of its common stock. The number of shares of common stock to be issued by
RAC Corp. shall be reduced by one share per $1.00 of liabilities assumed by RAC
Corp. in excess of $300,000. It also will issue performance vesting warrants to
purchase up to 2.5 million shares of its common stock. These securities will be
issued to the Subsidiary and immediately distributed to RAC LLC, a limited
liability company whose sole member will be us, as our designee, pursuant to the
liquidation of the Subsidiary in connection with these transactions.
RAC Nutrition Corporation.
RAC Nutrition Corporation is a newly formed Delaware corporation.
Pursuant to the Series A Preferred Stock Purchase Agreement, RAC Corp. will
initially be funded through the issuance of $15 million of shares of its Series
A Preferred Stock. Investors will include Aisling Capital II, LP, Menemsha
Capital Partners, Ltd. and, possibly, other qualified investors.
During the two years after the closing of the Asset Sale, RAC Corp.
may raise up to an additional $12.0 million through the issuance of additional
Series A Preferred Stock. The Company has the right to purchase up to $2.0
million of these additional shares in the subsequent rounds of issuance of
Series A Preferred Stock.
Common Stock Purchase Warrants of RAC Corp.
The Warrants to be issued as partial consideration for the Assets
will be exercisable for a period of five years at an initial exercise price of
$1.00 per share. The Warrants are not exercisable unless and until (i) RAC Corp.
has aggregate net revenues for the preceding four quarters equal to or exceeding
$50.0 million and (ii) RAC Corp.has aggregate pre-tax net income (before
dividends) of at least $5.0 million for the preceding four fiscal quarters. The
exercise price is subject to adjustments in the event of stock splits or
combinations, but not in the event of future issuances of equity securities.
Series A Convertible Preferred Stock of RAC Corp.
As discussed above, RAC Corp. will be funded initially by the
issuance of Series A Preferred Stock. This Preferred Stock will have the
following terms:
o Voting. Each share will entitle the holder thereof to
such number of votes as the number of shares of common
stock into which one share of such Preferred Stock is
convertible. Holders will vote along with the holders of
RAC Corp. common stock.
24
o Conversion Price. The original purchase price of $1.00
plus any accrued but unpaid dividends is convertible at
any time after issuance, into RAC Corp. common stock at
the rate of $1.00 per share, subject to adjustment for
anti dilution.
o Anti-Dilution. Subject to certain customary exclusions
such as common stock issuances to officers, directors
and consultants pursuant to Board approved plans, the
conversion price adjusts upon the happening of certain
specified events. If RAC Corp. issues shares at a price
below the then conversion price during the first 36
months after closing, the conversion price is reduced to
the issue price of such newly issued shares. Thereafter,
upon the issuance of shares at prices below the then
conversion price, the conversion price is reduced based
on a weighted-average formula. In addition, the
conversion price is subject to anti-dilution protection
in the event of (i) subdivision or combination of common
stock; (ii) dividends or distributions of common stock;
(iii) reclassification of the common stock into a
security other than the common stock; or (iv)
consolidation or merger of RAC Corp. with or into
another corporation.
o Liquidation Preference. Each share has a preference over
all other equity securities in the event of liquidation
to the extent of $1.00 plus accrued but unpaid
dividends. Thereafter, holders will share ratably with
holders of common stock on an as converted basis.
o Dividends. Holders will be entitled to receive a
preferred accrued dividend, before dividends on common
stock, at the rate of $0.10 per annum when, as and if
declared by RAC Corp.'s Board, but in any event upon
liquidation, redemption or conversion. In addition,
holders will be entitled to participate, pro rata, on an
as converted basis, in any dividends paid on RAC Corp.
common stock. Any earned but unpaid dividends on the
Series A Preferred Stock will be compounded at a rate of
10% per annum.
o Election of Directors. Holders will have the right to
elect three of the five members of RAC Corp.'s board of
directors.
o Protective Provisions. The consent of a majority of the
holders will be required for a number of actions related
to offering, issuing, repurchasing or changing RAC
Corp.'s securities; amending RAC Corp.'s certificate of
incorporation; selling or licensing RAC Corp.'s
intellectual property; payment of dividends or other
distributions to holder of RAC Corp.'s capital stock;
materially changing RAC Corp.'s business; changing the
size of the board of directors; granting registration
rights; incurring indebtedness in excess of $750,000;
acquiring another entity; selling or licensing all or
substantially all of RAC Corp.'s assets; or merger or
similar transactions.
RAC Nutrition Holdings LLC
RAC Nutrition Holdings LLC, a Delaware limited liability company,
was newly formed to hold the RAC Corp. shares and warrants to be issued by RAC
Corp. in consideration for the Assets. These securities will be held by the RAC
LLC for the benefit of the Company.
The sole member of RAC LLC will be the Company. Pursuant to the
operating agreement of RAC LLC, the manager of RAC LLC will be RAC Corp. The
manager will be responsible for the day-to-day management of RAC LLC, subject to
certain limitations which require the consent of the majority of the members of
RAC LLC.
In addition, pursuant to the operating agreement, RAC Corp. will
have the right to purchase all of the membership interest in RAC LLC from all of
its members at the fair value if the Company is not in compliance with the
Investment Company Act of 1940 or if the Company's cash losses for each of two
consecutive quarters exceeds four times our cash on hand at the end of such
quarters. RAC Corp.'s right to purchase the membership interest of RAC LLC will
terminate on the fourth anniversary of the closing of the Asset Sale.
Representations and Warranties
The Asset Purchase Agreement contains customary representations and
warranties by the parties thereto, including representations and warranties
regarding the following: (i) organization; (ii) authority regarding the Asset
Sale; (iii) accuracy of financial statements; (iv) absence of litigations; and
(v) consents and approvals and absence of violations of or conflicts with
certain laws and agreements.
25
In addition, the Company and the Subsidiary make numerous
representations to RAC Corp., including regarding the following: (i) adequacy of
rights to the Assets; (ii) contracts, permits, intellectual property, inventory,
accounts receivables and other assets of the Subsidiary; (iii) absence of
material events and undisclosed liabilities; (iv) taxes; (v) employees and
employee benefit plans; and (vi) solvency.
In addition, RAC Corp. makes numerous representations to the Company
and the Subsidiary, including regarding the following: (i) capitalization; and
(ii) absence of liabilities.
Covenants
The Asset Purchase Agreement contains customary covenants by the
parties. In addition, the Asset Purchase Agreement provides that during the
period from the date of the Asset Purchase Agreement and continuing until the
closing, the Company and the Subsidiary will (i) not lease, sell, dispose,
mortgage or encumber any of the Assets except in the ordinary course of
business; (ii) use best efforts to maintain relationships with customers,
suppliers and employees; (iii) not do any act or omit to do any act that will
cause a material breach of any agreement; (iv) maintain insurance coverage; (v)
not settle any material litigation; and (vi) timely file all tax returns.
In addition, the Company has agreed to take all necessary action to
call and hold a stockholder meeting for the purpose of obtaining stockholder
approval of the Asset Sale, including the preparation and filing of this Proxy
Statement with the Company's Board of Director's recommendation to approve the
Asset Sale.
The Company also has agreed to not invest in, own, manage, operate
or assist any person engaged in a business which competes with the Subsidiary's
nutraceuticals business for a period of five years and to not solicit, directly
or indirectly, for a period of two years, any employee or consultant of RAC
Corp.
The Company and the Subsidiary also agreed that pending the closing
or the termination of the Asset Purchase Agreement, they will not directly or
indirectly, initiate, solicit, encourage, consider or respond to any proposal,
inquiry or offer, nor enter into any agreement or arrangement, regarding any
sale of Assets other than sales in the ordinary course of business. However, the
Company may participate in negotiations or discussions with, or furnish
information to any person in connection with a merger or acquisition proposal if
such proposal is not solicited by the Company and such person submits the
proposal in writing to the Company. Prior to any such negotiation, discussion or
furnishing of information, the Company's Board of Directors must reasonably
determine in good faith that such proposal is capable of being completed and
would, if consummated, result in a superior transaction and that failure to
participate in such negotiations, discussions or furnishing of information would
be inconsistent with the Board's fiduciary duties. If prior to the closing of
the Asset Sale, a majority of the Board determines that it has received a
superior proposal and that consummating the Asset Sale would be inconsistent
with its fiduciary duties, the Board may withhold or withdraw its recommendation
of the Asset Sale; provided, the Company provide RAC Corp. six business days
notice of such determination during which time RAC Corp. shall have the
opportunity to modify the terms of the Asset Sale to provide substantially
equivalent value to the Company as contemplated in the superior proposal. In the
event the Asset Sale is not consummated due to such superior proposal, the
Company will be obligated to pay RAC Corp. $300,000 upon the consummation of
such superior transaction. In addition, the Company is not prohibited from
complying with Rule 14e-2 and Rule 14d-9 under the Securities Exchange Act of
1934, as amended, with respect to any tender offer.
Closing Conditions
The Company's and the Subsidiary's obligations to consummate the
Asset Sale are subject to the prior satisfaction or waiver of certain customary
conditions and additional conditions, including: (i) the representations and
warranties of RAC Corp. in the Asset Purchase Agreement shall be true in
material respects as of the closing and as if made at the time of the closing;
(ii) all organizational approvals necessary to authorize the Asset Sale shall
have been obtained by the Company, the Subsidiary and RAC Corp.; (iii) RAC Corp.
shall have performed in all material respects its obligations contained in the
Asset Purchase Agreement; (iv) the Company shall have received all of the
membership interest in RAC LLC; (v) RAC Corp. shall have issued the shares of
its common stock and warrants to acquire up to 2.5 million shares of its common
stock to the Subsidiary and be immediately distributed to RAC LLC; (vi) no
proceeding shall have been commenced or threatened against RAC Corp. challenging
the Asset Sale; (vii) RAC Corp. shall not have conducted any business nor have
any liabilities other than in connection with the Asset Sale; (viii) RAC Corp.
shall have received financing in an amount not less than $15 million through the
sale of its Series A Preferred Stock; and (ix) there shall not have been any
material adverse change to RAC Corp.
26
RAC Corp.'s obligation to consummate the Asset Sale is subject to
the prior satisfaction or waiver of certain customary conditions and additional
conditions, including: (i) the representations and warranties of the Company and
the Subsidiary in the Asset Purchase Agreement shall be true in material
respects as of the closing and as if made at the time of the closing; (ii) all
organizational approvals necessary to authorize the Asset Sale shall have been
obtained by the Company, the Subsidiary and RAC Corp.; (iii) the Company and the
Subsidiary shall have performed in all material respects its obligations
contained in the Asset Purchase Agreement; (iv) the receipt of all consents from
governmental agencies and third parties required to consummate the Asset Sale;
(v) no proceeding shall have been commenced or threatened against RAC Corp.
challenging the Asset Sale; (vi) RAC Corp. shall have received financing in an
amount not less than $15 million through the sale of its Series A Preferred
Stock; (vii) royalty agreements between the Subsidiary and certain individuals
shall have been terminated, (viii) the Company and the Subsidiary shall have
satisfied or converted all of its indebtedness, (ix) receipt of opinions that
the Asset Sale is fair from a financial point of view to the Company's
stockholders and that the Company and the Subsidiary are solvent and the Asset
Sale will not cause them to be insolvent; (x) entry into employment agreement
with a certain key employee; (xi) the Asset Sale shall have been approved by
Aisling Capital II, L.P.'s investment committee; (xii) there shall not have been
any material adverse change to RAC Corp.; and (xiii) the Company shall have had
operating revenues for the fourth quarter of 2006 of at least $175,000.
Termination; Expenses; Termination Fees
Each party is responsible for its own expenses. However, if RAC
Corp. terminates the Asset Purchase Agreement due to (i) any material breach of
any representation, warranty or covenant by the Company or the Subsidiary, (ii)
the closing not occurring prior to February 15, 2007 unless due to RAC Corp.'s
failure to fulfill its obligations; (iii) the failure to obtain stockholder
approval of the Asset Sale; (iv) the Company's Board of Directors' withdrawing
or modifying in an adverse manner to RAC Corp. its approval of the Asset Sale;
or (v) failure of the Company to have operating revenues for the fourth quarter
of 2006 of at least $175,000, the Company is responsible for reimbursement of
the RAC Corp.'s expenses in connection with the Asset Purchase Agreement in an
amount up to $350,000.
Indemnification
The Asset Purchase Agreement will contain customary provisions
pursuant to which the Company will indemnify the RAC Corp. and its affiliates.
Agreements Related to the Asset Sale
Co-Sale and First Refusal Agreement.
Pursuant to the Co-Sale and First Refusal Agreement, among RAC
Corp., the holders of the Series A Preferred Stock and the holders of RAC
Corp.'s common stock, subject to certain limitations, the holders of the common
stock, including RAC LLC, may not sell, assign, pledge or transfer their shares
of common stock unless such holder first offers to RAC Corp. the right to
purchase such shares upon the same terms as being offered by a proposed
transferee. To the extent RAC Corp. does not exercise its right to purchase the
holders of the Series A Preferred Stock will have the option to purchase such
shares of common stock upon the same terms.
If RAC Corp. and/or the holders of Series A Preferred stock do not
elect to purchase all of the shares being offered by such holder of common
stock, the non-participating holders of Series A Preferred Stock will have the
option to sell a proportionate number of shares of common stock to the proposed
transferee upon the same terms and conditions as being sold by such holder of
common stock.
Voting Agreement.
The Voting Agreement among RAC Corp., the holders of the Series A
Preferred Stock and the holders of RAC Corp.'s common stock (including RAC LLC),
provides the parties will vote all of their shares of RAC Corp. to elect:
o three directors nominated by Aisling Capital II, LP,
27
o one director nominated by RAC LLC, who initially will be
Andrew Schiff, so long as RAC LLC is the holder of not
less than 50% of Common stock held by it at the closing
of the Asset Sale;
o one director who is not an employee of RAC Corp.
nominated by all of the directors in the event RAC LLC
is longer the holder of at least 50% of common stock
held by it at the closing of the Asset Sale; and
o one director who shall be the Chief Executive Officer of
RAC Corp., who initially will be Lynne Millheiser
Swanbeck.
The Voting Agreement will terminate at the earlier of (i) the
holders who are party thereto ceasing to own at least a majority of the voting
power of RAC Corp. or (ii) an underwritten public offering at a price per share
of $3.00 resulting in an aggregate net proceeds of $30,000,000 to RAC Corp.
Investor Rights Agreement.
Pursuant to the Investor Rights Agreement among RAC Corp., the
holders of the Series A Preferred Stock and the holders of RAC Corp.'s common
stock, the holders of the Series A Preferred Stock will be granted the right to
demand RAC Corp. to file, at its expense, a registration statement with the
Securities and Exchange Commission covering the shares of Common Stock issuable
upon conversion of their Series A Preferred Stock. In addition, RAC LLC and the
holders of the Series A Preferred Stock will be granted piggyback registration
rights whereby such holder may request RAC Corp. to include the shares of Common
Stock held by them in a registration statement filed by RAC Corp. The
registration rights granted by the Investor Rights Agreement are subject to
customary underwriter cutbacks.
Business and Plan of Operation of RAC Nutritional Corporation
RAC Corp. will have had no substantive business activities prior to the
closing of the Asset Sale. Its sole activities will have consisted of
organizing, raising funds and entering into the Asset Purchase Agreement.
Following the closing of the Asset Sale, RAC Corp. plans to operate the
nutraceuticals business previously conducted by the Company. Its new management
plans to develop and effectuate a business plan to expand the marketing and
distribution of the Resurgex(R) line of products. As discussed above in "RAC
Nutrition Corporation," it is anticipated that RAC Corp. will be funded with
$15,000,000 of working capital under the terms of the Series A Preferred Stock
Purchase Agreement. It is RAC Corp. management's belief that this capital will
be sufficient to sustain operations for the next twelve months and, possibly, to
a point where RAC Corp. will generate positive cash flow. In the event that
additional funds are needed, the Series A Preferred Stock Purchase Agreement
provides for the sale of up to an additional $12,000,000 through the issuance
of additional Series A Preferred Stock. No assurance can be given that RAC Corp.
will not need in excess of this additional $12,000,000.
RAC NUTRITION CORP. PRO FORMA
BALANCE SHEET
(Unaudited)
Beginning Adjustments Closing
---------------------------------------
Assets
Current Assets
Cash ............................................................ $ -- $15,000,000 $15,000,000
Accounts receivable net of allowance for
doubtful accounts of $20,000
-- 186,690 186,690
Inventories
-- 553,025 553,025
Prepaid expenses
-- 83,462 83,462
Miscellaneous receivables
-- 105,131 105,131
---------------------------------------
Total Current Assets ................................................. -- 15,928,308 15,928,308
Property and equipment,
net of accumulated depreciation of $116,656 ....................... -- 13,672 13,672
Other Intangibles
-- 9,339,668 9,339,668
Deposits ............................................................. -- 18,352 18,352
---------------------------------------
Total Assets ............................................................. -- 25,300,000 25,300,000
=======================================
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable and accrued expenses ........................... -- 300,000 300,000
Short term debt ................................................. -- -- --
Current maturities of long term debt ............................ -- -- --
---------------------------------------
Total Current Liabilities ............................................ -- 300,000 300,000
Accrued royalties, long-term portion ................................. -- -- --
Total Liabilities .................................................... -- 300,000 300,000
---------------------------------------
Stockholders' Equity
Preferred stock, $.001 par value, $1 stated value, 15,000,000 shares
(authorized, issued and outstanding) ................................ -- 15,000 15,000
Common stock, $0.001 par value,
(10,000,000 shares authorized, issued and outstanding) .............. -- 10,000 10,000
Additional paid-in capital ........................................... -- 24,975,000 24,975,000
---------------------------------------
Total Stockholders' Equity ............................................... -- 25,000,000 25,000,000
---------------------------------------
Total Liabilities and Stockholders' Equity .......................... $ -- $25,300,000 $25,300,000
=======================================
PRIVATE PLACEMENT
On August 16, 2006, the Company entered into a Securities Purchase
Agreement ("Purchase Agreement") with six accredited investors for the sale of
13,000 Units (the "Private Placement"). Each Unit consists of (a) one share of
the Company's new Series E Senior Convertible Preferred Stock (the "Series E
Preferred Stock"), (b) warrants to acquire 800 shares of common stock (the
"Warrants") and (d) additional investment rights to acquire one share of Series
E Preferred Stock and Warrants to acquire 800 shares of common stock. In
addition, the lead investor, Iroquois Master Fund, Ltd. (the "Lead Investor")
agreed to purchase 100 shares of the Company's new Series F Senior Convertible
Preferred Stock (the "Series F Preferred Stock").
Securities Purchase Agreement
Pursuant to the terms of the Purchase Agreement, the purchase price
of each Unit is $200 and the purchase price of each share of Series F Preferred
Stock is $1.00, for an aggregate purchase price of $2.6 million for the Units
and of $100 for the Series F Preferred Stock. In addition, the Purchase
Agreement contemplates the issuance of approximately 14,630 Units to convert not
less than $2,926,000 of the Company's existing indebtedness by execution of a
Supplemental Purchase Agreement by the holders of such indebtedness and the
issuance of 2,000 additional Units upon the same terms as set forth in the
Purchase Agreement. The closing of the transactions contemplated in the Purchase
Agreement is to occur simultaneous with the consummation of the Asset Sale.
28
Pursuant to the Purchase Agreement, the Company may not (a) subject
to certain exceptions, offer or sell any equity securities or other rights
convertible or exchangeable into equity securities (a "Subsequent Placement")
until the effective date (the "Effective Date") of the registration statement
covering the common stock underlying the securities purchased pursuant to the
Purchase Agreement (see "Registration Rights Agreement" below); (b) subject to
certain exceptions, make any Subsequent Placement, at any time from the
Effective Date until the later of the date no Series E Preferred Stock is
outstanding or the second anniversary of the Effective Date, without first
offering the purchasers of the Units the opportunity to participate in such
Subsequent Placement; (c) so long as the Series E Preferred Stock is
outstanding, without the consent of the Lead Investor, issue or incur any debt
or equity that is senior to or pari passu with the Series E Preferred Stock; or
(d) so long as the Lead Investor is the holder of at least 3,000 shares of
Series E Preferred Stock, without the consent of the Lead Investor, (i) change
the number of directors of the Company from five, (ii) redeem any capital stock
of the Company (subject to certain exceptions), (iii) acquire another entity,
(iv) enter into any merger or consolidation, (v) sell all or substantially all
of its assets, (vi) make a tender offer for or exchange its common stock, or
(vii) incur indebtedness in excess of $250,000. In addition, in the event of a
change of control of the Company (as defined in the Purchase Agreement), a
holder of the Series E Preferred Stock may require the Company to repurchase
such holder's Series E Preferred Stock; provided, however, so long as the Lead
Investor is the holder of at least 3,000 shares of Series E Preferred Stock, all
of the holders' right to such redemption may be waived by the Lead Investor.
In addition to customary closing conditions, the purchasers'
obligation to consummate the transactions contemplated by the Purchase Agreement
is contingent upon the Company effectuating the conversion of at least $2.926
million of its debt into the Units, the closing of the Asset Sale and the
Company issuing 2,000 additional Units upon the same terms as set forth in the
Purchase Agreement.
Series E Preferred Stock
The Stated Value of each share of the Series E Preferred Stock is
$200, and the holder thereof is entitled to receive cash dividends at the rate
of 10% per annum payable quarterly; provided, subject to certain conditions, the
Company may, at its option, pay such dividends in the form of its common stock.
In all matters other than the election of directors, the holders of
the Series E Preferred Stock are entitled to vote together with the holders of
the common stock as a single class. Each share of Series E Preferred Stock is
entitled to such number of votes equal to the number of shares of common stock
into which the Series E Preferred Stock is convertible, subject to the
conversion limitations described below.
The Series E Preferred Stock, including any accrued but unpaid
dividend, is convertible into shares of common stock at a conversion price of
$.25 per share. Such conversion price is subject to anti-dilution and adjustment
provisions.
In the event of a liquidation, dissolution or winding up of the
Company, the Series E Preferred Stock is entitled to a liquidation preference
(senior to all other capital stock of the Company) in an amount equal to the
Stated Value plus all accrued but unpaid dividends. At the option of the Lead
Investor, a merger, consolidation, recapitalization, reorganization or sale of
substantially all of the assets may be deemed a liquidation event.
The Series E Preferred Stock is redeemable, at the option of the
holder thereof, at any time on and after the three year anniversary of the issue
date thereof at a price equal to the Stated Value plus all accrued but unpaid
dividends. The Series E Preferred Stock also is subject to mandatory redemption
on the five year anniversary of the issue date at a price equal to the Stated
Value plus all accrued but unpaid dividends. In addition, in the event of
certain triggering events, such as bankruptcy of the Company or a breach by the
Company of certain of its covenants or representations, a holder may require the
Company to repurchase such holder's Series E Preferred Stock.
Series F Preferred Stock
The holders of the Series F Preferred Stock are not entitled to
receive any dividends.
In all matters other than the election of directors, the holders of
the Series F Preferred Stock are entitled to vote together with the holders of
the common stock as a single class. Each share of Series F Preferred Stock is
entitled to such number of votes equal to the number of shares of common stock
into which the Series F Preferred Stock is convertible, subject to the
conversion limitations described below. In addition, the holders of the Series F
Preferred Stock, as a separate class, are entitled to elect three of the five
members of the Board of Directors of the Company.
29
Each share of Series F Preferred Stock is convertible into one share
of common stock of the Company, subject to anti-dilution and adjustment
provisions.
In the event of a liquidation, dissolution or winding up of the
Company, the Series F Preferred Stock is entitled to a liquidation preference
(senior to all other capital stock of the Company other than the Series E
Preferred Stock) in an amount equal to the Stated Value of $1.00 per share. At
the option of the Lead Investor, a merger, consolidation, recapitalization,
reorganization or sale of substantially all of the assets may be deemed a
liquidation event.
In the event of certain triggering events, such as bankruptcy of the
Company or a breach by the Company of certain of its covenants or
representations, a holder may require the Company to repurchase such holder's
Series F Preferred Stock.
Warrants
The Warrants are exercisable by the holder at a price of $.25 per
share (subject to anti-dilution and adjustment provisions) for a period of five
years from the date such Warrants are issued. The Warrants, the Series E
Preferred Stock and the Series F Preferred Stock may not be exercised or
converted by the holder if following such exercise or conversion the holder will
beneficially own more than 4.99% of the total number of outstanding common stock
of the Company.
Additional Investment Rights
The Additional Investment Rights contained in the Units are
exercisable by the holder at a price equal to the Stated Value of the Series E
Preferred Stock (subject to anti-dilution and adjustment provisions) for a
period of three years.
Registration Rights Agreement
In connection with the Purchase Agreement, the Company also entered
into a Registration Rights Agreement whereby the Company has agreed to file a
registration statement to register the re-sale of the shares of common stock
issuable upon conversion of the Series E Preferred Stock and the Series F
Preferred Stock and exercise of the Warrants. Under the Registration Rights
Agreement, the Company is obligated to file the registration statement within 30
days of the Closing and to use its best efforts to cause such registration
statement declared effective within 90 days (120 days in the event that the
Company receives comments from the Securities and Exchange Commission) of the
Closing and to keep such registration statement effective for a period of five
years. If the Company fails to comply with these or certain other provisions,
the Company will be required to pay as liquidated damages of 2% of the aggregate
purchase price paid by the purchasers plus 1% of the aggregate purchase price
for each month the failure continues.
PROPOSAL 2
AMENDMENT TO CERTIFICATE OF INCORPORATION
TO INCREASE THE NUMBER OF AUTHORIZED SHARES OF COMMON STOCK
The Board of Directors of the Company has unanimously determined
that it is advisable to amend the Company's Certificate of Incorporation to
increase the number of authorized shares of the Company's common stock from
200,000,000 to 400,000,000.
The amendment to the Company's Certificate of Incorporation adopting
the above change is set forth in Exhibit A to this Proxy Statement.
Reasons for the Change to the Company's Common Stock
As of January 10, 2007, the Company had 64,498,680 shares of common
stock outstanding and approximately 51,000,000 shares reserved for future
issuance under presently outstanding options and warrants and pursuant to the
amendments to employment agreements and the terminations of the royalty
agreements discussed above (see "Certain Interested Persons"). In the event all
of the Preferred Shares and related Warrants to be issued in connection with the
Private Placement are converted or exercised, the Company will issue
approximately 97,000,000 shares of its common stock in connection with the
Private Placement. In the event the Company does issue the 97,000,000 shares of
common stock the Company would receive aggregate cash in the amount of
$24,250,000. Accordingly, in the event the Private Placement is consummated, the
Company will have an insufficient number of its authorized shares. Pursuant to
the terms of the Private Placement, the Company is required to increase the
number of shares of its authorized common stock to 400,000,000 within 60 days of
the closing of the Private Placement. The proposed amendment to the Certificate
of Incorporation increasing the number of authorized shares thus is required in
order for the Company to fulfill its obligations under the terms of the Private
Placement.
30
In addition, the Company believes that the increase in the number of
authorized shares of common stock will benefit the Company by providing
flexibility to issue common stock for a variety of business and financial
objectives in the future without the necessity of delaying such activities for
further stockholder approval. These objectives include, but are not limited to,
raising additional capital for business and asset acquisitions, current and
future employee compensation and benefits and other corporate purposes. We
anticipate that we may be issuing shares and/or options in the near future to
raise additional needed capital and/or compensate employees and officers. As of
the date hereof, the Company is actively seeking to raise additional funds
through the sale of equity or convertible debt securities that would require
utilizing authorized but unissued/unreserved shares. However, other than the
Private Placement, it has no definitive plans at this time. Aside from the
foregoing, the Company has no current plans to issue any of the shares that
would be authorized should this proposal be approved by our stockholders.
General Effect of the Changes to the Company's Common Stock
Stockholders will not realize any dilution in their percentage of
ownership of the Company or their voting rights as a result of the foregoing
change. However, issuances of significant numbers of additional shares of common
stock in the future (i) will dilute stockholders' percentage ownership of the
Company and, (ii) if such shares are issued at prices below what current
stockholders paid for their shares, may dilute the value of current
stockholders' shares. In addition, the authorization of additional capital,
under certain circumstances, may have an anti-takeover effect, although this is
not the intent of the Board of Directors. For example, it may be possible for
the Board of Directors to delay or impede a takeover or transfer of control of
the Company by causing such additional authorized shares to be issued to holders
who might side with the Board in opposing a takeover bid that the Board of
Directors determines is not in the best interests of the Company and our
stockholders. The increased authorized capital therefore may have the effect of
discouraging unsolicited takeover attempts. By potentially discouraging
initiation of any such unsolicited takeover attempts, the increased capital may
limit the opportunity for the Company stockholders to dispose of their shares at
the higher price generally available in takeover attempts or that may be
available under a merger proposal. The increased authorized capital may have the
effect of permitting the Company's management, including the Board of Directors,
to retain its position, and place it in a better position to resist changes that
stockholders may wish to make if they are dissatisfied with the conduct of the
Company's business. However, the Board of Directors did not approve the increase
in the Company's authorized capital with the intent that it be utilized as a
type of anti-takeover device.
If stockholders do not approve the amendment to the Company's
Certificate of Incorporation, The Company will not be able to close the Private
Placement. Without the receipt of the funds from the Private Placement, the
Company will not be able to complete the Asset Sale and, if the Company is
unable to raise significant funds on acceptable terms, its financial condition
will be materially adversely affected and it may need to limit or curtail
operations.
Members of the Company's Board and the Company's executive officers,
who collectively own 5,846,901 shares of the Company's common stock, or
approximately 8.5% of the total votes, have indicated that they intend to vote
in favor of the Amendment to the Company's Certificate of Incorporation.
31
PROPOSAL 3
RATIFICATION OF SELECTION OF INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS
The Board of Directors, upon the recommendation of the Audit
Committee, has appointed the firm of Bagell, Josephs Levine & Company, L.L.C. as
independent registered public accountants of the Company for the fiscal year
ending December 31, 2006 subject to ratification by the stockholders. Bagell,
Josephs Levine & Company, L.L.C. has served as the Company's independent
auditors since March 31, 2005.
The total fees billed by Bagell, Josephs Levine & Company, L.L.C.
were $15,000 in 2004, and $26,000 in 2005. The Company was also billed $61,684
in 2004 by its prior Independent Registered Public Accountants, Rosenberg, Rich,
Baker and Berman, LLC. The following table shows the aggregate fees billed to us
by Bagell, Josephs Levine & Company, L.L.C. and Rosenberg, Rich, Baker and
Berman for professional services rendered during the year ended December 31,
2004 and aggregate fees billed by only Bagell, Josephs Levine & Company in 2005.
Amount ($)
-----------------
Description of Fees 2004 2005
- ------------------- ------- -------
Audit Fees $76,684 $26,000
Audit-Related Fees $ 0.00 $ 0
Tax Fees $ 3,433 $ 0
All Other Fees $ 0 $ 0
------- -------
Total $80,117 $26,000
======= =======
Audit Fees
Represents fees for professional services provided for the audit of
the Company's annual financial statements and review of its financial statements
included in its quarterly reports and services in connection with statutory and
regulatory filings.
Audit-Related Fees
Represents the fees for assurance and related services that are
reasonably related to the performance of the audit or review of the Company's
financial statements.
Although the Company established an Audit Committee, the Audit
Committee has not met or performed Audit Committee functions on a regular basis
(please see "Audit Committee and Audit Committee Expert" in "Meetings And
Committees Of The Board" below).
Representatives of Bagell, Josephs Levine & Company, L.L.C. will be
present at the annual meeting, will have the opportunity to make a statement if
they desire to do so and are expected to be available to respond to appropriate
questions.
32
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has employment agreements with its executive officers
and has granted its officers and directors options and warrants to purchase its
common stock, as discussed under the headings "Executive Compensation" and
"Principal Stockholders" below and "Certain Interested Persons; Amendments to
Employment Agreement" above in Proposal No. 1.
On January 11, 2001, the Subsidiary entered into an Investment and
Assignment Agreement with David Miller, a founding stockholder of the Company.
Pursuant to the agreement, Mr. Miller assigned to the Subsidiary all of his
rights, title and interest to all formulations, material and technologies made,
invented or developed by him which relate in any way to nutraceutical
supplements and also granted the Subsidiary the exclusive right to patent and
trademark any such inventions. In consideration of the assignment, the
Subsidiary issued 2,671,729 shares of its common stock to Mr. Miller and granted
to him a perpetual royalty equal to 3.33% of the gross sales of Resurgex(R) and
Resurgex Plus(R) and 3.3% of the gross profit from the sale of any additional
products of the Subsidiary. During the first quarter of 2005, Mr. Miller and
Jane Swon entered into an agreement whereby among others Miller transferred
$93,650 in accrued royalties and a promissory note for $50,000 to Jane Swon
(spouse of Jerry E. Swon). In accordance with instructions by Jane Swon, the
Company subsequently settled this note with payment of the principal to the
Company's chief executive officer.
On January 11, 2001 the Subsidiary entered into Royalty and
Investment Agreements with Jane Swon and P. Elayne Wishart (spouse of former
Chief Operating Officer and Director Bruce Deichl). Pursuant to such agreements,
Ms. Swon and Ms. Wishart were each issued 4,007,594 shares of the Subsidiary's
common stock for consideration of $25,000 each. In addition, Ms. Swon and Ms.
Wishart each paid the Subsidiary $25,000 for a perpetual royalty pursuant to
which they are each entitled to 3.3% of the gross sales of Resurgex(R) and
Resurgex Plus(R) and 3.3% of the gross profit from the sale of any additional
products. The $50,000 consideration is being amortized over 10 years to
additional paid-in-capital.
Upon the consummation of the Asset sale, the above discussed royalty
arrangements will be exchanged for shares of the Company's common stock (see
"Certain Interested Persons; Cancellation of Royalty Agreements" above in
Proposal No. 1).
33
PRINCIPAL STOCKHOLDERS
The following table sets forth as of January 10, 2007, the number
and percentage of outstanding shares of common stock beneficially owned by (i)
each person, individually or as a group, known to us to be deemed the beneficial
owners of five percent or more of our issued and outstanding common stock; (ii)
each director and nominee, (iii) each executive officer named in the Summary
Compensation table appearing herein, and (iv) all present executive officers and
directors as a group. In addition, the table sets forth information with respect
to the beneficial ownership of the voting securities, assuming the Asset Sale
and the Private Placement had closed as of January 10, 2007.
Amount and Nature Amount and Nature
Name and Address of Beneficial Percent of Beneficial Percent
of Beneficial Owner Ownership Of Class (1) Ownership (2) of Class (2)
- --------------------- ----------------- ------------ ----------------- ------------
Jerry E. Swon (3) 1,870,390 2.7% 3,870,390 2.3%
c/o the Company
Frank Guarino (4) 914,000 1.3% 2,314,000 1.4%
c/o the Company
Carl Germano (5) 2,092,313 3.0% 2,092,313 1.3%
c/o the Company
Michael G. Martin (6) 479,099 0.7% 479,099 0.3%
c/o the Company
David Sargoy (7) 491,099 0.7% 491,099 0.3%
c/o the Company
Jane Swon (8) 3,295,177 4.8% 3,295,177 2.0%
c/o the Company
All Directors and 5,846,901 8.5% 9,246,901 5.6%
Executive Officers as
a Group (5 persons)
* Address: c/o the Company.
- ----------
(1) For purposes of this table, a person or group of persons is deemed to have
"beneficial ownership" of any shares of common stock which such person has
the right to acquire within 60 days of January 10, 2007. For purposes of
computing the percentage of outstanding shares of common stock held by
each person or group of persons named above, any security which such
person or persons has or have the right to acquire within such date is
deemed to be outstanding but is not deemed to be outstanding for the
purpose of computing the percentage ownership of any other person. Except
as indicated in the footnote to this table and pursuant to applicable
community property laws, the Company believes based on information
supplied by such persons, that the persons named in this table have sole
voting and investment power with respect to all shares of common stock
which they beneficially own.
(2) These columns assume that the Asset Sale and the Private Placement had
closed on January 10, 2007, and as a result, that 29,800 shares of Series
E Preferred Stock, 1 share of Series F Preferred Stock, the related
Private Placement Warrants and the Additional Investment Rights had been
issued. For purposes of calculating the "beneficial ownership" and the
percentage ownership by each person or group of persons named above, these
columns assume that all the shares of Series E Preferred Stock and Series
F Convertible Stock and all the Private Placement Warrants to be issued to
such person or group of persons, including upon exercise of the Additional
Investment Rights, have been converted or exercised for shares of common
stock, without any limitation on conversion or exercise.
(3) Includes 183,333 shares issuable upon exercise of options and warrants.
These options and warrants have a cashless exercise provision and include
certain piggyback registration rights. Does not include any securities
owned by Jane Swon, Mr. Swon's spouse, as to which securities Mr. Swon
disclaims beneficial ownership.
(4) Includes 764,000 shares issuable upon exercise of warrants.
(5) Mr. Germano holds options to purchase 1,708,979 shares of the Company's
common stock. Also included are shares issuable upon exercise of warrants
to purchase 241,667 shares of Company common stock. All of these options
and warrants have a cash-less exercise provision.
34
(6) Includes 183,333 shares issuable upon exercise of warrants. These warrants
have a cash-less exercise provision and include certain piggyback
registration rights.
(7) Includes 183,333 shares issuable upon exercise of warrants. These warrants
have a cash-less exercise provision and include certain piggyback
registration rights.
(8) Includes warrants to purchase 1,068,692 shares of the Company's common
stock. Jerry E. Swon, Ms. Swon's husband, disclaims beneficial ownership
of all Company securities owned by Ms. Swon.
- ----------
** Less than 1%
Change in Control Following the Closing of the Private Placement
If and when the Private Placement closes, the Lead Investor will
have the power to elect three of the five members of the Company's board of
directors. Please see "Private Placement" above.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended, and, in accordance therewith, files
periodic reports, proxy statements, and other information with the SEC, which
may be inspected and copied at the SEC's public reference room at 450 Fifth
Street, N.W., Washington, D.C. 20549. Stockholders can obtain copies of these
documents, upon payment of a duplicating fee, by writing to the SEC. Please call
the SEC at 1-800-SEC-0330 for further information about the public reference
rooms. These filings are also vailable to stockholders on the SEC's website at
http://www.sec.gov.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the SEC by the Company pursuant
to the Securities Exchange Act of 1934, as amended, are incorporated by
reference in this proxy statement: None.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this proxy statement to the extent that a statement contained
herein or in any other subsequently filed document which also is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any such
document so modified or superseded, shall not be deemed, except as so modified
or superseded, to constitute a part of this proxy statement.
STOCKHOLDER PROPOSALS FOR 2006 ANNUAL MEETING
Any stockholder proposal intended to be presented at the 2006 Annual
Meeting of Stockholders must be received by the Company's Secretary at its
principal executive offices not later than March 16, 2007 for inclusion in the
Board of Directors' Proxy Statement and form of Proxy relating to that meeting.
Each proposal submitted should be accompanied by the name and address of the
stockholder submitting the proposal and the number of shares of common stock
owned. If the proponent is not a stockholder of record, proof of beneficial
ownership also should be submitted. All proposals must be a proper subject for
action and comply with the Proxy Rules of the Securities and Exchange
Commission.
The Company may use its discretion in voting Proxies with respect to
stockholder proposals not included in the Proxy Statement for the fiscal year
ended December 31, 2006, unless the Company receives notice of such proposals
prior to May 21, 2007.
OTHER BUSINESS
The Board of Directors knows of no business other than that set
forth above to be transacted at the meeting, but if other matters requiring a
vote of the stockholders arise, the persons designated as proxies will vote the
shares of common stock represented by the proxies in accordance with their
judgment on such matters. If a stockholder specifies a different choice on the
proxy, his or her shares of common stock will be voted in accordance with the
specification so made.
35
IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY. WE URGE YOU TO
FILL IN, SIGN AND RETURN THE ACCOMPANYING FORM OF PROXY IN THE
PREPAID ENVELOPE PROVIDED, NO MATTER HOW LARGE OR SMALL YOUR
HOLDINGS MAY BE.
By Order of the Board of Directors,
Frank Guarino, Secretary
Basking Ridge, New Jersey
January , 2007
36
ANNEX I
ASSET PURCHASE AGREEMENT
This Asset Purchase Agreement ("Agreement") is made and entered into as of
the 25th day of October, 2006 (the "Effective Date"), by and among RAC Nutrition
Corporation, a Delaware corporation, (the "Buyer"), and Millennium
Biotechnologies Group, Inc., a Delaware corporation (the "Parent" or the
"Company"), together with its wholly owned subsidiary Millennium
Biotechnologies, Inc., a Delaware corporation (the "Seller" or the
"Subsidiary"), and RAC Nutrition Holdings LLC, a Delaware limited liability
company ("LLC") and their respective successors and assigns.
RECITALS:
(A) WHEREAS, Seller is engaged in the distribution and sale of
nutraceuticals under the "Resurgex" name and mark (the "Business"), and;
(B) WHEREAS, Seller desires to sell to Buyer, and Buyer desires to
purchase from Seller, substantially all of the assets used in connection with
the Business, as provided herein, together with certain liabilities as defined
herein (the sale of such assets of the Business and certain liabilities by
Seller to Buyer referred to herein as the "Transaction").
(C) WHEREAS, for United States Federal income tax purposes, it is intended
that the Transaction shall qualify as a "reorganization" under Section 368(a) of
the Internal Revenue Code of 1986, as amended (together with the rules and
regulations promulgated thereunder, the "Code"), and that this Agreement shall
be, and hereby is, adopted as a plan of reorganization for purposes of Section
368 of the Code.
NOW, THEREFORE, in consideration of the premises above and of the mutual
covenants, representations, warranties, and agreements set forth herein, the
parties hereby agree as follows:
ARTICLE I
DEFINITIONS
Section 1.1 Certain Definitions. As used herein, the following capitalized
terms have the following meanings:
"Accounts Receivable" has the meaning set forth in Section 2.1(k).
"Adjustment Report" has the meaning set forth in Section 2.7(b).
"Affiliate" means, as to any Person, (a) any subsidiary of such Person and
(b) any other Person which, directly or indirectly, controls, is controlled by,
or is under common control with, such Person and includes, in the case of a
Person other than an individual, each officer, director, general partner or
member of such Person, and each Person who is the beneficial owner of
twenty-five percent (25%) or more of such Person's outstanding stock having
ordinary voting power of such Person. For the purposes of this definition,
"control" means the possession of the power to direct or cause the direction of
management and policies of such Person, whether through the ownership of voting
securities, by contract or otherwise.
"Agreement" has the meaning set forth in the Preamble.
"Assignment Agreement" has the meaning set forth in Section 2.10(a)(ii).
"Assumed Obligations" has the meaning set forth in Section 2.3.
"Big Four" means Ernst & Young, Deloitte Touche Tohmatsu,
PricewaterhouseCoopers and KPMG, collectively.
"Bill of Sale" has the meaning set forth in Section 2.10(a)(i).
"Business" has the meaning set forth in the Recitals.
"Business Day" means any day other than Saturday, Sunday, and any day on
which commercial banks in the State of New York are authorized by Law to be
closed.
"Business Employees" means, collectively, the individuals who are employed
by Seller (or an Affiliate of Seller) on a full-time or permanent basis
principally at or with respect to the business of the Company immediately prior
to the Closing and who are identified on Schedule 3.27(c).
"Business Intellectual Property" has the meaning set forth in Section
2.1(h). "Buyer" has the meaning set forth in the Preamble.
"Buyer Common Stock" means shares of common stock of Buyer, par value
$0.001 per share.
"Buyer Common Stock Issuance Calculation" means an amount equal to
10,000,000 shares of Buyer Common Stock less the number of shares equal to
Estimated Qualified Liabilities divided by $1.00.
"Certificate of Good Standing" means a certificate of good standing issued
by a Secretary of State of a competent jurisdiction evidencing the good standing
of the Company or the Subsidiary.
"Claim" means any demand, suit, claim or other assertion of liability by
third parties.
"Closing" has the meaning set forth in Section 2.9.
"Closing Date" has the meaning set forth in Section 2.9.
"Closing Statement" has the meaning set forth in Section 2.7(b).
"COBRA" means the requirements of Part 6 of Subtitle B of Title I of ERISA
and Section 4980B of the Code.
2
"Code" has the meaning set forth in the Recitals.
"Collected Receivables" has the meaning set forth in Section 2.6.
"Company" has the meaning set forth in the Preamble.
"Company Common Stock" has the meaning set forth in Section 5.8(a).
"Company Stockholders" has the meaning set forth in Section 5.8(a).
"Confidentiality Agreements" has the meaning set forth in Section
2.10(a)(xii).
"Consent Contract" has the meaning set forth in Section 2.5.
"Contract" and "Contracts" have the meaning given to them in Section
2.1(f).
"Current Liabilities" shall include all Accounts Payable, accrued expenses
and accrued Tax liabilities of the Company on the Closing Date net of any and
all accrued interest on any long-term or short-term debt obligations of Seller.
"Damages" has the meaning set forth in Section 9.1.
"Distributor Contracts" has the meaning set forth in Section 2.1(a).
"Domain Names" means URL addresses and all other internet and world wide
web addresses and designations.
"Effective Date" has the meaning set forth in the Preamble.
"Employee Benefit Plan" means any (a) nonqualified deferred compensation
or retirement plan or arrangement; (b) qualified defined contribution retirement
plan or arrangement which is an Employee Pension Benefit Plan; (c) qualified
defined benefit retirement plan or arrangement which is an Employee Pension
Benefit Plan (including any Multiemployer Plan); (d) Employee Welfare Benefit
Plan; (e) material fringe benefit including vacation pay or paid sick leave; and
(f) other retirement, bonus, severance, change in control, vacation, incentive,
profit sharing, equity-incentive, employee group insurance, hospitalization,
disability or other employee benefit plan, program policy or agreement, whether
formal or informal, and whether or not subject to ERISA in each case that is
sponsored, contributed to or maintained by Seller or to which Seller has an
obligation to contribute.
"Employer" means the entity designated by Buyer (which may be the Buyer,
its Affiliate or other entity) that employs the Transferred Employees as of the
Transfer Date.
"Encumbrances" has the meaning set forth in Section 3.7.
"Environmental, Health and Safety Requirements" has the meaning set forth
in Section 3.23.
3
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended and the rules and regulations adopted pursuant thereto.
"ERISA Affiliate" means with respect to the Seller, any trade or business
(whether or not incorporated) under common control with Seller or which,
together with the Seller is treated as a single employer within the meaning of
Sections 414(b),(c) or (m) of the Code.
"Estimated Qualified Liabilities" has the meaning set forth in Section
2.7(a).
"Exchange Act" means the Securities Exchange Act of 1934, as amended and
the rules and regulations adopted pursuant hereto.
"Excluded Assets" has the meaning set forth in Section 2.2.
"Exclusivity Period" has the meaning set forth in Section 10.1(a).
"Fairness Advisor Opinion" has the meaning set forth in Section 7.2(k).
"Fee" has the meaning set forth in Section 10.1(a).
"Financial Statements" has the meaning set forth in Section 3.5.
"401(k) Plan" means an Employee Pension Benefit Plan that is intended to
meet the requirements of a qualified cash or deferred arrangement under section
401(k) of the Code.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect from time to time set forth in the opinions and
pronouncements of the Accounting Principles Board and the American Institute of
Certified Public Accountants and the statements and pronouncements of the
Financial Accounting Standards Board.
"Governmental Authority" means any federal, state, local or foreign
government or governmental regulatory body and any of their respective
subdivisions, agencies, instrumentalities, authorities, courts or tribunals.
"Headquarters Lease" means the Lease Agreement, dated October __, 2001,
for the commercial real estate located at 664 Martinsville Road, Suite 219,
Basking Ridge, New Jersey 07920.
"Indebtedness" shall mean (a) obligations for borrowed money; (b)
obligations evidenced by bonds, debentures, notes or other similar instrument;
(c) obligations under a lease that are required to be classified and accounted
as capital lease obligation under GAAP; (d) obligations for reimbursement of any
obligor on any letter of credit, banker's acceptance or similar credit
transaction; and (e) guarantees and other contingent obligations in respect of
Indebtedness referred to in clauses (a) through (d) above.
"Indemnitee" has the meaning set forth in Section 9.5.
"Indemnitor" has the meaning set forth in Section 9.5.
4
"Independent Auditors" has the meaning set forth in Section 2.7(d).
"Intellectual Property" has the meaning set forth in Section 2.1(h).
"Inventory" has the meaning set forth in Section 2.1(d).
"Key Employee" means the employee listed in Schedule 2.10(a)(xi).
"Key Employment Agreement" has the meaning set forth Section 2.10(a)(xi).
"Law" means any federal, state, local or foreign law, ordinance, order,
rule, regulation, license or permit, and any order, writ, judgment, award,
injunction, or decree of any court or arbitrator or any Governmental Authority
of the United States of America, any state or political subdivision thereof or
any foreign Governmental Authority.
"Letter of Intent" means that certain Letter of Intent by and among the
Company, the Subsidiary and Aisling Capital II, L.P., dated April 5, 2006.
"Lien" means any charge, claim, community property interest, condition,
equitable interest, lien (including any Tax lien), mortgage, option, pledge,
security interest, right of first refusal, easement, servitude, right of way, or
other encumbrance or restriction of any kind, including any restrictions on use,
voting, transfer, receipt of income, or exercise of any other attribute of
ownership.
"LLC" has the meaning set forth in Section 7.1(e).
"LLC Interest" means a one hundred percent (100%) membership interest in
the LLC.
"Material Adverse Effect" means, when used with respect to Seller, any
event, condition, change, occurrence or circumstance which has a material
adverse effect on the Purchased Assets, operations, business, assets,
liabilities, results of operations, financial condition or prospects of the
Business on the whole, as now conducted by Seller.
"Operating Agreement" has the meaning set forth in Section 7.1(e).
"Organizational Documents" has the meaning set forth in Section 3.1.
"Other Businesses" has the meaning set forth in Section 9.1(b).
"Other Contracts" has the meaning set forth in Section 2.1(f).
"Parent" has the meaning set forth in the Preamble.
"Patent Assignment Agreement" has the meaning set forth in Section
2.10(a)(xv).
"Permits" has the meaning set forth in Section 2.1(g).
"Permitted Encumbrances" has the meaning set forth in Section 3.7.
5
"Person" means any individual, corporation, partnership, joint venture,
association, limited liability company, joint stock company, trust, or
unincorporated association, or any Governmental Authority, officer, department,
commission, board, bureau or instrumentality thereof.
"Personal Property Leases" has the meaning set forth in Section 2.1(j).
"Proxy Statement" has the meaning set forth in Section 5.8(c).
"Purchase Price" has the meaning set forth in Section 2.6.
"Purchased Assets" has the meaning set forth in Section 2.1.
"Qualified Liabilities" has the meaning set forth in Section 2.4.
"Representatives" has the meaning set forth in Section 10.1(a)
"Restricted Area" has the meaning set forth in Section 6.3(a).
"Royalty Agreement" has the meaning set forth in Section 2.10(a)(xiii).
"SEC" has the meaning set forth in Section 5.8(c).
"SEC Reports" has the meaning set forth in Section 3.4.
"Securities Act" has the meaning set forth in Section 5.8(c).
"Seller" has the meaning set forth in the Preamble.
"Solvency Opinion" has the meaning set forth in Section 7.2(l).
"Solvent" has the meaning set forth in Section 3.33.
"Stock Purchase Agreement" has the meaning set forth in Section
2.10(b)(x).
"Straddle Period" has the meaning set forth in Section 5.9(c)(ii).
"Stockholders' Meeting" has the meaning set forth in Section 5.8(a).
"Sublease" has the meaning set forth in Section 2.10(a)(xiv).
"Subsidiary" has the meaning set forth in the Preamble.
"Superior Proposal" has the meaning set forth in Section 10.1(b).
"Superior Transaction" has the meaning set forth in Section 10.1(b).
"Survival Period" has the meaning set forth in Section 9.4(a).
6
"Tax Audit" has the meaning set forth in Section 3.20(a)(v).
"Tax Deficiency" has the meaning set forth in Section 3.20(a)(vii).
"Tax" (including, with correlative meaning, "Taxes" and "Taxable") means
(i)(A) any net income, gross income, business and occupation, admissions, gross
receipts, sales, use, value added, ad valorem, transfer, transfer gains,
franchise, profits, license, withholding, payroll, employment, excise,
severance, stamp, rent, recording, occupation, premium, real or personal
property, intangibles, environmental or windfall profits tax, alternative or
add-on minimum tax, customs duty or other tax, fee, duty, levy, impost,
assessment or charge of any kind whatsoever (including but not limited to taxes
assessed to or on real property and water and sewer rents relating thereto),
together with (B) all interest, any penalties, additions to tax or additional
amounts imposed by any taxing or other governmental body, authority or
jurisdiction (domestic or foreign) (a "Tax Authority"); (ii) any liability for
the payment of any amount of the type described in the immediately preceding
clause (i) as a result of being a member of an affiliated, unitary, consolidated
or combined group with any other corporation at any time prior to the Closing
Date; and (iii) any liability for the payment of an amount of the type described
in the preceding clause (i) by reason of a contractual obligation to any other
Person.
"Tax Return" means any report, return, document, declaration or other
information (including any attached schedules or amendments thereto) required to
be supplied to or filed with any Tax Authority) with respect to any Tax,
including an information return, any document with respect to or accompanying
Tax payments or estimated Taxes, or with respect to or accompanying requests for
an extension of time in which to file any such report, return document,
declaration or other information.
"Terminated Employees" has the meaning set forth in Section 6.1(a).
"Third Party" has the meaning set forth in Section 10.1(a).
"Third Party Acquisition" has the meaning set forth in Section 10.1(a).
"Third Party Licenses" has the meaning set forth in Section 2.1(c).
"Third Party Proposal" has the meaning set forth in Section 10.1(b).
"Trademark and Domain Name Assignment Agreement" has the meaning set forth
in Section 2.10(a)(xvi).
"Transaction" has the meaning set forth in the Recitals.
"Transaction Documents" has the meaning set forth in Section 2.2(b).
"Transferred Employees" has the meaning set forth in Section 6.1(a).
"Transfer Date" has the meaning set forth in Section 6.1(b).
7
"Transfer Taxes" means all excise, sales, value added, use, registration,
stamp, transfer, gains, real estate transfer and other taxes imposed with
respect to a change in the ownership of any asset or of its direct or indirect
owners.
"UCC" means the Uniform Commercial Code in effect from time to time in the
jurisdiction in which a security interest is located.
"Unassumed Liabilities" has the meaning set forth in Section 2.4.
"Uniform Resource Locator" or "URL" means a string of characters that
refers to a resource on the internet by its location.
"Updated Schedules" has the meaning set forth in Section 5.2.
"Vendor Contracts" has the meaning set forth in Section 2.1(b).
"Warrant" has the meaning set forth in Section 2.6.
"Warrant Shares" has the meaning set forth in Section 2.6.
"Working Capital Adjustment Payment" has the meaning set forth in Section
2.7.
ARTICLE II
PURCHASE AND SALE OF PURCHASED ASSETS
Section 2.1 Purchase and Sale. Except for the Excluded Assets, as of the
Closing Date, Seller will sell, assign, transfer, convey, and deliver to Buyer,
and Buyer will purchase, accept and assume from Seller, all of Seller's right,
title and interest in and to all of the Seller's property and assets, real or
personal, tangible or intangible, relating to, reasonably necessary in and/or
used in connection with the Business as set forth below (collectively, the
"Purchased Assets"), free and clear of all Encumbrances other than Permitted
Encumbrances. The Purchased Assets shall consist of:
(a) All of Seller's right, title and interest in and to all written
customer contracts, distributor contracts, reseller contracts, and
contracts with sales agents or representatives, to which either Seller is
a party that are related to the Business and that are listed in Schedule
2.1(a), including, but not limited to, contracts, agreements, outstanding
proposals and commitments with such distributors, reseller, dealers and
sales agents (the "Distributor Contracts");
(b) All of Seller's right, title and interest in and to the vendor
purchase orders and contracts, that are related to the Business and that
are listed in Schedule 2.1(b) (the "Vendor Contracts");
(c) All of Seller's right, title and interest in and to third party
commercial computer software and related maintenance contracts relating to
the Business to which either Seller is a party and that are listed in
Schedule 2.1(c) (the "Third Party Licenses");
8
(d) All of Seller's inventory items relating to the Business whether
new, used, excess or obsolete, both in and out of service, inventory held
for sale, if any, including, but not limited to, all inventory currently
being held to supply Seller's contractual commitments to customers, and
all other similar items of inventory all of which are listed in Schedule
2.1(d) (the "Inventory");
(e) Seller's marketing and sales materials relating to the Business;
(f) All of Seller's right, title and interest in and to any written
contracts (including any solicitation or outstanding offers for contract),
agreements, outstanding price quotes, commitments from service providers,
customers and/or manufacturers, other than the Distributor Contracts,
Vendor Contracts and Third Party Licenses that relate to the Business to
which either Seller is a party and that are listed in Schedule 2.1(f) (the
"Other Contracts") (the Distributor Contracts, Vendor Contracts, Third
Party Licenses, and Other Contracts are sometimes referred to collectively
as the "Contracts" and individually as a "Contract");
(g) All of Seller's right, title and interest in and to the
licenses, permits, certificates, approvals, exemptions, franchises,
registrations, variances, accreditations or authorizations that relate to
the Business and are listed in Schedule 2.1(g) (the "Permits");
(h) All of Seller's right, title and interest in and to the
"Intellectual Property," (as such term is hereinafter defined) that relate
to the Business and as set forth in Schedule 2.1(h) (the "Business
Intellectual Property"). "Intellectual Property" shall mean, for purposes
of this Agreement: patents, patent rights, patent applications, patent
disclosures, and inventions and designs that are not disclosed in any
patent, patent application, or patent disclosure; registered and
unregistered trademarks, trade names, and service marks, brand marks,
brand names, copyrights, copyright registrations, and any applications
therefore; all designs, diagrams, specifications, schematics, molds,
tooling and assembly, installation and other key processes; licenses
granted by or to a party; trade secrets relating to or arising from any
monetary process; proprietary computer software, hardware and databases,
including source code and documentation corresponding thereto and any
software and source or object code; symbols and logos and all applications
therefor, registrations thereof and licenses and sublicenses or agreements
in respect thereof; improvements to any of the foregoing (whether or not
completed); all filings, registrations or issuances of any of the
foregoing with or by any federal, state, local or foreign regulatory,
administrative or governmental office; and other tangible and intangible
proprietary information owned or licensed by a party; including goodwill
and going concern value; technology, and know-how related to, reasonably
necessary in and used to support the Business and not embodied in any of
the foregoing; and other tangible and intangible proprietary information
owned or licensed by a party;
(i) The machinery, equipment, furniture, fixtures, furnishings,
supplies, office equipment, accessories, vehicles, personal computers,
notebook computers, cellular phones, pagers, copiers, calculators,
workstations, office automation software, printers, facsimile machines,
and other property relating to the Business, and as listed in Schedule
2.1(i);
9
(j) All leases of equipment, machinery or other tangible personal
property to which either Seller is a party, solely used in conducting the
Business as listed in Schedule 2.1(j) (the "Personal Property Leases");
(k) All accounts, notes, contracts or other receivables of Seller
generated in connection with the Business existing as of the Closing Date
that are listed in Schedule 2.1(k) and are not listed as Excluded Assets
herein, and rights and benefits of any security interests and
corresponding financing statements filed under the UCC (the "Accounts
Receivable");
(l) All of Seller's books and records relating exclusively to the
Business (other than Seller's Tax returns and Seller's organizational
books and records) including, without limitation, lists of customers,
vendors and suppliers, records with respect to pricing, volume, billing
and payment history, cost, inventory, machinery and equipment, mailing
lists, distribution lists, sales, purchasing and materials, technical
processes, production and testing techniques and procedures, marketing
research, design and manufacturing drawings and specifications and other
engineering data, promotional or sales literature, training, operations,
equipment and other manuals, quotation, correspondence, and other
miscellaneous information, including any such records which are maintained
on computer or any storage media;
(m) All service manuals, databases, and knowledge bases, in their
current forms, listed in Schedule 2.1(m) relating to the operation of the
Business as currently operated by Seller;
(n) Seller's backlog on orders relating to the Business;
(o) Seller's claims, demands, actions or causes of actions, which
either Seller has or may have against any other person or entity relating
to the Business, rights to judgments, and proceeds resulting from the
matters listed in Schedule 2.1(o); and
(p) All of Seller's domain names, internet names, web addresses and
internet locations, links to other relevant sites and applicable related
registrations related to the Business, and as listed on Schedule 2.1(p).
Section 2.2 Excluded Assets. Notwithstanding anything to the contrary
contained in Section 2.1 or elsewhere in this Agreement, the following assets of
Seller (collectively, the "Excluded Assets") are not part of the sale and
purchase contemplated hereunder, are excluded from the Purchased Assets and
shall remain the property of Seller after the Closing Date:
(a) All property and assets of Seller that are not related to the
Business;
(b) All rights of either Seller under this Agreement and the other
documents, agreements and instruments executed or delivered in connection
with this Agreement (together with this Agreement, the "Transaction
Documents") including all monies to be received by either Seller, and all
other rights of Seller under the Transaction Documents, including without
limitation, the Purchase Price (as defined herein);
10
(c) all real estate and real property leases, including the
Headquarters Lease;
(d) all minute books, transfer records and corporate seals of
Seller;
(e) all cash, cash equivalents, bank accounts, certificates of
deposit, commercial paper, annuities, treasury notes, bills and other
marketable securities of Seller;
(f) all rights of Seller relating to claims, refunds, causes of
action, rights of recovery, rights of set-off, deposits and prepaid
expenses and claims for refunds and rights to offset of every kind and
nature whether or not related to the Business and related to time periods
prior to the Closing Date, except for Accounts Receivable claims
pertaining to the Business and other matters set out in Schedule 2.1(o);
(g) all insurance policies of Seller and rights thereunder,
including, without limitation, all rights to receive proceeds of insurance
policies and all rights of offset, counterclaims and insurance coverage
thereunder;
(h) any tax credits and refunds;
(i) Intellectual Property of the Seller not related to the Business
and any rights or obligations associated therewith;
(j) all severance, pension, retirement and other Employee Benefit
Plans and administration and services contracts related thereto, or
funding arrangements,
(k) all of Seller's distributor contracts, purchase contracts and
other contracts that are not related to the Business; and
(l) all of Seller's Domain Names not related to the Business.
Section 2.3 Assumed Obligations. At the Closing, Purchaser shall assume,
and agree to pay, perform, fulfill and discharge, the following obligations of
Seller that relate to or arise out of the Purchased Assets (the "Assumed
Obligations"). The Assumed Obligations shall include, but not be limited to, the
following:
(a) Obligations which are required to be performed under the
Contracts, Permits, Personal Property Leases and Intellectual Property,
except where (i) such obligations are not fully disclosed in accordance
with the Agreement or arise in contravention of this Agreement, or (ii)
such obligations arise due to any breach of contract, breach of warranty,
tort, infringement, or violation of Law or arose out of any Claim,
provided, such breach, tort, infringement, violation or Claim arose out of
events occurring prior to the Closing, or (iii) the consent of any third
party is required for the assignment of such Contract, Permit or Personal
Property Lease and such consent has not been obtained;
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(b) Obligations and liabilities set forth on the face of the balance
sheet as of June 30, 2006 included in the Financial Statements (rather
than in any notes thereto), and all liabilities which have arisen after
June 30, 2006 in the ordinary course of business of the Business; provided
that such Assumed Obligations (i) do not include any Indebtedness; (ii)
are reflected in the calculation of the Purchase Price; (iii) are fully
disclosed to Buyer pursuant to this Agreement and do not arise in
contravention of this Agreement; and (iv) do not relate to any breach of
contract, breach of warranty, tort, infringement, or violation of Law or
arise out of any Claim,; it being understood that the number of shares of
Buyer Common Stock to be delivered to the LLC pursuant to Section 2.6
shall be reduced in the manner specified in Section 2.6 and 2.7 to the
extent that the value of Qualified Liabilities exceeds zero; and
(c) Obligations arising after the Closing Date with respect to
Transferred Employees as set forth in Section 6.1.
Section 2.4 No Other Liabilities Assumed. Anything in this Agreement to
the contrary notwithstanding, neither Buyer nor any of its Affiliates shall
assume, and shall not be deemed to have assumed, any debt, claim, obligation or
other liability of Seller or any of its Affiliates, whether known or unknown,
now or hereafter existing, accrued or contingent, other than as specifically set
forth in Section 2.3 including, but not limited to (i) any environmental costs
and liabilities, (ii) any of Seller's liabilities in respect of Taxes, (iii) any
income, transfer, sales, use, and other Taxes arising in connection with the
consummation of the transactions contemplated hereby (other than as expressly
provided in this Agreement), (iv) any brokers or finders' fees, or other
liability of Seller for costs and expenses (including legal fees and expenses)
incurred in connection with this Agreement or the consummation of the
transactions contemplated hereby, (vi) any liabilities or obligations arising
out of the Royalty Agreements, (vii) any liability or obligation of Seller under
this Agreement, (viii) any Indebtedness, (ix) any obligations or liabilities,
including severance, for Seller's employees who are not Transferred Employees,
(x) any liabilities of the Seller or any of its ERISA affiliates relating to any
Employee Benefit Plan to which any of the Seller or its ERISA Affiliates
contributes or has any obligation to contribute, or with respect to which any of
the Seller or Seller's Affiliates has any liability or potential liability
(including, without limitation any such liability (a) relating to benefits
payable under any Employee Benefit Plan, (b) relating to Title IV of ERISA (c)
relating to a multiemployer plan, (d) with respect to noncompliance with the
notice and benefit continuation requirements of COBRA, or (e) with respect to
any noncompliance with ERISA or any other applicable laws), (xi) any liability
or obligation of Seller in respect of pending or threatened claims listed on
Schedule 3.14, (xii) any obligation or liability arising as a result of or whose
existence is a breach of Seller's representations, warranties, agreements or
covenants, or (xiii) any Qualified Liabilities (as defined below) to the extent
that the aggregate value of the Qualified Liabilities is greater than $500,000
(collectively, "Unassumed Liabilities"). Each of the Seller and Parent hereby
agrees to pay, perform and discharge all of the obligations that are Unassumed
Liabilities hereunder. "Qualified Liabilities" shall mean liabilities assumed by
Purchaser pursuant to Section 2.3(b).
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Section 2.5 Non-Assignment of Certain Property. To the extent that the
assignment hereunder of any of the Permits, Personal Property Leases or
Contracts shall require the consent of any other party (or in the event that any
of the same shall be nonassignable) (each, a "Consent Contract"), neither this
Agreement nor any action taken pursuant to its provisions shall constitute an
assignment or an agreement to assign if such assignment or attempted assignment
would constitute a breach thereof; provided, however, that in each such case,
Seller shall use its commercial reasonable efforts to obtain the consents of
such other party to an assignment to Buyer on or prior to the Closing. If any
such consent has not been obtained as of the Closing Date, the parties shall
continue to use its commercially reasonable efforts to obtain such consent after
the Closing Date. Pending the receipt of any such consents, the Seller shall
cooperate with the Buyer in any commercially reasonable arrangement designed to
provide for the Buyer all of the benefits under all of the Consent Contracts,
and for the Buyer to discharge the corresponding obligations. At the Buyer's
request and expense, the Seller shall take all commercially reasonable best
efforts requested by the Buyer to enforce, for the benefit of the Buyer, any and
all rights of the Seller under any Consent Contract. Seller agrees to remit
promptly, and to cause their Affiliates to remit promptly (but in no event later
than three (3) Business Days after receipt), to the Buyer all collections or
payments received by them or their Affiliates in respect of all Consent
Contracts following the Closing Date, and shall hold all such collections or
payments for the benefit of and in trust and as a fiduciary for and promptly pay
the same over to, the Buyer. When such consents to the transfer, conveyance and
assignment of a Consent Contract have been obtained, if ever, such Consent
Contract shall thereupon automatically be transferred, conveyed and assigned to
Buyer, and the obligations and liabilities of either Seller under such Consent
Contract shall automatically cease to be excluded from the Assignment Agreement
(as hereinafter defined) by reason of this Section 2.5, without the payment of
any additional consideration.
Section 2.6 Purchase Price. In consideration for the sale, transfer and
assignment by the Seller of the Purchased Assets, the Buyer shall: (i) assume
the Assumed Obligations; provided, however, in no event shall the value of the
Qualified Liabilities assumed by the Buyer exceed Five Hundred Thousand Dollars
($500,000.00); (ii) issue a certificate evidencing the LLC Interest to the
Parent; and (iii) issue to the LLC a performance vesting warrant to purchase up
to an additional Two Million Five Hundred Thousand (2,500,000) shares of Buyer
Common Stock (the "Warrant Shares") upon the terms and conditions set forth in
the form of warrant reasonably agreed by Buyer and Seller (the "Warrant"). The
Warrant shall be exercisable for a period of five years at an exercise price of
$1.00 and shall further provide that the holder may not exercise the Warrant
unless and until Buyer has (i) aggregate net revenues for the preceding four
quarters of at least $50.0 million and (ii) pre-tax net income of at least $5.0
million for the preceding four quarters. For purposes of this Agreement, the
term "Purchase Price" shall mean, initially, $10,000,000, consisting of (y) the
value of Assumed Obligations (provided, pursuant to the terms of this Agreement,
Qualified Liabilities to be assumed by the Buyer may range from zero to
$500,000), and (z) the LLC Interest (having an assumed value equal to the
$10,000,000, less the value of the Qualified Liabilities). At the Closing, the
Buyer shall deliver to the LLC a number of shares of Buyer Common Stock equal to
(i) 10,000,000, less (ii) a number of shares equal to (A) the Estimated
Qualified Liabilities (as defined below) less $300,000, divided by (B) $1.00.
Section 2.7 Purchase Price Payment Adjustment.
(a) At least ten (10) days prior to the Closing, the Sellers shall
provide to the Buyer an estimate as of the Closing Date, which, absent
manifest error, shall be the basis for calculating, on a preliminary
basis, of the value of the Qualified Liabilities for purposes of
determining the number of shares of Buyer Common Stock to be issued to the
LLC at Closing (the "Estimated Qualified Liabilities").
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(b) Not later than sixty (60) days after the Closing, the Buyer at
its own cost, shall prepare and deliver to the Sellers a statement of the
value of the Qualified Liabilities as of the Closing Date (the "Closing
Statement"), prepared in accordance with GAAP, applied consistently with
the Sellers' past practices. A failure by the Buyer to deliver the Closing
Statement within the required sixty (60) day period shall constitute its
acceptance of the Estimated Qualified Liabilities. Within fifteen (15)
days after the Closing Statement is delivered to the Sellers pursuant to
this Section 2.7(b), the Sellers at their own cost, shall complete its
examination thereof, and provide for the examination thereof by its
accountants, if necessary, and shall deliver to the Buyer either (i) a
written acknowledgment accepting the determination of the value of the
Qualified Liabilities or (ii) a written report of an independent
accounting firm engaged by the Sellers setting forth in reasonable detail
any proposed adjustments to the value of the Qualified Liabilities
("Adjustment Report"). A failure by the Sellers to deliver the Adjustment
Report within the required fifteen (15) day period shall constitute its
acceptance of the Closing Statement. The Buyer shall, and shall cause its
independent auditors to, cooperate with the Sellers and its accountants in
the course of the preparation of the Adjustment Report.
(c) Following the Closing, the number of shares of Common Stock
issued to the LLC in satisfaction of the Purchase Price shall be decreased
by a number of shares equal to (i) the amount, if any, by which the value
of the Qualified Liabilities as specified on the Closing Statement exceeds
the Estimated Qualified Liabilities, divided by (ii) $1.00; provided, if
the Qualified Liabilities as specified in the Closing Statement is less
than $300,000, there shall be no adjustment to the number of shares of
Common Stock pursuant to this Section 2.7(c).
(d) During a period of fifteen (15) days following the receipt by
the Buyer of the Adjustment Report, the Buyer and Sellers shall attempt to
resolve any difference they may have with respect to the matters raised in
the Adjustment Report. In the event the Buyer and Sellers fail to agree on
all of the proposed adjustments contained in the Adjustment Report within
such fifteen (15) day period, then the Buyer and the Sellers mutually
agree that the New York office of KPMG, or such other "Big Four"
accounting firm mutually acceptable to the Buyer and the Sellers (the
"Independent Auditors"), shall make the final determination with respect
to the correctness of the proposed adjustments in the Adjustment Report in
light of the terms and provisions of this Agreement. The decision of the
Independent Auditors shall be final and binding on the Buyer and Sellers,
and may be used in a court of law by either the Buyer or the Sellers for
the purpose of enforcing such decision. The costs and expenses of the
Independent Auditors and their services rendered pursuant to this clause
(d) shall be borne by the non-prevailing party or, if neither party
prevails, equally by the Buyer and the Sellers.
Section 2.8 Prorations. At Closing, the parties hereto shall determine the
proration of any expenses, if necessary.
Section 2.9 Closing. The closing of the transactions contemplated in this
Agreement (the "Closing") shall take place at the offices of Andrews Kurth LLP,
450 Lexington Avenue, 15th Floor, New York, NY, 10017, or such other location as
the parties may select, within thirty (30) calendar days of the clearance of the
Proxy Statement by the SEC or at such other time and place as the Purchaser, in
its sole discretion, may agree (the "Closing Date").
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Section 2.10 Deliveries at Closing
(a) Deliveries by Seller. At the Closing, Seller shall deliver or
cause to be delivered to Buyer the following documents, instruments,
certificates and agreements (which shall be in form and substance
reasonably satisfactory to Buyer and its counsel):
(i) an executed counterpart to the Bill of Sale in a form to
be mutually agreed upon (the "Bill of Sale"), duly executed by
Seller;
(ii) an executed counterpart to the Assignment and Assumption
Agreement in a form to be mutually agreed upon (the "Assignment
Agreement"), duly executed by Seller;
(iii) such other deeds, bills of sale, assignments and other
instruments of sale, in form and substance reasonably satisfactory
to Buyer's counsel, as shall be required or as may be desirable to
vest in Buyer good and marketable title to the Purchased Assets,
free and clear of all Encumbrances other than the Permitted
Encumbrances;
(iv) a Certificate signed by an authorized officer of each of
the Seller and dated as of the Closing Date, certifying that the
representations and warranties of Seller contained in this Agreement
are true and correct on the Closing Date as if such representations
and warranties were made on the Closing Date;
(v) an incumbency and specimen certificate with respect to the
officer(s) of Seller executing the Transaction Documents to which
such entity is a party;
(vi) a Certificate of Good Standing for Seller issued not
earlier than thirty (30) days prior to the Closing Date by the
Secretary of State of Delaware as applicable;
(vii) the Fairness Opinion;
(viii) The Solvency Opinion
(ix) a release of Liens as may be identified by the Buyer
prior to the Closing;
(x) all of the required consents of third Persons set forth in
Schedule 2.10(a)(x);
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(xi) an executed employment contract between the buyer and the
individual listed in Schedule 2.10(a)(xi) (the "Key Employee") (the
"Key Employment Agreement");
(xii) executed copies of certain Confidentiality Agreements
and Assignment of Invention Agreements by any Transferred Employees
who are employed prior to Closing (the "Confidentiality
Agreements");
(xiii) evidence satisfactory to the Buyer that the Seller has
obtained releases with respect to all royalty agreements between the
Company and the following individuals: (i) P. Elayne Wishart; (ii)
Jane Swon; (iii) Jerry T. Swon; (iv) John Swon; (v) David Miller;
and (vi) Carl Germano (collectively, the "Royalty Agreements"),
provided, that the Buyer shall have the option to waive such
requirement;
(xiv) an executed counterpart of the sublease under the
Headquarters Lease, in form and substance satisfactory to Buyer (the
"Sublease"); in a form reasonably acceptable to the Buyer and the
Seller, pursuant to which Buyer subleases the premises covered by
the Headquarters Lease;
(xv) an executed counterpart of the Patent Assignment
Agreement (the "Patent Assignment Agreement") in a form reasonably
acceptable to the Buyer and Seller, pursuant to which the Seller
shall assign all of the patents contained in the Purchased Assets to
Buyer;
(xvi) an executed counterpart of Trademark and Domain Name
Assignment Agreement (the "Trademark and Domain Name Assignment
Agreement") in a form reasonably acceptable to Buyer and Seller,
pursuant to which the Seller shall assign all of the trademarks and
domain names contained in the Purchased Assets to the Buyer;
(xvii) evidence satisfactory to the Buyer regarding payoff,
conversion or release of all Indebtedness; and
(xviii) Operating Agreement executed by the Parent.
(b) Deliveries by Buyer. At the Closing, Buyer shall deliver or
cause to be delivered to Seller the following documents, instruments,
certificates and agreements (which shall be in form and substance
reasonably satisfactory to Seller and its counsel):
(i) a counterpart to the Bill of Sale, duly executed by Buyer;
(ii) a counterpart to the Assignment Agreement, duly executed
by Buyer;
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(iii) a certificate signed by an authorized officer of Buyer
and dated as of the Closing Date, certifying that the
representations and warranties of Buyer contained in this Agreement
are true and correct in all material respects on the Closing Date as
if such representations and warranties were made on the Closing
Date;
(iv) an incumbency and specimen certificate with respect to
the officer(s) of Buyer executing the Transaction Documents to which
Buyer is party;
(v) a counterpart to the Patent Assignment Agreement;
(vi) a counterpart to the Trademark and Domain Name Assignment
Agreement;
(vii) the LLC Interest;
(viii) a copy of the Warrant issued to the LLC;
(ix) a copy of the Operating Agreement, duly executed by
Buyer;
(x) a counterpart to the Key Employment Agreement duly
executed by Buyer;
(xi) a counterpart to the Sublease duly executed by Buyer;
(xii) evidence satisfactory to Seller that Buyer has been
capitalized in an amount not less than $15 million through the sale
of its Series A Convertible Preferred Stock in accordance with the
Series A Preferred Stock Purchase Agreement by and among the Buyer
and the purchasers named therein (the "Stock Purchase Agreement").
ARTICLE III
REPRESENTATION AND WARRANTIES OF SELLER
Each of Parent and Seller represent and warrant to Buyer as of the
Effective Date and agree to represent and warrant to Buyer as of the Closing
Date as follows:
Section 3.1 Organization. The Company is a corporation duly organized and
validly existing under the Laws of the State of Delaware. Subsidiary is a
corporation duly organized and validly existing under the laws of the State of
Delaware. Both Company and Subsidiary have (i) the requisite power and authority
to conduct the Business as now conducted and (ii) the necessary corporate power
and authority to execute, deliver and perform their obligations under the
Transaction Documents and to consummate the transactions contemplated herein and
therein. Complete and correct copies of the Certificates of Incorporation and
Bylaws of Company and of Subsidiary have previously been delivered to Buyer
(such documents, the "Organizational Documents"). Each of Company and Subsidiary
are is duly qualified to do business in every jurisdiction in which the nature
of its business makes such qualifications necessary, except where such failure
would not have a Material Adverse Effect. Each of Company and Subsidiary have
the full right, power, and authority to engage in the Business as it is now
conducted, and has all necessary licenses and permits to operate the Business as
it is presently being operated.
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Section 3.2 Authority. Each of Company and Subsidiary now have, or will
have, all requisite organizational authority to execute, deliver and perform
each Transaction Document to which it is a party, and to perform its obligations
and consummate the transactions contemplated under the Transaction Documents to
which it is a party, subject to receipt of shareholder approval, if the Board of
Directors of the Company determines that such approval is required. Subject to
receipt of shareholder approval, the execution and the delivery of each
Transaction Document to which either Company or Subsidiary is a party, and the
performance of the transactions contemplated by such Transaction Documents, have
been duly authorized by each of Company and Subsidiary and all necessary
corporate or organizational actions by each of Company and Subsidiary for the
execution, delivery and performance of each Transaction Document to which such
Company or Subsidiary is a party and the consummation of the transactions
contemplated hereby and thereby have been taken, and no further corporate or
organizational authorization will be necessary to authorize the execution and
delivery by each of Company and Subsidiary, and the performance of its
obligations under, each Transaction Document to which such Company or Subsidiary
is a party.
Section 3.3 Execution and Delivery. Each Transaction Document to which
either Company or Subsidiary is a party has been validly executed and delivered
by such party and constitutes valid and binding obligations of each such party,
enforceable against each such party in accordance with its terms, except (i) as
such enforceability may be limited by or subject to any bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting creditors' rights
generally, (ii) as such obligations are subject to general principles of equity
and (iii) as rights to indemnity may he limited by federal or state securities
laws or by public policy.
Section 3.4 SEC Reports. The Seller has timely filed all forms, reports,
statements and documents required to be filed by it with the SEC and with any
other governmental body, agency, official or authority (collectively, the "SEC
Reports"). Each SEC Report (i) was prepared in accordance with the requirements
of the Securities Act, the Exchange Act and the rules and regulations thereunder
(ii) did not at the time it was filed contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
in order to make the statements made therein, in the light of the circumstances
under which they were made, not misleading. Each of the financial statements
(including, in each case, any notes thereto) contained in the SEC Reports was
prepared in accordance with GAAP (except, in the case of unaudited financial
statements, for the absence of footnotes and subject to normal year end
adjustments, which adjustments are not material) applied on a consistent basis
throughout the periods indicated (except as may be indicated in the notes
thereto) and each presented fairly the financial position of Buyer as at the
respective dates thereof, and results of operations, stockholders' equity and
cash flows for the respective periods indicated therein, except as otherwise
noted therein (subject, in the case of unaudited statements, to normal and
recurring immaterial year-end adjustments).
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Section 3.5 Financial Statements. Seller has delivered the balance sheet
of the Parent as of June 30, 2006 and the related statements of income,
stockholders' equity, changes in financial position and cash flow (the
"Financial Statements"). Seller represent that, to Seller's actual knowledge,
and subject to adjustments recommended by Seller's independent auditors, the
Financial Statements (i) are true and correct: in accordance with the books of
account and records of Parent and Subsidiary in all material respects; and (ii)
accurately and fairly reflect in all material respects all assets and
liabilities of Parent and Subsidiary. To Seller's actual knowledge, neither
Parent nor Subsidiary has any indebtedness or liability, absolute or contingent,
which is not reflected in the financial statements, or that has not been
specifically identified herein to Buyer, other than liabilities or indebtedness
incurred in the ordinary course of business.
Section 3.6 No Conflict or Default. The execution and performance of this
Agreement, the compliance with its provisions by each of Company and Subsidiary,
and the transfer of the Purchased Assets to Buyer on the Closing Date will not
conflict with or result in any breach of any of the terms, conditions, or
provisions of any agreement, indenture, mortgage, or other instrument to which
either Seller is a party or by which it is bound, except for any such breach
which would not in the aggregate reasonably be expected to have a Material
Adverse Effect or as set forth in Schedule 3.6. Further, subject to shareholder
approval, the execution and performance of this Agreement, the compliance with
its provisions by Seller, and the transfer of the Purchased Assets to Buyer on
the Closing Date will materially comply with all Laws of any Governmental
Authority applicable to the Business or any of the Purchased Assets and will not
conflict with, or result in, the breach of any of the terms of any
Organizational Documents. Except as set forth in Schedule 3.6, the consummation
of the transactions contemplated by this Agreement will not require the consent
of any Person with respect to the rights, licenses, franchises, leases,
contracts or agreements (including but not limited to the Contracts) of Seller
and will not have a Material Adverse Effect upon any such rights, licenses,
franchises, leases or agreements.
Section 3.7 Title to Assets. Seller has or shall have good and marketable
title, or valid leasehold rights (in the case of leased property) to all of the
Purchased Assets, free and clear of all security interests, liabilities,
conditions, pledges, liens, mortgages, licenses in favor of any Person other
than either Seller, conditional sales contracts, attachments, hypothecations,
judgments, easements, claims, and encumbrances of every kind and nature
(collectively, "Encumbrances"), except for those set forth in Schedule 3.7 (the
"Permitted Encumbrances"). At the Closing, Seller will sell, assign, transfer,
convey, and deliver good and marketable title to the Purchased Assets, or, in
the case of assets constituting Purchased Assets which are leased or licensed by
either Seller pursuant to Personal Property Leases or other Contracts, valid
leasehold interests or licenses to such Personal Property Leases or other
Contracts, free and clear of all Encumbrances other than Permitted Encumbrances.
Section 3.8 Contracts. All of the Contracts are in full force and are
enforceable against Company or Subsidiary, as the case may be, in accordance
with their terms. To the Company's and Subsidiary's knowledge and except as set
forth in Schedule 3.8 and except a default or breach which is capable of being,
and shall be, cured prior to the Closing, (i) none of the Contracts is in breach
or default due to the action of Company or Subsidiary, or to Seller's knowledge,
of any other party thereto; and (ii) no event exists which is a default or
breach due to the action of Company or Subsidiary, under any of the Contracts,
or which after the passage of time or giving of notice or both would constitute
a breach or default, due to the action of Company or Subsidiary. Except as set
forth in Schedule 3.8, all duties and obligations required to be performed by
any party to the Contracts prior to Closing have been so performed or will be
performed prior to Closing. Except as set forth in Schedule 3.8, the Contracts
are freely assignable, or if the consent of the contracting party to the
assignment is required, Seller shall have obtained such consent prior to
Closing, or if the giving of notice of such assignment is required, Seller has
provided such notice prior to the Closing. To Seller's actual knowledge: (x) no
party to any of the Contracts is threatened with insolvency; and (y) there
exists no fact or circumstance which may cause a party to one of the Contracts
to fail to perform such Contract. The execution, delivery, consummation and
performance of this Agreement and the transactions contemplated herein will not
cause either Seller to be in breach or default of any of the Contracts.
Schedules 2.1(a), (b), (c), and (f) collectively constitute accurate, correct
and complete lists of the Contracts.
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Section 3.9 No Other Contracts. Other than the Contracts or the Excluded
Assets, there are no written or oral or contractual commitments, contracts or
agreements that relate to the Business to which Seller is a party that will be
binding upon Buyer, or that will affect Buyer or the Purchased Assets, on or
after the Closing.
Section 3.10 Permits. Other than the Contracts or the Excluded Assets, the
Permits listed in Schedule 2.1(g) constitute all of the licenses, permits,
certificates, approvals, exemptions, franchises, registrations, variances,
accreditations or authorizations related to, reasonably necessary in, currently
used in or required for the operation of the Business. The Permits are valid and
in full force and effect and there are no pending proceedings which could result
in the termination, revocation, limitation or impairment of any of the Permits.
The Seller has not received notice of any violations in respect of any of the
Permits. Schedule 2.1(g) contains an accurate, correct and complete list of the
Permits that are reasonably necessary in, currently used in or required for the
operation of the Business.
Section 3.11 Intellectual Property. Other than the Contracts or the
Excluded Assets, the Business Intellectual Property listed in Schedule 2.1(h)
constitutes all of the Intellectual Property owned or licensed by Seller that is
currently used solely in the conduct of the Business, and any license for any of
the foregoing in each case. Seller owns, or licenses or otherwise possesses,
legally enforceable rights to use the Business Intellectual Property that is
listed in Schedule 2.1(h) and such Business Intellectual Property is sufficient
for the conduct of the Business of Seller as it is currently being conducted on
the date hereof. Except as disclosed in Schedule 3.11, neither the manufacture,
marketing, license, sale or intended use of any tangible product currently sold
by the Business violates any license or agreement between either Seller and any
third party relating to such product or, to Seller's knowledge, infringes any
Intellectual Property right of any other party. The Seller has not received any
written charge, complaint, claim, demand, or notice alleging any such
interference, infringement, misappropriation, or violation (including any claim
that either Seller must license or refrain from using any Intellectual Property
rights of any Person relating to the Business Intellectual Property), nor is
there any pending claim or litigation contesting the validity of the Business
Intellectual Property or Seller's ownership or right to use, sell, license or
dispose of the Business Intellectual Property. The Seller has not received any
notice asserting that any of the Business Intellectual Property or the proposed
use, sale, license or disposition thereof conflicts or will conflict with the
rights of any other party, and the Seller has not licensed the use of the
Business Intellectual Property to any third party nor permitted the use by any
third party of the same in a manner which would infringe the trademark rights of
Seller. Seller will make available to Buyer complete and correct copies of all
reasonably accessible user and technical documentation related to the Business
Intellectual Property that is listed in Schedule 2.1(h). Except as disclosed in
Schedule 3.11, the Seller has not received any notice that any of their current
or prior members, officers, employees or consultants claim an ownership interest
in any of the Business Intellectual Property as a result of having been involved
in the development of such property while employed by or consulting to the
Business or otherwise.
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Section 3.12 Inventory. Except as set forth in Schedule 3.12, Sellers are
not in possession of any inventory that is not owned by them. All of the
Inventory has been valued at cost on a first-in, first-out basis.
Section 3.13 No Real Property Owned by Seller. Seller owns no real
property used in the Business. Except as set forth in Schedule 3.13, the
Headquarters Lease may be freely assigned, assumed or sublet, is valid and in
full force and effect, and to Seller's knowledge there is not pending or
threatened any proceedings which could result in the termination revocation,
limitation or impairment of the Headquarters Lease.
Section 3.14 Litigation. Except as set forth in Schedule 3.14, there is no
litigation, proceeding, or governmental investigation pending in front of any
court, arbitration board, administrative agency, or tribunal against or relating
to Seller that would prevent or affect the Purchased Assets, the Business, or
the consummation of this Agreement or the sale, transfer or assignment of the
Purchased Assets by Seller.
Section 3.15 Compliance with Law. Except as set forth in Schedule 3.15,
Seller has been and are in, and the Business has been and is being conducted in,
compliance in all material respects with all Laws that are applicable to or
binding upon the Business or the Purchased Assets, and Seller has not received
any written or oral notice of any violation or alleged violation of any Law.
Section 3.16 Investment Company. Seller is not an "investment company", or
an "affiliated person" of an "investment company", or a company "controlled" by
an "investment company" as such terms are defined in the Investment Company Act
of 1940, as amended, and Buyer is not an "investment adviser" or an "affiliated
person" of an "investment adviser" as such terms are defined in the Investment
Advisers Act of 1940, as amended.
Section 3.17 Brokers' Fees. Except as set forth in Schedule 3.17, Seller
has no liability or obligation to pay any fees or commissions to any broker,
finder or agent with respect to the transactions contemplated by the Transaction
Documents.
Section 3.18 No Material Adverse Effect. Since June 30, 2006, there have
been no changes that would have a Material Adverse Effect. Since June 30, 2006,
Seller has operated the Business in the ordinary course of business consistent
with past practices and Seller has used reasonable efforts to keep the Business
intact.
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Section 3.19 Accounts Receivable. Except as set forth on Schedule 3.19,
all Accounts Receivable of the Business arose from valid transactions and in the
ordinary course of business for goods sold or services rendered and are not
subject to any valid counterclaims or setoffs known to Seller with respect to
any such Accounts Receivable. The list of Accounts Receivable listed in Schedule
2.1(k) is a true, accurate and complete list of such accounts generated in
connection with the Business and existing as of the date thereof.
Section 3.20 Taxes
(a) Except as set forth in Schedule 3.20 (a), as of the Closing
Date:
(i) The Seller has timely filed or, if not yet due, will
timely file all Tax Returns required to be filed by them on or
before the Closing Date and all such Tax Returns are or, in the case
of Tax Returns not yet filed, will be, true, correct and complete in
all respects.
(ii) The Seller has paid all Taxes with respect to all Taxable
periods ending on or before the Closing Date and all Taxable periods
starting before and ending after the Closing Date to the extent
attributable to the portion of such periods up to and including the
Closing Date, except to the extent the failure to pay any such Taxes
would not reasonably expected to have a Material Adverse Effect.
(iii) The Seller has made or will make available to Buyer
signed copies of all Tax Returns filed by the Seller relating to all
Taxable periods ending on or before the Closing Date as to which the
statute of limitations remains open.
(iv) No extension of time has been requested or granted for
the Seller to file any Tax Return that has not yet been filed or to
pay any Tax that has not yet been paid, and the Seller has not
granted a power of attorney that remains outstanding with regard to
any Tax matter.
(v) There is no pending or, to the knowledge of the Seller,
threatened examination, investigation, audit, suit, action, claim or
proceeding relating to Taxes (a "Tax Audit") of the Seller.
(vi) Buyer has received copies of all material audit reports
and correspondence between the Seller and any Tax Authority and a
true and complete summary of all oral communications between the
Seller and any Tax Authority relating to any Tax Audit of the
Seller, including without limitation any Tax Audit that is in
progress or for which an extension of the statute of limitations was
granted.
(vii) The Seller has not received notice of a determination by
a Tax Authority that Taxes are owed by the Seller (such
determination being referred to as a "Tax Deficiency") and, to the
knowledge of the Seller, no Tax Deficiency is proposed or
threatened.
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(viii) All Tax Deficiency asserted against the Seller has been
paid or finally settled and all amounts asserted in any Tax
Deficiency to be owed have been paid.
(ix) There are no Liens arising from or related to Taxes on or
pending against the Seller or any of their properties other than
statutory Liens for personal property Taxes that are not yet due and
payable.
(x) There are no presently outstanding waivers or extensions,
or requests for waiver or extension, of the time within which a Tax
Deficiency may be asserted or assessed against the Seller.
(xi) No issue has been raised in any Tax Audit of the Seller
which, by application of similar principles to any past, present or
future period as to which the statute of limitations remains open,
would result in an adjustment to the amounts reported in such
period.
(xii) The Seller has not changed a Tax accounting method
during any Taxable year ending on or before the Closing Date. Seller
has not taken any action, whether or not required, that has resulted
or will result in deferring a liability for Taxes of the Seller from
a Taxable period ending on or before the Closing Date to a Taxable
period ending after such date.
(xiii) The Seller has not ever been required to include in
income an adjustment pursuant to Section 481 of the Code and no Tax
Authority has ever made or proposed any such adjustment. The Seller
has not entered into a closing agreement described in Section 7121
of the Code, an advance pricing agreement or any other agreement
with a Tax Authority relating to Taxes.
(xiv) The Seller does not own any property that is tax-exempt
use property within the meaning of Section 168(h) of the Code, that
is described in Section 168(f)(8) of the Code as in effect prior to
its amendment by the Tax Reform Act of 1986, that is tax-exempt bond
financed property within the meaning of Section 168(g) of the Code
or that is "limited use property" within the meaning of Rev. Proc.
76-30.
(xv) The Seller is not party to any arrangement to which
Section 162(m) or Section 280G of the Code might apply.
(xvi) The Seller has not filed a consent pursuant to Section
341(f) of the Code or agreed to have Section 341(f)(2) apply to the
disposition of any asset.
(xvii) The Seller has not participated in or cooperated with
any international boycott within the meaning of Section 999 of the
Code.
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(xviii) The Seller is not now nor has ever been (a) an
includable member of an "affiliated group" within the meaning of
Section 1504(a) of the Code other than an affiliated group
consisting only of the Seller and one or more of the current Parent
subsidiaries or otherwise liable for the Taxes (or amounts in lieu
of Taxes) of a person other than the Seller pursuant to Treasury
Regulation Section 1.1502-6 or any similar provision of state, local
or foreign Laws, whether or not as a transferee, a successor, by
operation of law, by contract or otherwise, (b) a member of any
consolidated, combined or unitary Tax Return filing group other than
a group consisting only of the Seller and one or more of the current
Parent subsidiaries, (c) a party to any Tax sharing agreement, Tax
indemnity agreement or similar agreement, arrangement or practice
with respect to Taxes, including an agreement that obligates it to
make any payment computed by reference to the Taxes, Taxable income
or Tax losses of any other individual or entity, (d) a personal
holding company as defined in Section 542 of the Code, (e) the owner
of an interest in an entity that is treated as a Tax partnership,
trust, regulated investment company as defined in Section 851 of the
Code or real estate investment trust as defined in Section 856 of
the Code (f) a United States shareholder as defined in Section
951(b) of the Code of a controlled foreign corporation as defined in
Section 957 of the Code, (g) a United States real property holding
company within the meaning of Section 897(c)(2) of the Code or (h) a
shareholder of a passive foreign investment company, as defined in
Section 1297 of the Code.
(xix) Seller has not entered into a gain recognition or other
agreement requiring it to take into account Taxable income or to
incur a Tax liability that it would not have had to take into
account or would not have had to incur but for such agreement.
(xx) Seller has not failed to disclose on its federal, state,
local and foreign income Tax Returns all positions taken therein
that could give rise to a penalty under Section 6662 of the Code or
any corresponding provision of state, local or foreign Tax Laws.
(xxi) Seller has not ever participated, directly or
indirectly, in a transaction which is described in Treasury
Regulation Sections 1.6011-4(b)(2) or 1.6011-4(b)(3) nor has ever
held "an interest" in a "tax shelter," as those terms are defined in
Treasury Regulation Section 301.6112-1.
(xxii) Seller has not ever been a party to a transaction that
gave rise to deferred intercompany gains or losses that have not
been fully taken into income for income Tax purposes. (xxiii) To the
knowledge of the Seller, no claim has ever been made by a Tax
Authority in any jurisdiction that the Seller is or may be subject
to Tax in a jurisdiction in which it does not currently pay Tax or
file a Tax Return.
(xxiv) The Seller has not ever requested a private ruling from
a Tax Authority on any matter.
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(xxv) Seller has not been a "distributing corporation" or a
"controlled corporation" in connection with a distribution described
in Section 355 of the Code.
(xxvi) The Seller nor, to the knowledge of the Seller, any
other Person, has taken any action or failed to take any action that
would cause the Transaction to fail to qualify as a tax-free
reorganization under Section 368(a) of the Code, and no facts exist
that would cause the Transaction to fail to so qualify.
(xxvii) The net operating losses, alternative minimum tax net
operating losses, net capital losses, alternative minimum tax net
capital losses, Tax credits, alternative minimum tax credits and
other Tax attributes of the Seller are not subject to any
consolidated return limitation, limitation under Section 382 of the
Code or any other limitation on their use, allowance or
availability, other than a limitation arising from the transaction
pursuant to this Agreement.
(xxviii) The Seller has retained all supporting and backup
papers, receipts, spreadsheets and other information necessary for
the preparation of all Tax Returns with respect to the Seller and
the defense of Tax Audits involving all Taxable periods either ended
on or during the six (6) years prior to the Closing Date or from
which there are unutilized net operating loss, capital loss or
investment tax credit carryovers.
(xxix) The Seller has collected, or will, on or before the
Closing Date, collect, all sales and use, employment, excise and
other Taxes that are required to have been or to be collected on or
prior to the Closing Date and the Seller has remitted, or will, on
or before the Closing Date, or as soon as practicable thereafter,
but in no event after the date such Taxes are required to be
remitted, remit to the appropriate Tax Authority all sales and use,
employment, excise and other Taxes that were collected on or before
the Closing Date or that are required to have been or to be remitted
on or prior to the Closing Date.
(xxx) The Seller has maintained and has in its possession all
records, supporting documents and exemption and resale certificates
required by applicable sales and other Tax statutes and regulations
to be retained in connection with the collection and remittance of
Taxes or necessary to justify the amounts of such Taxes reported and
paid in each case for all periods up to and including the Closing
Date.
(xxxi) No Transfer Taxes or other Taxes are or will be imposed
on Buyer, or the Seller or on any of their properties by reason of
the Transaction pursuant to this Agreement.
(xxxii) The Seller is not subject to Tax in any foreign
country and the Seller has complied with all applicable Tax Laws and
regulations of all countries whose Tax laws to which they are
subject.
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(b) Schedule 3.20(b) sets forth:
(i) A schedule of the filing dates of all Tax Returns required
to be filed by the Seller;
(ii) A description of all past Tax Audits involving the
Seller;
(iii) A list of all elections made by the Seller relating to
Taxes;
(iv) A description of any change of accounting method of the
Seller;
(v) A schedule of the Seller's Tax basis in each of its assets
as of the Closing Date, and the recovery period and annual
depreciation or amortization deduction for each such asset for each
year of its remaining Tax recovery period and in the case of
amortizable assets, a description of each asset; and
(vi) A schedule of the Tax attributes of the Seller
(including, but not limited to, net operating losses, capital
losses, investment credits, foreign tax credits and alternative
minimum tax credits), together with a description of all limitations
to which such Tax attributes are subject (e.g., limitations under
Section 382 of the Code).
(c) Each reference to a provision of law in this Section 3.20 shall
be treated for state, local and foreign Tax purposes as a reference to all
analogous and similar provisions of state, local and foreign Laws.
Section 3.21 Accounts Payable. Except as set forth on Schedule 3.21, all
accounts payable of Seller related to the Business are current and have been
generated in the ordinary course of business. Except as set forth in Schedule
3.21, Seller has paid promptly, when due, all accounts payable related to the
Business, including lease payments and rental fees, utility bills, and other
obligations due as a result of the operation of the Business and the ownership
of the Purchased Assets through the Closing Date.
Section 3.22 No Undisclosed Liabilities. Except as disclosed on Schedule
3.22, Seller has no material liability related to the operation of the Business,
except for liabilities reflected in the Financial Statements and for current
liabilities incurred in the ordinary course of business. Seller has no liability
or obligation to refund any economic development incentives received from any
governmental entity.
Section 3.23 Environmental, Health & Safety Compliance. To Seller's
knowledge, neither the conduct nor operation of the Business, nor any condition
of the Headquarters Lease, nor the premises leased by the Headquarters Lease,
violates any Law or common law concerning public health and safety, worker
health and safety, and pollution or protection of the environment
("Environmental, Health, and Safety Requirements"), where such violation would
reasonably be expected to have a Material Adverse Effect and Seller has not
received any notice stating that the operation or condition of any real property
presently leased or operated in connection with the Business is in violation of
any Environmental, Health, and Safety Requirements, where such violation would
reasonably be expected to have a Material Adverse Effect.
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Section 3.24 Government Authorizations. The governmental authorizations
listed in Schedule 3.24 collectively constitute all of the authorizations of any
Governmental Authority necessary to permit Seller to lawfully conduct and
operate the business in the manner in which they currently conduct and operate
the business and to permit Seller to own and use the Purchased Assets in the
manner in which they currently own and use such Purchased Assets, except where
the failure to do so would not have a Material Adverse Effect.
Section 3.25 Relationships with Affiliates. Neither Seller nor any of
their Affiliates has any interest in, has owned, of record or as a beneficial
owner, or has an equity interest or any other financial or profit interest in
any Person that has (a) had business dealings or a material financial interest
in any transaction with either Seller other than business dealings or
transactions disclosed in Schedule 3.25 or (b) engaged in competition with
Seller with respect to the Business in any market presently served by Seller.
Except as set forth in Schedule 3.25, neither Seller nor any of their Affiliates
is a party to any Contract with, or has any claim or right against, either
Seller, (i) providing for the furnishing of services by, (ii) providing for the
rental of real or personal property from, or (iii) otherwise requiring payments
to (other than for services as managers, officers, directors or employees of the
Business), any such person or any corporation, partnership, trust or other
entity in which any such person has a substantial interest as a stockholder,
officer, director, trustee or partner.
Section 3.26 ERISA. Neither Seller nor any ERISA Affiliate maintains or
contributes to or has or had any obligation to maintain or contribute to any
employee pension benefit plan within the meaning of Section 3(2) of ERISA that
(i) is subject to minimum funding standards of the Code or ERISA; or (ii) is a
multiemployer plan as defined in Section 4001(a)(3) of ERISA.
Section 3.27 Employees.
(a) Each Employee Benefit Plan maintained by the Seller is listed in
Schedule 3.27(a) and copies or descriptions of each such Employee Benefit
Plan have been delivered to Buyer. Buyer will not have, as a consequence
of the transactions contemplated hereby, any liability or obligation with
respect to or under any agreement between either Seller and any of the
Employees, except for the Transferred Employees (as such term is defined
herein) to the extent contemplated by Section 6.1 hereof.
(b) Each Employee Benefit Plan maintained by Seller with respect to
the Business Employees has been maintained and administered at all times
in material compliance with its terms and all applicable Laws.
(c) Schedule 3.27(c) contains: (i) a list of the Business Employees;
(ii) the current annual compensation provided by Seller to each such
Business Employee as of the Closing Date; (iii) a list of any increase
presently scheduled (including the effective date thereof) in the rate of
compensation of any the Business Employees; (iv) the title and location of
each such Business Employee; and (v) a job description for each Business
Employee.
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(d) Neither Seller is a party to or bound by any union contract or
collective bargaining agreement and has not experienced any strike,
grievance or any arbitration proceeding, claim of unfair labor practices
filed or, to Seller's knowledge, threatened to be filed or any other
material labor difficulty.
(e) All of the Business Employees are United States citizens, or
lawful residents of the United States.
Section 3.28 No Disputes. Except as set forth on Schedule 3.28, to
Seller's knowledge, there are no material conflicts or problems with any
officer, manager or Key Employee of Seller that would likely result in the
termination or resignation of employment of any such individual. To Seller's
knowledge, there are no material disputes with suppliers that would likely
result in the termination of the source of supply of a material product and
there are no long term commitments with suppliers.
Section 3.29 Insurance Coverage. Except as set forth in Schedule 3.29,
Seller maintains insurance policies for fire, liability and other forms of
insurance covering the Business and the Purchased Assets in amounts and against
such losses and risks as are generally maintained for comparable businesses and
properties and such insurance will be maintained through Closing.
Section 3.30 Consents and Approvals. Except for consents with respect to
the Consent Contracts, no material consent, approval, waiver or authorization is
required to be given or made by any Government Authority or other Person in
connection with the execution, delivery and performance of this Agreement by the
Seller.
Section 3.31 Assets of the Business. The Seller (and not any third party
or Affiliate of any Seller) is the beneficial owner of the Purchased Assets,
other than the leased Purchased Assets, and has (and, at the Closing, the Buyer
will receive) good and marketable title to such Purchased Assets, or, in the
case of leased Purchased Assets, valid and enforceable rights to use such
Purchased Assets, free and clear of all Liens other than Permitted Encumbrances.
All the Purchased Assets that are tangible assets are in good operating
condition and repair for the purpose in which they are intended, subject only to
ordinary wear and tear. The Purchased Assets constitute all of the assets
(whether real or personal, tangible or intangible) that are required to operate
the Business as currently being operated by the Seller prior to the Closing
other than the assets listed on Schedule 3.31.
Section 3.32 Product Warranties. Each product manufactured, licensed or
sold by Seller has been in substantial conformity with all contractual
commitments and express warranties applicable to Seller, all of which are
described in Schedule 3.32, as well as with all warranties implied by law.
Section 3.33 Solvency. Seller will be Solvent immediately following the
Closing. Seller will not fail to be Solvent as a result of the execution and
delivery of the Transaction Documents. "Solvent" shall mean, when used with
respect to any person or entity, that at the time of determination: (i) its
assets exceed its liabilities; (ii) it is then able and expects to be able to
pay its debts as they mature; and (iii) it has capital sufficient to carry on
its business as conducted and as proposed to be conducted.
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ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer represents and warrants to Seller as of the Effective Date and
agrees to represent and warrant to Seller as of the Closing Date as follows:
Section 4.1 Organization. Buyer is a corporation duly organized and
validly existing under the laws of the State of Delaware. Buyer has (i) all
requisite power and authority to carry on respective business as it is now being
conducted and as contemplated to be conducted immediately following the Closing,
and (ii) the necessary corporate power and authority to execute, deliver and
perform its obligations under the Transaction Documents and to consummate the
transactions contemplated herein and therein.
Section 4.2 Authority. Buyer now has, and at Closing will have, all
requisite organizational authority to execute, deliver and perform the
Transaction Documents and to perform its obligations and consummate the
transactions contemplated under the Transaction Documents to which it is a
party. The execution and the delivery of the Transaction Documents to which
Buyer is a party and the performance of the transactions contemplated by such
Transaction Documents have been duly authorized by Buyer, as the case may be,
and all necessary corporate or organizational actions by Buyer for the
execution, delivery and performance of the Transaction Documents to which either
of them is a party and the consummation of the transactions contemplated hereby
and thereby have been taken, and no further corporate or organizational
authorization will be necessary to authorize the execution and delivery by Buyer
of, and the performance of its obligations under, each Transaction Document to
which Buyer is a party. Each Transaction Document to which Buyer is a party has
been validly executed and delivered by Buyer, as the case may be, and
constitutes valid and binding obligations of Buyer, enforceable against Buyer in
accordance with its terms, except (i) as such enforceability may be limited by
or subject to any bankruptcy, insolvency, reorganization, moratorium or other
similar laws affecting creditors' rights generally, (ii) as such obligations are
subject to general principles of equity and (iii) as rights to indemnity may be
limited by federal or state securities laws or by public policy.
Section 4.3 Approvals. No third-party action, waiver, consent or approval
is required of any Person for the execution, delivery and performance of the
Transaction Documents by Buyer, and the execution, delivery or performance, and
the consummation of the transactions contemplated herein or therein do not
breach any provision of Buyer's Certificate of Incorporations and Bylaws. No
action, waiver, consent or approval by any Governmental Authority is necessary
to make this Agreement a valid instrument binding on Buyer in accordance with
its terms.
Section 4.4 Broker or Finder's Fee. Buyer has no liability or obligation
to pay any fees or commissions to any broker, finder or agent with respect to
the transactions contemplated by this Agreement.
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Section 4.5 No Conflict or Default. The execution and performance of this
Agreement, the compliance with its provisions by Buyer, and the transfer of the
Purchased Assets to Buyer on the Closing Date will not conflict with or result
in any breach of any of the terms, conditions, or provisions of any agreement,
indenture, mortgage, or other instrument to which either Buyer is a party or by
which it is bound. Further, the execution and performance of this Agreement, the
compliance with its provisions by Buyer, and the transfer of the Purchased
Assets to Buyer on the Closing Date will materially comply with all Laws of any
Governmental Authority applicable to the Business or any of the Purchased Assets
and will not conflict with, or result in the breach of any of the terms of any
of Buyers' Organizational Documents. The consummation of the transactions
contemplated by this Agreement will not require the consent of any Person with
respect to the rights, licenses, franchises, leases, contracts or agreements
(including but not limited to the Contracts) of Buyer.
Section 4.6 Litigation. There is no litigation, proceeding or governmental
investigation pending in front of any court, arbitration board, administrative
agency or tribunal against or relating to Buyer.
Section 4.7 No Default. Buyer is not in default with respect to any
indebtedness, note, indenture, loan agreement, mortgage, lease, deed or other
agreement to which Buyer is a party or by which it is bound and neither Buyer
nor Parent has received any notice or demands with respect to the same that
would prevent or affect the transactions contemplated by the Transaction
Documents.
Section 4.8 Capitalization. Immediately following the Closing and after
giving effect to the transactions contemplated in this Agreement and the Stock
Purchase Agreement, (a) the authorized capital stock of the Buyer will consist
of: (i) an aggregate of 75,000,000 shares of Buyer Common Stock, of which up to
10,000,000 shares will have been issued and outstanding pursuant to this
Agreement and (ii) an aggregate of 27,000,000 shares of Series A Convertible
Preferred Stock of which 15,000,000 shares will have been issued and outstanding
pursuant to the Stock Purchase Agreement; and (b) there will be no options,
warrants, conversion privileges or other rights outstanding to purchase or
otherwise acquire from the Buyer any capital stock or other securities of the
Buyer, or any other agreements to issue any such securities or rights other than
(i) the Warrant, (ii) the issued and outstanding shares of the Series A
Convertible Preferred Stock, (iii) pursuant to the Stock Purchase Agreement and
(iv) a stock option plan covering 5,303,030 shares of Buyer Common Stock.
ARTICLE V
PARENT & SELLER COVENANTS
The Parent and Seller hereby covenant and agree as follows:
Section 5.1 Maintenance of the Purchased Assets. Until the Closing Date,
Seller shall not lease, sell, or dispose of any of the Purchased Assets other
than in the ordinary course of business consistent with past practice or
otherwise except with the prior written consent of Buyer.
30
Section 5.2 Update of Disclosure Schedule. Prior to the Closing Date,
Seller shall supplement or amend all relevant Schedules and/or notify Buyer with
respect to any matter thereafter arising or discovered which, if existing or
known on the Effective Date of this Agreement, would have been required to be
set forth or described in such Schedule(s) or would have been required to be
disclosed to Buyer under this Agreement. At the Closing Date, Seller shall
deliver to Buyer a complete Disclosure Schedule, marked to show all of the
changes since the Effective Date (the "Updated Schedules").
Section 5.3 Conduct of Business. From the date hereof to the Closing Date,
except (i) for entering into and performing this Agreement, and the other
Transaction Documents; (ii) for the effect of the consummation of the
transactions contemplated hereby and thereby; (iii) repayment, conversion or
satisfaction of its liabilities and Indebtedness; (iv) the transactions
contemplated in that certain Securities Purchase Agreement, dated August 16,
2006, among the Parent and the Purchasers identified therein; or (v) as
otherwise consented to by Buyer in writing, the Seller shall conduct the
Business in the ordinary course in substantially the same manner in which it has
previously been conducted, and shall take or refrain from taking (as
appropriate) the following actions:
(a) Seller will use its best efforts to maintain and preserve
relationships with its current customers and suppliers of the Business and
Transferred Employees;
(b) Seller will maintain the books, accounts and records on a basis
consistent with that of prior periods and said books, accounts and records
will accurately reflect activities of Seller with respect to the Business;
(c) Seller will not do any act or omit to do any act or permit any
act or omission to act that will cause a material breach of any contract,
commitment or obligation of either Seller, including but not limited to
the Contracts, where such breach would reasonably likely have a Material
Adverse Effect;
(d) Seller will use its best efforts to prevent the occurrence of
any change or event which would prevent any of its representations and
warranties contained herein from being true at and as of the Closing Date;
(e) Seller will maintain in full force and effect the insurance
coverage under the policies set forth in Section 3.29;
(f) Seller will give Buyer and Buyer's Representatives access during
normal business hours, without unreasonable interference with business
operations, to all of the facilities, properties, books, contracts,
commitments and records of Seller and shall make Seller's officers and
employees available to Buyer as Buyer shall from time to time reasonably
request. Buyer and its Representatives will be furnished the information
concerning Seller relating to the Business which Buyer reasonably
requests.
(g) Seller will not enter into any settlement of any material
litigation or proceeding relating to the Purchased Assets, the Business or
the Assumed Obligations;
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(h) Seller will not incur any material obligation or liability or
enter into any transaction material to the Business without the prior
written consent of the Buyer;
(i) Seller will discharge or satisfy any known encumbrance or pay or
satisfy any known obligation or liability (whether absolute, accrued,
contingent or otherwise), other than Permitted Encumbrances, liabilities
being contested in good faith and for which adequate reserve have been
provided and Encumbrances, obligations and liabilities arising in the
ordinary course of business that do not, individually or in the aggregate,
materially interfere with the use, operation, or marketability of any of
the Purchased Assets or which may be discharged or satisfied at Closing
with a portion of the Purchase Price.
(j) Seller will not mortgage, pledge or subject to any Encumbrance
any of the Purchased Assets, except for Permitted Encumbrances and
Encumbrances arising in the ordinary course of business and consistent
with past practice and liens for Taxes not yet due and payable;
(k) Seller will not dispose of any of the Purchased Assets or enter
into any material contracts relating to the Business, except in the
ordinary course of business and consistent with past practices, without
the prior written consent of the Buyer;
(l) Seller will not become or remain in breach or default on any
material obligation other than such breach or default which can and shall
be cured prior to the Closing;
(m) Seller will not write-off as uncollectible any of its Accounts
Receivable relating to the Business or any portion thereof unless
otherwise advised by Seller's independent accountants;
(n) Seller will not discontinue the sales of any products of the
Business;
(o) Seller will not increase any salary or wage of any Transferred
Employee, other than regularly scheduled salary increases agreed upon by
the board of directors of the Company or the Subsidiary (which shall not
exceed two percent (2%) in the aggregate, per annum), or as agreed to
prior to the Effective Date, declare or pay any bonus, revise, amend,
institute, or terminate any employee benefit of any Employee other than
previously disclosed to Buyer;
(p) Seller will not enter into any agreement or make any commitment
to do any of the foregoing;
(q) Seller will assist in the transfer of Transferred Employees
needed for the Business; and
(r) Seller shall assist Buyer with reasonable integration efforts
and transition.
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Section 5.4 Notification. Seller shall promptly notify Buyer in writing if
it becomes aware of (a) any fact or condition that, in Seller's reasonable
determination, causes or constitutes a material breach of any of Seller's
representations and warranties made as of the Effective Date or (b) the
occurrence after the Effective Date of any fact or condition that, in Seller's
reasonable determination, would or would be reasonably likely to (except as
expressly contemplated by this Agreement) cause or constitute a breach of any
such representation or warranty had that representation or warranty been made as
of the time of the occurrence of, or Seller's discovery of, such fact or
condition.
Section 5.5 Interim Financial Statements. Until the Closing Date, Seller
shall deliver to Buyer within ten (10) Business Days after the end of each month
a copy of the unaudited financial statements of Subsidiary or such month
prepared in accordance with GAAP, consistently applied, in a manner and
containing information consistent with Seller's current practices.
Section 5.6 Compliance with Laws. Seller shall duly comply with all Laws
applicable to the Business or the Purchased Assets (including, without
limitation, all environmental Laws) or as may be required for the valid and
effective transfer and assignment of the Purchased Assets.
Section 5.7 Notice of Developments. Seller will give prompt written notice
to the Buyer of any material development affecting the assets, liabilities,
business, financial condition, operations, results of operations, or future
prospects of Seller. Seller will give prompt written notice to Buyer of any
material development affecting the ability of Seller to consummate the
transactions contemplated by the Agreement. No disclosure by Seller pursuant to
this Section 5.7, however, shall be deemed to amend or supplement the Disclosure
Schedule or to prevent or cure any misrepresentation, breach of warranty, or
covenant.
Section 5.8 Meeting of Company Stockholders.
(a) In connection with obtaining the approval of the holders of
Company's common stock, par value $0.001 (the "Company Common Stock", and
such holders, the "Company Stockholders"), the Company will take all
action necessary in accordance with applicable law and regulations and its
Certificate of Incorporation and Bylaws to duly call, give notice of,
convene and hold, as promptly as reasonably practicable after the date
hereof, a meeting (the "Stockholders' Meeting") of the Company
Stockholders for the purpose of obtaining approval of this Agreement and
the Transaction and shall submit this Agreement and the Transaction for
approval by the Company Stockholders at such meeting or any adjournment
thereof.
(b) Company, through its board of directors, shall recommend
approval of the Transactions by the Company Stockholders at the
Stockholders' Meeting or any adjournment thereof, shall include such
recommendation in the Proxy Statement and shall use all commercially
reasonable efforts to obtain the approval of the Company Stockholders.
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(c) Within fourteen (14) days of the execution of this Agreement,
Company shall prepare and file with the Securities and Exchange Commission
("SEC") proxy materials as required by applicable law to solicit from the
Company Stockholders proxies in favor of the adoption of this Agreement
and the approval of the Transaction (the "Proxy Statement"), and shall use
reasonable efforts to have the Proxy Statement cleared by the SEC. The
Proxy Statement shall comply with applicable provisions of the Securities
Act of 1933, as amended (the "Securities Act") and the Exchange Act and
the rules and regulations thereunder. If at any time prior to the
Stockholder's Meeting any event shall occur that should be set forth in an
amendment of or a supplement to the Proxy Statement, Company shall prepare
and file with the SEC such amendment or supplement as soon thereafter as
is reasonably practicable. Buyer and Company shall cooperate with each
other in the preparation of the Proxy Statement, and Company shall notify
Buyer of the receipt of any comments of the SEC with respect to the Proxy
Statement and of any requests by the SEC for any amendment or supplement
thereto or for additional information, and shall provide to Buyer promptly
copies of all correspondence between Company or any representative of
Company and the SEC with respect to the Proxy Statement. Buyer and its
counsel shall have the right to review the Proxy Statement and all
responses to requests for additional information by and replies to
comments of the SEC before their being filed with, or sent to, the SEC.
Each of Company and Buyer agrees to use commercially reasonable efforts,
after consultation with the other parties hereto, to respond promptly to
all such comments of and requests by the SEC in an effort to cause the
Proxy Statement to be mailed to the holders of Company Common Stock
entitled to vote at the Stockholders' Meeting at the earliest practicable
time. Company agrees that the information provided by it for inclusion in
the Proxy Statement and each amendment or supplement thereto, at the time
of mailing thereof and at the time of the Stockholders' Meeting, will not
include an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
Section 5.9 Tax Matters.
(a) Tax Returns. The Seller shall prepare and shall timely file with
the appropriate Tax Authority all Tax Returns with respect to Taxable
periods ending on or before the Closing Date. In the event of Tax Returns
whose due date is after the Closing Date, taking into account all
extensions that are properly obtained, at least ten (10) business days
prior to filing a Tax Return, the Seller shall provide or cause to be
provided to Buyer a copy thereof and such Tax Return shall not be filed if
Buyer notifies the Seller in writing within such ten (10) day period of
its material objection to any material aspect of such Tax Return.
(b) Liability for Taxes. Seller shall indemnify and hold harmless
the Buyer, from and against all Taxes of or with respect to the Seller,
any its business, its assets or its capital, which are owed for any
Taxable period ending on or before the Closing Date, or the portion of any
Straddle Period up to and including the Closing Date.
(c) Allocation of Taxes.
(i) Taxable Periods Ending on the Closing Date. Seller shall,
whenever required or permitted to do so, end its taxable period on
the Closing Date, including without limitation the federal income
tax period ending on the Closing Date and begin a new taxable period
on the day after the Closing Date.
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(ii) Straddle Periods. In the case of a Taxable period that
begins on or before the Closing Date and ends after the Closing Date
(a "Straddle Period"), items shall be allocated between the portion
of the Straddle Period up to and including the Closing Date and the
portion of the Straddle Period after the Closing Date, on the basis
of a "closing of the books" by allocating to each such portion of
the Straddle Period: (A) sales Taxes in proportion to the Taxable
sales which take place in each portion of the Straddle Period, (B)
use Taxes in proportion to the Taxable purchases which take place in
each portion of the Straddle Period, (C) Taxes based on gross
receipts in proportion to the gross receipts accrued in each portion
of the Straddle Period, (D) Taxes which accrue over time (including
without limitation, property Taxes) in proportion to the number of
days in each portion of the Straddle Period and (E) in the case of
all other Taxes, on a reasonable basis that gives effect to a
"closing of the books."
(iii) Cooperation. Parent, the Seller, and the Buyer shall
reasonably cooperate, and shall cause their Representatives and
agents reasonably to cooperate, in the preparation of Tax Returns,
the payment of Taxes and the resolution of Tax Audits and Tax
Deficiencies, including maintaining and making available to each
other all records necessary in connection therewith.
(iv) Section 368(a) Qualification. From and after the date
hereof, neither Parent nor Seller will (i) knowingly take any action
or fail to take any action that would cause the Transaction to fail
to qualify as a tax-free reorganization under Section 368(a) or (ii)
enter into any contract, agreement, commitment or arrangement the
performance of which would result in any such action.
(v) FIRPTA Clearance. Buyer shall have received from the
Seller a statement meeting the requirements of Treasury Regulation
Section 1.1445-2(b)(2) that the Seller is not a foreign person.
(vi) Survival. The covenants set forth in this Section 5.9
shall survive the Closing and continue in full force and effect
forever thereafter.
Section 5.10 Liquidation. Promptly following the Closing, Parent shall
cause Subsidiary to liquidate, dissolve, and distribute all of its remaining
assets to Parent as sole stockholder of Subsidiary.
ARTICLE VI
MUTUAL COVENANTS.
Each of the parties hereto, as the case may be, hereby covenant and agree
as follows:
Section 6.1 Employee Matters.
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(a) Transferred Employees. Schedule 3.27(c) lists all of the
Business Employees as of the date of this Agreement. Seller shall continue
to employ all of the Employees until the Closing, except for any Employee
who prior to the Closing (i) is terminated for cause; (ii) is terminated
with the consent of Buyer, or (iii) voluntarily resigns. Within sixty (60)
business days of the execution of this Agreement, Buyer shall deliver to
Seller a list of those Business Employees who will be offered employment
by Buyer on terms and conditions of employment to be determined in the
sole discretion of the Buyer. From the date of this Agreement to the
Closing Date, Seller shall permit Buyer to communicate with the Business
Employees, at reasonable times and upon reasonable notice and to interview
the Business Employees and review the personnel records and such other
information concerning such employees as Buyer may reasonably (subject to
obtaining any legally required written permission of any affected employee
and to any other applicable law). Buyer's offer of employment shall be
contingent upon and effective as of the Closing Date. The Business
Employees who are offered and accept employment by the Buyer shall
hereinafter be referred to as the "Transferred Employees." Business
Employees to whom offers are made but who decline such offers, or who fail
to perform one hour of service for Buyer after the Closing Date shall
hereinafter be referred to as the "Terminated Employees." Seller and Buyer
agree, with respect to Transferred Employees, to take the position that
they are, respectively, a "predecessor" and "successor" as defined in
Revenue Procedure 96-60 and Treasury Regulation Section 31.3
121(a)(l)-l(b). Seller and Buyer shall use the "Standard Procedure"
described in Section 4 of Revenue Procedure 96-60 with respect to all
Transferred Employees. Seller shall supply to Buyer, with respect to all
Transferred Employees, all cumulative payroll information as of the
Closing Date that Buyer shall reasonably request in order not to restart
the wage base of Transferred Employees for social security and Medicare
tax purposes.
(b) Employment of the Transferred Employees with the Buyer shall be
effective as of 12:01 a.m. on the date immediately following the Closing
Date (the "Transfer Date"). As to the Transferred Employees, the Buyer
will not cause any period of unemployment between the time employment with
the Seller ends and the effective date of employment with the Buyer.
(c) Except as specifically set forth below, the Seller shall retain
sole liability for claims of the Business Employees and their dependents
arising on or prior to the Closing Date. Buyer shall have sole liability
to the Transferred Employees and their dependents for any and all claims
by the Transferred Employees and their dependents arising after the
Closing Date. The Seller shall be solely responsible for and Buyer does
not assume any liability for the Seller's actions in terminating the
employment of any Business Employee, including but not limited to any
obligation to pay any Business Employee a severance benefit.
(d) The Seller shall retain sole liability for and shall pay all
premiums, costs and expenses with respect to unemployment compensation
obligations occurring during the Seller's employment of the Business
Employees on and prior to the Closing Date. The Seller shall be liable for
all work-related injury claims of Business Employees occurring on and
prior to the Closing Date, including but not limited to those claims
covered by workers' compensation statutes. The Buyer shall be solely
liable for and shall pay all premiums, costs and expenses with respect to
unemployment compensation obligations occurring during the Buyer's
employment of the Transferred Employees. The Buyer shall be liable for all
work-related injury claims of Transferred Employees occurring after the
Closing Date, including but not limited to those claims covered by
workers' compensation statutes.
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(e) Notwithstanding anything herein to the contrary, the Buyer shall
not assume any liability or responsibility for any Employee Benefit Plans
sponsored or maintained by the Seller, and Seller shall be solely
responsible and liable for such Employee Benefit Plans, including, but not
limited to:
(f) Payment of any accrued but unused vacation benefits for
Transferred Employees accruing on or prior to the Closing Date;
(g) Payment of any severance pay or stay bonuses due to any Business
Employees pursuant to any severance or stay bonus program or policy of the
Seller in effect as of the Closing Date; or
(h) Payment of benefits of the Business Employees attributable to
Seller's 401(k) plan or other retirement or savings plan, whether
qualified or non-qualified;
(i) The Buyer shall recognize all service credited for the
Transferred Employees on the Seller's records for purposes of eligibility
for benefits (but not vesting or benefit accrual) under the Buyer's
benefit plans and programs, but the Buyer shall not recognize service
credited on the Seller's records to the extent that such recognition of
service would result in duplication of benefits.
(j) The Seller will retain responsibility for and continue to pay
all hospital, medical, life insurance, disability and other welfare
benefit plan expenses and benefits for each Employee with respect to
claims incurred by such Employee or such Employee's covered dependents on
or prior to the Closing Date. Hospital, life insurance and other welfare
benefit plan expenses and benefits with respect to claims incurred by any
Transferred Employee or such Transferred Employee's covered dependents
after the Closing Date shall be the Buyer's responsibility in accordance
with the terms of any applicable welfare benefit plan maintained by the
Buyer for the Transferred Employee. For purposes of this paragraph, a
claim is deemed incurred when the services giving rise to the claim were
performed.
(k) At the Buyer's discretion and expense, the Seller shall maintain
coverage for the Transferred Employees and their covered dependents in the
Seller's group medical and dental plans for up to sixty (60) days after
the Closing Date. With respect to any period of coverage for the
Transferred Employees in the Seller's group medical and dental plans after
the Closing Date, the Seller will cause the Transferred Employees' medical
and dental expenses to be paid under the Seller's plans. The Buyer shall
promptly reimburse the Seller for the Seller's actual costs associated
with the coverage of the Transferred Employees and their covered
dependents and any applicable administrative costs during the period of
coverage upon receipt of an invoice, supported by reasonable
documentation, from the Seller for those costs.
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(l) The Transferred Employees and their eligible dependents who were
participants in Seller's group health plan shall become participants in
the group medical and dental plans offered by Buyer on the later of either
(i) the Closing Date or (ii) the date of termination of coverage (other
than coverage for COBRA purposes) under the Seller's group health plans
pursuant to the preceding paragraph. The Transferred Employees and their
eligible dependents who present certificates of creditable coverage to
Buyer shall not be subject to any pre-existing conditions limitations
under the Buyer's group health plans to the extent that such limitations
did not apply under Seller's group health plans.
(m) Seller shall retain and Buyer shall not assume liability for any
of Seller's obligations under COBRA, including the obligation, if any, to
provide notice and continuation of coverage to any "M&A qualified
beneficiary" (as such term is defined in COBRA). Seller shall reimburse
and indemnify Buyer for any costs or liabilities relating to Seller's
COBRA responsibility with respect to any Business Employee or former
employee of Seller.
(n) Seller shall be responsible for and shall pay promptly after the
Closing any remaining vacation under the Seller's vacation policy for the
period prior to and including the Closing Date. The Transferred Employee
shall be eligible for vacation under the Buyer's vacation policy beginning
on the Transfer Date.
(o) As of the Closing Date, each Transferred Employee will become
fully vested in his interests in the Seller's 401(k) or other retirement
or savings plan, whether qualified or unqualified, maintained by the
Seller. The Seller shall cause the Seller's 401(k) plan or other
retirement or savings plans to be amended, to the extent necessary, to
accomplish the foregoing.
(p) No provision of this Agreement shall create any rights in any
Business Employee, former employee of the Seller, Transferred Employee
(including any beneficiary or dependent thereof) or Terminated Employee
with respect to continued employment (or resumed employment), and this
Agreement shall not create any rights in any such persons with respect to
any benefits that may be provided, directly or indirectly, under any
employee benefit plan or arrangement sponsored by either the Seller or the
Buyer.
(q) No intention, implication or interpretation of this Agreement
shall convey any guarantee of employment for any Transferred Employee for
any particular period of time. The Transferred Employees shall be
employees-at-will of the Buyer. Except as otherwise provided in this
Agreement, the Buyer shall have the absolute discretion to establish and
modify the terms and conditions of employment for any Transferred
Employee.
(r) Prior to and following the Closing Date, the Seller and the
Buyer shall supply each other appropriate and reasonably necessary
employee data and other records to carry out the purposes and terms of
this Article VI, including but not limited to data appropriate to complete
actuarial computations, evaluations, benefit reports, filings and claims
analysis and government filings.
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Section 6.2 Payment of Liabilities. On or prior to the Closing Date,
Seller shall pay or otherwise satisfy in the ordinary course of business all of
its retained liabilities and other obligations associated with the Business,
other than the Assumed Obligations.
Section 6.3 Noncompetition, Nonsolicitation and Nondisparagement.
(a) Noncompetition with Buyer. For a period of five (5) years after
the Closing Date, Seller shall not anywhere in the world (the "Restricted
Area"), directly or indirectly, invest in, own, manage, operate, finance,
control, advise, aid or assist, act as a broker for, render services to,
be employed by or guarantee the obligations of any Person engaged in or
planning to become engaged in a business which competes with the Business.
With respect to the covenants and agreements set forth in this Section
6.3, Seller agree that it may be impossible to measure in monetary terms
the damages which will accrue to Buyer by reason of an actual breach by it
of such covenants and agreements, that a violation of such covenants and
agreements will cause irreparable injury to Buyer, and that Buyer shall be
entitled, in addition to any other rights and remedies it may have, at law
or in equity, to apply to a court of competent jurisdiction for an
injunction to restrain Seller from violating, or continuing to violate,
such covenants and agreements. Nothing in this Section 6.3 shall be deemed
to limit Buyer's right to recover damages caused by any actual breach by
Seller.
(b) Nonsolicitation. Seller agrees that it shall not, for a period
of two (2) years from the Closing Date, either directly or indirectly on
its own behalf or in association with or on behalf of others, directly or
indirectly, solicit, entice or induce any employee or independent
consultant of Buyer to leave its service with Buyer or solicit, entice or
induce for employment or employ, whether as an advisor, independent
consultant or otherwise, any person who was, either at the Closing Date or
within a period of three months prior thereto, an employee of Buyer. The
geographic scope of this Section 6.3(b) shall extend worldwide to anywhere
the Buyer or Seller is doing business, has done business or has plans to
do business, or to such lesser geographic area as a court of competent
jurisdiction may direct. The provisions of Section 6.3(b) shall not be
deemed to apply to or include general solicitations of employment that are
not specifically directed towards employees of the other party.
(c) Nondisparagement. After the Closing Date, neither party will
disparage any other party hereto or any of such party's Representatives.
(d) Modification of Covenant. If a final judgment of a court or
tribunal of competent jurisdiction determines that any term or provision
contained in this Section 6.3(d) is invalid or unenforceable, then the
parties agree that the court or tribunal will have the power to reduce the
scope, duration or geographic area of the term or provision, to delete
specific words or phrases or to replace any invalid or unenforceable term
or provision with a term or provision that is valid and enforceable and
that comes closest to expressing the intention of the invalid or
unenforceable term or provision. This Section 6.3(d) will be enforceable
as so modified after the expiration of the time within which the judgment
may be appealed. This Section 6.3(d) is reasonable and necessary to
protect and preserve Buyer's legitimate business interests in the
geographical locations in which the business operates and the value of the
Purchased Assets and to prevent any unfair advantage conferred on Seller.
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Section 6.4 Further Assurances. Seller agrees to cooperate with Buyer and
its authorized Representatives in connection with any steps required to be taken
as part of Seller's respective obligations under this Agreement, and shall (i)
furnish upon request to Seller such further information; (ii) execute and
deliver to Seller such other documents; and (iii) do such other acts and things,
all as Buyer may reasonably request for the purpose of carrying out the intent
of this Agreement and the transactions contemplated thereby.
Section 6.5 Collection of Accounts Receivable. After the Closing Date,
Buyer shall collect any Accounts Receivable that were generated in connection
with the Business prior to the Closing Date. Seller shall promptly remit to
Buyer any such payments on the Accounts Receivable received by Seller after the
Closing Date. After the Closing Date, Buyer shall have the right to notify any
customers who owe Seller any amounts properly payable to Buyer to send its
payments directly to Buyer.
Section 6.6 Necessary Action. Seller shall, at its own expense, use
commercially reasonable efforts, both prior to and after the Closing, take all
necessary action, obtain any consents, approvals and amendments of agreements
required to carry out the transactions contemplated by this Agreement and to
satisfy any conditions for which any of them is responsible hereunder.
ARTICLE VII
CONDITIONS TO CLOSING
Section 7.1 Conditions Precedent to Seller's Obligation to Perform. The
obligation of Seller to consummate the transaction contemplated in this
Agreement is subject to the satisfaction or express waiver by Seller at or prior
to the Closing of the following conditions:
(a) All representations and warranties by Buyer in this Agreement or
in any document delivered by Buyer pursuant to this Agreement shall be
true and correct in all material respects on and as of the Closing Date
and the Effective Date;
(b) All organizational approvals necessary to authorize the
transactions contemplated herein shall have been obtained by Seller;
(c) Buyer shall have performed, satisfied and complied with all
covenants, agreements, and conditions required by this Agreement to be
performed or complied with by it on or before the Effective Date and the
Closing Date;
(d) Buyer shall have delivered all of the documents, agreements,
instruments and other items that Buyer is required to deliver at the
Closing pursuant to Section 2.10(b) of this Agreement;
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(e) Buyer shall have formed a limited liability company under the
laws of Delaware (the "LLC") pursuant to an operating agreement in a form
reasonably acceptable to Buyer and Seller (the "Operating Agreement");
(f) Buyer shall have issued to the LLC a duly authorized stock
certificate evidencing the number of shares of the Buyer Common Stock to
be issued pursuant to the Buyer Common Stock Issuance Calculation;
(g) Buyer shall have issued a duly authorized Warrant to the LLC;
(h) All organizational approvals necessary to authorize Buyer to
consummate the transactions contemplated under this Agreement shall have
been obtained by Buyer (or obtained by Seller and evidence of such
approval is delivered to Buyer);
(i) Since the Effective Date, there shall not have been commenced or
threatened against Buyer any proceeding (a) involving any challenge to, or
seeking Damages or other relief in connection with, any of the
transactions contemplated under this Agreement or (b) that may have the
effect of preventing, delaying, making illegal, imposing limitations or
conditions on or otherwise interfering with any of the transactions;
(j) Buyer shall have not conducted any business other than entering
into this Agreement and the other Transaction Documents and the
transactions contemplated thereby;
(k) Buyer shall not have any obligations or liabilities other than
in connection with this Agreement and the other Transaction Documents;
(l) Buyer shall have received financing in an amount not less than
$15 million through the sale of its Series A Convertible Preferred Stock
in accordance with the Stock Purchase Agreement; and
(m) Since the Effective Date, there shall not have been any material
adverse changes to Buyer or its assets.
Section 7.2 Conditions Precedent to Buyer's Obligation to Perform. The
obligation of Buyer to consummate the transaction contemplated in this Agreement
is subject to the satisfaction or express waiver by Buyer at or prior to the
Closing of the following conditions:
(a) All organizational approvals necessary to authorize the
transaction contemplated under this Agreement shall have been obtained by
Buyer (or obtained by Seller and evidence of such approval is delivered to
Buyer), including without limitation either (i) an opinion reasonably
acceptable to the Seller and Buyer, of Delaware counsel that is reasonably
acceptable to the Seller and the Buyer, stating the approval by the
Company Stockholders is not required under Law for the consummation of the
transactions contemplated herein; or (ii) the approval of the transactions
contemplated herein by proxy or written consent of a majority of the
holders of the outstanding shares of Common Stock or securities
convertible or exchangeable into Common Stock and having the right to vote
in such matter in a form and substance reasonably acceptable to the Buyer;
41
(b) All necessary consents of third parties to the transaction
contemplated by the Transaction Documents shall have been obtained by
Seller or Buyer, as applicable, including, without limitation, (i) any
required consents in the Contracts, and (ii) any required consents of
creditors, lessors, suppliers and Governmental Authorities including
without limitation those listed in Schedule 3.24, attached hereto;
(c) All representations and warranties by Seller in this Agreement
or in any document delivered by Seller pursuant to this Agreement shall be
true and correct in all respects on and as of the Effective Date and the
Closing Date;
(d) Buyer shall have received approval from Aisling Capital II,
L.P.'s internal investment committee to take all actions contemplated by
this Agreement and the Stock Purchase Agreement;
(e) Qualified Liabilities do not exceed $500,000;
(f) Seller shall have performed, satisfied and complied with all
covenants, agreements, and conditions required by this Agreement to be
performed or complied with by it on or before the Closing Date;
(g) Seller shall have delivered all of the documents, agreements,
instruments and other items that Seller is required to deliver at the
Closing pursuant to Section 2.10(a) of this Agreement;
(h) Buyer shall have entered into the Key Employment Agreement with
the Key Employee;
(i) Subject to Section 2.10(a)(xii), Seller shall have obtained
releases with respect to all of the Royalty Agreements;
(j) Seller shall have paid off, converted or released all of its
Indebtedness;
(k) Seller shall have received an opinion from a financial advisor,
in form and substance reasonably acceptable to Buyer that this transaction
is fair from a financial point of view to the Company Stockholders (the
"Fairness Opinion");
(l) Seller shall have received an opinion from a financial advisor,
in form and substance reasonably acceptable to Buyer that Seller is not
insolvent as of the Closing Date, and the sale of the Purchased Assets
will not cause Seller to be insolvent immediately following the Closing
(the "Solvency Opinion");
(m) Since the Effective Date, there shall not have been any material
adverse changes to the Business;
(n) Since the Effective Date, there shall not have been commenced or
threatened against Buyer, or against any Affiliate of Buyer, any
proceeding (a) involving any challenge to, or seeking Damages or other
relief in connection with, any of the transactions contemplated under this
Agreement or (b) that may have the effect of preventing, delaying, making
illegal, imposing limitations or conditions on or otherwise interfering
with any of the transactions; and
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(o) Seller shall have provided assistance as reasonably requested by
Buyer in obtaining, and Buyer shall have obtained, appropriate amendments
to or terminations of any third party agreements that Buyer and Seller
mutually agree appropriate in their reasonable discretion, provided,
however, Seller shall not be required to make any payment in connection
herewith.
ARTICLE VIII
TERMINATION
Section 8.1 Termination by Seller. Seller may, on or prior to the Closing
Date, terminate this Agreement without liability if:
(a) there shall have been a material breach of any representations
or warranties set forth in this Agreement on the part of Buyer or if any
representations or warranties of Buyer shall have become untrue, provided
that Seller has not materially breached any of its obligations hereunder;
or
(b) there shall have been a material breach by Buyer of any of its
covenants or agreements hereunder and such breach would result in a
material adverse effect on Buyer or on the ability of Buyer or Seller to
consummate the transactions contemplated by this Agreement, and Buyer has
not cured such breach within ten (10) Business Days after notice by Seller
thereof setting forth in reasonable detail the nature of such breach;
provided that Seller has not materially breached any of its obligations
hereunder; or
(c) the approval of the Company's stockholders required by Section
5.8 shall not have been obtained at a meeting duly convened thereafter or
at any adjournment or postponement thereof; or
(d) the Closing has not occurred by January 31, 2007, unless such
date shall have been extended by the mutual written consent of Seller and
Buyer; provided, however, that this right to terminate shall not be
available to Seller if Seller's failure to fulfill in any material respect
any covenant or obligation under this Agreement has been the cause of, or
results in, the failure of the Closing to occur on or before the Closing
Date; or any court of competent jurisdiction in the United States or other
United States federal or state governmental entity shall have issued a
final order, decree or ruling, or taken any other final action,
restraining, enjoining or otherwise prohibiting the transactions
contemplated by this Agreement and such order, decree, ruling or other
action is or shall have become non-appealable, and if this Agreement is
terminated under this Section 8.1(d), neither Buyer nor Seller shall have
any liability hereunder; or
(e) in the exercise of its good faith judgment and to its fiduciary
duties to its stockholders imposed by law, the Board of Directors of this
Company determines that such termination is required.
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Section 8.2 Termination by Buyer. Buyer may, on or prior to the Closing
Date, terminate this Agreement without liability if:
(a) If prior to the Closing Date, the interim financial statements
delivered pursuant to Section 5.5 indicate that the operating revenues of
the Business for the fourth quarter of 2006 are less than $175,000; or
(b) there shall have been a material breach of any representations
or warranties set forth in this Agreement on the part of the Seller or if
any representations or warranties of the Seller shall have become untrue
provided that Buyer has not materially breached any of its obligations
hereunder; or
(c) there shall have been a material breach by Seller of one or more
of its covenants or agreements hereunder having a Material Adverse Effect
on Seller or materially adversely affecting (or materially delaying) the
ability of Seller and Buyer to consummate transactions contemplated by
this Agreement, and Seller has not cured such breach within ten (10)
Business Days after notice by Buyer thereof setting forth in reasonable
detail the nature of such breach, provided that Buyer has not materially
breached any of its obligations hereunder; or
(d) the approval of the Company's stockholders required by Section
5.8 shall not have been obtained at a meeting duly convened thereafter or
at any adjournment or postponement thereof; or
(e) the Closing has not occurred by January 31, 2007, unless such
date shall have been extended by the mutual written consent of Seller and
Buyer; provided, however, that this right to terminate shall not be
available to Buyer if Buyer's failure to fulfill in any material respect
any covenant or obligation under this Agreement has been the cause of, or
results in, the failure of the Closing to occur on or before the Closing
Date; or any court of competent jurisdiction in the United States or other
United States federal or state governmental entity shall have issued a
final order, decree or ruling, or taken any other final action,
restraining, enjoining or otherwise prohibiting the transactions
contemplated by this Agreement and such order, decree, ruling or other
action is or shall have become non-appealable, and if this Agreement is
terminated under this Section 8.2(e), neither Buyer nor Seller shall have
any liability hereunder; or
(f) Buyer shall not have entered into the Key Employment Agreement
with the Key Employee;
(g) the Board of Directors shall have withdrawn or modified in any
manner adverse to Buyer its approval of this Agreement and the
transactions contemplated hereby; or
(h) Buyer shall have failed to receive financing in an amount not
less than $15 million through the sale of its Series A Convertible
Preferred Stock in accordance with the Stock Purchase Agreement.
44
Section 8.3 Termination by Mutual Consent. This Agreement may be
terminated by mutual written consent of Seller and Buyer (in which case neither
Buyer not Seller shall have any liability hereunder).
Section 8.4 Procedures Upon Termination. In the event of termination
pursuant to this Article VIII, written notice shall forthwith be given to the
other party or parties, and the transactions contemplated hereby shall be
abandoned, without further action by any party hereto; provided, however, that
nothing contained herein shall be construed to prevent any parties hereto from
pursuing any remedy available at law or in equity for any breach, violation,
default or other failure of performance of any other party hereto prior to
Closing.
Section 8.5 Expense Reimbursement.
If this Agreement is terminated pursuant to Section 8.2 (other than
Section 8.2(f), (h) or (e) (except, with regard to (e), where such termination
is due to any material breach of any representation, warranty, covenant or
agreement hereunder by Seller or Parent)), the Seller shall pay the Buyer an
amount equal to the lesser of (i) Buyer's reasonable, actual out-of-pocket costs
and expenses incurred in connection with preparing this Agreement and the
transaction contemplated hereby, including, without limitation, the expenses of
legal counsel or (ii) $350,000.
ARTICLE IX
Indemnification.
Section 9.1 Seller Indemnification. Seller agrees to protect, defend,
indemnify and hold harmless Buyer and its directors, officers, employees,
agents, managers, shareholders, members, successors and assigns, from any and
all losses, claims, liabilities, obligations, deficiencies, assessments, fines,
costs, and damages (including, without limitation, interest, penalties,
reasonable legal fees and reasonable accounting fees), whether fixed or
contingent, liquidated or unliquidated, matured or unmatured and all demands,
assessments and judgments (collectively, "Damages"), resulting from, arising
from or relating to: (a) any liability of Seller or the Business arising on or
before the Closing Date other than the Assumed Obligations; (b) any events
relating to the Business occurring on or before the Closing Date, other than the
Assumed Obligations; (c) any misrepresentation, inaccuracy or breach of any
warranty or representation by Seller in this Agreement; (d) any material failure
of Seller to perform any covenant or agreement in the Transaction Documents in a
timely manner and the failure of which remains uncured for a period of ten (10)
Business Days after receipt of written notice from Buyer setting forth in
reasonable detail the nature of such material failure; or (e) any forfeitures,
fines, penalties, or other sanctions imposed as a result of noncompliance by
Seller prior to the Closing Date with any Laws applicable to the Business or the
Purchased Assets.
Section 9.2 Buyer Indemnification. Buyer shall protect, defend, indemnify
and hold harmless Seller and its directors, officers, employees, agents,
managers, shareholders, partners, members, successors and assigns, from and
against any and all Damages resulting from, arising from or relating to: (a) the
Assumed Obligations; (b) any misrepresentation, inaccuracy or breach of any
warranty or representation by Buyer in this Agreement; (c) the operation or
ownership of the Business and the Purchased Assets after the Closing Date; (d)
any events relating to the Business occurring after the Closing Date; and (e)
any material failure of Buyer to perform any covenant or agreement in
Transaction Documents in a timely manner and the failure of which remains
uncured for a period of ten (10) Business Days after the receipt of written
notice front Seller setting forth in reasonable detail the nature of such
material failure; provided, however, Buyer shall not indemnify Seller for any
Damages which arising out of a termination of this Agreement pursuant to Section
8.2(d).
45
Section 9.3 Exclusive Remedy. The parties hereby acknowledge and agree
that, from and after the Closing, the sole remedy with respect to any and all
claims arising under this Agreement shall be pursuant to the indemnification
provisions set forth in this Article IX. In furtherance of the foregoing, the
parties hereby waive, from and after the Closing, to the fullest extent
permitted by Law, any and all other rights, claims and causes of action they may
have against the other parties hereto, or any of the other parties'
Representatives and Affiliates relating to any misrepresentation in or breach of
any representation or warranty or nonfulfillment of any covenant, agreement or
other obligation contained in the Transaction Documents .
Section 9.4 Survival.
(a) With respect to any and all claims among the parties hereto
arising in connection with this Agreement, the representations,
warranties, covenants and agreements that are set forth in this Agreement
shall be continuing and shall survive the Closing for a period of three
(3) years except (1) the representations and warranties set out in
Sections 3.20, 3.23, 3.26 and 3.32, which shall survive for the period of
the applicable statute of limitations plus thirty (30) days; (2) the
representations and warranties set out in Sections 3.3, 3.7 and 4.2 shall
indefinitely survive the Closing; and (3) in the case of a claim for any
breach of any of the representations and warranties contained in this
Agreement involving fraud or fraudulent misrepresentation shall survive
and continue in full force and effect without limitation of time, subject
only to applicable limitation periods imposed by Law (the period during
which the representations and warranties and covenants and agreements
shall survive being referred to herein with respect to such
representations and warranties and covenants and agreements as the
"Survival Period"), but shall thereafter terminate and be of no further
force and effect unless a written notice asserting a claim shall have been
made pursuant to this Section 9.4(a) within the Survival Period with
respect to such matter
(b) All claims made hereunder prior to the expiration of the
applicable survival period stated above, but which are not yet settled,
shall be subject to the indemnification provisions hereunder.
Section 9.5 Procedure for Indemnification. If a party entitled to
indemnification under this Agreement (an "Indemnitee") asserts that a party
obligated to indemnify it under this Agreement (an "Indemnitor'") has become
obligated to such Indemnitee pursuant to this Agreement, or if any suit, action,
investigation, claim or proceeding is begun, made or instituted as a result of
which the Indemnitor may become obligated to an Indemnitee hereunder, such
Indemnitee shall promptly give written notice to the Indemnitor. The Indemnitor
agrees to defend, contest or otherwise protect the Indemnitee against any such
suit, action, investigation, claim or proceeding at its sole cost and expense.
The Indemnitee shall have the right, but not the obligation, to participate at
its own expense in the defense thereof by counsel of the Indemnitee's choice and
shall in any event cooperate with and assist the Indemnitor to the extent
reasonably possible. If the Indemnitor fails timely to defend, contest or
otherwise protect against such suit, action, investigation, claim or proceeding,
the Indemnitee shall have the right to do so, including, without limitation, the
right to make any compromise or settlement thereof, and the Indemnitee shall be
entitled to recover the entire cost thereof from the Indemnitor, including,
without limitation, reasonable attorneys' fees, disbursements and amounts paid
as the result of such suit, action, investigation, claim or proceeding. The
parties shall in no case settle or compromise the other's claim or consent to
the entry of judgment, in either case other than solely for money damages,
without the prior written consent of the other party if such settlement,
compromise or judgment would adversely affect the rights of the other party in
any continuing manner.
46
ARTICLE X
MISCELLANEOUS
Section 10.1 No Negotiation. (a)Except as specifically set forth in
Section 10.1(a), (b), (c), (d) or (e) hereof, until the earlier of the Closing
or the termination of this Agreement pursuant to Section 8 hereof (the
"Exclusivity Period"), Seller shall not directly or indirectly, individually or
through any of their respective officers, directors, stockholders, employees,
representatives, agents, affiliates, or otherwise (collectively, the
"Representatives") initiate, solicit or encourage, consider, evaluate, or
respond to (other than to say that Seller is contractually obligated not to
respond, and referring such party to public disclosure regarding this Agreement,
but shall not otherwise respond, including, without limitation, by way of
furnishing non-public information or assistance) any proposals, inquiries or
offers from any person or entity, ("Third Party"), or enter into any
confidentiality agreement, due diligence agreement, letter of intent, purchase
agreement, merger agreement or other arrangement, regarding any proposed sale of
all or any portion of the Purchased Assets or control thereof, whether by means
of a sale or exchange of shares, sale of assets, whether in whole or in part,
merger, recapitalization, liquidation or otherwise ("Third Party Acquisition").
Except as specifically set forth in Sections 10.1(a), (b), (c), (d) or (e)
hereof, during the Exclusivity Period, Seller shall not have, and shall take
reasonable efforts to cause its Representatives not to have, any discussions,
conversations, negotiations or other communications relating to any Third Party
Acquisition with any Third Party expressing interest therein, and shall
immediately discontinue negotiations with any Third Party with which it
heretofore has engaged in negotiations or discussions regarding any Third Party
Acquisition. During the Exclusivity Period, Seller shall immediately notify
Buyer of all terms of any written inquiry, contact, communication, or proposal
by any Third Party with respect to any Third Party Acquisition that is received
by Seller or any of its Representatives (including Seller's response thereto),
and immediately shall provide Buyer with a copy of any such written inquiry,
contact, communication or proposal. With respect to any oral inquiry, contact,
communication or proposal, Seller shall document the same in writing (including
Seller's response thereto) and reasonably promptly provide Buyer with a copy of
the same. Seller agrees that if the Seller shall breach and fail to cure
promptly any material provision of this Section 10.1 and within twelve (12)
months thereafter enter into any definitive agreement with a Third Party,
including any of its affiliates, with whom Seller breached this Section 10.1
regarding a Third Party Acquisition, then upon the consummation of such
acquisition, Seller immediately shall pay to Buyer by wire transfer (in readily
available funds) $300,000 (the "Fee"), which Seller acknowledges is reasonable
under the circumstances and designed to compensate Buyer for the lost
opportunity to consummate the Transaction. The Fee will serve as the exclusive
remedy to Buyer hereunder in the event of a breach by Seller of the exclusivity
arrangement set forth herein, including, but not limited to, Buyer's damages
relative to its efforts, expenses and costs incurred in evaluating the
Transaction. The parties acknowledge that the foregoing provisions do not
necessarily require Seller to provide Buyer a written summary of on-going
discussions with a third party, nor shall Seller be required to document to
Buyer any oral inquiry, contact, communication or proposal that does not
materially change any inquiry, contact, communication or proposal previously
provided by Buyer.
47
(b) The parties acknowledge that prior to the Closing, in response
to a bona fide unsolicited written proposal for a Third Party Acquisition
that did not result from the breach of this Section 10.1 (a "Third Party
Proposal") and following delivery to Buyer of notice and a copy of the
Third Party Proposal in compliance with its obligations under Section
10.1(a) hereof, the Seller may participate in discussions or negotiations
with or furnish information (pursuant to a confidentiality agreement with
customary terms comparable to those in place between Buyer and Seller) to
any Third Party which makes a bona fide written Third Party Proposal if,
and only if, prior to taking such action: (i) a majority of the Company's
board of directors reasonably determines in good faith that the
transactions contemplated by such Third Party Proposal are capable of
being completed and would, if consummated, result in a Superior
Transaction (as hereinafter defined) and (ii) a majority of Company's
board of directors determines in good faith (after receiving the written
advice of outside legal counsel) that it is necessary to pursue such
Superior Proposal in order to comply with its fiduciary duties to its
shareholders under applicable law and (iii) Seller complies with the
information and notice obligations set forth in Section 10.1(a).
For purposes of this Agreement, "Superior Proposal" means a bona fide
Third Party Proposal to purchase at least two-thirds of the outstanding equity
securities of Seller pursuant to a tender offer or exchange offer or to effect
any merger, consolidation, business combination or sale of all or substantially
all of the Purchased Assets, recapitalization or similar transaction involving
the Seller, on terms which a majority of Company's board of directors determines
in good faith to be superior to the Company and its shareholders (in their
capacity as shareholders) from a financial point of view (taking into account,
among other things, all legal, financial, regulatory and other aspects of the
proposal and identity of the offeror) as compared to (i) the transactions
contemplated hereby and (ii) any alternative proposed by Buyer in accordance
with Section 10.1(e) which is reasonably capable of being consummated (any such
transaction being referred to herein as a "Superior Transaction").
(c) The Seller and Buyer agree that, notwithstanding anything to the
contrary herein, prior to the Closing, the Company and/or its board of
directors may take the actions otherwise prohibited by Section 10.1(a),
subject to the conditions of and as limited by Section 10.1(b), if and
only if: (i) (A) a Third Party makes a Superior Proposal, and (B) the
Company complies with its obligations under Section 10.1(b) and (c) and
its disclosure obligations under Section 10.1(a), (ii) all of the
conditions to Company's board of directors' right to withhold or withdraw
its recommendation of this Transaction in accordance with Section 10.1(e)
hereof have been complied with (including the expiration of the six (6)
Business Day period described therein) with the exception of compliance
with the requirement to pay the amounts contemplated pursuant to Section
10.1(e) hereof), which amount shall be paid when due pursuant to the terms
thereof; and (iii) simultaneously therewith, the Company's board of
directors withholds or withdraws its recommendation of this Agreement in
accordance with Section 10.1(e) hereof.
48
(d) Buyer agrees that nothing contained in this Section 10.1 shall
prohibit Company from taking and disclosing to its shareholders a position
contemplated by Rule 14d-9 and Rule 14e-2 promulgated under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), with respect to any
tender offer.
(e) If at any time prior to the Closing a Superior Proposal is
received by the Seller and the board of directors of the Company
reasonably determines in good faith (after receiving the advice of outside
legal counsel) that it is necessary to withhold or withdraw the board's
recommendation of this Transaction and to enter into an agreement to
effect the Superior Proposal in order to comply with its fiduciary duties
to its shareholders under applicable law, then the Company's board of
directors may withhold or withdraw its recommendation of this Transaction;
provided that the Company Board of directors may not withdraw its
recommendation pursuant to this Section 10.1(e) unless and until (i) six
(6) Business Days have elapsed following delivery to Buyer of a written
notice of such determination by the board of directors of Company, and
during such six Business Day period the Company has fully cooperated with
Buyer, including, without limitation, informing Buyer of the terms and
conditions of such Superior Proposal and the identity of the Third Party
making such Superior Proposal and providing to Buyer copies of all
documents required by Section 10.1(a), with the intent of enabling the
parties hereto to agree to a modification of the terms and conditions of
this Agreement to provide substantially equivalent value to the Seller as
determined in the reasonable and good faith exercise of the discretion of
the board of directors of Company, so that the transactions contemplated
hereby may be effected, it being the intent that Buyer be given the
opportunity to consummate the Transaction on substantially equivalent
financial terms as any Superior Proposal, without any requirement to
provide more favorable terms thereto; (ii) at the end of such six Business
Day period the Third Party Proposal continues in the good faith judgment
of the board of directors of Company to constitute a Superior Proposal
compared to this Transaction or any other offer made by Buyer and the
Board of directors of Company confirms its determination (after receiving
the advice of outside legal counsel) that it is necessary to withhold or
withdraw its recommendation of the Transaction and enter into an agreement
to effect the Superior Proposal to comply with its fiduciary duties to its
shareholders under applicable law; and (iii) immediately following such
withdrawal, the Seller enter into a definitive acquisition, merger or
similar agreement to effect the Superior Proposal and immediately
following the execution of a definitive agreement for the Superior
Transaction, Buyer is paid the Fee by wire transfer of immediately
available funds.
Section 10.2 Time is of the Essence. Buyer, as a party on the one hand,
and Seller and Parent, on the other hand, hereby agree that the time is of the
essence with respect to closing of the Transaction contemplated by this
Agreement. Therefore, it is understood by Buyer, on the one hand, and Seller and
Parent, on the other hand, that timing conditions set forth in Sections 2.9 and
8.2 of this Agreement are a material inducement to Buyer in entering this
Agreement and the Transaction, and, accordingly, the extension thereof shall be
solely in the Buyer's discretion and business judgment. The Buyer's refusal to
extend any such timing conditions shall not be viewed as a bad faith action.
49
Section 10.3 Confidentiality. Buyer, as a party on the one hand, and
Seller, as a party on the other, agree that it will treat in confidence all
documents, materials and other information which it shall have obtained
regarding the other party during the course of the negotiations leading to the
consummation of the transactions contemplated by this Agreement (whether
obtained before or after the date of this Agreement), the investigation provided
for herein and the preparation of this Agreement and other related documents,
and, in the event that such transactions shall not be consummated, each party
will return to the other party all copies of nonpublic documents and materials
which have been furnished in connection therewith. Such documents, materials and
information shall not be communicated to any third Person (other than, in the
case of Buyer, to its counsel, accountants, financial advisors or lenders, and
in the case of Seller. to its counsel, accountants or financial advisors). No
Person shall use any confidential information, including, without limitation,
with respect to the Business, any information relating to the Business or
customers, suppliers, contractors, subcontractors and licensors, in any manner
whatsoever except for (a) the purpose of evaluating the proposed purchase and
sale of the Purchases Assets or the negotiation or enforcement of this Agreement
or any agreement contemplated hereby; (b) where the disclosure of any portion
thereof is required by applicable law or determined to be necessary to comply
with any court order or Governmental Authorization (but only to the extent so
required); provided, however, that such party shall first notify the other party
of any such requirement and, if the other party desires, shall cooperate with
that party to seek approval to prevent or limit such disclosure; (c) where the
disclosure of any portion thereof is required in order to obtain any of the
consents contemplated hereby, and both parties agree in writing that such
disclosure is necessary; (d) where the information becomes generally available
to the public other than as a result of a disclosure by Buyer or Seller; or (e)
where the information is or becomes lawfully available to Buyer from a source
other than Seller who is authorized to make such disclosure without restriction.
Notwithstanding the foregoing, after the Closing, Buyer may use or disclose any
confidential information related to the Purchased Assets or the Business.
Notwithstanding the foregoing, the parties hereto hereby reaffirm the
confidentiality provisions set forth in the Letter of Intent. The parties
acknowledge and agree that this Agreement and a description hereof will be made
publicly available by Company upon its execution, but only to the extent
required by applicable federal securities law.
Section 10.4 Governing Law. This Agreement and all claims arising out of
or relating to this Agreement shall be governed by and construed in accordance
with the Laws of the State of New York.
Section 10.5 Jurisdiction and Venue. Any process against Buyer, Parent or
Seller in, or in connection with, any suit, action or proceeding arising out of
or relating to this Agreement or any of the transactions contemplated by this
Agreement may be served personally or by certified mail at the address set forth
in this Section 10.5 with the same effect as though served on it personally.
Buyer, Parent and Seller hereby irrevocably submit in any suit, action or
proceeding arising out of or relating to this Agreement or any of the
transactions contemplated by this Agreement to the exclusive jurisdiction and
venue of the United States District Court for the Southern District of New York
or any court of the State of New York located in Manhattan and irrevocably waive
any and all objections to jurisdiction and review or venue that each may have
under the Laws of New York or the United States.
50
Section 10.6 Notices. Any notices or demands to another party under the
terms of this Agreement shall be sent (a) by personal service, (b) by United
States registered or certified mail, postage prepaid and return receipt
requested, or (c) by a nationally recognized overnight courier, and shall be
deemed effective (a) immediately upon personal delivery or (b) five Business
Days after deposit in the mail or (c) one Business Day after deposit with the
courier, and addressed to:
If to Buyer:
RAC Nutrition Corporation
888 Seventh Avenue - 30th Floor
New York, NY 10106
Attention: Andrew N. Schiff, M.D.
With a copy to (which copy shall not constitute Notice):
Andrews Kurth LLP
450 Lexington Avenue, 15th Floor
New York, NY 10017
Attention: David Concannon
If to Seller:
Millennium Biotechnologies Group, Inc.
665 Martinsville Road, Suite 219
Basking Ridge, NJ 07920
Attention: President
With a copy to (which copy shall not constitute a Notice):
Silverman Sclar Shin & Byrne PLLC
381 Park Avenue South, 16th Floor
New York, NY 10016
Attention: Peter Silverman
Any party may change the address to which notices are to he addressed by giving
the other party notice in the manner set forth herein.
Section 10.7 No Assignment. This Agreement, and the covenants herein
contained, shall be binding upon, shall inure to the benefit of, and shall be
enforceable by the parties hereto and their respective successors and permitted
assigns. Neither Party may assign this Agreement, either in part or in whole,
without the prior written consent of the other party; provided that Buyer may
assign its rights to any affiliate having an equal or greater net worth.
Section 10.8 Public Announcements. Any public announcement, press release
or similar publicity with respect to this Agreement will be issued, if at all,
at such time and in such manner as the parties may mutually determine. Seller
and Buyer will consult with each other concerning the means by which Seller's
employees, customers, suppliers and others having dealings with Seller will be
informed of the transactions contemplated by this Agreement, and Buyer will have
the right to be present for any such communication. Notwithstanding the
foregoing, the parties acknowledge that Company will disclose this Agreement,
its terms and conditions, including a copy thereof, but only to the extent
required pursuant to federal securities law.
51
Section 10.9 Waiver. The waiver by either party to this Agreement of any
breach of any provision of this Agreement shall not constitute a continuing
waiver or a waiver of any breach of any other provision of this Agreement.
Section 10.10 Severability. If any provision of this Agreement is held to
be unenforceable for any reason, the remainder of this Agreement shall,
nevertheless, remain in full force and effect.
Section 10.11 Captions. Section captions used herein are for reference
purposes only and shall not in any way affect the meaning or interpretation of
this Agreement.
Section 10.12 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed on original, but all of which taken
together shall constitute one Agreement.
Section 10.13 Entire Agreement; Amendment. This Agreement, together with
the Schedules and Exhibits attached hereto, supersedes all, other agreements and
understandings between the parties, either oral or written, constitutes the
entire agreement of the parties with respect to the subject matter hereof, and
may be amended only by an instrument in writing executed by all of the parties
hereto.
Section 10.14 Consents to Assignments. Subject to Section 2.5 hereof,
nothing in this Agreement or the documents to be executed and delivered at the
Closing shall be deemed to constitute an assignment or an attempt to assign any
Permit, Contract or other agreement to which Seller is a party, if the attempted
assignment thereof without the consent of the other party to such Permit,
Contract or other agreement would constitute a breach thereof or affect in any
way the rights of Seller thereunder.
Section 10.15 No Third Party Beneficiaries. This Agreement is solely for
the benefit of the parties hereto and, to the extent provided in Article IX, the
Persons indemnified thereunder, and no provision of this Agreement shall be
deemed to confer upon any other third parties any remedy, claim, liability,
reimbursement, cause of action or other right.
Section 10.16 Exculpation. Seller and Parent recognize that the Buyer and
their respective affiliates, directors, officers and consultants have
participated in, directly or indirectly, and will continue to participate in,
including managing and/or making venture capital and other direct investments in
corporations, partnerships, joint ventures, limited liability companies and
other entities and other similar transactions (the "Other Businesses"). In such
Other Businesses, the Buyers, may encounter business opportunities that may be
in direct or indirect competition with the Business. Recognizing such, in the
event that this Agreement is terminated pursuant to Section 8.2, the Seller and
Parent hereby waive and release, on behalf of themselves, their stockholders,
subsidiaries and agents, any and all claims for Damages that they may have
against the Buyer and its directors, officers, employees, agents, managers,
shareholders, members, consultants, successors and assigns in connection with or
arising out of Buyer's, or any such affiliates', directors', officers' or
consultants', involvement in Other Businesses.
52
Section 10.17 Expenses. Except as otherwise set forth herein, each party
to this Agreement shall pay all fees and expenses incurred by it in connection
with this Agreement and the transactions contemplated by this Agreement.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
53
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the Effective Date.
RAC NUTRITION CORPORATION
By: /s/ Dennis Purcell
---------------------------------------
Name: Dennis Purcell
Title:
MILLENNIUM BIOTECHNOLOGIES GROUP, INC.
By: /s/ Jerry Swon
---------------------------------------
Name: Jerry Swon
Title: Chief Executive Officer
MILLENNIUM BIOTECHNOLOGIES, INC.
By: /s/ Jerry Swon
---------------------------------------
Name: Jerry Swon
Title: Chief Executive Officer
RAC NUTRITION HOLDINGS LLC
By: /s/ Dennis Purcell
---------------------------------------
Name: Dennis Purcell
Title:
54
ANNEX II
BERWYN CAPITAL
494 LANTERN LANE, SUITE 100
BERWYN, PA 19312-2047
December 7, 2006
Board of Directors
Millennium Biotechnologies Group, Inc.
665 Martinsville Road, Suite 219
Basking Ridge, NJ 07920
Dear Sirs:
We understand that Millennium Biotechnologies Group, Inc. ("Millennium" or the
"Company") proposes to enter into an Asset Purchase Agreement (the "Purchase
Agreement"), which provides, among other things, the sale (the "Asset Sale") of
all of the assets of the Company and its wholly owned subsidiary used in its
nutraceutical business, which assets constitute substantially all of the assets
of the Company, to RAC Nutrition Corporation ("RAC Corp"), a new newly formed
company in exchange for common stock (the "Common Stock") of RAC Corp. The terms
and conditions of the Asset Sale are more fully set forth in the Purchase
Agreement and the other agreements contemplated thereby (the "Transaction
Documents").
The Company proposes to sell the assets used in its nutraceutical business to
RAC Corp., which will be capitalized with $15 million from certain investors
including Aisling Capital II, LP and Menemsha Capital Partners, Ltd
(collectively, the "Investors"). Subject to certain adjustments described below,
the Investors will own approximately 60% of RAC Corp. in the form of 10% Series
A Convertible Preferred Stock (the "Preferred Stock"), and Millennium, through a
newly formed limited liability company of which Millennium will be the sole
member, will own approximately 40% of RAC Corp. in the form of Common Stock.
Millenium has an option to purchase up to $2 million of the Preferred Stock at a
subsequent funding. In addition, the number of shares of Common Stock to be
issued by RAC Corp. in consideration for the purchased assets will be reduced by
one share per each $1.00 of liabilities assumed by RAC Corp. in excess of
$300,000.
We have been asked by the company to render our opinion as to whether the
transaction is fair from a financial point of view, to Millenium shareholders.
We have been engaged for this purpose only and not for any other purpose.
Further, we have not been asked to address, nor does this opinion address the
Company's underlying business decision to effect this transaction.
BERWYN CAPITAL
494 LANTERN LANE, SUITE 100
BERWYN, PA 19312-2047
In the course of our analyses for rendering this opinion, we have:
1. Reviewed drafts of the Purchase Agreement and the other Transaction
Documents provided to us;
2. Reviewed Millenium's audited financial statements for the fiscal
years ended December 31, 2004 and December 31, 2005 and its
unaudited interim financial statements for the period ended March
31, 2005 and June 30, 2006.
3. Reviewed certain operating and financial information, including
projections, provided to us by management relating to the Company's
business prospects.
4. Met with certain members of Millenium senior and operating
management to discuss the Company's operations, historical financial
results and future prospects.
5. Evaluated the stock price history and reported events of Millenium.
6. Visited the Company's facilities in Basking Ridge.
7. Considered publicly available data and stock market performance data
of public companies we deem comparable to Millenium and conducted
such other studies, analyses, inquiries, investigations, as we
deemed appropriate.
In the course of our investigation, we have assumed and relied upon the accuracy
and completeness of the financial and other information provided and represented
to us by management and we have further relied upon the assurances of management
that they were unaware of any facts that would make the information provided to
us incomplete or misleading. We have not assumed any responsibility for
independent verification of such information or assurances.
In arriving at our opinion, we have not performed any independent appraisal of
the assets of the Millenium business. Our analysis does not constitute an
examination, review of or compilation of prospective financial statements.
We do not express an opinion or any other form of assurance on the
reasonableness of the underlying assumptions or whether any of the prospective
financial statements, if used, are presented in conformity with accepted
guidelines. Further, there will usually be differences between prospective and
actual results because events and circumstances frequently do not occur as
expected and those differences may be material. We have also assumed the Company
is not currently involved in any material transaction other than the Asset Sale
and those activities undertaken in the ordinary course of conducting its
business.
BERWYN CAPITAL
494 LANTERN LANE, SUITE 100
BERWYN, PA 19312-2047
This opinion is furnished solely for your benefit and does not constitute a
recommendation to any stockholder of the Company as to how such stockholder
should vote with respect to the transaction. This opinion is delivered subject
to the conditions, scope of engagement, limitations and understanding set forth
in its opinion and subject to the understanding that the obligations of Berwyn
Capital in the Asset Sale are solely corporate obligations. Furthermore, no
officer, director, employee or shareholder of Berwyn Capital shall be subjected
to any personal liability whatsoever in person, nor will any such claim be
asserted by or on behalf of you or your affiliates.
On the basis of the forgoing, it is our opinion that the Asset Sale is fair,
from a financial point of view, to the shareholders of Millenium Biotechnologies
Group, Inc.
Respectfully,
Conrad Huss
Exhibit A
CERTIFICATE OF AMENDMENT
TO THE
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
MILLENNIUM BIOTECHNOLOGIES GROUP, INC.
The above corporation organized and existing under and by virtue of the General
Corporation Law of the State of Delaware does hereby certify:
FIRST: By unanimous consent of the Board of Directors of MILLENNIUM
BIOTECHNOLOGIES GROUP, INC. (the "Company") resolutions were duly adopted
setting forth a proposed amendment of the Company's Amended and Restated
Certificate of Incorporation, declaring said amendment to be advisable and
calling a meeting of the stockholders of the Company for consideration thereof.
The resolution setting forth the proposed amendment is as follows:
RESOLVED, that it is recommended to the Company's stockholders that Paragraph B
of Article FOURTH of the Company's Amended and Restated Certificate of
Incorporation, which sets forth the Company's capitalization, be amended and, as
amended, read as follows:
"B. AUTHORIZED SHARES.
The aggregate number of shares of all classes of capital stock which the
Corporation shall have authority to issue shall be Four Hundred Million Five
Hundred Thousand (400,500,000) shares, consisting of:
(1) Five Hundred Thousand (500,000) shares of preferred stock, par value $1.00
per share ("Preferred Stock"); and (2) Four Hundred Million (400,000,000) shares
of common stock, par value $0.001 per share."
SECOND: That thereafter, pursuant to resolution of its Board of Directors, a
special meeting of the stockholders of said corporation was duly called and held
upon notice in accordance with Section 222 of the General Corporation Law of the
State of Delaware at which meeting the necessary number of shares as required by
statute were voted in favor of the amendment.
THIRD: That said amendment was duly adopted in accordance with the provisions of
Section 242 of the General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, the Company has caused this certificate to be signed this __
day of ____________ 2007.
By:
--------------------------------------
Jerry E. Swon, Chief Executive Officer
Exhibit B
FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended
September 30, 2006
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _______ to _______
Commission file number 0-3338
MILLENNIUM BIOTECHNOLOGIES GROUP, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 22-1558317
------------ --------------------
(State or other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
665 Martinsville Road, Suite 219, Basking Ridge, NJ 07920
(Address of Principal Executive Office) (Zip Code)
(908) 604-2500 (Registrant's telephone number
including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes |x| No | |
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes| | No |x|
The number of shares of Registrant's Common Stock, $0.001 par value, outstanding
as of October 31, 2006, was 68,618,293 shares.
MILLENNIUM BIOTECHNOLOGIES GROUP, INC. AND SUBSIDIARY
INDEX
Page
Number
PART 1-FINANCIAL INFORMATION
Item 1 Financial Statements (unaudited)
Consolidated Balance Sheet
- September 30, 2006 ............................................................ 3
Consolidated Statements of Operations
- Three and nine months ended September 30, 2006 and 2005 ....................... 4
Consolidated Statements of Cash Flows
- Nine months ended September 30, 2006 and 2005 ................................. 5
Notes to Consolidated Financial Statements ...................................... 6-15
Item 2 Management's Discussion and Analysis of Financial Conditionand
Results of Operations ........................................................... 16
Item 3 Controls and Procedures .......................................................... 22
PART II-OTHER INFORMATION ...............................................................22-23
SIGNATURES .............................................................................. 24
2
PART I - Item 1
MILLENNIUM BIOTECHNOLOGIES GROUP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
September 30, 2006
(Unaudited)
Assets
Current Assets
Cash ........................................................................... $ 45,193
Accounts receivable, net of allowance for
doubtful accounts of $20,000 ................................................ 186,690
Inventories . .................................................................. 553,025
Prepaid expenses ............................................................... 83,462
Miscellaneous receivables ...................................................... 105,131
---------------
Total Current Assets ........................................................ 973,501
Property and equipment, net of accumulated
depreciation of $116,656 .................................................... 13,672
Patents, net of accumulated amortization of $2,975 ............................. 8,542
Deposits ....................................................................... 18,352
---------------
Total Assets ................................................................ 1,014,067
===============
Liabilities and Stockholders' Equity (Deficit)
Current Liabilities
Accounts payable and accrued expenses .......................................... 3,249,212
Short term debt ................................................................ 4,106,267
Current maturities of long term debt ........................................... 50,000
---------------
Total Current Liabilities ................................................... 7,405,479
Accrued royalties, long-term portion ........................................... 16,250
---------------
Total Liabilities ........................................................... 7,421,729
Stockholders' Equity (Deficit)
Preferred Stock, $1 par value, 810,360 shares authorized:
Convertible, Series B, non-voting, 65,141 shares issued and
outstanding, at redemption value ............................................ 130,283
Cumulative, Series C, non-voting, 64,762 shares issued and outstanding ......... 64,762
Convertible, Series D, 0 shares issued and outstanding ......................... --
Common Stock, $0.001 par value, 200,000,000 shares authorized,
68,618,293 shares issued and outstanding ....................................... 68,618
Additional paid-in capital ..................................................... 26,646,819
Accumulated deficit ............................................................ (33,292,050)
Deferred compensation .......................................................... (26,094)
Total Stockholders' Equity (Deficit) ........................................ (6,407,662)
Total Liabilities and Stockholders Equity (Deficit) ......................... $ 1,014,067
===============
The accompanying notes are an integral part of the consolidated financial
statements.
3
MILLENNIUM BIOTECHNOLOGIES GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended September 30, Nine Months Ended September 30,
---------------------------------- ---------------------------------
2006 2005 2006 2005
--------------- --------------- --------------- ---------------
Total Revenues ................................ $ 239,239 $ 184,279 $ 658,632 $ 634,868
Cost of Goods Sold ........................ 169,780 113,575 477,392 380,854
--------------- --------------- --------------- ---------------
Gross Profit .................................. 69,459 70,704 181,240 254,014
Research and development cost ................. 26,425 30,326 51,917 38,239
Selling, general & administrative expenses .... 2,080,905 1,077,874 8,081,575 2,739,210
--------------- --------------- --------------- ---------------
Total operating expenses ...................... 2,107,330 1,108,200 8,133,492 2,777,449
Loss from Operations .......................... (2,037,871) (1,037,496) (7,952,252) (2,523,435)
Other Income (Expense)
Miscellaneous expense ..................... (877) (7,050) (2,395) (181,069)
Interest expense, net ..................... (1,097,988) (342,523) (2,500,661) (470,011)
--------------- --------------- --------------- ---------------
Total Other Income (Expense) .................. (1,098,865) (349,573) (2,503,056) (651,080)
--------------- --------------- --------------- ---------------
Loss before Provision for Income taxes ........ $ (3,136,736 $ (1,387,069) $ (10,455,308) $ (3,174,515)
Provision for Income Taxes ................ -- -- 2,351 --
Net Loss ...................................... $ (3,136,736) $ (1,387,069) $ (10,457,659) $ (3,174,515)
=============== =============== =============== ===============
Net Loss per Common Share ..................... $ (0.05) $ (0.03) $ (0.16) $ (0.07)
=============== =============== =============== ===============
Weighted Average Number of
Common Shares Outstanding ................. 68,105,677 49,786,803 65,465,851 46,043,862
=============== =============== =============== ===============
The accompanying notes are an integral part of the consolidated financial
statements.
4
MILLENIUM BIOTECHNOLOGIES GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended September 30,
----------------------------------
2006 2005
--------------- ---------------
Cash Flows from Operating Activities
Net (Loss) ........................................ $ (10,457,659) $ (3,174,515)
Adjustments to Reconcile Net (Loss) to
Net Cash (used by) Operations
Depreciation and amortization .................. 14,176 19,740
Securities issued for various expenses ......... 3,015,890 878,400
Securities issued for compensation ............. 1,011,572 113,436
Amortization of note discount .................. -- 7,039
Amortization of deferred compensation .......... 256,141 --
Convertible feature of notes ................... 521,557 --
Decreases (Increases) in Assets
Accounts receivable ............................ 13,844 (122,282)
Inventories .................................... 409,756 (271,472)
Prepaid expenses ............................... (7,077) (369,121)
Other assets ................................... (2,143) (26,668)
Increases (Decreases) in Liabilities
Accounts payable and accrued expenses .......... 516,781 574,829
Notes offset against miscellaneous receivables . 80,000 (176,250)
--------------- ---------------
Net Cash (Used by) Operating Activities .............. (4,627,162) (2,546,864)
Cash Flows from Financing Activities
Proceeds from loans and notes payable ............. 3,206,000 1,650,000
Repayment of loans and notes payable .............. (899,515) (274,000)
Liabilities for stock to be issued ................ (660,851) --
Changes in long term royalties obligation ......... (2,500) (3,750)
Issuance of common stock .......................... 2,975,116 1,313,575
--------------- ---------------
Net Cash Provided by Financing Activities ............ 4,618,250 2,685,825
Net (Decrease) Increase in Cash ...................... (8,912) 138,961
Cash at beginning of period .......................... 54,105 23,087
--------------- ---------------
Cash at end of period ................................ $ 45,193 $ 162,048
=============== ===============
The accompanying notes are an integral part of the consolidated financial
statements.
5
MILLENNIUM BIOTECHNOLOGIES GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Millennium Biotechnologies Group, Inc. (the Company or "Millennium
Group"), formerly Regent Group, Inc., is a holding company for its
subsidiary Millennium Biotechnologies, Inc. ("Millennium").
Millennium was incorporated in the State of Delaware on November 9, 2000
and is located in New Jersey. Millennium is a research based
bio-nutraceutical corporation involved in the field of nutritional
science. Millennium's principal source of revenue is from sales of its
nutraceutical supplements, RESURGEX(R) RESURGEX PLUS(R) and Defenzyme(TM)
which serve as a nutritional support for immuno-compromised individuals
undergoing medical treatment for chronic debilitating diseases.
The Company acquired Millennium on July 27, 2001, when it completed a
merger with Millennium. In the merger, new Convertible Preferred Series D
stock was issued in exchange for all the outstanding stock of Millennium.
Such preferred shares were convertible into approximately 96% of the
outstanding common stock of the Company at the time of issuance. Under the
terms of the Agreement and Plan of Reorganization, a new wholly-owned
Millennium Group subsidiary merged into Millennium. For accounting
purposes, the merger has been treated as an acquisition of Millennium
Group by Millennium, and a re-capitalization of Millennium. The financial
statements are those of the Company and its wholly-owned subsidiary
Millennium on a consolidated basis.
Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial statements and with the instructions to Form 10-QSB and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and disclosures required for annual financial statements.
These financial statements should be read in conjunction with the
consolidated financial statements and related footnotes included in the
Company's annual report on Form 10-KSB for the year ended December 31,
2005, and the quarterly reports on Form 10-QSB for the periods ended March
31, 2006 and June 30, 2006.
In the opinion of the Company's management, all adjustments (consisting of
normal recurring accruals) necessary to present fairly the Company's
financial position as of September 30, 2006, the results of operations for
the three and nine months periods ended September 30, 2006 and 2005, and
the cash flows for the nine months ended September 30, 2006 and 2005, have
been included.
Principles of Consolidation
The Company's operations presently consist almost exclusively of the
operations of Millennium. The consolidated financial statements include
the accounts of the Company and its subsidiary from the acquisition date
and/or through their respective disposition dates. All significant
inter-company transactions and balances have been eliminated.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as of 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.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
Depreciation, which includes amortization of assets under capital leases,
is calculated using the straight-line method over the estimated useful
lives of the assets: 3-8 years for machinery and equipment, leasehold
improvements are amortized over the shorter of the estimated useful lives
of the underlying lease term. Repairs and maintenance expenditures which
do not extend the useful lives of related assets are expensed as incurred.
For Federal income tax purposes, depreciation is computed under
accelerated methods over the assets class life.
6
MILLENNIUM BIOTECHNOLOGIES GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
Patents
Patents are capitalized and amortized over 240 months. Amortization
expense was $432 and $432, for the quarters ended September 30, 2006 and
2005, respectively.
Evaluation of Long-Lived Assets
Long-lived assets are assessed for recoverability on an ongoing basis. In
evaluating the fair value and future benefits of long-lived assets, their
carrying value would be reduced by the excess, if any, of the long-lived
asset over management's estimate of the anticipated undiscounted future
net cash flows of the related long-lived asset.
Revenue Recognition
Revenue is recognized at the date of shipment to customers provided that
the resulting receivable is deemed probable of collection.
Advertising costs
Advertising costs are charged to operations when incurred. Advertising
expense was $5,769 and $27,008 and $37,459 and $31,016 for the quarters
and nine months periods, respectively, ended September 30, 2006 and 2005.
Stock-Based Compensation
The Company recognizes compensation expense for grants of stock, stock
option and other equity instruments to employees as well as non-employees
based on fair value. The fair market value of the Company's stock on the
date of stock issuance or option grant is used.
Income Taxes
The Company provides for income taxes based on enacted tax law and
statutory tax rates at which items of income and expenses are expected to
be settled in the Company's income tax return. Certain items of revenue
and expense are reported for Federal income tax purposes in different
periods than for financial reporting purposes, thereby resulting in
deferred income taxes. Deferred taxes are also recognized for operating
losses that are available to offset future taxable income. Valuation
allowances are established when necessary to reduce deferred tax assets to
the amount expected to be realized. The Company has incurred net operating
losses for financial-reporting and tax-reporting purposes. Accordingly,
for Federal and state income tax purposes, the benefit for income taxes
has been offset entirely by a valuation allowance against the related
federal and state deferred tax asset for the year ended December 31, 2005.
Loss Per Common Share
Basic and diluted loss per common share are computed by dividing net loss
by the weighted average number of common shares outstanding during the
periods. Potential common shares used in computing diluted earnings per
share related to stock options, warrants, convertible preferred stock and
convertible debt which, if exercised, would have an anti- dilutive effect
on earnings per share, have not been included.
Fair Value of Financial Instruments
For financial instruments including cash, prepaid expenses and other
current assets, short-term debt, accounts payable and accrued expenses, it
was assumed that the carrying values approximated fair value because of
their short-term maturities.
7
MILLENNIUM BIOTECHNOLOGIES GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
Limitations
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial statement.
These estimates are subjective in nature and involve uncertainties and
matters of significant judgment and therefore cannot be determined with
precision. Changes in assumptions could significantly affect the
estimates.
Reclassification
Certain reclassifications have been made to prior year balances to conform
to the current year's presentation.
2. GOING CONCERN
The accompanying consolidated financial statements have been prepared on a
going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities and commitments in the normal course of
business. The Company had incurred substantial losses during the last two
fiscal years, that there existed a working capital deficit, and that the
ability of the Company to continue as a going concern was dependent on
increasing sales and obtaining additional capital and financing. The
accompanying financial statements do not include any adjustments that
might be necessary if the Company were unable to continue as a going
concern. Management's plans are to fund future operations by seeking
additional working capital through equity and debt placements with private
and institutional investors, until cash flow from operations grows to a
level sufficient to supply adequate working capital. These factors all
raise substantial doubt about the ability of the Company to continue as a
going concern.
3. CONCENTRATIONS OF BUSINESS AND CREDIT RISK
The Company maintains cash balances in several financial institutions
which are insured by the Federal Deposit Insurance Corporation up to
$100,000. Balances in these accounts may, at times, exceed the federally
insured limits.
The Company provides credit in the normal course of business to customers
located throughout the U. S. The Company performs ongoing credit
evaluations of its customers and maintains allowances for doubtful
accounts based on factors surrounding the credit risk of specific
customers, historical trends, and other information.
4. PREPAID EXPENSES
Prepaid expenses consists $66,400 advance salaries and $17,062 prepaid
rent and miscellaneous expenses.
8
MILLENNIUM BIOTECHNOLOGIES GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
5. INVENTORIES
Inventories consist of work-in-process and finished goods for the
Company's RESURGEX(R) and RESURGEX PLUS(R) product lines. Cost-of-goods
sold are calculated using the average costing method. Inventories at
September 30, 2006 consist of the following:
Raw Materials $ 23,957
Work in Process 23,260
Samples 170,377
Finished Goods 419,184
Packaging 3,286
---------------
640,064
Less: Reserve for losses (87,039)
---------------
Total $ 553,025
===============
6. PROPERTY AND EQUIPMENT
Property and equipment at cost, less accumulated depreciation, at
September 30, 2006, consists of the following:
Furniture $ 46,127
Equipment 22,445
Leasehold improvements 61,756
---------------
Subtotal 130,328
Less accumulated depreciation (116,656)
---------------
Total $ 13,672
===============
Depreciation expense charged to operations was $4,267 and $14,176, and
$7,716 and $7,716 for the quarters and nine months periods ended September
30, 2006 and 2005, respectively
9
MILLENNIUM BIOTECHNOLOGIES GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following at
September 30, 2006:
Accounts payable $ 2,416,772
Accrued interest 232,158
Accrued salaries, bonuses and payroll taxes 111,794
Accrued royalties 139,323
Accrued professional fees 36,000
Accrued minimum purchase obligations 265,209
Miscellaneous accruals 47,956
---------------
$ 3,249,212
===============
8. DEBT
Short-term debt at September 30, 2006, is as follows:
Cash advances by three accredited investors, due on demand, non-interest
bearing. $ 4,440
Promissory note dated December 17, 2002, originally for $50,000 issued to
an accredited investor, maturing September 28, 2003, bearing interest at
the rate of 10% per annum. The note has been changed to be due on demand
and remains outstanding at September 31, 2006. The holder of the note is
entitled to convert all or a portion of the principal and interest at any
time after the maturity date into shares of common stock of the Company at
a price equal to $.10/share of the principal if the principal and interest
is not fully repaid on or before the maturity date. Management has repaid
$25,000 in December 2003 and is presently negotiating to convert the
remaining $25,000 into equity. The Company issued 125,000 5-year common
stock purchase warrants in conjunction with the note which were exercised
at a rate of $0.01 per share. The computed discount (computed with
Black-Scholes) related to the detachable stock purchase warrants has been
fully amortized. 25,000
Promissory note dated October 17, 2002 in the amount of $125,000, bearing
interest at 12% per annum, originally maturing February 17, 2003 less
discount. The 12% interest per annum accrued to date on the principal
amount outstanding is to be paid weekly with 25% of all cash receipts
received by the Company. The Company issued 70,000 3-year common stock
purchase warrants exercisable at $.50 per share in conjunction with the
note and has recorded a discount for the fair market value (computed under
Black-Scholes) for the warrant. The maturity date on the note was extended
to September 17, 2003 and subsequently to March 26, 2004. The note has
been changed to be due on demand and $15,342 remains outstanding at
September 30, 2006. 15,342
Promissory convertible note dated February 21, 2003, issued to an
accredited investor originally due on August 21, 2003, bearing interest at
8% per annum payable in stock. The note was extended to December 31, 2004
and was made non-interest bearing, and has subsequently been changed to be
due on demand. The note is convertible into restricted common shares at
the rate of $0.25 per share, at the option of the holder. 10,000
10
MILLENNIUM BIOTECHNOLOGIES GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
DEBT (Continued)
Originally formulated as a $150,000 promissory note dated March 5, 2003,
bearing interest payable in the form of 100,000 shares of restricted
common stock, issued to an accredited investor and originally maturing
April 5, 2003. The note was initially extended to October 5, 2003. The
note was subsequently extended to March 26, 2004 bearing 12% interest per
annum, and has subsequently been changed to be due on demand and remains
outstanding at September 30, 2006. The balance of $150,000 has been folded
into a grid note which, at September 30, 2006, has a total outstanding
balance of $411,000 411,000
Convertible Promissory Note to an accredited investor dated May 20, 2003,
maturing May 20, 2004, bearing interest at a rate 8% per annum payable in
restrictedshares of common stock at a rate of $0.25 per share. The note is
convertible at the option of the holder into restricted shares of common
stock at a rate of $0.25 per share. The note has been changed to be due on
demand and remains outstanding at September 30, 2006. 30,000
Convertible promissory note dated July 3, 2003 originally due December 31,
2003, bearing interest at 12% per year payable in restricted common stock,
extended through December 31, 2004. The note has subsequently been changed
to be due on demand and remains outstanding at September 30, 2006. The
note is convertible at the option of the holder into restricted common
stock at the rate of $0.20 per share. 50,000
Two demand loans extended by two investors in March 2004 and January 2005,
bearing no interest. 25,000
Promissory note issued to an accredited investor on October 26, 2004,
originally maturing December 31, 2004 which was subsequently changed to be
due on demand. The note carries interest at the rate of 15% per year and
is secured by a pledge of the proceeds to the Company from the sale of
current and future tax-loss carry-forwards under the New Jersey Emerging
Technology and Biotechnology Financial Assistance Act. A portion of
$125,000 was converted onto stock at the rate of $0.25 per share. 25,000
Promissory note issued to an accredited investor on December 13, 2004 and
maturing December 13, 2005. The note was subsequently changed to be due on
demand and carries interest at the rate of 8% per year and is convertible
at the option of the holder into common shares at the rate of $0.25 per
share. 25,000
Promissory note issued to an accredited investor on February 18, 2005 and
maturing June 18, 2005, presently carrying penalty interest at the rate of
$6,000 per month. The note remains open at September 30, 2006 and is now
due on demand. 100,000
11
MILLENNIUM BIOTECHNOLOGIES GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
DEBT (Continued)
Promissory note issued to an accredited investor on March 17, 2005 and
maturing June 15, 2005, carrying interest at the rate of 10% per year. In
the event of default by debtor, the interest rate increases to 20% per
year. $112,515 were repaid during the second quarter 2006, and $20,000
during the third quarter 2006, with maturity of the remainder extended to
December 15, 2006. The note was subject to a $20,000 origination fee and
assumption of $3,000 related legal expenses. 87,485
Promissory note for $100,000 issued to an accredited investor on July 19,
2005 and maturing December 31, 2005, carrying interest at the rate of 10%
per year. $20,000 were repaid in December 2005, $5,000 in May 2006 and
$10,000 during the third quarter 2006, with the maturity of the remainder
extended to December 31, 2006. The note is convertible into common shares
of the Company at the option of the holder, at $0.25 per share. 65,000
Promissory note for $200,000 issued to an accredited investor on July 12,
2005 and maturing December 31, 2005, carrying interest at the rate of 10%
per year. The note is presently due on demand. The note is convertible
into common shares of the Company at the option of the holder, at $0.25
per share. 200,000
Two promissory notes for $100,000 each issued to an accredited investor on
August 15 and September 1, 2005 and maturing December 31, 2005, carrying
interest at the rate of 10% per year. The notes are presently due on
demand. In connection with this change 50,000 5-year warrants, exercisable
at $0.25/share have been issued to the investor. The notes are convertible
into common shares of the Company at the option of the holder, at $0.25
per share. 200,000
Two promissory notes for $100,000 each issued to an accredited investor on
August 17 and August 31, 2005 and maturing December 31, 2005, carrying
interest at the rate of 10% per year. The notes have been changed to be
due on demand. In connection with this change 150,000 5-year warrants,
exercisable at $0.38/share have been issued to the investor. The notes are
convertible into common shares of the Company at the option of the holder,
at $0.25 per share. 200,000
Two promissory notes issued to an accredited investor in February and
March 2006, due on March 31, 2006, since changed to be due on demand. The
notes carry interest at the rate of 10% per year. One note for $100,000 is
convertible at the option of the holder into common stock at the rate of
$0.25 per share. The other note had been accompanied by issuance of stock
purchase warrants for 400,000 shares, exercisable at $0.25 per share.
300,000
Promissory note issued to an accredited investor in January 2006, maturing
December 31, 2006. The note carries interest at the rate of 10% and
convertible at the option of the holder into common stock at the rate of
$0.25 per share. 220,000
Promissory note issued to an accredited investor in March 2006, originally
maturing May 30, 2006, and which since has been changed to be due on
demand. The note carries interest computed at a lump sum of $8,916. The
note had been accompanied by issuance of stock purchase warrants for
100,000 shares, exercisable at $0.25 per share. 214,000
12
15 promissory notes issued to 15 accredited investors in May 2006,
originally maturing June 16, 2006 and since extended to be due on demand.
The notes carry interest at the rate of 10% per year and are convertible
at the option of the holder into common stock at the rate of $0.25 per
share. Eleven of these notes were accompanied by warrants for the purchase
of between 100,000 and 200,000 shares each, exercisable at $0.25 per
share. 450,000
Two promissory notes issued to an accredited investor in June 2006,
originally maturing August 1, 2006, and which since have been changed to
be due on demand. The notes carries interest computed at the rate of 10%
per year and were accompanied by warrants for the purchase of a total
2,000,000 shares, exercisable at $0.25 per share. 500,000
-----------
Promissory notes issued to eight accredited investors in July 2006,
originally maturing between September 15, 2006, and October 1, 2006, and
which since have been changed to be due on demand. The notes carry
interest computed at the rate of 10% per year, with the rate on $406,000
of such notes changed to 14% at the original maturity dates which same
notes also were accompanied by warrants for the purchase of a total
1,624,000 shares, exercisable at $0.25 per share. $156,000 of the notes is
convertible into common shares at the rate of $0.25 per share. 491,000
-----------
Promissory notes issued to three accredited investors in August 2006,
originally maturing between September 15, 2006, and November 15, 2006, and
which since have been changed to be due on demand. The notes carry
interest computed at the rate of 10% per year, which changed to 14% at the
original maturity dates. The notes were accompanied by warrants for the
purchase of a total 500,000 shares, exercisable at $0.25 per share and are
convertible into common shares at the rate of $0.25 per share. 125,000
-----------
Promissory notes issued to ten accredited investors in September 2006,
maturing between November 2006 and January 2007. The notes carry interest
computed at the rate of 10% per year which will change to 14% at maturity
if not repaid at that time. The notes were accompanied by warrants for the
purchase of a total 1,532,000 shares, exercisable at $0.25 per share and
are convertible into common shares at the rate of $0.25 per share. 383,000
-----------
Total Short Term Debt $ 4,156,267
===========
9. LONG TERM DEBT
Long-term debt at September 30, 2006 is as follows:
Two convertible promissory notes to an accredited investor dated August 8,
2003, maturing $ 50,000 August 8, 2005, bearing no interest. The notes
have been changed to be due on demand and remain open at June 30, 2006.
The notes are convertible into restricted shares of common stock at the
option of the holder at a rate of $0.25 per share. 50,000
Less Current Maturities (50,000)
-----------
Total Long Term Debt $ 0
===========
13
MILLENNIUM BIOTECHNOLOGIES GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
10. DEFERRED COMPENSATION
Deferred compensation consists common stock and warrants issued to
consultants for future services, and is amortized over the period of the
agreements ranging from one to three years.
11. OPERATING LEASE COMMITMENTS
The Company leases certain office space and equipment under operating
leases.
On October 2001, the Company signed a 5-year lease commencing in December
2002, for approximately 4,500 square feet of office space in
Bernardsville, NJ at a monthly rental of $9,116 through November, 2004 and
$9,876 thereafter, plus an allocated portion of certain operating
expenses. The lease is personally guaranteed by the Company's Chief
Executive Officer Jerry E. Swon.
The following is a schedule of future minimum rental payments (exclusive
of allocated expenses) required under operating leases that have initial
or non-cancelable lease terms in excess of one year as of September 30,
2006:
Year Ending December 31,
------------------------
2006 29,629
2007 108,636
2008 --
2009 --
----------
Total minimum payments required $ 138,265
==========
12. RELATED PARTY TRANSACTIONS
On January 11, 2001 Millennium entered into Royalty and Investment
Agreements with Jane Swon (spouse of Jerry E. Swon, President and Chief
Executive Officer of the Company) and P. Elayne Wishart (spouse of former
Chief Operating Officer and Director Bruce Deichl). Pursuant to such
agreements, Ms. Swon and Ms. Wishart were each issued 4,007,594 shares of
Millennium common stock for consideration of $25,000 each. In addition,
Ms. Swon and Ms. Wishart each paid Millennium $25,000 for a perpetual
royalty pursuant to which they are each entitled to 3.3% of the gross
sales of RESURGEX(R) and RESURGEX PLUS(R) and 3.3% of the gross profit
from the sale of any additional products. The $50,000 consideration is
being amortized over 10 years to additional paid-in-capital..
14
MILLENNIUM BIOTECHNOLOGIES GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
13. COMMITMENTS
On July 25, 2001, Millennium entered into an exclusive limited patent
sublicense and distribution agreement with Isocell SA, a French company,
which owns the rights to certain specialty ingredients. Pursuant to the
License Agreement, Millennium is granted an exclusive sublicense to
promote and distribute this product for use as a dietary supplement or
functional food in certain defined medical market channels of distribution
in North America involving direct sales of nutraceutical products to
physicians for resale to their patients or through physician prescription
for Medicaid/Medicare reimbursement for nutritional supplements.
The License Agreement provides for the sale of the product to Millennium
at stated unit prices subject to volume discounts. The term of the
agreement is for five years, provided that Isocell may cancel the license
(or make it non-exclusive) in the event that Millennium purchases of the
product do not meet scheduled minimum quotas for any calendar quarter
during the term. In such event, Millennium may avoid termination of the
license by paying 50% of the prescribed purchase minimum. As of September
30, 2006 Millennium is due to pay Isocell $265,209 for licensing fees for
calendar years 2004 and 2005. This amount is included in Accounts Payable
and Accrued Expenses. This agreement expired in July 2006 Millennium and
Aisling are in the process of negotiating a long term extension.
14. SUBSEQUENT EVENTS
On October 25, 2006, Millennium Biotechnologies Group, Inc. (the
"Company") and its wholly owned subsidiary, Millennium Biotechnology, Inc.
(the "Subsidiary"), entered into an Asset Purchase (the "Purchase
Agreement") with RAC Nutrition Corporation ("RAC Corp.") and RAC Nutrition
Holdings LLC ("RAC LLC") as contemplated by the previously announced
letter of intent with Aisling Capital II, LP ("Aisling").
15
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cautionary Statement Pursuant To "Safe Harbor" Provisions
Of Section 21e Of The Securities Exchange Act Of 1934
Except for historical information, the Company's reports to the Securities and
Exchange Commission on Form 10-KSB and Form 10-QSB and periodic press releases,
as well as other public documents and statements, contain "forward-looking
statements" within the meaning of Section 21E of the Securities Exchange Act of
1934. Forward-looking statements are subject to risks and uncertainties that
could cause actual results to differ materially from those expressed or implied
by the statements. These risks and uncertainties include general economic and
business conditions, development and market acceptance of the Company's
products, current dependence on the willingness of investors to continue to fund
operations of the Company and other risks and uncertainties identified in the
risk factors discussed below and in the Company's other reports to the
Securities and Exchange Commission, periodic press releases, or other public
documents or statements.
Readers are cautioned not to place undue reliance on forward-looking statements.
The Company undertakes no obligation to republish or revise forward-looking
statements to reflect events or circumstances after the date hereof or to
reflect the occurrences of unanticipated events.
Results of Operations for the Quarter Ended September 30, 2006:
Total revenues generated from the sales of RESURGEX(R), RESURGEX PLUS(R) and
RESURGEX SELELCT(TM) for the quarter ended September 30, 2006 were $239,239 an
increase of approximately 30% from the third quarter in 2005 which had total
revenues of $184,279. This increase is largely attributed increasing sales from
the Oncology market.
Gross profits for the quarter ended September 30, 2006 amounted to $69,459 for a
30% gross margin. This compares to $70,704 and 38%, respectively, for the third
quarter in 2005. The decrease is due to smaller manufacturing runs associated
with the lack of adequate levels working capital.
After deduction of selling, general and administrative expenses of $2,080,905
and research and development costs of $26,425, the Company realized an operating
loss of $2,037,871. Included in selling, general and administrative expenses are
$1,278,995 non-cash outlays in the form of restricted stock issued for
compensation and services. As required by current SEC guidelines, the Company
recorded such transactions at the fair market price on the date of issuance.
Selling general and administrative expenses for the period showed an increase
from the corresponding figure a year ago when such expenses totaled $1,077,874.
Increased outlays for national sales and marketing efforts in the Oncology
sector were the primary reason for the increase. Additional costs for outside
professional services also contributed to the increase.
The net result for the quarter ended September 30, 2006 was a loss of $3,136,736
or $0.05 per share, compared to a loss of $1,387,069 or $0.03 per share for the
respective quarter in the prior year.
Liquidity and Capital Resources
The Company's operations were generally financed by new debt and equity
investments through private placements with accredited investors. During the
second quarter of 2006, the Company obtained new working capital primarily
though the issuance of common stock to accredited private investors and the
placement of short-term debt. Together the capital supplied provided the
majority of the funds that were needed to finance operations and provide capital
required to finance the product launch into Oncology during the reporting
period. Such transactions resulted in the receipt by the Company of $1,105,000.
These funds were adequate to fund ongoing operations although they were not
sufficient to build up a liquidity reserve. The Company's financial position at
the end of the quarter shows a working capital showing a deficit of $6,431,978.
On October 25, 2006, as noted in the Company's Current Report on Form 8-K filed
with the SEC on October 30, 2006, the Company entered into an Asset Purchase
Agreement with an investment fund which, if consummated, would result in the
exchange by Millennium's wholly owned subsidiary of all of the assets used in
Millennium's nutraceutical business to a newly formed company in exchange for
equity in the new company. The newly formed company would be initially
capitalized by the issuance of $15 million in convertible preferred stock. The
Asset Purchase Agreement, which has been filed as an exhibit to the Current
Report on Form 8-K, is binding however it is subject to various conditions, and
approval by Millennium's stockholders.
16
On August 16, 2006, as noted in the Company's Current Report of Form 8-K filed
with the SEC on August 17, 2006, the Company entered into a Securities Purchase
Agreement ("Purchase Agreement") with 6 accredited investors for the sale of
13,000 Units for an aggregate purchase price of $2.6 million. Each Unit consists
of (a) one share of the Company's new Series E Senior Convertible Preferred
Stock, (b) warrants to acquire 800 shares of Common Stock at an exercise price
of $.25 per share and (d) additional investment rights to acquire, at a purchase
price of $200, one share of Series E Preferred Stock and warrants to acquire 800
shares of Common Stock. In addition, the lead investor, Iroquois Master Fund,
Ltd. (the "Lead Investor") agreed to purchase 100 shares of the Company's new
Series F Senior Convertible Preferred Stock for an aggregate purchase price of
$100. Each share of the Series E Preferred Stock is initially convertible into
800 shares of Common Stock, and each share of the Series F Preferred Stock is
initially convertible into one share of Common Stock. As the holder of the
Series F Preferred Stock, the Lead Investor will have the right to elect 3 of
the 5 members of the Company's board of directors. The closing of the
transactions contemplated in the Purchase Agreement is to occur simultaneous
with the consummation of anticipated sale by Millennium of all of the assets
used in the its nutraceutical business. In addition to customary closing
conditions, the purchasers' obligation to consummate the transactions
contemplated by the Purchase Agreement is contingent upon the Company
effectuating the conversion of at least $2,926,000 of its debt into the Units,
the election of three members of the directors to be selected by the Lead
Investor, the closing of the sale of the Company's nutraceutical business and
the Company issuing 2,000 additional Units upon the same terms as set forth in
the Purchase Agreement. For a more detailed description of the Purchase
Agreement, see the Company's Current Report of Form 8-K filed with the SEC on
August 17, 2006 and the exhibits filed therewith. The firm commitment for
funding pursuant to the terms of the Purchase Agreement expired on September 30,
2006 a subsequent extension was agreed to which extended the commitment until
January 31, 2007. The Company issued 400,000 shares of common stock as
consideration for this extension to the institutional investors.
Management expects, but cannot assure, it will be able to successfully conclude
the above transactions. See "We require additional funding to maintain our
operations and to further develop our business. Our inability to obtain
additional financing would have an adverse effect on our business" in "Risk
Factors" below.
RISK FACTORS
The following cautionary statements identify important factors that could
cause our actual result to differ materially form those projected in the
forward-looking statements made in this report.
We have operated at a loss and cannot assure that we will be able to attain
profitable operations.
Although we are generating revenues, we continue to operate at a loss.
During the quarter ended September 30, 2006, we generated revenues of $239,239
from sales of our products. However, during this period we realized net losses
of $3,136,736. We expect to continue incurring operating losses until we are
able to derive meaningful revenues from marketing our three products and other
products we intend to bring to market. We cannot assure that we will be able to
attain profitable operations.
We require additional funding to maintain our operations and to further develop
our business. Our inability to obtain additional financing would have an adverse
effect on our business.
Our success depends on our ability to develop a market for our three products
and other nutraceutical supplements we intend to bring to market. This means
having an adequate advertising and marketing budget and adequate funds to
continue to promote our products. In the past, we have funded our operating
needs by the issuance of equity and debt securities. We need to continue to
raise funds to cover working capital requirements until we are able to raise
revenues to a point of positive cash flow. However, there can be no assurance
that any such financing would be possible or obtainable upon terms acceptable to
us or at all. Financings may be on terms that are dilutive or potentially
dilutive to our stockholders. In addition, pursuant to the Securities Purchase
Agreement entered into by the Company on August 16, 2006, the Company is
prohibited from offering or selling any equity securities or other rights
convertible or exchangeable into equity securities or from incuring
indebtedness, subject to certain exceptions. If financings are insufficient or
unavailable, we will be required to modify our operating plans to the extent of
available funding or suspend operations.
Our year end audited financial statements contain a "going concern" explanatory
paragraph. Our inability to continue as a going concern would require a
restatement of assets and liabilities on a liquidation basis, which would differ
materially and adversely from the going concern basis on which our financial
statements included in this report have been prepared.
17
Our consolidated financial statements for the year ended December 31, 2005 and
the periods ended September 30, 2006 included herein have been prepared on the
basis of accounting principles applicable to a going concern. Our auditors'
report on the consolidated financial statements for the year ended December 31,
2005 included an additional explanatory paragraph following the opinion
paragraph on our ability to continue as a going concern. A note to these
consolidated financial statements describes the reasons why there is substantial
doubt about our ability to continue as a going concern and our plans to address
this issue. Our December 31, 2005 and September 30, 2006 consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty. Our inability to continue as a going concern would require a
restatement of assets and liabilities on a liquidation basis, which would differ
materially and adversely from the going concern basis on which our consolidated
financial statements have been prepared.
We are subject to significant government regulation.
The packaging, labeling, advertising, promotion, distribution and sale of
RESURGEX(R), RESURGEX Plus(TM) and RESURGEX SELECT(TM) and other products we
plan to produce and market are subject to regulation by numerous governmental
agencies, the most active of which is the U.S. Food and Drug Administration (the
"FDA"), which regulates our products under the Federal Food, Drug and Cosmetic
Act (the "FDCA") and regulations promulgated thereunder. Our products are also
subject to regulation by, among other regulatory entities, the Consumer Product
Safety Commission (the "CPSC"), the U.S. Department of Agriculture (the "USDA")
and the Environmental Protection Agency (the "EPA"). Advertising and other forms
of promotion and methods of marketing of our products are subject to regulation
by the U.S. Federal Trade Commission (the "FTC"), which regulates these
activities under the Federal Trade Commission Act (the "FTCA"). The manufacture,
labeling and advertising of our products are also regulated by various state and
local agencies. Failure to comply with applicable regulatory requirements may
result in, among other things, injunctions, product withdrawals, recalls,
product seizures, and fines.
Our involvement in defending product liability claims could have a detrimental
effect on our operations.
Like other retailers and distributors of products designed for human
consumption, we face an inherent risk of exposure to product liability claims in
the event that the use of our products results in injury. We may be subjected to
various product liability claims, including, among others, that our products
include inadequate instructions for use or inadequate warnings concerning
possible side effects and interactions with other substances. We carry
$10,000,000 of product liability insurance. Thus, any product liabilities
exceeding our coverage relating to our products could have a material adverse
effect on our business, financial condition and results of operations.
We face significant competition.
The biotechnology and nutraceutical supplement industries are highly
competitive and subject to significant and rapid technological change.
Developments by our competitors may render our products obsolete or
noncompetitive. Numerous companies compete in our market, many of which have
greater size and financial, personnel, distribution and other resources greater
than ours. Our principal competition in the distribution channels where we are
marketing our current products and where we intend to market other products,
comes from a limited number of large nationally known manufacturers and many
smaller manufacturers of nutraceutical supplements. In addition, large
pharmaceutical companies compete with us on a limited basis in the nutraceutical
supplement market. Increased competition from such companies could have a
material adverse effect on us because such companies have greater financial and
other resources available to them and possess distribution and marketing
capabilities far greater than ours. We also face competition in mass market
distribution channels from private label nutraceutical supplements offered by
health and natural food store chains and drugstore chains. We cannot assure that
we will be able to compete.
If we are unable to protect our intellectual property or we infringe on
intellectual property of others, our business and financial condition may be
materially and adversely affected.
We own all rights to the formulation of RESURGEX(R) and RESURGEX Plus(R),
have a use and compositional patent with respect to RESURGEX(R) (which covers
RESURGEX Plus(R)). We also have registered trademarks for the names "RESURGEX"
and "RESURGEX Plus". We have filed patent applications internationally with
regards to RESURGEX(R) AND RESURGEX Plus(R). No assurance can be given that
patents will be issued from pending applications or that there rights, if issued
and the rights from our existing patents and registered name will afford us
adequate protections. In addition, we rely on trade secrets and unpatented
proprietary technology. There is no assurance that others may not independently
develop the same or similar technology or produce products which provide the
same benefits as RESURGEX(R) and RESURGEX Plus(R) or our other proposed
products. RESURGEX Select(TM) is currently patent pending and the Company has
received trademark protection.
18
Although we will seek to ensure that our products do not infringe the
intellectual property rights of others, there can be no assurance that third
parties will not assert intellectual property infringement claims against us.
Any infringement claims by third parties against us may have a material adverse
effect on our business, financial condition and results of operations.
There can be no assurance that we will be able to renew our license agreement
with Isocell SA.
On July 25, 2001, Millennium entered into an exclusive limited patent
sublicense and distribution agreement with Isocell SA, a French company, which
owns the rights to certain specialty ingredients. Pursuant to the License
Agreement, Millennium is granted an exclusive sublicense to promote and
distribute this product for use as a dietary supplement or functional food in
certain defined medical market channels of distribution in North America
involving direct sales of nutraceutical products to physicians for resale to
their patients or through physician prescription for Medicaid/Medicare
reimbursement for nutritional supplements. The License Agreement pursuant to its
terms expired on July 25, 2006. Although we are currently negotiating the
renewal of the License Agreement, there can be no assurance that we will be able
to successfully renew the License Agreement upon terms acceptable to us.
Because our Board can issue common stock without stockholder approval, you could
experience substantial dilution.
Our Board of Directors has the authority to issue up to 200,000,000 shares
of common stock and to issue options and warrants to purchase shares of our
common stock without stockholder approval. As of September 30, 2006,
approximately 102,000,000 shares are issued and outstanding or reserved for
issuance on a fully-diluted basis. Future issuance of our additional shares of
common stock could be at values substantially below the current market price of
our common stock and, therefore, could represent substantial dilution to
investors in this offering. In addition, our Board could issue large blocks of
our common stock to fend off unwanted tender offers or hostile takeovers without
further stockholder approval.
If we consummate the private placement of our Series E Senior Convertible
Preferred Stock and related warrants and additional investment rights, you will
experience substantial dilution.
Pursuant to the terms of the Securities Purchase Agreement, dated August
16, 2006, the Company has agreed to issue (a) 13,000 shares of Series E Senior
Convertible Preferred Stock, which shares of preferred stock are convertible
into 10,400,000 shares of Common Stock at a conversion price of $.25 per share,
(b) warrants to purchase 10,400,000 shares of Common Stock at an exercise price
of $.25 per share, and (c) additional investment rights to purchase 13,000
additional shares of Series E Preferred Stock and warrants to purchase
additional 10,400,000 shares of Common Stock. In addition, the Purchase
Agreement contemplates the Company (a) converting $2,926,000 of its debt into
14,630 shares of Series E Preferred Stock and related warrants and additional
investment rights and (b) issuing 2,000 additional shares of Series E Preferred
Stock and related warrants and additional investment rights upon the same terms
as set forth in the Purchase Agreement. As a result, assuming that the
transactions contemplated in the Purchase Agreement are consummated and the
holders thereof convert and/or exercise all their shares of Series E Preferred
Stock, warrants and additional investment rights that are issued or issuable,
the Company will be required to issue 94,816,000 shares of Common Stock.
Assuming exercise of the warrants and additional investment rights the Company
would receive approximately $16,000,000 in new capital.
If we consummate the private placement of the Series F Senior Convertible
Preferred Stock, a change in control of the Company will occur.
Pursuant to the terms of the Securities Purchase Agreement, dated August
16, 2006, and the terms of the contemplated Certificate of Designations of the
Series F Senior Convertible Preferred Stock, the holder of the Series F
Preferred Stock will be entitled to nominate and elect 3 of the 5 members of the
board of directors of the Company and thereby resulting in a change in control
of the Company.
If we consummate the Aisling transaction we will need to acquire a new business.
Since we have not yet identified a potential new business, we cannot currently
ascertain the merits or risks of the business which we may ultimately acquire.
If we consummate the Aisling transaction we will need to acquire a new
business. As of the date hereof, we have no specific business under
consideration. Accordingly, there is no current basis for you to evaluate the
possible merits or risks of the particular business which we may ultimately
acquire. To the extent we complete a business combination with a financially
unstable company or an entity in its development stage, we may be affected by
numerous risks inherent in the business operations of those entities. If we
complete a business combination with an entity in an industry characterized by a
high level of risk, we may be affected by the currently unascertainable risks of
that industry. Although our management will endeavor to evaluate the risks
inherent in a particular industry or target business, we cannot assure you that
we will properly ascertain or assess all of the significant risk factors.
Anti-takeover provisions of the Delaware General Corporation Law could
discourage a merger or other type of corporate reorganization or a change in
control even if they could be favorable to the interests of our stockholders.
The Delaware General Corporation Law contains provisions which may enable
our management to retain control and resist a takeover of us. These provisions
generally prevent us from engaging in a broad range of business combinations
with an owner of 15% or more of our outstanding voting stock for a period of
three years from the date that this person acquires his stock. Accordingly,
these provisions could discourage or make more difficult a change in control or
a merger or other type of corporate reorganization even if they could be
favorable to the interests of our stockholders.
19
We do not intend to pay cash dividends in the foreseeable future.
We have never declared or paid cash dividends on our capital stock. We
currently intend to retain all of our earnings, if any, for use in its business
and do not anticipate paying any cash dividends in the foreseeable future. The
payment of any future dividends will be at the discretion of our Board of
Directors and will depend upon a number of factors, including future earnings,
the success of our business activities, our general financial condition and
future prospects, general business conditions and such other factors as the
Board of Directors may deem relevant. In addition, no cash dividends may be
declared or paid on our Common Stock if, and as long as, the Series B Preferred
Stock is outstanding or there are unpaid dividends on outstanding shares of
Series C Preferred Stock. No dividends may be declared on the Series C Preferred
Stock if, and as long as, the Series B Preferred Stock is outstanding. Pursuant
to the terms of the contemplated Series E Senior Convertible Preferred Stock, no
dividends may be paid on our Common Stock so long as the Series E Preferred
Stock is outstanding. Accordingly, it is unlikely that we will declare any cash
dividends in the foreseeable future.
We cannot assure that there will be a sustained public market for our common
stock.
At present, our common stock is quoted on the OTC Bulletin Board and
tradable in the over-the-counter market. Our common stock is not traded on a
sustained basis or with significant volume. In addition, we currently do not
meet the requirements for listing our common stock on NASDAQ or a national
securities exchange and we cannot assure if or when our common stock will be
listed on such an exchange. For the foregoing reasons, we cannot assure that
there will be a significant and sustained public market for the sale of our
common stock. Accordingly, if you purchase our common stock, you may be unable
to resell it. In the absence of any readily available secondary market for our
common stock, you may experience great difficulty in selling your shares at or
near the price that you originally paid.
The market price of our common stock may be volatile.
The market price of our common stock may fluctuate significantly in
response to the following factors:
o variations in quarterly operating results;
o our announcements of significant contracts, milestones,
acquisitions;
o our relationships with other companies or capital commitments;
o additions or departures of key personnel;
o sales of common stock or termination of stock transfer restrictions;
o changes in financial estimates by securities analysts; and
o fluctuations in stock market price and volume.
Our stock price may be adversely affected if a significant amount of shares are
sold in the public market.
As of October 31, 2006, approximately 68,618,293 shares of our common stock
constituted "restricted securities" as defined in Rule 144 under the Securities
Act of 1933. In addition, as of October 31, 2006, we had warrants outstanding
for the purchase of an aggregate of 24,417,888 shares of our common stock, and
stock options for 10,994,464 shares. If we consummate the transactions
contemplated in the Securities Purchase Agreement, dated August 16, 2006, we
will issue shares of Series E Senior Convertible Preferred Stock, warrants and
additional investment rights which are exercisable and/or convertible into
approximately 94,816,000 share of Common Stock. To the extent the exercise price
of the warrants and conversion of the Series E Preferred Stock is less than the
market price of the common stock, the holders of the warrants and the Series E
Preferred Stock are likely to exercise them and sell the underlying shares of
common stock and to the extent that the exercise price of the warrants are
adjusted pursuant to anti-dilution protection, the warrants could be exercisable
or convertible for even more shares of common stock. Moreover, some of the
remaining restricted shares as well as shares resulting from the exercise of the
other warrants and options may, after certain holding periods, enter the market,
and we may issue additional shares to raise funding or compensate employees,
consultants and/or directors. We are unable to estimate the amount, timing or
nature of future sales of outstanding common stock. Sales of substantial amounts
of our common stock in the public market could cause the market price for our
common stock to decrease. Furthermore, a decline in the price of our common
stock would likely impede our ability to raise capital through the issuance of
additional shares of common stock or other equity securities.
Our shares are subject to the Penny Stock Reform Act.
Our shares are subject to the Penny Stock Reform Act of 1990 which may
potentially decrease your ability to easily transfer our shares. Broker-dealer
practices in connection with transactions in "penny stocks" are regulated. Penny
stocks generally are equity securities with a price of less than $5.00. The
penny stock rules require a broker-dealer, prior to a transaction in a penny
stock not otherwise exempt from the rules, to deliver a standardized risk
disclosure document that provides information about penny stocks and the risks
in the penny stock market. The broker-dealer also must provide the customer with
current bid and offer quotations for the penny stock, the compensation of the
broker-dealer and its salesperson in the transaction, and monthly account
statements showing the market value of each penny stock held in the customer's
account. In addition, the penny stock rules generally require that prior to a
transaction in a penny stock, the broker-dealer make a special written
determination that the penny stock is a suitable investment for the purchaser
and receive the purchaser's written agreement to the transaction. These
disclosure requirements may have the effect of reducing the level of trading
activity in the secondary market for a stock that becomes subject to the penny
stock rules. As our shares immediately following this offering will likely be
subject to such penny stock rules, investors in this offering will in all
likelihood find it more difficult to sell their securities.
Because the risk factors referred to above could cause actual results or
outcomes to differ materially from those expressed in any forward-looking
statements made by us, you should not place undue reliance on any such
forward-looking statements. Further, any forward-looking statement speaks only
as of the date on which it is made and we undertake no obligation to update any
forward-looking statement or statements to reflect events or circumstances after
the date on which such statement is made or reflect the occurrence of
unanticipated events. New factors emerge from time to time, and it is not
possible for us to predict which will arise. In addition, we cannot assess the
impact of each factor on our business or the extent to which any factor, or
combination of factors, may cause actual results to differ materially from those
contained in any forward-looking statements.
20
New Accounting Pronouncements
In 2004, the FASB issued SFAS Statement No. 151, "Inventory Costs, an Amendment
of ARB No. 43, Chapter 4". This Statement amends the guidance in ARB No. 43,
Chapter 4 "Inventory Pricing" to clarify the accounting for abnormal amounts of
idle facility expense, freight, handling costs and wasted materials (spoilage).
His Statement requires that those items be recognized as current-period charges
regardless of whether they meet the criterion of "so abnormal". In addition,
this Statement requires the allocation of fixed production overheads to the
costs of conversion be based on the normal capacity of the production
facilities. The provisions of this Statement shall be effective for inventory
costs incurred during fiscal years beginning after June 15, 2005. Earlier
application is permitted for inventory costs incurred during fiscal years
beginning after the date this Statement is issued. The provisions of this
Statement shall be applied prospectively. The adoption of this Statement is not
expected to have a significant impact on the Company's results of operation or
financial position.
Disclosure About Off-Balance Sheet Arrangements
We do not have any transactions, agreements or other contractual arrangements
that constitute off-balance sheet arrangements.
Critical Accounting Policies
Our Management's Discussion and Analysis of Financial Condition and Results of
Operations section discusses our consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. On an on-going
basis, management evaluates its estimates and judgments, including those related
to revenue recognition, accrued expenses, financing operations, and
contingencies and litigation. Management bases its estimates and judgments on
historical experience and on various other factors that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying value of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. The most significant
accounting estimates inherent in the preparation of our financial statements
include estimates as to the appropriate carrying value of certain assets and
liabilities which are not readily apparent from other sources. These accounting
policies are described at relevant sections in this discussion and analysis and
in the notes to the consolidated financial statements included in this report.
Revenue Recognition
Revenue is recognized at the date of shipment to customers provided that the
resulting receivable is deemed probable of collection.
21
Item 3. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
The term "disclosure controls and procedures" is defined in Rules 13a-15(e) and
15d-15(e) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). This term refers to the controls and procedures of a company that are
designed to ensure that information required to be disclosed by a company in the
reports that it files under the Exchange Act is recorded, processed, summarized,
and reported within the required time periods. Our Chief Executive Officer and
our Chief Financial Officer have evaluated the effectiveness of our disclosure
controls and procedures as of the end of the period covered by this quarterly
report. They have concluded that, as of that date, our disclosure controls an
procedures were effective at ensuring that required information will be
disclosed on a timely basis in our reports filed under the Exchange Act.
(b) Changes in Internal Control over Financial Reporting
No change in our internal control over financial reporting (as defined in Rules
13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the period
covered by this report that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting
PART II - OTHER INFORMATION
Item 1 Legal Proceedings
- None
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
(a) Issuance of unregistered securities
During the quarter ended September 30, 2006, the Company issued the following
unregistered securities, all of which were issued pursuant to the exemption from
registration provided by Section 4(2), Rule 506 of Regulation D of the
Securities Act of 1933:
(i) 101,468 shares of its common stock to a creditor following his
conversion of a promissory note and accrued interest totaling
$25,367.
(ii) 120,000 shares of its common stock to an investor pursuant to a
private placement subscription which resulted in the receipt by the
Company of $30,000 in cash.
(iii) 158,190 shares of its common stock pursuant to the cashless exercise
of warrants.
(iv) 700,000 shares of its common stock to a consultant for services
performed.
(v) Warrants for 3,856,000 shares of its common stock, exercisable at
$0.25 during three years, to twenty creditors in connection with the
issue of convertible promissory notes.
The Company changed the exercise price of warrants for 303,158 shares from
$0.25 to $0.01 and extended the exercise period on a portion of such
arrants, in return for a creditor agreeing to extended payment terms.
The Company also cancelled 420,000 shares of common stock pursuant to the
rescission of transactions involving conversion of promissory notes and
the exercise of warrants
(b) Not Applicable
22
(c) Not Applicable
Item 3 Defaults Upon Senior Securities
- None
Item 4 Submission of Matters to a Vote of Securities' Holders
- None
Item 5 Other Information
- None
Item 6 Exhibits
31.1 Certification of Jerry E. Swon, Chief Executive Officer, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Frank Guarino, Chief Financial Officer, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Jerry E. Swon, Chief Executive Officer, pursuant to
Sections 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section
1350.
32.2 Certification of Frank Guarino, Chief Financial Officer, pursuant to
Sections 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section
1350.
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MILLENNIUM BIOTECHNOLOGIES GROUP, INC.
Date: November 20, 2006 By: /s/ Frank Guarino
------------------
Frank Guarino
Chief Financial Officer
Chief Accounting Officer
24
Exhibit C
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year ended December 31, 2005
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES AND
EXCHANGE OF 1934
For the Transition Period From to
Commission file number 0-3338
MILLENNIUM BIOTECHNOLOGIES GROUP, INC.
--------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 22-1558317
---------------------------------------------------------------
(State or other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
665 Martinsville Road, Suite 219 Basking Ridge, NJ 07920
--------------------------------------------------------
(Address of Principal Executive Office) (Zip Code)
(908) 604-2500
--------------
(Registrant's telephone number including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.001
par value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes |X| No |_|
Check whether the issuer is not required to file reports pursuant to Section 13
or 15(d) of the Exchange Act. |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. |_|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes |_| No |X|
The Registrant's revenues for the fiscal year ended December 31, 2005, were
$797,987.
Common stock, par value $.001 per share ("Common Stock"), was the only class of
voting stock of the Registrant outstanding on March 31, 2006. Based on the
closing price of the Common Stock on the OTC Electronic Bulletin Board as
reported on March 31, 2006, ($0.45), the aggregate market value of the
50,891,263 shares of the Common Stock held by persons other than officers,
directors and persons known to the Registrant to be the beneficial owners (as
the term is defined under the rules of the Securities and Exchange Commission)
of more than five percent of the Common Stock on March 31, 2006, was
approximately $22,901,068. By the foregoing statements, the Registrant does not
intend to imply that any of the officers, directors, or beneficial owners are
affiliates of the registrant or that the aggregate market value, as computed
pursuant to rules of the Securities and Exchange Commission, is in any way
indicative of the amount which could be obtained for such shares of Common
Stock.
As of March 31, 2006, 62,552,031 shares of Common Stock, $0.001 par value,
65,141 shares of Series B Convertible Preferred Stock, $1.00 par value, and
64,763 shares of Series C Cumulative Preferred Stock, $1.00 par value, were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: SEE EXHIBIT INDEX
Transitional Small Business Disclosure Format: Yes |_| No |X|
MILLENNIUM BIOTECHNOLOGIES GROUP, INC.
CONTENTS
Page
----
PART I.
Item 1. usiness.................................................... 2
Item 2. roperties.................................................. 16
Item 3. egal Proceedings........................................... 16
Item 4. ubmission of Matters to a Vote of Security Holders......... 16
PART II.
Item 5. Market for Registrant's Common Equity, Related Stockholder
Matters And Small business Issuer Purchases of Equity
Securities ............................................... 17
Item 6. Management's' Discussion and Analysis of Financial
Condition and Results of Operations....................... 20
Item 7. Financial Statements....................................... 24
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 25
Item 8A. Controls and Procedures.................................... 25
Item 8B. Other Information.......................................... 25
PART III.
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.......... 25
Item 10. Executive Compensation..................................... 28
Item 11. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters................ 29
Item 12. Certain Relationships and Related Transactions............. 30
Item 13. Exhibits................................................... 31
Item 14. Principal Accountant Fees and Services .................... 32
Signatures................................................................ 34
Exhibit Index..............................................
CAUTIONARY STATEMENT PURSUANT TO "SAFE HARBOR" PROVISIONS OF SECTION 21E OF THE
SECURITIES EXCHANGE ACT OF 1934
Except for historical information, the Company's reports to the Securities
and Exchange Commission on Form 10-KSB and Form 10-QSB and periodic press
releases, as well as other public documents and statements, contain
"forward-looking statements" within the meaning of Section 21E of the Securities
Exchange Act of 1934. Forward-looking statements are subject to risks and
uncertainties that could cause actual results to differ materially from those
expressed or implied by the statements. These risks and uncertainties include
general economic and business conditions, development and market acceptance of
the Company's products, current dependence on the willingness of investors to
continue to fund operations of the Company and other risks and uncertainties
identified in the Company's reports to the Securities and Exchange Commission,
periodic press releases, or other public documents or statements.
Readers are cautioned not to place undue reliance on forward-looking
statements. The Company undertakes no obligation to republish or revise
forward-looking statements to reflect events or circumstances after the date
hereof or to reflect the occurrences of unanticipated events.
1
PART I
ITEM 1: BUSINESS
The Company
Millennium Biotechnologies Group, Inc. (the Company or "Millennium
Group"), formerly Regent Group, Inc., is a holding company for its subsidiary
Millennium Biotechnologies, Inc. ("Millennium").
Millennium was incorporated in the State of Delaware on November 9, 2000,
and is located in New Jersey. Millennium is a research based bio-nutraceutical
corporation involved in the field of nutritional science. Millennium's principal
source of revenue is from sales of its nutraceutical supplements,RESURGEX
SELECT(TM), RESURGEX(R), and RESURGEX PLUS(R), These three products create the
Resurgex product line and are used by immuno-compromised individuals undergoing
medical treatment for chronic debilitating diseases as well as healthy people
searching for proper nutrition. In September of 2005, the Company contracted
Cardinal Health's (Red Key Pharma Division) syndicated sales force and launched
the Resurgex Product Line nationwide.
The Company acquired Millennium on July 27, 2001, when it completed a
merger with Millennium. During the year prior to the merger, the Company had no
material operations. For more information on the Company's operations prior to
the merger and the general terms of the merger we refer to the Company's report
on Form 10-KSB for the period ended July 31, 2001, and related filings with the
Securities and Exchange Commission. In the merger, new Convertible Preferred
Series D stock was issued in exchange for all the outstanding stock of
Millennium. Such preferred shares were subsequently converted into approximately
96% of the outstanding common stock of the Company. For accounting purpose, the
merger has been treated as an acquisition of Millennium Group by Millennium, and
a re-capitalization of Millennium. The historical financial statements prior to
July 27, 2001, are those of Millennium. Subsequent to July 27, 2001, the
financial statements are those of the Company and its wholly-owned subsidiary
Millennium, on a consolidated basis. Narrative Description of Business
ABOUT MILLENNIUM
Millennium's three nutritional formulas, RESURGEX(R) and RESURGEX
PLUS(R)and RESURGEX Select form the company's Continuum of Care, which serves as
a nutritional adjunct to the medical treatment for certain chronic
immuno-compromising debilitating diseases such as cancer, Acquired Immune
Deficiency Syndrome ("AIDS"), and hepatitis. . Those living with these diseases
present a multitude of medical/nutritional problems, which include weight loss,
immune dysfunction, free-radical pathology , loss of energy production, organ
failure, and cachexia. The Resurgex Continuum of Care gives patients and
practicioners the ability to choose a product from the Resurgex product line
that addresses the specific needs of an individual. Millennium's growth and
maturity as a company can be directly attributed to the evolution of the
Resurgex product line.
Millennium's development of the two patented nutritional formulas,
RESURGEX(R) and RESURGEX PLUS(R), was the driving force in Millennium's first
patient population HIV/ AIDS. People living with HIV/AIDS often experience loss
of lean muscle (wasting), nutrient depletion, immune dificiencies, mitochondrial
dysfunction (energy loss) and oxidative stress (free-radical damage). We believe
that RESURGEX(R) and RESURGEX PLUS(TM) are the first multi-component nutritional
supplements designed to deal with the multiple nutritional needs of the
immuno-compromised individual. In addition to addressing the debilitating
effects of HIV/ AIDS, RESURGEX(R) and RESURGEX PLUS'(TM) the taste and
versatility of the products have provided the HIV/AIDS patients with a
nutritional product that they enjoy taking. Our ability to prove the business
model in HIV/AIDS assisted in the company's expansion into oncology.
2
The American Cancer Society estimates that there will be 1,399,790 new
cases of cancer in the United States in 2006, and due to the debilitating
effects from cancer therapies, much like HIV/AIDS, there is a myriad of people
living with cancer who rely on nutrional products to be a source of valuable
nutrition. Millennium recognized the need for a product that was specific to
people who were going through chemotherapy and radiation and formulated Resurgex
Select. When Resurgex Select was created in September of `05, Millennium had
completed its Continuum of Care for patients, with Resurgex Select designed to
be utilized during cancer treatment and Resurgex and Resurgex Plus for post
treatment. In our effort to launch their three products nationwide, Millennium
contracted Cardinal Health's shared sales force. The key roles of the shared
representative is to detail nurses, dieticians, and doctors on the unique
qualities of the Resurgex products, and once a relationship has been
established, the representative calls on the office to supply samples as well as
Resurgex sales materials. Over 1,200 sampling stations called Taste and Learning
Centers, that are strategically placed in waiting rooms and infusion rooms in
cancer hospitals and cancer clinics throughout the United States.
With the assistance of Cardinal Health's part time sales force Millennium
has received national exposure, and moving forward Millennium will transition
the sales force into a full time one. These full time sales representatives will
work in the cities that are densely populated with Oncology practices.
Intuitively these cities have the largest populations of people living with
cancer.
The professional and consumer acceptance of the Resurgex Continuum of Care
is in response to Millennium's sales and marketing efforts in cancer and
HIV/AID's. The comprehensive nutrition, great taste, and competitive pricing
that the Resurgex products offer is a unique combination in the marketplace. The
overall demand in the nutritional market for new innovative products further
positions the Resurgex products for continued market penetration. Millennium's
newly developed product line extensions of confectionary bars and freeze pops is
another step in expanding the product line. The nutritional bars and freeze pops
give options to those who want variety or may want a healthy snack on the go.
General Description
RESURGEX SELECT(TM), RESURGEX(R), and RESURGEX PLUS(R) are unique
multi-component nutritional formulas that were designed to address the multiple
nutritional needs (oxidative stress, lean tissue loss, energy depletion, immune
support, weight loss) of immuno-compromised conditions as an adjunct to medical
treatment. They have been positioned to provide for a comprehensive, high
quality alternative to traditional high sugar, high fat supplements that
comprised primarily of corn oil, corn syrup and sucrose or the "single magic
bullet" products that only address one of the several nutritional needs and
concerns of the individual.
RESURGEX SELECT(TM) is a whole foods based nutritional product that
combines high protein(15g), low sugar (5g), dietary fiber (3g), with no added
antioxidants to be a high calorie (350 calorie) supplement. The enteral
nutritional formula (may be administered orally or may be fed through a gastro
intestinal tube) provides multiple comprehensive nutritional regimens into one
delicious and convenient drink.
RESURGEX(R) is the first high protein(12g), low sugar (5g), low calorie
(90 calorie), antioxidant rich, enteral nutritional formula (may be administered
orally or may be fed through a gastro intestinal tube) to provide multiple
comprehensive nutritional regimens into one delicious and convenient drink. It
is commonly used as a nutritional supplement to meals.
RESURGEX PLUS(R) is the first high protein (21g), high calorie (400
calorie), antioxidant rich, enteral nutritional formula to provide multiple
comprehensive nutritional regimens into one delicious and convenient drink. It
is commonly used as a meal replacement or can be used as a sole source of
nutrition as directed by a physician. Concentrated calories are derived from
high quality food sources as opposed to typical corn oil, sucrose and corn syrup
found in other nutritional supplements.
3
THE RESURGEX PRODUCT LINE OF RESURGEX SELECT(TM) , RESURGEX(R), and
RESURGEX PLUS(R) form Millennium's Continuum of Care. RESURGEX SELECT(TM)
contain a comprehensive mix of specialized nutrients that contribute to
maintenance of lean muscle, immune support, and increased energy levels with no
added antioxidants. RESURGEX(R), and RESURGEX PLUS(R) also contain a
comprehensive mix of specialized nutrients that contribute to one or more
aspects of support - immune, energy, antioxidant and maintenance of lean tissue
with added anitoxidants. The Continuum of Care gives individuals or recommenders
options, depending on the specific needs of a person. Millennium's research and
development division recently created a compliment to the Resurgex Continuuum of
Care in the form of delicious confectionary bars and refreshing freeze pops.
These newly developed line extensions of the Resurgex beverage formulas will
provide the same quality nutrition as the beverages with a variety of flavors.
(Nutritional Facts?) Millennium anticipates that the bars and freeze pops are
scheduled to be available for sale in the 4th quarter of 2006.
How The Products Work
Essentially, there are several pathways and concerns that must be
addressed when it comes to nutritional support in any major degenerative or
immuno-compromised condition. While there are several "single magic bullet"
products on the market, this approach will inevitably fail since it only focuses
on one concern while neglecting the others. RESURGEX SELECT(TM), RESURGEX(R),
and RESURGEX PLUS(R) were developed to address the major nutritional concerns
that may be influenced by nutritional support as an adjunct to medical care. In
addition, rather then providing significant amounts of calories from corn oil,
sucrose and corn syrup combined with an inexpensive multivitamin blend, RESURGEX
SELECT(TM), RESURGEX(R), and RESURGEX PLUS(R)were developed to provide a
comprehensive and complex array of nutrients and nutraceuticals that play
important roles in health and well being. These include:
Mitochondrial (Energy) Support
Mitochondria are tiny organelles found inside all human cells of the body.
Essentially, they are the cell's "power plants" that produce energy (ATP) as
well as involved in protein and fat processing. Several things can affect how
well the mitochondria work. As people age, presence of infections or certain
diseases, strenuous activity and certain medications hamper the efficiency and
function of the mitochondria. These changes or mutations may damage the
mitochondria (mitochondrial toxicity) and either disrupt the normal function or
cause them to stop working altogether. Millennium has a patented blend of
ingredients that help support the function of the mitochondria and assist in the
production of energy in the cell. Some of these ingredients include:
o Coenzyme Q10 (COQ10) - an essential component of cellular energy
production and respiration since it participates in the
mitochondrial electron transport system, which supplies energy (ATP)
for a variety of physiological functions. Muscle mitochondria lack
adequate COQ10 in several chronic conditions. (Found In RESURGEX(R),
and RESURGEX Plus(R)).
o L-Carnitine - functions primarily to regulate fat metabolism and
also acts as a carrier of fatty acids into the mitochondria, where
they are oxidized and converted into energy (ATP). It has been
established in the literature that serum carnitine deficiency is
common in certain conditions and several medications are associated
with mitochondrial destruction. (Found In RESURGEX(R), and RESURGEX
Plus(R)).
o Ribose - a carbohydrate used by the cells to form the primary source
of all the body's energy - ATP. Ribose plays a key role in the
generation and recovery of ATP. Ribose can offer powerful
complimentary support to other nutrients addressing energy depletion
by aiding normal ATP production. (Found In RESURGEX(R), and RESURGEX
Plus(R)).
4
Reduce Oxidative Stress (Free Radical Burden)
Oxidative Stress in the body is caused by an imbalance or overload of
oxidants (free radicals from air, food, metabolism, medications, stress,
disease, etc.). Sustained oxidative stress disrupts the cell's structure and
defenses resulting in damage or death to the cell and contributes to the
pathophysiology of many diseases. As we age or encounter disease, proper
antioxidant defense is essential for recovery. While there are many important
antioxidants - Vitamin C, Vitamin E, zinc, selenium, polyphenols, carotenoids,
etc, - the one that stands above all is the cell's master antioxidant defense
enzyme called superoxide dismutase (SOD). The clinical relevancy of SOD has been
demonstrated in numerous scientific studies in cardiology, immunology, oncology,
inflammatory conditions, asthma, vision and liver support. Exclusive to
Millennium, in the medical market, is the first orally effective vegetarian form
of SOD as opposed to the injectable bovine material previously USED. Millennium
has a blend of ingredients that help support the cell's ability to defend
against oxidative stress. Some of these ingredients include:
o (SOD/Gliadin) - SOD/Gliadin was shown to reduce oxidative stress in
humans by reducing genetic damage to the cell and reducing
isoprostanes. SOD helps to decrease oxidative stress - it is the
master cellular defense enzyme of the cell and serves as significant
support for the immune system, it can counter the harmful effects of
free radicals, thereby diminishing their negative effects on the
body. SOD has been shown to influence the negative effects of
inflammatory cytokines, support immune function, and reduce
oxidative stress. (Found In RESURGEX(R), and RESURGEX Plus(R)).
o Undenatured Whey Protein - undenatured whey has been shown to assist
in cellular defense by increasing available glutathione - another
important cellular antioxidant required by the body to ward off the
effects of oxidative stress. (Found In RESURGEX SELECT(TM),
RESURGEX(R), and RESURGEX Plus(R)).
o Beta Glucans -powerful antioxidant attributes, with heightened
free-radical scavenging capabilities. (Found In RESURGEX(R), and
RESURGEX Plus(R)).
o Multi-Vitamin/Mineral Mix, Polyphenols - contain important accessory
antioxidants. Coenzyme Q10 - a powerful cellular antioxidant with
roles in preventing oxidation of fatty cell membranes and ultimately
cell death. (Found In RESURGEX(R), and RESURGEX Plus(R)).
Maintain Lean Muscle
A common problem as we age and among many chronic degenerative or
immuno-compromised conditions is lean muscle loss or wasting. This problem, also
known as cachexia, can diminish the quality of life, and exacerbate illness.
Several issues related to the loss of muscle during illness and aging include:
inadequate caloric intake, problems with metabolism, elevations of inflammatory
compounds that break down muscle (certain cytokines) or malabsorption.
Nutritional supplementation has played an important role in boosting caloric
intake, but in many conditions increasing calories may not be the only answer.
Millennium has a blend of ingredients that help maintain lean tissue by
providing high quality protein and compounds that assist in building muscle and
prevent its breakdown. Some of these ingredients include:
o Undenatured Whey - When it comes to nutritional support directed at
maintaining lean mass, adequate calories and good quality protein is
essential. By virtue of it's biological value (BV), whey protein has
long been considered the best source of protein for building and
retaining lean muscle mass, which is why it has become a nutritional
staple for immuno-compromised patients. (Found In RESURGEX
SELECT(TM), RESURGEX(R), and RESURGEX Plus(R)).
o Ornithine alpha-ketoglutarate(OKG) - affects wasting through three
primary mechanisms: as an anabolic agent (build-up of muscle
tissue), as an anti-catabolic agent (prevents breakdown of muscle
tissue), and as an inducer of protein synthesis. All three
mechanisms contribute to muscular development and enhanced recovery.
OKG also spares the loss of glutamine in muscle, which is essential
for recovery and repair. (Found In RESURGEX(R), and RESURGEX
Plus(R)).
5
o Branched Chain Amino Acids (BCAA) - play a principle role in muscle
recovery, muscle growth and energy maintenance and must be present
in the muscle cells to promote protein synthesis. Why we need these
special amino acids is simple: scientific evidence shows that
branched-chain amino acids may help build and retain lean muscle
mass. (Found In RESURGEX SELECT(TM), RESURGEX(R), and RESURGEX
Plus(R)).
o Nucleotides - building blocks of (DNA) and (RNA) dietary source is
required to promote optimal tissue growth. (Found In RESURGEX(R),
and RESURGEX Plus(R)).
Immune Support
Essentially, good nutritional support supplying essential macronutrients
and micronutrients are critically important for maintaining a proper immune
system. Nevertheless, if the cells of the immune system cannot produce energy
efficiently (mitochondrial dysfunction), have poor antioxidant defenses
(oxidative stress) and the body is losing important lean muscle, immune support
cannot effectively be achieved. Millennium has developed as a modular component
system that provides support in addressing these needs and issues. Millennium
products contain a patented blend of ingredients that help support the immune
system. Some of these ingredients include:
o SOD/Gliadin (GliSODin(R)), Beta Glucans, Nucleotides, OKG,
CoQ10 and Carnitine - (Found In RESURGEX(R), and RESURGEX
Plus(R)).
o Undenatured Whey high in Immunoglobulins, - (Found In RESURGEX
SELECT(TM), RESURGEX(R), and RESURGEX Plus(R)).
o Fruit and Vegetable Extract Blend - Equivalent to 1-2 servings
per day. The phytonutrients found in fruits and vegetables
directly contribute to a healthy immune system. (Found In
RESURGEX SELECT(TM)).
Special Features of RESURGEX Continuum of Care
Tastes Good
o VARIETY OF FLAVORS WITH GREAT TASTE
o Smooth Texture and juice like consistency
Easy To Use
o Single-Serving Dosage
o Mixes Easily
o Convenient Anytime, Anywhere
o They can be mixed in any cold liquid such as juice, milk, or water.
They can also be mixed in foods like pudding, yogurt, apple sauce,
or ice cream.
o Great For Travel
6
o Includes SOD/Gliadin (GliSODin(TM)), a unique, vegetarian patented,
orally effective form of superoxide dismutase derived from melon.
(Found In RESURGEX(R), and RESURGEX Plus(R)).
o RESURGEX(R) was awarded a use and composition patent (which covers
RESURGEX PLUS(R)).
o High Quality Undenatured Protein. (Found In RESURGEX SELECT(TM),
RESURGEX(R), and RESURGEX Plus(R)).
o Concentrated High Quality Calories in RESURGEX Plus(R) and RESURGEX
SELECT(TM), Low Calories in RESURGEX(R)
o Comprehensive Nutrient Mix. (Found In RESURGEX SELECT(TM),
RESURGEX(R), and RESURGEX Plus(R)).
o Low Sugar. ( Found in RESURGEX SELECT(TM), RESURGEX(R), and RESURGEX
Plus(R)).
Principal Market
Millennium's principal market is cancer. The American Cancer Society
estimates that there are 13,000,000 million people in the United States living
with cancer and there will be 1,399,790 new cases of cancer in the United States
in 2006. Due to the challenging effects of cancer therapies such as taste
aversion, weight loss, organ dysfunction, fatigue, and cachexia there's a high
demand for nutritional products in cancer. Even when cancer patients complete
their chemotherapy or radiation good nutrition is needed to combat post
treatment fatigue and stay healthy. Thus the need for good nutrition throuought
one's life is important and the Resurgex Continuum of Care provides the
necessary quality calories.
Particulary important to the cancer patient population is their challenges
with taste aversion. Therapies can severly alter people's appetites, taste buds
and cause nausea. Due to these factors many people are particular about what
they eat. The Resurgex Continuum of Care was designed to taste great and give
people the opportunity to make the products taste they way they would like. The
Resurgex Products are powders and thus can be mixed in a variety of things such
as milk, water, juice and foods like pudding, apple sauce, yogurt, cereal, and
ice cream. The versatility of the Resurgex products can satisfy the difficulties
oncology patients have with taste.
Millennium also markets to patients infected by HIV/AIDS, whose immune
systems have been compromised as a result of chronic and acute viral based
infections and are receiving medical care. Management believes that there is a
significant demand and expanding market for the Resurgex Continuum of Care
because of the large population of HIV infected persons. Nutritional supplements
are steadily becoming an important adjunct in the treatment of people living
with HIV and AIDS. Both products are enteral nutritional supplements targeted to
nutritionally support immuno-compromised individuals undergoing medical
treatment for chronic debilitating conditions that cause tissue wasting (weight
loss), oxidative stress, mitochondrial failure (fatigue/low energy) and immune
dysfunction. In the long term, the Company plans to expand its focus on other
patient populations such as nursing homes, and pediatrics. In addition, we plan
to explore RESURGEX SELECT(R) , RESURGEX(R), and RESURGEX PLUS(R) applications
to the health market as a supplement to enhancing health and well being.
Intellectual Property
Millennium owns all rights to the formulations of RESURGEX(R) and RESURGEX
PLUS(TM) and has filED A compositional patent application with respect to these
formulations. RESURGEX(R) and RESURGEX PLUS(R) are registeRED trademarks and
Millennium has received trademark protection approval for the name "RESURGEX
SELECT(R)". RESURGEX SELECT(TM) is presently pending before the United States
Patent and Trademark Office.
7
On January 7, 2003, RESURGEX(R) was issued a Use and Composition Patent
(United States Patent 6,503,506 Nutrient therapy for immuno-compromised
patients).In addition, the Company relies on trade secrets and unpatented
proprietary technology. There is no assurance that others may not independently
try to develop the same or similar technology; however they would be infringing
upon our patent and would not have access to an important proprieatary
ingredient GliSODin(R). In addition they would not immediately have Federal
HCPCS Codes or approval for reimbursement on formularies.
On July 25, 2001, Millennium obtained an exclusive limited patent
sublicense and distribution right from Isocell SA, a French company, which owns
the rights to the combination of oral administrable SOD/gliadin (GLISODIN(R)).
Isocell SA also owns the United States patent for Pharmaceutical compositions
containing a Superoxide Dismutase which includes gliadin. Pursuant to the
License Agreement with Isocell SA, Millennium is granted an exclusive sublicense
to promote and distribute GliSODin(R) for use as a dietary supplement or
functional food in certain defined medical market channels of distribution in
North America involving direct sales of nutraceutical products to the medical
markets.
The License Agreement provides for the sale of GliSODin(R) to Millennium
at stated unit prices subject to volume discounts. The term of the agreement is
for five years, provided that Isocell may cancel the license (or make it
non-exclusive) in the event that Millennium purchases of GliSODin(R) do not meet
agreed upon terms any calendar quarter during the term. The 5-year term is
scheduled to end in August of 2006 at such time Millennium will attempt but
cannot ensure the contract will be extended.
On March 20, 2006, Millennium received the Healthcare Common Procedure
Coding System (HCPCS) coding for their new enteral nutritional formula, Resurgex
Select(R). HCPCS is one of the formats in which nutritional formulas may be
coded for Medicare reimbursement and is specifically required for Medicaid
reimbursement in many states.
Regulatory Environment
The manufacturing, processing, formulation, packaging, labeling and
advertising of RESURGEX(R), RESURGEX PLUS(R) and RESURGEX SELECT(TM) are subject
to regulation by federal agencies, including the Food and DrUG Administration
(the "FDA"), the Federal Trade Commission, the Consumer Product Safety
Commission, the United States Department of Agriculture, the United States
Postal Service and the United States Environmental Protection Agency. These
activities are also subject to regulation by various agencies of the states and
localities in which the Company sells and plans to sell RESURGEX(R), RESURGEX
PLUS(R) and RESURGEX SELECT(TM).
The Dietary Supplement Health and Education Act of 1994 (the "Dietary
Supplement Law") broadly regulates nutritional labeling, claims and
manufacturing requirements for dietary supplements. The Dietary Supplement Law
provides for regulation of Statements of Nutritional Support ("Statements").
These Statements may be made if they are truthful and not misleading and if
"adequate" substantiation for the claims is available. Statements can describe
claims of enhanced well-being from use of the dietary supplement or product
statements that relate to affecting a structure or function of the body.
However, Statements cannot claim to diagnose, treat, cure, or prevent any
disease, regardless of the possible existence of scientific reports
substantiating such claims.
Statements appearing in dietary supplement labeling must be accompanied by
disclaimer stating that the FDA has not evaluated the Statements. Notification
to the FDA of these Statements is not considered approval of the Statements. If
the FDA determines in possible future proceedings that dietary supplement
Statements fail to meet the requirements of the Dietary Supplement Law, a
product may be subject to regulation as a drug. The FDA retains all enforcement
means available to it (i.e. seizure, civil or criminal penalties, etc.), when
investigating or enforcing labeling claims.
8
The Federal Trade Commission ("FTC") regulates advertising of dietary
supplements such as RESURGEX(R), RESURGEX PLUS(R) AND RESURGEX SELECT(TM) The
Federal Trade Commission Act prohibits unfair or deceptive traDE practices and
false or misleading advertising. The FTC has recently been very active in its
enforcement of advertising against manufacturers and distributors of nutritional
dietary supplements having instituted several enforcement actions resulting in
signed agreements and payment of large fines. Although the Company has not been
the target of a FTC investigation, there can be no assurance that the FTC will
not investigate the Company's advertising in the future.
The Company is unable to predict the nature of any future laws,
regulations, interpretations, or applications, nor can it predict what effect
additional governmental regulations or administrative orders, when and if
promulgated, would have on its business in the future. They could, however,
require the reformulation of certain products not possible to be reformulated,
imposition of additional record keeping requirements, expanded documentation of
the properties of certain products, expanded or different labeling and
scientific substantiation regarding product ingredients, safety or usefulness.
Any or all such requirements could have a material adverse effect on the
Company's results of operations and financial condition.
Medicaid Reimbursement
Millennium has gained inclusion into the First Data Bank ("FDB"). FDB
provides pharmaceutical and nutraceutical pricing and product information to
most states, as well as the District of Columbia. FDB, a wholly owned subsidiary
of the Hearst Corporation, is the world's leading supplier of healthcare
knowledge databases, supplying drug knowledge to over 40,000 pharmacies, 4,000
hospitals, all 50 state Medicaid programs and virtually all major vendor and
private drug benefit programs. The majority of drug wholesalers and
manufacturers also use one or more of its products. Inclusion in FDB facilitates
access to most state Medicaid programs, Managed Care Organizations and other
important health care and reimbursement organizations.
With inclusion in FDB, some state Medicaid organizations qualify
RESURGEX(R) and RESURGEX PLUS(R) automatically under the open formulary system.
Other states require a more formal application process, among them the State of
New York. Millennium applied for approval by Medicaid and ADAP (Aids Drug
Assistance Program) for the State of New York. Effective June 1, 2003,
RESURGEX(R) was approved for Medicaid reimbursement in New YorK State, and is
now reimbursed by additional state programs such as the ADAP program (the AIDS
Drug Assistance Program) in New York.
Sales and Marketing Strategy
The Company continued to market Resurgex(R) and Resurgex Plus(R) then
commenced the marketing of Resurgex Select(TM) In the 4th quarter of 2005 in
conjunction with its national sales launch into the oncology market with
Cardinal Health's Shared Sales Force. The preparation for the launch began in
July of 2005 and the actual launch began in the 4th quarter of 2005. The
Cardinal Sales Force which markets products of the Company and others, gave the
Company's products national exposure. This sales force dedicated approximately
20% of their sales efforts on Millennium's products.
During the fourth quarter of 2005 the Company was actively engaged in the
training and implementation phase associated with a national sales, marketing
and distribution campaign to expand the market share of the products the Company
manufactures. The national launch began early in the fourth quarter of 2005 and
provided for an additional 165 non-dedicated sales representatives; 14 District
Managers and 3 Regional Mangers nationwide. The product was accepted into the
oncology marketplace proven by the acceptance of over 1,000 taste and learning
stations in cancer institutions across the United States.
9
The Company launched a new website as well during the third quarter of
2005. The site, which provides ordering and product information for patients and
healthcare professionals on the Resurgex line of products, was designed by Blue
Diesel, a leading interactive communications agency serving the healthcare
industry. Blue Diesel is a subsidiary of inChord Communications Inc., one of the
top ten largest healthcare marketing organizations in the world. The launch of
the website was timed to coincide with the recent national launch of the
Resurgex Select(TM) line of products that focus on the nutritional needs of the
oncology patient undergoinG treatment.
Research and Development
During 2004, the Company spent $65,272 on research and development of its
products and, during 2005, the Company spent $66,391 on research and development
of its products.
Competition
There are many other nutraceutical products on the market that are
reimbursed by Medicaid as dietary supplements in the field of
immuno-deficiencies. These products tend to be of a high content of corn oil and
corn syrup (fat and sugar). Millennium has found the nutritional market to be
very receptive to our alternative to fat and sugar, which is the multi-component
approach to nutritional supplementation (please read the section titled "How the
Products Work" above for a full description) used in RESURGEX(R) RESURGEX
PLUS(R) and RESURGEX SELECT(TM). Please see "Risk Factors- Competition" below.
Product Production
All manufacturing, warehousing and distribution functions are outsourced
to various vendors and suppliers.
Seasonality and Dependency
The industry segment in which the Company does business is not seasonal.
Employees
As of December 31, 2005, the Company employed nine persons, of whom two
are primarily engaged in research and development and product support
activities, three are primarily engaged in managerial functions associated with
sales and marketing, and four are engaged in general administrative and
managerial functions. The Company has no collective bargaining agreements with
its employees.
10
RISK FACTORS
The following cautionary statements identify important factors that could
cause our actual result to differ materially form those projected in the
forward-looking statements made in this report.
WE HAVE OPERATED AT A LOSS AND CANNOT ASSURE THAT WE WILL BE ABLE TO ATTAIN
PROFITABLE OPERATIONS.
Although we are generating revenues, we continue to operate at a loss.
During the year ended December 31, 2005, we generated revenues of $797,987 from
sales of our three products. However, during this period we realized net losses
of $6,949,472. We expect to continue incurring operating losses until we are
able to derive meaningful revenues from marketing our three products and other
products we intend to bring to market. We cannot assure that we will be able to
attain profitable operations.
WE REQUIRE ADDITIONAL FUNDING TO MAINTAIN OUR OPERATIONS AND TO FURTHER DEVELOP
OUR BUSINESS. OUR INABILITY TO OBTAIN ADDITIONAL FINANCING WOULD HAVE AN ADVERSE
EFFECT ON OUR BUSINESS.
Our success depends on our ability to develop a market for our three
products and other nutraceutical supplements we intend to bring to market. This
means having an adequate advertising and marketing budget and adequate funds to
continue to promote our products. Although our revenues have steadily increased
prior to this years decrease due to the transition into the oncology market from
the HIV market, our operating expenses are significantly greater than our
revenues. During 2005, the Company obtained new equity capital that supplied the
majority of the funds that were needed to finance operations during the
reporting period. Such new investments resulted in the receipt by the Company of
$2,319,142. However, because stock certificates for an aggregate 3,655,717
shares issuable for such investments as well as for conversion of promissory
notes and for services rendered, had not yet been issued at December 31, 2005,
the Company reclassified the related equity contributions as current liabilities
at year-end. The Company obtained $1,011,750 from borrowings, net of debt
repayments, through issuance of promissory notes, some of which are convertible
at the option of the holders into common shares at a rate of $0.25 per share
(see Note 8 to our audited Financial Statements below). These funds in
conjunction with on going operating revenues provided adequate capital for our
operating needs for 2005. We need to continue to raise funds to cover working
capital requirements until we are able to raise revenues to a point of positive
cash flow. We plan to do this, as before, through additional equity or debt
financings. We may not be able to raise such funds on terms acceptable to us or
at all. Financings may be on terms that are dilutive or potentially dilutive to
our stockholders. If sources of financing are insufficient or unavailable, we
will be required to modify our operating plans to the extent of available
funding or curtail or suspend operations.
OUR YEAR END AUDITED FINANCIAL STATEMENTS CONTAIN A "GOING CONCERN" EXPLANATORY
PARAGRAPH. OUR INABILITY TO CONTINUE AS A GOING CONCERN WOULD REQUIRE A
RESTATEMENT OF ASSETS AND LIABILITIES ON A LIQUIDATION BASIS, WHICH WOULD DIFFER
MATERIALLY AND ADVERSELY FROM THE GOING CONCERN BASIS ON WHICH OUR FINANCIAL
STATEMENTS INCLUDED IN THIS REPORT HAVE BEEN PREPARED.
Our consolidated financial statements for the year ended December 31, 2005
included herein have been prepared on the basis of accounting principles
applicable to a going concern. Our auditors' report on the consolidated
financial statements contained herein includes an additional explanatory
paragraph following the opinion paragraph on our ability to continue as a going
concern. A note to these consolidated financial statements describes the reasons
why there is substantial doubt about our ability to continue as a going concern
and our plans to address this issue. Our December 31, 2005 consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty. Our inability to continue as a going concern would
require a restatement of assets and liabilities on a liquidation basis, which
would differ materially and adversely from the going concern basis on which our
consolidated financial statements have been prepared. See, "Part
11
II. Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations; Liquidity and Capital Resources."
WE ARE SUBJECT TO SIGNIFICANT GOVERNMENT REGULATION.
The packaging, labeling, advertising, promotion, distribution and sale of
RESURGEX(R) and RESURGEX Plus(TM) and other products we plan to produce and
market are subject to regulation by numerous governmental agencies, the most
active of which is the U.S. Food and Drug Administration (the "FDA"), which
regulates our products under the Federal Food, Drug and Cosmetic Act (the
"FDCA") and regulations promulgated thereunder. Our products are also subject to
regulation by, among other regulatory entities, the Consumer Product Safety
Commission (the "CPSC"), the U.S. Department of Agriculture (the "USDA") and the
Environmental Protection Agency (the "EPA"). Advertising and other forms of
promotion and methods of marketing of our products are subject to regulation by
the U.S. Federal Trade Commission (the "FTC"), which regulates these activities
under the Federal Trade Commission Act (the "FTCA"). The manufacture, labeling
and advertising of our products are also regulated by various state and local
agencies. Failure to comply with applicable regulatory requirements may result
in, among other things, injunctions, product withdrawals, recalls, product
seizures, and fines.
OUR INVOLVEMENT IN DEFENDING PRODUCT LIABILITY CLAIMS COULD HAVE A DETRIMENTAL
EFFECT ON OUR OPERATIONS.
Like other retailers and distributors of products designed for human
consumption, we face an inherent risk of exposure to product liability claims in
the event that the use of our products results in injury. We may be subjected to
various product liability claims, including, among others, that our products
include inadequate instructions for use or inadequate warnings concerning
possible side effects and interactions with other substances. We carry
$10,000,000 of product liability insurance. Thus, any product liabilities
exceeding our coverage relating to our products could have a material adverse
effect on our business, financial condition and results of operations.
WE FACE SIGNIFICANT COMPETITION.
The biotechnology and nutraceutical supplement industries are highly
competitive and subject to significant and rapid technological change.
Developments by our competitors may render our products obsolete or
noncompetitive. Numerous companies compete in our market, many of which have
greater size and financial, personnel, distribution and other resources greater
than ours. Our principal competition in the distribution channels where we are
marketing our current products and where we intend to market other products,
comes from a limited number of large nationally known manufacturers and many
smaller manufacturers of nutraceutical supplements. In addition, large
pharmaceutical companies compete with us on a limited basis in the nutraceutical
supplement market. Increased competition from such companies could have a
material adverse effect on us because such companies have greater financial and
other resources available to them and possess distribution and marketing
capabilities far greater than ours. We also face competition in mass market
distribution channels from private label nutraceutical supplements offered by
health and natural food store chains and drugstore chains. We cannot assure that
we will be able to compete.
IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY OR WE INFRINGE ON
INTELLECTUAL PROPERTY OF OTHERS, OUR BUSINESS AND FINANCIAL CONDITION MAY BE
MATERIALLY AND ADVERSELY AFFECTED.
We own all rights to the formulation of RESURGEX(R) and RESURGEX Plus(R),
have a use and compositioNAL patent with respect to RESURGEX(R) (which covers
RESURGEX Plus(R)). We also have registered trademarks for the naMES "RESURGEX"
and "RESURGEX Plus". We have filed patent applications internationally with
regards to RESURGEX(R) AND RESURGEX Plus(R). No assurance can be given that
patents will be issued from pending applications or that therE rights, if issued
and the rights from our existing patents and registered name will afford us
adequate protections. In addition, we rely on trade secrets and unpatented
proprietary technology. There is no assurance that others may not independently
develop the same or similar technology or produce products which provide the
same
12
benefits as RESURGEX(R) and RESURGEX Plus(R) or our other proposed products.
RESURGEX Select(TM) is curRENtLy patent pending and the Company has received
trademark protection.
Although we will seek to ensure that our products do not infringe the
intellectual property rights of others, there can be no assurance that third
parties will not assert intellectual property infringement claims against us.
Any infringement claims by third parties against us may have a material adverse
effect on our business, financial condition and results of operations.
BECAUSE OUR BOARD CAN ISSUE COMMON STOCK WITHOUT STOCKHOLDER APPROVAL, YOU COULD
EXPERIENCE SUBSTANTIAL DILUTION.
Our Board of Directors has the authority to issue up to 200,000,000 shares
of common stock and to issue options and warrants to purchase shares of our
common stock without stockholder approval. As of March 31, 2006, 86,814,077
shares are issued and outstanding or reserved for issuance on a fully-diluted
basis. Future issuance of our additional shares of common stock could be at
values substantially below the current market price of our common stock and,
therefore, could represent substantial dilution to investors in this offering.
In addition, our Board could issue large blocks of our common stock to fend off
unwanted tender offers or hostile takeovers without further stockholder
approval.
ANTI-TAKEOVER PROVISIONS OF THE DELAWARE GENERAL CORPORATION LAW COULD
DISCOURAGE A MERGER OR OTHER TYPE OF CORPORATE REORGANIZATION OR A CHANGE IN
CONTROL EVEN IF THEY COULD BE FAVORABLE TO THE INTERESTS OF OUR STOCKHOLDERS.
The Delaware General Corporation Law contains provisions which may enable
our management to retain control and resist a takeover of us. These provisions
generally prevent us from engaging in a broad range of business combinations
with an owner of 15% or more of our outstanding voting stock for a period of
three years from the date that this person acquires his stock. Accordingly,
these provisions could discourage or make more difficult a change in control or
a merger or other type of corporate reorganization even if they could be
favorable to the interests of our stockholders.
WE DO NOT INTEND TO PAY CASH DIVIDENDS IN THE FORESEEABLE FUTURE.
We have never declared or paid cash dividends on our capital stock. We
currently intend to retain all of our earnings, if any, for use in its business
and do not anticipate paying any cash dividends in the foreseeable future. The
payment of any future dividends will be at the discretion of our Board of
Directors and will depend upon a number of factors, including future earnings,
the success of our business activities, our general financial condition and
future prospects, general business conditions and such other factors as the
Board of Directors may deem relevant. In addition, no cash dividends may be
declared or paid on our Common Stock if, and as long as, the Series B Preferred
Stock is outstanding or there are unpaid dividends on outstanding shares of
Series C Preferred Stock. No dividends may be declared on the Series C Preferred
Stock if, and as long as, the Series B Preferred Stock is outstanding.
Accordingly, it is unlikely that we will declare any cash dividends in the
foreseeable future.
WE CANNOT ASSURE THAT THERE WILL BE A SUSTAINED PUBLIC MARKET FOR OUR COMMON
STOCK.
At present, our common stock is quoted on the OTC Bulletin Board and
tradable in the over-the-counter market. Our common stock is not traded on a
sustained basis or with significant volume. In addition, we currently do not
meet the requirements for listing our common stock on NASDAQ or a national
securities exchange and we cannot assure if or when our common stock will be
listed on such an exchange. For the foregoing reasons, we cannot assure that
there will be a significant and sustained public market for the sale of our
common stock. Accordingly, if you purchase our common stock, you may be unable
to resell it. In the absence of any readily available secondary market for our
common stock, you may experience great difficulty in selling your shares at or
near the price that you originally paid.
13
THE MARKET PRICE OF OUR COMMON STOCK MAY BE VOLATILE.
The market price of our common stock may fluctuate significantly in
response to the following factors:
o variations in quarterly operating results;
o our announcements of significant contracts, milestones,
acquisitions;
o our relationships with other companies or capital commitments;
o additions or departures of key personnel;
o sales of common stock or termination of stock transfer restrictions;
o changes in financial estimates by securities analysts; and
o fluctuations in stock market price and volume.
OUR STOCK PRICE MAY BE ADVERSELY AFFECTED IF A SIGNIFICANT AMOUNT OF SHARES ARE
SOLD IN THE PUBLIC MARKET.
As of April 14, 2006, approximately 18,808,132 shares of our common stock
constituted "restricted securities" as defined in Rule 144 under the Securities
Act of 1933. In addition, as of April 14, 2006, we had warrants outstanding for
the purchase of an aggregate of 13,893,763 shares of our common stock, and stock
options for 10,368,283 shares. 9,241,761 of the shares issuable upon exercise of
the warrants have been registered pursuant to agreements between us and the
selling stockholders, requiring us to register their shares for resale under the
Securities Act. Registration of the shares permits the sale of the shares of
common stock in the open market or in privately negotiated transactions without
compliance with the requirements of Rule 144. To the extent the exercise price
of the warrants is less than the market price of the common stock, the holders
of the warrants are likely to exercise them and sell the underlying shares of
common stock and to the extent that the exercise price of the warrants are
adjusted pursuant to anti-dilution protection, the warrants could be exercisable
or convertible for even more shares of common stock. Moreover, some of the
remaining restricted shares as well as shares resulting from the exercise of the
other warrants and options may, after certain holding periods, enter the market,
and we may issue additional shares to raise funding or compensate employees,
consultants and/or directors. We are unable to estimate the amount, timing or
nature of future sales of outstanding common stock. Sales of substantial amounts
of our common stock in the public market could cause the market price for our
common stock to decrease. Furthermore, a decline in the price of our common
stock would likely impede our ability to raise capital through the issuance of
additional shares of common stock or other equity securities.
OUR SHARES ARE SUBJECT TO THE PENNY STOCK REFORM ACT.
Our shares are subject to the Penny Stock Reform Act of 1990 which may
potentially decrease your ability to easily transfer our shares. Broker-dealer
practices in connection with transactions in "penny stocks" are regulated. Penny
stocks generally are equity securities with a price of less than $5.00. The
penny stock rules require a broker-dealer, prior to a transaction in a penny
stock not otherwise exempt from the rules, to deliver a standardized risk
disclosure document that provides information about penny stocks and the risks
in the penny stock market. The broker-dealer also must provide the customer with
current bid and offer quotations for the penny stock, the compensation of the
broker-dealer and its salesperson in the transaction, and monthly account
statements showing the market value of each penny stock held in the customer's
account. In addition, the penny stock rules generally require that prior to a
transaction in a penny stock, the broker-dealer make a special written
determination that the penny stock is a suitable investment for the purchaser
and receive the purchaser's written agreement to the transaction. These
disclosure requirements may have the effect of reducing the level of trading
activity in the secondary market for a stock that becomes subject to the penny
stock rules. As
14
our shares immediately following this offering will likely be subject to such
penny stock rules, investors in this offering will in all likelihood find it
more difficult to sell their securities.
Because the risk factors referred to above could cause actual results or
outcomes to differ materially from those expressed in any forward-looking
statements made by us, you should not place undue reliance on any such
forward-looking statements. Further, any forward-looking statement speaks only
as of the date on which it is made and we undertake no obligation to update any
forward-looking statement or statements to reflect events or circumstances after
the date on which such statement is made or reflect the occurrence of
unanticipated events. New factors emerge from time to time, and it is not
possible for us to predict which will arise. In addition, we cannot assess the
impact of each factor on our business or the extent to which any factor, or
combination of factors, may cause actual results to differ materially from those
contained in any forward-looking statements.
15
ITEM 2: PROPERTIES
The Company leases certain office space and equipment under operating
leases.
In October 2001, the Company signed a 5-year lease commencing in December
2002, for approximately 4,500 square feet of office space at a monthly rental of
$9,116 through November, 2004 and $9,876 per month thereafter, plus an allocated
portion of certain operating expenses. The Company presently occupies these
facilities. The lease is personally guaranteed by the Company's Chief Executive
Officer.
ITEM 3: LEGAL PROCEEDINGS
None
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the security holders during the
fourth quarter of this fiscal period. However, at our Special Meeting of
Stockholders on February 3, 2006, stockholders approved the following:
Approval of an amendment of our Certificate of Incorporation to increase the
authorized number of shares of common stock from 75,000,000 shares to
200,000,000 shares.
For: 28,033,056 Against: 2,581,660 Abstain: 3,926
Total shares voted: 30,618,546 out of 55,318,497 eligible to vote.
As a result, on February 6, 2006, we amended our Certificate of Incorporation to
increase the authorized number of shares of common stock from 75,000,000 shares
to 200,000,000 shares.
16
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES
(a) Market Information
The Company's common stock currently trades in the OTC market and is
quoted on the Electronic Bulletin Board of the OTC market, under the symbol
MBTG. The following table sets forth, for the calendar quarters indicated during
the last two fiscal years and the first quarter of fiscal 2005, the high and low
quotations of the Company's common stock. The quotations reflect inter-dealer
prices, without retail mark-up, mark-down, or commission and may not represent
actual transactions. The market for the common stock has been sporadic and there
have been long periods during which there were few, if any, transactions in the
common stock and no reported quotations. Accordingly, reliance should not be
placed on the quotes listed below, as the trades and depth of the market may be
limited, and therefore, such quotes may not be a true indication of the current
market value of the Company's common stock.
OTC-BB
-------------------
High/Bid Low/Bid
-------- -------
2004
First Quarter ............... $ 0.85 $ 0.51
Second Quarter .............. 0.87 0.44
Third Quarter ............... 0.58 0.17
Fourth Quarter .............. 0.35 0.18
2005
First Quarter ............... $ 0.52 $ 0.25
Second Quarter .............. 0.60 0.32
Third Quarter ............... 0.49 0.27
Fourth Quarter .............. 0.48 0.28
2006
First Quarter ............... $ 0.51 $ 0.27
(b) Stockholders
As of April 12, 2006, there were approximately 534 stockholders of record
for the Company's Common Stock. The number of record holders does not include
stockholders whose securities are held in street names the Company estimates
over 1,000 holders in street names. In addition, there were approximately 10
holders of record of the Company's Series B Convertible Preferred Stock and 67
holders of record of the Company's Series C Preferred Stock.
(c) Dividends
The Company has not declared or paid, nor has it any present intention to
pay, cash dividends on its common stock. No cash dividends may be declared or
paid on the Company's Common Stock if, and as long as, the Series B Preferred
Stock is outstanding or there are unpaid dividends on outstanding shares of
Series C Preferred Stock. No dividends may be declared on the Series C Preferred
Stock if, and as long as, the Series B Preferred Stock is outstanding.
Accordingly, it is unlikely the Company will declare any cash dividends in the
foreseeable future.
17
Recent Issues of Unregistered Securities
During the fourth quarter of 2005 the Company issued the following
unregistered securities )*:
(i) 3,940,668 shares of common stock and warrants for the purchase of
550,000 common shares, exercisable at prices ranging from $0.35 to
$0.42 per share, to twenty accredited investors pursuant to a
private placement subscriptions under Section 4(2), Rule 506 of
Regulation D of the Securities Act, which resulted in the receipt by
the Company of $1,027,250 in cash.
(ii) 16,000 shares of common stock and warrants for the purchase of
425,000 common shares, exercisable at prices ranging from $0.25 to
$0.38 per share to five creditors in lieu of interest, and as
consideration for the extension of the due date of notes payable.
(iii) 100,000 shares of common stock pursuant to the conversion of a
$25,000 convertible promissory note.
(iv) 700,000 shares of common stock to a consultant for services
performed.
(v) Options for 9,977,979 shares of common stock, with simultaneous
cancellation of options for 1,795,008 shares, to six officers and
employees pursuant to the terms of their employment agreements.
The foregoing issuances of securities were private transactions and exempt from
registration under section 4(2) of the Securities Act and/or regulation D rule
506 promulgated under the Securities Act.
At December 31, 2005, stock certificates for an aggregate 3,655,717 shares
issuable for investments as well as for conversion of promissory notes and for
services rendered, had not yet been issued and the Company reclassified the
related equity contributions as current liabilities at year-end.
Information about common stock that may be issued upon the exercise of options
and warrants is contained in the Notes to Consolidated Financial Statements
attached hereto.
Securities authorized for issuance under equity compensation plans
NUMBER OF SECURITIES TO WEIGHTED-AVERAGE NUMBER OF SECURITIES
BE ISSUED UPON EXERCISE EXERCISE PRICE OF REMAINING AVAILABLE FOR
PLAN CATEGORY OF OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, WARRANTFUTURERISSUANCE UNDER
WARRANTS AND RIGHTS WARRANTS AND RIGHTS EQUITY COMPENSATION PLANS
- -------------------------------------------------------------------------------------------------------------
Equity compensation
plans approved by
security holders 0 -- 0
- -------------------------------------------------------------------------------------------------------------
Equity compensation
plans not approved by
security holders 0 -- 500,000
- -------------------------------------------------------------------------------------------------------------
Total 0 -- 500,000
Information about common stock that may be issued upon the exercise of options
and warrants is contained in the Notes to Consolidated Financial Statements
attached hereto.
18
Purchases of Equity Securities
None.
19
ITEM 6: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The selected financial information presented below under the captions
"Balance Sheet" and "Statement of Operations" for the years ended December 31,
2005 and 2004 is derived from the financial statements of the Company and should
be read in conjunction with the financial statements and notes thereto.
The financial data are those of Millennium Biotechnologies Group, Inc.
including the operations of Millennium Biotechnologies, Inc. All inter-company
accounts and transactions have been eliminated in consolidation.
SELECTED FINANCIAL DATA
Balance Sheet December 31,
2005
------------
Total assets ......................... $ 1,451,534
Current liabilities .................. 5,312,216
Long-term liabilities ................ 20,000
Working capital ..................... (3,915,425)
Shareholders' equity (deficit) ... $ (3,880,682)
Statement of Operations For the Year Ended December 31,
------------------------------
2005 2004
------------ -------------
Total revenues ....................... $ 797,987 $ 1,083,458
Operating income (loss) .............. (5,668,342) (4,886,365)
Net (loss) ........................... (6,949,472) (5,398,574)
Net loss per common share ............ $ (0.14) $ (0.14)
Number of shares used in computing
per share data ....................... 48,010,461 38,034,860
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2005 COMPARED TO THE YEAR
ENDED DECEMBER 31, 2004:
During the third quarter of 2005 the Company announced the development of
its latest product Resurgex Select(TM) which was designed to address the
nutritional needs of those undergoing cancer treatments. ThIS comprehensive,
high protein, high calorie, whole foods based nutritional formula is designed to
provide essential high quality nutrients in efforts as an alternative to the
poor quality ingredient formulas presently on the market. The Company the
commenced the marketing of Resurgex Select(TM) in the 4th quarter of 2005 in
conjunctiON with its national sales launch into the oncology market with
Cardinal Health's Shared Sales Force. The Cardinal Shares Sales Force is shared
with other companies resulting in approximately 20% of their time dedicated to
Millennium's sales efforts.
The Company launched a new website as well during the third quarter of
2005. The site, which provides ordering and product information for patients and
healthcare professionals on the Resurgex line of products, was designed by Blue
Diesel, a leading interactive communications agency serving the healthcare
industry. Blue Diesel is a subsidiary of inChord Communications Inc., one of the
top ten largest healthcare marketing organizations in the world. The launch of
the website was timed to coincide with the recent national launch of the
Resurgex Select(TM) line of products that focus on the nutritional needs of the
oncology patient undergoinG treatment.
20
During the fourth quarter of 2005 the Company was actively engaged in the
training and implementation phase associated with a national sales, marketing
and distribution campaign to expand the market share of the products the Company
manufactures. The national launch began early in the fourth quarter of 2005 and
provided for an additional 165 non-dedicated sales representatives; 14 District
Managers and 3 Regional Mangers nationwide. The product was accepted into the
oncology marketplace proven by the acceptance of over 1,000 taste and learning
stations in cancer institutions across the United States.
Total revenues generated from the sales of RESURGEX(R), RESURGEX PLUS(R),
and RESURGEX SELECT(TM) for thE YEar ended December 31, 2005 were $797,987 a
decrease of 26% from last year. The decrease in total revenues is attributable
to the redirection of the Company's resources into the oncology market.
Total revenues generated from the sales of RESURGEX(R), RESURGEX PLUS(R)
and RESURGEX SELECT(TM) foR THe quarter ended December 31, 2005 were
$163,118.48, a decrease of $148,193 or 48% from the fourth quarter 2004 which
had total revenues of $311,311.
At this stage in the Company's development, revenues are not yet
sufficient to cover ongoing operating expenses.
Gross profits for the year ended December 31, 2005 amounted to $209,646
for a 27% gross margin. Gross profits decreased $152,298 or 42% for the year
ended December 31, 2004 compared to $361,944 for the year ended December 31,
2004. The decrease in gross profits in 2005 was attributable to the decrease in
sales earned during the period which was due to the redirection of resources to
the oncology market.
After deducting research and development costs of $66,391 and selling,
general and administrative expenses of $5,811,597, the Company realized an
operating loss of $5,668,342. Included in selling, general and administrative
expenses are $2,438,071 non-cash outlays in the form of restricted stock and
warrants issued for professional fees, interest and compensation. As required by
current SEC guidelines the Company recorded such transactions at the fair market
price on the date of issuance. Non-operating expenses totaled $1,512,008 for the
year ended December 31, 2005.
The net result for the year ended December 31, 2005 was a loss of
$6,949,472 or $0.14 per share, compared to a loss of $5,398,574 or $0.14 per
share for the prior year. The years' 2004 and 2005 net results were
significantly affected by the need for expenditures in connection with setting
up the required marketing and sales operations resulting in increased operating
expenses. Management does not consider this atypical for a company engaged in
launching new products into new sectors. The Company will continue to invest in
further expanding its operations and a comprehensive marketing campaign with the
goal of accelerating the education of potential clients and promoting the name
and products of the Company. Given the fact that most of the operating expenses
are fixed or have quasi-fixed character management expects them to significantly
decrease as a percentage of revenues as revenues increase.
LIQUIDITY AND CAPITAL RESOURCES
The Company's business operations generally have been financed by new
equity investments through private placements with accredited investors. During
2005, the Company obtained new equity capital that supplied the majority of the
funds that were needed to finance operations during the reporting period. Such
new investments resulted in the receipt by the Company of $2,319,142. In
addition, the Company obtained $1,011,750 from borrowings, net of debt
repayments, through issuance of promissory notes, some of which are convertible
at the option of the holders into common shares at a rate of $0.25 per share
(see Note 8 to Financial Statements"). While these funds sufficed to compensate
for the negative cash flow from operations they were not sufficient to build up
a liquidity reserve. As a result, the Company's financial position at the end of
the year was severely constrained, with working capital showing a deficit of
$3,840,425. During the fourth quarter of 2005 and in the first quarter of 2006
the Company obtained new loans totaling $495,000 to fund ongoing working capital
requirements. We need to continue to raise funds to cover working capital
requirements until we are able to raise revenues to a point of positive cash
flow. See "Risk Factors: We require
21
additional funding to maintain our operations and to further develop our
business. Our inability to obtain additional financing would have an adverse
effect on our business" in Item 1. Business above.
On April 5, 2006, as noted in the Company's Current Report on Form 8-K filed
with the SEC on April 6, 2006, the Company announced that it has entered into a
letter of intent with an investment fund which, if consummated, would result in
the sale by Millennium's wholly owned subsidiary of all of the assets used in
Millennium's nutraceutical business to a newly formed company in exchange for
shares of common stock of the new company. The newly formed company would be
initially capitalized by the issuance of $15 million in convertible preferred
stock. The letter of intent, which has been filed as an exhibit to the Current
Report on Form 8-K, is nonbinding and is subject to various conditions,
including completion of due diligence by the investment fund and approval by
Millennium's stockholders.
22
NEW ACCOUNTING PRONOUNCEMENTS
In 2004, the FASB issued SFAS Statement No. 151, "Inventory Costs, an
Amendment of ARB No. 43, Chapter 4". This Statement amends the guidance in
ARB No. 43, Chapter 4 "Inventory Pricing" to clarify the accounting for
abnormal amounts of idle facility expense, freight, handling costs and
wasted materials (spoilage). His Statement requires that those items be
recognized as current-period charges regardless of whether they meet the
criterion of "so abnormal". In addition, this Statement requires the
allocation of fixed production overheads to the costs of conversion be
based on the normal capacity of the production facilities. The provisions
of this Statement shall be effective for inventory costs incurred during
fiscal years beginning after June 15, 2005. Earlier application is
permitted for inventory costs incurred during fiscal years beginning after
the date this Statement is issued. The provisions of this Statement shall
be applied prospectively. The adoption of this Statement is not expected
to have a significant impact on the Company's results of operation or
financial position.
In December 2004, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 154, Accounting
Changes and Error Corrections - a replacement of APB Opinion No. 20 and
FASB Statement No. 3. SFAS No. 154 requires retrospective application to
prior periods' financial statements of changes in accounting principle,
unless it is impracticable to determine either the period-specific effects
or the cumulative effect of the change. SFAS No. 154 also requires that
retrospective application of a change in accounting principle be limited
to the direct effects of the change. Indirect effects of a change in
accounting principle, such as a change in nondiscretionary profit-sharing
payments resulting from an accounting change, should be recognized in the
period of the accounting change. SFAS No. 154 also requires that a change
in depreciation, amortization or depletion method for long-lived,
non-financial assets be accounted for as a change in accounting estimate
effected by a change in accounting principle.
SFAS No. 154 is effective for accounting changes and corrections of errors
made in fiscal years beginning after December 15, 2005. Early adoption is
permitted for accounting changes and corrections of errors made in fiscal
years beginning after the date this Statement is issued. Management does
not expect the implementation of this new standard to have a material
impact on the Company's financial position, results of operations and cash
flows.
In December 2004, the FASB issued SFAS No.123 (revised 2004), "Share-Based
Payment". Statement 123(R) will provide investors and other users of
financial statements with more complete and neutral financial information
by requiring that the compensation cost relating to share-based payment
transactions be recognized in financial statements.
That cost will be measured based on the fair value of the equity or
liability instruments issued. Statement 123(R) covers a wide range of
share-based compensation arrangements including share options, restricted
share plans, performance-based awards, share appreciation rights, and
employee share purchase plans. Statement 123(R) replaces FASB Statement
No. 123, Accounting for Stock-Based Compensation, and supersedes APB
Opinion No. 25, Accounting for Stock Issued to Employees. Statement 123,
as originally issued in 1995, established as preferable a fair-value-based
method of accounting for share-based payment transactions with employees.
However, that Statement permitted entities the option of continuing to
apply the guidance in Opinion 25, as long as the footnotes to financial
statements disclosed what net income would have been had the preferable
fair-value-based method been used. Public entities (other than those
filing as small business issuers) will be required to apply Statement
123(R) as of the first interim or annual reporting period that begins
after June 15, 2005.
In March 2005, the SEC released Staff Accounting Bulletin No. 107,
"Share-Based Payment" ("SAB 107"), which provides interpretive guidance
related to the interaction between SFAS 123(R) and certain SEC rules and
regulations. It also provides the SEC staff's views regarding valuation of
share-based payment arrangements. In April 2005, the SEC amended the
compliance dates for SFAS 123(R), to allow companies to implement the
23
standard at the beginning of their next fiscal year, instead of the next
reporting period beginning after June 15, 2005.
On August 31, 2005, the FASB issued FASB Staff Position FSP FAS 123R-1,
"Classification and Measurement of Freestanding Financial Instruments
Originally Issued in Exchange for Employee Services under FASB Statement
No. 123R." In this FSP, the FASB decided to defer the requirements in FASB
Statement No. 123 (Revised 2004), Share-Based Payment, that make a
freestanding financial instrument subject to the recognition and
measurement requirements of other GAAP when the rights conveyed by the
instrument are no longer dependent on the holder being an employee. The
guidance in this FSP should be applied upon initial adoption of Statement
123R. The FSP includes transition guidance for those entities that have
already adopted Statement 123R in their financial statements.
The Company does not expect that the adoption of SFAS 123(R) and the
implementation of this new standard to have a material impact on the
Company's financial position, results of operations and cash flows.
DISCLOSURE ABOUT OFF-BALANCE SHEET ARRANGEMENTS
We do not have any transactions, agreements or other contractual
arrangements that constitute off-balance sheet arrangements.
"CRITICAL ACCOUNTING POLICIES
Our Management's Discussion and Analysis of Financial Condition and
Results of Operations section discusses our consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States of America. The preparation of these financial
statements requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. On an on-going basis, management evaluates its estimates and
judgments, including those related to revenue recognition, accrued expenses,
financing operations, and contingencies and litigation. Management bases its
estimates and judgments on historical experience and on various other factors
that are believed to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying value of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions. The most
significant accounting estimates inherent in the preparation of our financial
statements include estimates as to the appropriate carrying value of certain
assets and liabilities which are not readily apparent from other sources. These
accounting policies are described at relevant sections in this discussion and
analysis and in the notes to the consolidated financial statements included in
this Annual Report."]
REVENUE RECOGNITION
Revenue is recognized at the date of shipment to customers provided that
the resulting receivable is deemed probable of collection.
ITEM 7: FINANCIAL STATEMENTS
The Company's Financial Statements and Notes to Financial Statements have
been prepared in accordance with the requirements of Item 310(a) of Regulation
S-B and are and are included at the end of this Annual Report on Form 10-KSB.
24
ITEM 8: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
As disclosed in our Current Report on Form 8-K filed with the Commission
on April 1, 2005, on March 31, 2005 Rosenberg Rich Baker Berman & Company
("RRBB") resigned as our principal independent registered public accounting firm
and we engaged Bagell, Josephs & Company, L.L.C. as our independent registered
public accounting firm to audit our financial statements. There were no
disagreements with RRBB on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of RRBB, would have caused
RRBB to make reference to the matter in its reports.
Aside from the foregoing, there have been no changes in or disagreements
with the Registrant's independent auditors during the last two years.
ITEM 8A: CONTROLS AND PROCEDURES
a) Evaluation of Disclosure Controls and Procedures
The term "disclosure controls and procedures" is defined in Rules 13a-15(e) and
15d-15(e) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). This term refers to the controls and procedures of a company that are
designed to ensure that information required to be disclosed by a company in the
reports that it files under the Exchange Act is recorded, processed, summarized,
and reported within the required time periods. Our Chief Executive Officer and
our Chief Financial Officer have evaluated the effectiveness of our disclosure
controls and procedures as of the end of the period covered by this annual
report. They have concluded that, as of that date, our disclosure controls and
procedures were effective at ensuring that required information will be
disclosed on a timely basis in our reports filed under the Exchange Act.
(b) Changes in Internal Control over Financial Reporting
No change in our internal control over financial reporting (as defined in Rules
13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the period
covered by this report that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
ITEM 8 B: OTHER INFORMATION
None.
PART III
ITEM 9: DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT
Information about all directors and executive officers of the Company are as
follows:
Name Position Term(s) of Office
- --------------------- ------------------------------------ ------------------
Jerry E. Swon, 56 President, Chief Executive Officer, Jul.27, 2001 until present
Chairman of the Board of the Company
25
Frank Guarino, 31 Chief Financial Officer Oct.15, 2001 until present
Michael G. Martin, 54 Company Director Oct.15, 2001 until present
David Sargoy, 46 Company Director Oct.15, 2001 until present
Carl Germano, 51 Executive Vice President, Research May 15, 2001 until present
and Product Development
- ----------
There are no other family relationships among the Company's officers and
directors. All directors hold office until the next annual meeting of
stockholders and the election and qualification of their successors. Vacancies
on the Board of Directors may be filled by the remaining directors until the
next annual stockholders' meeting. Officers serve at the discretion of the
Board.
A summary of the business experience for each of our officers and
directors is as follows:
Jerry E. Swon
Mr. Swon, a founder of Millennium, has been Millennium's President and
Chief Executive Officer since its formation, and the Company's President, Chief
Executive Officer and Chairman of the Board since July 27, 2001. Prior to
joining Millennium, and since 1992, Mr. Swon was the Chief Executive Officer of
Royal Capital Inc., a New Jersey based company, which provided financial
consulting and corporate structuring services to private and public companies.
In 1998, Mr. Swon served as Chief Executive Officer and as a Director of
Magnitude Information Systems Inc., a company engaged in the design and
development of ergonomic software for office uses. Mr. Swon was also co-founder
of the Tax Transfer Corporation of New Jersey in 1999. Mr. Swon received a B.A.
degree from Hamline University in 1972.
Frank Guarino
Mr. Guarino has been Millennium's Chief Financial Officer since October
15, 2001. Mr. Guarino was previously employed from December 1997 through
February 2001 as the Controller for First National Funding Corporation of
America, a mortgage banking firm with 55 branches nationwide producing over $350
million dollars in annual volume at the time of his departure. Mr. Guarino
earned a BS degree in Accounting from St. Peter's College in 1997
Michael G. Martin
Mr. Martin was appointed a Director of the Company on October 15, 2001. In
1991, Mr. Martin founded Magnitude, Inc. (then known as Proformix, Inc.), a
company engaged in the design and development of ergonomic software for office
uses. Mr. Martin served as the Chairman and President of Magnitude, Inc. and its
parent, Magnitude Information Systems Inc. from 1991 until 1999. Since June
2000, Mr. Martin has served as the director of business development for the
Behrle Group, a regional interior office design company. Mr. Martin received a
B.A. degree from Bloomsburg State College in 1972.
David Sargoy
Mr. Sargoy was appointed a Director of the Company on October 15, 2001.
From January 1997 to the present, Mr. Sargoy has been a Director of the
commercial real estate division of Brown Harris Stevens. Prior to 1997, Mr.
Sargoy
26
was a partner in Willrock L.I. Inc., a commercial real estate company. Mr.
Sargoy received a Bachelor of Science degree from Ithaca College in 1979 and an
M.B.A. from Washington University in 1981.
Carl Germano
Mr. Germano serves as Millennium's Executive Vice President of New Product
Development & Research. He is a registered, certified and licensed nutritionist.
Mr. Germano holds a master's degree in clinical nutrition from New York
University and has over 22 years experience using innovative, complementary
nutritional therapies in private practice. For the last 15 years he has
dedicated his efforts to research and product development for the nutritional
supplements industry, where he has been instrumental in bringing cutting-edge
nutritional substances and formulations to the health/dietary supplement
industry. From April 1999 to July 2001, Mr. Germano was Senior Vice President of
Research and Product Development for Nutratech, Inc., a nutraceutical raw
materials supplier. From 1992 to 1999, he was Vice President of Product
Development and Research for Solgar Vitamin and Herb, a division of American
Home Products Corporation.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
To our knowledge, based solely on a review of such materials as are
required by the Securities and Exchange Commission, no officer, director or
beneficial holder of more than ten percent of our issued and outstanding shares
of common stock failed to file in a timely manner with the Securities and
Exchange Commission any form or report required to be so filed pursuant to
Section 16(a) of the Securities Exchange Act of 1934 during the fiscal year
ended December 31, 2005 except for Messrs. Jerry E. Swon, David Sargoy, Michael
Martin, Bruce Deichl, Frank Guarino who are currently late in filing forms 4
pertaining to certain security acquisitions from the Company in 2005.
Audit Committee and Audit Committee Expert
Audit Committee. We have an audit committee consisting of 2 members. Our
securities are not listed on a national securities exchange. Accordingly, all
members of the audit committee are not required to be independent. We do not
have a financial expert as defined in Securities and Exchange Commission rules
on the committee in the true sense of the description. However, Mr. Martin is a
businessman and has 20 years of experience working with budgets, analyzing
financials and dealing with financial institutions.
Corporate Governance And Code Of Ethics
The Company has always been committed to good corporate governance. In
furtherance of this commitment, in February 2003 the Board of Directors
appointed an Audit Committee whose duties specifically include responsibility
and oversight of corporate governance matters and adherence to the Company's
Code of Ethics.
A copy of the Corporate Code of Ethics and Conduct was set forth as an
exhibit to Form 10-KSB for the fiscal year ended December 31, 2002, and is
included herein by reference. A copy may be obtained free of charge by
submitting a request in writing to the Company at the address shown on the first
page of this report.
27
ITEM 10: EXECUTIVE COMPENSATION
The following table sets forth the cash compensation and executive
capacities for the fiscal years ended December 31, 2005, December 31, 2004, and
December 31, 2003, for the chief executive officer and for each executive
officer whose aggregate cash remuneration exceeded $100,000:
- ---------------------------------------------------------------------------------------------------------------------------------
Other Securities All
Annual Restricted Underlying Other
Name and Salary ($) Directors Compensation($) Stock Options ($) Compens.($)
Principal Position Year (1) Fee ($) (2) Awards ($) (3) (6)
- ---------------------------------------------------------------------------------------------------------------------------------
Jerry E. Swon (4) 2005 300,000 25,000 18,000 -- --
Chief Executive Officer, 2004 310,577 25,000 18,000 43,125 --
President 2003 274,293 -- 18,000 122,885 --
- ---------------------------------------------------------------------------------------------------------------------------------
Carl Germano (5) 2005 200,000 -- -- -- -- --
Exec. Vice President 2004 192,697 -- 6,300 -- -- --
2003 127,576 -- 2,700 -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
- ----------
(1) The value of other non-cash compensation, except for the items listed
under (2), (3), (4) and (5), that was extended to or paid for individuals
named above did not exceed 10% of the aggregate cash compensation paid to
such individual, or to all executive officers as a group.
(2) Consists of automobile expenses allowances.
(3) The Company did not expense options and warrants granted to the named
executives in the years 2002 to 2004. Beginning with the year 2005 the
Company recognized expenses for options and warrants granted to employees
on the basis of fair value calculated using the Black-Scholes formula (see
below).
(4) The "Salary" figure for 2004 include $8,955 which was paid by the Company
for certain expenses incurred by Mr. Swon. Mr. Swon also received as
remuneration for his services as a director of the Company in 2005 a
payment of $25,000 and in 2004 a payment of $25,000, listed in the
"Directors Fee" column, as well as 62,500 restricted common shares in 2004
which are listed in the "Restricted Stock Awards" column. The "Salary"
figure for 2003 includes $127,947 paid in form of 492,104 restricted
common shares. In 2005, Mr. Swon also received stock options for an
aggregate 5,000,000 shares, exercisable at $0.50 per share which vest over
time subject to the attainment by the Company of certain revenue goals. If
fully vested such options, priced in accordance with the Black-Scholes
formula, would be expensed at a total of $1,105,000.
(5) In 2005, Mr. Germano received options for a total of 1,708,979 shares,
exercisable at prices between $0.01 and $0.25 per share. Such options are
being expensed at a total of $576,897 in accordance with valuations
pursuant to the Black-Scholes formula. Simultaneously with the grant of
these options, previously issued options for 1,127,076 shares, exercisable
at $0.37 per share, were cancelled. In 2004, Mr. Germano received warrants
to purchase 150,000 common shares of the Company, exercisable at $0.25 per
share, and pursuant to the terms of his employment agreement options to
purchase 281,769 common shares, exercisable at $0.37 per share, and
pursuant to an amendment of his employment agreement further 202,854
options, exercisable at $0.37 per share. In 2003, Mr. Germano received
pursuant to the terms of his employment agreement, options to purchase
180,342 common shares, exercisable at $0.37 per share. Not included in the
figures for 2003 are $72,424 deferred salary and $8,100 accrued unpaid
automobile expense allowance.
STOCK OPTIONS /STOCK PURCHASE WARRANTS:
The following table sets forth options and stock purchase warrants granted
during 2005, to executive officers, certain other employees with highest
remuneration, directors, and beneficial owners of more than 10 percent of any
class of equity securities of the Company:
- --------------------------------------------------------------------------------
Number of Common % of Total Options/Warrants
Shares Underlying Granted to Employees
28
Options and and Directors Exercise Expiration
Name Warrants Granted in FY 2005 Price ($/Sh.) Date
- -------------------------------------------------------------------------------------------------------
Jerry E. Swon 5,000,000)* 50 $0.50 11/11/10
Frank Guarino 600,000)** 6 $0.01 11/11/08
Frank Guarino 334,000 3 $0.37 11/11/10
Carl Germano 1,408,979 14 $0.01 12/31/10
Carl Germano 300,000 3 $0.25 12/31/10
- ----------
)* vesting of these options subject to the attainment of certain revenue goals.
)** in addition to 100,000 restricted common shares granted outright.
There were no exercises of stock options or warrants during 2005 by
executive officers, other employees with highest remuneration, directors or
beneficial owners of more than 10 percent of any class of equity securities of
the Company:
COMPENSATION OF OUR DIRECTORS
During 2005, each of three directors was awarded a bonus of $25,000 for a
total $75,000, of which $25,000 was paid in cash. The remainder, together with
$50,000 bonus accrued from 2004, was paid in form of 466,532 restricted common
shares.
EMPLOYMENT AGREEMENTS
Certain employees have received employment agreements the details of which
are outlined in the section "Employment Agreements" in the Notes to the
Financial Statements attached as an exhibit to this report.
ITEM 11: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table sets forth, as of March 31, 2006, the record and
beneficial ownership of common stock of the Company by each executive officer
and director, all executive officers and directors as a group, and each person
known to the Company to own beneficially, or of record, five percent or more of
the outstanding shares of the Company:
Title Name and Address of Amount and Nature of Percent
of Class Beneficial Owner Beneficial Ownership (1) of Class
- --------- ---------------- ------------------------ --------
Common Jerry E. Swon 1,870,390 (2) 3.3 %
Stock Frank Guarino 914,000 (3) 1.5 %
Carl Germano 2,092,313 (4) 3.3 %
Michael G. Martin 479,099 (5) **
David Sargoy 491,099 (6) **
Jane Swon 3,295,177 (7) 5.2 %
P. Elayne Wishart 4,573,289 (8) 7.2 %
Louis C. Rose 3,422,430 (9) 5.5 %
All Directors and Executive Officers 5,846,901 10.1 %
as a Group (5 persons)
Address of all persons above: c/o the Company.
29
- ----------
(1) For purposes of this table, a person or group of persons is deemed to have
"beneficial ownership" of any shares of common stock which such person has
the right to acquire within 60 days of March 31, 2006. For purposes of
computing the percentage of outstanding shares of common stock held by
each person or group of persons named above, any security which such
person or persons has or have the right to acquire within such date is
deemed to be outstanding but is not deemed to be outstanding for the
purpose of computing the percentage ownership of any other person. Except
as indicated in the footnote to this table and pursuant to applicable
community property laws, the Company believes based on information
supplied by such persons, that the persons named in this table have sole
voting and investment power with respect to all shares of common stock
which they beneficially own.
(2) Includes 183,333 shares issuable upon exercise of options and warrants.
These options and warrants have a cashless exercise provision and include
certain piggyback registration rights. Does not include any securities
owned by Jane Swon, Mr. Swon's spouse, as to which securities Mr. Swon
disclaims beneficial ownership.
(3) Includes 764,000 shares issuable upon exercise of warrants. (4) Mr.
Germano holds options to purchase 1,708,979 shares of the Company's
common stock. Also included are shares issuable upon exercise of warrants
to purchase 241,667 shares of Company common stock. All of these options
and warrants have a cash-less exercise provision.
(5) Includes 183,333 shares issuable upon exercise of warrants. These warrants
have a cash-less exercise provision and include certain piggyback
registration rights.
(6) Includes 183,333 shares issuable upon exercise of warrants. These warrants
have a cash-less exercise provision and include certain piggyback
registration rights.
(7) Includes warrants to purchase 1,068,692 shares of the Company's common
stock. Jerry E. Swon, Ms. Swon's husband, disclaims beneficial ownership
of all Company securities owned by Ms. Swon.
(8) Includes warrants to purchase 1,068,692 shares of the Company's common
stock. Does not include securities of the Company owned by Bruce Deichl,
Ms. Wishart's husband, as to which securities Mrs. Wishart disclaims
beneficial ownership.
(9) Includes warrants to purchase 75,000 shares of the Company's common stock.
- ----------
** Less than 1%
ITEM 12: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On January 11, 2001 Millennium entered into an Investment and Assignment
Agreement with David Miller, a founding shareholder of the Company.
Pursuant to the agreement, Mr. Miller assigned to Millennium all of his
rights, title and interest to all formulations, material and technologies
made, invented or developed by him which relate in any way to
nutraceutical supplements and also granted Millennium the exclusive right
to patent and trademark any such inventions. In consideration of the
assignment, Millennium issued 2,671,729 shares of its common stock to Mr.
Miller and granted to him a perpetual royalty equal to 3.33% of the gross
sales of RESURGEX(R) AND RESURGEX PLUS(R) and 3.3% of the gross profit
from the sale of any additional products of Millennium. During the first
quarter of 2005 Mr. Miller and Jane Swon entered into an agreement whereby
among others Miller transferred $93,650 in accrued royalties and a
promissory note for $50,000 to Jane Swon. In accordance with instructions
by Jane Swon, the Company subsequently settled this note with payment of
the principal to the Company's chief executive officer.
On January 11, 2001 Millennium entered into Royalty and Investment
Agreements with Jane Swon (spouse of Jerry E. Swon) and P. Elayne Wishart
(spouse of former Chief Operating Officer and Director Bruce Deichl).
Pursuant to such agreements, Ms. Swon and Ms. Wishart were each issued
4,007,594 shares of Millennium common stock for consideration of $25,000
each. In addition, Ms. Swon and Ms. Wishart each paid Millennium $25,000
for a perpetual royalty pursuant to which they are each entitled to 3.3%
of the gross sales of RESURGEX(R) and RESURGEX PLUS(R) and 3.3% of the
gross profit from the sale of any additional products. The $50,000
consideration is being amortized over 10 years to additional
paid-in-capital.
30
ITEM 13: EXHIBITS
Exhibit Description
- ------- ----------------------------------------------------------------------
3.1 Certificate of Incorporation and Bylaws of the Company.(1)
3.2 Certificate of Incorporation and Bylaws of Millennium.*
4.1 Certificate of Designations filed July 26, 2001*
10.1 Agreement and Plan of Reorganization between the Company, Millennium
and the Stockholders of Millennium dated July 26, 2001.(2)
10.2 License Agreement with Isocell SA.(3)
10.3 Royalty and Investment Agreement between Millennium and P. Elayne
Wishart dated January 11, 2001.*
10.4 Royalty and Investment Agreement between Millennium and Jane Swon
dated January 11, 2001.*
10.5 Royalty and Investment Agreement between Millennium and David Miller
dated January 11, 2001.*
10.6 Employment Agreement between Millennium and Jerry E. Swon dated April
1, 2001.*
10.7 Employment Agreement between Millennium and Bruce Deichl dated April
1, 2001.*
10.8 Letter of Intent, among Millennium Biotechnologies Group, Inc.,
Millennium Biotechnologies Inc., Aisling Capital II, LP, dated April
5, 2006 (5)
21 Subsidiaries of the Company: (i) Millennium Biotechnologies, Inc. is a
corporation formed under the laws of the State of Delaware and is the
name under which it conducts business.
14 Corporate Code of Ethics and Business Conduct (4)
23.1 Consent of Bagell, Josephs & Company, L.L.C., Independent Registered
Public Accounting Firm.
31.1 Certification of Jerry E. Swon, Chief Executive Officer, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Frank Guarino, Chief Financial Officer, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Jerry E. Swon, Chief Executive Officer, pursuant to
Sections 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section
1350.
31
32.2 Certification of Frank Guarino, Chief Financial Officer pursuant to
Sections 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section
1350.
- ----------
* Previously filed as an exhibit to the Company's Annual Report on Form
10-KSB for the fiscal year ended July 31, 2001.
(1) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
for the fiscal year ended July 31, 1981, and incorporated herein by
reference.
(2) Previously filed as an exhibit to the Company's report on Form 8-K filed
on August 10, 2001, and incorporated herein by reference.
(3) Portions of this Exhibit were omitted and have been filed separately with
the Secretary of the Securities and Commission pursuant to the Company's
Application requesting Confidential Treatment under Rule 406 of the
Securities Act of 1933.
(4) Previously filed as an exhibit to the Company's Annual report on Form
10-KSB for the fiscal year ended December 31, 2002.
(5) Previously filed as an exhibit to the Company's report on Form 8-K filed
on April 5, 2006, and incorporated herein by reference.
ITEM 14: PRINCIPAL ACCOUNTANT FEES AND SERVICES
AUDIT FEES
Rosenberg Rich Baker Berman & Company ("Rosenberg") billed us in the
aggregate amount of $61,684 for professional services rendered for their reviews
of the financial statements included in our Forms 10-QSB for the year ended
December 31, 2004. Bagell, Josephs, & Company L.L.C. ("Bagell") billed us
$26,000 for professional services rendered from their audits and reviews of our
annual financial statements for the year ended December 31, 2005 included in
this Form 10-KSB and $15,000 for audit services pertaining to the year 2004.
AUDIT-RELATED FEES
Rosenberg and Bagell did not bill us for, nor perform professional
services rendered for assurance and related services that were reasonably
related to the performance of audit or review of the Company's financial
statements for the fiscal years ended December 31, 2005 and December 31, 2004.
TAX FEES
Rosenberg billed us in the aggregate amount of $3,433 for professional
services rendered for tax related services for the fiscal year ended December
31, 2004. Bagell billed us in the aggregate amount of $0.00 for professional
services rendered for tax related services for the fiscal year ended December
31, 2005.
32
ALL OTHER FEES
The aggregate fees billed by Rosenberg for services rendered to the
Company during the last two fiscal years, other than as reported above, were $0
and $0, respectively. The aggregate fees billed by Bagell for services rendered
to the Company during the last two fiscal years, other than as reported above,
were $0 and $0, respectively.
33
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act, the
Registrant has caused this Report to be signed on its behalf by the undersigned,
thereunto duly authorized.
MILLENNIUM BIOTECHNOLOGIES GROUP, INC.
By: /s/ Jerry E. Swon Date: April 17, 2006
-------------------------------------
Jerry E. Swon
President and Chief Executive Officer
(Principal Executive Officer),
Chairman of the Board
By: /s/ Frank Guarino Date: April 17, 2006
-------------------------------------
Frank Guarino
Chief Financial Officer
(Principal Financial Officer)
In accordance with the requirements of the Securities Exchange Act, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Name Date
/s/ Jerry E. Swon April 17, 2006
------------------------------
Jerry E. Swon, Director
/s/ Michael G. Martin April 17, 2006
------------------------------
Michael G. Martin, Director
/s/ David Sargoy April 17, 2006
------------------------------
David Sargoy, Director
34
MILLENNIUM BIOTECHNOLOGIES GROUP, INC.
AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
35
MILLENNIUM BIOTECHNOLOGIES GROUP, INC. AND SUBSIDIARY
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
Page
Reports of Independent Registered Public Accounting Firm.................. 1
Financial Statements
Consolidated Balance Sheet........................................... 2
Consolidated Statements of Operations................................ 3
Consolidated Statement of Stockholders' Equity (Deficit)............. 4-5
Consolidated Statements of Cash Flows................................ 6-7
Notes to the Consolidated Financial Statements....................... 8-28
36
BAGELL, JOSEPHS & COMPANY, LLC
200 HADDONFIELD BERLIN ROAD, GIBBSBORO, NJ 08026
TEL: 856.346.2628 FAX: 856.346.2882
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders'
Millennium Biotechnologies Group, Inc.
Basking Ridge, NJ 07920
We have audited the accompanying consolidated balance sheets of Millennium
Biotechnologies Group, Inc. and Subsidiary as of December 31, 2005 and 2004, and
the related consolidated statements of operations, stockholders' equity
(deficiency) and cash flows for the years then ended. 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 standards established by the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audits 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 consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Millennium
Biotechnologies Group, Inc. and Subsidiary as of December 31, 2005 and 2004, and
the results of its operations and its cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States of
America.
The accompanying consolidated financial statements for December 31, 2005 and
2004 have been prepared assuming the Company will continue as a going concern.
As discussed in Note 8 to the consolidated financial statements, the Company has
sustained operating loses and accumulated deficit that raise substantial doubt
about its ability to continue as a going concern. Management's operating and
financing plans in regard to these matters are also discussed in Note 8. The
consolidated financial statements do not include any adjustments that might
result from the outcome of these uncertainties.
BAGELL, JOSEPHS & COMPANY, LLC
BAGELL, JOSEPHS & COMPANY, LLC
Gibbsboro, New Jersey
April 12, 2006
1
MILLENNIUM BIOTECHNOLOGIES GROUP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2005
Assets
Current Assets:
Cash $ 54,105
Accounts receivable, net of allowance for doubtful accounts of $20,000 195,689
Inventories 962,782
Prepaid expenses 76,384
Miscellaneous receivables 107,831
------------
Total Current Assets 1,396,791
Property and equipment, net of accumulated depreciation of $102,912 27,417
Patents, net of accumulated amortization of $2,543 8,974
Deposits 18,352
------------
Total Assets 1,451,534
============
Liabilities and Stockholders' Equity (Deficit)
Current Liabilities:
Accounts payable and accrued expenses 2,732,428
Liability for stock issuances 660,851
Current maturities of long-term debt 83,750
Short-term debt 1,835,187
------------
Total Current Liabilities 5,312,216
Accrued royalties, long-term portion 20,000
------------
Total Liabilities 5,332,216
Stockholders' Equity (Deficit)
Preferred stock, par value $1,810,360 shares authorized, none issued and
outstanding:
Convertible Series B, 65,141 shares issued and outstanding; 130,282
at redemption value
Cumulative Series C, non-voting 64,763 shares issued and outstanding 64,763
Convertible Series D, voting, 0 shares issued and outstanding --
Common stock, par value $0.001; authorized 200,000,000 shares; issued 52,961
and outstanding 52,961,114 shares
Additional paid-in capital 18,987,939
Deferred compensation (282,235)
Accumulated Deficit (22,834,392)
------------
Total Stockholders' Equity (Deficit) (3,880,682)
------------
Total Liabilities and Stockholders' Equity (Deficit) $ 1,451,534
============
The accompanying notes are an integral part of the consolidated financial
statements.
2
MILLENNIUM BIOTECHNOLOGIES GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
----------------------------
2005 2004
------------ ------------
Net Sales $ 797,987 $ 1,083,458
Cost of Sales 588,341 721,514
------------ ------------
Gross Profit 209,646 361,944
Research and development costs 66,391 65,272
Selling, general and administrative expenses 5,811,597 5,183,037
------------ ------------
Loss from operations (5,668,342) (4,886,365)
------------ ------------
Other expense
Loss on disposal of assets (259,862) (314)
Miscellaneous non-operating expenses (176,019) --
Interest and financing expense (665,687) (722,523)
Beneficial conversion feature (410,440) --
------------ ------------
Net loss before taxes (7,180,350) (5,609,202)
Benefit from income taxes 230,878 210,628
------------ ------------
Net Loss (6,949,472) (5,398,574)
============ ============
Net Loss Per Common Share $ (0.14) $ (0.14)
============ ============
Weighted average number of common shares outstanding 48,010,461 38,034,860
============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
3
MILLENNIUM BIOTECHNOLOGIES GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
Preferred Stock Common Stock
--------------------------------------------------------- ------------------
Convert- Convert- Convert- Convert-
ible ible Cumulative Cumulative ible ible Additional
Series B Series B Series C Series C Series D Series D Paid in Accumulated
Shares Amount Shares Amount Shares Amount Shares Amount Capital Deficit Total
-------- -------- ---------- ---------- -------- -------- ---------- ------- ----------- ------------ ----------
Balance,
January 1,
2004 65,141 $130,282 64,763 $ 64,763 -- $ -- 30,286,819 $30,286 $9,325,358 $(10,486,345) $ (935,656)
Issuance
of
common 7,458,034 7,458 2,518,177 2,525,635
stock -
private
placements
Issuance
of
common 1,401,981 1,402 282,571 283,973
stock
pursuant
to
exercise
of
warrants
Issuance
of
common 387,559 388 260,531 260,919
stock
for
compensation
Issuance
of
common 699,999 700 242,300 243,000
stock
pursuant
to
note
conversion
Issuance
of
common 444,442 445 252,418 252,863
stock
for
interest
and loan
origination
fees
Issuance
of
common 2,045,065 2,045 1,346,218 1,348,263
stock
for
services
Repurchase
and (100,000) (100) (29,900) (30,000)
cancellation
of
common
shares
Issuance
of stock 437,112 437,112
warrants
for
services
Issuance
of stock 8,460 8,460
warrants
for
interest
Amortization
of 5,000 5,000
equity
investment
versus
deferred
royalties
Net (loss) (5,398,575) (5,398,575)
-------- -------- ---------- ---------- -------- -------- ---------- ------- ----------- ------------ ----------
Balance,
December 65,141 $130,282 64,763 $ 64,763 -- $ -- 42,623,899 $42,624 $14,648,245 $(15,884,920) $ (999,006)
31, 2004
======== ======== ========== ========== ======== ======== ========== ======= =========== ============ ==========
The accompanying notes are an integral part of the consolidated financial
statements.
4
MILLENNIUM BIOTECHNOLOGIES GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
Preferred Stock Common Stock
----------------------------------------------- ------------------
Conver- Conver- Cumul- Cumul- Conver- Conver- tible tible ative
ative tible tible
Series Series Series Series Series Series Deferred Additional
B B C C D D Compen- Paid in Accumulated
Shares Amount Shares Amount Shares Amount Shares Amount sation Capital Deficit Total
------- -------- ------ ------- ------- ------- ---------- ------- --------- ----------- ------------ -----------
Balance,
January 1,
2005 65,141 $130,282 64,763 $64,763 -- $ -- 42,623,899 $42,624 $ -- $14,648,245 $(15,884,920) $ (999,006)
Issuance
of
common
stock -
private
placements 4,321,702 4,322 1,118,098 1,122,420
Issuance
of
common
stock
pursuant
to
exercise
of
warrants 2,418,689 2,419 619,913 622,332
Issuance
of
common
stock
for
compensation 466,532 466 99,534 100,000
Issuance
of
common
stock
pursuant
to
note
conversion 913,334 913 244,087 245,000
Issuance
of
common
stock
for
interest
and loan
origination
fees 466,952 467 206,666 207,133
Issuance
of
common
stock
for
services 1,750,000 1,750 641,950 643,700
Finder's
fee paid (86,460) (86,460)
Emloyee
stock
options 972,532 972,532
Change in
deferred
compensation (282,235) (282,235)
Issuance
of stock
warrants
for note
due date
extensions 107,934 107,934
Beneficial
conversion
rights of
convertible
notes 410,440 410,440
Amortization
of equity
investment
versus
deferred
royalties 5,000 5,000
Net (loss) (6,949,472) (6,874,472)
------- -------- ------ ------- ------- ------- ---------- ------- --------- ----------- ------------ -----------
Balance,
December 31, 65,141 $130,282 64,763 $64,763 -- $ -- 52,961,114 $52,961 $(282,235) $18,987,939 $(22,834,392) $(3,880,682)
2005
======= ======== ====== ======= ======= ======= ========== ======= ========= =========== ============ ===========
The accompanying notes are an integral part of the consolidated financial
statements.
5
MILLENNIUM BIOTECHNOLOGIES GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
--------------------------
2005 2004
----------- -----------
Cash Flows from Operating Activities:
Net loss $(6,949,472) $(5,398,574)
Adjustments to reconcile net (loss) to net cash provided (used)
by Operating Activities:
Depreciation and amortization 26,794 28,993
Stock issued for services 606,200 1,785,375
Stock issued for compensation 100,000 260,919
Convertible feature of notes 1,490,905 --
Amortization of deferred compensation (282,235) --
Stock issued for interest 207,133 261,322
Amortization of note discount 7,039 184,347
Write-off of pending patent -- 10,455
Change in inventory reserve -- (15,953)
Disposition of assets -- 314
Changes in assets and liabilities
Decrease (Increase) in inventory (673,236) 26,324
Decrease (Increase) in accounts receivable (96,792) 8,556
Decrease in prepaid expenses 448,096 592,624
Decrease in deposits -- --
Increase in miscellaneous receivables (42,700) (48,541)
Liability for stock to be issued 660,851 --
Increase (Decrease) in accounts payable and accrued expenses 1,858,394 (406,028)
----------- -----------
Net Cash (Used) by Operating Activities (2,639,023) (2,709,867)
----------- -----------
Cash Flows from Investing Activities:
Decrease in due from related party -- --
Repayments of notes payable - related party -- (123,060)
Purchases of property and equipment -- (14,328)
----------- -----------
Net Cash (Used) Provided by Investing Activities -- (137,388)
----------- -----------
Cash Flows from Financing Activities:
Proceeds from borrowings 2,112,000 1,135,000
Repayment of loans and notes (1,100,250) (950,000)
Increase (Decrease) in due to officers -- (122,594)
Repurchase and cancellation of stock -- (30,000)
Proceeds from issuance of common and preferred stock 1,658,291 2,809,609
----------- -----------
Net Cash Provided by Financing Activities 2,670,041 2,842,015
----------- -----------
Net (Decrease) in Cash 31,018 (5,240)
Cash - beginning of year 23,087 28,327
----------- -----------
Cash - end of year $ 54,105 $ 23,087
=========== ===========
Supplemental information:
Cash paid during the year for:
Interest $ 166,870 $ 106,893
=========== ===========
Income taxes $ -- $ 62
=========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
6
MILLENNIUM BIOTECHNOLOGIES GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
Schedule of non-cash investing and financing activities: 2005 2004
----------- -----------
In connection with consideration for services, 1,750,000 common
shares were issued $ 643,700
===========
In connection with consideration for compensation, 466,532 common
shares were issued $ 100,000
===========
In connection with consideration for interest and loan origination fees,
466,952 common shares were issued $ 207,133
===========
In connection with conversion of convertible notes, 913,334 common
shares were issued $ 245,000
===========
In connection with consideration for services, 2,045,065 common
shares were issued $ 1,348,263
===========
In connection with consideration for compensation, 387,559 common
shares were issued $ 260,919
===========
In connection with consideration for interest and loan origination fees,
444,442 common shares were issued $ 252,863
===========
In connection with conversion of convertible notes, 699,999 common
shares were issued $ 243,000
===========
In connection with consideration for services, 758,238 common
stock purchase warrants were issued $ 437,112
===========
In connection with consideration for interest,
the exercise price on 300,000 warrants was changed $ 8,460
===========
The accompanying notes are an integral part of the consolidated financial
statements.
7
MILLENNIUM BIOTECHNOLOGIES GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Millennium Biotechnologies Group, Inc. (the Company or "Millennium
Group"), formerly Regent Group, Inc., is a holding company for its
subsidiary Millennium Biotechnologies, Inc. ("Millennium").
Millennium was incorporated in the State of Delaware on November 9, 2000
and is located in New Jersey. Millennium is a research based
bio-nutraceutical corporation involved in the field of nutritional
science. Millennium's principal source of revenue is from sales of its
nutraceutical supplements, RESURGEX(TM) and RESURGEX PLUS(TM) which serve
as a nutritional support for immuno-compromised individuals undergoing
medical treatment for chronic debilitating diseases.
The Company acquired Millennium on July 27, 2001, when it completed a
merger with Millennium. In the merger, new Convertible Preferred Series D
stock was issued in exchange for all the outstanding stock of Millennium.
Such preferred shares were convertible into approximately 96% of the
outstanding common stock of the Company at the time of issuance. Under the
terms of the Agreement and Plan of Reorganization, a new wholly-owned
Millennium Group subsidiary merged into Millennium. For accounting
purposes, the merger has been treated as an acquisition of Millennium
Group by Millennium, and a re-capitalization of Millennium. The financial
statements are those of the Company and its wholly-owned subsidiary
Millennium on a consolidated basis.
Principles of Consolidation
The Company's operations presently consist almost exclusively of the
operations of Millennium. The consolidated financial statements include
the accounts of the Company and its subsidiary from the acquisition date
and/or through their respective disposition dates. All significant
inter-company transactions and balances have been eliminated.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as of 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.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
Depreciation, which includes amortization of assets under capital leases,
is calculated using the straight-line method over the estimated useful
lives of the assets: 3-8 years for machinery and equipment, leasehold
improvements are amortized over the shorter of the estimated useful lives
of the underlying lease term. Repairs and maintenance expenditures which
do not extend the useful lives of related assets are expensed as incurred.
For Federal income tax purposes, depreciation is computed under
accelerated methods over the assets class life.
Patents
Patents are capitalized and amortized over 240 months. Amortization
expense was $576 and $576 for 2005 and 2004, respectively.
8
MILLENNIUM BIOTECHNOLOGIES GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
Evaluation of Long-Lived Assets
Long-lived assets are assessed for recoverability on an ongoing basis. In
evaluating the fair value and future benefits of long-lived assets, their
carrying value would be reduced by the excess, if any, of the long-lived
asset over management's estimate of the anticipated undiscounted future
net cash flows of the related long-lived asset.
Revenue Recognition
Revenue is recognized at the date of shipment to customers provided that
the resulting receivable is deemed probable of collection.
Advertising costs
Advertising costs are charged to operations when incurred. Advertising
expense was $65,421 and $73,066 for the years ended December 31, 2005 and
2004, respectively.
Shipping and Handling Costs
Shipping and handling costs are included in cost of sales. Shipping and
handling costs were $55,278 and $25,832 for the years ended December 31,
2005 and 2004, respectively.
Stock-Based Compensation
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation". The standard encourages, but does not require, companies to
recognize compensation expense for grants of stock, stock option and other
equity instruments to employees based on fair value. For non-employees,
the fair market value of the Company's stock on the date of stock issuance
or option grant is used.
Income Taxes
The Company provides for income taxes based on enacted tax law and
statutory tax rates at which items of income and expenses are expected to
be settled in the Company's income tax return. Certain items of revenue
and expense are reported for Federal income tax purposes in different
periods than for financial reporting purposes, thereby resulting in
deferred income taxes. Deferred taxes are also recognized for operating
losses that are available to offset future taxable income. Valuation
allowances are established when necessary to reduce deferred tax assets to
the amount expected to be realized. The Company has incurred net operating
losses for financial-reporting and tax-reporting purposes. Accordingly,
for Federal and state income tax purposes, the benefit for income taxes
has been offset entirely by a valuation allowance against the related
federal and state deferred tax asset for the year ended December 31, 2005.
Loss Per Common Share
Basic and diluted loss per common share are computed by dividing net loss
by the weighted average number of common shares outstanding during the
periods. Potential common shares used in computing diluted earnings per
share related to stock options, warrants, convertible preferred stock and
convertible debt which, if exercised, would have an anti- dilutive effect
on earnings per share, have not been included.
Fair Value of Financial Instruments
For financial instruments including cash, prepaid expenses and other
current assets, short-term debt, accounts payable and accrued expenses, it
was assumed that the carrying values approximated fair value because of
their short-term maturities.
9
MILLENNIUM BIOTECHNOLOGIES GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
Limitations
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial statement.
These estimates are subjective in nature and involve uncertainties and
matters of significant judgment and therefore cannot be determined with
precision. Changes in assumptions could significantly affect the
estimates.
Reclassification
Certain reclassifications have been made to prior year balances to conform
to the current year's presentation.
2. GOING CONCERN
As shown in the accompanying consolidated financial statements, the
Company incurred substantial net losses for the year ended December 31,
2005. There is no guarantee whether the Company will be able to generate
enough revenue and/or raise capital to support those operations. This
raises substantial doubt about the Company's ability to continue as a
going concern.
The Company's future success is dependent upon its ability to achieve
profitable operations and generate cash from operating activities, and
upon additional financing. There is no guarantee that the Company will be
able to raise enough capital or generate revenues to sustain its
operations. Management believes they can raise the appropriate funds
needed to support their business plan and acquire an operating, cash flow
positive company.
The consolidated financial statements do not include any adjustments
relating to the recoverability or classification of recorded assets and
liabilities that might result should the Company be unable to continue as
a going concern.
3. CONCENTRATIONS OF BUSINESS AND CREDIT RISK
The Company maintains cash balances in several financial institutions
which are insured by the Federal Deposit Insurance Corporation up to
$100,000. Balances in these accounts may, at times, exceed the federally
insured limits.
The Company provides credit in the normal course of business to customers
located throughout the U. S. The Company performs ongoing credit
evaluations of its customers and maintains allowances for doubtful
accounts based on factors surrounding the credit risk of specific
customers, historical trends, and other information.
4. ACQUISITIONS AND MERGERS
On July 27, 2001, pursuant to an Agreement and Plan of Reorganization,
Millennium paid Regent $146,000, which was used to pay certain
indebtedness of Millennium. In addition, in November and December, 2001,
the Company paid off pre-merger Millennium Group liabilities of $91,640.
Each share of common stock of Millennium was converted into preferred
Series D shares of Millennium Group at a rate of .025 preferred shares for
each common share of Millennium. Each of these preferred Series D shares
is convertible into 641.215 common shares of Millennium and is entitled to
641.215 votes. The preferred Series D shares have been converted into
common shares on April 1, 2002.
10
MILLENNIUM BIOTECHNOLOGIES GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
5. INVENTORIES
Inventories consist of work-in-process and finished goods for the
Company's RESURGEX(TM) and RESURGEX PLUS(TM) product lines. Cost-of-goods
sold are calculated using the average costing method. Inventories at
December 31, 2005, consist of the following:
Raw Materials $ 23,957
Work in Process 267,166
Samples 113,122
Finished Goods 642,290
Packaging 3,286
------------
1,049,822
Less: Reserve for losses (87,039)
------------
Total $ 962,782
============
6. PROPERTY AND EQUIPMENT
Property and equipment at cost, less accumulated depreciation, at December
31, 2005, consists of the following:
Furniture $ 46,127
Equipment 22,445
Leasehold improvements 61,757
------------
Subtotal 130,329
Less accumulated depreciation (102,912)
------------
Total $ 27,417
============
Depreciation expense charged to operations was $26,218 and $28,417 for the
years ended December 31, 2005 and 2004, respectively.
11
MILLENNIUM BIOTECHNOLOGIES GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following at
December 31, 2005:
Accounts payable $ 1,582,952
Accrued interest 135,440
Accrued salaries, bonuses and payroll taxes 113,694
Accrued royalties 138,982
Accrued professional fees 473,711
Accrued minimum purchase obligations 265,209
Miscellaneous accruals 22,440
--------------
$ 2,732,428
==============
8. DEBT
Short-term debt at December 30, 2005, is as follows:
Cash advances by three accredited investors, due on
demand, non-interest bearing except for $46,000 which
carries interest at 12% per year. $ 50,440
Promissory note dated December 17, 2002, originally for
$50,000 issued to an accredited investor, maturing
September 28, 2003, bearing interest at the rate of 10%
per annum. The note has been changed to be due on demand
and remains outstanding at December 31, 2005. The holder
of the note is entitled to convert all or a portion of
the principal and interest at any time after the
maturity date into shares of common stock of the Company
at a price equal to $.10/share of the principal if the
principal and interest is not fully repaid on or before
the maturity date. Management has repaid $25,000 in
December 2003 and is presently negotiating to convert
the remaining $25,000 into equity. The Company issued
125,000 5-year common stock purchase warrants in
conjunction with the note which were exercised at a rate
of $0.01 per share. The computed discount (computed with
Black-Scholes) related to the detachable stock purchase
warrants has been fully amortized. 25,000
Promissory note dated October 17, 2002 in the amount of
$125,000, bearing interest at 12% per annum, originally
maturing February 17, 2003 less discount. The 12%
interest per annum accrued to date on the principal
amount outstanding is to be paid weekly with 25% of all
cash receipts received by the Company. The Company
issued 70,000 3-year common stock purchase warrants
exercisable at $.50 per share in conjunction with the
note and has recorded a discount for the fair market
value (computed under Black-Scholes) for the warrant.
The maturity date on the note was extended to September
17, 2003 and subsequently to March 26, 2004. The note
has been changed to be due on demand and $27,747 remain
outstanding at December 31, 2005. 27,747
Promissory convertible note dated February 21, 2003,
issued to an accredited investor originally due on
August 21, 2003, bearing interest at 8% per annum
payable in stock. The note was extended to December 31,
2004 and was made non-interest bearing, and has
subsequently been changed to be due on demand. The note
is convertible into restricted common shares at the rate
of $0.25 per share, at the option of the holder. 10,000
12
MILLENNIUM BIOTECHNOLOGIES GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
DEBT (Continued)
Promissory note dated March 5, 2003, bearing interest
payable in the form of 100,000 shares of restricted
common stock, issued to an accredited investor and
originally maturing April 5, 2003. The note was
initially extended to October 5, 2003. The note was
subsequently extended to March 26, 2004 bearing 12%
interest per annum, and has subsequently been changed to
be due on demand and remains outstanding at December 31,
2005. 150,000
Convertible Promissory Note to an accredited investor
dated May 20, 2003, maturing May 20, 2004, bearing
interest at a rate 8% per annum payable in
restrictedshares of common stock at a rate of $0.25 per
share. The note is convertible at the option of the
holder into restricted shares of common stock at a rate
of $0.25 per share. The note has been changed to be due
on demand and remains outstanding at December 31, 2005. 30,000
Convertible promissory note dated July 3, 2003
originally due December 31, 2003, bearing interest at
12% per year payable in restricted common stock,
extended through December 31, 2004. The note has
subsequently been changed to be due on demand and
remains outstanding at December 31, 2005. The note is
convertible at the option of the holder into restricted
common stock at the rate of $0.20 per share. 50,000
Two demand loans extended by two investors in March 2004 and January
2005, bearing no interest. 25,000
Promissory note issued to an accredited investor on
October 26, 2004, originally maturing December 31, 2004
which was subsequently changed to be due on demand. The
note carries interest at the rate of 15% per year and is
secured by a pledge of the proceeds to the Company from
the sale of current and future tax-loss carry-forwards
under the New Jersey Emerging Technology and
Biotechnology Financial Assistance Act. 150,000
Promissory note issued to an accredited investor on
December 13, 2004 and maturing December 13, 2005. The
note was subsequently changed to be due on demand and
carries interest at the rate of 8% per year and is
convertible at the option of the holder into common
shares at the rate of $0.25 per share. 25,000
Promissory grid note issued to one accredited investor
for demand loans extended between September and December
2004. The note carries interest at the rate of 10% per
year. Of the amounts originally loaned, $225,000 had
been repaid in October and December 2004, $80,000 during
the third quarter in 2005 and $145,000 during the fourth
quarter in 2005. 20,000
Promissory note issued to an accredited investor on February 18, 2005 and
maturing June 18, 2005, carrying interest at the rate of 12% per year.
The note remains open at December 31, 2005 and is now due on demand.
100,000
13
MILLENNIUM BIOTECHNOLOGIES GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
DEBT (Continued)
Promissory note issued to an accredited investor on
March 17, 2005 and maturing June 15, 2005, carrying
interest at the rate of 10% per year. In the event of
default by debtor, the interest rate increases to 20%
per year. The note remains open at December 31, 2005 and
is in default. The note was subject to a $20,000
origination fee and assumption of $3,000 related legal
expenses. 220,000
Promissory note for $200,000 issued to an accredited
investor on July 19, 2005 and maturing December 31,
2005, carrying interest at the rate of 10% per year.
$20,000 were repaid in December 2005, with the maturity
of the remainder extended to December 31, 2006. The note
is convertible into common shares of the Company at the
option of the holder, at $0.25 per share. 180,000
Promissory note for $100,000 issued to an accredited investor on July 12,
2005 and maturing December 31, 2005, carrying interest at the rate of 10%
per year. The note is presently due on demand. The note is convertible
into common shares of the Company at the option of the holder, at $0.25
per share. 100,000
Two promissory notes for $100,000 each issued to an
accredited investor on August 15 and September 1, 2005
and maturing December 31, 2005, carrying interest at the
rate of 10% per year. The notes are presently due on
demand. In connection with this change 50,000 5-year
warrants, exercisable at $0.25/share have been issued to
the investor. The notes are convertible into common
shares of the Company at the option of the holder, at
$0.25 per share. 200,000
Two promissory notes for $100,000 each issued to an
accredited investor on August 17 and August 31, 2005 and
maturing December 31, 2005, carrying interest at the
rate of 10% per year. The notes have been changed to be
due on demand. In connection with this change 150,000
5-year warrants, exercisable at $0.38/share have been
issued to the investor. The notes are convertible into
common shares of the Company at the option of the
holder, at $0.25 per share. 200,000
Promissory grid note, originally for $60,000 issued to
an accredited investor on December 22, 2005, due on
demand. The note carries interest at the rate of 12% per
year and has an open balance of $22,000 on December 31,
2005. 22,000
Three promissory notes totaling $250,000 issued to three accredited
investors on December 7, 2005 and maturing January 10, 2006. The
investors were issued a total 225,000 warrants in lieu of interest,
exercisable during five years at $0.25 /share. 250,000
-----------
Total Short Term Debt $ 1,835,187
===========
14
MILLENNIUM BIOTECHNOLOGIES GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
9. LONG TERM DEBT
Long-term debt at December 31, 2005 is as follows: $ 33,750
Five non-interest bearing convertible notes dated between October 22,
2002 and December 30, 2002 issued to five accredited investors, maturing
between October 22,2004 and December 30, 2004, he option of the holders
into common shares at the rate of $.25/share. All of these notes have
been converted into an aggregate 135,000 common shares during the first
quarter in 2006.
Two convertible promissory notes to an accredited
investor dated August 8, 2003, maturing August 8, 2005,
bearing no interest. The notes have been changed to be
due on demand and remain open at December 31, 2005. The
notes are convertible into restricted shares of common
stock at the option of the holder at a rate of $0.25 per
share. $ 50,000
-----------
83,750
Less Current Maturities (83,750)
-----------
Total Long Term Debt $ 0
===========
10. INCOME TAX
The income tax provision (benefit) is comprised of the following:
Year Ended December 31,
------------------------
2005 2004
---------- -----------
State current provision (benefit) $ (230,878) $ (210,628)
State deferred provision (benefit) -- --
---------- -----------
$ (230,878) $ (210,628)
========== ===========
In 1998, the State of New Jersey enacted legislation allowing emerging
technology and/or biotechnology companies to sell their unused New Jersey
Net Operating Loss ("NOL") Carryover and Research and Development Tax
Credits ("R&D Credits") to corporate taxpayers in New Jersey. The Company
entered into an agreement under which it retained unrelated intermediaries
to identify a buyer for Millennium's 2005 and 2004 NOL Carryovers. The
total tax benefit of this transaction was $230,878 in 2005 and $210,628 in
2004.
The Company's total deferred tax asset and valuation allowance are as
follows:
Year Ended December 31,
-------------------------
2005 2004
----------- -----------
Total deferred tax asset, non-current $(9,133,757) $ 6,110,000
Less valuation allowance (6,110,000)
----------- -----------
Net deferred tax asset, non-current $(9,133,757) $ --
=========== ===========
15
MILLENNIUM BIOTECHNOLOGIES GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
The difference between income tax benefits in the financial statements and
the tax benefit computed at the combined state and U. S. Federal statutory
rate of 40% are as follows:
Year Ended December 31,
------------------------
2005 2004
---------- -----------
Tax benefit 40% 40%
Valuation allowance 40% 40%
---------- -----------
Effective tax rate -- --
========== ===========
At December 31, 2005, the Company has available approximately $22,800,000
of net operating losses to carry-forward and which may be used to reduce
future federal taxable income and expire between December 31, 2020 and
2025.
At December 31, 2005, the Company has available approximately $3,340,000
of net operating losses to carry-forward and which may be used to reduce
future state taxable income which expire December 31, 2011.
The Company and Millennium file separate tax returns and have different
tax years. The Company files on a fiscal year ended July 31; Millennium
has a calendar year end.
At July 31, 2001, the Company had a net operating loss ("NOL")
carry-forward of approximately $11,126,000 for tax purposes expiring in
the years 2003 through 2021. The Tax Reform Act of 1986 provided for a
limitation on the use of NOL carry-forwards, following certain ownership
changes. As a result of transactions in the Company's stock during the
year ended July 31, 1999 and July 31, 2001, a change in ownership of
greater than 50%, as defined, had occurred. Under such circumstances, the
potential benefits from utilization of tax carry-forwards may be
substantially limited or reduced on an annual basis. Accordingly, the
Company has not reflected any benefit of such net operating loss
carry-forward in the deferred tax asset and valuation allowance
computation.
16
MILLENNIUM BIOTECHNOLOGIES GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
11. EMPLOYMENT AGREEMENTS
Pursuant to a first amendment dated November 11, 2005 to his original
employment agreement, dated April 1, 2001, between Millennium and the
Company's President and CEO, Jerry Swon, Mr. Swon is entitled to a base
salary of $300,000 per year. Immediately following the first fiscal
quarter in which the Company shall have achieved annualized revenues in
excess of $5,000,000, the Base Salary shall be increased to the rate of
$400,000 per annum. Immediately following the first fiscal quarter in
which the Company shall have achieved annualized revenues in excess of
$10,000,000, the Base Salary shall be increased to the rate of $500,000
per annum. In addition to a base salary Millennium shall pay a
discretionary bonus, payable annually during each year of the term, at the
sole and exclusive discretion of Millennium. Mr. Swon also receives a
monthly expense allowance. Pursuant to the amendment Mr. Swon is to
receive Options exercisable at a rate of $0.50 per share to purchase
5,000,000 shares of common stock of which (a) Options for the first
1,000,000 shares shall vest and become exercisable immediately following
the first fiscal year in which the Company shall have achieved annual
revenues in excess of $5,000,000; (b) Options for the second 1,000,000
shares shall vest and become exercisable immediately following the first
year in which the Company shall have achieved annual revenues in excess of
$10,000,000; (c) Options for the third 1,000,000 shares shall vest and
become exercisable immediately following the first year in which the
Company shall have achieved annual revenues in excess of $15,000,000; (d)
Options for the fourth 1,000,000 shares shall vest and become exercisable
immediately following the first year in which the Company shall have
achieved annual revenues in excess of $20,000,000; and (e) Options for the
fifth 1,000,000 shares shall vest and become exercisable immediately
following the first year in which the Company shall have achieved annual
revenues in excess of $25,000,000.
Pursuant to a five year amended employment agreement, dated December 22,
2005, with Millennium, Carl Germano who has been serving since May 2001
and continues to serve as Executive Vice President of Product Development
& Research is entitled to a base salary of $200,000 per year. In addition
to the base salary Mr. Germano was initially granted as stock option by
Millennium to purchase an aggregate of 1,408,979 shares of common stock of
Group at an exercise price of $.37 per share in 2001, the exercise period
of which option shall be extended to December 31, 2010. Provided the
Executive is continually employed under the terms of the amended
employment agreement by the Company through January 15, 2006, the exercise
price for the Group Stock Options shall be reduced to $.01 per share
effective as of that date. The terms for Mr. Germano to receive this
Option are as follows: Mr. Germano must adhere to the non-complete clause
ending on the earlier of (i) May 18, 2011 or (ii) such date as the Company
terminates the Executive's Employment without cause. In the event that Mr.
Germano terminates the Agreement at any time during the five year period
commencing upon the date if the Second Amendment, Executive shall
immediately and automatically forfeit and return to the Company such
number of Group Stock Options as determined by the following formula: If
such termination occurs prior to the first anniversary of this Second
Amendment -- 100% of the Group Stock Options; if such termination occurs,
respectively, prior to the second, third, fourth or fifth anniversary of
this Second Amendment -- 80%, 60%, 40% or 20%, respectively, of the Group
Stock Option. In lieu of delivering the requisite number of Group Stock
Options and,or to the extent that Executive has exercised the Group Stock
Option and, as a result, is unable to return the requisite number of the
Group Stock Options, Executive shall pay the Company an amount equal to
$0.36 times the number of Group Stock Options that the Executive is
required to return but does not return. If, at any time after the second
anniversary of this Second Amendment, there is a Change of Control and
Executive does not voluntarily terminate the Agreement prior to the date
of the Change of Control, the provisions of this subsection (b) shall be
null and void and of no further effect.
17
MILLENNIUM BIOTECHNOLOGIES GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
EMPLOYMENT AGREEMENTS (Continued)
Pursuant to a five year employment agreement dated November 11, 2005 with
Millennium, Frank Guarino who has served as the Chief Financial Officer
since October, 2001 and continues to serve as CFO is entitled to a base
salary of $98,000 per year. Immediately following the first fiscal quarter
in which the Company shall have achieved revenues in excess of $1,250,000,
the Base Salary shall be increased to the rate of $125,000 per annum.
Immediately following the first quarter in which the Company shall have
achieved revenues in excess of $2,500,000, the Base Salary shall be
increased to the rate of $150,000 per annum. Immediately following the
first quarter in which the Company shall have achieved revenues in excess
of $3,750,000, the Base Salary shall be increased to the rate of $200,000
per annum. Pursuant to the amendment Mr. Guarino is to receive: a) Options
to purchase 334,000 shares of common stock at an exercise price of $.37
for a term of five years from the date hereof, which Options shall vest on
January 1, 2006; and (b) Option to purchase an additional 600,000 shares
of common stock at an exercise price of $.01, for a term of three years
from the date hereof, of which (a) Options for 400,000 shares shall vest
and become exercisable only in the event the Executive is continually
employed under the terms of this Agreement by the Company through January
15, 2006; and (b) Options for the remaining 200,000 shares shall vest and
become exercisable only in the event the Executive is continually employed
under the terms of this Agreement through January 15, 2007.
Pursuant to a five year employment agreement dated November 11, 2005 with
Millennium, John Swon who was a co-founder of the Millennium in November
2000 and is currently serving as a National Sales Manager is entitled to a
base salary of $98,000 per year. Immediately following the first fiscal
quarter in which the Company shall have achieved revenues in excess of
$1,250,000, the Base Salary shall be increased to the rate of $125,000 per
annum. Immediately following the first quarter in which the Company shall
have achieved revenues in excess of $2,500,000, the Base Salary shall be
increased to the rate of $150,000 per annum. Immediately following the
first quarter in which the Company shall have achieved revenues in excess
of $3,750,000, the Base Salary shall be increased to the rate of $200,000
per annum. Pursuant to the amendment Mr. Swon is to receive: a) Options to
purchase 334,000 shares of common stock at an exercise price of $.37 for a
term of five years from the date hereof, which Options shall vest on
January 1, 2006; and (b) Option to purchase an additional 600,000 shares
of common stock at an exercise price of $.01, for a term of three years
from the date hereof, of which (a) Options for 400,000 shares shall vest
and become exercisable only in the event the Executive is continually
employed under the terms of this Agreement by the Company through January
15, 2006; and (b) Options for the remaining 200,000 shares shall vest and
become exercisable only in the event the Executive is continually employed
under the terms of this Agreement through January 15, 2007.
Pursuant to a five year employment agreement dated November 11, 2005 with
Millennium, Jerry T. Swon who was a co-founder of Millennium in November
2000 and is currently serving as a National Sales Manager is entitled to a
base salary of $98,000 per year. Immediately following the first fiscal
quarter in which the Company shall have achieved revenues in excess of
$1,250,000, the Base Salary shall be increased to the rate of $125,000 per
annum. Immediately following the first quarter in which the Company shall
have achieved revenues in excess of $2,500,000, the Base Salary shall be
increased to the rate of $150,000 per annum. Immediately following the
first quarter in which the Company shall have achieved revenues in excess
of $3,750,000, the Base Salary shall be increased to the rate of
18
MILLENNIUM BIOTECHNOLOGIES GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
EMPLOYMENT AGREEMENTS (Continued)
$200,000 per annum. Pursuant to the amendment Mr. Swon is to receive: a)
Options to purchase 334,000 shares of common stock at an exercise price of
$.37 for a term of five years from the date hereof, which Options shall
vest on January 1, 2006; and (b) Option to purchase an additional 600,000
shares of common stock at an exercise price of $.01, for a term of three
years from the date hereof, of which (a) Options for 400,000 shares shall
vest and become exercisable only in the event the Executive is continually
employed under the terms of this Agreement by the Company through January
15, 2006; and (b) Options for the remaining 200,000 shares shall vest and
become exercisable only in the event the Executive is continually employed
under the terms of this Agreement through January 15, 2007.
Pursuant to a five year employment agreement dated November 11, 2005 with
Millennium, Christopher Swon who is currently serving as a Regional Sales
Manager is entitled to a base salary of $60,000 per year. Immediately
following the first fiscal quarter in which the Company shall have
achieved revenues in excess of $1,250,000, the Base Salary shall be
increased to the rate of $75,000 per annum. Immediately following the
first quarter in which the Company shall have achieved revenues in excess
of $2,500,000, the Base Salary shall be increased to the rate of $100,000
per annum. Immediately following the first quarter in which the Company
shall have achieved revenues in excess of $3,750,000, the Base Salary
shall be increased to the rate of $125,000 per annum. Pursuant to the
amendment Mr. Swon is to receive: (a) Options to purchase 167,000 shares
of common stock at an exercise price of $.37 for a term of five years from
the date hereof, which Options shall vest on January 1, 2006; and (b)
Option to purchase an additional 300,000 shares of common stock at an
exercise price of $.01, for a term of three years from the date hereof, of
which (a) Options for 200,000 shares shall vest and become exercisable
only in the event the Executive is continually employed under the terms of
this Agreement by the Company through January 15, 2006; and (b) Options
for the remaining 100,000 shares shall vest and become exercisable only in
the event the Executive is continually employed under the terms of this
Agreement through January 15, 2007.
12. CAPITAL STOCK
a) Preferred Stock
Convertible Series B preferred shares ("Series B") are non-dividend
bearing, and are convertible into shares of the Company's common stock
at any time at the option of the holder and are subject to adjustment in
accordance with certain anti-dilution clauses. Cumulative Series C
preferred shares ("Series C") are not convertible but are entitled to
cumulative cash dividends at the rate of $.65 per share per annum,
payable in each year commencing the year after all the shares of Series
B are retired. Convertible Series D preferred shares ("Series D") are
non-dividend bearing and are convertible into shares of the Company's
common stock at the option of the Company and are subject to adjustment
in accordance with certain anti-dilution clauses. Pursuant to the
Agreement and Plan of Reorganization with Millennium, 237,049.7 Series D
shares were issued in exchange for all outstanding common stock of
Millennium. An additional 4,148.8 shares were issued in July 2001 at
prices between $24.00 and $36.00 per share to four individual accredited
investors. All Series D Preferred Shares were converted into common
stock in April 2002.
b) Voting Rights
The holders of Series B and Series C preferred stock have no voting
rights. Each share of common stock is entitled to one vote.
19
MILLENNIUM BIOTECHNOLOGIES GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
CAPITAL STOCK (Continued
c) Dividend Restrictions
No cash dividends may be declared or paid on the Company's common stock
if, and as long as, Series B preferred stock is still outstanding or
there are dividends in arrears on outstanding shares of Series C
preferred stock. No dividends may be declared on Series C shares if, and
as long as, any Series B shares are outstanding.
d) Other information is summarized as follows:
Convertible Cumulative Convertible
Series B Series C Series D
--------------- -------------- --------------
Number of common shares to be issued upon 10 None 641.215
conversion of each preferred share
Redemption price and involuntary liquidation value per
preferred shares (if redeemed, ranking would be
Convertible Series D then , Convertible Series B then
Cumulative Series C) $ 2.00 $ 10.00 (1) $ 1.00
----------
(1) Plus any dividend in arrears.
Because the Series B preferred stock had mandatory redemption requirements
at the time of its issuance (which are no longer applicable), these shares
are stated at redemption value. Series B shares are stated at par value.
20
MILLENNIUM BIOTECHNOLOGIES GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
13. OPTIONS AND WARRANTS
The Company has adopted the disclosure only provisions of Statement of
Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation" (FAS No. 123). Accordingly, no compensation cost for
employees has been recognized for the stock options and warrants awarded.
In February 2000, Millennium adopted its 2001 Stock Option Plan ("The 2001
Plan"). The 2001 Plan provides that certain options granted thereunder are
intended to qualify as "Incentive Stock Options" (ISO) within the meaning
of Section 422A of the United States Internal Revenue Code of 1986, while
non-qualified options may also be granted under the Plan. The Plan
provided for the grant of options for up to 500,000 shares. The purchase
price per common stock deliverable upon exercise of each ISO shall not be
less than 100% of the fair market value of the common stock on the date
such option is granted. If an ISO is issued to an individual who owns, at
the time of grant, more than 10% of the total enhanced voting power of all
classes of Millennium's common stock, the exercise price of such option
shall be at least 110% of the fair market value of the common stock on the
date of grant and the term of the option shall not exceed five years from
the date of grant. The purchase price of shares subject to non-qualified
stock options shall be determined by a committee established by the Board
of Directors with the condition that such prices shall not be less than
85% of the fair market value of the common stock at the time of grant.
Millennium had no options issued pursuant to this Plan as of December 31,
2005.
The granting of the following Company stock options was not under a formal
stock option plan.
Information regarding the Company's stock options and warrants for fiscal
years ended December 31, 2005 and 2004 is as follows:
December 31, 2005 December 31, 2004
---------------------------- ----------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------------- ------------- ------------- -------------
Options outstanding - beginning of year 2,255,312 $ 0.36 1,538,920 $ 0.36
Options expired (70,000) 0.50 -- --
Options granted 9,977,979 0.30 766,392 0.37
Options cancelled (1,795,008) 0.37 (50,000) 0.50
------------- ------------- ------------- -------------
Options outstanding - end of year 10,368,283 $ 0.31 2,255,612 $ 0.36
============= ============= ============= =============
Option price at end of year $0.31 $0.36
21
MILLENNIUM BIOTECHNOLOGIES GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
OPTIONS AND WARRANTS, Continued
December 31, 2005 December 31, 2004
---------------------------- ----------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------------- ------------- ------------- -------------
Option price range for N/A N/A N/A N/A
exercised shares
Options available for N/A N/A N/A N/A
grant at end of year
Warrants outstanding - beginning of year 17,968,913 0.61 9,082,796 $ 0.43
Warrants exercised (2,514,434) 0.25 (1,401,981) 0.20
Warrants granted 975,000 0.34 11,121,431 0.63
Warrants expired (2,535,716) 0.45 (833,333) 0.42
------------- ------------- ------------- -------------
Warrants outstanding - end of year 13,893,763 0.64 17,968,913 $ 0.61
============= ============= ============= =============
Warrants price range at end of year $0.17 - $2.65 $0.17 - $2.65
Warrants price for
exercised shares $ 0.25-0.40 $ 0.17-0.30
Warrants available for
grant at end of year N/A N/A N/A N/A
The weighted exercise price and weighted fair value of options and warrants
granted by the Company for years ended 2005 and 2004, are as follows:
December 31, 2005 December 31, 2004
---------------------------- ----------------------------
Weighted Weighted Weighted Weighted
Average Average
Exercise Average Exercise Average
Price Fair Value Price Fair Value
------------- ------------- ------------- -------------
Weighted average of options and warrants granted
during the year whose exercise price exceeded
fair market value at the date of grant $ 0.47 $ 0.22 $ 1.24 $ 0.59
Weighted average of options and warrants granted during the year whose
exercise price was equal or lower than fair market value at the date of
grant $ 0.07 $ 0.33 $ 0.60 $ 0.75
22
MILLENNIUM BIOTECHNOLOGIES GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
OPTIONS AND WARRANTS, Continued
The following table summarizes information about fixed-price stock options
and warrants outstanding at December 31, 2005.
Number Average Number
Outstanding at Remaining Weighted Exercisable at Weighted
Range of Exercise December 31, Contractual Average December 31, Average
Prices 2005 Life Exercise Price 2005 Exercise Price
----------------- -------------- ----------- -------------- -------------- --------------
$ 0.01 - 0.25 5,396,356 38 Mo's $ 0.09 1,587,377 $ 0.24
$ 0.35 - 0.50 12,429,060 36 Mo's $ 0.45 6,928,060 $ 0.43
$ 0.75 - 3.00 6,436,631 34 Mo's $ 0.92 6,436,631 $ 0.92
-------------- --------------
24,262,047 14,952,068
============== ==============
The Company has used the fair value based method of accounting for its
employee stock options beginning with the year ended December 31, 2005, as
prescribed by Statement of Financial Accounting Standards No. 123. It has
not restated its results for the year ended December 31, 2004.
Compensation cost in net loss for the year ended December 31, 2004 would
have increased by $448,525, resulting in net loss of $5,847,099 net of tax
and loss per share of $.15. The value of each option grant is estimated on
the date of grant using the Black-Scholes option pricing model with the
following weighted average assumptions: expected dividend, 0%; risk-free
interest rate, 5%; and expected volatility 80%.
Total compensation cost recognized in the income statement for stock-based
employee and directors' compensation awards was $1,174,531 and $260,919 in
2005 and 2004, respectively. In addition, the Company notes a contingent
liability from the fair value of unvested options granted to certain
employees where vesting is conditional upon the Company reaching certain
revenue targets (see "Employment Agreements"). Such contingent liabilities
amount to $$1,486,299.
14. OPERATING LEASE COMMITMENTS
The Company leases certain office space and equipment under operating
leases.
The Company's previous administrative facilities were located in
approximately 2,200 square feet of leased office space in Bernardsville,
New Jersey, as to which Millennium entered into a 5 year lease, starting
January 1, 2001. The lease was for a monthly rent of $5,807 plus allocated
expenses and was personally guaranteed by certain officers of the Company.
The Company was released from this lease in June, 2003.
On October 2001, the Company signed a 5-year lease commencing in December
2002, for approximately 4,500 square feet of office space in
Bernardsville, NJ at a monthly rental of $9,116 through November, 2004 and
$9,876 thereafter, plus an allocated portion of certain operating
expenses. The lease is personally guaranteed by the Company's Chief
Executive Officer Jerry E. Swon.
23
MILLENNIUM BIOTECHNOLOGIES GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
OPERATING LEASE COMMITMENTS, Continued
The following is a schedule of future minimum rental payments (exclusive
of allocated expenses) required under operating leases that have initial
or non-cancelable lease terms in excess of one year as of December 31,
2005:
Year Ending December 31,
2006 118,512
2007 108,636
2008 --
2009 --
----------
Total minimum payments required $ 226,748
==========
Rent expense for the Company under operating leases for the years ended
December 31, 2005 and 2004 was $118,325 and $102,183, respectively.
15. NEW ACCOUNTING PRONOUNCEMENTS.
In 2004, the FASB issued SFAS Statement No. 151, "Inventory Costs, an
Amendment of ARB No. 43, Chapter 4". This Statement amends the guidance in
ARB No. 43, Chapter 4 "Inventory Pricing" to clarify the accounting for
abnormal amounts of idle facility expense, freight, handling costs and
wasted materials (spoilage). His Statement requires that those items be
recognized as current-period charges regardless of whether they meet the
criterion of "so abnormal". In addition, this Statement requires the
allocation of fixed production overheads to the costs of conversion be
based on the normal capacity of the production facilities. The provisions
of this Statement shall be effective for inventory costs incurred during
fiscal years beginning after June 15, 2005. Earlier application is
permitted for inventory costs incurred during fiscal years beginning after
the date this Statement is issued. The provisions of this Statement shall
be applied prospectively. The adoption of this Statement is not expected
to have a significant impact on the Company's results of operation or
financial position.
In December 2004, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 154, Accounting
Changes and Error Corrections - a replacement of APB Opinion No. 20 and
FASB Statement No. 3. SFAS No. 154 requires retrospective application to
prior periods' financial statements of changes in accounting principle,
unless it is impracticable to determine either the period-specific effects
or the cumulative effect of the change. SFAS No. 154 also requires that
retrospective application of a change in accounting principle be limited
to the direct effects of the change. Indirect effects of a change in
accounting principle, such as a change in nondiscretionary profit-sharing
payments resulting from an accounting change, should be recognized in the
period of the accounting change. SFAS No. 154 also requires that a change
in depreciation, amortization or depletion method for long-lived,
non-financial assets be accounted for as a change in accounting estimate
effected by a change in accounting principle.
SFAS No. 154 is effective for accounting changes and corrections of errors
made in fiscal years beginning after December 15, 2005. Early adoption is
permitted for accounting changes and corrections of errors made in fiscal
years beginning after the date this Statement is issued. Management does
not expect the implementation of this new standard to have a material
impact on the Company's financial position, results of operations and cash
flows.
24
MILLENNIUM BIOTECHNOLOGIES GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
NEW ACCOUNTING PRONOUNCEMENTS (continued)
In December 2004, the FASB issued SFAS No.123 (revised 2004), "Share-Based
Payment". Statement 123(R) will provide investors and other users of
financial statements with more complete and neutral financial information
by requiring that the compensation cost relating to share-based payment
transactions be recognized in financial statements.
That cost will be measured based on the fair value of the equity or
liability instruments issued. Statement 123(R) covers a wide range of
share-based compensation arrangements including share options, restricted
share plans, performance-based awards, share appreciation rights, and
employee share purchase plans. Statement 123(R) replaces FASB Statement
No. 123, Accounting for Stock-Based Compensation, and supersedes APB
Opinion No. 25, Accounting for Stock Issued to Employees. Statement 123,
as originally issued in 1995, established as preferable a fair-value-based
method of accounting for share-based payment transactions with employees.
However, that Statement permitted entities the option of continuing to
apply the guidance in Opinion 25, as long as the footnotes to financial
statements disclosed what net income would have been had the preferable
fair-value-based method been used. Public entities (other than those
filing as small business issuers) will be required to apply Statement
123(R) as of the first interim or annual reporting period that begins
after June 15, 2005.
In March 2005, the SEC released Staff Accounting Bulletin No. 107,
"Share-Based Payment" ("SAB 107"), which provides interpretive guidance
related to the interaction between SFAS 123(R) and certain SEC rules and
regulations. It also provides the SEC staff's views regarding valuation of
share-based payment arrangements. In April 2005, the SEC amended the
compliance dates for SFAS 123(R), to allow companies to implement the
standard at the beginning of their next fiscal year, instead of the next
reporting period beginning after June 15, 2005.
On August 31, 2005, the FASB issued FASB Staff Position FSP FAS 123R-1,
"Classification and Measurement of Freestanding Financial Instruments
Originally Issued in Exchange for Employee Services under FASB Statement
No. 123R." In this FSP, the FASB decided to defer the requirements in FASB
Statement No. 123 (Revised 2004), Share-Based Payment, that make a
freestanding financial instrument subject to the recognition and
measurement requirements of other GAAP when the rights conveyed by the
instrument are no longer dependent on the holder being an employee. The
guidance in this FSP should be applied upon initial adoption of Statement
123R. The FSP includes transition guidance for those entities that have
already adopted Statement 123R in their financial statements.
The Company does not expect that the adoption of SFAS 123(R) and the
implementation of this new standard to have a material impact on the
Company's financial position, results of operations and cash flows.
25
MILLENNIUM BIOTECHNOLOGIES GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
16. RELATED PARTY TRANSACTIONS
On January 11, 2001 Millennium entered into an Investment and Assignment
Agreement with David Miller, a founding shareholder of the Company.
Pursuant to the agreement, Mr. Miller assigned to Millennium all of his
rights, title and interest to all formulations, material and technologies
made, invented or developed by him which relate in any way to
nutraceutical supplements and also granted Millennium the exclusive right
to patent and trademark any such inventions. In consideration of the
assignment, Millennium issued 2,671,729 shares of its common stock to Mr.
Miller and granted to him a perpetual royalty equal to 3.33% of the gross
sales of RESURGEX(R) AND RESURGEX PLUS(R) and 3.3% of the gross profit
from the sale of any additional products of Millennium. During the first
quarter of 2005 Mr. Miller and Jane Swon entered into an agreement whereby
among others Miller transferred $93,650 in accrued royalties and a
promissory note for $50,000 to Jane Swon. In accordance with instructions
by Jane Swon, the Company subsequently settled this note with payment of
the principal to the Company's chief executive officer.
On January 11, 2001 Millennium entered into Royalty and Investment
Agreements with Jane Swon (spouse of Jerry E. Swon) and P. Elayne Wishart
(spouse of former Chief Operating Officer and Director Bruce Deichl).
Pursuant to such agreements, Ms. Swon and Ms. Wishart were each issued
4,007,594 shares of Millennium common stock for consideration of $25,000
each. In addition, Ms. Swon and Ms. Wishart each paid Millennium $25,000
for a perpetual royalty pursuant to which they are each entitled to 3.3%
of the gross sales of RESURGEX(R) and RESURGEX PLUS(R) and 3.3% of the
gross profit from the sale of any additional products. The $50,000
consideration is being amortized over 10 years to additional
paid-in-capital.
26
MILLENNIUM BIOTECHNOLOGIES GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
17. CONVERTIBLE NOTES
At December 31, 2005 the Company had an aggregate of $853,750 payable in
seventeen convertible notes of which $83,750 are non-interest bearing,
$65,000 bear interest at 8% per annum, $525,000 at 10% per annum and
$180,000 bear interest at 18% per annum. The terms of the Company's
convertible notes generally provide that the holder of the note is
entitled, at its option at any time on or before the maturity date, to
convert all or a portion of the principal amount into shares of common
stock of the Company at a fixed price. The holding period for the shares
would be one year from the funding of the convertible note.
The Company follows EITF 98-5 in accounting for convertible notes with
"beneficial conversion features" (i.e., the notes may be converted into
common stock at the lower of a fixed rate at the commitment date or a
fixed discount to the market price of the underlying common stock at the
conversion date). Because the Company's convertible notes contained a
beneficial conversion feature on the date of issuance, the Company
measured and recognized the intrinsic value of the beneficial conversion
feature of the convertible notes when the convertible notes were issued.
During the years ended December 31, 2005 and 2004, interest expense of
$440,000 and $0 respectively, was recognized as the intrinsic value of the
beneficial conversion feature of the convertible notes that were issued
during such periods.
27
MILLENNIUM BIOTECHNOLOGIES GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
18. MAJOR VENDORS
For the sourcing of raw materials, procurement of inherent specialty
ingredients, manufacture of bulk product; quality control and testing; and
contact research assistance, the Company has retained the services of one
vendor.
19. COMMITMENTS
On July 25, 2001, Millennium entered into an exclusive limited patent
sublicense and distribution agreement with Isocell SA, a French company,
which owns the rights to certain specialty ingredients. Pursuant to the
License Agreement, Millennium is granted an exclusive sublicense to
promote and distribute this product for use as a dietary supplement or
functional food in certain defined medical market channels of distribution
in North America involving direct sales of nutraceutical products to
physicians for resale to their patients or through physician prescription
for Medicaid/Medicare reimbursement for nutritional supplements.
The License Agreement provides for the sale of the product to Millennium
at stated unit prices subject to volume discounts. The term of the
agreement is for five years, provided that Isocell may cancel the license
(or make it non-exclusive) in the event that Millennium purchases of the
product do not meet scheduled minimum quotas for any calendar quarter
during the term. In such event, Millennium may avoid termination of the
license by paying 50% of the prescribed purchase minimum. Expenses of
$123,994 and $409,731 were incurred under the terms of this agreement for
the years ended December 31, 2005 and 2004, respectively, and are included
in selling, general and administrative expenses. As of December 31, 2005
Millennium is due to pay Isocell $263,209 for licensing fees for calendar
year 2005. This amount is included in Accounts Payable and Accrued
Expenses.
21. LITIGATION
None
22. SUBSEQUENT EVENTS
On April 5, 2006, as noted in the Company's Current Report on Form 8-K
filed with the SEC on April 6, 2006, the Company announced that it has
entered into a letter of intent with an investment fund which, if
consummated, would result in the sale by Millennium's wholly owned
subsidiary of all of the assets used in Millennium's nutraceutical
business to a newly formed company in exchange for shares of common stock
of the new company. The newly formed company would be initially
capitalized by the issuance of $15 million in convertible preferred stock.
The letter of intent, which has been filed as an exhibit to the Current
Report on Form 8-K, is nonbinding and is subject to various conditions,
including completion of due diligence by the investment fund and approval
by Millennium's stockholders.
28
MILLENNIUM BIOTECHNOLOGIES GROUP, INC.
ANNUAL MEETING OF STOCKHOLDERS
February 13, 2007
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Jerry E. Swon, with full power of substitution,
as proxies to represent the undersigned at the Annual Meeting of Stockholders to
be held at The Somerset Hills Hotel, located at 200 Liberty Corner Road, Warren,
NJ 07059 on the 13th day of February, 2007, at 8:00 a.m. local time and at any
adjournment thereof, and to vote all of the shares of common stock of Millennium
Biotechnologies Group, Inc. the undersigned would be entitled to vote if
personally present, upon the following matters:
Please mark box in blue or black ink.
1. Proposal No.1 - for approval of the sale by Millennium Biotechnologies,
Inc. to sell substantially all of its assets, which sale will constitute
the sale of substantially all of the assets of Millennium Biotechnologies
Group Inc. under Delaware law.
o For o Against o Abstain
2. Proposal No.2 - for approval of the amendment to the Certificate of
Incorporation of Millennium Biotechnologies Group Inc. to increase the
number of shares of authorized common stock from 200,000,000 to
400,000,000.
o For o Against o Abstain
3. Proposal No.3 - for ratification and approval of Josephs Levine & Company,
L.L.C., as the independent public accountants of Millennium
Biotechnologies Group, Inc., to audit its financial statements for the
fiscal year ending December 31, 2006.
o For o Against o Abstain
In his discretion, the proxy is authorized to vote upon such other business as
may properly come before the meeting.
THIS PROXY WILL BE VOTED AS DIRECTED, OR, IF NO DIRECTION IS INDICATED, WILL BE
VOTED "FOR" PROPOSALS NO. 1-3 AND, IN THE DISCRETION OF THE PROXY, ON ALL OTHER
MATTERS PROPERLY BROUGHT BEFORE THE ANNUAL MEETING. THIS PROXY IS SOLICITED ON
BEHALF OF THE BOARD OF DIRECTORS.
Please date, sign as name appears at
left, and return promptly. If the stock
is registered in the name of two or more
persons, each should sign. When signing
as Corporate Officer, Partner, Executor,
Administrator, Trustee, or Guardian,
please give full title. Please note any
change in your address alongside the
address as it appears in the Proxy.
Dated:
---------------------------------
---------------------------------
Signature
---------------------------------
(Print Name)
SIGN, DATE AND RETURN PROXY CARD PROMPTLY USING THE ENCLOSED ENVELOPE