________________________________________________________________________________
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
____________________
For the Fiscal Year Ended Commission File Number
December 31, 2001 0-32565
NUTRASTAR INCORPORATED
California 87-0673375
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(State of Incorporation) (I.R.S. Employer Identification)
Principal Executive Offices:
1261 Hawk's Flight Court
El Dorado Hills, CA 95762
Telephone: (916) 933-7000
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of Each Class Name of Each Exchange on Which Registered
------------------- -----------------------------------------
None None
Securities registered pursuant to Section 12(g) of the Exchange Act: NONE
Title of Each Class Name of Each Exchange on Which Registered
------------------- -----------------------------------------
Common Stock No Par Value
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
----------- ------------
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
The issuer's revenues for its most recent fiscal year was approximately $1.6
million.
As of March 15, 2002, the aggregate value of the voting stock held by
non-affiliates of the Registrant, computed by reference to the average of the
bid and ask price on such date was approximately $8,185,000 based upon the
average price of $1.01/share.
ISSUER INVOLVED IN BANKRUPTCY PROCEEDING DURING THE PAST FIVE YEARS
Check whether the issuer has filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court.
Yes X No
----------- ------------
As of March 15, 2002, the Registrant had outstanding 21,802,853 shares of common
stock (no par value).
Transitional Small Business Disclosure Format: Yes [ ] No [X]
Documents Incorporated by Reference
Certain exhibits required by Item 13 have been incorporated by reference from
the Company's previously filed Form 8-K's, Form 10-QSB and Form 10-KSB.
________________________________________________________________________________
TABLE OF CONTENTS
Page of
Report
--------
PART I...............................................................................1
ITEM 1.DESCRIPTION OF BUSINESS...............................................1
ITEM 2.DESCRIPTION OF PROPERTY..............................................12
ITEM 3.LEGAL PROCEEDINGS....................................................12
ITEM 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................13
PART II.............................................................................14
ITEM 5.MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS.......................... .......................14
ITEM 6.MANAGEMENT'S DISCUSSION AND ANALYSIS AND PLAN OF OPERATION...........16
ITEM 7.FINANCIAL STATEMENTS.................................................21
ITEM 8.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.............. ..............................21
PART III............................................................................22
ITEM 9.DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT ..........22
ITEM 10.EXECUTIVE COMPENSATION..............................................24
ITEM 11.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT......27
ITEM 12.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS......................27
ITEM 13.EXHIBITS AND REPORTS ON FORM 8-K....................................28
SIGNATURES..........................................................................30
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
General
NutraStar Incorporated (referred to as "NutraStar" or the "Company") is a
California Corporation formerly known as Alliance Consumer International, Inc.
As a result of the Exchange Transaction, discussed below, NutraStar's business
is now the business previously carried on by NutraStar Technologies
Incorporated, a Nevada Corporation ("NTI"). NutraStar is an emerging growth
health sciences company focused on becoming a leading nutraceutical company in
the World through the development and distribution of its "super food" products
and natural arthritic relief products for both humans and animals. NutraStar
also intends to distribute "all natural" cosmetics and beauty aids. Most of
NutraStar's products offer the beneficial elements of stabilized rice bran and
specially formulated rice bran oil. NutraStar's "all natural" nutraceutical
products deliver biological effects without the deleterious side effects of many
pharmaceuticals. Accordingly, NutraStar believes that certain of its products
may be used in place of, or as a supplement to some of the World's most widely
distributed pharmaceuticals. NutraStar will continue to aggressively support its
claims through clinical trials and third party analysis. To date, NutraStar and
its affiliates have conducted a number of limited clinical trials on several of
its products, including, the treatment of Type I and Type II Diabetes, high LDL
cholesterol, triglycercides, and Apolipoprotien B, a treatment for joint pain
and joint inflammation in mammals, a treatment for Irritable Bowel Syndrome
("IBS"), and a treatment for Inflammatory Bowel Disease ("IBD").
NutraStar has developed a number of product lines that are immediately available
for sale in the market through the company's four divisions: TheraFoods(R)
(business to consumer), NutraCea(TM) (medical foods), NutraGlo (animal
products), and NutraBeauticals(R) (cosmetics and beauty aids). Because of the
efficacy and safety of its products, NutraStar anticipates developing strategic
distribution and marketing agreements with well-known retail product and
pharmaceutical companies and medical practices and institutions. NutraStar
currently enjoys such a relationship with W.F. Young, Inc., the distributors of
the Absorbine(R) line of human and animal products, including NutraStar's
Absorbine Flex+(TM) equine product line which NTI developed for W.F. Young,
Inc.. NutraStar and W.F. Young, Inc. have recently entered into a letter of
intent to pursue a joint venture to market and distribute NutraStar's
NutraFlex(TM) product line to relieve arthritic and joint pain under the
Absorbine(R) branding.
1
History
NutraStar Incorporated (referred to as "NutraStar" or the "Company") was
originally incorporated on March 18, 1998 under the laws of the State of
California as Hickory Investments II, Inc. ("Hickory"). On June 2, 1998, Hickory
changed its name to Alliance Consumer International, Inc. ("Alliance"). On
December 14, 2001, Alliance changed its name to NutraStar Incorporated in
connection with the Exchange (see below).
In mid-1998 and early 1999, the Company undertook two public offerings of its
securities pursuant to the Rule 504 exemption from registration of Regulation D
promulgated under of the Securities Act of 1933, as amended (the "Securities
Act"). During this same period, the Company was engaged in the business of
manufacturing cosmetics, detergents and pharmaceuticals. On September 17, 1998,
the Company was approved for quotation on the Over-the-Counter Bulletin Board
("OTC-BB") where it was quoted until June 3, 1999. On June 3, 1999, the Company
moved to the "Pink Sheets" published by the Pink Sheets LLC (previously National
Quotation Bureau, LLC). During the second quarter of 2001, the Company's ticker
symbol was changed to "ACIN" and the Company again became listed on the OTC-BB.
On July 13, 1999, the Company filed a voluntary petition under Chapter 11 of the
U.S. Bankruptcy Code. The case was filed in the Central District of California,
Los Angeles Division, Chapter 11 Case No. LA-99-36256-EC. In November 1999, the
U.S. Bankruptcy Court approved a Plan of Reorganization (referred to as the
"plan") which provided for the sale of substantially all of the Company's
assets. During the pendency of the Chapter 11 bankruptcy proceedings, an
investor group led by Home Marketing Enterprises, LLC, a Utah limited liability
company, made an offer to purchase a majority of the Company's issued and
outstanding shares. This offer was accepted by the attorneys for the Debtor in
Possession and thereafter formally approved by the Bankruptcy Court at a
February 21, 2001 Sale Confirmation Hearing. A formal Order reflecting the sale
was entered with the Clerk of the Court on March 12, 2001.
On March 12, 2001 the Company emerged from Chapter 11 bankruptcy with no
remaining material assets or liabilities. Among other things, the Bankruptcy
Court approved (1) a change in officers and directors, (2) the cancellation of
all authorized and any outstanding preferred shares, (3) a reverse common stock
split at a ratio of one share for every fifty shares that were then-issued and
outstanding, (4) an increase in the authorized common capital shares from
15,000,000 to 50,000,000 shares, and (5) the issuance of 3,500,000 post-split
common capital shares to the investor group.
As a result of the one-for-fifty shares reverse split, the Company, prior to the
Court-authorized issuance of the 3,500,000 shares referenced above, had 132,377
common shares issued and outstanding. At the time of the Bankruptcy purchase
transaction, the Company also issued 17,133 post-split shares to four
individuals involved in, or associated with, the pre-petition Company. The total
number of the post-split issued and outstanding shares, following Bankruptcy
Court approval of the purchase transaction was 3,649,520.
On March 28, 2001, the Restated Articles of Incorporation implementing the
changes and amendments to the Company's Articles approved by the U.S. Bankruptcy
Court was filed with the Secretary of State of the State of California. Since
2
its emergence from Chapter 11 bankruptcy and concluding with the Exchange
Transaction, the Company has been seeking to engage in a business combination.
The Common Stock and deficit accumulated during such stage have been restated
with the statement of operations to begin on March 12, 2001, the date of entry
of the Bankruptcy Court Order approving the purchase and sale by the investor
group.
Fresh-Start Reporting
In accordance with the American Institute of Certified Public Accountants'
Statement of Position 90-7, "Financial Reporting by Entities in Reorganization
Under the Bankruptcy Code", the Company was required to adopt fresh-start
accounting as of March 12, 2001 at the time the Plan was approved by the
Bankruptcy Court. The Company was required to adopt fresh-start reporting
because the holders of the existing voting shares immediately prior to filing
and confirmation of the Plan received less than 50% of the voting shares of the
emerging entity and its reorganization value was less than the total of its
post-petition liabilities and allowed claims.
In accordance with fresh-start accounting, the gain on discharge of debt
resulting from the bankruptcy proceedings as reflected on the predecessor
Company's financial statements for the period ended March 11, 2001 was
eliminated, and, at March 12, 2001, the reorganized Company's financial
statements reflected no beginning retained earnings or deficit. Since November
7, 2000, the Company's financial statements have been prepared as if it were a
new reporting entity and separate column headings denote pre-reorganization
operating results (the "Predecessor Company") from post-reorganization operating
results (the "Reorganized Company") since they are not prepared on a comparable
basis.
Under fresh-start accounting, all assets and liabilities are restated to reflect
their reorganization value, which approximates fair value at the date of
reorganization. The Company's management determined that, based on the fact that
the Company has historically incurred losses from operations and has projected
minimal future operating profits, the reorganization value of the Company (the
fair value of the Company before considering liabilities) was equivalent to the
fair value of the Company's tangible assets and that no other intrinsic value
existed above the amount paid for Common Stock by Home Marketing Enterprises,
LLC as part of the Plan of Reorganization. As a result, all assets and
liabilities have been stated at their fair value.
Exchange Transaction
On December 14, 2001, the Company issued 17,000,000 shares of the Company's
Common Stock (the "Common Stock") to the shareholders of NutraStar Technologies
Incorporated, a Nevada corporation in exchange for all of the issued and
outstanding shares of the common stock of NTI (the "Exchange Transaction")
pursuant to that certain Plan and Agreement of Exchange dated November 9, 2001
(the "Exchange Agreement") between the Company, NTI and the principal
shareholders of NTI. As a result of the Exchange Transaction, NTI became a
wholly owned subsidiary of the Company and the former shareholders of NTI became
the owners of approximately 82% of the Company's then outstanding common stock.
Upon the Exchange Transaction, the sole officer and director of the Company
resigned and the officers and directors of NTI became the officers and directors
of the Company and the Company changed its ticker symbol to "NTRA".
On April 27, 2000, prior to the Exchange Transaction, NTI formed NutraGlo
Incorporated ("NutraGlo"), a Nevada corporation, which was owned 80% by NTI and
20% by NutraGlo Investors L.P. During fiscal year 2001, NutraGlo started
marketing, manufacturing and distributing one of NTI's products to the equine
market. At the time of the Exchange Transaction, NutraStar issued 250,001 shares
of its common stock to the limited partnership in exchange for the remaining 20%
of the common stock of NutraGlo. The value of the shares was $250,001. As a
result, NutraGlo is now a wholly-owned subsidiary.
3
Industry Overview
By definition, nutraceuticals are food constituents that have biologically
therapeutic effects in humans and mammals. These compounds include vitamins,
antioxidants, polyphenols, phytosterols, as well as macro and trace minerals.
Rice bran and rice bran oil are good sources for some of these compounds,
including tocotrienols, a newly discovered complex of vitamin E, and gamma
oryzanol, which is found only in rice bran. These compounds act as antioxidants.
Stabilized rice bran and its derivatives and rice bran oil also contain high
levels of B-complex vitamins, beta-carotene (a vitamin A precursor), other
carotenoids and phytosterols, as well as both a balanced amino acid profile
(protein) as well as both soluble and insoluble fiber.
Rice is one of the world's major cereal grains, although United States
production of rice is only a small fraction of total world production.
Approximately 60% of the nutritional value of rice is contained in the rice
bran, the outer brown layer of the rice kernel. However, unstabilized rice bran
deteriorates rapidly, within hours after milling. The RiceX Company ("RiceX"),
one of NutraStar's primary suppliers, has developed a method of stabilizing rice
bran that NutraStar believes is superior to other methods, and provides a shelf
life of approximately two years, which NutraStar believes is longer than any
other stabilized rice bran. Certain of NutraStar's core products,
RiSolubles(TM), RiceMucil(R), NutraFlex(TM), and StaBran(R) are based on
"stabilized rice bran" produced by RiceX. NutraStar has an exclusive license to
distribute RiceX's value-added rice bran products in the United States and has
an exclusive worldwide license for patents held by RiceX covering rice bran
treatments of diabetes and arteriosclerosis.
In 1999, the Alliance for Aging Research in Washington D.C. reported that when
Americans reach their 50th birthday, their chance of being diagnosed for the
first time with hypertension, arthritis, or diabetes will triple by the time
they reach 60. As the population of the United States ages over the next 30
years, NutraStar believes demand for its products will grow dramatically. Since
stabilized rice bran is a safe food product, NutraStar believes that its
beneficial effects can be reached without any known deleterious side effects,
such as those that may be present in pharmaceuticals. If further clinical trials
support the beneficial effects of NutraStar's stabilized rice bran products and
if the medical community widely endorses such use of NutraStar's products, then
NutraStar believes that its products may be used as the first treatment either
prior to or as a compliment to traditional pharmaceutical therapies for the
treatment of diabetes and coronary heart disease.
Many physicians have taken a keen interest in NutraStar's nutraceutical products
as a means of offering alternative or complementary modalities for treating
serious health care problems. Board Certified gastroenterologists have tested
NutraStar's RiceMucil(R) product in their local practices, as well as at the
University of California, Davis Medical Center. It is now their fiber of choice
as it does not produce methane in the intestines and is much better tolerated
than psyllium husk (Metamucil(R), Procter & Gamble) and soluble fibers. As a
result of these findings, new products have been formulated by these physicians
that include NutraStar's RiSolubles(R) and RiceMucil(R) as base ingredients.
4
Products
NutraStar has four primary divisions through which it sells its products:
1. TheraFoods(TM). NutraStar distributes its consumer products through its
TheraFoods(TM) division. The primary products currently sold through this
division are RiSolubles(R), RiceMucil(R), NutraFlex(TM), and StaBran(R).
All four products are available in capsule and powdered form for use as
food supplements. The powdered form can also be used as a food additive in
breads, cookies, snacks, beverages, and similar foods. NutraStar has also
developed a topical, transdermal cream product for arthritic and joint pain
in connection with the Absorbine(R) branded joint venture which will be
marketed under either Absorbine Pro(TM) or Absorbine Sr.(R).
2. NutraCea(TM). NutraCea(TM)has been created to compliment NutraStar's
medical foods products through a newly created distribution channel in the
medical community, primarily doctors and health care providers. Current
annual expenditures in the United States for the following diseases have
been estimated at $65 billion for arthritis; $98 billion for diabetes; and
$170 billion for heart disease. NutraStar believes it has extremely
efficacious products in each of these areas. For example, a limited
clinical trial suggests that certain of NutraStar's products may lower
blood glucose levels of diabetes mellitus patients. NutraStar has
consulting relationships with several physicians who assist in formulating
medical food products. Three such products have already been created:
Synbiotics(TM)1 (for treatment of IBS), Synbiotics(TM)2 (for treatment of
IBD), and NutraBetics (for treatment of Diabetes, Hyperglycemia and
Hypoglycemia). In addition, through its consulting physicians, NutraStar
has support from several medical institutions and practices that are and
will continue to conduct clinical trials and beta work for the products.
For example, UC Davis Medical Center is conducting a 50-subject, open label
clinical trial for the Synbiotics(TM)2 product on IBD patients, the Aoki
Institute at UC Davis Medical Center is conducting a 50-subject clinical
trial for the NutraBetics(TM)product on the normalization of fasting blood
glucose levels in Type I and Type II diabetes, and a private physician
group is conducting a 50-subject, open label clinical trial for the
Synbiotics(TM)product on IBS patients. Additionally, based on clinical
trials and a United States patent, NutraStar believes that certain of its
products may be beneficial in reducing high blood cholesterol and high
blood lipid levels. NutraStar intends to conduct additional clinical trials
to further investigate such effects.
3. NutraBeauticals(R). NutraBeauticals(R) is focused on providing natural
products to improve skin health. NutraBeauticals(R) Skin Cream is such a
product, and contains rice bran oil and other natural ingredients that
support the health of the skin. NutraStar is also pursuing acquisitions and
product development for natural cosmetic products.
4. NutraGlo. NutraStar developed a derivative of its NutraFlex(TM)product to
prevent and rehabilitate debilitating joint degeneration in horses.
NutraStar and W.F Young Company (Absorbine(R)products) sponsored an
extensive 50 horse equine study that was monitored and conducted by leading
equine veterinarian Gary D. Kaufman, D. V. M., with the results
5
statistically verified by an independent organization, which demonstrates
that NutraStar's product is clinically proven to be a superior product for
treating horses.
Marketing
The Company's TheraFoods(TM) products are currently marketed domestically
through various distribution arrangements and sold through the Internet at
http://www.nutrastar.com/products.html.
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NutraStar's equine product is distributed under the name "Absorbine Flex+" by W.
F. Young, Inc. pursuant to a distribution agreement with NutraStar and will soon
be introduced into the international market in 36 countries. NutraStar has a
developed a number of other animal products which it is seeking to distribute
through various distribution channels such as the Internet and strategic joint
ventures to the large animal, pet and veterinarian industries.
NutraStar intends to distribute many of its consumer products through direct
response marketing channels such as infomercials and catalogue sales. NutraStar
expects its Absorbine(R) branded NutraFlex(TM) products to be sold initially
through television and radio infomercial campaigns.
Product Supply
NutraStar has entered into an agreement with RiceX, whereby RiceX will sell
NutraStar its stabilized rice bran, rice bran solubles, rice bran fiber
concentrates, and other rice bran products at prices equal to the lower of
RiceX's standard price or the price negotiated by other customers for like
quantities and products. The agreement also provides that RiceX will not sell
any rice bran solubles or rice bran fiber concentrates products in the United
States except to NutraStar. To maintain this exclusive right, NutraStar must
purchase products equal to $250,000 by April 15, 2002, $500,000 during the
three-month period ending July 15, 2002, $750,000 during the three-month period
ending October 15, 2002, $1,250,000 during the three-month period ending January
15, 2003, $1,500,000 for the six month period ending July 15, 2003, $2,250,000
for the six-month period ending January 15, 2004, $6,000,000 for the one-year
period ending January 15, 2005, and increasing amounts each one-year period
thereafter at a 10% increase per year. NutraStar has met its first purchase
quota by April 15, 2002.
To purchase products from RiceX, the Company is required to provide a 50%
deposit for all purchase orders in addition to the $135,000 security deposit
already paid to RiceX. In consideration for this exclusive right, NutraStar will
pay RiceX a royalty of 2% of NutraStar's gross receipts of all NutraStar's
products that incorporated RiceX products, exclusive of shipping charges and
returned product. The agreement has a 5-year term, and automatically renews for
2 additional 5-year terms unless NutraStar elects not to renew.
NutraStar believes that its agreement with RiceX will provide NutraStar with an
assured source of high quality rice bran products.
NutraStar believes that RiceX's processing facility in Dillon, Montana does not
have sufficient capacity to produce NutraStar's products in the quantities that
NutraStar anticipates that it will be able to sell. NutraStar's long-term plans
6
include assisting RiceX in the expansion of its existing and future processing
facilities, so that NutraStar will have more control of both the production and
distribution of its products, and/or the establishment of a joint venture with a
significant distributor to construct a processing facility to produce the
product to be sold to such distributor. However, such undertakings will require
substantial additional funds beyond the amount of the Offering, and there are no
assurances that RiceX will accept any offer from NutraStar or that NutraStar
will establish a joint venture.
Competition
NutraStar competes with other companies that offer stabilized rice bran as well
as other companies that offer other food ingredients and nutritional supplements
although NutraStar believes its rice bran has a longer shelf life than its
competitors. NutraStar's leading competitors in the stabilized rice bran market
include Producer's Rice Mill and Uncle Ben's Rice, Inc. NutraStar is unaware of
others who offer stabilized rice bran. In addition, NutraStar faces competition
from those who currently offer oat bran and wheat bran in the nutritional
supplement market, as NutraStar believes that some consumers may consider the
differences between different bran products to be minimal. Many of NutraStar's
competitors have greater marketing, research, and capital resources than
NutraStar, and may be able to compete more effectively, especially with price.
There are no assurances that NutraStar's products will be able to compete
successfully. NutraStar's inability to generate brand demand and establish
competitive advantages in the marketplace would have a material adverse effect
on NutraStar's operations and profits.
Government Regulation
The manufacturing, packaging, labeling, advertising, distribution, and sale of
the Company's products are subject to extensive regulation by one or more
federal agencies. The primary governmental agency that overseas NutraStar's
products is the Food and Drug Administration (the "FDA").
The Dietary Supplement Health Education Act of 1994 (the "DSHEA") provides the
basic statutory framework governing the composition and labeling of dietary
supplements which would include the Company's TheraFoods(TM) and NutraCea(TM)
product lines. A seller of dietary supplements, which include vitamins,
minerals, herbs, and other dietary substances for human consumption, may make
three different types of claims in its labeling: nutrient content claims,
nutritional support claims, and health benefit claims. In January 2000, the FDA
adopted regulations implementing the labeling provisions of the DSHEA.
Nutrient content claims are those claims that state the nutritional content of a
dietary supplement, and further include claims such as "high in calcium" and "a
good source of vitamin C." The DSHEA prescribes the form and content of
nutritional labeling of dietary supplements, and requires the manufacturer to
list all additional ingredients. A manufacturer is not required to file any
information with the FDA regarding nutrient claims, but should have adequate
data to support any such claims.
7
There are two types of nutritional support claims. The first type are claims
about classical nutritional deficiency diseases, such as "vitamin C prevents
scurvy." A manufacturer may make such claims, as long as the statement discloses
the prevalence of the disease in the United States. The second type are called
structure/function claims, which are statements about the dietary supplement's
effect on the structure or function of the body, or the "well being" achieved by
using the dietary supplement, such as "calcium builds strong bones." In order to
make a structure/function claim, the manufacturer must have substantiation that
the claims are truthful and not misleading, and the label must bear the
prescribed warning "This statement has not been evaluated by the Food and Drug
Administration. This product is not intended to diagnose, treat, cure, or
prevent any disease." A manufacturer must notify the FDA of structure/function
claims within 30 days after a product bearing such claim is first marketed.
Health benefit claims state a relationship between a nutrient and a disease or a
health related condition. Under the DSHEA, a manufacturer must notify the FDA of
the intent to use a health benefit claim at least 120 days prior to first
marketing a product bearing such a claim, and include authoritative statements
published by a federal scientific body (such as the National Institutes of
Health), and currently in effect, that are based on the scientific body's
deliberative view of the scientific evidence. To date, only 10 health benefit
claims have been approved, none of which directly relate to rice bran.
Any claim by a dietary supplement to diagnose, prevent, mitigate, treat, or cure
a specific disease will be treated by the FDA as a drug, which must be proven
"safe and effective" prior to marketing.
Initially, NutraStar intends to make only nutrient content and
structure/function claims with respect to its products. However, there are no
assurances that the FDA will accept NutraStar's substantiation as to any of its
claims. Further, there are no assurances that the FDA will not determine that a
claim made by NutraStar is a health benefit claim or a drug claim, either of
which would require NutraStar to undertake a protracted and prohibitively
expensive procedure to prove its claims. In such circumstances, NutraStar may be
required to withdraw certain of its claims.
One limited clinical study has been performed, which suggests that NutraStar's
rice bran products may have a significant effect on reducing the blood glucose
levels in diabetes mellitus patients. However, further clinical trials are
necessary to substantiate any health benefit claim. Further, an authoritative
statement published by a federal scientific body must support any health benefit
claim that NutraStar may desire to make. Even if further clinical trials support
the beneficial effects of NutraStar's products, it is a time-consuming and
expensive process to receive such authoritative statement. Even if NutraStar
receives an authoritative statement that is favorable, the FDA may require
further substantiation before NutraStar may make any health benefit claims.
There are no assurances that NutraStar will ever be able to make any health
benefit claims with respect to its products.
The DSHEA provides that the manufacturer of any dietary supplement that contains
an ingredient that was not marketed in the United States prior to October 1994,
must notify the FDA at least 75 days prior to marketing such product, and must
provide the FDA with information that supports the conclusion that the dietary
supplement with the new ingredient "will reasonably be expected to be safe."
8
The DSHEA also provides that third party literature, such as scientific
literature, may be used in connection with the sale of a dietary supplement.
Such a publication must not be false or misleading, may not mention a particular
manufacturer or brand of dietary supplement, must be presented so as to offer a
balanced view of available scientific information, and must be physically
separated from the products when used in a retail establishment. There are no
assurances that all pieces of third party literature that may be disseminated in
connection with NutraStar's products, including by distributors for whom
NutraStar provides private label products, will be determined by the FDA to
satisfy these requirements.
The DSHEA requires that all dietary supplements be prepared, packaged, and held
under conditions that satisfy the good manufacturing practice regulations that
the FDA may adopt. The FDA proposed such regulations in February 1997, but has
yet to adopt final regulations. Once adopted, there are no assurances that
NutraStar or RiceX will be able to meet such good manufacturing practices.
The FDA has broad authority to enforce the provisions of federal law applicable
to dietary supplements, including the power to seize adulterated or misbranded
products or unapproved new drugs, to request product recall, to enjoin further
manufacture or sale of a product, to issue warning letters, and to institute
criminal proceedings. In the future, NutraStar may be subject to additional laws
or regulations administered by the FDA or other regulatory authorities, the
repeal of laws or regulations that NutraStar might consider favorable, or more
stringent interpretations of current laws or regulations. NutraStar is not able
to predict the nature of such laws or regulations, nor can it predict the effect
of such laws or regulations on its operations. NutraStar may be required to
reformulate certain of its products, recall or withdraw those products that
cannot be reformulated, keep additional records, or undertake expanded
scientific substantiation. Any or all of such requirements could have a material
adverse effect on NutraStar's operations and financial condition.
While the FDA primarily regulates the labeling of dietary supplements, the
Federal Trade Commission (the "FTC") regulates the advertising of such products.
The FTC's primary concern is that any advertising must be truthful and not
misleading, and that a company must have adequate substantiation for all product
claims. In general, the FTC gives deference to an FDA determination of whether
there is adequate support for health related claims. However, the FTC has been
very active in enforcing requirements that companies possess adequate
substantiation for product claims. FTC enforcement actions may result in consent
decrees, cease and desist orders, judicial injunctions, and the payment of
fines. There are no assurances that the FTC will not question NutraStar's
advertising in the future.
In addition to the foregoing, NutraStar's operations will be subject to federal,
state, and local government laws and regulations, including those relating to
zoning, workplace safety, and accommodations for the disabled, and NutraStar's
relationship with its employees are subject to regulations, including minimum
wage requirements, anti-discrimination laws, overtime and working conditions,
and citizenship requirements. NutraStar believes that it is in substantial
9
compliance with all material governmental laws and regulations, except for such
minor irregularities that will not have a material adverse effect on NutraStar's
business or results of operations.
Intellectual Property
NutraStar has filed applications with the U.S. Patent & Trademark Office and has
successfully registered NutraStar's logo, StaBran(R), RiSolubles(R),
RiceMucil(R), and 18 other product names, as registered federal trademarks and
servicemarks. NutraStar has additional trademark and servicemark applications
pending. See "Risk Factors - Intellectual Property."
NutraStar has an exclusive license from RiceX for Patent Number 6,126,943
entitled "A Method for Treating Hypercholesterolmia, Hyperlipidemia, and
Atherosclerosis," which was published October 3, 2000, Patent Number 6,303,586
entitled "A Method for Treating Diabetes, Hyperglycemia and Hypoglycemia," which
was published October 16, 2001, and Patent Number 6,350,473 entitled "A Method
for Treating Diabetes, Hyperglycemia and Hypoglycemia," which was published
February 26, 2002. This newly allowed diabetes patent grants claims for lowering
glycosylated hemoglobin levels and improving the synthesis of insulin. See "Risk
Factors - Intellectual Property." The term of the exclusive license is for the
same term as NutraStar's distribution agreement with RiceX. See "Business -
Marketing and Product Supply."
NutraStar recently filed its first patent application for a method of treating
arthritis, joint inflammation and joint pain. There are no assurances that this
patent will be issued or that the issued patents will adequately protect
NutraStar's technology, or that another company may develop a similar but
non-infringing product.
Research and Development & Expenditures
During fiscal year 2001, NTI spent $83,444 on product research and development.
It is expected that expenditures for research and development will increase in
the current year as the Company's product line expands.
Employees
The Company currently has 10 full-time employees, and anticipates that it will
add approximately three executive employees and 10 full-time non-executive
employees on the expansion of the Company's operations which is expected to
occur during 2002. If the Company's sales increase as rapidly as management
anticipates, the Company may hire an additional 5 to 15 employees, primarily for
marketing services. The Company anticipates that it will not have any
substantial difficulty locating and hiring qualified employees for its planned
expansion. None of the Company's employees are employed pursuant to a collective
bargaining or union agreement, and the Company considers that its relationship
with its employees is good.
10
Factors Affecting NutraStar's Business
The Company will need additional funds to finance additional products as well as
fund its current operations. It currently has limited cash reserves and limited
working capital to fund its operations, and its ability to meet its obligations
in the ordinary course of business is dependent upon its ability to raise
additional financing through public or private equity financings, establish
increasing cash flow from operations, enter into collaborative or other
arrangements with corporate sources, or secure other sources of financing to
fund operations.
NutraStar has developed and is marketing a number of products, both food
supplements and cosmetics, which are derived from stabilized rice bran and
specially formulated rice bran oil. These rice bran based products are
relatively new which will require NutraStar to successfully introduce products
to the marketplace and create a sustainable and expanding market for the
Company's products. The failure of the Company to effectively create a market
and demand for its products would have a material adverse effect on its
financial condition and results of operation.
The dietary supplement and cosmetic industries are subject to considerable
government regulation both as to efficacy as well as labeling and advertising.
There is no assurance that all of NutraStar's products and marketing strategies
will satisfy all of the applicable regulations of the DSHEA, FDA and./or the FTA
and/or the FTC. Failure to meet any applicable regulations would require
NutraStar to limit the production or marketing of any non-compliant products or
advertising.
The Company's prospects for financial success are difficult to forecast because
the Company has a limited operating history. The Company's current business
commenced in February 2000, when its wholly-owned subsidiary, NTI, first started
its operations. Consequently, both the Company and its operating subsidiary have
a limited operating history upon which an evaluation of their prospects can be
based. Neither the Company nor its subsidiary, NTI, has ever made a profit in
any fiscal quarter. The Company's prospects for financial success must be
considered in light of the risks, expenses and difficulties frequently
encountered by companies in new, unproven and rapidly evolving markets. To
address these risks, NutraStar must, among other things, expand its customer
base, increase its cash flow from operations, respond effectively to competitive
developments, and continue to attract, retain and motivate qualified employees.
The Company's inability to further develop and expand its operations would
materially adversely affect the Company's business financial condition and
results of operations.
The audit report of the Company's independent auditors includes a "going
concern" qualification. In the auditor's opinion, the Company's limited
operating history and the accumulated net deficit as of December 31, 2001, raise
substantial doubt about its ability to continue as a going concern.
The Company operates in a rapidly changing and growing industry, which is
characterized by vigorous competition from both established companies and
potential new companies. The markets for food supplements and cosmetics are
extremely competitive both as to price and quality.
11
In summary, the Company's net sales and operating results in any particular
quarter may fluctuate as a result of a number of factors, including competition
in the markets in which the Company's products compete, delays in achieving
production targets, establishing markets for its products, the current economic
conditions as well as the overall performance of the food supplement and
cosmetic industries as discussed above. The Company's future operating results
will depend, to a large extent, on its ability to anticipate and successfully
react to these and other factors and successfully implement its growth strategy.
ITEM 2. DESCRIPTION OF PROPERTY
The Company subleases its executive offices, warehouse and laboratory, located
at 1261 Hawk's Flight Court, El Dorado Hills, California, for a monthly rental
of $5,228 plus its share of common area expenses. The monthly rental will
increase by 2.5% on each October 1 in 2002 and 2004. The Company subleases this
5,500 square foot facility through September 30, 2006. The Company believes that
this facility will be adequate for current operations. The Company subleases its
office space from RiceX.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved from time to time in various lawsuits that arise in the
course of its business.
NutraStar has initiated one lawsuit against a former officer citing a number of
causes of action resulting from his various breaches of his fiduciary
responsibility to NTI while an officer. The lawsuit was filed in Superior Court,
El Dorado County, on November 2, 2001 (Case No. PC20010624). NTI had an
understanding with the former officer and director of NTI, whereby he would
introduce investors to NTI resulting in at least $2 million in funding in
exchange for receiving a salary and 1,240,000 shares of NTI's common stock. He
was terminated for cause as an officer of NTI on April 4, 2001 and removed as a
director of NTI by NTI's shareholders on September 25, 2001. The former officer
did not successfully introduce investors to NTI resulting in at least $2 million
in funding. Accordingly, he was not paid a salary and did not receive the
1,240,000 shares of NTI's common stock. In addition, NTI also had an agreement
in principle with a company of which the former officer was the controlling
shareholder to purchase such company for an additional 124,000 shares of NTI's
common stock. The transaction never took place and the offer was terminated by
NTI as a result of material misrepresentations by the former officer and his
failure to deliver a number of documents requested by NTI during its due
diligence investigation. Accordingly, NTI has notified the former officer that
he is not entitled to any compensation, including any shares of NutraStar's
common stock. NutraStar believes that it has no further obligation to him or any
entity with which he is affiliated, but the former officer had not confirmed
such to NutraStar. NutraStar has not reserved any amount for any potential
liability or shares of Common Stock to him or to his company. NutraStar has
commenced litigation against the former officer on a number of causes of action
resulting from his various breaches of his fiduciary responsibility to NTI while
an officer and director.
12
NTI had an understanding with an individual and his company whereby he would
introduce a strategic partner to NTI in exchange for a fee if the strategic
partner made an investment in NTI. The introduction was made, but NTI never
consummated a transaction with the strategic partner. In addition, he solicited
certain funds from prospective investors. NTI agreed to issue 372,000 shares of
its common stock to him in exchange for the above-described investment banking
services. Upon investigation, NTI determined that neither he nor his company had
the proper license to be providing these services. Accordingly, NTI has notified
him that he was not entitled to any compensation, including any shares of NTI's
common stock. NTI believes that it has no further obligation to him or his
company, but he had not confirmed such to NutraStar. NutraStar has not reserved
any amount for any potential liability or shares of its common stock to him or
to his company.
Subsequent to the fiscal year end, a Complaint was filed against NTI by
Millennium Integrated Services, Inc. ("MISI") in Superior Court, Sacramento
County, on April 4, 2002 (Case No. 02A502006). MISI provided website development
services to NTI, at a cost of $204,405. MISI is seeking payment of $204,405 plus
interest of $32,031. On April 9, 2002, MISI filed a Motion for a Writ of
Attachment which would allow MISI to seize and hold NTI assets worth $236,436
pending the resolution of the lawsuit. On April 10, 2002, a Writ of Attachment
was granted by the Court. NTI believes it has valid defenses and offsets to the
payment for these services and will attempt to settle this matter. Settlement of
this case could have a material affect on the Company's cash flow depending on
how quickly any settlement would need to be paid.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
13
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS.
Commencing in May 2001, the Company's common stock was listed and traded on the
NASDAQ Electronic Bulletin Board under the symbol "ACIL". Effective as of
December 17, 2001, the Company's trading symbol was changed to "NTRA" to reflect
the Exchange Transaction with NTI. The following chart sets forth the known high
and low price on a bid and ask basis for the Company's stock for each quarter
during the previous two years. Except for the most recent quarter reported, all
prices are as reported in the "Pink Sheets" published by the Pink Sheets LLC.
The quotations set forth below reflect inter-dealer prices, without retail
mark-up, mark-down or commissions and may not represent actual transactions.
--------------------------------- -------------------- ---------------
Year Ended December 31, 2001 Low High
--------------------------------- -------------------- ---------------
Fourth Quarter $0.30** $2.77**
--------------------------------- -------------------- ---------------
Third Quarter $0.41* $2.29*
--------------------------------- -------------------- ---------------
Second Quarter $.001* $0.41*
--------------------------------- -------------------- ---------------
First Quarter $.001 $ .01
--------------------------------- -------------------- ---------------
--------------------------------- -------------------- ---------------
Year Ended December 31, 2000 Low High
--------------------------------- -------------------- ---------------
Fourth Quarter $.001 $.005
--------------------------------- -------------------- ---------------
Third Quarter .005 .01
--------------------------------- -------------------- ---------------
Second Quarter .01 .04
--------------------------------- -------------------- ---------------
First Quarter .001 .04
--------------------------------- -------------------- ---------------
----------------------------
* Reflects post-reverse stock split of 1 for 50.
** Represents post-share exchange transaction.
As of March 1, 2002, there were approximately 82 holders of record of the
Company's Common Stock. This amount does not include shares held in street name.
Dividend Policy
The Company has never paid any cash dividends on its common stock. The Company
currently anticipates that it will retain all future earnings for use in its
business. Consequently, it does not anticipate paying any cash dividends in the
foreseeable future.
14
Recent Sales of Unregistered Securities
During the Company's last fiscal year ended December 31, 2001, it issued the
following equity securities pursuant to exemptions from registration under the
Securities Act of 1933 (the "1933 Act").
On December 14, 2001, the Company issued 17,000,000 shares of its common stock
to the 38 NTI shareholders in exchange for all of the outstanding shares of NTI
common stock. The Company shares were issued without any public solicitation and
were acquired for investment purposes only and without a view to distribution.
The shares were issued pursuant to the private placement exemption provided by
Section 4(2) and Rule 506 of Regulation D of the 1933 Act. These shares are
deemed to be "restricted securities" as defined in Rule 144 under the 1933 Act
and the certificates evidencing the shares bear a legend stating the
restrictions on resale.
During the fiscal year 2001, the Company issued shares of its Series A Preferred
Stock in the following transactions:
(i) 100,000 shares were issued as settlement of certain litigation. The stock
was valued at $1.00 per share;
(ii) 130,000 shares were issued to a related party as payment for accounts
payable totaling $130,000;
(iii)13,000 shares were issued to one individual for services rendered to the
Company. The services were valued at $13,000;
(iv) 56,000 shares were issued for conversion of $50,000 of debt plus interest.
These shares were issued to two individuals and valued at $1.00 per share;
(v) 1,775,707 shares were issued in exchange for short-term promissory notes or
pursuant to the conversion of outstanding convertible notes aggregating
$1,705,707 of principal and related interest due thereon. The shares were
issued to thirteen creditors.
All of the above issuances were made without any public solicitation, to a
limited number of individuals or entities and were acquired for investment
purposes only. The shares were issued pursuant to the private placement
exemption provided by Section 4(2) of the 1933 Act. These are deemed to be
"restricted securities" as defined in Rule 144 under the 1933 Act and the
certificates evidencing the shares bear a legend stating the restrictions on
resale.
On December 27, 2001, the Company closed a private placement of 1 million shares
of common stock pursuant to which it raised $1 million. The shares were valued
at $1.00 per share. The shares were issued without any public solicitation, were
sold to a limited number of accredited investors and were acquired with
investment intent and without a view to distribution. The shares were issued
pursuant to the exemptions provided by Rule 506 of Regulation D and Section 4(6)
of the 1933 Act. These shares are deemed to be "restricted securities" as
defined in Rule 144 under the 1933 Act and the certificates evidencing the
shares bear a legal stating the restrictions on resale.
15
In addition to the Exchange Transaction and private placement referred to above,
the Company issued shares of its common stock in the following transactions:
(i) A total of 20,000 shares were issued to two individuals for cash
investments totaling $28,546;
(ii) 21,409 shares were issued to acquire the rights to a registered trademark
valued at $21,409;
(iii)356,824 shares were issued to one individual to extend the term of a note
payable and payment of principal and interest thereon. The shares were
valued at $249,314;
(iv) A total of 249,314 shares were issued to one individual for services
rendered to the Company. The services were valued at $249,314.
All of the above issuances were made without any public solicitation, to a
limited number of individuals or entities and were acquired for investment
purposes only. The shares were issued pursuant to the private placement
exemption provided by Section 4(2) of the 1933 Act. These are deemed to be
"restricted securities" as defined in Rule 144 under the 1933 Act and the
certificates evidencing the shares bear a legend stating the restrictions on
resale.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS AND PLAN OF OPERATION
For more detailed financial information, please refer to the audited December
31, 2001 Financial Statements included in this Form 10-KSB.
Caution about forward-looking statements
This Form 10-KSB includes "forward-looking" statements about future financial
results, future business changes and other events that haven't yet occurred. For
example, statements like we "expect," we "anticipate" or we "believe" are
forward-looking statements. Investors should be aware that actual results may
differ materially from our expressed expectations because of risks and
uncertainties about the future. We do not undertake to update the information in
this Form 10-KSB if any forward-looking statement later turns out to be
inaccurate. Details about risks affecting various aspects of the Company's
business are discussed throughout this Form 10-KSB and should be considered
carefully.
16
Plan of Operation for the Next Twelve Months
NTI was formed on February 4, 2000 and became the wholly-owned subsidiary of
NutraStar on December 14, 2001. To date, NutraStar has focused on its
relationship with the producer of its raw materials, RiceX, and to a lesser
extent on its strategic alliances. NutraStar has commenced the limited
distribution of its stabilized rice bran and rice bran products on the Internet
and through direct-to-consumer response advertising campaigns. In the very near
future, NutraStar intends to commence the full distribution of its products as
private label brands through strategic distributors on the occurrence of certain
events, including the raising of additional capital required to implement its
business plan. NutraStar's fiscal year is the calendar year.
NutraStar anticipates that in the next 12 to 24 months, it will need an
additional $10 to $20 million in financing. NutraStar anticipates that it will
need $5 to $15 million to make certain acquisitions, $2.5 million to further
increase production capacity, and $2.5 million for additional working capital,
including the purchase of inventory for anticipated sales growth. NutraStar
expects to obtain this additional funding from private placements of the
Company's debt and/or equity securities, or through the public offering of its
Common Stock.
Results of Operation
Year Ended December 31, 2001 versus 2000
----------------------------------------
During the fiscal year 2001, NutraStar generated net sales of $1,610,222
compared to $127,954 for the eleven month period ended December 31, 2000. This
substantial increase reflects the Company's progress from a start-up entity in
fiscal year 2000 to a more fully operational business during fiscal year 2001.
The cost of goods sold for the year ended December 31, 2001 increased to
$945,633 compared to $157,170 in fiscal year 2000. This increase reflects the
significant increase in production of products for resale. Operating expenses of
approximately $3,357,000 in fiscal year 2001 more than doubled over fiscal year
2000 operating expenses of approximately $1,513,000. This increase represents
the Company's expansion of operations during fiscal year 2001.
NutraStar incurred an operating loss of $2,692,315 during fiscal year 2001
compared to an operating loss of $1,542,237 during fiscal year 2000. This 74%
increase in operating loss reflects the significant increases in the cost of
goods sold and operating expenses relating to the Company's expanded business
operations during fiscal year 2001.
Operating expenses in fiscal year 2001 included the expansion of the Company's
inspection, quality control, clinical trials and research and development as
well as the Company's expansion of its distribution channels for its products.
Operating expenses in fiscal year 2001 include approximately $890,470 which
related to employee expenses.
During the fiscal year 2001, NutraStar recognized interest expense of $1,080,602
which reflects interest paid on short-term promissory notes and convertible
promissory notes outstanding during all or part of the fiscal year. This expense
17
increased NutraStar's overall net loss to $3,771,474 compared to a total loss of
$1,556,700 recorded in fiscal year 2000.
Due to the December 14, 2001 share exchange with Alliance, for accounting
purposes, the acquisition has been treated as a recapitalization of NutraStar
(formerly Alliance) with NTI as the acquirer (reverse acquisition).
Consequently, the financial statements of NTI are presented as those of the
Company. As a result, a comparison of the current financial statements as
compared to those of Alliance as previously reported in its Form 10-SB may not
be deemed relevant.
Capital Financing
As a part of the exchange transaction with NTI, Alliance issued 17,000,000
shares of its common stock to the shareholders of NTI in exchange for all of the
outstanding shares of NTI. This transaction has been accounted for as a reverse
acquisition, whereby NTI is considered the acquiring company and Alliance the
acquired company.
In connection with the exchange agreement, Alliance obtained $1,000,000 from the
sale of its common stock which was issued at $1.00 per share. The Company issued
an additional 569,348 shares of common stock for $398,900.
The Company issued 21,409 shares of common stock to acquire a patent valued at
$21,409 and issued 306,078 shares of common stock for services rendered valued
at $253,291.
The Company issued 356,824 shares of common stock to extend the term of a note
payable and recorded an interest expense of $356,824.
Liquidity and Capital Resources
NutraStar has incurred significant operating losses for its first two fiscal
years since its inception, and, as of December 31, 2001 NutraStar has an
accumulated deficit of $5,328,174. At December 31, 2001, the Company had cash
and cash equivalents of $405,502 and a net working capital deficit of $52,760.
To date, NutraStar has funded its operations through a combination of short term
debt and the issuance of common and preferred stock. As of December 31, 2000
NutraStar had raised approximately $383,000 from the sale of its common stock
through private placement channels. During December 2001 NutraStar completed two
private placements; the first raised $1,000,000 from the sale of common stock at
$1.00 per share; and the second raised approximately $2,675,707 through the
conversion of debt into preferred stock that was priced at $1.00 per share.
The Company is dependent on the proceeds from future debt or equity investments
to expand NutraStar's operations and fully implement NutraStar's business plan.
If the Company is unable to raise sufficient capital, the Company will be
required to delay or forego some portion of its business plan, which may have a
material adverse effect on the Company's anticipated results from operations and
18
financial condition. Alternatively, the Company may seek interim financing in
the form of bank loans, private placement of debt or equity securities, or some
combination thereof. Such interim financing may not be available in the amounts
or at the times when the Company requires, and will likely not be on terms
favorable to the Company.
Dependence on Key Supplier
NutraStar has entered into an agreement with The RiceX Company, whereby RiceX
will sell NutraStar its rice bran solubles and rice bran fiber concentrates at
prices equal to the lower of RiceX's standard price or the price negotiated by
other customers for like quantities and products. The agreement also provides
that RiceX will not sell any rice bran solubles or rice bran fiber concentrates
products in the United States except to NutraStar. To maintain this exclusive
right, NutraStar must purchase products equal to $250,000 by April 15, 2002
(which quota has been met), $500,000 during the three-month period ending July
15, 2002, $750,000 during the three-month period ending October 15, 2002,
$1,250,000 during the three-month period ending January 15, 2003, $1,500,000 for
the six month period ending July 15, 2003, $2,250,000 for the six-month period
ending January 15, 2004, $6,000,000 for the one-year period ending January 15,
2005, and increasing amounts each one-year period thereafter at a 10% increase
per year. In consideration for this exclusive right, NutraStar will pay RiceX a
royalty of 2% of NutraStar's gross receipts of all NutraStar's products that
incorporated RiceX products, exclusive of shipping charges and returned product.
To purchase products from RiceX, the NTI is required to provide a 50% deposit
for all purchase orders in addition to the $135,000 security deposit already
paid to RiceX. The agreement has a 5-year term, and automatically renews for 2
additional 5-year terms unless NutraStar elects not to renew.
In addition to the risks associated with the potential termination of the RiceX
Agreement, the inability of RiceX to deliver the amount of product that
NutraStar requires, any interruption in product delivery for any reason, or the
inability of RiceX to fulfill its contractual obligations would have a material
adverse effect on NutraStar's business, results from operations, and financial
condition, as NutraStar could not readily find and implement alternative
suppliers and likely not on advantageous terms. NutraStar has the exclusive
right to distribute certain of RiceX's products in the United States, but
NutraStar may lose this exclusive right if it does not purchase increasing
amounts of product from RiceX each year. RiceX's ability to manufacture certain
of NutraStar's core products is currently limited to the production capability
of RiceX's Dillon, Montana plant (the "Dillon Plant"). Currently, the Dillon
Plant is capable of producing only a limited quantity of NutraStar's products,
which will not be sufficient to meet NutraStar's short-term and long-term sales
goals. The Company and/or RiceX plan to add production capacity during the
current year.
19
Recently Issued Accounting Pronouncements
-----------------------------------------
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
141, "Business Combinations." This statement addresses financial accounting and
reporting for business combinations and supersedes APB Opinion No. 16, "Business
Combinations," and SFAS No. 38, "Accounting for Pre-Acquisition Contingencies of
Purchased Enterprises." All business combinations in the scope of this statement
are to be accounted for using one method, the purchase method. The provisions of
this statement apply to all business combinations initiated after June 30, 2001.
Use of the pooling-of-interests method for those business combinations is
prohibited. This statement also applies to all business combinations accounted
for using the purchase method for which the date of acquisition is July 1, 2001
or later. The Company does not expect adoption of SFAS No. 141 to have a
material impact, if any, on its financial position or results of operations.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." This statement addresses financial accounting and reporting for
acquired goodwill and other intangible assets and supersedes APB Opinion No. 17,
"Intangible Assets." It addresses how intangible assets that are acquired
individually or with a group of other assets (but not those acquired in a
business combination) should be accounted for in financial statements upon their
acquisition. This statement also addresses how goodwill and other intangible
assets should be accounted for after they have been initially recognized in the
financial statements. It is effective for fiscal years beginning after December
15, 2001. Early application is permitted for entities with fiscal years
beginning after March 15, 2001, provided that the first interim financial
statements have not been issued previously. The Company does not expect adoption
of SFAS No. 142 to have a material impact, if any, on its financial position or
results of operations.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." This statement applies to legal obligations associated with the
retirement of long-lived assets that result from the acquisition, construction,
development, and/or the normal operation of long-lived assets, except for
certain obligations of lessees. This statement is not applicable to the Company.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." This statement addresses financial accounting
and reporting for the impairment or disposal of long-lived assets. This
statement replaces SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of," the accounting and
reporting provisions of APB No. 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual, and Infrequently Occurring Events and Transactions," for the disposal
of a segment of a business, and amends Accounting Research Bulletin No. 51,
"Financial Statements," to eliminate the exception to consolidation for a
subsidiary for which control is likely to be temporary. The Company does not
expect adoption of SFAS No. 144 to have a material impact, if any, on its
financial position or results of operations.
20
ITEM 7. FINANCIAL STATEMENTS
The financial statements filed with this item are listed below:
Independent Auditors' Report F-2
Former Independent Auditors' Report F-3
Consolidated Financial Statements:
Consolidated Balance Sheet as of December 31, 2001 F-4 - F-5
Consolidated Statements of Operations and Comprehensive Loss
for the Years ended December 31, 2001 and 2000 F-6
Consolidated Statements of Stockholders' Equity (Deficit)
for the Years-ended December 31, 2001 and 2000 F-7 - F-8
Consolidated Statements of Cash Flows for the Years ended
December 31, 2001 and 2000 F-9 - F-11
Notes to Consolidated Financial Statements F-12 - F-28
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
After the exchange transaction with NTI, the newly constituted board of
directors of the Company by resolution adopted March 7, 2002, Andersen Andersen
& Strong L.L.C. ("AA&S"), the independent accountants for Alliance, and Hood &
Strong, LLP ("H&S"), the independent accountants for NTI were dismissed. The
Board retained the accounting firm of Singer Lewak Greenbaum & Goldstein, LLP as
the independent accountants for NutraStar and its subsidiaries, commencing with
the fiscal year ended December 31, 2001. These changes were previously reported
in the Company's Form 8-K filed March 14, 2002 and the Amended Form 8-K filed
March 25, 2002.
21
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
The following table sets forth information about the directors and executive
officers of the Company who assumed their respective positions upon the closing
of the exchange transaction with NTI on December 14, 2001:
------------------------- --- ------------------------------------------------------ ------------------
Name of Person Age Position and Office Presently Held With the Company Director Since
------------------------- --- ------------------------------------------------------ ------------------
Radd C. Barrett* 38 Chairman, CEO and President ----
------------------------- --- ------------------------------------------------------ ------------------
Patricia McPeak 60 Chairman, CEO and President December 14, 2001
------------------------- --- ------------------------------------------------------ ------------------
Edward G. Newton 65 Vice President, Secretary and Director December 14, 2001
------------------------- --- ------------------------------------------------------ ------------------
James W. Kluber 51 Chief Financial Officer ----
------------------------- --- ------------------------------------------------------ ------------------
Dr. Rukmini Cheruvanky 66 Chief Science Officer of NTI ----
------------------------- --- ------------------------------------------------------ ------------------
----------------------
* Mr. Barrett served as the CEO and sole Director of the Company until his
resignation on December 14, 2001 in conjunction with the exchange transaction
with NTI.
Patricia McPeak has been the Company's Chairman, CEO and President since
December 14, 2001. She was the founder of NTI, and has been the Chief Executive
Officer, President, and a director of NTI since its formation in February 2000,
and was the Secretary of NTI from February to October 2000. She has extensive
experience in the field of protein and ingredient production, having served as
an executive in this industry for 24 years. Ms. McPeak was a co-founder of The
RiceX Company, and was the President and a director of that company since its
formation in May 1989, until she resigned as President of that company to found
NutraStar. See "Certain Transactions - The RiceX Company." In 1981, Ms. McPeak
co-founded Brady International, Inc., and was an executive officer of that
company from 1981 to May 1989.
Edward G. Newton has been Company's Secretary, Vice President-Sales and a
Director since December 14, 2001. He was the Vice President, Sales and a
director of NTI since its formation in February 2000, has been the Secretary of
NTI since October 2000. Mr. Newton has more than 32 years of experience in the
food industry. For the last 20 years, he worked in various sales and management
capacities for General Mills, an international consumer foods company. His
positions at General Mills included Director of Personnel and Sales Training,
Manager of Military Sales, and Purchasing Director of Ingredients. Mr. Newton
received his bachelor's degree in economics and business administration from
Whitman College.
James W. Kluber has been the Chief Financial Officer of the Company since
December 2001. Mr. Kluber has served as a senior financial executive in a
variety of service and technology environments with special focus on high growth
companies and restructuring operations. He has successfully raised capital for
22
companies in a variety of markets, utilizing public and private equity as well
as securitized and unsecured debt to accomplish funding requirements. Mr. Kluber
is also a partner in Concord Ventures LLC, a private firm focusing on
operational and financial services for growth oriented companies requiring
assistance in developing and executing their business strategies. Additionally,
he was the Senior Vice President and CFO from 1996 to 1999 for RealPage, Inc. a
leading provider of software and services to the real estate industry. From 1993
to 1996 he served as Vice President of Financial Operations for two public
companies sponsored by Security Capital Group, ProLogis Trust (NYSE: PLD) and
Archstone Communities (NYSE: ASN).
Dr. Rukmini Cheruvanky, is a leading researcher in the therapeutic effects of
rice bran and rice bran oil for over 30 years and has been NTI's Chief Science
Officer since March 2000. Prior to joining NTI, she served as the Director of
Research and Development of The RiceX Company from April 1996 to March 2000.
From January to April 1996, Dr. Cheruvanky was the Laboratory Supervisor for
Certified Analytical Laboratories in New York, a company that specializes in
food analysis. From November 1994 to December 1995, she was Research Chemist in
the Research and Development Department of DuPont Merck Pharmaceutical Company
in New York. From May 1967 to February 1994, Dr. Cheruvanky served the National
Institute of Nutrition located in Hyderabad, India, a premier nutritional
institute, under the Indian Council of Medical Research. Dr. Cheruvanky retired
in 1994 as a Deputy Director heading the Food Toxicology and Environmental
Carcinogenic Division of the Institute. From May 1965 to May 1967, Dr.
Cheruvanky worked as a Research Officer, investigating the active principles of
the Indian Medicinal plants, under Indian Council of Medical Research scheme at
the Chemistry Department, Andhra University, Waltair, India. Dr. Cheruvanky
received her master's degree in Organic Chemistry from Andhra University in
India in 1959 and doctorate degree in Organic Chemistry of Natural Plant
Products from Andhra University in 1965. Dr. Cheruvanky has more than 80
peer-reviewed scientific publications to her credit. She was a mentor to several
Ph.D. and Master of Science students. Dr. Cheruvanky traveled widely for
exchange of scientific knowledge and study of food regulatory aspects in several
countries, on a prestigious World Health Organization program. Dr. Cheruvanky is
a Fellow of the American College of Nutrition.
The current directors will serve and hold office until the next annual
shareholders' meeting or until their respective successors have been duly
elected and qualified. The Company's executive officers are appointed by the
Board of Directors and serve at the discretion of the Board.
Board Meetings and Committees
The Board of Directors of the Company held no meetings and acted by unanimous
consent on five occasions during the year ended December 31, 2001. The Board
does not currently have an Audit, Executive or Compensation Committee.
Family Relationships
There are no family relationships between any director or executive officer.
23
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the
Company's executive officers and directors, and persons who own more than 10% of
the Company's common stock to file reports of ownership on Form 3 and changes in
ownership on Form 4 with the Securities and Exchange Commission (the "SEC").
Such executive officers, directors and 10% stockholders are also required by SEC
rules to furnish the Company with copies of all Section 16(a) forms they file.
Based solely upon its review of copies of such forms received by it, or on
written representations from certain reporting persons that no other filings
were required for such persons, the Company believes that, during the year ended
December 31, 2001, its executive officers and directors and 10% stockholders
complied with all applicable Section 16(a) filing requirements except that one
Form 5 for Patricia McPeak was not filed by the due date but will be filed in
the near future.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth the compensation of the Company's Chief Executive
Officer during the last three complete fiscal years. One other officer received
annual compensation in excess of $100,000 during the last completed fiscal year.
SUMMARY COMPENSATION TABLE
Annual Compensation Long Term Compensation
------------------------------------------ ------------------------------------------
Awards Payout
--------------------------- ----------
Securities
Restricted Underlying LTIP All Other
Other Annual Stock Options Payout Compensation
Year Salary Bonus ($) Compensation ($) Award(s) ($) (#) ($) ($)
------------- ------------- ---------- ----------------- ------------- ------------- ---------- --------------
Radd Barrett 2/21/01 to
(CEO) 12/14/01 -0- -0- -0- -0- -0- -0- -0-
2000(1)
1999(1)
Patricia 2001 $241,667(2) $8,333 $12,000(3) -0- 28,820 -0- (4)
McPeak
(CEO)
2000 $182,692(2) -0- $12,000(3) -0- -0- -0- -0-
Edward 2001 $100,000(2) -0- -0- -0- 304,124 -0- (4)
Newton (VP)
-----------------------------
(1) From July, 1999 through February 21, 2001, the Company was in bankruptcy.
(2) Amount includes payments received from both NTI and NutraStar.
(3) Includes lease payments for one automobile.
(4) Ms. McPeak and Mr. Newton are provided with Company paid medical, life and disability insurance benefits.
24
Stock Option Plan
The Company does not have a formal stock option plan currently in place. Options
to date have been granted on an individual basis pursuant to individual option
agreements. The Company expects to adopt a formal stock option plan during this
current fiscal year.
Options/SAR Grants in Last Fiscal Year
The following table sets forth certain information with respect to option or SAR
grants in NutraStar during the fiscal year ended December 31, 2001 to the Named
Executive Officers.
-------------------- ---------------------- -------------------- ------------------- ------------------
Percent of Total
Number of Securities Options Granted to Exercise or Base
Underlying Options Employees in Price
Name Granted Fiscal Year ($ Per Share) Expiration Date
-------------------- ---------------------- -------------------- ------------------- ------------------
Patricia M. McPeak 28,820 3.08% $0.28 September 1, 2005
-------------------- ---------------------- -------------------- ------------------- ------------------
Edward G. Newton 304,124 32.51% $0.25 April 1, 2002
-------------------- ---------------------- -------------------- ------------------- ------------------
Aggregated Option/SAR Exercises Year-End Table.
During the fiscal year ended December 31, 2001, none of the Named Executive
Officers exercised any options/SARs issued by NutraStar. The following table
sets forth information regarding the stock options held as of December 31, 2001
by the Named Executive Officers.
---------------------- ---------------------------------------- -------------------------------
Number of Securities Underlying Value of Unexercised
Unexercised Options at In-the-Money Options at
Name Fiscal Year End Fiscal Year End
---------------------- ---------------------------------------- -------------------------------
Exercisable Unexercisable Exercisable Unexercisable
---------------------- --------------------- ------------------ -------------- ----------------
Patricia McPeak (1) 28,820 $70,300(3)
---------------------- --------------------- ------------------ -------------- ----------------
Edward G. Newton (2) 304,124 $760,310(3)
---------------------- --------------------- ------------------ -------------- ----------------
------------------------------------------------
(1) As of December 31, 2001 5,764 options were vested.
(2) As of December 31, 2001 152,062 options were vested.
(3) Based on closing price of $2.50 per common share as of December 31, 2001.
Compensation of Directors
The Company's directors are also officers of the Company and do not receive any
additional compensation for their services as members of the Board of Directors.
The Company intends to appoint additional directors in the future who may or may
not be non-employees. For the non-employee directors the Company may seek
shareholder approval for a "Director Option Plan" which would serve as the
compensation plan for such directors. No specific plan has been developed as of
the date of this filing.
25
Employment/Consulting Contracts
Patricia M. McPeak ("McPeak") has an employment contract with NTI (the "McPeak
Employment Agreement"). The McPeak Employment Agreement provides that McPeak
receive an annual base salary of $150,000 which annual base salary shall
increase to $500,000 when the Company achieves $25 million in annual gross sales
or the Common Stock is publicly traded and has a sales price of at least $25 per
share for 90 consecutive days, and the annual base salary shall increase to $1
million when the Company achieves $50 million in annual gross sales. Ms. McPeak
will be entitled to calendar quarterly bonuses of $25,000 upon achievements of
certain benchmarks that will be set and determined by the Company's Board of
Directors. The agreement provides that McPeak shall participate in the Company's
stock bonus plans, and that the Company shall provide McPeak with medical, life,
and disability insurance benefits, additional executive level benefits, and an
annual automobile allowance of $12,000. The agreement has a term of 10 years,
however, NTI may terminate the agreement on 30-days prior notice, but will
remain liable for all base salary, bonus, and benefits obligations throughout
the remaining term of the agreement. The Company is renegotiating its employment
agreement with McPeak. The Company anticipates that the compensation arrangement
will remain substantially the same, but that the Company's obligations on
termination of the new agreement or a change in control will increase.
Edward Newton ("Newton") has an employment contract with NTI (the "Newton
Employment Agreement"). The Newton Employment Agreement provides that Newton
receive an annual base salary of $100,000. The Agreement provides that Newton
shall participate in the Company's stock bonus plans, and that the Company shall
provide Newton with medical, life and disability insurance benefits. The
Agreement has a term of three years, however, NTI may terminate the agreement
with or without cause. If the agreement is terminated without cause or if Mr.
Newton resigns for good reason, a severance package will be paid.
Limitation of Liability and Indemnification Matters
The Company's Restated Articles of Incorporation provide that it will
indemnify its officers and directors, employees and agents and former officers,
directors, employees and agents unless such person shall have been adjudged to
be liable to the corporation in the performance of that person's duty to the
corporation or its shareholders. This indemnification includes expenses
(including attorneys' fees), judgments, fines, and amounts paid in settlement
actually and reasonably incurred by these individuals in connection with such
action, suit, or proceeding, including any appeal thereof, subject to the
qualifications contained in California law as it now exists. Expenses (including
attorneys' fees) incurred in defending a civil or criminal action, suit, or
proceeding will be paid by the Company in advance of the final disposition of
such action, suit, or proceeding upon receipt of an undertaking by or on behalf
of the director, officer, employee or agent to repay such amount, if it shall
ultimately be determined that he or she is not entitled to be indemnified by the
Company. This indemnification will continue as to a person who has ceased to be
a director, officer, employee or agent, and will benefit their heirs, executors,
and administrators. These indemnification rights are not deemed exclusive of any
other rights to which any such person may otherwise be entitled apart from the
bylaws. California law generally provides that a corporation shall have the
power to indemnify persons if they acted in good faith in a manner reasonably
believed to be in the best interests of the corporation and, with respect to any
criminal action or proceeding, had no reasonable cause to believe the conduct
was unlawful. In the event any such person is judged liable to the corporation
26
or its shareholders, this indemnification will apply only if approved by the
court in which the action was pending. Any other indemnification shall be made
only after the determination by the Company's Board of Directors (excluding any
directors who were party to such action), by independent legal counsel in a
written opinion, or by a majority vote of stockholders (excluding any
stockholders who were parties to such action) to provide such indemnification.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the number of shares of the Company's
Common Stock beneficially owned as of March 1, 2002 by, (i) each executive
officer and director of the Company; (ii) all executive officers and directors
of the Company as a group; and (iii) owners of more than 5% of the Company's
Common Stock.
-------------------------------------- ------------------------ ------------------------- -------------------
Name and Address of Position Number of Shares Percent
Beneficial Owner Beneficially Owned
-------------------------------------- ------------------------ ------------------------- -------------------
Officers and Directors
-------------------------------------- ------------------------ ------------------------- -------------------
Patricia McPeak
1261 Hawk's Flight Court Chairman and CEO 14,005,130(1) 63.5%
El Dorado Hills, CA 95762
-------------------------------------- ------------------------ ------------------------- -------------------
Edward Newton
1261 Hawk's Flight Court Vice President, 304,124(2) 1.4%
El Dorado Hills, CA 95762 Secretary and Director
-------------------------------------- ------------------------ ------------------------- -------------------
James Kluber
1261 Hawk's Flight Court CFO -0- *
El Dorado Hills, CA 95762
-------------------------------------- ------------------------ ------------------------- -------------------
All officers and directors as a
group (3 individuals) 14,139,254 64.9%
-------------------------------------- ------------------------ ------------------------- -------------------
------------------------
(1) Amount includes 5,764 shares issuable under stock options exercisable within 60 days of
March 1, 2002 and 300,000 shares of Series A Preferred Stock.
(2) Amount represents shares issuable under stock options exercisable within 60 days of March 1, 2002.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Distribution Agreement with The RiceX Company
On December 12, 2001, the Company entered into a revised 15-year agreement with
RiceX to be the exclusive distributor of rice solubles and rice bran fiber
concentrate in the United States of America and to have the exclusive rights to
various patents and trademarks owned by RiceX. Under the terms of this
agreement, RiceX has agreed to cancel certain indebtedness by the Company in
exchange for 130,000 shares of Series A preferred stock and payment of $41,335
27
in interest, has agreed to new minimum purchase requirements, and has agreed to
extend the term of the agreement for five years, with two additional renewal
periods of five years each. Daniel L. McPeak, Ms. McPeak's husband, is the
President of RiceX.
During the year ended December 31, 2001, the Company recorded commissions
revenue totaling $317,668 from RiceX related to sales made by RiceX to customers
of the Company.
During the year ended December 31, 2001, the Company issued 300,000 Series A
preferred stock to Patricia M. McPeak, Chair of the Board and Chief Executive
Officer in exchange for the cancellation of $300,000 of convertible promissory
notes owed to her.
During the year ended December 31, 2001, the Company entered into a
non-interest-bearing loan agreement with Patricia M. McPeak, Chair of the Board
and the Chief Executive Officer of the Company. Related to this agreement, the
Company recorded a Due to Officer in the amount of $32,029 at December 31, 2001.
During the year ended December 31, 2001, certain operating expenses of the
Company totaling $111,313 were paid by RiceX. The Company reimbursed these
expenses, and at December 31, 2001, there were no amounts owed to RiceX.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 2(1) Plan and Agreement of Exchange.
Exhibit 3.1(2) Restated Articles of Incorporation filed March 28, 2001.
Exhibit 3.2(2) Bylaws
Exhibit 3.3 Restated and Amended Articles of Incorporation dated
December 11, 2001.
Exhibit 10.1 Executive Employment Agreement between NutraStar
Incorporated and Patricia McPeak.
Exhibit 10.2 Executive Employment Agreement for Edward Newton.
Exhibit 16.1(3) Letter on change in certifying accountant dated
March 13, 2002.
Exhibit 16.2(4) Updated letter on change in certifying accountant dated
March 25, 2002.
Exhibit 16.3(4) Letter on change in certifying accountant dated March
21, 2002.
--------------------
(1) Incorporated by reference to exhibits previously filed on Form 8-K filed on
November 19, 2001.
(2) Incorporated by reference to exhibits previously filed on Form 10-SB filed
on April 19, 2001.
(3) Incorporated by reference to exhibits previously filed on Form 8-K filed on
March 14, 2002.
(4) Incorporated by reference to exhibits previously filed on Form 8-K/A filed
on March 25, 2001.
(b) Reports on Form 8-K filed during the quarter ended December 31, 2001:
28
The Company filed a Form 8-K for November 19, 2002 reporting an Item 5 event
regarding the Company's entering into a Plan and Agreement of Exchange with NTI.
The Company filed a Form 8-K for December 14, 2001 reporting on Item 1
and Item 2 event regarding the consummation of an exchange transaction with NTI
whereby the former shareholders of NTI were issued shares representing
approximately 82% ownership of the Company's then outstanding common stock and
the Company assumed the business operations of NTI.
29
SIGNATURES
In accordance with Section 13 or 15 (d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
NUTRASTAR INCORPORATED
By /s/ Patricia McPeak
--------------------------------------
Patricia McPeak
President and Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
Signature Title Date
--------- ----- ----
\s\ Patricia McPeak
-----------------------
Patricia McPeak Chairman of the Board and April 15, 2002
President
\s\ Edward G Newton
-----------------------
Edward G. Newton Secretary and Director April 15, 2002
\s\ James W Kluber
-----------------------
James W. Kluber Chief Financial Officer April 15, 2002
(Principal Financial and
Accounting Officer)
30
NUTRASTAR INCORPORATED AND SUBSIDIARIES
CONTENTS
December 31, 2001
________________________________________________________________________________
Page
INDEPENDENT AUDITOR'S REPORT F-2
FORMER INDEPENDENT AUDITOR'S REPORT F-3
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheet F-4 - F-5
Consolidated Statements of Operations F-6
Consolidated Statements of Shareholders' Equity (Deficit) F-7 - F-8
Consolidated Statements of Cash Flows F-9 - F-11
Notes to Consolidated Financial Statements F-12 - F-28
F-1
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Shareholders
NutraStar Incorporated and subsidiaries
We have audited the accompanying consolidated balance sheet of NutraStar
Incorporated and subsidiaries as of December 31, 2001, and the related
consolidated statements of operations, shareholders' equity (deficit), and cash
flows for each of the two years in the period ended December 31, 2001. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of NutraStar
Incorporated and subsidiaries as of December 31, 2001, and the consolidated
results of their operations and their cash flows for each of the two years in
the period ended December 31, 2001 in conformity with accounting principles
generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
financial statements, during the year ended December 31, 2001, the Company
incurred a net loss of $3,771,474 and had negative cash flows from operations of
$855,316. In addition, the Company had an accumulated deficit of $5,328,174 at
December 31, 2001. These factors, among others, as discussed in Note 2 to the
financial statements, raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 2. The consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
March 17, 2002
F-2
Independent Auditors' Report
Board of Directors
Nutrastar, Incorporated
El Dorado Hills, California
We have audited the accompanying statements of operations, stockholders' deficit
and cash flows of NUtrastar, INCorporated (the Company) for the period from
February 4, 2000 (inception) through December 31, 2000. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatements. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of NutraStar, Incorporated's operations and
its cash flows for the period ended December 31, 2000 in conformity with
accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has incurred losses since inception,
anticipates continuing losses for the foreseeable future and will require
substantial additional capital in order to complete its operational objectives.
This raises substantial doubt about the Company's ability to continue as a going
concern. Management plans in regard to these matters are also described in Note
2. The financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
/s/ Hood & Strong LLP
December 19, 2001
F-3
NUTRASTAR INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, 2001
________________________________________________________________________________
ASSETS
Current assets
Cash $ 405,502
Accounts receivable 1,593
Inventory 93,886
Prepaid expenses 8,788
----------
Total current assets 509,769
Property and equipment, net 210,955
Patents and trademarks, net 109,505
Goodwill 250,001
Deposits 181,071
----------
Total assets $1,261,301
==========
The accompanying notes are an integral part of these financial statements.
F-4
NUTRASTAR INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, 2001
_______________________________________________________________________________________
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 382,117
Accrued salaries and benefits 61,014
Accrued expenses 87,369
Due to officer 32,029
-----------
Total current liabilities 562,529
-----------
Commitments and contingencies
Shareholders' equity
Convertible series A preferred stock, no par value, $1 stated value
3,000,000 shares authorized
2,084,707 shares issued and outstanding 1,980,802
Common stock, no par value
50,000,000 shares authorized
21,649,520 shares issued and outstanding 4,572,845
Common stock committed 399,174
Deferred compensation (925,875)
Accumulated deficit (5,328,174)
-----------
Total shareholders' equity 698,772
-----------
Total liabilities and shareholders' equity $ 1,261,301
===========
The accompanying notes are an integral part of these financial statements.
F-5
NUTRASTAR INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31,
_____________________________________________________________________________________
2001 2000
------------ ------------
Net sales $ 1,610,222 $ 127,954
Cost of goods sold 945,633 157,170
------------ ------------
Gross profit (loss) 664,589 (29,216)
Operating expenses 3,356,904 1,513,021
------------ ------------
Loss from operations (2,692,315) (1,542,237)
------------ ------------
Other income (expense)
Interest income 1,443 2,304
Interest expense (1,080,602) (16,767)
------------ ------------
Total other income (expense) (1,079,159) (14,463)
------------ ------------
Net loss $ (3,771,474) $ (1,556,700)
============ ============
Basic and diluted loss per share $ (0.20) $ (0.10)
============ ============
Basic and diluted weighted-average shares outstanding 18,686,078 15,651,442
============ ============
The accompanying notes are an integral part of these financial statements.
F-6
NUTRASTAR INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
For the Years Ended December 31,
____________________________________________________________________________________________________________________________________
Series A Preferred Stock Common Stock Committed Deferred
-------------------------- ------------------------ Common Compen- Accumulated
Shares Amount Shares Amount Stock sation Deficit Total
---------- ------------ ----------- ----------- --------- ---------- ----------- ------------
Balance, February 4,
2000 (inception) - $ - - $ - $ - $ - $ - $ -
Common stock
issued
for services - - 56,764 3,977 - - - 3,977
for cash - - 540,802 378,900 - - - 378,900
Common stock split - - 15,346,340 - - - - -
Net loss - - - - - - (1,556,700) (1,556,700)
---------- ------------ ----------- ----------- --------- ---------- ----------- ------------
Balance, December
31, 2000 - - 15,943,906 382,877 - - (1,556,700) (1,173,823)
Common stock
issued
for cash - - 28,546 20,000 - - - 20,000
for acquisition
of patent - - 21,409 21,409 - - - 21,409
to extend note
payable - - 356,824 356,824 - - - 356,824
services rendered - - 249,314 249,314 - - - 249,314
acquisition of
NutraGlo - - 250,001 250,001 - - - 250,001
for settlement of
litigation - - 150,000 150,000 - - - 150,000
for cash in conjunction
with acquisition
by Alliance - - 4,649,520 1,000,000 - - - 1,000,000
Committed stock for
conversion of
notes payable - - - - 399,174 - - 399,174
The accompanying notes are an integral part of these financial statements.
F-7
NUTRASTAR INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
For the Years Ended December 31,
____________________________________________________________________________________________________________________________________
Series A Preferred Stock Common Stock Committed Deferred
-------------------------- ---------------------- Common Compen- Accumulated
Shares Amount Shares Amount Stock sation Deficit Total
---------- ------------ --------- ----------- -------- ---------- ----------- ------------
Preferred stock
issued during 2001
as settlement of
litigation 100,000 $ 100,000 - $ - $ - $ - $ - $ 100,000
for payment for
accounts payable 130,000 130,000 - - - - - 130,000
for conversion of
notes payable
and accrued
interest 1,775,707 1,671,802 - - - - - 1,671,802
for services
rendered 13,000 13,000 - - - - - 13,000
for deposits
payable 56,000 56,000 - - - - - 56,000
as interest
expense 10,000 10,000 - - - - - 10,000
Stock options
issued for
compensation - - - 647,429 - (449,515) - 197,914
services rendered - - - 1,273,861 - (476,360) - 797,501
settlement of
litigation - - - 107,047 - - - 107,047
Warrants issued
with convertible
debt - - - 114,083 - - - 114,083
Net loss - - - - - - (3,771,474) (3,771,474)
Balance, December
31, 2001 2,084,707 $ 1,980,802 21,649,520 $ 4,572,845 $ 399,174 $ (925,875) $ (5,328,174) $ 698,772
============= =========== =========== =========== ========= =========== ============= ============
The accompanying notes are an integral part of these financial statements.
F-8
NUTRASTAR INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
_________________________________________________________________________________________________
2001 2000
----------- -----------
Cash flows from operating activities
Net loss $(3,771,474) $(1,556,700)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 94,397 7,172
Non-cash issuances of common stock 756,138 3,977
Non-cash issuances of preferred stock 468,511 --
Non-cash issuances of stock options 1,102,462 --
Non-cash issuances of warrants 10,178 --
Non-cash issuances of committed stock 130,487 --
(Increase) decrease in
Accounts receivable 114,043 (115,636)
Inventory 421,886 (515,772)
Prepaid expenses 6,597 (15,385)
Deposits (80,546) (100,525)
Increase (decrease) in
Accounts payable (333,773) 904,407
Accrued salaries and benefits 36,079 --
Accrued expenses 157,670 --
Due to officer 32,029 --
----------- -----------
Net cash used in operating activities (855,316) (1,388,462)
----------- -----------
Cash flows from investing activities
Purchase of property and equipment (234,348) (70,692)
Purchase of patents and trademarks (30,199) (65,381)
----------- -----------
Net cash used in investing activities (264,547) (136,073)
----------- -----------
Cash flows from financing activities
Proceeds from the issuance of common stock 1,020,000 378,900
Proceeds from deposits payable -- 896,500
Refunds of deposits payable (240,500) --
Principal payments on convertible notes payable (490,000) --
Proceeds from convertible note payable 1,230,000 255,000
----------- -----------
Net cash provided by financing activities 1,519,500 1,530,400
----------- -----------
Net increase in cash 399,637 5,865
Cash, beginning of year 5,865 --
----------- -----------
Cash, end of year $ 405,502 $ 5,865
=========== ===========
The accompanying notes are an integral part of these financial statements.
F-9
NUTRASTAR INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
________________________________________________________________________________
2001 2000
----------- ----------
Supplemental disclosures of cash flow information
Interest paid $ - $ -
=========== ==========
Income taxes paid $ - $ -
=========== ==========
Supplemental schedule of non-cash investing and financing activities
During the year ended December 31, 2001, notes with a principal balance of
$1,340,000 and accrued interest of $90,196 had been converted into 1,430,196
shares of the Company's Series A preferred stock. Related to these conversions,
the Company issued an additional 345,511 shares of Series A preferred stock to
certain of the note holders and recorded related interest charges of $345,511.
The remaining notes with a principal balance of $250,000 and accrued interest of
$18,687 had been converted into committed common stock. Related to the
conversion, the Company recorded interest charges of $130,487 for additional
shares that will be issued.
During the year ended December 31, 2001, the Company entered into a 12-month
consulting agreement, issued 144,676 shares of common stock, and recorded
consulting expense totaling $144,676.
During the year ended December 31, 2001, the Company issued 100,000 shares of
Series A preferred stock as a settlement of certain litigation. Related to this,
the Company recorded expense of $100,000.
During the year ended December 31, 2001, the Company issued 130,000 shares of
Series A preferred stock to a related party as payment of accounts payable
totaling $130,000.
During the year ended December 31, 2001, the Company issued 13,000 shares of
Series A preferred stock for services rendered valued at $13,000.
During the year ended December 31, 2001, the Company issued 56,000 shares of
Series A preferred stock for deposits payable totaling $56,000. In relation to
one of these transactions, the Company issued 10,000 shares of preferred stock
as interest expense totaling $10,000.
During the year ended December 31, 2001, the Company issued 21,409 shares of
common stock to acquire a patent valued at $21,409.
During the year ended December 31, 2001, the Company issued 356,824 shares of
common stock to extend the term of a note payable and recorded interest expense
totaling $356,824.
During the year ended December 31, 2001, the Company issued 249,314 shares of
common stock for services rendered valued at $249,314.
The accompanying notes are an integral part of these financial statements.
F-10
NUTRASTAR INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
________________________________________________________________________________
Supplemental schedule of non-cash investing and financing activities (Continued)
During the year ended December 31, 2001, the Company issued options to purchase
935,564 shares of common stock to employees of the Company. In relation to these
issuances, the Company recorded compensation expense totaling $197,914 and
deferred compensation expense totaling $449,515.
During the year ended December 31, 2001, the Company issued options to purchase
1,498,660 shares of common stock. In relation to these issuances, the Company
recorded consulting expenses totaling $797,501 and deferred compensation expense
totaling $476,360.
During the year ended December 31, 2001, the Company issued options to purchase
142,730 shares of common stock in settlement of certain disputes. In relation to
these issuances, the Company recorded settlement expenses totaling $107,047.
The accompanying notes are an integral part of these financial statements.
F-11
NUTRASTAR INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001
________________________________________________________________________________
NOTE 1 - ORGANIZATION AND LINE OF BUSINESS
General
-------
NutraStar Incorporated ('NutraStar"), a California corporation, markets
proprietary whole food dietary supplements derived from nutrient-dense
stabilized rice bran (a nutraceutical) produced by an affiliated
company, The RiceX Company ("RiceX"), a current shareholder and a
publicly traded company. The Company has a license to distribute
certain derivatives of RiceX's stabilized rice bran, as well as
valued-added rice bran products in the United States of America.
On December 14, 2001, Alliance Consumer International, Inc.
("Alliance") acquired all of the outstanding common stock of NutraStar.
For accounting purposes, the acquisition has been treated as a
recapitalization of NutraStar with NutraStar as the acquirer (reverse
acquisition).
Effective April 27, 2000, NutraStar became an 80% owner of NutraGlo
Incorporated ("NutraGlo"), a Nevada corporation. NutraGlo was
non-operative during 2000. During the year ended December 31, 2001,
NutraGlo started marketing, manufacturing, and distributing NutraStar's
stabilized rice bran and other nutraceuticals to the equine market. In
connection with NutraStar's acquisition of Alliance, NutraStar issued
250,001 shares of common stock in exchange for the remaining 20% of the
common stock of NutraGlo. The value of the shares was $250,001, which
has been recorded as goodwill in the accompanying consolidated balance
sheet.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of NutraStar
and its wholly owned subsidiaries, NutraStar Technologies, Inc. and
NutraGlo (collectively, the "Company"). All significant inter-company
accounts and transactions are eliminated in consolidation.
Basis of Presentation
---------------------
The accompanying financial statements have been prepared in conformity
with United States generally accepted accounting principles which
contemplate continuation of the Company as a going concern. During the
year ended December 31, 2001, the Company incurred a net loss of
$3,771,474, and it had negative cash flows from operations of $855,316.
In addition, the Company had an accumulated deficit of $5,328,174 at
December 31, 2001. These factors raise substantial doubt about the
Company's ability to continue as a going concern.
F-12
NUTRASTAR INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001
________________________________________________________________________________
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Basis of Presentation (Continued)
---------------------
Recovery of the Company's assets is dependent upon future events, the
outcome of which is indeterminable. Successful transition of the
Company to the attainment of profitable operations is dependent upon
the Company achieving a level of sales adequate to support the
Company's cost structure. The financial statements do not include any
adjustments relating to the recoverability and classification of
recorded asset amounts or amounts and classification of liabilities
that might be necessary should the Company be unable to continue in
existence.
Management's plans to alleviate substantial concern about the Company's
ability to continue as a going concern include the following:
o The Company anticipates that it will be able to raise additional
equity that will be sufficient for it to continue to implement
its current business strategy. It plans on registering all common
stock with the Securities and Exchange Commission not previously
registered as well as any future common stock issued. This should
result in more market liquidity for the Company's common
shareholders.
o The Company plans on implementing an aggressive marketing
strategy that will enhance consumer awareness of its products.
The strategy includes establishing and/or expanding existing
strategic relationships; completing an Internet
business-to-business and business-to-consumer Web site that will
handle increased product demand if its marketing strategy is
successful; creating a direct response marketing campaign; and
advertising in targeted, industry specific magazines.
o The Company is reducing its fixed overhead expenses and plans to
continue to control such items for the foreseeable future.
Revenue Recognition
-------------------
Revenue is generally recognized upon shipment of product with a
provision for estimated returns and allowances recorded at that time,
if applicable.
Comprehensive Income
--------------------
The Company utilizes Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income." This statement
establishes standards for reporting comprehensive income and its
components in a financial statement. Comprehensive income as defined
includes all changes in equity (net assets) during a period from
non-owner sources. Examples of items to be included in comprehensive
income, which are excluded from net income, include foreign currency
translation adjustments, minimum pension liability adjustments, and
unrealized gains and losses on available-for-sale securities.
Comprehensive income is not presented in the Company's financial
statements since the Company did not have any changes in equity from
non-owner sources.
F-13
NUTRASTAR INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001
________________________________________________________________________________
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Accounts Receivable
-------------------
The Company provides for the possible inability to collect accounts
receivable by recording an allowance for doubtful accounts. The Company
writes off an account when it is considered to be uncollectible. As of
December 31, 2001, an allowance for doubtful accounts was not deemed
necessary.
Inventory
---------
Inventory is stated at the lower of cost (first-in, first-out) or
market and consists of nutraceutical products manufactured by an
affiliated company, RiceX, which the Company enhances for final
distribution to its customers. While the Company has an inventory of
these products, which contain ingredients supplied by RiceX, any
significant prolonged shortage of these ingredients or of the supplies
used to enhance these ingredients could materially adversely affect the
Company's results of operations.
Patents and Trademarks
----------------------
The Company has exclusive licenses for several patents. All costs
associated with the patents are capitalized. Amortization is computed
on the straight-line method based on an estimated useful life of 20
years. The Company also has several registered trademarks which are
amortized over an estimated useful life of 10 years.
Property and Equipment
----------------------
Property and equipment are stated at cost. The Company provides for
depreciation using the straight-line method over the estimated useful
lives as follows:
Furniture and equipment 7 years
Software 3 years
Expenditures for maintenance and repairs are charged to operations as
incurred while renewals and betterments are capitalized. Gains or
losses on the sale of property and equipment are reflected in the
statements of operations.
Fair Value of Financial Instruments
-----------------------------------
The Company measures its financial assets and liabilities in accordance
with generally accepted accounting principles. For certain of the
Company's financial instruments, including cash, accounts receivable,
accounts payable, accrued salaries and benefits, and accrued expenses,
the carrying amounts approximate fair value due to their short
maturities.
Stock Split
-----------
During the year ended December 31, 2000, the Company effected a
300-for-one split of its common stock. All share and per share data
have been retroactively restated to reflect this reverse stock split.
F-14
NUTRASTAR INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001
________________________________________________________________________________
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Stock-Based Compensation
------------------------
SFAS No. 123, "Accounting for Stock-Based Compensation," defines a
fair value based method of accounting for stock-based compensation.
However, SFAS No. 123 allows an entity to continue to measure
compensation cost related to stock and stock options issued to
employees using the intrinsic method of accounting prescribed by
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for
Stock Issued to Employees." Entities electing to remain with the
accounting method of APB No. 25 must make pro forma disclosures of net
income and earnings per share as if the fair value method of
accounting defined in SFAS No. 123 had been applied. The Company has
elected to account for its stock-based compensation to employees under
APB No. 25.
Advertising Expense
-------------------
The Company expenses all advertising costs, including direct response
advertising, as they are incurred. Advertising expense for the years
ended December 31, 2001 and 2000 was $24,369 and $17,640, respectively.
Income Taxes
------------
The Company accounts for income taxes under the liability method, which
requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been included in
the financial statements or tax returns. Under this method, deferred
income taxes are recognized for the tax consequences in future years of
differences between the tax bases of assets and liabilities and their
financial reporting amounts at each period end based on enacted tax
laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances
are established, when necessary, to reduce deferred tax assets to the
amount expected to be realized.
Loss Per Share
--------------
The Company utilizes SFAS No. 128, "Earnings per Share." Basic loss per
share is computed by dividing loss available to common shareholders by
the weighted-average number of common shares outstanding. Diluted loss
per share is computed similar to basic loss per share except that the
denominator is increased to include the number of additional common
shares that would have been outstanding if the potential common shares
had been issued and if the additional common shares were dilutive.
Common equivalent shares are excluded from the computation if their
effect is anti-dilutive. As such, basic and diluted loss per share are
the same.
Estimates
---------
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenue and expenses during the reporting period. Actual results could
differ from those estimates.
F-15
NUTRASTAR INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001
________________________________________________________________________________
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Concentrations of Credit Risk
-----------------------------
The Company sells its services throughout the United States, extends
credit to its customers, and performs ongoing credit evaluations of
such customers. The Company evaluates its accounts receivable on a
regular basis for collectability and provides for an allowance for
potential credit losses as deemed necessary.
On May 1, 2001, the Company entered into an exclusive distribution
agreement with a customer, in which the customer is required to
purchase a minimum of 90,000 pounds of the Company's product on or
before July 1, 2001, 120,000 pounds before September 1, 2002, 275,000
pounds between September 1, 2002 and August 31, 2003, and 350,000
pounds between September 1, 2003 and August 31, 2004. At December 31,
2001, sales to this customer totaled $596,627 (46% to total sales).
There were not any amounts due from this customer at December 31, 2001.
In addition to the above, for the year ended December 31, 2001, one
customer accounted for 19% of the Company's sales. There were not any
amounts due from this customer at December 31, 2001.
Recently Issued Accounting Pronouncements
-----------------------------------------
In June 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 141, "Business Combinations." This statement addresses
financial accounting and reporting for business combinations and
supersedes APB Opinion No. 16, "Business Combinations," and SFAS No.
38, "Accounting for Pre-Acquisition Contingencies of Purchased
Enterprises." All business combinations in the scope of this statement
are to be accounted for using one method, the purchase method. The
provisions of this statement apply to all business combinations
initiated after June 30, 2001. Use of the pooling-of-interests method
for those business combinations is prohibited. This statement also
applies to all business combinations accounted for using the purchase
method for which the date of acquisition is July 1, 2001 or later. The
Company does not expect adoption of SFAS No. 141 to have a material
impact, if any, on its financial position or results of operations.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets." This statement addresses financial accounting and
reporting for acquired goodwill and other intangible assets and
supersedes APB Opinion No. 17, "Intangible Assets." It addresses how
intangible assets that are acquired individually or with a group of
other assets (but not those acquired in a business combination) should
be accounted for in financial statements upon their acquisition. This
statement also addresses how goodwill and other intangible assets
should be accounted for after they have been initially recognized in
the financial statements. It is effective for fiscal years beginning
after December 15, 2001. Early application is permitted for entities
with fiscal years beginning after March 15, 2001, provided that the
first interim financial statements have not been issued previously. The
Company does not expect adoption of SFAS No. 142 to have a material
impact, if any, on its financial position or results of operations.
F-16
NUTRASTAR INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001
________________________________________________________________________________
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recently Issued Accounting Pronouncements (Continued)
-----------------------------------------
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." This statement applies to legal obligations
associated with the retirement of long-lived assets that result from
the acquisition, construction, development, and/or the normal operation
of long-lived assets, except for certain obligations of lessees. This
statement is not applicable to the Company.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This statement addresses
financial accounting and reporting for the impairment or disposal of
long-lived assets. This statement replaces SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of," the accounting and reporting provisions of APB No. 30,
"Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual, and
Infrequently Occurring Events and Transactions," for the disposal of a
segment of a business, and amends Accounting Research Bulletin No. 51,
"Financial Statements," to eliminate the exception to consolidation for
a subsidiary for which control is likely to be temporary. The Company
does not expect adoption of SFAS No. 144 to have a material impact, if
any, on its financial position or results of operations.
NOTE 3 - CASH
The Company maintains its cash balances at one bank located in
California. The balances at the bank are insured by the Federal Deposit
Insurance Corporation up to $100,000. At times, cash balances are in
excess of the insured limit.
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment at December 31, 2001 consisted of the following:
Furniture and equipment $ 16,714
Software 288,326
----------------
305,040
Less accumulated depreciation 94,085
----------------
Total $ 210,955
================
Depreciation expense was $89,026 and $5,059 for the years ended
December 31, 2001 and 2000, respectively.
F-17
NUTRASTAR INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001
________________________________________________________________________________
NOTE 5 - PATENTS AND TRADEMARKS
Patents and trademarks at December 31, 2001 consisted of the following:
Patents $ 84,439
Trademarks 32,550
----------------
116,989
Less accumulated amortization 7,484
----------------
Total $ 109,505
================
Amortization expense was $5,371 and $2,113 for the years ended December
31, 2001 and 2000, respectively.
NOTE 6 - PROMISSORY NOTES PAYABLE
During the years ended December 31, 2001 and 2000, the Company raised
an aggregate of $2,080,000 through the issuance of short-term
promissory notes and convertible promissory notes.
Activities related to the promissory notes are as follows:
o The promissory notes, with an aggregate principal balance of
$1,180,000, bore interest ranging from 8% to 12% per annum. As of
December 31, 2001, all of the promissory notes had been retired.
o The convertible notes, with an aggregate principal balance of
$900,000, were immediately converted into shares of the Company's
preferred stock at $1 per share and bore interest ranging from 8%
to 15% per annum. As the convertible notes were convertible at
rates that approximated market value, no discount was recorded
relative to a beneficial conversion feature.
o As of December 31, 2001, the Company had paid notes in the amount
of $490,000 in cash. Notes with a principal balance of $1,340,000
and accrued interest of $90,196 had been converted into 1,430,196
shares of the Company's Series A preferred stock. Related to
these conversions, the Company issued an additional 345,511
shares of Series A preferred stock to certain of the note holders
and recorded related interest charges of $345,511. The remaining
notes with a principal balance of $250,000 and accrued interest
of $18,687 had been converted into committed common stock.
Related to the conversion, the Company recorded interest charges
of $130,487 for additional shares that will be issued.
F-18
NUTRASTAR INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001
________________________________________________________________________________
NOTE 6 - PROMISSORY NOTES PAYABLE (Continued)
o In connection with certain of the notes, the Company issued
warrants to purchase 350,000 shares of the Company's common stock
at an exercise price of $1 per share. The warrants expire on June
25, 2006 and are immediately exercisable. The Company recorded a
discount related to the detachable warrants of $114,083, which
represented the portion of the proceeds allocated to the warrants
based on the relative fair values of the debt and warrants. At
the date of conversion, $103,905 of the discount remained
unamortized and has been debited to convertible series A
preferred stock as part of the conversion. In relation to these
issuances, interest expense of $10,178 was recorded.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
Lease
-----
The Company leases its office space under a non-cancelable operating
lease with RiceX that expires in September 2006 and requires monthly
payments of $5,230. Future minimum payments under this lease agreement
at December 31, 2001 were as follows:
Year Ending
December 31,
------------
2002 $ 63,123
2003 64,298
2004 64,700
2005 65,906
2006 49,429
-----------
Total $ 307,456
===========
Rent expense was $66,799 and $74,550 for the years ended December 31,
2001 and 2000, respectively.
F-19
NUTRASTAR INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001
________________________________________________________________________________
NOTE 7 - COMMITMENTS AND CONTINGENCIES (Continued)
Employment Agreements
---------------------
The Company has entered into several employment agreements with key
employees with terms ranging from three to 10 years. Minimum future
payments under these agreements at December 31, 2001 were as follows:
Year Ending
December 31,
------------
2002 $ 625,000
2003 508,750
2004 380,000
2005 283,333
2006 250,000
Thereafter 708,333
----------------
Total $ 2,755,416
================
Generally, if the Company terminates these agreements without cause or
the employee resigns with good reason, as defined, the Company will pay
the employees' salaries, bonuses, and benefits payable for the
remainder of the term of the agreements.
On November 14, 2001, the Company entered into a magazine advertising
agreement for services in the amount of $29,160 to be rendered during
the year ended December 31, 2002.
On December 14, 2001, the Company entered into a 12-month consulting
services agreement, whereby a $15,000 retainer fee was paid for
financial and accounting services.
On December 14, 2001, the Company entered into a 12-month consulting
services agreement, whereby it agreed to pay a $5,000 retainer fee for
financial and accounting services. In connection with this agreement,
the Company issued 144,676 shares of common stock. Consulting expense
totaling $144,676 was recorded as of December 31, 2001.
Legal Proceedings
-----------------
The Company was involved in litigation with several potential
investors. The plaintiffs requested a return of $750,000 in funds
deposited with the Company, representing potential permanent
investments. These matters have been resolved in connection with the
acquisition of Alliance during December 2001. As of December 31, 2001,
there were not any additional liabilities related to these matters.
F-20
NUTRASTAR INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001
________________________________________________________________________________
NOTE 7 - COMMITMENTS AND CONTINGENCIES (Continued)
Legal Proceedings (Continued)
-----------------
There are various other claims that have been made against the Company
by certain of its vendors. Management expects that the settlement of
these claims will not have a significant effect on the Company's
financial position and results of operations.
NOTE 8 - SHAREHOLDERS' EQUITY
Series A Preferred Stock
------------------------
In December 2001, the Company approved the issuance of 3,000,000 shares
of series A preferred stock and executed a certificate of designation
of the rights, preferences, and privileges of the series A preferred
stock. Each share of Series A preferred stock is entitled to receive a
7% cumulative dividend, which is only payable in the case of
liquidation or redemption. The Series A preferred stock has a $1 per
share stated value and will receive certain liquidation preferences
after satisfaction of claims of creditors, but before payment or
distributions of assets and surplus funds.
Furthermore, the Series A preferred stock is convertible at the option
of the holder at $1 per share into the Company's common stock, subject
to certain anti-dilution provisions. In addition, the series A
preferred stock will automatically convert into common stock in the
event of a qualified public trading benchmark, which is defined as (i)
the common stock is listed on a national exchange at twice its
conversion price or (ii) the common stock is quoted on the
over-the-counter bulletin board at an average bid price of at least
$1.25 per share over any 30-day trading period.
During the year ended December 31, 2001, the Company issued 100,000
shares of Series A preferred stock as a settlement of certain
litigation. Related to this, the Company recorded expense of $100,000.
During the year ended December 31, 2001, the Company issued 130,000
shares of Series A preferred stock to a related party as payment of
accounts payable totaling $130,000.
During the year ended December 31, 2001, the Company issued 13,000
shares of Series A preferred stock for services rendered valued at
$13,000.
During the year ended December 31, 2001, the Company issued 56,000
shares of Series A preferred stock for deposits payable totaling
$56,000. In relation to one of these transactions, the Company issued
10,000 shares of preferred stock as interest expense totaling $10,000.
F-21
NUTRASTAR INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001
________________________________________________________________________________
NOTE 8 - SHAREHOLDERS' EQUITY (Continued)
Common Stock
------------
Effective December 14, 2001, the Company was combined with Alliance,
whereby the Company became a wholly owned subsidiary of Alliance. In
connection with the acquisition, the Company issued an additional
249,770 shares of common stock for services rendered. Under the terms
of the agreement, all of the issued and outstanding shares of the
Company's common stock were exchanged for 17,000,000 shares of
Alliance's common stock.
The transaction has been accounted for as a reverse acquisition,
whereby NutraStar is considered the acquiring company and Alliance the
acquired company. The equity section of NutraStar has been restated,
similar to a recapitalization, to reflect the pro-rata shares it
received in the acquisition. The ratio of shares issued in the
share-exchange was approximately 1.43 shares of Alliance's common stock
to every one share of NutraStar's outstanding common stock. All share
and per share data prior to the acquisition have been restated to
reflect this ratio.
Outstanding unexercised options and warrants of the Company were also
converted into options and warrants to acquire shares of Alliance's
common stock at a ratio of 1 to 1.43. Alliance also obtained $1,000,000
from the sale of its common stock in connection with the acquisition
agreement. These shares of stock were issued for $1 per share. There
were 3,649,520 shares outstanding as of the date of the acquisition.
Prior to the acquisition, NutraStar changed its name to NutraStar
Technologies Incorporated. Subsequent to the acquisition, Alliance
changed its name to NutraStar Incorporated.
During the year ended December 31, 2001, the Company issued 28,546
shares of common stock for cash totaling $20,000.
During the year ended December 31, 2001, the Company issued 21,409
shares of common stock to acquire a patent valued at $21,409.
During the year ended December 31, 2001, the Company issued 356,824
shares of common stock to extend the term of a note payable and
recorded interest expense totaling $356,824.
During the year ended December 31, 2001, the Company issued 249,314
shares of common stock for services rendered valued at $249,314.
During the year ended December 31, 2001, the Company issued 150,000
shares of common stock as settlement for the cancellation of a
consulting agreement and recorded consulting expense totaling $150,000.
F-22
NUTRASTAR INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001
________________________________________________________________________________
NOTE 8 - SHAREHOLDERS' EQUITY (Continued)
Common Stock (Continued)
------------
During the year ended December 31, 2000, the Company issued 56,764
shares of common stock for services rendered valued at $3,977.
During the year ended December 31, 2000, the Company issued 540,802
shares of common stock for cash totaling $378,900.
Common Stock Warrants
---------------------
A summary of the Company's warrant activity is listed below:
Weighted- Weighted-
Weighted- Average Average
Average Exercise Exercise
Stock Stock Remaining Price of Price of
Exercise Warrants Warrants Contractual Warrants Warrants
Price Outstanding Exercisable Life Outstanding Exercisable
----------- ----------- --------------- ------------- ----------- -----------
$ 1.00 300,000 300,000 5 years $ 1.00 $ 1.00
Options
-------
During the year ended December 31, 2001, the Company issued options to
purchase 935,564 shares of common stock to employees of the Company. In
relation to these issuances, the Company recorded compensation expense
totaling $197,914 and deferred compensation expense totaling $449,515.
During the year ended December 31, 2001, the Company issued options to
purchase 1,498,660 shares of common stock. In relation to these
issuances, the Company recorded consulting expenses totaling $797,501
and deferred compensation expense totaling $476,360.
During the year ended December 31, 2001, the Company issued options to
purchase 142,730 shares of common stock in settlement of certain
disputes. In relation to these issuances, the Company recorded
settlement expenses totaling $107,047.
F-23
NUTRASTAR INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001
________________________________________________________________________________
NOTE 8 - SHAREHOLDERS' EQUITY (Continued)
Options (Continued)
-------
The following table summarizes all of the Company's stock option
transactions:
Employee Options Consultant Options
---------------------------- ----------------------------
Weighted- Weighted-
Average Average
Stock Options Exercise Stock Options Exercise
Outstanding Price Outstanding Price
--------------- ----------- --------------- -----------
Outstanding, February 4,
2000 (inception) and
December 31, 2000 - $ - $ - $ -
--------------- ---------------
Granted 935,564 $ 0.31 1,641,390 $ 0.51
--------------- ---------------
Outstanding,
December 31, 2001 935,564 $ 0.31 1,641,390 $ 0.51
=============== ===============
Exercisable,
December 31, 2001 278,350 $ 0.29 977,698 $ 0.59
=============== ===============
The weighted-average remaining contractual life of the options
outstanding at December 31, 2001 was 9.93 years. The exercise prices of
the options outstanding at December 31, 2001 ranged from $0.25 to $1,
and information relating to these options is as follows:
Weighted- Weighted-
Weighted- Average Average
Average Exercise Exercise
Range of Stock Stock Remaining Price of Price of
Exercise Options Options Contractual Options Options
Prices Outstanding Exercisable Life Outstanding Exercisable
---------------- ----------- --------------- ---------------- ----------- -------------
$ 0.25 - 0.28 1,934,671 799,313 9.93 years $ 0.25 $ 0.25
$ 0.29 - 1.00 642,283 456,735 9.93 years $ 1.00 $ 1.00
------------ ---------------
2,576,954 1,256,048
============ ===============
The Company has adopted the disclosure-only provisions of SFAS No. 123.
Accordingly, no compensation cost other than that required to be
recognized by APB 25 for the difference between the fair value of the
Company's common stock at the grant date and the exercise price of the
options has been recognized.
F-24
NUTRASTAR INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001
________________________________________________________________________________
NOTE 8 - SHAREHOLDERS' EQUITY (Continued)
Options (Continued)
-------
Had compensation cost for the Company's stock option plan been
determined based on the fair value at the grant date for awards
consistent with the provisions of SFAS No. 123, the Company's net loss
and loss per share for the years ended December 31, 2001 and 2000 would
have been increased to the pro forma amounts indicated below:
2001 2000
------------- -------------
Net loss
As reported $ (3,771,474) $ (1,556,700)
Pro forma $ (4,099,194) $ (1,556,700)
Basic loss per common share
As reported $ (0.20) $ (0.10)
Pro forma $ (0.22) $ (0.10)
The fair value of these options was estimated at the date of grant
using the minimum value method with the following weighted-average
assumptions for the year ended December 31, 2001: dividend yield of 0%,
risk-free interest rate of 3.12%, and expected life of 2.85 years. The
weighted-average exercise price was $0.44 at December 31, 2001.
The weighted-average fair value of the options issued during the year
ended December 31, 2001 was $0.88.
NOTE 9 - INCOME TAXES
Significant components of the Company's deferred tax asset for income
taxes consisted of the following at December 31, 2001:
Deferred tax asset
Net operating loss carryforwards $ 2,124,660
Less valuation allowance 2,124,660
----------------
Net deferred tax asset $ -
================
F-25
NUTRASTAR INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001
________________________________________________________________________________
NOTE 9 - INCOME TAXES (Continued)
A reconciliation of the expected income tax computed using the federal
statutory income rate to the Company's effective rate for the years
ended December 31, 2001 and 2000 was as follows:
2001 2000
-------- --------
Income tax computed at federal statutory tax rate 34.0% 34.0%
State taxes, net of federal benefit 5.8 5.8
Change in valuation allowance (39.8) (39.8)
-------- --------
Total - % - %
======== ========
Realization of the future tax benefits related to the deferred assets
is dependent on many factors, including the Company's ability to
generate taxable income within the net operating loss carryforward
period. Management has considered these factors in reaching its
conclusion as to the valuation allowance for financial reporting
purposes.
At December 31, 2001, the Company had net operating loss carryforwards
for federal and state income tax purposes of approximately $10,109,000,
which being to expire in 2020. Certain of the net operating loss
carryforwards are limited to each year in accordance with the Internal
Revenue Code.
NOTE 10 - RELATED PARTY TRANSACTIONS
On December 12, 2001, the Company entered into a 15-year agreement with
RiceX to be the exclusive distributor of rice solubles and rice bran
fiber concentrate in the United States of America and to have the
exclusive rights to various patents and trademarks owned by RiceX.
Under the terms of this agreement, RiceX has agreed to cancel certain
indebtedness by the Company in exchange for 130,000 shares of Series A
preferred stock and payment of $41,335 in interest, has agreed to new
minimum purchase requirements, and has agreed to extend the term of the
agreement for five years, with two additional renewal periods of five
years each.
The sales price to the Company will be the lower of RiceX's published
standard price or the price negotiated by other customers for like
quantities and products. Under this agreement, the Company maintained a
$150,000 advance payment with RiceX, which is included in deposits as
of December 31, 2001. In January 2002, the Company revised the 15-year
agreement with RiceX, which reduced the advance payment to $135,000.
F-26
NUTRASTAR INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001
________________________________________________________________________________
NOTE 10 - RELATED PARTY TRANSACTIONS (Continued)
To maintain rights under this revised agreement, the Company must
purchase $250,000 of product from RiceX by April 2002, $500,000 by July
2002, $750,000 by October 2002, $1,250,000 by January 2003, $1,500,000
by July 2003, $2,250,000 by January 2004, $6,000,000 by January 2005,
and increasing thereafter by 10% per annum through the remaining term
of the agreement. Purchases from RiceX were $471,126 (20% to total
purchased) and $620,000 (96% to total purchased) for the years ended
December 31, 2001 and 2000, respectively.
In connection with this agreement, the Company was granted exclusive
patent and licensing rights by RiceX for which the Company will pay
RiceX a royalty equal to 2% of gross receipts received by the Company
from the sale of the Company's products that incorporate any of RiceX's
products, less certain selling expenses. At December 31, 2001, the
Company recorded patents and licenses in the amount of $84,439 related
to these exclusive rights.
During the year ended December 31, 2001, the Company recorded
commissions revenue totaling $317,668 from RiceX related to sales made
by RiceX to customers of the Company.
During the year ended December 31, 2001, the Company issued 300,000
series A preferred stock to the Chief Executive Officer in exchange to
cancel $300,000 of convertible promissory notes.
During the year ended December 31, 2001, the Company entered into a
non-interest-bearing loan agreement with the Chief Executive Officer of
the Company. Related to this agreement, the Company recorded a Due to
Officer in the amount of $32,029 at December 31, 2001.
During the year ended December 31, 2001, certain operating expenses of
the Company totaling $111,313 were paid by RiceX. These expenses were
reimbursed by the Company, and at December 31, 2001, there were not any
amounts owed to RiceX.
NOTE 11 - 401(K) PROFIT SHARING PLAN
Effective April 2000, the Company adopted a 401(k) profit sharing plan
(the "Plan") for the exclusive benefit of eligible employees and their
beneficiaries. Substantially all employees are eligible to participate
in the Plan. Matching contributions to the Plan are 3% of the
employees' gross salary, not to exceed a certain percentage. For the
years ended December 31, 2001 and 2000, the Company made matching
contributions of $18,620 and $14,157, respectively.
F-27
NUTRASTAR INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001
________________________________________________________________________________
NOTE 12 - SUBSEQUENT EVENTS
On January 10, 2002, the Company entered into a consulting services
agreement for marketing services in return for a non-refundable
retainer fee of $3,000 per month, plus expenses for a period of six
months. In addition to the cash compensation, the Company issued
10-year stock options to purchase 25,000 common shares with an exercise
price of $1 per share.
On February 4, 2002, the Company entered into a three-month marketing
services agreement for public relations and advertising services.
Related to this transaction, the Company paid a retainer of $35,000
upon execution of the agreement and issued 35,000 restricted common
shares and 50,000 stock options.
On February 21, 2002, the Company entered into a financial advisory
services agreement. In consideration of such financial advisory
services, the Company agreed to pay a non-refundable retainer fee of
$20,000, issue 200,000 restricted shares of common stock, and issue
300,000 options to purchase restricted shares at $1, $2.50, and $4 per
share. In addition, if the financial services provider introduces the
Company to another party or entity during the term of this agreement
previously unknown to the Company, and as a result of such
introduction, a financing transaction is consummated during the term of
this agreement or during the 12-month period following the term of this
agreement, the Company will pay the financial services provider a fee
equal to 5% of the gross proceeds raised in such transaction. In
addition, if an acquisition transaction is consummated with a third
party introduced by the financial services provider, the Company agreed
to pay a fee equal to 5% of the first $1,000,000 of the consideration
and 3% for the balance of the consideration.
On February 26, 2002, the Company entered into a master services
agreement for certain e-commerce services in the amount of $9,975.
On March 15, 2002, the Company issued 153,333 shares of common stock
with a detachable purchase warrant to purchase 153,333 shares of common
stock at an exercise price of $1.20 per share in exchange for $100,000.
F-28