UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934
Date of report (Date of earliest event reported) December 31, 2007
HEALTHCARE TECHNOLOGIES LTD.
(Exact name of registrant as specified in its charter)
Israel 011-14129 N/A
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(State or other jurisdiction of (Commission File Number) (IRS Employer
incorporation) Identification No.)
2533 Windguard Circle, Suite 101
Wesley Chapel, Florida 33544
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 813-929-4820
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions (see General Instruction A.2. below):
[_] Written communications pursuant to Rule 425 under the Securities Act (17
CFR 230.425)
[_] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
[_] Pre-commencement communications pursuant to Rule 14d-2(b) under the
Exchange Act (17 CFR 240.14d-2(b))
[_] Pre-commencement communications pursuant to Rule 13e-4(c) under the
Exchange Act (17 CFR 240.13e-4(c))
FORWARD LOOKING STATEMENTS
This Current Report on Form 8-K contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. This Current
Report includes statements regarding our plans, goals, strategies, intent,
beliefs or current expectations. These statements are expressed in good faith
and based upon a reasonable basis when made, but there can be no assurance that
these expectations will be achieved or accomplished. These forward looking
statements can be identified by the use of terms and phrases such "believe,"
"plan," "intend," "anticipate," "target," "estimate," "expect," and the like,
and/or future-tense or conditional constructions ("will," "may," "could,"
"should," etc.). Items contemplating or making assumptions about, actual or
potential future sales, market size, collaborations, and trends or operating
results also constitute such forward-looking statements.
Although forward-looking statements in this report reflect the good faith
judgment of management, forward-looking statements are inherently subject to
known and unknown risks, business, economic and other risks and uncertainties
that may cause actual results to be materially different from those discussed in
these forward-looking statements. Readers are urged not to place undue reliance
on these forward-looking statements, which speak only as of the date of this
report. We assume no obligation to update any forward-looking statements in
order to reflect any event or circumstance that may arise after the date of this
report, other than as may be required by applicable law or regulation. Readers
are urged to carefully review and consider the various disclosures made by us in
our reports filed with the Securities and Exchange Commission ("SEC") which
attempt to advise interested parties of the risks and factors that may affect
our business, financial condition, results of operation and cash flows,
including the in the field of ethanol and biodiesel fuel production under "Risk
Factors" in Part I, Item 1 of this Report. If one or more of these risks or
uncertainties materialize, or if the underlying assumptions prove incorrect, our
actual results may vary materially from those expected or projected.
EXPLANATORY NOTE
In accordance with that certain Purchase Agreement, dated as of January 16,
2007, as amended (the "Purchase Agreement"), by and among, Healthcare
Technologies Ltd., an Israeli corporation ("Healthcare"), NexGen Biofuels, Inc.,
a Delaware corporation ("NexGen Bio"), MAC Bioventures Inc., a Belize
corporation ("MAC") and Gamida for Life B.V., a Netherlands corporation
("Gamida"), on December 31, 2007, Healthcare completed a Plan of Arrangement
(the "Plan") pursuant to which Healthcare transferred substantially all of its
existing business and assets in the field of biotechnology and medical devices
to Gamida and acquired NexGen's principal assets in the field of ethanol and
biodiesel fuel production. Healthcare will continue the business of NexGen Bio
in the field of ethanol and biodiesel as a publicly traded company under the
name NexGen Biofuels Ltd. Unless otherwise indicated, the terms "the Company",
"NexGen", "we," "us," and "our" refer to Healthcare Technologies Ltd. unless
otherwise stated or the context clearly indicates otherwise.
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ITEM 1.01. ENTRY INTO A MATERIAL DEFINITIVE AGREEMENT.
On December 31, 2007, the Company completed the Plan pursuant to the
Purchase Agreement. For a description of the Purchase Agreement and the material
agreements entered into in connection therewith, please SEE Item 2.01 of this
Current Report on Form 8-K, which disclosure is incorporated herein by
reference.
ITEM 2.01. COMPLETION OF ACQUISITION OR DISPOSITION OF ASSETS.
THE PLAN AND RELATED TRANSACTIONS
THE PURCHASE AGREEMENT
CLOSING TRANSACTIONS.
The closing of the Purchase Agreement took place on December 31, 2007 (the
"Closing Date"). At the closing, the following transactions, which together
comprise the Plan, occurred:
o NexGen Bio transferred its principal assets (the "NexGen Assets") in
the ethanol and biodiesel fuel industry consisting of options to
purchase five Greenfield sites in the United States and permitting for
100 million gallons of annual ethanol or bio-diesel production per
site to NexGen 2007, Inc. ("Newco"), a wholly-owned subsidiary of the
Company;
o The Company issued to MAC and MAC's designees an aggregate of
38,280,000 ordinary shares, representing the $58 million appraised
value of the NexGen Assets divided by $1.50 (the agreed upon value of
the Company shares less 1%);
o The Company issued to Israel Amir an aggregate of 386,666 ordinary
shares; and
o The Company transferred substantially all of its existing assets to
Gamida, in consideration for 4,700,000 shares of the Company held by
Gamida.
The form of Purchase Agreement is filed as Exhibit 4.34 to this Current
Report on Form 8-K and is incorporated herein by reference.
The Purchase Agreement was approved by the Audit Committee, Board of
Directors and the shareholders of the Company. In addition, the Plan was
approved by order of the Tel Aviv District Court dated December 31, 2007.
GUARANTEES OF PAYMENT BY MAC
The Purchase Agreement provides that in the event, following the Closing,
the Company is obligated to pay an amount on account of the Excluded Liabilities
(as defined), or liabilities created following the Closing, MAC shall provide
the Company with sufficient funds, either directly or pursuant to a service
agreement to be entered into, to ensure that the Company will be able to pay
such liabilities when due.
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INDEMNIFICATION ARRANGEMENTS AMONG THE PARTIES TO THE PURCHASE AGREEMENT
The Purchase Agreement provides for the following Indemnification
arrangements:
o NexGen Bio shall indemnify, defend and hold harmless the Company and
NewCo for claims relating to the NexGen Assets, which exist as of
Closing or which arise thereafter, unless such claims relate to
unperformed obligations and liabilities of NexGen Bio which are
specifically assumed by NewCo. NewCo shall assume those unperformed
obligations and liabilities of NexGen Bio, arising under the contracts
transferred to NewCo but only from the date of Closing.
o The Company shall indemnify, defend and hold harmless, NexGen Bio, MAC
and NewCo, for claims arising out of any breach of the Purchase
Agreement by the Company, including reach of representations or
warranties made by the Company.
o NexGen Bio, MAC and their affiliates shall indemnify, defend and hold
harmless, the Company and Gamida, for claims arising out of their
breach of the Agreement, including breach of representations or
warranties made by NexGen Bio.
o Gamida shall indemnify, defend and hold harmless: (1) NexGen Bio, MAC
and NewCo, for claims arising out of any breach of the Purchase
Agreement by Gamida, including breach of representations or warranties
made by the Company; and (2) MAC, during the 12 month period following
the Closing, for claims arising out of any breach of the Purchase
Agreement by the Company, including breach of representations or
warranties made by the Company, for damages of no less than $100,000,
and up to the maximum aggregate amount of $1,000,000; and (3) the
Company for any claims relating to the transfer by Gamida to the
Company of 10,132 shares of the Company (of the 4,700,000 shares
contemplated by the Arrangement).
o Under the terms of the Purchase Agreement, at the Closing, Gamida
delivered to MAC a personal guarantee in an amount of $100,000 from
Mr. Daniel Kropf, our former Chairman, and the controlling shareholder
of the parent company of Gamida, in respect of Gamida's
indemnification obligations described in (2) above.
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AMERICAN APPRAISAL VALUATION
In connection with the Purchase Agreement, the Company retained American
Appraisal Associates, ("American Appraisal"), an independent financial
consulting firm, to assist the Company in its determination regarding the value
of the NexGen Assets. American Appraisal produced a written report dated May 4,
2007, which valued the NexGen Assets, on a net present value basis, as
represented by a 100% interest in NexGen Bio's common stock, at approximately
$58 million as of February 14, 2007 (the "AAA Valuation"). The AAA Valuation is
based on assumptions related to the future construction and operations of the
facilities, including inter alia, timing and costs of the construction, debt
incurred, and actual start-up of the proposed facilities. In producing the AAA
Valuation, American Appraisal relied on the accuracy and completeness of certain
financial projections and other data provided by the Company to American
Appraisal. American Appraisal did not independently verify or audit such
information, but assumed its accuracy for the purposes of the AAA Valuation. It
is noted that subsequent to the date of the AAA Valuation, an option on one of
the land sites held by NexGen Bio and mentioned therein was replaced with an
option on another site. In a letter dated, July 13, 2007, a copy of which is
filed as an exhibit hereto, American Appraisal stated that such does not affect
the assumptions and conclusions reached in the AAA Valuation. A copy of the AAA
Valuation is filed as an exhibit hereto. Forward looking statements and any
projections, forecasts and/or estimations contained in the AAA Valuation should
not be relied upon for any purpose. A copy of the AAA Valuation is listed as an
exhibit to this Current Report.
BOAS VALUATION REPORT
Prior to the approval of the Audit Committee and Board of Directors of the
Purchase Agreement, the Company received a valuation from David Boas Business
Consultant Ltd., an independent financial consulting firm, dated January 2007,
which established the value of the Company and the Company's holdings in its
subsidiaries, using the discounted cash flow method derived from the business
over five years (the "Boas Valuation"). The valuation was based on audited and
unaudited financial data, and on business estimates provided by the Company's
executives and directors. The value attributed to the Company's holdings in the
Company's Subsidiaries was $7.4-$7.8 million while the value attributed to the
Company itself, mainly based on the Company's shares trading on NASDAQ and
having carry forward losses for tax purposes was $1.1-$1.2 million, giving the
Company a total value of $8.5-$9 million. A copy of the Boas Valuation is filed
as an exhibit to this Current Report.
NEXGEN BIO'S OPTION
Pursuant to the Purchase Agreement, NexGen Bio may, subject to the
Company's written consent, until 180 days following the Closing, transfer to
NewCo an existing functional ethanol or bio-diesel plant or all of the shares
held by NexGen Bio of an entity which directly owns such a plant ("Option
Assets"), in consideration for such number of our ordinary shares equal to the
value of the Option Assets (based on a written valuation prepared by a
recognized independent firm acceptable to the Company) divided by $1.50 less 1 %
("Option Shares").
The aggregate number of Option Shares issuable by the Company, if any,
shall not exceed 80,000,000 Ordinary Shares.
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ACCOUNTING TREATMENT
The Plan was treated as a recapitalization of the Company for financial
accounting purposes. Accordingly, the historical financial statements of the
Company before the Plan will be replaced with the historical financial
statements of NexGen Bio before the Plan in all future filings that the Company
makes with the SEC.
OFFICERS AND DIRECTORS
On the Closing Date, all of the Company's existing directors other than
Elan Penn, Varda Rotter, and Israel Amir, resigned and Messrs. J. Ram Ajjarapu,
Bruce W. Wilkinson, Esq., Jim McAlinden, Rodrick D. Morrow and Kenneth Hoyt were
appointed to fill the vacancies. Also on the Closing Date, the then-current
officers of the Company, other than Eran Rotem, resigned and new executive
officers designated by NexGen Bio will be appointed in the Company's upcoming
Board meeting. The current officers and directors are identified on Item 5.
under "Directors and Executive Officers, Promoters and Control Persons."
PRO FORMA OWNERSHIP
Immediately after giving effect to the Plan, there are issued and
outstanding on a fully diluted basis (including ordinary shares underlying
outstanding options), 42,100,998 ordinary shares of the Company, as follows:
o MAC and MAC's designees received 38,280,000 ordinary shares,
approximately 91% of the Company's outstanding ordinary shares on a
fully-diluted basis;
o the existing stockholders of the Company retained 3,434,332 ordinary
shares , approximately 8.1% of the Company's outstanding ordinary
shares on a fully-diluted basis; and
o Israel Amir received 386,666 ordinary shares, approximately 0.9% of
the Company's outstanding ordinary shares on a fully-diluted basis.
PART I
1. DESCRIPTION OF BUSINESS
GENERAL
NexGen is currently in the process of obtaining permits and raising capital
to develop, construct, own, and operate four 100 million gallon ethanol plants
and one 100 million gallon bio-diesel plant in five different states in the
United States, in two phases. It is contemplated that the plants will be built
on land over which NexGen, through its wholly-owned subsidiaries, holds options.
We anticipate that in the first phase, three plants will be constructed and
brought to operation (two ethanol plants and one bio-diesel) and in the second
phase two additional ethanol plants will be constructed. The proposed plant
sites are located in Iowa, Ohio, Indiana, Wisconsin and Arkansas. The size of
each of the sites ranges between 100-200 acres and are intended to accommodate
rail loops and the plant. All of the sites are located near existing grain
production, roads, rail transportation and livestock.
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Ethanol is a type of alcohol that in the United States is produced
principally from corn. Bio-diesel is a type of mono-alkyl esters of long chain
fatty acids derived from vegetable oils or animal fats and is made in the United
States mostly from soybean oil. Ethanol/bio-diesel are used as a blend component
in the gasoline and diesel fuel markets. Refiners and marketers, including some
of the major integrated oil companies and a number of independent refiners and
distributors, have historically blended ethanol/bio-diesel with gasoline and
petroleum diesel to increase octane and reduce tailpipe emissions. According to
the Renewable Fuel Association (RFA), the ethanol/bio-diesel industry has grown
significantly over the last few years. NexGen believes that the fuel blends
composed of ethanol/bio-diesel will become increasingly important over time as
an alternative to petroleum based gasoline/diesel, as a result of its favorable
production economics relative to petroleum gasoline/diesel, ethanol/bio-diesel's
clean burning characteristics, a shortage of domestic petroleum refining
capacity, geopolitical concerns, and federally mandated renewable fuel usage.
NexGen is currently negotiating construction contracts with contractors to
build the plants, based upon engineering specifications put forth by
full-service engineering and manufacturing sub-contractors. Other
sub-contractors have also been identified, and NexGen's management intends to
enter into negotiations with such sub-contractors and with selected vendors once
funding is secured.
NexGen has recently acquired a one percent (1%) ownership interest in Mid
America Bio Energy and Commodities, LLC ("MABE") for $1 million dollars. NexGen
has also entered into a letter of intent which contemplates that NexGen will be
granted an option to purchase an additional 24% ownership interest in MABE for
an additional approximate amount of $27,750,000 to be paid in cash and stock.
MABE is a Nebraska limited liability company, which is in the business of
developing and operating ethanol production facilities. MABE currently has an
indirect majority ownership interest in three ethanol projects in various stages
of development which are planned to have capacity to produce 40, 40, and 110
million gallons of ethanol per year, respectively.
BUSINESS STRATEGY
NexGen's objective is to meet the need for clean, economic, alternative
energy sources that achieve less dependence on hydrocarbons. NexGen expects to
capitalize on economic benefits and public policy drivers for renewable fuels
such as ethanol and bio-diesel and develop cost-competitive production
facilities. Key elements of NexGen's strategy to achieve this objective include:
o Building new biofuel plants in strategic locations
o Acquiring currently producing plants
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o Establishing strategic alliances with procurement and marketing
partners
o Achieving good economies of scale in the plants being built
and/or acquired
o Monitoring the market dynamics in the market and adjusting its
operations to sustain in the market place for the long-term
INDUSTRY BACKGROUND
o ETHANOL
American-made, renewable ethanol directly displaces the amount of crude oil
needed from imports, offering independence and security from foreign sources of
energy. According to the Renewable Fuels Association (RFA), current U.S. ethanol
production of 4.85 billion gallons per year can reduce gasoline imports and
effectively extends gasoline supplies at a time when refining capacity is at its
maximum. According to the RFA, the 5 billion gallon ethanol production level
contemplated in the Renewable Fuels Standard could reduce oil imports by nearly
170 million barrels per year.
According to the Renewable Fuels Association in its outlook report for
2007, ethanol production capacity in the United States has grown in the last
twenty years from almost nothing to an estimated 4.9 billion gallons per year.
Plans to construct new plants or to expand existing plants have been announced,
and an increased capacity of approximately 6.38 billion gallons per year is
expected. Increased capacity may continue in the future. The effect of this
increase on the demand for, or price of, ethanol is uncertain.
The ethanol industry has grown to over 119 production facilities in the
United States. The largest ethanol producers include Archer Daniels Midland,
Cargill, Minnesota Corn Processors, Midwest Grain, Williams Energy Service, New
Energy Corporation and High Plains Corporation. According to NexGen's estimates,
each of the aforementioned is capable of producing more than 400 million gallons
ethanol annually.
o BIO-DIESEL
When bio-diesel is blended with petroleum diesel it results in relatively
low start-up costs. Bio-diesel is positioned as a more environmentally friendly
fuel that can result in lower health and safety impacts than petroleum diesel
and while reducing American dependence on imported oil. Although bio-diesel can
achieve incremental reductions in smoke, unburned hydrocarbons and particulate
matter, several studies have shown that bio-diesel can result in slight NOx
increases. Other alternative fuels have demonstrated the ability to decrease all
regulated pollutants. Bio-diesel is domestically produced and renewable.
According to the National Bio-diesel Board, currently 1.39 billion gallons
of bio-diesel from 148 plants is being produced in United States and there are
96 plants under construction which will add 1.89 billion gallons.
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o TARGET MARKET
According to the National Corn Growers Association (NCGA), today's demand
of more than four billion gallons of ethanol per year is expected to grow to 7.5
billion gallons per year by the year 2012 under current law. If the use of MTBE
is phased out on a national level in the next few years and the regulatory
requirements remain unchanged, the anticipated growth may yield a doubling of
ethanol demand much sooner. Recently, a bill including provisions known as the
Renewable Fuels Standard was signed by the President. The new legislation is
changing the use of fuel by determining the specific volume of ethanol to be
used in gasoline on a nationwide basis. NexGen anticipates that the forecasted
demand for ethanol will assist its plants' successful entry and continued
operation in the industry. The dramatic rise in ethanol utilization in the
coming years predicted by the NCGA is expected to require doubling present
ethanol production capacity to supply the demand.
o ETHANOL/BIO-DIESEL PRODUCTION PROCESS
Below is a description of the production process of ethanol and bio-diesel.
ETHANOL:
The ethanol plants will produce ethanol generally by processing corn. The
corn will be received by rail and by truck, then weighed and unloaded in a
receiving building into storage bins. Thereafter, the corn will be conveyed to a
scalper to remove rocks and debris before it is transported to a hammer mill or
grinder where it is grounded into a mash and conveyed into a slurry tank for
enzymatic processing. Water, heat and enzymes will be added to break the ground
grain into fine slurry which will be heated for sterilization and pumped to a
liquefaction tank where additional enzymes are added. Next, the grain slurry
will be pumped into fermenters, where yeast is added, to begin a batch
fermentation process. A vacuum distillation system will divide the alcohol from
the grain mash. Alcohol is then transported through a rectifier column, a side
stripper and a molecular sieve system where it is dehydrated. Two hundred-proof
alcohol is then pumped to farm shift tanks and blended with five percent
denaturant, usually gasoline, as it is pumped into storage tanks. The two
hundred-proof alcohol and five percent denaturant constitute ethanol.
Ethanol's by-products, mainly distillers grains, are made when corn mash
from the distillation stripper is pumped into one of several decanter type
centrifuges for dewatering. The water ("thin stillage") is then pumped from the
centrifuges to an evaporator where it is dried into thick syrup. The solids that
exit the centrifuge or evaporators ("the wet cake") are conveyed to the
distillers dried grains dryer system. Syrup is added to the "the wet cake" as it
enters the dryer, where moisture is removed. The distillers grains can be used
as animal feed.
BIO-DIESEL:
Bio-diesel is made through a chemical process called transesterification
whereby glycerin is separated from animal fat or vegetable oil. The process
leaves behind two products -- methyl esters (the chemical name for bio-diesel)
and glycerin (a marketable by-product). There are three basic routes to produce
bio-diesel from oils and fats: (1) base catalyzed transesterification of the oil
with alcohol; (2) direct acid catalyzed esterification of the oil with methanol;
and (3) conversion of the oil to fatty acids, and then to Alkyl esters with acid
catalysis. The majority of the alkyl esters produced today are done with the
base catalyzed reaction because it is the most economic for several reasons: low
temperature (150(degree) F) and pressure (20 psi) processing, high conversion
(98%) with minimal side reactions and reaction time, direct conversion to methyl
ester with no intermediate steps and exotic materials of construction are not
necessary.
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A fat or oil is reacted with an alcohol, like methanol, in the presence of
a catalyst to produce glycerine and methyl esters or bio-diesel. The methanol is
charged in excess to assist in quick conversion and recovered for reuse. The
catalyst is usually sodium or potassium hydroxide which has already been mixed
with the methanol.
o MARKETING ARRANGEMENTS
Most all ethanol/bio-diesel plants around the country, sell
ethanol/bio-diesel and their by-products (distillers grains, corn oil, glycerin
and CO2) through a strategic alliance partner or marketing firms. They do not
engage their own sales personnel in the process. We will follow the same sales
and marketing strategy.
NexGen intends to transport ethanol/bio-diesel, corn oil, DDGS and glycerin
using rail cars, trucks, and other channels of distribution as needed. NexGen
has started discussions with certain rail car leasing companies to lease
sufficient tank cars and DDGS/Corn cars to be delivered before the production
starts at each plant.
Ethanol/bio-diesel pricing is highly volatile and driven by the crude oil
prices as well as gasoline and diesel prices. Its price is frequently
proportional to imported oil prices. Historically, ethanol/bio-diesel plants
sign long-term contracts with ethanol/bio-diesel marketing companies to mitigate
risk and avoid any major cash flow swings. Most ethanol/bio-diesel plants sell
80% of their production on long-term contracts and the remaining 20% on spot
markets to take advantage of upswing prices. NexGen's management will follow
these practices and will employ hedging futures and options to protect against
downturns.
For a further discussion of NexGen's proposed plan of operations, see Item
2. Management's Analysis or Plan of Operation below.
RISK FACTORS
An investment in NexGen involves a high degree of risk, including the risks
and uncertainties described below.
RISKS RELATED TO THE CONSTRUCTION, DEVELOPMENT AND OPERATION OF THE PROPOSED
FACILITIES
Our principal assets consist of options to own land sites on which we
propose to construct ethanol and/or bio-diesel production facilities. We may not
obtain the funding or the consents and approvals required to construct and
operate the proposed ethanol and/or bio-diesel production facilities.
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The planning, construction and operation of ethanol and/or bio-diesel
production facilities is a complex undertaking that involves various elements
including engineering, design, procurement of equipment, construction and
obtaining financing and permits required therefor.
We will be entirely dependent on obtaining debt and equity financing from
third parties to fund the construction and development of our production
facilities following the Closing. NexGen estimates that it will cost
approximately $200 million per ethanol site and $100 million per bio-diesel
site, to develop and construct such facilities. We do not have any definitive
agreements or understandings at this time to obtain this financing and there can
be no assurance that we will be successful in doing so.
If we are not successful obtaining the necessary permits and approvals or
raising the necessary funds, in a timely manner, or at all, in order to plan,
construct or operate the production facilities, you could lose all or a
substantial part of the value of your shares in our company.
NEXGEN HOLDS OPTIONS TO PURCHASE THE LAND SITES BUT DOES NOT OWN THEM.
NexGen's principal assets are options to purchase land sites in the United
States on which we propose to construct our production facilities. In order to
obtain ownership of the land sites, we will need to exercise these options under
the terms of the option agreements. The timing of the exercise of these options
will depend, in part, on our prospects for raising funds and prevailing and
forecasted market conditions. If we do not exercise the options prior to their
expiration dates, we may have to seek alternative sites in order to implement
our business plan, which may not be available on reasonable terms or at all.
WE MAY NEVER BECOME PROFITABLE.
We expect to incur significant losses until we successfully complete
construction and commence operations of one or more of the planned
ethanol/bio-diesel production facilities or otherwise acquire one or more
functional ethanol/bio-diesel production facilities that operate at sufficient
profit levels. NexGen estimates that it will take approximately 18 to 24 months
to develop and construct each ethanol facility and approximately 12 to 18 to
develop and construct the bio-diesel facility, but it may take longer. We may
not be successful in our efforts to build and operate the facilities. In
addition, we may not be successful in securing financing necessary to build and
operate our ethanol/bio-diesel production facilities or to fund our ongoing
general and administrative expenses. Even if we successfully meet all of these
objectives and begin operations, we may be unable to operate profitably. In
addition, we expect to record significant depreciation and amortization expenses
which will add to our losses.
WE HAVE NO OPERATING HISTORY OF ETHANOL/BIO-DIESEL PRODUCTION FACILITIES,
WHICH COULD RESULT IN ERRORS IN MANAGEMENT AND OPERATIONS, CAUSING A MATERIAL
ADVERSE EFFECT ON OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
NexGen has no history of operating a bio-fuels production facility. While
Mr. Ram Ajjarapu has extensive experience and knowledge within the
ethanol/bio-diesel industry in carrying out projects involving 100 million
gallons per year production facilities, NexGen does not have experience in
constructing, developing or operating an ethanol or bio-diesel production
facility.
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We may be unable to manage the start-up of our facilities in a timely and
cost-effective manner, and any failure by us to do so would delay our ability to
begin producing and selling ethanol or bio-diesel. A delay in start-up
operations is likely to further delay our ability to generate revenue and
satisfy our debt obligations and our financial condition and results of
operations could be materially adversely affected.
We anticipate a period of significant growth, involving the construction
and start-up of operations of several production facilities. This period of
growth and the start-up of our facilities are likely to be a substantial
challenge to us. If we fail to manage this start-up effectively, you could lose
all or a substantial part of the value of your shares.
WE MAY BE UNABLE TO MEET THE ADMINISTRATIVE AND OPERATIONAL NEEDS OF OUR
DEVELOPMENT AND GROWTH EFFECTIVELY, WHICH COULD RESULT IN OUR INABILITY TO
ADEQUATELY INCREASE OUR SALES OR TO EFFICIENTLY OPERATE OUR BUSINESS.
Our strategy envisions a period of rapid growth and that may impose a
significant burden on our administrative and operational resources. The
completion of construction of our facilities and growth of our business, will
require significant investments of capital and management's close attention. Our
ability to effectively manage our growth will require us to substantially expand
the capabilities of our administrative and operational resources and to attract,
train, manage and retain qualified management, technicians and other personnel.
We may be unable to retain and hire the number of qualified persons necessary to
operate our facilities effectively.
WE ARE DEPENDENT UPON OUR OFFICERS AND DIRECTORS, AND OUR FAILURE TO HIRE
OR THE LOSS OF ANY OF THESE PERSONS COULD ADVERSELY AFFECT OUR OPERATIONS AND
RESULTS.
We are dependent upon our officers and directors for execution of our
business plan. The assembly of our management team is still not complete. Our
failure to hire or the loss of any of our officers or directors could adversely
affect the execution of our business plan and have a material adverse effect
upon our results of operations and financial position. We do not intend to
maintain "key person" life insurance for any of our officers or directors.
OUR MANAGEMENT'S TIME AND ATTENTION WILL BE DIVIDED AMONG OUR PLANTS, AND
EACH OF OUR PLANTS WILL BE MANAGED UNDER A SIMILAR MANAGEMENT MODEL, WHICH MAY
PREVENT US FROM ACHIEVING A MAXIMUM RETURN FROM ANY ONE PLANT.
Our business model calls for us to establish a U.S. holding company, NewCo,
that will wholly-own separate business entities which in turn will each own one
of our plants; however each of such entities will be managed by a centralized
management team. The demands on our management's time from one plant may, from
time to time, compete with the time and attention required for the operation of
the other plants. This division of our management's time and attention among our
plants may make it difficult for us to realize the maximum return from any one
plant.
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IF OUR PRINCIPAL AGREEMENTS ARE TERMINATED OR BECOME UNFAVORABLE, OUR
PROJECTS MAY FAIL OR BE HARMED IN WAYS THAT SIGNIFICANTLY REDUCE THE VALUE OF
YOUR SHARES.
We will be dependent on various contractors, suppliers, lenders and other
third parties for the implementation and financing of each project. If
agreements with such parties are terminated or if the terms are amended
unfavorably to us, our projects may be harmed or even fail. Because we will be
dependent on the success of several large-scale projects, the impairment or
failure of any of these projects could significantly reduce our production and
revenues.
GIVEN THAT ALL OF OUR REVENUE WILL BE PRIMARILY DERIVED FROM THE PRODUCTION
AND MARKETING OF ETHANOL AND BIO-DIESEL AND THEIR CO-PRODUCTS, ANY DISRUPTION IN
OUR OPERATIONS COULD HAVE A MATERIAL ADVERSE EFFECT ON US.
Assuming we will successfully construct and bring some or all of the
proposed facilities to operation, our primary source of revenues will be from
the sale of ethanol and bio-diesel and related co-products that we will produce
at our facilities. We will not have an alternative line of business in the event
that we are unable to operate our facilities for any reason. Any delay or
stoppage in our anticipated production would substantially reduce our revenues
and adversely affect our results of operations.
OUR DEPENDENCY ON KEY SUPPLIERS TO DESIGN AND BUILD OUR FACILITIES AND
SUPPLY NECESSARY EQUIPMENT MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS.
We are highly dependent upon general contractors and key vendors to design,
engineer and build the proposed facilities. We do not have any definitive
agreements or understandings with any such contractors or vendors at this time.
If one of our future contractors or vendors were to terminate its relationship
with us, there is no assurance that we would be able to obtain a replacement
contractor or vendor or that a replacement would be able to complete
construction within the originally contracted time frame and at the same or a
lower price. Any delay in the planning, construction or commencement of
operations of our facilities or problems in the design or engineering of our
facilities could have a material adverse effect on our production and results of
operations and could force us to abandon our business plan.
OUR GENERAL CONTRACTORS, SUPPLIERS AND VENDORS MAY HAVE CONFLICTING
INTERESTS THAT COULD CAUSE THEM TO PUT THEIR FINANCIAL INTERESTS AHEAD OF OURS,
WHICH MAY HAVE A MATERIAL ADVERSE EFFECT OUR BUSINESS.
Our contractors, suppliers and vendors may experience conflicts of interest
that cause them to put their financial interests ahead of our best interests.
Our contractors, suppliers and vendors may also have conflicts of interest due
to the fact that they are involved in the design and construction of other
ethanol/bio-diesel plants. Although schedule and performance guarantees may
motivate our contractors, suppliers and vendors to perform their agreements with
respect to our facilities, we cannot ultimately require them to devote their
full time or attention to our activities. As a result, they may come to have, a
conflict of interest in allocating personnel, materials and other resources to
our facilities which could result in inefficiencies and delays in our
production, which could materially adversely affect our business. Such conflicts
of interest may reduce our profitability and the value of our shares.
13
THE COST AND TIME TO CONSTRUCT OUR FACILITIES AND COMMENCE OPERATIONS MAY
BE MORE THAN WE ANTICIPATE.
The cost to construct our facilities and commence operations may be higher
than expected and the construction of any of our facilities could take longer
than anticipated. For example, in order to commence construction of our
facilities, we will need to obtain numerous governmental and regulatory permits,
including the consent of municipal authorities to change the zoning regarding
some of our proposed facilities. It may take us significantly more time than
anticipated to obtain the necessary permits and consents for us to commence
construction.
Any significant increase in the estimated construction cost of, or in the
estimated length of time for, one or more of our facilities could hinder our
ability to complete construction and would delay our ability to generate
revenues and as a result could have a material adverse effect on our business
and results of operations or even force us to abandon our business plan.
Moreover, our failure to receive any of the required permits or consents could
have a material adverse effect on our business and results of operations or even
force us to abandon our business plan.
WE MAY ENCOUNTER DEFECTIVE MATERIAL AND WORKMANSHIP OR PROCESS ENGINEERING
THAT COULD CAUSE SIGNIFICANT DELAYS IN THE COMMENCEMENT OF OUR OPERATIONS.
Any defects in material or workmanship may cause substantial delays in the
commencement of operations of our facilities. If defects are discovered after
commencement of operations, or if our facilities fail to meet the performance
criteria, substantial delays in the commencement of operations could occur which
may have a material adverse effect on our business and results of operations.
WE WILL BE SUBJECT TO THE RISK OF LOSS DUE TO FIRE BECAUSE ETHANOL AND
BIO-DIESEL AND THE MATERIALS TO BE USED TO PRODUCE OUR PRODUCTS ARE HIGHLY
FLAMMABLE.
Ethanol and bio-diesel, and products such as natural gas and/or propane
which are used in the production thereof, are highly flammable materials and we
are therefore subject to the risk of loss arising from fires. The risk of fire
associated with these materials cannot be completely eliminated. We intend to
maintain insurance policies to reduce losses caused by fire, including business
interruption insurance. If any of our production facilities were to be damaged
or cease operations as a result of a fire, or if our insurance proves to be
inadequate, it would harm our manufacturing capacity and adversely effect our
results of operations.
THE CONDITION OF OUR CONSTRUCTION SITES MAY DIFFER FROM WHAT WE EXPECT.
If we encounter concealed or unknown conditions at our facility sites, it
could result in an increase in the cost of construction of our facilities and
may result in time delays and alternatives may not be available on reasonable
terms or at all. Concealed or unknown conditions include any concealed physical
conditions at each site that materially differ from the conditions contemplated.
Although the sites have undergone limited inspection by NexGen, concealed or
unknown conditions are often difficult to detect and there can be no assurance
that we will not encounter them. There is no assurance that after full
investigation some or all of the sites will be determined to be suitable for the
plants. We have not inspected the sites and are relying on NexGen's judgment as
to the suitability thereof for the construction and operation of the proposed
production facilities.
14
RISKS RELATED TO FINANCING THE CONSTRUCTION AND DEVELOPMENT OF THE FACILITIES
WE MAY SELL INTERESTS IN OR FORM PARTNERSHIPS OR JOINT VENTURES TO DEVELOP
SPECIFIC PROJECTS, WHICH COULD RESULT IN A MATERIAL DECREASE IN OUR INTEREST IN,
AND CONTROL OVER, SUCH PROJECTS, MAY AFFECT THE CONSOLIDATION OF THESE PROJECTS
IN OUR FINANCIAL STATEMENTS, AND WILL SUBJECT US TO RISKS RELATED TO ATTRACTING
AND MAINTAINING RELATIONSHIPS WITH CO-PARTNERS AND CO-VENTURERS.
To finance and develop specific projects, we may sell interests in or form
partnerships or joint ventures. Any dispositions of interests in the specific
projects may result in a deconsolidation of these project subsidiaries from our
consolidated financial results and may result in a material decrease in our
interest in, and control over, such projects. In addition, these partnerships or
joint ventures may involve the following risks: (i) we may be unable to maintain
productive relationships with our co-partners or co-venturers; (ii) we may be
unable to locate appropriate parties willing to buy interests or participate in
partnerships or joint ventures on a timely and economic basis, if at all; (iii)
our co-partner or co-venturer in a project might become bankrupt or encounter
liquidity problems; (iv) our co-partner or co-venturer may have economic or
business interests or goals that are, or that become, inconsistent with our
business interests or goals; (v) we may incur liabilities as the result of the
action taken by our co-partner or co-investor; (vi) our co-partner or
co-venturer may be in a position to take action contrary to our instructions or
requests or contrary to our policies or objectives; (vii) we may have a right of
first refusal to buy out other co-partners or co-venturers, but may be unable to
finance such buy-out at the appropriate time; and (viii) we may be unable to
sell our interest in a partnership or joint venture if we desire to exit the
venture for any reason.
OUR BUSINESS COULD BE MATERIALLY ADVERSELY AFFECTED AS A RESULT OF THE
RISKS ASSOCIATED WITH ACQUISITIONS OF FUNCTIONAL PLANTS. IN PARTICULAR, WE MAY
NOT SUCCEED IN EFFECTIVELY INTEGRATING SUCH ACQUISITIONS.
As part of our business strategy, we may make acquisitions of existing
functional plants or of companies owning such plants. We evaluate the tactical
or strategic opportunity available related to acquiring existing renewable fuel
plants or companies owning such plants. The process of integrating an acquired
company's business into our operations, may result in unforeseen operating
difficulties and large expenditures and may absorb significant management
attention that would otherwise be available for the ongoing development of our
business. Other risks commonly encountered with acquisitions include the effect
of the acquisition on our financial and strategic position and reputation, the
failure of the acquired business to further our strategies, the inability to
successfully integrate or commercialize acquired production facilities or
otherwise realize anticipated synergies or economies of scale on a timely basis,
and the potential impairment of acquired assets. Moreover, there can be no
assurance that the anticipated benefits of any acquisition or investment will be
realized. Future acquisitions could result in potentially dilutive issuances of
equity securities, the incurrence of debt and contingent liabilities, and
amortization expenses related to intangible assets, any of which could have a
material adverse effect on our operating results and financial condition.
15
WE WILL HAVE A SUBSTANTIAL AMOUNT OF INDEBTEDNESS, WHICH MAY ADVERSELY
AFFECT OUR CASH FLOW AND OUR ABILITY TO OPERATE OUR BUSINESS.
In order to implement our business plan following the Closing, we expect to
have a substantial amount of indebtedness which will result in substantial debt
service requirements, which could have important adverse consequences that could
hinder our ability to conduct our operations, including our ability to: (i)
incur additional indebtedness; (ii) make capital expenditures; (iii) make
distributions to shareholders, or redeem or repurchase shares; (iv) make certain
types of investments or acquisitions; (v) create liens on our assets; and (vi)
merge or consolidate or dispose of assets.
A large amount of indebtedness will reduce the funds available to us for
operations because a substantial portion of our operating cash flow will be used
to pay interest and principal on debt subject all or substantially all of our
operating subsidiaries' assets to liens, limit our ability to adjust to changing
market conditions, which could make us more vulnerable to a downturn in the
economy, the ethanol/bio-diesel industry or our business. We cannot be certain
that our earnings will be sufficient to allow us to pay the principal and
interest on our debt and meet our other obligations. If we do not have enough
money to service our debt, we may be unable to refinance all or part of our
debt, sell assets, borrow more money or raise equity on terms acceptable to us,
if at all, in order to meet our obligations. Furthermore, if we breach any of
the covenants or undertakings in our loan agreements, a lender could require us
to immediately repay all loans made by them to us, plus penalties, and they
would be entitled to exercise the remedies available to them under our loan
agreements, which may include the enforcement of liens against all of our
assets. This would have a material adverse effect on our company and may cause
us to cease our operations.
OUR INABILITY TO OBTAIN THE DEBT FINANCING NECESSARY TO CONSTRUCT AND
OPERATE OUR PLANNED PRODUCTION FACILITIES COULD RESULT IN THE FAILURE OF THOSE
PROJECTS.
Our financing plan requires a significant amount of debt financing. The
amount and nature of the debt financing that we will be seeking will be subject
to fluctuating interest rates and an ever-evolving credit environment as well as
general economic factors and other factors over which we have no control. The
construction and start-up of each facility is contingent on our ability to
arrange debt financing from third party financing sources. If the debt financing
we need is not available for any reason, we could be forced to abandon one or
more of our projects which singularly or in the aggregate could adversely impact
our business and could force us to abandon our business plan.
16
RISKS RELATED TO OWNERSHIP OF OUR SHARES FOLLOWING THE ARRANGEMENT
THE PRICE OF OUR SHARES HAS BEEN AND MAY CONTINUE TO BE VOLATILE, WHICH
COULD RESULT IN SUBSTANTIAL LOSSES FOR INDIVIDUAL SHAREHOLDERS.
The market price of the Company's ordinary shares during 2007 ranged
between a high sales price of $ 2.03 and a low sales price of $ 0.80 and may
continue to be highly volatile and subject to wide fluctuations in response to
factors including the following, some of which are beyond the Company's control:
o actual or anticipated variations in the Company's quarterly operating
results;
o announcements or new pricing practices by the Company or its
competitors;
o changes in government regulations relating to the construction of our
production facilities and the production of our products;
o results of regulatory inspections;
o changes in earnings estimates or recommendations by research analysts
who might follow us or other companies in our industry;
o announcements by the Company or its competitors of significant
acquisitions, strategic partnerships, joint ventures or capital
commitments;
o additions or departures of key personnel; and
o sales of additional ordinary shares.
In addition, the stock market in general has from time to time experienced
extreme price and volume fluctuations. These broad market fluctuations may
adversely affect the market price of the Company's ordinary shares, regardless
of the Company's actual operating performance.
OUR ISSUING OF ADDITIONAL SHARES WILL DILUTE OR OTHERWISE LIMIT YOUR VOTING
OR ECONOMIC RIGHTS.
To enable us to plan, construct, develop and/or operate each of the
production facilities, we expect to seek additional equity financing, which
would cause dilution to the holders of our shares, and a reduction in their
voting and equity interests. It is currently anticipated that in the first phase
of our business plan, in which we intend to construct two ethanol facilities and
one bio-diesel facility, we will seek to raise approximately $150 million
through equity. Shareholders do not have any preemptive rights with regard to
shares to be issued by us in the future in connection with any such additional
equity financing. If we sell additional shares, the sale price of those shares
could be higher or lower than the price per share of the Company's shares prior
to the Arrangement. In addition, it is likely that we will issue in the future
options to purchase additional shares of the Company, to attract, retain and
reward our key directors, managers, employees, consultants and service
providers, an act that would be dilutive to all existing shareholders. We may
also decide to pay in kind all or a portion of the purchase price of the land
underlying our land options by issuing shares or other securities.
17
CONCENTRATION OF OWNERSHIP OF THE COMPANY'S SHARES MIGHT LOWER THEIR
TRADING VOLUME.
MAC, the Company's principal shareholder, owns approximately 85% of our
outstanding shares and the shares held by MAC are restricted securities under
U.S. securities laws. This concentration of ownership may result in low trading
volumes of our shares which could adversely affect our shareholders' ability to
sell their shares in the short term period or at all.
MAC, THE COMPANY'S PRINCIPAL SHAREHOLDER, EXERTS SIGNIFICANT INFLUENCE OVER
US AFTER THE CONSUMMATION OF THE ARRANGEMENT. ITS INTERESTS MAY NOT COINCIDE
WITH YOURS AND IT MAY MAKE DECISIONS WITH WHICH YOU MAY DISAGREE.
MAC, the Company's principal shareholder owns approximately 85% of our
outstanding shares. As a result, MAC controls substantially all matters
requiring shareholder approval, including the election of directors and approval
of significant corporate transactions. In addition, this concentration of
ownership may delay or prevent a change in control of our company and make some
transactions more difficult or impossible without the support of MAC. The
interests of MAC may not always coincide with our interests as a company or the
interest of other shareholders. Accordingly, MAC could cause us to enter into
transactions or agreements that you would not approve or make decisions with
which you may disagree.
WE DID NOT MEET THE NASDAQ CAPITAL MARKET INITIAL LISTING STANDARDS
FOLLOWING THE CLOSING WHICH WILL RESULT IN THE DELISTING OF OUR SHARES FROM THE
NASDAQ CAPITAL MARKET.
Our ordinary shares are traded on the NASDAQ Capital Market, which has
adopted rules that establish criteria for initial and continued listing of
securities. We have been advised that NASDAQ believes that the Arrangement
constitute a reverse merger transaction under NASDAQ Rule 4340. As a result, we
were required to meet the NASDAQ Capital Market initial listing standards, which
include shareholders' equity of at least $4 million, market value of publicly
held shares of at least $15 million, market value of all shares of at least $50
million and a minimum bid price of $4, immediately following the Closing in
order to remain listed on NASDAQ. We did not meet such standards. As a result,
we anticipate that Nasdaq shall seek to delist our ordinary shares. If our
ordinary shares are delisted from the NASDAQ Capital Market, trading in our
ordinary shares could be conducted on an electronic bulletin board established
for securities that do not meet the NASDAQ listing requirements, and our shares
would be subject to the so-called penny stock rules that impose restrictive
sales practice requirements on broker-dealers who sell those securities.
Consequently, could affect the ability of our shareholders to sell their
ordinary shares in the secondary market. The restrictions applicable to shares
that are de-listed, as well as the lack of liquidity for shares that are traded
on an electronic bulletin board, may adversely affect the market price of such
shares.
18
A LOW MARKET PRICE MAY SEVERELY LIMIT THE POTENTIAL MARKET FOR OUR ORDINARY
SHARES.
Our ordinary shares are currently trading at a price substantially below
$5.00 per share, subjecting trading in the stock to certain SEC rules requiring
additional disclosures by broker-dealers. These rules generally apply to any
equity security that has a market price of less than $5.00 per share, subject to
certain exceptions (a "penny stock"). Such rules require the delivery, prior to
any penny stock transaction, of a disclosure schedule explaining the penny stock
market and the risks associated therewith and impose various sales practice
requirements on broker-dealers who sell penny stocks to persons other than
established customers and institutional or wealthy investors. For these types of
transactions, the broker-dealer must make a special suitability determination
for the purchaser and have received the purchaser's written consent to the
transaction prior to the sale. The broker-dealer also must disclose the
commissions payable to the broker-dealer, current bid and offer quotations for
the penny stock and, if the broker-dealer is the sole market maker, the
broker-dealer must disclose this fact and the broker-dealer's presumed control
over the market. Such information must be provided to the customer orally or in
writing before or with the written confirmation of trade sent to the customer.
Monthly statements must be sent disclosing recent price information for the
penny stock held in the account and information on the limited market in penny
stock. The additional burdens imposed upon broker-dealers by such requirements
could discourage broker-dealers from effecting transactions in our ordinary
shares.
WE MAY NOT EVER DISTRIBUTE DIVIDENDS.
The Company has not paid cash dividends on its ordinary shares in the past
and has no plans to pay such dividends in the future. However, the Company does
not rule out the possibility of paying such dividends in the future in the
appropriate circumstances. An investor should not rely on an investment in the
Company if such investor requires dividend income; the only return that such
investor may receive may come from the appreciation, if any, in the value of the
Company's ordinary shares. In determining whether to pay dividends, the
Company's Board of Directors will consider many factors, including its earnings,
capital requirements and financial condition. In addition, under Israeli law,
the Company may only pay cash dividends from its retained earnings, if any, as
calculated under Israeli law.
RISKS RELATED TO GOVERNMENT REGULATION
THE UNITED STATES RENEWABLE FUELS INDUSTRY IS HIGHLY DEPENDENT UPON A
MYRIAD OF FEDERAL AND STATE LEGISLATION AND REGULATIONS, AND ANY CHANGES IN
LEGISLATION OR REGULATIONS COULD MATERIALLY ADVERSELY AFFECT OUR RESULTS OF
OPERATIONS AND FINANCIAL CONDITION.
The elimination of or significant reduction in federal ethanol and
bio-diesel tax incentives could have a material adverse effect on our results of
operations and financial condition. The cost of production of ethanol and
bio-diesel is made significantly more competitive with regular gasoline by
federal tax incentives. Before January 1, 2005, the federal excise tax incentive
program allowed gasoline distributors who blended ethanol with gasoline to
receive a federal excise tax rate reduction for each blended gallon they sold
while there was no credit for bio-diesel blends. If the fuel was blended with
10% ethanol, the refiner/marketer paid $0.052 less tax per gallon of blended
fuel, which equated to an incentive of $0.52 per gallon of ethanol. The $0.52
per gallon incentive for ethanol was reduced to $0.51 per gallon in 2005 and a
refund system was created for bio-diesel, allowing an incentive of $0.50 per
gallon of bio-diesel. Unless otherwise extended, the refund system for ethanol
and bio-diesel will expire at the end of 2010 (2008 in the case of bio-diesel).
We cannot provide you with any assurance that the federal tax incentives will be
renewed in 2010 (2008 in the case of bio-diesel) or if renewed, on what terms
they will be renewed. The elimination or any significant reduction in the
federal tax incentives may have a material adverse effect on our results of
operations and financial condition.
19
The effect of the Renewable Fuels Standard, or RFS, in the recent U.S.
Energy Policy Act of 2005 is uncertain. The use of fuel oxygenates, including
ethanol, was mandated through government regulations, and much of the forecasted
growth in demand for ethanol was expected to result from additional mandated use
of oxygenates. The Energy Policy Act of 2005, or the Energy Policy Act, however,
eliminated the mandated use of oxygenates and established minimum nationwide
levels of renewable fuels, including ethanol to be included in gasoline. The
Energy Policy Act also included provisions for trading of credits for use of
renewable fuels. We can provide no assurance that the favorable ethanol
provisions in the Energy Policy Act will not be adversely affected by
regulations or the enactment of additional legislation in the future.
FEDERAL REGULATIONS CONCERNING TAX INCENTIVES COULD EXPIRE OR CHANGE WHICH
COULD REDUCE OUR REVENUES.
The U.S. federal government presently encourages ethanol and bio-diesel
production by taxing it a lower rate. This currently equates to a $0.51 per
gallon subsidy of ethanol and $0.50 per gallon subsidy of bio-diesel. Some
states and cities provide additional incentives. The Energy Policy Act of 2005
effectively mandates increases in the amount of annual ethanol and bio-diesel
consumption in the United States. The result is that the ethanol/bio-diesel
industry's economic structure is highly dependent on government policies.
Although current policies are favorable factors, any major change in federal
policy, including a decrease in ethanol/bio-diesel production incentives, would
have significant adverse effects on our proposed plan of operations and cause us
to discontinue our ethanol/bio-diesel business.
There is disagreement in the scientific community about the wisdom of
policies encouraging ethanol/bio-diesel production, which could result in
changes in governmental policies concerning ethanol.
Some past studies have challenged whether ethanol is an appropriate source
of fuel and fuel additives because of concerns about energy efficiency,
potential health effects, cost and impact on air quality. Federal energy policy,
as set forth in the Energy Policy Act of 2005, strongly supports ethanol
production. If a consensus develops that ethanol production does not enhance the
U.S. overall energy policy, our ability to produce and market ethanol could be
materially and adversely affected.
20
THE COST OF COMPLIANCE AND/OR NON-COMPLIANCE WITH THE EXTENSIVE
ENVIRONMENTAL LAWS AND REGULATIONS THAT APPLY COULD HAVE A MATERIAL ADVERSE
EFFECT ON OUR BUSINESS.
We will be subject to various federal, state and local environmental laws
and regulations, with regards, inter alia, to the construction of the
facilities, and operation of the plants, such as, discharge of materials into
the air, water and ground, the generation, storage, handling, use,
transportation and disposal of hazardous materials. We are required to obtain
permits that must be renewed from time to time to operate our business.
Additionally, compliance with new or amended environmental laws, regulations
and/or permits, or new interpretations of such laws, regulations and/or permits,
could require us to incur significant expense. Such changes in laws, regulations
and/or permits, or increased enforcement by governmental authorities, may have a
material adverse effect on our financial condition. These laws, regulations and
permits may limit our operations, require us to alter our production process or
purchase pollution control equipment, any of which could negatively impact our
business. We may not at all times be in complete compliance with these laws,
regulations and/or permits and we cannot guarantee that we will be successful in
obtaining all permits required to operate our business. A violation of these
laws and regulations or permits can result in significant fines, criminal
sanctions, permit revocations, damages and/or operational shutdowns, all or any
of which may adversely affect our business.
WE MAY BE SUBJECT TO LEGAL ACTIONS BROUGHT BY THIRD PARTIES FOR ACTUAL OR
ALLEGED VIOLATIONS OF CERTAIN OF OUR ENVIRONMENTAL PERMITS OR ENVIRONMENTAL LAWS
AND REGULATIONS.
We also may be subject to legal actions from third parties alleging that we
have an obligation to remediate or respond to an environmental condition or
alleging property damage and/or personal injury resulting from the handling,
producing, storing, transporting, and/or using our raw materials and/or
products. Ethanol and bio-diesel production may produce an odor which may be
objectionable to surrounding residents, and may increase dust in the vicinity of
the plant due to our operations and the transportation of grain to our
facilities and transportation of ethanol, bio-diesel, glycerin and distillers
grains from our facilities. Such activities could subject us to nuisance,
trespass or similar claims by employees of our facilities or property owners or
residents in the vicinity of the plant. The occurrence of events which result in
significant personal injury or damage to property or third parties that is not
fully covered by insurance could have a material adverse impact on our results
of operations and financial condition.
We may be subject to liability for the investigation and cleanup of
environmental contamination at our facilities and/or at off-site properties
where we arrange for the disposal of hazardous materials. If such materials are
disposed of or released at sites that undergo investigation and/or remediation,
we may be responsible under environmental laws for all or part of the costs of
such investigation and/or remediation, and for damages to natural resources. We
may also be subject to related claims by private parties alleging property
damage and/or personal injury due to exposure to hazardous or other materials
at, on, under or from such properties. Some of these matters may require us to
expend significant amounts of money for investigation and/or cleanup or other
costs.
21
AS A RESULT OF THE CLOSING OF THE PLAN WE ARE NO LONGER CONSIDERED A
FOREIGN PRIVATE ISSUER UNDER U.S. SECURITIES LAWS, AND ARE SUBJECT TO BROADER
REPORTING REQUIREMENTS, WHICH MAY PUT A STRAIN ON OUR ACCOUNTING, INTERNAL AUDIT
AND OTHER MANAGEMENT SYSTEMS AND RESOURCES, AND MAY SUBJECT OUR SHAREHOLDERS TO
ADDITIONAL LEGAL REQUIREMENTS.
As a result of the closing of the Plan we are required to comply with
reporting requirements for a domestic company rather than a foreign private
issuer under U.S. securities laws. As a domestic reporting company, the Company
is required to file more detailed reports with the SEC. Furthermore, the
Company's officers and directors will also be subject to certain liabilities
such as the reporting and "short swing" profit recovery provisions contained in
Section 16 of the U.S. Securities Exchange Act, and reporting requirements to
which they are currently exempted, such as the requirement to report their
holdings of the Company's shares.
Since NexGen Bio was a privately held company, we anticipate that we will
need to implement additional financial and management controls, reporting
systems and procedures, implement an internal audit function and hire additional
accounting, internal audit and finance staff in order to prepare our new
management to comply with the financial reporting and other requirements to
which we are or may become subject. If we are unable to accomplish these
objectives in a timely and effective fashion, our ability to comply with our
financial reporting requirements and other rules that apply to reporting
companies could be impaired. Any failure to maintain effective internal controls
could have a material adverse effect on our business, operating results and
share price.
RISKS RELATED TO THE ETHANOL AND BIO-DIESEL INDUSTRY
THE MARKET PRICE OF ETHANOL/BIO-DIESEL IS VOLATILE AND SUBJECT TO
SIGNIFICANT FLUCTUATIONS WHICH MAY CAUSE OUR PROFITABILITY TO FLUCTUATE
SIGNIFICANTLY.
The market prices of ethanol/bio-diesel are influenced by many factors,
including the price of gasoline and diesel and crude oil and the supply of
ethanol/bio-diesel in the market. Oil prices are highly volatile and difficult
to forecast due to frequent changes in global politics and the world economy and
the demand for petroleum-derived products. The supply and demand for oil
throughout the world is affected by incidents in unstable political
environments, the demand for oil from rapidly developing countries such as China
and India, weather conditions, drilling, extraction and refinery technology,
success in exploration, decisions made by OPEC and its member countries,
industrial output and many other factors. We cannot predict the future price of
crude oil or gasoline. Although the market price of ethanol/bio-diesel has
historically tracked the market price of gasoline and diesel, we cannot provide
any assurance that this will continue to occur. Low prices for crude oil,
gasoline and diesel and the relationship between ethanol/bio-diesel supply and
demand may reduce the price of ethanol/bio-diesel to a level that makes it
unprofitable to produce. In recent years, the prices of crude oil, gasoline and
diesel and ethanol/bio-diesel have all reached historically high levels. If the
prices of crude oil, gasoline or diesel were to decline, our revenues and
ultimately our profitability may be adversely affected. Fluctuations in the
market price of ethanol or bio-diesel may cause our profitability to fluctuate
significantly.
22
OUR BUSINESS WILL BE HIGHLY SENSITIVE TO CORN, SOYBEAN OIL AND OTHER
FEEDSTOCK PRICES AND WE GENERALLY WILL NOT BE ABLE TO PASS ON INCREASES IN CORN,
SOYBEAN OIL AND OTHER FEEDSTOCK PRICES TO OUR FUTURE CUSTOMERS.
The principal raw materials we will use to produce ethanol and bio-diesel
and co-products, including dry and wet distiller grains in ethanol plants and
glycerin in bio-diesel plants, will be corn, soybean oil, animal fats and palm
oil or other vegetable oils. We may also use other feedstock. As a result,
changes in the prices of our feedstock can significantly affect our business. In
general, rising feedstock prices result in lower profit margins. For example,
because ethanol and bio-diesel compete with non-corn-based fuels, we generally
will be unable to pass on increased corn costs to our future customers. At
certain levels, feedstock prices may make ethanol and bio-diesel uneconomical to
use in fuel markets. The prices of feedstock are influenced by many factors
including world supply and demand, weather conditions, crop yields, farmer
planting decisions and general economic, market and regulatory factors and
subsidies with respect to agriculture. The significance and relative effect of
these factors on the price of our feedstock is difficult to predict. Any event
that tends to negatively affect the supply of our feedstock, such as adverse
weather or crop disease, could increase our feedstock prices and potentially
harm our future business. In addition, we may also have difficulty, from time to
time, in physically sourcing feedstock on economical terms due to supply
shortages. Such a shortage could require us to suspend operations until
feedstock is available at economical terms, which would have a material adverse
effect on our business, results of operations and financial position. If an
additional ethanol/bio-diesel production facility is built in the same general
vicinity as where we intend to build our facilities, the price we pay for our
feedstock at a facility could increase and the local supply of the feedstock be
reduced, which may result in increased costs and reduced profits.
THE SPREAD BETWEEN ETHANOL/BIO-DIESEL AND THE PRICES OF DOMESTIC RENEWABLE
RESOURCES CAN VARY SIGNIFICANTLY AND WE DO NOT EXPECT THE SPREAD TO REMAIN AT
RECENT HIGH LEVELS WHICH COULD MATERIALLY ADVERSELY IMPACT OUR GROSS MARGINS.
Our gross margins will be principally dependent on the spread between
ethanol/bio-diesel and the prices of the renewable resources used in their
production (such as corn, soybean, animal fats and palm oils). In the past, this
spread fluctuated widely and we cannot provide any assurance that fluctuations
in this spread will not continue to occur. In recent periods, the spread between
ethanol/bio-diesel and the renewable resources prices reached historical levels.
Any reduction in the spread between ethanol/bio-diesel and renewable resources
prices, whether as a result of an increase in corn, soybean, animal fats or palm
oil prices or a reduction in ethanol/bio-diesel prices, would adversely affect
our results of operations and financial condition.
WE MAY ENGAGE IN HEDGING TRANSACTIONS WHICH INVOLVE RISKS THAT CAN HARM OUR
BUSINESS.
In an attempt to partially offset the effects of the volatility of
ethanol/bio-diesel prices and feedstock costs, we may take hedging positions in
order to limit our exposure to commodity price fluctuations. These may include
(i) purchasing feedstock through spot cash, fixed-price forward and delayed
pricing contracts, (ii) utilizing hedging positions in the corn, soybean oil,
animal fats and palm oil futures and options markets on the Chicago Board of
Trade, or CBOT, to manage the risk of corn, soybean oil, animal fats or palm oil
price fluctuations, (iii) entering into contracts to supply a portion of our
ethanol or bio-diesel production on a forward basis and, in connection with our
feedstock hedging positions, to lock in specific "crush" margins for a portion
of our feedstock requirements, and (iv) establishing from time to time an
unleaded gasoline/NYMEX RBOB/diesel hedge position using futures to reduce our
exposure to unleaded gasoline and diesel price risk. The financial impact of
these activities is dependent upon, among other things, the commodity futures
prices involved and our ability to sell sufficient products to use all of the
feedstock for which we have futures contracts. Hedging arrangements also expose
us to the risk of financial loss in situations where the other party to the
hedging contract defaults or, in the case of physical contracts, where there is
a change in expected differential of an open position and the underlying price
in the hedging agreement affecting the actual prices paid or received by us.
Hedging activities can themselves result in losses when a position is purchased
in a declining market or a position is sold in a rising market. A hedge position
often settled in the same time frame as the physical commodity, is either
purchased, as in the case of corn, soybean oil, animal fats or palm oil, and
natural gas, or sold as in the case of ethanol or bio-diesel. Hedging losses may
be offset by a decreased cash price for corn, soybean oil, animal fats and palm
oil, and an increased cash price for ethanol and bio-diesel. We may also vary
the amount of hedging or other risk mitigation strategies we undertake, and we
may choose not to engage in hedging transactions at all. Our hedging activities
may cause us to forego additional future profits or result in our making cash
payments.
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SINCE THE PRODUCTION OF ETHANOL/BIO-DIESEL REQUIRES A SIGNIFICANT SUPPLY OF
WATER AND ELECTRICITY, OUR BUSINESS WILL BE MATERIALLY HARMED IF WE ARE UNABLE
TO OBTAIN AN ADEQUATE QUALITY AND QUANTITY OF WATER AND ELECTRICITY.
Our facilities will require a significant and uninterrupted supply of water
and electricity to operate. We anticipate that we will enter into arrangements
with local electric companies and municipalities to provide our supply of
electricity and water. However, there can be no assurances that, with respect to
water, we will be able to reach definitive agreements for our water supply. In
the event that we do not reach definitive agreements for our water supply, we
may be required to expend significant amounts to drill wells and to provide for
the necessary infrastructure for such well water to reach our planned
facilities. In addition, there are no assurances that such water will be of an
adequate quality. If the water quality from any of these sources is not
adequate, we may, at greater cost to us, need to treat the water or find other
sources. In addition, there can be no assurances that the water and electricity
companies will be able to reliably supply the water and electricity that we need
at any of our facilities or that back-up water wells that we may build will be
adequate to sustain production over an extended period of time. If there is an
interruption in the supply of water or electricity for any reason, which may
include natural disasters, we might be required to halt production. If
production is halted for an extended period of time, or there is any
interruption in the quantity or quality of our water or electricity, it may have
a material adverse effect on our operations, cash flows and financial
performance.
THE TRANSPORTATION OF FEEDSTOCK TO US AND OF ETHANOL/BIO-DIESEL TO OUR
CUSTOMERS WILL BE AFFECTED BY BUSINESS RISKS THAT ARE LARGELY OUT OF OUR
CONTROL, ANY OF WHICH COULD SIGNIFICANTLY REDUCE OUR REVENUES AND OPERATING
MARGINS.
The operation of our facilities will depend on our ability to receive
adequate amounts of feedstock (over and above our storage capability) in a
timely manner and our failure to receive sufficient feedstock could have a
material adverse effect on our production, revenues and results of operations.
We anticipate purchasing corn, soybean oil, animal fats and other feedstock from
states in the U.S. Midwest, to be delivered to us by rail and truck. We will
rely on third parties to transport feedstock to us and our ethanol/bio-diesel to
our customers. The transportation companies with whom we contract may be subject
to risks that are largely out of their and our control, including weather,
limitations on capacity in the transportation industry, security measures, fuel
prices, taxes, license and registration fees, and insurance premiums. In
addition, to the extent we will rely upon delivery by trains and trucks of
feedstock to us and ethanol/bio-diesel to our customers, we may be affected by
any overall shortage of rail road service or truck drivers caused by the Hazmat
Threat Assessment Program implemented under the US Patriot Act or any other
security measures instituted as a result of the threat of terrorism. This
shortage may result in increased shipping costs or delays in transport, which
could adversely affect our production and profits.
24
WORK STOPPAGES AND OTHER LABOR RELATIONS ISSUES COULD RESULT IN DECREASED
SALES OR INCREASED COSTS, EITHER OF WHICH WOULD NEGATIVELY IMPACT OUR FINANCIAL
CONDITION AND RESULTS OF OPERATION.
We do not anticipate that our employees will be unionized. However, while
we believe that our relations with employees will be satisfactory, any prolonged
work stoppage or strike could have a negative impact on our business, financial
condition or results of operations. In addition, our suppliers, contractors or
other third parties associated with the construction of our facilities or the
operation of our business may have unionized work forces. A labor strike, work
stoppage or slowdown by unionized employees could halt or slow the construction
of our facilities or the production, transportation or sale of our products,
which could increase our costs and have a significant adverse impact on our
operations.
NATURAL DISASTERS, SUCH AS FIRES, HURRICANES, FLOODS, UNUSUALLY HEAVY OR
PROLONGED RAIN AND DROUGHTS MAY CAUSE FLUCTUATIONS IN THE PRICE, AVAILABILITY
AND QUALITY OF SUPPLIES, LABOR AND RAW MATERIALS WHICH COULD RESULT IN
PRODUCTION DELAYS AND INCREASE COSTS CAUSING A MATERIAL ADVERSE EFFECT ON OUR
BUSINESS.
Fluctuations in the price, availability and quality of supplies, labor, and
raw materials that we need in order to produce, transport and sell
ethanol/bio-diesel could have a material adverse effect on our construction,
cost of sales or ability to meet our customers' demands. The price and
availability of such supplies, labor, and raw materials may fluctuate
significantly, depending on many factors, including natural disasters, such as
fires, hurricanes, floods, unusually heavy or prolonged rain, and droughts
natural resources. These events can also cause increased freight costs.
OUR BUSINESS WILL BE SUBJECT TO SEASONAL FLUCTUATIONS, WHICH COULD
ADVERSELY AFFECT OUR RESULTS OF OPERATIONS AND FINANCIAL POSITION.
Our operating results will be influenced by seasonal fluctuations in the
price of our primary operating inputs such as corn, soybean oil, animal fats and
palm oil, and the price of our primary products, ethanol and bio-diesel. In
addition, ethanol and bio-diesel prices are substantially correlated with the
price of unleaded gasoline and diesel. The price of unleaded gasoline and diesel
tends to be highest in the summer and winter months. Given our lack of operating
history, we do not know yet how these seasonal fluctuations will affect our
results over time.
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WE WILL BE DEPENDENT ON OTHERS FOR THE SALE OF OUR PRODUCTS.
As is customary in the ethanol/bio-diesel industry, we intend to sell
ethanol/bio-diesel and their by-products through strategic alliance partners or
marketing firms as opposed to maintaining our own sales force. As such, we will
be highly dependent on third parties to sell our products. Such third parties
may not have exclusive contracts with us and therefore may put the interests of
their other customers, which may be competitors to us, ahead of our interests.
WE WILL OPERATE IN A COMPETITIVE INDUSTRY AND COMPETITION MAY NEGATIVELY
IMPACT OUR PROFITABILITY.
We will be in competition with numerous other ethanol/bio-diesel producers,
some of whom may have greater resources than we do. Additional
ethanol/bio-diesel producers may enter the market if the demand for
ethanol/bio-diesel increases and existing producers may increase the capacity of
their current plants or build new ethanol/bio-diesel production facilities. The
largest ethanol/bio-diesel producers in the United States include
Archer-Daniel-Midland Company, VeraSun Energy Corporation, Hawkeye Holdings,
Inc., Aventine, Cargill, Inc. and Abengoa Bioenergy Corp., all of which are
capable of producing as much or more ethanol/bio-diesel than we expect to
initially produce.
We also face increasing competition from international suppliers of
ethanol/bio-diesel. According to the Renewable Fuel Association, or RFA, Brazil
is currently the world's second largest producer and exporter of
ethanol/bio-diesel. In Brazil, ethanol/bio-diesel is produced primarily from
sugarcane, which is also used to produce food-grade sugar. Brazil experienced a
dramatic increase in ethanol/bio-diesel production and trade in 2006, exporting
several million gallons to the U.S. alone. Ethanol/bio-diesel imported from
Brazil may be a less expensive alternative to U.S. domestically produced
ethanol, which is primarily made from corn. For example, the current $0.54 per
gallon import duty imposed on Brazilian ethanol may be reduced in the future.
Competition from ethanol/bio-diesel imported from Brazil may affect our ability
to sell our ethanol/bio-diesel profitably, which would reduce the value of your
shares.
Lastly, ethanol/bio-diesel is not the only product that can be added to
gasoline to reduce emissions and increase octane levels. Oil companies have
historically used methyl tertiary butyl ether, or MTBE, as a fuel additive to
reduce emissions, and although the use of MTBE has been limited or banned in 25
states in the U.S. due to potentially adverse environmental effects from its
production, it is still used by several major oil companies in some markets.
Alternatives to ethanol/bio-diesel and MTBE are continually under development
and existing alternatives, such as alkylates and ethyl tertiary butyl ether, or
ETBE, may become more cost effective. Our competitors may be able to
successfully develop and market alternatives to ethanol/bio-diesel which could
adversely affect our business and results of operations.
26
NEW PLANTS UNDER CONSTRUCTION OR DECREASES IN THE DEMAND FOR ETHANOL OR
BIO-DIESEL MAY RESULT IN EXCESS PRODUCTION CAPACITY IN OUR INDUSTRY CAUSING A
MATERIAL ADVERSE EFFECT ON OUR REVENUES AND PROFITABILITY.
According to the Renewable Fuels Association of the U.S. Energy Information
Administration, domestic ethanol production capacity has increased steadily from
1.77 BGY (or billion gallons per year) in 2001 to an annualized rate of
approximately 4.9 BGY in 2006. In addition, 2006 closed with no fewer than 73
bio-refineries under construction in the U.S. and 8 expanding that are expected
to add 6 billion gallons of new production capacity by 2009. According to the
U.S. National Bio-diesel Board, there are 101 bio-diesel production plants under
construction or expansion as of June 2007 representing a total potential
production of 1.89 BGY. Excess capacity in the ethanol and bio-diesel industries
would have an adverse impact on our results of operations, cash flows and
financial condition. In a manufacturing industry with excess capacity, producers
have an incentive to manufacture additional products for so long as the price
exceeds the marginal cost of production. This incentive can result in the
reduction of the market price of ethanol/bio-diesel to a level that is
inadequate to generate sufficient cash flow to cover our costs. In addition,
increased production of ethanol/bio-diesel could result in increased demand for
corn, soybean oil, animal fats, palm oil or other feedstock. This could result
in higher prices for corn, soybean oil, animal fats, palm oil and other
feedstock and cause higher ethanol/bio-diesel production costs and, in the event
that we are unable to pass increases in the price of corn or other feedstock to
our customers, would result in lower profits. Excess capacity may also weaken
pricing for wet distiller grains with solubles, known as WDGS, or dry distiller
grains with solubles, known as DDGS, an ethanol co-product we intend to produce
and sell to local feedyards and feed lots. Any material decline in the price of
ethanol, WDGS or DDGS will adversely affect our revenues and results of
operations.
Excess capacity may result or intensify from increases in capacity coupled
with insufficient demand. Demand could be impaired due to a number of factors,
including regulatory developments and reduced U.S. gasoline and diesel
consumption. Reduced gasoline and diesel consumption could occur as a result of
increased prices for gasoline and diesel or crude oil.
For example, price increases could cause businesses and consumers to reduce
driving or acquire vehicles with more favorable gasoline mileage. There is some
evidence that this has occurred in the recent past as U.S. gasoline prices have
increased.
DEVELOPMENT OF ALTERNATIVE ETHANOL OR BIO-DIESEL PRODUCTION SYSTEMS OR
ALTERNATIVE FUELS COULD AFFECT OUR RESULTS OF OPERATIONS.
Alternative fuels and gasoline and diesel oxygenates production methods are
continually under development. A number of automotive, industrial and power
generation manufacturers are developing more efficient engines, hybrid engines
and alternative clean power systems using fuel cells or clean burning gaseous
fuels. Vehicle manufacturers are working to develop vehicles that are more fuel
efficient and have reduced emissions using conventional gasoline. Vehicle
manufacturers have developed and continue to work to improve hybrid technology,
which powers vehicles by engines that utilize both electric and conventional
gasoline fuel sources. The emerging fuel cell industry may offer a technological
option to address increasing worldwide energy costs, the long-term availability
of petroleum reserves and environmental concerns. Fuel cells have emerged as a
potential alternative to certain existing power sources because of their higher
efficiency, reduced noise and lower emissions. Fuel cell industry participants
are currently targeting the transportation, stationary power and portable power
markets in order to decrease fuel costs, lessen dependence on crude oil and
reduce harmful emissions. If the fuel cell and hydrogen industries continue to
expand and gain broad acceptance, and hydrogen becomes readily available to
consumers for motor vehicle use, we may not be able to compete effectively. This
additional competition could reduce the demand for ethanol or bio-diesel, which
would negatively impact our profitability.
27
In addition, many of our competitors invest heavily in research and
development of alternative ethanol or bio-diesel production systems and
alternative fuels. Our inability to meet the substantial capital investments
required to remain technologically competitive could result in our competitors
being able to produce ethanol or bio-diesel more cost effectively or produce
less expensive alternative fuels, which could adversely affect the demand for
our production. These events could have a material adverse effect on our
business.
CORN-BASED ETHANOL MAY COMPETE WITH CELLULOSE-BASED ETHANOL IN THE FUTURE,
WHICH COULD MAKE IT MORE DIFFICULT FOR US TO PRODUCE ETHANOL ON A COST-EFFECTIVE
BASIS AND COULD REDUCE THE VALUE OF YOUR INVESTMENT.
Most ethanol is currently produced from corn and other raw grains, such as
milo or sorghum (especially in the United States Midwest). The current trend in
ethanol production research is to develop an efficient method of producing
ethanol from cellulose-based biomass such as agricultural waste, forest residue,
municipal solid waste, and other biomass material. This trend is driven by the
fact that cellulose-based biomass is generally cheaper to obtain than corn and
that the use of cellulose-based biomass to produce ethanol would create
opportunities to locate plants and produce ethanol in areas that are not
suitable to grow corn in significant amounts. Although the current technology
for converting cellulose-based biomass to ethanol is not sufficiently efficient
to be competitive with ethanol produced from corn, a report by the U.S.
Department of Energy entitled "Outlook for Biomass Ethanol Production and
Demand" indicates that new conversion technologies may be developed in the
future. If an efficient method of producing ethanol from cellulose-based biomass
is developed, we may not be able to compete effectively. Our facilities will not
be equipped to convert cellulose-based biomass into ethanol, and to convert our
facilities to be able to process cellulose-based ethanol would require
significant additional capital investments. If we are unable to produce ethanol
as cost-effectively as cellulose-based producers, our ability to generate
revenue will be negatively impacted and your shares could lose value.
CONSUMER RESISTANCE TO THE USE OF ETHANOL OR BIO-DIESEL, WHICH MAY BE BASED
ON THE BELIEFS THAT ETHANOL IS EXPENSIVE, ADDS TO AIR POLLUTION, HARMS ENGINES
OR TAKES MORE ENERGY TO PRODUCE THAN IT CONTRIBUTES, MAY AFFECT THE DEMAND FOR
ETHANOL AND BIO-DIESEL.
Certain individuals believe that the use of ethanol/bio-diesel will
increase consumer gasoline prices such as at gas stations. Some also believe
that ethanol/bio-diesel adds to air pollution and harms car and truck engines.
Still other consumers believe that the process of producing ethanol/bio-diesel
actually uses more fossil energy, such as oil and natural gas, in relation to
the amount of ethanol/bio-diesel that is produced and its benefits. These
consumer beliefs could potentially be wide-spread. If consumers choose not to
buy ethanol/bio-diesel, it would affect the demand for our products and
negatively affect our profitability and financial condition.
28
THE EXPANSION OF DOMESTIC ETHANOL AND BIO-DIESEL PRODUCTION IN COMBINATION
WITH STATE BANS ON MTBE AND/OR STATE RENEWABLE FUELS STANDARDS MAY BURDEN RAIL
AND TERMINAL INFRASTRUCTURE, RAISING THE COST OF OUR SHIPMENT TO BLENDING
TERMINALS.
If the volume of ethanol/bio-diesel shipments continues to increase and
blenders switch from MTBE to ethanol and bio-diesel, there may be weaknesses in
infrastructure such that our ethanol/bio-diesel cannot reach its target markets.
Many terminals may need to make infrastructure changes to blend
ethanol/bio-diesel instead of MTBE. If the blending terminals do not have
sufficient capacity or the necessary infrastructure to make the switch, there
may be an oversupply of ethanol/bio-diesel in the market, which could depress
ethanol/bio-diesel prices and negatively impact our financial performance. In
addition, rail infrastructure may be inadequate to meet the expanding volume of
ethanol/bio-diesel shipments, which could prevent us from shipping our products
to our target markets.
Substantial development of infrastructure will be required for our
operations and the ethanol/bio-diesel industry generally, to grow. Areas
requiring expansion include, but are not limited to additional rail capacity,
additional storage facilities for ethanol/bio-diesel, increases in truck fleets
capable of transporting ethanol/bio-diesel within localized markets, expansion
of refining and blending facilities to handle ethanol/bio-diesel, and growth in
service stations equipped to handle ethanol/bio-diesel.
There is no assurance that the substantial investments required for these
infrastructure changes and expansions will be made or that they will be made on
a timely basis. Any delay or failure in making the changes to or expansion of
infrastructure could hurt the demand or prices for our products, impede our
delivery of products, impose additional costs on us or otherwise have a material
adverse effect on our results of operations or financial position. Our business
is dependent on the continuing availability of infrastructure and any
infrastructure disruptions could have a material adverse effect on our business.
ETHANOL CAN BE IMPORTED DUTY FREE FROM CERTAIN COUNTRIES INTO THE UNITED
STATES, WHICH MAY UNDERMINE THE ETHANOL INDUSTRY IN THE UNITED STATES.
Ethanol can be imported into the U.S. duty-free from some countries, which
may negatively affect the ethanol industry in the U.S. and our operations.
Imported ethanol is generally subject to a $0.54 per gallon tariff that was
designed to offset the $0.51 per gallon ethanol incentive available under the
federal excise tax incentive program for refineries that blend ethanol in their
fuel. A special exemption from the tariff exists for ethanol imported from 24
countries in Central America and the Caribbean, which is limited to a total of
7% of the previous year's U.S. production per year. Imports from the exempted
countries may increase as a result of new plants under development in such
countries and also due to increased domestic production. In addition, reductions
in the tariff currently applicable to ethanol imports from countries other than
those in Central America and the Caribbean that qualify for the exemption, or
increases in the percentage of ethanol that may be imported from Central America
and the Caribbean on a duty-free basis, may result in more ethanol from
countries having a lower cost of production than the United States being
imported into the U.S. An increase in such imported ethanol could adversely
affect the demand for domestically-produced ethanol and the price at which we
will be able to sell our ethanol.
29
COMPETITION FOR QUALIFIED PERSONNEL IN THE ETHANOL AND BIO-DIESEL
INDUSTRIES IS INTENSE AND MAY PREVENT US FROM HIRING AND RETAINING QUALIFIED
PERSONNEL TO OPERATE OUR PRODUCTION PLANTS.
Our success will depend in part on our ability to attract and retain
competent personnel. For each of our plants, we must hire qualified managers,
engineers, operators and other personnel, which can be challenging in the rural
communities in which our facilities will be located. Competition for both
managers and plant employees in the ethanol and bio-diesel industries is
intense, and we may be unable to attract and retain qualified personnel. If we
are unable to hire and retain productive and competent personnel, the
implementation of our business plan may be adversely affected, the amount of
ethanol/bio-diesel we produce may decrease and we may not be able to efficiently
operate our production plants and execute our business strategy.
CHANGES IN SPECIFICATION STANDARDS FOR BIO-DIESEL FUEL MAY INCREASE
PRODUCTION COSTS OR REQUIRE ADDITIONAL CAPITAL EXPENDITURES TO UPGRADE AND/OR
MODIFY OUR BIO-DIESEL FACILITY TO MEET THEM. SUCH UPGRADES AND/OR MODIFICATIONS
MAY ENTAIL DELAYS IN OR STOPPAGES OF PRODUCTION.
The American Society of Testing and Materials (ASTM) is the recognized
standard-setting body for fuels and additives in the United States. ASTM's
specification for pure bio-diesel (to be used in blends of up to 20% with diesel
fuel), ASTM D 6751, has been adopted by the Environmental Protection Agency, and
compliance is required in order for our bio-diesel to qualify as a legal motor
fuel for sale and distribution. ASTM has modified its D 6751 specification in
the past, and is expected to continue to modify the specification in the future
as the use of and experience with bio-diesel expands. There is no guarantee that
our future production facility will be able to produce compliant bio-diesel fuel
in the event of changes to the specification. We may need to invest significant
capital resources to upgrade or modify our future bio-diesel facility, which
might cause delays in or stoppages of production and the resultant loss of
revenues, or which might not be economically feasible at all. Any modifications
to the production facility or to the bio-diesel specifications may entail
increased production costs or reduced production capacity. These consequences
could result in a negative impact on our financial performance.
ITEM 2. MANAGEMENT'S ANALYSIS OR PLAN OF OPERATION
NEXGEN'S FINANCIAL PLANS
We intend to plan, develop, construct and operate and own four 100 million
gallon per year Ethanol plants and one 100 million gallon biodiesel plant. The
ethanol plants will be corn-based dry mill fuel-grade ethanol plants located in
Arkansas, Indiana, Ohio and Wisconsin. The biodiesel plant will use palm and/or
soybeans as well as animal fats and will be located in Iowa. Each ethanol plant
is expected to process approximately 37 million bushels of corn each per year
into 100 million gallons of fuel grade ethanol. The biodiesel plant will process
approximately 333 MT of soybean and or palm oil. It is anticipated that in the
first phase, three plants will be constructed and brought to operation (two
ethanol plants and one bio-diesel) and in the second phase two additional
ethanol plants will be constructed.
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We will not generate any revenues until we acquire an operating plant or
complete construction of one of our plants. We anticipate that our losses will
continue to increase until at least one plant is operational. The construction
period for an ethanol plant is approximately 18 to 24 months. The construction
period for a bio-diesel plant is approximately 12 to 18 months. Our intention is
to start construction on the bio-diesel plant first.
In order to be responsive to changing market conditions in the ethanol and
biodiesel industries, we will also consider acquiring existing ethanol and
biodiesel plants rather than constructing new plants if we are able to make such
acquisitions at favorable enterprise valuations and have access to reasonable
financing terms.
We have limited financial resources and are entirely dependent on funds
that will be raised from third party financing sources for working capital
purposes and for the development of the ethanol and bio-diesel plants. Our goal
is to raise $500 million, utilizing different financial instruments in order to
fund the first phase of our development plans. The following is the estimated
breakdown of the sources and uses of such financing:
SOURCE OF FUNDS
Preferred/Common Equity 30% $150,000,000
Long Term Debt 60% $300,000,000
Subordinate Debt 10% $ 50,000,000
Total Source of Funds 100% $500,000,000
USE OF FUNDS
Design, Construction & Startup
Plant Construction $425,000,000
Land & Site-Development Cost $ 15,000,000
STARTUP COSTS
Inventory $ 19,500,000
Working Capital $ 17,400,000
Pre-production Costs $ 1,350,000
Rolling Stock $ 3,000,000
Fire Protection/Water Supply $ 3,000,000
$ 44,250,000
ORGANIZATIONAL & FINANCING
Equity Raising Costs $ 10,500,000
Organizational Costs $ 3,125,000
Operating Costs $ 2,125,000
$ 15,750,000
Total Use of Funds $500,000,000
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We estimate that we will need an additional $400 million to fund the second
phase of our development plans with approximately $300 million to be obtained
from third party financing sources and the balance to be generated by funds from
operations of the plants that are built in the first phase.
PLAN OF OPERATIONS UNTIL PLANT START-UP
From the present to the third quarter of 2008, or earlier if possible, we
will be actively involved in six principal tasks in connection with the first
phase of our development plans:
(1) Raising our equity and securing debt capital;
(2) Acquiring and preparing our plant sites;
(3) Completing construction agreements and securing necessary permits;
(4) Constructing our plants;
(5) Arranging and negotiating agreements for the purchase of corn, natural
gas and other needs and for marketing our ethanol and distillers grains; and
(6) Hiring and training management and operating employees.
Assuming that we successfully complete our financing objectives and obtain
adequate debt and equity financing, we believe that we will have sufficient cash
resources to cover all of our expenses associated with the construction and
commencement of operations of the plants, including site acquisition and
development, installation of road and rail access and utilities, application for
and receipt of permits, equipment acquisition and plant construction. We also
believe that we will have sufficient operating capital to cover our staff,
office, audit, legal, compliance, training and other start-up expenses during
this period.
We have contacted and have had limited discussions with prospective lenders
and investors, but have no agreement with any lender for the debt or investors
for the equity financing that we need.
At any time after we have received at least $50,000,000 in debt and or
equity financing, we expect to begin the construction of the bio-diesel plant,
for which, as mentioned, we will need to raise an additional approximately
$50,000,000 to complete the construction thereof.
If for any reason our options on one or more sites expire before we have
our equity and debt financing available to acquire such sites, we may find it
necessary to pay more than the option purchase price for such sites or to locate
alternative sites. There is no assurance that after full investigation we will
determine that any of our sites will be suitable for our plants or will be
acquired for those purposes. New sites could be identified by our site
acquisition team. Our Board of Directors reserves the right to change the
locations of the sites for our plants, in its sole discretion, for any reason.
We expect to continue the permitting process on our sites, and, if necessary
conduct investigations on other sites, including overall suitability for our
plants, environmental matters and road and rail access considerations.
32
CONSTRUCTION AGREEMENTS AND PERMITS
We expect to enter into an agreement with EPC contractors which will
provide for the construction of each of our plants. We anticipate that the
agreement will provide that the EPC contractors will prepare engineering
diagrams and drawings for our sites, plants, utilities and process systems,
assist us in obtaining permits for the construction of our plants, establish
final project specifications, contract documents and contract pricing and place
orders on our behalf for equipment, particularly equipment with lengthy order
lead times.
We anticipate that the EPC agreements will state the complete set of design
and construction services to be provided by our EPC contractors to construct our
ethanol and biodiesel plants for us, state the allocated costs of the work to be
performed, state the manner in which increased costs due to equipment and
materials expense increases and change orders requested by us would be
allocated, state the responsibility for our EPC contractors and us to acquire
permits, provide a timetable for construction, and include warranties and
guarantees with respect to plant capacity and operation, payment terms and
similar matters.
After we identify our EPC contractors, we expect to work with the
contractors on the preliminary and final designs of the plants so construction
may be commenced as soon as possible following successful completion of our
equity and debt financings. Concurrently, we will seek necessary construction
permits, environmental permits and other contracts and permits necessary for the
construction of our plants.
Construction of our plants will include completion and approval of the
final design for the plant, final site preparation, installation of underground
piping, conduits and footings, structural framing, installation of tanks,
equipment and above-ground piping, enclosing structures, installation of outside
yard facilities, loading docks and related structures, and a variety of other
tasks. The construction phase will include testing of the plants through
certification by the construction engineers. Commencement of operations will
include training of plant operations personnel and incorporation of operational
testing, quality control and safety procedures.
The construction process will commence with the completion of final grading
for all plant structures and our tank farms, installation of underground
plumbing and construction of footings and other concrete work. Subject to
weather conditions, we expect that this work can be completed in approximately
one month. Immediately thereafter, construction will proceed on the construction
of our bio-diesel and ethanol distillation facilities and other structures, a
task that will take approximately from 14 to 18 months. Throughout these phases
of construction work would continue on our railroad access, including
installation of sidings and switches, with completion expected approximately
four months after the commencement of construction.
Also in the above phase, six months will be dedicated to the installation
of piping and wiring, erection of our tank farm and installation of process and
other equipment. The final phase of construction, extending to include an
additional month of work, will include the installation of heat tracing
equipment and insulation, office build-out, painting and landscaping. During
this extended period, we and our EPC contractors will also commence the process
to obtain our operating permits, which will involve preparing and submitting
applications, working with regulatory authorities and coordinating site
inspections and preliminary equipment testing.
33
With construction complete, we will move to the plant start-up phase, which
will involve complete start-up and testing of all equipment and facilities,
including any adjustments necessary. This process will take approximately two
months. Assuming the availability of final operating permits, and following a
final capacity test run and certification by our construction engineers, the
plant will be turned over to us for the commencement of commercial operations.
ITEM 3. DESCRIPTION OF PROPERTY
The following table sets forth information concerning NexGen's land
purchase options:
SIZE OF
LOCATION OF INTENDED TYPE LAND OPTION EXPIRATION
LAND SITE OF FACILITY (ACRES) DATE PURCHASE PRICE
- ------------- -------------- -------- ----------------- ----------
Arkansas* Ethanol 407 July 9, 2008 $3,715,300
Wisconsin** Ethanol 88 February 1, 2008 $ 800,000
Iowa Bio-diesel 15 August 19, 2009 $ 337,500
Ohio Ethanol 72 January 12, 2008 $1,440,000
Indiana Ethanol 160 April 20, 2008 $4,000,000
* NexGen has an option to purchase the land with a party that itself has an
option to purchase the land. NexGen has informed us that it is negotiating the
extension of the option.
**Comprised of two options for two adjacent sites.
34
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets out, to the best of our knowledge, the numbers of
shares in us beneficially owned as at December 31, 2007 by:
(i) each of our present Executive Officers and Directors,
(ii) each person (including any "group" as that term is defined in Section
13(d)(3) of the Securities Exchange Act) who beneficially owns more
than 5% of our Common Stock, and
(iii) all of our present Directors and officers as a group.
Number of Percentage of Ordinary
Name Ordinary Shares(1) Shares Owned Outstanding(1)
- ---- ----------------- ------------
J. Ram Ajjarapu 35,630,229(2) 85%
Jim McAlinden 899,199 2%
Eran Rotem 137,000(3)
Bruce W. Wilkinson 64,229
Rodrick D. Morrow 42,820
Kenneth Hoyt 42,820
Israel Amir 386,666 0.9%
Varda Rotter -
Elan Penn -
Officers and Directors
as a Group (9 persons) 38,838,666(3) 93%
MAC Bioventures, Inc. 35,595,229 85%
- ----------
(1) Based upon 41,759,458 ordinary shares outstanding as of the Closing Date.
(2) Including 35,595,229 shares owned by MAC, as to which Mr. Ajjarapu may be
deemed to share beneficial ownership.
(3) Includes 117,000 shares issuable upon exercise of options.
35
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
As of the date of this Current Report, the executive officers and directors
of the Company are as follows:
NAME AGE POSITION WITH THE COMPANY
- ---- ----- -------------------------
J. Ram Ajjarapu 39 Chief Executive Officer (*) & Director
Jim McAlinden 57 Director
Eran Rotem 39 Chief Financial Officer
Bruce W. Wilkinson 69 Director
Rodrick D. Morrow 64 Director
Kenneth Hoyt 70 Director
Israel Amir 65 Director
Varda Rotter 60 Director
Elan Penn 56 Director
(*) MR. AJJARAPU IS EXPECTED TO BE APPOINTED AT THE COMPANY'S UPCOMING
BOARD MEETING.
MR. J. RAM AJJARAPU. has been a board member since the Closing Date and is
EXPECTED TO BE APPOINTED AS CHIEF EXECUTIVE OFFICER AT THE COMPANY'S UPCOMING
BOARD MEETING. Mr. Ajjarapu has been President and Chief Executive Officer of
NexGen Bio since August 2006. Prior to joining NexGen Bio, Mr. Ajjarapu served
as President and a director of American Ethanol until he left the company in
July 2006. In 2004, he co-founded Wahoo Ethanol, LLC and Sutton Ethanol, LLC and
served as Managing Member until both were sold to American Ethanol in January
2006. While at Wahoo and Sutton, Mr. Ajjarapu negotiated EPC (Engineering
Procurement and Construction) agreements, as well as procurement and off-take
agreements. Mr. Ajjarapu was also instrumental in obtaining Tax Increment
Financing (TIF) of $10 million for each company, as well as sales tax refunds
and community grants. In 1995, he co-founded and served as President and
Director for 10-years of Global Information Technology, Inc, an IT outsourcing
and system design company. He co-founded and also served as Managing Director
for an Indian outsourcing company from 1997 to 2004. He received a Bachelors
degree in Electronics and Communication Engineering from The Institute of
Engineer (India) and a Masters in Business Administration from University of
South Florida.
BRUCE W. WILKINSON ESQ. Mr. Wilkinson has been a director of the Company
since the Closing Date. Mr. Wilkinson has been Secretary of NexGen Bio since
August 2006. Mr. Wilkinson is a corporate lawyer and business consultant
providing corporate legal and business counsel to clients nationwide. Following
an initial career as in-house counsel, in 2002 he established, Intellysis Inc.,
a Tampa based outsourcing and consulting firm. As in-house counsel, he served as
Vice President and General Counsel of Stromberg Carlson, Vice President and
General Counsel of Thorn EMI (U.S.), and, at United Technologies, as corporate
counsel in several divisional capacities. His combined career as corporate
counsel and independent consultant/entrepreneur has blended skills in corporate
law, business and commercial transactions (including acquisitions) as well as
other matters affecting the management and operation of his business clients. He
holds a Bachelors degree from Williams College, a law degree from Cornell
University, and is a member of the California, Illinois and American Bar
Associations.
36
JIM MCALINDEN, Mr. McAlinden has been since the Closing Date a director of
the Company. Mr. McAlinden has held the positions of CFO and Chief Operating
Officer of NexGen Bio since August 2006. Mr. McAlinden started MicMac
Investments, Inc. and Hospitality Communications in 1992. Mr. McAlinden served
as President and CEO until their sale to a Phoenix Industries, Inc. in 1999.
MicMac was a pay phone provider and Hospitality Communications was a telecom
aggregator. In 2001, Jim joined MSHOW.com and served as General Manager and was
responsible for turning its losses into profits and the sale of the business in
2002. In 2002, Jim joined AirNet Wireless, Inc. as its President. In 2004,
AirNet Wireless merged with AIT Wireless where Jim served as CFO until leaving
in 2005. Jim earned a Bachelors of commerce degree from Sir George Williams
University.
ERAN ROTEM. Mr. Eran Rotem has served as the Company's Chief Financial
Officer since May 2002. During April 2006, Mr. Rotem was appointed as a director
of Afferix Ltd. And resigned on January 6, 2008 Mr. Rotem served as a senior
manager in Ernst & Young, Certified Public Accountants, from 1995 until April,
2002. He is himself a CPA and received his B.A. in Accounting and Finance form
the Tel-Aviv College of Management.
RODRICK P. MORROW. Mr. Morrow has served as a director of the Company since
the Closing Date. Mr. Morrow has 30 years of experience with retail and
distribution firms in senior management positions in marketing, finance,
information technology and human resources. He is currently the CFO and a
Director for Southern Imaging Group, Inc. Mr. Morrow was Vice President and CFO
for Pelican Companies, Inc., based in Conway, South Carolina. He served as Vice
President for Lowe's Companies with responsibilities in marketing, information
systems, human resources and administration. He has been a business consultant
in several industries, both domestic and international. Mr. Morrow holds a
Bachelors degree in Business Administration from the University of North
Carolina, Chapel Hill.
KENNETH HOYT. Mr. Hoyt has served as a director of the Company since the
Closing Date. Mr. Hoyt is a retired management consultant with a diverse
background of corporate and consulting experience in different industries in the
US and around the world. During a 20-year consulting career at Arthur D. Little,
Ascom AG and KSH International, Inc. Mr. Hoyt focused on serving the business
development, advanced technology and strategic investment needs of the
telecommunications equipment industry. As an electrical engineer and economist,
from 1960 to 1986, he held sales, marketing strategic planning and general
management positions in electrical equipment, computers, automotive parts and
telecommunications operating divisions at General Electric, Honewell, ITT,
General Dynamics and Plessey PLC. Mr. Hoyt also has served on a variety of
non-profit boards and governmental agencies in transportation and land-use
planning in the Tampa, Florida region where he resides.
ISRAEL AMIR. Mr. Israel Amir has served as a director of the Company since
January 2000. Mr. Amir has also served as an external director of Dan Vehicle
and Transportation (D.R.T.) Ltd., an Israeli public company and as a member of
the boards of directors of several private Israeli companies (A.T. & T.
(Israel), TNS Teleseker Ltd., Israel Amir Consulting Ltd., SCT Stem Cell
Technologies Ltd. and Tele-Gal Ltd.). Mr. Amir has served since 1989 as an
independent economic consultant. He received his M.A. in Economics from the
Hebrew University in Jerusalem.
37
PROF. VARDA ROTTER has served as an External Director of the Company since
October 2001. Prof. Rotter received her B.Sc. and M.Sc. from Bar-Ilan University
in 1969 and 1971 respectively, and a Ph.D. in Cell Biology from the Weizmann
Institute of Science, Rehovot, in 1976. Following post-doctoral research at the
Center for Cancer Research of the Massachusetts Institute of Technology, she
joined the Weizmann Institute's Department of Cell Biology. She was appointed
Associate Professor in 1985 and Full Professor in 1992, and is now the incumbent
of the Norman and Helen Asher Professorial Chair in Cancer Research at the
Institute. Prof. Rotter is a genetic engineer, building biological bridges in
the submicroscopic world of cancer research, focusing on certain tumor
suppressor genes which may be used to obstruct the proliferation of cancer
cells.
DR. ELAN PENN has served as an External Director of the Company since
December 2003. Since 2002, he has owned and managed a private publisher (Penn
Publishing Ltd.). Prior to that Dr. Penn was V.P. Finance of A.1-Research &
Development of Artificial Intelligence Ltd. From 1998 to 2000 Dr. Penn was a
Director and the Chief Executive Officer of Sivan Computer Training Company Ltd
(traded on the TASE) and a Director and V.P. Finance of Mentortech Inc. (traded
on NASDAQ), both companies being part of the Formula Systems Ltd. group of
companies. From 1987 to 2000 Dr. Penn was V. P. Finance, Mashov Computers Ltd.
(traded on the TASE) and Magic Software Enterprises Ltd. (traded on NASDAQ),
both companies also being part of the Formula Systems Ltd. group. He has served
as a member of the Board of Directors of Mashov Computers Ltd. and Walla
Communications Ltd. (traded on the TASE), as well as of several international
subsidiaries of the Mashov Computers Ltd. group of companies. In 2005, he was
appointed as a director and audit committee member of Magic software Enterprises
Ltd and Telkor Power Supplies Ltd. Dr. Penn completed his PhD in Management
Science, Imperial College of Science & Technology, University of London and read
Economics at the Hebrew University of Jerusalem.
TERMS OF OFFICE
The Company's Articles of Association, as amended, provide for a board of
directors that consists of not less than two and no more than thirteen
Directors, including the external directors to be appointed and hold office in
accordance with the provisions of the Companies Law and any Regulations enacted
thereunder, as amended from time to time.
With the exception of the election of external directors which shall be
governed in accordance with the provisions of the Companies Law, directors shall
be elected at the Annual General Meeting by an ordinary majority .The directors
so elected shall hold office until the next Annual General Meeting unless
determined otherwise at a subsequent General Meeting. Notwithstanding the
aforesaid, if no directors are appointed at the Annual General Meeting, the
directors appointed at the previous Annual General Meeting shall continue to
hold office. With the exception of the removal of external directors which shall
be governed in accordance with the provisions of the Companies Law, at a General
Meeting by an Ordinary Majority, the shareholders shall be entitled to remove
any director(s) from office, to elect directors in place of the director(s) so
removed or to fill any vacancy, however created, including a vacancy resulting
from an enlargement of the Board of Directors by resolution of the Board of
Directors, on the Board of Directors.
38
The Board of Directors may, from time to time, appoint an additional
director or additional directors to the Company, in order to fill the office of
a director which has been vacated or for any reason or as an additional director
or additional directors, provided that the overall number of directors does not
exceed the maximum number specified above. A director appointed as aforesaid
shall cease to hold office at the end of the Annual Meeting following his
appointment.
The Companies Law requires the board of directors of a public company to
determine the number of directors who shall possess accounting and financial
expertise On March 29, 2006 the board of directors determined the minimum number
to be two directors. The Company may be deemed to be a "controlled company"
under the applicable Nasdaq regulations because MAC, the Company's principal
stockholder owns approximately 85% of the Company's issued and outstanding
shares. As such, the Company is exempt from the requirements of Nasdaq Rule
4350(c) with respect to the nomination of directors.
ALTERNATE DIRECTORS
The Articles of Association of the Company provide that any director may, by
written notice to the Company, appoint another person to serve as an alternate
director, subject to the approval of the directors, and may cancel such
appointment. According to the Companies Law, the following persons may not be
appointed nor serve as an alternate director: (i) a person not qualified to be
appointed as a director, (ii) an actual director, or (iii) another alternate
director. Appointment of an alternate director for a member of a committee of
the board of directors is only permitted if the alternate director is a member
of the board of directors and does not regularly serve as a member of such
committee. If the committee member being substituted is an external director,
such alternate director may only be another outside director possessing the same
expertise as the external director being substituted and may not be a regular
member of such committee. There are currently no alternate directors.
EXTERNAL DIRECTORS
Pursuant to Israeli law, the Company is required to appoint two external
directors. These directors must be unaffiliated with the Company and its
principals. A person shall be qualified to serve as an external director only if
he or she possesses accounting and financial expertise or professional
qualifications. At least one external director must posses accounting and
financial expertise and the other external directors are to possess professional
qualifications, as promulgated by regulations to the Companies Law. These
regulations provide that financial and accounting expertise require such
external director to possess a high level of understanding in business matters,
such that he or she can read and understand financial statements in depth and be
able to raise issues with respect to the manner in which the financial data is
presented therein. The company's board of directors is to determine such
candidate's qualifications based on his or her education, experience and skills
regarding financial and control matters in companies of similar size and in a
similar industry and knowledge of preparation and approval of financial
statements under the Companies Law and Israeli securities laws These
requirements do not apply to external directors appointed before the recent
amendment to the Companies Law but will apply to their re-appointment for an
additional term.
39
External directors are to be elected by a majority vote at a shareholders'
meeting, provided that such majority includes at least one-third of the shares
held by non-controlling shareholders voted at the meeting or that the total
number of shares held by non-controlling shareholders voted against the election
of the director does not exceed one percent of the aggregate voting rights in
the Company.
The initial term of an external director is three years and may be extended
for. additional periods of up to three years each, pursuant to a recent
amendment to the Companies Law, provided that the audit committee and the board
of directors confirm that, in light of the outside director's expertise and
special contribution to the work of the board of directors and its committees,
the reelection for such additional period(s) is beneficial to the company
External directors may be removed only by the same percentage of shareholders as
is required for their election, or by a court, and then only if the external
directors cease to meet the statutory qualifications for their appointment or if
they violate their duty of loyalty to the Company. Under the Companies Law, any
committee of the Board of Directors must include at least one external director,
and the Audit Committee must include all if the external Directors.
The Companies Law details certain standards for the independence of
external directors. These directors must be unaffiliated with the company on
whose board they serve and such company's principals. They are entitled to
obtain all information relating to such company's management and assets and to
receive assistance, in special cases, from outside experts at the expense of the
company. The Companies Law imposes an obligation on these directors to convene a
meeting of a company's board of directors upon becoming aware of matters that
suggest infringements of law, neglect of good business practice or improper
conduct.
An external director is entitled to compensation, as provided for in
regulations adopted under the Companies Law, but is prohibited from receiving
any other compensation, directly or indirectly, in connection with service
provided as an external director.
In October 2001, the Company's shareholders appointed Prof. Varda Rotter as
an External Director, and on December 20, 2004 and there after on December 27,
2007, the shareholders re-appointed her in the same capacity. In December 2003,
the Company's shareholders appointed Mr. Elan Penn as an External Director and
on December 20, 2006 the shareholders re-appointed him in the same capacity.
Both Prof. Rotter and Mr. Penn have been serving as external directors from the
date of their respective appointments to date.
40
DIRECTORS' COMPENSATION
The Company's executive directors (i.e. directors who receive remuneration
from the Company either as employees or consultants) are not entitled to receive
any separate compensation in consideration for their services as directors of
the Company. The Company's non-executive directors receive annual fees which
amounted to approximately $6,000 per person in 2006 on account of all services
as directors, including participation in board and audit committee proceedings.
The members of the board do not receive any additional remuneration upon
termination of their services as directors. The Company's non-executive
directors for the year of 2006 were Professors. Varda Rotter, Ethan Rubinstein
and Samuel Penchas , Mr. Rolando Eisen, and Dr. Elan Penn.
AUDIT COMMITTEE
The Companies Law requires that certain transactions, actions and
arrangements be approved in certain cases, by the audit committee of the
company's board of directors, whose members meet certain criteria of
independence as defined in the Companies Law and by the board of directors
itself and in certain circumstances, shareholder approval is also required. The
vote required by the audit committee and the board of directors for approval of
such matters, in each case, is a majority of the disinterested directors
participating in a duly convened meeting. The Company's audit committee is
comprised of Professors Varda Rotter, and Dr. Elan Penn. The Company has
determined that the members of the audit committee meet the applicable NASDAQ
and SEC independence standards. In addition, the Company has determined that Dr.
Elan Penn is a financial expert as defined by the SEC.
INTERNAL AUDITOR
Under the Companies Law, Israeli companies whose securities are publicly
traded are also required to appoint an Internal Auditor in accordance with the
proposal of the audit committee. The role of the Internal Auditor is to examine,
inter alia, whether the Company's actions comply with the law, integrity and
orderly business procedure. In November 2000, Mr. Yossi Ginosar was appointed as
the Company's Internal Auditor. In March 2007, Mr. Yossi Ginosar was
re-appointed as such.
41
ITEM 6. EXECUTIVE COMPENSATION
The following table sets forth the annual salary, bonuses and all other
compensation awards and pay outs on account of NexGen Bio's Chief Executive
Officer for services rendered to it during the fiscal year ended December 31,
2006. No executive officer received more than US$100,000 per annum during this
period.
42
SUMMARY COMPENSATION TABLE
Change in
Pension
Value and
Non-Equity Nonqualified
Incentive Deferred
Name and Stock Option Plan Compensation
Principal Salary Bonus Awards Awards Compensation Earnings All Other Total
Position Year (US$) (US$) (US$) (US$) (US$) (US$) Compensation (US$)
- -------- ----- ------- ----- ----- ----- ----- ----- ----- -------
J. Ram
Ajjarapu,
Chairman
and CEO 2006 $76,344(1) - - - $76,344
(1) THIS SALARY WAS ACCRUED AND HAS NOT BEEN PAID.
DIRECTOR COMPENSATION
The following table sets forth information concerning the compensation paid
to the non-employee directors of NexGen Bio during fiscal 2006 :
Change in
Pension Value
Fees Non-Equity and
Earned Incentive Nonqualified
or Paid Stock Option Plan Deferred All Other
in Cash Awards Awards Compensation Compensation Compensation Total
Name (US$) ($) ($) ($) Earnings ($) (US$)
- -------- ------ ------ ------ ------ ------ ------ ------
Aruna
Ajjarapu 0 - - - -
Dipak
Sinha 50,000 50,000
Jan
Ohvrall 50,000 50,000
43
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Mr. Daniel Kropf, who served as Chairman of the Company's Board of
Directors until the Closing Date, is the controlling shareholder of the parent
company of Gamida.
In consideration for Mr. Israel Amir's commitment to continue to serve as a
director of the Company for a period of no less than two years from the Closing,
the Purchase Agreement provided that the Company shall issue to Mr. Amir
Ordinary shares (or options exercisable into ordinary Shares) in an amount equal
to 1% of NexGen Assets Valuation divided by $1.50. In addition, if applicable,
the Company shall issue to Mr. Amir 1% of the Option Shares divided by $1.50, in
an amount not to exceed 800,000 Ordinary Shares.
Prior to the closing of the Purchase Agreement, NexGen Bio proposed that
Mr. Eran Rotem, the Company's chief financial officer, continue in this position
following the Closing. A new employment agreement is currently being negotiated.
ITEM 8. DESCRIPTION OF SECURITIES
Set forth below is a summary of the material provisions governing our share
capital. This summary is not complete and should be read together with our
Memorandum and Articles of Association, as amended, copies of which have been
filed as exhibits to our SEC Reports.
As of December 31, 2007, our authorized share capital consisted of
150,000,000 ordinary shares, NIS 0.04 nominal value.
DESCRIPTION OF ORDINARY SHARES
All issued and outstanding ordinary shares of the Company are duly
authorized and validly issued, fully paid and nonassessable. The ordinary shares
do not have preemptive rights. Neither our Memorandum , Articles of Association
nor the laws of the State of Israel restrict in any way the ownership or voting
of ordinary shares by non-residents of Israel, except with respect to subjects
of countries which are in a state of war with Israel.
DIVIDEND AND LIQUIDATION RIGHTS
Subject to the rights of the holders of shares with preferential or other
special rights that may be authorized, the holders of ordinary shares are
entitled to receive dividends in proportion to the sums paid up or credited as
paid up on account of the nominal value of their respective holdings of the
shares in respect of which the dividend is being paid (without taking into
account the premium paid up on the shares) out of assets legally available
therefor and, in the event of our winding up, to share ratably in all assets
remaining after payment of liabilities in proportion to the nominal value of
their respective holdings of the shares in respect of which such distribution is
being made, subject to applicable law. Our Board of Directors may declare
interim dividends and recommend a final annual dividend only out of profits and
in such amounts as the Board of Directors may determine. Declaration of the
final annual dividend requires shareholder approval at a general meeting, which
may reduce but not increase such dividend from the amount recommended by the
Board of Directors.
44
In case of a share dividend, holders of shares can receive shares of a
class whether such class existed prior thereto or was created therefore or
shares of the same class that conferred upon the holders the right to receive
such dividend.
VOTING, SHAREHOLDER MEETINGS AND RESOLUTIONS
Holders of ordinary shares have one vote for each ordinary share held on
all matters submitted to a vote of shareholders. Such rights may be affected by
the future grant of any special voting rights to the holders of a class of
shares with preferential rights. Once the creation of a class of shares with
preference rights has been approved, the Board of Directors may issue preferred
shares, unless the Board is limited from doing so by the Articles of Association
or a contractual provision.
An annual general meeting must be held once every calendar year at such
time (not more than 15 months after the last preceding annual general meeting)
and at such place, either within or outside the State of Israel, as may be
determined by the Board of Directors. The quorum required for a general meeting
of shareholders consists of at least two shareholders present in person or by
proxy and holding, or representing, more than one-third of the total voting
rights in the Company on the record date for such meeting. A meeting adjourned
for lack of a quorum may be adjourned to the same day in the next week at the
same time and place, or to such time and place as the Board of Directors may
determine. At such reconvened meeting, if a quorum is not present within half an
hour from the appointed time, any two shareholders present in person or by proxy
(and not in default under the articles) will constitute a quorum. Shareholder
resolutions generally will be deemed adopted if approved by the holders of a
majority of the voting power represented at the meeting, in person or by proxy,
and voting thereon. Shareholder resolutions for amending our memorandum and/or
articles of association, including making changes in our capital structure,
approving mergers with or into our company and/or our liquidation will be deemed
adopted if approved by the holders of 75% of the voting power represented at the
meeting, in person or by proxy, entitled to vote and voting on the resolution.
In addition, the Companies Law provides for certain extraordinary
majorities for the approval of certain related party transactions, nomination of
External Directors, authorizing a chairman of a company's board of directors to
also act as its general manager as well as certain arrangements between a
company and its shareholders and/or creditors.
TRANSACTIONS REQUIRING SPECIAL APPROVAL
An "office holder" is defined in the Companies Law as a director, general
manager, chief business manager, deputy general manager, vice general manager
and any person assuming the responsibilities of any of the foregoing positions
without regard to such person's title and any other manager who is directly
subject to the general manager.
The Companies Law imposes a duty of care and a duty of loyalty on all office
holders of a company. The duty of care requires an office holder to act with the
level of care which a reasonable office holder in the same position would have
acted under the same circumstances.
45
The breach of such duty is governed by Israeli contract laws. The duty of care
includes a duty to use reasonable means to obtain:
- information on the appropriateness of a given action brought for
his approval or performed by him by virtue of his position; and
- all other important information pertaining to the previous
actions.
The duty of loyalty requires an office holder to act in good faith for the
interests of the company and includes a duty to:
- refrain from any conflict of interest between the performance of
his duties in the company and his personal affairs;
- refrain from any activity that is competitive with the Company;
- refrain from exploiting any business opportunity of the company
to receive a personal gain for himself or others; and
- disclose to the company any information or documents relating to
a company's affairs which the office holder has received due to
his position as an office holder.
Each person listed in the table under "Item 5 - Directors and Executive
Officers, Promoters and Control Persons" is an office holder.
The Companies Law requires that an office holder disclose to the Company any
personal interest that he or she may have, and all related material information
known to him or her, in connection with any existing or proposed transaction by
the company. The disclosure is required to be made promptly and in any event, no
later than the board of directors meeting in which the transaction is first
discussed. A personal interest of an office holder includes an interest of a
company in which the office holder is, directly or indirectly, a 5% or greater
shareholder, director or general manager or in which he or she has the right to
appoint at least one director or the general manager. If the transaction is an
extraordinary transaction, the office holder must also disclose any personal
interest held by his or her relative.
Under the Companies Law, an extraordinary transaction is a transaction:
- not in the ordinary course of business;
- not on market terms; or
- likely to have a material impact on the company's profitability,
assets or liabilities.
Under the Companies Law, once an office holder complies with the above
disclosure requirement, the board of directors may approve the transaction,
unless the company's articles of association provide otherwise. A transaction
that is adverse to the Company's interest may not be approved. If the
transaction is an extraordinary transaction, then it also must be approved by
the audit committee, before the board approval, and under certain circumstances,
by the shareholders of the Company. A director who has a personal interest in a
matter which is considered at a meeting of the board of directors or the audit
committee may not be present at this meeting or vote on this matter. If a
majority of the directors has a personal interest in a transaction, these
directors are permitted to be present and vote, but shareholder approval is also
required.
46
Approval by the audit committee and/or the board of directors is required for
such matters as: (i) certain transactions to which the company intends to be a
party and in which an Office Holder, a controlling shareholder and/or certain
other parties (including affiliates of the aforementioned) have a direct or
indirect personal interest, (ii) actions or arrangements which could otherwise
be deemed to constitute a breach by an Office Holder of a fiduciary duty to the
company, (iii) arrangements with directors as to the term of their service, (iv)
indemnification and/or insurance of Office Holders, and (v) certain transactions
defined in the Companies Law as extraordinary transactions (a transaction which
is not in the ordinary course of business or is not at market conditions, or a
transaction which is likely to have a material impact on the profitability,
property or obligations of the Company).
Under the Companies Law, the disclosure requirements which apply to an office
holder also apply to a controlling shareholder of a public company. A
controlling shareholder includes a shareholder that holds 25% or more of the
voting rights in a public company if no other shareholder owns more than 50% of
the voting rights in the company.
Extraordinary transactions of a public company with a controlling shareholder or
in which a controlling shareholder has a personal interest, and the terms of
compensation of a controlling shareholder who is an office holder, require the
approval of the audit committee, the board of directors and the shareholders of
the Company. The shareholder approval must satisfy either of the following
criteria:
- the majority of the votes for the approval includes the votes of
at least one-third of the total votes of shareholders who are
present at the meeting and who have no personal interest in the
transaction; the votes of abstaining shareholders shall not be
included in the number of the said total votes; or
- the total number of votes against the approval, among the
shareholders who are present at the meeting and who have no
personal interest in the transaction shall not exceed 1% of the
aggregate voting rights in the company.
For information concerning the direct and indirect personal interests of certain
of our office holders and principal shareholders in certain transactions with
us, see "Item 7 - Certain Relationships and Related Party Transactions."
Under the Companies Law, all arrangements as to compensation of office holders
who are not directors require approval of the board of directors. Arrangements
as to compensation of directors also require audit committee approval, before
board approval, and shareholder approval. The Companies Regulations (Rules
Regarding Compensation and Expenses of External Directors), 2000, ("Companies
Regulations - Compensation of External Directors") regulate compensation of
external directors.
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SHAREHOLDERS' DUTIES
Under the Companies Law, a shareholder has a duty to act in good faith
towards the company and other shareholders and to refrain from abusing his power
in the company, including, among other things, when voting at the general
meeting of shareholders on the following matters:
o any amendment to the articles of association;
o an increase of the authorized share capital of the company;
o a merger; or -
o approval of certain acts and transactions which require shareholder
approval.
In addition, a shareholder has the general duty to refrain from depriving
other shareholders of their rights. Furthermore, any controlling shareholder,
any shareholder who knows that he possesses the power to determine the outcome
of a shareholder vote and any shareholder who, pursuant to the articles of
association, has the power to appoint an office holder is under a duty to act in
fairness towards the company. The Companies Law does not describe the substance
of this duty.
ANTI-TAKEOVER PROVISIONS UNDER ISRAELI LAW
Under the Companies Law, a merger is generally required to be approved by
the shareholders and board of directors of each of the merging companies. If the
share capital of the company that will not be the surviving company is divided
into different classes of shares, the approval of each class is also required.
The Companies Law provides that the articles of association of companies, such
as ours, that were incorporated prior to February 1, 2000 are deemed to include
a provision whereby the approval of a merger requires a majority of three
quarters of those present and voting at a general meeting of shareholders. In
addition, a merger can be completed only after all approvals have been submitted
to the Israeli Registrar of Companies and at least seventy days have passed from
the time that a proposal for approval of the merger was filed with the
Registrar.
The Companies Law provides that an acquisition of shares in a public
company must be made by means of a tender offer if, as a result of the
acquisition the purchaser would become a 25% shareholder of the company. This
rule does not apply if there is already another 25% shareholder of the company.
Similarly, the Companies Law provides that an acquisition of shares in a
public company must be made by means of tender offer if as a result of the
acquisition the purchaser would become a 45% shareholder of the company, unless
someone else already holds 50% of the voting power of the company. These rules
do not apply if the acquisition is made by way of a merger. Regulations
promulgated under the Companies Law provide that these tender offer requirements
do not apply to companies whose shares are listed for trading outside of Israel
if, according to the law in the country in which the shares are traded,
including the rules and regulations of the stock exchange on which the shares
are traded, either:
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o there is a limitation on acquisition of any level of control of the
company; or
o the acquisition of any level of control requires the purchaser to do
so by means of a tender offer to the public.
However, under the Companies Law, if following any acquisition of shares
the acquirer holds 90% or more of the company's shares or of a class of shares,
the acquisition must be made by means of a tender offer for all of the target
company's shares or all the shares of the class, as applicable. An acquirer who
wishes to eliminate all minority shareholders must do so by way of a tender
offer and acquire 95% of all shares not held by or for the benefit of the
acquirer prior to the acquisition. If, however, the tender offer to acquire 95%
is not successful, the acquiror may not acquire shares tendered if, by doing so
the acquiror would own more than 90% of the shares of the target company.
Finally, Israeli tax law treats specified acquisitions, including a
share-for-share swap between an Israeli company and a non-Israeli company, less
favorably than does U.S. tax law. For example, Israeli tax law may subject a
shareholder who exchanges his ordinary shares for shares in a non-Israeli
corporation to immediate taxation, although the tax event can be postponed in
certain cases for 2 to 4 years upon approval of the tax authorities.
TRANSFER OF SHARES AND NOTICES
Fully paid ordinary shares are issued in registered form and may be
transferred freely. Each shareholder of record is entitled to receive at least
21 days prior notice of shareholders' meetings. For purposes of determining the
shareholders entitled to notice and to vote at such meetings, the Board of
Directors may fix the record date not exceeding 60 days prior to the date of any
general meeting.
MODIFICATION OF CLASS RIGHTS
If at any time the share capital is divided into different classes of
shares, the rights attached to any class (unless otherwise provided by our
Articles of Association) may be modified or abrogated by the Company by a
special resolution subject to the consent in writing of the holders of the
issued shares of the class, or by the adoption of a special resolution passed at
a separate general meeting of the holders of the shares of such class.
ACCESS TO INFORMATION
We file reports with the Israeli Registrar of Companies regarding our
registered address, our registered capital, our shareholders and the number of
shares held by each, the identity of the directors and details regarding
security interests on our assets. In addition, the Company must file with the
Israeli Registrar of Companies its Articles of Association and a copy of any
special resolution adopted by a general meeting of shareholders. The information
filed with the Registrar of Companies is available to the public. In addition to
the information available to the public, our shareholders are entitled, upon
request, to review and receive copies of all minutes of meetings of our
shareholders.
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TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our ordinary shares is Continental
Stock Transfer & Trust Company.
PART II
ITEM 1. MARKET PRICE AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDERS MATTERS
The following table sets forth for the periods indicated the closing
representative high and low sales price quotations of our ordinary shares as
reported by NASDAQ. These quotations are not adjusted for retail mark-up,
mark-down or commissions and do not necessarily represent actual transactions.
2005 HIGH LOW
- ---- ---- ----
First Quarter 1.09 0.58
Second Quarter 0.95 0.60
Third Quarter 0.87 0.65
Fourth Quarter 0.75 0.60
2006 HIGH LOW
- ---- ---- ----
First Quarter 1.31 0.39
Second Quarter 1.06 0.51
Third Quarter 0.99 0.63
Fourth Quarter 4.30 0.85
2007 HIGH LOW
- ---- ---- ----
First Quarter 1.98 1.12
Second Quarter 2.03 0.92
Third Quarter 1.19 0.80
Fourth Quarter 1.15 0.80
ITEM 2. LEGAL PROCEEDINGS
Not applicable
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Not applicable.
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ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES
Reference is made to the disclosure set forth under Item 2.01 of this
Current Report on Form 8-K, which disclosure is incorporated herein by
reference.
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under the Companies Law, an Israeli company may not exempt an office holder
from liability with respect to a breach of his duty of loyalty, but may exempt
in advance an office holder from his liability to the company, in whole or in
part, with respect to a breach of his duty of care. Under the Companies Law, a
company may not (1) indemnify an office holder or absolve him from liability
towards the company for, or (2) enter into an insurance contract which would
provide coverage for any monetary liability incurred as a result of any one of
the following:
o a breach by the office holder of his duty of loyalty unless the office
holder acted in good faith and had a reasonable basis to believe that
the act would not be detrimental to the benefit of the company;
o an intentional or reckless breach by the office holder of his duty of
care;
o any act or omission intended to confer on the office holder an illegal
personal gain; or
o any fine levied against the office holder.
Article 109 of the Articles of Association of the Company contains
provisions which relate to the indemnity and insurance of officers and
directors. Subject to the provisions of the Companies Law, the Company's
Articles of Association provide that it may enter into a contract for the
insurance of the liability of any of its office holders with respect to:
(i) a breach of his duty of care to the Company or to any other person;
(ii) a breach of fiduciary duty to the Company provided that the Officer
has acted in good faith and that he had reasonable grounds to assume that the
act would not harm the good of the Company;
(iii) a financial liability which shall be imposed on such Officer in favor
of any other person, in respect of an act performed by him by virtue of his
being an officer of the Company;
Subject to the provisions of the Companies Law, the Company's Articles of
Association provide that it may indemnify an officer holder with respect to any
of the following:
(i) a financial liability imposed on him in favor of any other person by
any judgment, including a judgment given as a result of a settlement or an
arbitrator's award which has been confirmed by a court, in respect of an act
performed by him by virtue of his being an Officer of the Company.
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(ii) reasonable litigation costs, including lawyer's fees, expended by an
Officer or which were imposed on an Officer by a court in proceedings filed
against him by the Company or in its name or by any other person or in a
criminal charge on which he was acquitted, in respect of an act performed by him
by virtue of his being an Officer of the Company.
In addition, under the Companies Law, indemnification of, and procurement
of insurance coverage for, the Company's office holders must be approved by its
audit committee and its board of directors and, in specified circumstances, by
its shareholders.
The Company has obtained directors' and officers' liability insurance.
PART F/S
Reference is made to the disclosure set forth under Item 9.01 of this
Current Report on Form 8-K, which disclosure is incorporated herein by
reference.
PART III
1. INDEX TO EXHIBITS
See Item 9.01(d) below, which is incorporated by reference herein.
2. DESCRIPTION OF EXHIBITS
See Exhibit Index below and the corresponding exhibits, which are
incorporated by reference herein.
ITEM 3.02. RECENT SALES OF UNREGISTERED SECURITIES.
Reference is made to the disclosure set forth under Item 2.01 of this
Current Report on Form 8-K, which disclosure is incorporated herein by
reference.
The securities described above in Section 2.01 were issued in reliance upon
an exemption from the registration requirements of the Securities Act of 1933,
as amended (the "Act") under Section 4(2) of the Act and/or under Regulations S
promulgated under the Act.
ITEM 5.01. CHANGES IN CONTROL OF REGISTRANT.
Reference is made to the disclosure set forth under Item 2.01 of this
Current Report on Form 8-K, which disclosure is incorporated herein by
reference.
ITEM 5.02. DEPARTURE OF DIRECTORS OR PRINCIPAL OFFICERS; ELECTION OF DIRECTORS;
APPOINTMENT OF PRINCIPAL OFFICERS.
Reference is made to the disclosure set forth under Item 2.01 of this
Current Report on Form 8-K, which disclosure is incorporated herein by
reference.
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ITEM 5.03. AMENDMENTS TO ARTICLES OF INCORPORATION OR BYLAWS; CHANGE IN FISCAL
YEAR.
In connection with the approval of the Plan, the shareholders of the
Company approved the following amendments to its Articles of Association (the
"Articles"), which became effective on the Closing Date.
(i) The deletion of the Articles 65(a) and 65(b) in their entirety and
their replacement with the following:
"65 (a) The Board of Directors of the Company shall consist of not
less than two and no more than thirteen Directors, including the External
Directors (the "External Directors") to be appointed and hold office in
accordance with the provisions of the Companies Law and any Regulations
enacted thereunder, as amended from time to time.
65(b) With the exception of the election of External Directors which
shall be governed in accordance with the provisions of the Companies Law,
directors shall be elected at the Annual General Meeting by an Ordinary
Majority. The directors so elected shall hold office until the next Annual
General Meeting unless determined otherwise at a subsequent General
Meeting. Notwithstanding the aforesaid, if no directors are appointed at
the Annual General Meeting, the directors appointed at the previous Annual
General Meeting shall continue to hold office. With the exception of the
removal of External Directors which shall be governed in accordance with
the provisions of the Companies Law, at a General Meeting by an Ordinary
Majority, the shareholders shall be entitled to remove any director(s) from
office, to elect directors in place of the director(s) so removed or to
fill any vacancy, however created, including a vacancy resulting from an
enlargement of the Board of Directors by resolution of the Board of
Directors, on the Board of Directors."
(ii) The deletion of the Article 66 in its entirety and its replacement
with the following:
"66 The Board of Directors may, from time to time, appoint an
additional director or additional directors to the Company, in order to
fill the office of a director which has been vacated or for any reason or
as an additional director or additional directors, provided that the
overall number of directors does not exceed the maximum number specified in
Article 65(a) above. A director appointed as aforesaid shall cease to hold
office at the end of the Annual Meeting following his appointment."
In addition, immediately following the Closing, the Company amended its
Memorandum and Articles to change its name to NexGen Biofuels Ltd. which is
pending Registrar approval.
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ITEM 9.01. FINANCIAL STATEMENTS AND EXHIBITS. (*)
(*) To be filed by amendment.
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(D) EXHIBITS
Incorp. by
Exhibit No. Reference Description
- ---------- ---------- -----------
1.1 1.1(1) Memorandum of Association of the Registrant, as
amended
1.2 2 Articles of Association, restated to include all
amendments in effect as of December 31, 2006
1.3 * Amendment to Articles of Association
4.33 3 Audit Committee Charter
4.34 2 Purchase Agreement between Healthcare Technologies
Ltd., Gamida For Life B.V., MAC Bioventures Inc.
and NexGen Biofuels Inc.
4.35 * Amendment No. 1 to Purchase Agreement.
4.36 4 AAA Valuation dated May 4, 2007 and letter dated July
13, 2007.
4.37 4 Valuation from David Boas Business Consultant Ltd.,
dated January 20, 2007.
8. * Subsidiaries of the Registrant
11 2 Code of Ethics
- ----------
*Filed herewith.
(1) Incorporated by reference to the Registrant's Annual
Report on Form 20-F for the Fiscal year ended
December 31, 1997.
(2) Incorporated by reference to the Registrant's Annual
Report on Form 20-F for the Fiscal year ended
December 31, 2006.
(3) Incorporated by reference to the Registrant's Annual
Report on Form 20-F for the Fiscal year ended
December 31, 2004.
(4) Incorporated by reference to the Registrant's Proxy
Statement filed as an exhibit to the Registrant's
Form 6-K dated August 2007, filed on August 16, 2007.
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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 hereunto duly authorized.
Healthcare Technologies Ltd.
By: /s/ Eran Rotem
------------------
Eran Rotem
Chief Financial Officer
Dated: January 7, 2008
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