As filed with the Commission on June 4, 2002 File No.
---------
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
NUTRASTAR INCORPORATED
(Name of small business issuer in its charter)
California 2044 87-0673375
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(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code) Identification No.)
1261 Hawk's Flight Court, El Dorado Hills, CA 95762
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(Address and telephone number of principal executive offices)
1261 Hawk's Flight Court, El Dorado Hills, CA 95762
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(Address of principal place of business or intended principal place of business)
Patricia McPeak, Chair and CEO
NutraStar Incorporated
1261 Hawk's Flight Court, El Dorado Hills, CA 95762
(916) 933-7000
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(Name, address and telephone number of agent for service)
Copy to:
Roger D. Linn, Esq.
Weintraub Genshlea Chediak Sproul
400 Capitol Mall, Eleventh Floor, Sacramento, CA 95814
Telephone: (916) 558-6064
Approximate date of proposed sale to the public: As soon as practicable after
the registration statement becomes effective.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following blocks and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
========================================= ================ =================== =================== =====================
Proposed Maximum Proposed Maximum
Title of Each Class of Amount to Be Offering Price Aggregate Amount of
Securities to be Registered Registered Per Share Offering Price Registration Fee
----------------------------------------- ---------------- ------------------- ------------------- ---------------------
----------------------------------------- ---------------- ------------------- ------------------- ---------------------
Common stock to be offered by selling 2,228,851 $0.52(1) $1,159,002 $106
shareholders
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Common stock for resale by holders of 1,480,177 $0.52(2) $769,692 $71
series A preferred stock assuming the
conversion of such preferred stock
========================================= ================ =================== =================== =====================
Total 3,709,028 $1,928,694 $177
========================================= ================ =================== =================== =====================
_______________________________
(1) Fee calculated in accordance with Rule 457(c) of the Securities Act of 1933, as amended ("Securities Act").
Estimated for the sole purpose of calculating the registration fee and based upon the average quotation of the
high and low price per share of our common stock on May 30, 2002, as quoted on the OTC Bulletin Board.
(2) Assumes that the holders of the Series A preferred stock has converted such stock. Maximum offering price per
share is based upon the average quotation of the high and low price per share of our common stock on May 30, 2002,
as reported on the OTC Bulletin Board.
The registrant hereby amends this Registration Statement on the date or dates as
may be necessary to delay its effective date until the registrant shall file a
further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on the date as the Commission, acting pursuant to said Section 8(a),
may determine.
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PROSPECTUS Subject to Completion
June 4, 2002
NUTRASTAR INCORPORATED
RESALE OF COMMON STOCK
_______________
This prospectus relates to the resale of up to 3,709,028 shares of common stock.
These shares include up to 1,480,177 shares that are issuable upon the
conversion of Series A preferred stock. The selling shareholders may sell the
common stock from time to time in the over-the-counter market at the prevailing
market price or in private negotiated transactions. The selling shareholders
will determine the price they may offer or sell shares of our common stock
independent of us. We will not receive any proceeds from the resale of shares of
common stock.
Our common stock is quoted on the OTC Bulletin Board under the symbol "NTRA." On
May 30, 2002, the closing price for one share of common stock was $0.51. We do
not have any other securities that are currently traded on any other exchange or
quotation system.
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Investing in the common stock involves a high degree of risk. You should
purchase shares only if you can afford a complete loss. Various risk factors
applicable to the common stock are set forth at page 4 - 8 of this Prospectus.
Neither the Securities and Exchange Commission nor any State Securities
Commission has approved or disapproved of these securities or determined if this
Prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
________________________________
The date of this Prospectus is ______________, 2002.
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TABLE OF CONTENTS
Page
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PROSPECTUS SUMMARY............................................................2
RISK FACTORS..................................................................4
THE OFFERING..................................................................9
MARKET FOR OUR COMMON STOCK...................................................9
DIVIDEND POLICY..............................................................10
FORWARD-LOOKING STATEMENTS...................................................11
BUSINESS.....................................................................11
MANAGEMENT'S DISCUSSION AND ANALYSIS.........................................20
AND PLAN OF OPERATIONS.......................................................20
MANAGEMENT...................................................................26
EXECUTIVE COMPENSATION.......................................................29
SECURITY OWNERSHIP OF CERTAIN................................................34
BENEFICIAL OWNERS AND MANAGEMENT.............................................34
LEGAL PROCEEDINGS............................................................34
PLAN OF DISTRIBUTION.........................................................36
SELLING SHAREHOLDERS.........................................................37
DESCRIPTION OF SECURITIES....................................................38
LEGAL MATTERS................................................................41
EXPERTS......................................................................41
AVAILABLE INFORMATION........................................................42
FINANCIAL STATEMENTS.........................................................42
PART II.......................................................................1
INFORMATION NOT REQUIRED IN PROSPECTUS........................................1
SIGNATURES....................................................................7
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PROSPECTUS SUMMARY
This summary is intended to highlight information contained elsewhere in this
prospectus. You should carefully read the entire prospectus.
Our Business
As used in this prospectus, the reference to "we" and "NutraStar" and the
business operations discussed in this prospectus refer to NutraStar Incorporated
and its subsidiaries.
NutraStar Incorporated is a California corporation formerly known as Alliance
Consumer International, Inc. As a result of the Exchange Transaction discussed
below, our business is now the business previously carried on by NutraStar
Technologies Incorporated, a Nevada corporation ("NTI"). NTI was formed and
started doing business in February, 2000. We are an emerging growth health
sciences company focused on becoming a nutraceutical company through the
development and distribution of our "super food" products and natural arthritic
relief products for both humans and animals. We also intend to distribute "all
natural" cosmetics and beauty aids. Most of our products offer the beneficial
elements of stabilized rice bran and specially formulated rice bran oil. Many of
our "all natural" nutraceutical products deliver beneficial biological effects
with fewer of the adverse side effects common with many pharmaceuticals.
Accordingly, we believe that certain of our products may be used in place of, or
as a supplement to some of the World's most widely distributed pharmaceuticals.
We will continue to aggressively support our products 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").
We have developed a number of product lines that are currently or soon will be
available for sale in the market through our four divisions: TheraFoods(R)
(business to consumer), NutraCea(TM) (medical foods), NutraGlo (animal
products), and NutraBeauticals(R) (cosmetics and beauty aids). Because of the
many potential benefits of our products, we anticipate developing strategic
distribution and marketing agreements with well-known retail product and
pharmaceutical companies and medical practices and institutions.
Our corporate offices and operations are located at 1261 Hawk's Flight Court, El
Dorado Hills, California 95762. Our telephone number is (916) 933-7000. We have
one wholly owned subsidiary, NTI, which in turn wholly owns NutraGlo,
Incorporated, a Nevada corporation. Both of these subsidiaries maintain business
offices at our principal business office in El Dorado Hills, California.
Offering Summary
The selling shareholders are registering for resale up to 3,709,028 shares of
our common stock, which they currently own or may acquire upon conversion of
shares of our Series A convertible preferred stock.
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Securities offered by selling shareholders .................3,709,028(1)
Common stock outstanding before the offering ...............21,802,853(2)
Common stock to be outstanding after the offering ..........23,283,030(2)
Use of proceeds ............................................We will not receive any proceeds
from this offering
Offering Price .............................................Market price or negotiated prices at
the time of resale.
Symbol for our common stock ................................NTRA
Market for common stock ....................................Our share are currently listed for
trading on the over-the-counter
electronic bulleting board.
__________________________
(1) Assumes (a) the conversion of 1,480,177 shares of our Series A convertible preferred stock,
which are currently outstanding, into a maximum of 1,480,177 shares of our common stock and
(b) the inclusion of 2,228,851 shares of common stock previously issued to various
shareholders.
(2) The number of shares of our common stock outstanding as of May 30, 2002 excludes options
outstanding to purchase 4,305,352 shares of our common stock at an exercise price between
$0.25 and $1.00 per share and warrants outstanding to purchase 300,000 shares of our common
stock at an exercise price between $0.50 and $1.00 per share.
Summary of Consolidated Financial Data
Year-Ended (Unaudited)
December 31, Three Months Ended March 31,
2001 2000 2002 2001
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Net Sales $ 1,601,222 $ 127,954 $ 294,357 $ 468,320
Cost of Goods Sold 945,633 157,170 182,472 404,425
Operating Expenses 3,356,904 1,513,021 1,181,468 419,993
Earnings (Loss) from Operations (2,692,315) (1,542,237) (1,069,583) (356,098)
Earnings (Loss) Per Share (0.20) (0.10) (0.05) (0.02)
(Unaudited)
Year Ended Three Months Ended
December 31, 2001 March 31, 2002
----------------- --------------
Total Assets $ 1,261,301 $ 1,020,388
Working Capital (Deficit) (52,760) (516,656)
Shareholders' Equity (Deficit) (1,282,030) (1,771,802)
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RISK FACTORS
An investment in our securities involves a high degree of risk. Before deciding
whether to invest, you should read and consider carefully the following risk
factors.
We expect continued losses in 2002 since current revenues are insufficient to
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cover expenses; for the three months ended March 31, 2002, we had a net loss of
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$1,069,723.
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We have incurred losses since we started our business in 2000. For the year
ended December 31, 2001, we incurred a net loss of over $3,771,000 and have an
accumulated deficit of over $5,328,000. Our current revenues are not enough to
pay all our expenses. Our net losses are expected to continue through the
current fiscal year. As a result of these losses and negative cash flows from
operations, our ability to continue operations will depend on our ability to
generate revenues for working capital and the availability of outside capital
until we achieve profitability. In addition, we are subject to a Put/Call
Agreement whereby after July 15, 2002, the RiceX Company can require us to
repurchase 130,000 of Series A preferred stock in exchange for $130,000 plus any
accrued dividends. Also, upon the five-year anniversary of the date of issuance,
we are required to redeem all remaining Series A preferred stock at $1.00 per
share, plus any accrued and unpaid dividends declared.
Our audited consolidated financial statements for the fiscal year ended December
31, 2001 as well as our financial statements for the quarter ended March 31,
2002 were prepared on a going concern basis in accordance with United States
generally accepted accounting principles. The going concern basis of
presentation assumes we will continue in operation for the foreseeable future
and will be able to utilize our assets and discharge our liabilities and
commitments in the normal course of business. Certain conditions currently exist
which require this assumption.
Through the most recently completed quarter, March 31, 2002, we have not been
profitable and have experienced negative cash flows from operations. For the
first quarter ended March 31, 2002, we incurred a net loss of $1,069,723 and
have an accumulated deficit of approximately $6,398,000. Operations have been
financed through the issuance of preferred and common stock and other external
financing. Our future operations are dependent upon continued external funding,
our ability to increase revenues and contain expenses, and the success of our
proposed development and marketing of our nutraceutical products. There are no
assurances that the above conditions will occur.
We Have a Limited Operating History. Our business is essentially the operations
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of NTI and its subsidiary NutraGlo Incorporated. NTI was formed and started
operations in February, 2000. Since then, NTI has focused on perfecting its
business plan, formulating products, forming a strategic alliance with its key
supplier, and negotiating various strategic alliances with distributors. As a
result, neither NutraStar nor NTI has any significant operating history upon
which an evaluation of our performance can be made. Our prospects must be
considered in light of the risks and difficulties encountered by new emerging
growth companies with limited operating history. See "Business."
We Are Dependent on One Supplier for Our Stabilized Rice Bran. We are dependent
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on one company, The RiceX Company ("RiceX"), to manufacture and provide the
stabilized rice bran which forms the basic ingredient for many of our products.
We have entered into a 5-year contractual relationship with RiceX, with two
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five-year renewal periods, to ensure the availability of RiceX products and
provide long-term price stability at favorable prices (the "RiceX Agreement").
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 we
require, 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 our business, results from operations, and financial condition. At the
present time, we could not readily find and implement alternative suppliers and
likely not on advantageous terms. RiceX's ability to manufacture certain of our
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 rice bran products, which may
not be sufficient to meet our short-term and long-term sales goals. Although
RiceX has indicated that it can now outsource some production of its core
products outside the Dillon Plant, there is no assurance that RiceX will
actually be able to do so. See "Business - Product Supply" and "Certain
Transactions - The RiceX Company."
Exclusive Marketing Rights Could be Forfeited. We have the exclusive right to
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distribute certain of RiceX's products in the United States, but we may lose
this exclusive right if we do not purchase increasing amounts of product from
RiceX each year. See "Business-Product Supply." The loss of this exclusive right
would allow RiceX to sell its rice bran products to other manufacturers who
could then compete more directly with us. This could have a material adverse
affect on our sales and operations.
We Intend to Pursue an Aggressive Growth Strategy. For the foreseeable future,
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we intend to pursue an aggressive growth strategy for the expansion of our
operations, and our future operating results will depend largely upon our
ability to market our products and successfully manage an expanding business.
Our ability to rapidly expand our sales will depend upon many factors, including
our ability to identify and enter new markets, establish and maintain strategic
alliances with distributors, and obtain adequate capital resources on acceptable
terms. Any restrictions on our ability to expand may have a materially adverse
effect on our business, results of operations, and financial condition.
Accordingly, there are no assurances that we will be able to achieve our targets
for sales growth, or that our operations will be successful or achieve
anticipated operating results.
See "Business."
We are Dependent on Future Financing. We anticipate needing $10 to $20 million
------------------------------------
in additional financing in the next 12 to 24 months to expand sales to
anticipated levels, complete our business plan, make strategic acquisitions,
invest in production infrastructure, and for other working capital purposes.
However, as of March 31, 2002, we had a negative tangible net book value of
$2,135,830 (which does not include the convertible, redeemable Series A
preferred stock), and a working capital deficit of $516,656. Consequently, for
the foreseeable future, we will be dependent on external sources of capital.
There are no assurances that we will be able to secure such future financing in
the amounts or at the times needed, or on favorable terms. If we are not able to
secure such capital, we may not be able to achieve or sustain anticipated sales
growth, which would have a material adverse effect on NutraStar.
We Currently Have Limited Distribution Capability. We currently have only a
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limited capability to distribute our products. We offer our products directly to
consumers over the Internet and through wholesale distribution channels,
5
although we anticipate that Internet sales will only amount to a small
percentage of total projected sales. To meet our long-term sales objectives, we
will have to establish and maintain relationships with a number of distributors
and marketing private label brands. Although we are negotiating with several
distributors, we have only entered into one distribution agreement to date and
have yet to enter into an agreement with any other distributors. There are no
assurances that we will be able to establish or maintain relationships with a
number of distributors such that we will experience anticipated sales growth, or
that such distributors will produce the level of sales that we expect. If we are
unable to establish and maintain relationships with distributors, our business
and results from operations would be adversely impacted. See "Business -
Marketing."
We Expect Continued Control by Management. NutraStar's officers and directors
------------------------------------------
currently beneficially own approximately 64% of the outstanding shares of
NutraStar's common stock. Consequently, management is in a position to control
the election of a majority of directors and other matters subject to a
shareholder vote. See "Security Ownership of Certain Beneficial Owners and
Management."
We are Dependent on Management and Key Employees. We believe that our success
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will largely be dependent upon management's implementation of our business plan,
especially the efforts and abilities of Patricia McPeak, NTI's founder and
NutraStar's Chief Executive. We also believe that our success will be dependent,
in part, on our research team, including Dr. Rukmini Cheruvanky and Dr. Reddy
Sastry V. Cherukuri. NutraStar has written employment agreements with Ms.
McPeak, and Drs. Cheruvanky and Cherukuri. In addition, we believe that our
future success will be dependent upon attracting and retaining key management
personnel for positions that, as yet, do not exist. There are no assurances that
we will be able to recruit and employ such executives, at the times and with the
skills that we require, and on terms that are acceptable to NutraStar. See
"Management - Officers and Directors."
New Product Requires Market Acceptance. Most of NutraStar's products seek to
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exploit the beneficial aspects of stabilized rice bran. These nutraceutical
products are relatively new. Consequently, we believe that demand for our
products will depend upon increasing consumer awareness of and willingness to
purchase high quality food supplements and nutraceuticals. There are no
assurances that the current trend towards natural and high quality food
supplements will continue or increase. Even if such trend does increase, there
are no assurances that our products will find acceptance with consumers. See
"Business."
Retail Competition is Intense. The natural foods and food supplement industry in
-----------------------------
which we operate is highly competitive. Although we are not aware of any
competitor that currently offers products that are the same as our products with
the same attributes, there are a great number of other companies that provide
similar products. If we are unable to establish or maintain stabilized rice bran
as a competitive edge in our markets, sales and stability will be adversely
affected. Many of these companies have substantially greater financial,
marketing, and/or technical resources than NutraStar. Further, there are no
assurances that our products will remain competitive with our competitors and
new competitors could enter this market. See "Business - Competition."
Possible Adverse Publicity or Claims. Like many companies that sell personal
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health products, we may be subject to complaints or litigation from customers
alleging product-related illnesses, efficacy or other product quality, health,
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or safety concerns. Adverse publicity resulting from such allegations may
materially adversely affect our operations, regardless of whether such
allegations are true or whether we are ultimately held liable. A lawsuit or
other claim that results in an adverse decision against us may materially affect
NutraStar's business, results from operations, or financial condition. See
"Business."
We are Subject to Substantial Governmental Regulation. The processing,
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formulation, packaging, labeling, and advertising of our products are subject to
regulation by one or more government agencies. Recent federal law and
implementing regulations have provided the Food and Drug Administration (the
"FDA") with a complex mechanism for the labeling of dietary supplements, and for
health claims about dietary supplements made by manufacturers. Differing types
of claims require differing levels of substantiation, and in general, the more
specific or more health related the claim, the increased level of
substantiation. There are no assurances that the FDA will accept our
substantiation for any claim that we may make, or will not require us to incur
substantial time and expense to provide an increased level of substantiation. In
addition, the FDA has proposed regulations for good manufacturing practices that
will regulate the processing, packaging, and storage of our products, and it may
be difficult or expensive for us to comply with such regulations. Further, any
advertising by NutraStar will be subject to the truth-in-advertising rules of
the Federal Trade Commission.
We may be subject to additional laws or regulations in the future, or more
strict interpretations of current laws and regulations. We cannot predict the
nature or effect of new laws and regulations or different interpretations of
existing laws and regulations, but they may have a material adverse effect on
our operations or financial condition. See "Business - Government Regulation."
Need to Continue Research of Health Benefits. We believe that our stabilized
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rice bran products have certain health benefits, and intend to conduct a number
of clinical trials to substantiate such health benefits. However, there are no
assurances that the results of any such trials will be favorable to us, that the
cumulative results of such trials will be sufficient to induce a federal
scientific body to issue an authoritative statement in support of our health
benefit claims, or that the FDA or other governmental regulatory authority will
not challenge the results, adequacy, or sufficiency of the substantiation of our
health benefit claims. If the FDA or other regulatory authorities challenges any
of our health benefit claims, we may be required to either expend substantial
amounts of time and money to defend our claims or withdraw them. See "Business -
Government Regulation."
Need to Protect Intellectual Property. NTI has filed applications with the U.S.
---------------------------------------
Patent and Trademark Office and has successfully registered NTI's logo,
StaBran(R), RiSolubles(R), RiceMucille(R), and 21 other product names, as
registered federal trademarks and service marks. NTI has additional trademark
and service mark applications pending. NTI has an exclusive license from RiceX
for three of its patents and NTI has 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 our technology, or that another company may develop a similar
but non-infringing product. There are no assurances that we will be able to
successfully exploit these patents. There are no assurances that we will be able
to successfully register all of our trademarks and service marks or patents, or
even if registered, that registration will provide us with adequate protection.
7
Furthermore, we will have to protect our marks and patents from infringing uses
or products. See "Business - Intellectual Property."
However, some or all of our patents, trademarks, or other intellectual property
rights may not be enforceable, even if registered, against any prior users of
similar intellectual property or competitors who seek or intend to use similar
intellectual property. Enforcement of our intellectual property rights may
involve lengthy and expensive litigation, which we may not be able to maintain.
However, if we fail to enforce our intellectual property rights, we may lose
certain of those rights. It is possible that we will encounter claims from prior
users of similar intellectual property, which, if sustained, could limit our
operations and possibly subject us to liability for damages or license fees to a
prior user, developer or registrant of similar intellectual property. See
"Business - Intellectual Property."
Potential Liability to Finders and Brokers. NTI has utilized and NutraStar
---------------------------------------------
continues to utilize the services of various investment bankers, brokers and
finders to assist it in securing investment capital. NTI is currently disputing
the services rendered by and the compensation to be paid to two such
individuals. These claims for compensation could result in NTI having to pay
substantial fees in cash or issuance of NutraStar common stock. One of these
disputes has resulted in litigation. Although NTI believes its position is
justified, it may have to expend time and money to defend its position or its
position may ultimately be found to be unjustified. See "Legal Proceedings."
Since the market price of our common stock has ranged in price from $0.35 to
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$2.60 since December 17, 2001, investors may not be able to resell at prices
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similar or higher than they purchased.
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The average daily trading volume of our common stock has generally been low,
which we believe is a reflection of the lack of business operations of Alliance
Consumer International, Inc. prior to its merger with NTI in December, 2001 as
well as the limited number of common stock shareholders. As a result, the market
price has been highly volatile and may not be indicative of the market price in
a more liquid, stable market. Consequently, investors may not be able to resell
their shares of our common stock at prices similar to or higher than their
purchase price. The market price of our common stock could be subject to
significant fluctuations in response to a number of factors, including investor
perception, depth and liquidity of the market for our common stock, public
announcements by us, our clients and our competitors, and general market
conditions, which may or may not relate to our performance.
Trading in our stock is restricted by the SEC's penny stock regulations which
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may limit a stockholder's ability to buy and sell our stock.
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Trading in our common stock is subject to the U.S. Securities and Exchange
Commission's ("SEC") penny stock regulations, which may limit a stockholder's
ability to buy or sell our common stock. The SEC has adopted regulations which
generally define "penny stock" to be any equity security that has a market price
(as defined) of less than $5.00 per share or an exercise price of less than
$5.00 per share, subject to certain exceptions. Our common stock is currently
covered by the penny stock rules, which impose additional sales practice
requirements on broker-dealers who sell to persons other than established
customers and financially qualified investors. For transactions covered by this
rule, the broker-dealers must make a special suitability determination of the
purchaser and receive the purchaser's written agreement of the transaction prior
8
to the sale. Consequently, these rules may affect the ability of broker-dealers
to trade our common stock and affect the ability of existing shareholders to
sell their shares in the secondary market.
THE OFFERING
We are registering, on behalf of the selling shareholders, for resale up to
3,709,028 shares of common stock, including up to 1,480,177 shares of common
stock assuming the conversion of outstanding Series A Preferred Stock. You will
find listed below the sources of the shares of common stock being registered for
resale in this prospectus.
o 1,480,177 shares of common stock issuable upon conversion of 1,480,177
shares of Series A preferred stock
o 2,228,851 shares of common stock issued as compensation to persons and
entities for services rendered or money invested in connection with
NutraStar's business.
The shares of common stock offered for resale and the shares of common stock to
be issued upon the conversion of the remaining outstanding Series A Preferred
Stock may be sold in a secondary offering by the selling shareholders by means
of this prospectus. The shares will be sold at the prevailing market price
existing at the time of sale.
MARKET FOR OUR COMMON STOCK
On September 17, 1998, Alliance Consumer International, Inc. was approved for
quotation on the National Association of Securities Dealers' Over-the-Counter
Bulletin Board ("OTCBB") where it was quoted until June 3, 1999. On June 3,
1999, Alliance moved to the "Pink Sheets" published by the Pink Sheets LLC
(previously National Quotation Bureau, LLC). In May, 2001, Alliance's common
stock was once again listed on the OTCBB and its ticker symbol was changed to
"ACIL."
Effective as of December 17, 2001, NutraStar's trading symbol was changed to
"NTRA" to reflect the Exchange Transaction with NTI. The following chart sets
forth the known high and low bid price for NutraStar's stock for each quarter
during the previous two years. The last four quarters reported reflect prices
quoted on the NASD's OTCBB while all previous quarters reflect prices 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.
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Year Ended December 31, 2002 Low Bid High Bid
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First Quarter $0.43** $2.50**
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Year Ended December 31, 2001
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Fourth Quarter $0.30** $2.77**
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Third Quarter $0.41* $2.29*
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Second Quarter $ .001* $0.41*
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First Quarter $ .001 $ .01
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Year Ended December 31, 2000
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Fourth Quarter $ .001 $ .005
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Third Quarter .005 .01
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Second Quarter .01 .04
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First Quarter .001 .04
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* Reflects post-reverse stock split of 1 for 50.
** Represents post-share exchange transaction.
As of May 30, 2002, we had 21,802,853 shares of common stock outstanding and
approximately 82 holders of record of NutraStar's Common Stock. This amount does
not include shares held in street name.
The provisions in our Articles of Incorporation relating to our preferred stock
would allow our directors to issue additional preferred stock with rights to
multiple votes per share and dividend rights which would have priority over any
dividends paid with respect to our common stock. The issuance of preferred stock
with such rights may make the removal of management difficult even if such
removal would be considered beneficial to shareholders generally. It would have
the effect of limiting stockholder participation in certain transactions such as
mergers or tender offers if such transactions are not favored by our management.
We are authorized to issue up to 3,000,000 blank check preferred shares of which
2,084,707 are currently issued and outstanding. There are no current plans,
arrangements, commitments or undertakings to issue additional preferred stock.
However, the board of directors has the authority to issue additional shares of
preferred stock at any time up to the amount authorized in our Articles of
Incorporation.
DIVIDEND POLICY
Holders of our common stock are entitled to receive such dividends as may be
declared by our board of directors and, in the event of liquidation, to share
pro rata in any distribution of our assets after payment of liabilities and
liquidation preferences of our preferred stock. Our board of directors is not
obligated to declare a dividend. We have not paid any dividends on our common
stock and we do not have any current plans to pay any common stock dividends.
Series A preferred stocks are not entitled to any dividends but if declared,
would be paid prior to any dividends being paid on the common shares. In
addition, the Series A preferred stock is entitled to a cumulating annual
10
dividend of $0.07 per share payable upon the redemption of the shares or
liquidation of NutraStar.
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements, as that term is defined in
the Private Securities Litigation Reform Act of 1995. These statements relate to
future events or our future financial performance. In some cases, you can
identify forward-looking statements by terminology such as "may," "will,"
"should," "expects," "plans," "anticipates," "believes," "estimates,"
"predicts," "potential" or "continue" or the negative of these terms or other
comparable terminology. These statements are only predictions and involve known
and unknown risks, uncertainties and other factors, including the risks in the
section entitled "Risk Factors," that may cause our or our industry's actual
results, levels of activity, performance or achievements to be materially
different from any future results, levels of activity, performance or
achievements expressed or implied by these forward-looking statements.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Except as required by applicable law,
including the securities laws of the United States, we do not intend to update
any of the forward-looking statements to conform these statements to actual
results.
BUSINESS
History
NutraStar Incorporated 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 Transaction (see below).
In mid-1998 and early 1999, Alliance was engaged in the business of
manufacturing cosmetics, detergents and pharmaceuticals. On July 13, 1999,
Alliance 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 Alliance's assets. While the
Chapter 11 bankruptcy proceedings were pending, an investor group led by Home
Marketing Enterprises, LLC, a Utah limited liability company, made an offer to
purchase a majority of Alliance'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 Alliance 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
11
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, Alliance, 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, Alliance also issued 17,133 post-split shares to four individuals
involved in, or associated with, Alliance. 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 Alliance Articles approved by the U.S. Bankruptcy
Court, were filed with the Secretary of State of the State of California. Since
its emergence from Chapter 11 bankruptcy and concluding with the Exchange
Transaction, Alliance 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.
Exchange Transaction
On December 14, 2001, Alliance issued 17,000,000 shares of its the common stock
(the "Common Stock") to the shareholders of NutraStar Technologies Incorporated,
a Nevada corporation ("NTI"), 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 Alliance, NTI and the principal shareholders of NTI. As a
result of the Exchange Transaction, Alliance changed its name to NutraStar
Incorporated, NTI became a wholly owned subsidiary of NutraStar and the former
shareholders of NTI became the owners of approximately 82% of NutraStar's then
outstanding common stock. Upon the Exchange Transaction, the sole officer and
director of Alliance resigned and the officers and directors of NTI became the
officers and directors of NutraStar and it 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. In connection with the Exchange Transaction, NTI 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 of NTI.
12
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", Alliance was required to adopt fresh-start
accounting as of March 12, 2001 at the time the Plan was approved by the
Bankruptcy Court. Alliance 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 March 12,
2001, Alliance'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. Alliance's management determined that, based on the fact that it
has historically incurred losses from operations and has projected minimal
future operating profits, the reorganization value of Alliance (the fair value
of the company before considering liabilities) was equivalent to the fair value
of Alliance'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.
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 we believe is superior to other methods, and provides a shelf life of
approximately two years, which we believe is longer than any other stabilized
rice bran. Certain of our core products, RiSolubles(TM), RiceMucil(R),
NutraFlex(TM), and StaBran(R) are based on "stabilized rice bran" produced by
RiceX. We have an exclusive license to distribute RiceX's value-added rice bran
products in the United States and an exclusive worldwide license for patents
held by RiceX covering rice bran treatments of diabetes and arteriosclerosis.
13
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, we believe demand for our products will grow dramatically. Since
stabilized rice bran is a safe food product, we believe that its beneficial
effects can be obtained with a minimum of known deleterious side effects, such
as those that may be present in pharmaceuticals. If further clinical trials
support the beneficial effects of our stabilized rice bran products and if the
medical community widely endorses such use of our products, we then believe that
our products may be used as the first treatment either prior to or as a
compliment to traditional pharmaceutical therapies for the treatment of a
variety of ailments including diabetes and coronary heart disease.
Many physicians have taken an interest in our nutraceutical products as a means
of offering alternative or complementary approaches for treating serious health
care problems. Board Certified gastroenterologists have tested our 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 our
RiSolubles(R) and RiceMucil(R) as base ingredients.
Products
NutraStar has four primary divisions through which it sells its products:
1. TheraFoods(TM). We distribute our consumer products through the
TheraFoods(TM) division. The primary products currently sold through this
division are RiSolubles(TM), 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. We have 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(R). NutraCea(R)has been created to compliment our medical foods
products through a newly created distribution channel in the medical
community, primarily doctors and health care providers. Annual expenditures
in the United States in 1999 for the following diseases have been estimated
in various trade publications at $15 billion for arthritis; $100 billion
for diabetes; and $170 billion for heart disease. We believe we have
effective products in each of these areas. For example, a limited clinical
trial by Advanced Medical Research, Madison, Wisconsin suggests that
certain of our products may lower blood glucose levels of diabetes mellitus
patients. We have 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 Synbiotics(TM)3 (for treatment
14
of antibiotic-induced diarrheal conditions). In addition, through our
consulting physicians, we have support from several medical institutions
and practices that are and will continue to conduct clinical trials and
beta work for our products. For example, a 50-subject, open label clinical
trial for the Synbiotics(TM)2 product on IBD patients is being conducted by
physicians at UC Davis Medical Center and a private physicians group is
conducting a 50-subject, open label clinical trial for the Synbiotics(TM)2
product on IBS patients. Additionally, based on clinical trials and a
United States patent, we believe that certain of its products may be
beneficial in reducing high blood cholesterol and high blood lipid levels.
We intend 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. We are also pursuing acquisitions and
product development for natural cosmetic products.
4. NutraGlo. We developed a derivative of our 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 statistically
verified by a qualified statistician specializing in medical research work,
which demonstrates that our product is clinically proven to be a superior
product for treating horses.
Marketing
Our TheraFoods(TM) products are currently marketed domestically through various
distribution arrangements and sold through the Internet at
http://www.nutrastar.com/products.html.
---------------------------------------
Our equine product is distributed under the name "Absorbine Flex+" by W. F.
Young, Inc. pursuant to a distribution agreement with us and will soon be
introduced into the international market in 36 countries. We have developed a
number of other animal products which we are seeking to distribute through
various distribution channels such as the Internet and strategic joint ventures
to the large animal, pet and veterinarian industries.
We have entered into a strategic alliance with World Nutriceuticals, Inc.
("WNI") pursuant to which WNI will introduce our products to potential
customers. This marketing affiliation has an initial term of two years and
provides for a commission to be paid by us on sales to customers identified by
WNI.
We also intend to distribute many of our consumer products through direct
response marketing channels such as infomercials and catalogue sales. We expect
our Absorbine(R) branded NutraFlex(TM) products to be sold initially through
television and radio infomercial campaigns.
Product Supply
We have entered into an agreement with RiceX, whereby RiceX will sell us 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. We
15
believe RiceX has a unique manufacturing process which allows its stabilized
rice bran products to have an estimated shelf life of up to three years while
other companies using stabilized rice bran products have a typical shelf life of
approximately two months. 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, we 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. We met our first purchase quota by April 15, 2002.
To purchase products from RiceX, we are required to provide a 50% deposit for
all purchase orders in addition to a $135,000 security deposit already paid to
RiceX. In consideration for this exclusive right, we will pay RiceX a royalty of
2% of our gross receipts from sales of our 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 we
elect not to renew.
We believe that our agreement with RiceX will provide us with an assured source
of high quality rice bran products. The failure to maintain our exclusive rights
in the United States could allow other potential competitors to use RiceX's
unique rice bran products.
We believe that RiceX's processing facility in Dillon, Montana does not have
sufficient capacity to produce rice bran products in the quantities that we
anticipate needing in the future. However, RiceX has indicated that it is able
to outsource production to meet our needs but this has not been verified or
implemented. Our long-term plans include assisting RiceX in the expansion of its
existing and future processing facilities, so that we will have more control of
both the production and distribution of our 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, and there are no
assurances that RiceX will accept any offer from us or that we will successfully
establish a joint venture.
Competition
We compete with other companies that offer stabilized rice bran as well as other
companies that offer other food ingredients and nutritional supplements although
we believe our rice bran has a longer shelf life than our competitors. Our
leading competitors in the stabilized rice bran market include Producer's Rice
Mill and Uncle Ben's Rice, Inc. We are unaware of others who offer stabilized
rice bran products. In addition, we face competition from those who currently
offer oat bran and wheat bran in the nutritional supplement market, as we
believe that some consumers may consider the differences between different bran
products to be minimal. Many of our competitors have greater marketing,
research, and capital resources than we do, and may be able to compete more
effectively, especially with price. There are no assurances that our products
will be able to compete successfully. Our inability to generate brand demand and
establish competitive advantages in the marketplace would have a material
adverse effect on our operations and profits.
16
Government Regulation
The manufacturing, packaging, labeling, advertising, distribution, and sale of
our products are subject to extensive regulation by one or more federal
agencies. The primary governmental agency that oversees our 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 our 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.
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 14 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, we intend to make only nutrient content and structure/function claims
with respect to its products. However, there are no assurances that the FDA will
17
accept our substantiation as to any of our claims. Further, there are no
assurances that the FDA will not determine that a claim made by us is a health
benefit claim or a drug claim, either of which would require us to undertake a
protracted and prohibitively expensive procedure to prove such claims. In such
circumstances, we may be required to withdraw or modify certain of our claims.
One limited clinical study has been performed by Advanced Medical Research in
Madison, Wisconsin, which suggests that our 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, any health benefit claim that we may desire to
make must be supported by an authoritative statement published by a federal
scientific body. Even if further clinical trials support the beneficial effects
of our products, it is a time-consuming and expensive process to receive such
authoritative statements. Even if we receive an authoritative statement that is
favorable, the FDA may require further substantiation before we may make any
health benefit claims. There are no assurances that we will ever be able to make
any health benefit claims with respect to our 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."
NutraStar's current products do not require FDA notification.
The DSHEA also provides that third party literature, such as scientific
publications, 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 our products, including those distributors for whom we provide
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. Both
NutraStar and RiceX meet these proposed standards.
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, we may be subject to additional laws or
regulations administered by the FDA or other regulatory authorities, the repeal
of laws or regulations that we might consider favorable, or more stringent
interpretations of current laws or regulations. We are not able to predict the
nature of such laws or regulations, nor can we predict the effect of such laws
or regulations on our operations. We may be required to reformulate certain of
our products, recall or withdraw those products that cannot be reformulated,
keep additional records, or undertake expanded scientific substantiation. Any or
18
all of such requirements could have a material adverse effect on our business
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 our advertising in
the future.
In addition to the foregoing, our 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 our relationship with
our employees are subject to regulations, including minimum wage requirements,
anti-discrimination laws, overtime and working conditions, and citizenship
requirements. We believe that we are in substantial compliance with all material
governmental laws and regulations.
Intellectual Property
We have (through NTI) filed applications with the U.S. Patent and Trademark
Office and have successfully registered NutraStar's logo, StaBran(R),
RiSolubles(R), RiceMucil(R), and 21 other product names, as registered federal
trademarks and service marks. We have nine additional trademark and service mark
applications pending. See "Risk Factors - Intellectual Property."
We have 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, Patent Number 6,303,586 B1 entitled "Supportive Therapy for
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, and Atherosclerosis" 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 our distribution agreement with RiceX. See "Business - "Marketing"
and "Product Supply."
We recently filed, through NTI, our first patent application for a method of
treating arthritis, joint inflammation and joint pain, patent application number
020766-000110US filed November 6, 2001. There are no assurances that this patent
will be issued or that the issued patent will adequately protect our technology,
or that another company may develop a similar but non-infringing product.
19
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 our product line expands. We spent approximately $19,000
during the first quarter of 2002 for product research and development.
Employees
We currently have 10 full-time employees, and anticipate that we will add
approximately two executive employees and 10 full-time non-executive employees
to support the expansion of our operations, which is expected to occur during
2002. If our sales increase as rapidly as management anticipates, we may hire
additional employees, primarily for marketing services. We anticipate that we
will not have any substantial difficulty locating and hiring qualified employees
for our planned expansion. None of our employees are employed pursuant to a
collective bargaining or union agreement, and we consider that our relationship
with our employees is good.
PROPERTY
We sublease our executive offices, warehouse and laboratory, located at 1261
Hawk's Flight Court, El Dorado Hills, California, for a monthly rental of
$5,228. The monthly rental will increase by 2.5% on each October 1 in 2002 and
2004. We sublease this 5,500 square foot facility through September 30, 2006. We
believe that this facility will be adequate for current operations. We sublease
our office space from RiceX.
MANAGEMENT'S DISCUSSION AND ANALYSIS
AND PLAN OF OPERATIONS
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, we have focused on our relationship
with the producer of our raw materials, RiceX, and to a lesser extent on its
strategic alliances. We have commenced the limited distribution of our
stabilized rice bran and rice bran products on the Internet and through
direct-to-consumer response advertising campaigns. In the very near future, we
intend to commence the full distribution of our products as private label brands
through strategic distributors on the occurrence of certain events, including
the raising of additional capital required to implement our business plan. Our
fiscal year is the calendar year.
We anticipate that in the next 12 to 24 months, we will need an additional $10
to $20 million in financing. We anticipate that we 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. We expect to obtain this
additional funding from private placements of debt and/or equity securities, or
possibly through a future public offering of our common stock.
20
Results of Operation
Three Months Ended March 31, 2002 and March 31, 2001
----------------------------------------------------
During the first quarter 2002, we generated net sales of $294,357 compared to
$468,320 for the first quarter 2001, a decrease of 37% in comparison to 2001.
Reasons for the decrease include a delay in obtaining final approval of the new
Exclusive Distribution Agreement with The RiceX Company, which temporarily
limited the amount of stabilized rice bran being shipped to us. In addition, new
terms of the Exclusive Distribution Agreement transferred prior industrial
customers of NutraStar to RiceX.
The cost of goods sold for the quarter ended March 31, 2002 decreased 45% to
$182,472 compared to $404,425 for the quarter ended March 31, 2001. This
decrease reflects the increase in production of higher margin products for
resale as well as 2001 having more start-up production costs. Our gross profit
percentage increased to 38% from 14% for the quarter ended March 31, 2002
compared to the quarter ended March 31, 2001. Operating expenses of $1,181,468
in the first quarter of 2002 more than doubled over the comparable period in
fiscal year 2001 which had operating expenses of $419,993. This increase
represents our continued expansion of operations during fiscal year 2002 in a
number of areas. During the quarter ended March 31, 2002 employee related
expenses rose $235,000 to $451,000 as result of additional hired employees both
after the first quarter of 2001 and during the first quarter of 2002.
Professional fees increased approximately $449,000 to $558,000 in the first
quarter of 2002 as we are using outside consultants in such areas as legal,
financial and marketing in an attempt to limit direct hires until additional
funding is obtained. Included in operating expenses in the quarter ended March
31, 2002 is approximately $479,951 related to restricted stock grants issued in
lieu of cash to both employees and outside consultants.
We incurred an operating loss of $1,069,583 during the quarter ended March 31,
2002 compared to an operating loss of $356,098 during the quarter ended March
31, 2001. This 200% increase in operating loss reflects the significant increase
in the operating expenses relating to our expanded business operations during
fiscal year 2002 as discussed above.
During the quarter ended March 31, 2002, we recognized interest expense of $740,
which reflects interest paid on short-term promissory notes outstanding during
all or part of the quarter and represents a decrease from interest expense of
$4,898 for the quarter ended March 31, 2001. This decrease reflects the
significant reduction in the amount of promissory notes outstanding. This
expense increased our overall net loss to $1,069,723 compared to a total loss of
$360,227 recorded in the quarter ended March 31, 2001.
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
NutraStar. 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.
21
Year Ended December 31, 2001 versus 2000
----------------------------------------
During the fiscal year 2001, we generated net sales of $1,610,222 compared to
$127,954 for the eleven-month period ended December 31, 2000. This substantial
increase reflects our 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 compared to
fiscal year 2000 operating expenses of approximately $1,513,000. This increase
represents our expansion of operations during fiscal year 2001.
We 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 our expanded business operations during fiscal
year 2001.
Operating expenses in fiscal year 2001 included the expansion of our inspection,
quality control, clinical trials and research and development as well as our
expansion of the distribution channels for our products. Operating expenses in
fiscal year 2001 include approximately $890,470, which related to employee
expenses.
During the fiscal year 2001, we 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 increased
our 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
NutraStar. 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. However, from a structural aspect, NTI is now the wholly owned
subsidiary of NutraStar.
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. Alliance also
issued 1,785,707 shares of its Series A preferred stock in exchange for the
cancellation of outstanding notes owed by NTI aggregating $1,705,707 plus
accrued interest.
22
In March 2002, in connection with a private placement of Units consisting of one
share of NutraStar's common stock and a warrant to purchase one additional share
of common stock, we sold 153,333 Units at $0.65 per Unit for gross proceeds of
$100,000.
Alliance also issued Series A preferred stock for the following purposes:
- Issued 100,000 shares to settle a litigation matter valued at
$100,000;
- Issued 130,000 shares to reduce NTI accounts payable of $130,000.
However, on January 15, 2002, RiceX and NutraStar entered into a
Put/Call Agreement whereby RiceX could require NutraStar to repurchase
the 130,000 shares after July 15, 2002 in exchange for $130,000.
NutraStar may also voluntarily repurchase the 130,000 shares for
$130,000 plus any accrued dividends thereon if NutraStar desires and
is able to do so;
- Issued 13,000 shares for services rendered valued at $13,000; and
- Issued 56,000 shares to convert $50,000 of debt plus interest.
Prior to the Exchange Transaction, NTI issued common stock for the following
purposes:
- Issued an additional 569,348 shares of common stock for $398,900;
- Issued 21,409 shares of common stock to acquire a patent valued at
$21,409;
- Issued 306,078 shares of common stock for services rendered valued at
$253,291;
- Issued 356,824 shares of common stock to extend the term of a note
payable and recorded an interest expense of $356,824; and
- Issued 150,000 shares to settle a terminated consulting agreement and
recorded consulting expense of $150,000.
Liquidity and Capital Resources
We have incurred significant operating losses for the first two fiscal years
since the inception of our business, and, as of March 31, 2002, we have an
accumulated deficit of $6,397,897. At March 31, 2002, we had cash and cash
equivalents of $43,620 and a net working capital deficit of $516,656.
To date, we have funded our operations through a combination of short-term debt
and the issuance of common and preferred stock. As of December 31, 2000, NTI had
raised approximately $379,000 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 $1,785,707 through the conversion
of debt into preferred stock that was priced at approximately $0.95 per share.
During March 2002, NutraStar raised an additional $100,000 through the sale of
Common Stock Units.
We expect our expenses will continue to increase during the foreseeable future
as a result of increased marketing expenses and the expansion of our product
line. We are dependent on the proceeds from future debt or equity investments to
expand our operations and fully implement our business plan. If we are unable to
raise sufficient capital, we will be required to delay or forego some portion of
our business plan, which may have a material adverse effect on our anticipated
results from operations and financial condition. Alternatively, we may seek
23
interim financing in the form of bank loans, private placement of debt or equity
securities, or some combination of these. Such interim financing may not be
available in the amounts or at the times when we require, and will likely not be
on terms favorable to us.
Financial Requirements to Maintain Exclusive US License
We have entered into an agreement with The RiceX Company, whereby RiceX will
sell us 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 us. To maintain this exclusive right, we
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, we will pay RiceX a royalty of 2% of our
gross receipts from the sale of our products that incorporated RiceX products,
exclusive of shipping charges and returned product. To purchase products from
RiceX, we are 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 two additional 5-year terms
unless we elect not to renew.
Critical Accounting Policies
Our discussion and analysis of our financial conditions and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with generally accepted accounting principles in the
United States. The preparation of financial statements require managers to make
estimates and disclosures on the date of the financial statements. On an
on-going basis, we evaluate our estimates, including, but not limited to, those
related to revenue recognition. We use authoritative pronouncements, historical
experience and other assumptions as the basis for making judgments. Actual
results could differ from those estimates. We believe that the following
critical accounting policies affect our more significant judgments and estimates
in the preparation of our consolidated financial statements.
Revenue recognition
-------------------
We are required to make judgments based on historical experience and future
expectations, as to the realizability of shipments made to our customers. These
judgments are required to assess the propriety of the recognition of revenue
based on Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition," and
related guidance. We make these assessments based on the following factors: i)
customer-specific information, ii) return policies, and iii) historical
experience for issues not yet identified.
24
Valuation of long-lived assets
------------------------------
Long-lived assets, consisting primarily of property and equipment, patents and
trademarks, and goodwill, comprise a significant portion of NutraStar's total
assets. Long-lived assets are reviewed for impairment whenever events or changes
in circumstances indicate that their carrying values may not be recoverable.
Recoverability of assets is measured by a comparison of the carrying value of an
asset to the future net cash flows expected to be generated by those assets. The
cash flow projections are based on historical experience, management's view of
growth rates within the industry, and the anticipated future economic
environment.
Factors we consider important that could trigger a review for impairment include
the following:
(a) significant underperformance relative to expected historical or projected
future operating results,
(b) significant changes in the manner of our use of the acquired assets or the
strategy of our overall business, and
(c) significant negative industry or economic trends.
When we determine that the carrying value of patents and trademarks, long-lived
assets and related goodwill and enterprise-level goodwill may not be recoverable
based upon the existence of one or more of the above indicators of impairment,
we measure any impairment based on a projected discounted cash flow method using
a discount rate determined by our management to be commensurate with the risk
inherent in our current business model.
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. NutraStar 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
25
beginning after March 15, 2001, provided that the first interim financial
statements have not been issued previously. NutraStar 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 NutraStar.
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. NutraStar does not
expect adoption of SFAS No. 144 to have a material impact, if any, on its
financial position or results of operations.
MANAGEMENT
Directors and Executive Officers
The following table sets forth information about the directors and executive
officers of NutraStar, most of whom 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 NutraStar Director Since
------------------------- -------- ------------------------------------------------------ ------------------------
------------------------- -------- ------------------------------------------------------ ------------------------
Patricia McPeak 61 Chairman and CEO December 14, 2001
------------------------- -------- ------------------------------------------------------ ------------------------
Joseph Ferrara 44 President ----
------------------------- -------- ------------------------------------------------------ ------------------------
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 ----
------------------------- -------- ------------------------------------------------------ ------------------------
Dr. Reddy S.V. Cherukuri 65 Director of Science and Technology for NTI ----
------------------------- -------- ------------------------------------------------------ ------------------------
Danny Lowell 50 Chief Information Officer ----
------------------------- -------- ------------------------------------------------------ ------------------------
Patricia McPeak has been NutraStar's Chairman and CEO since December 14, 2001.
She also served as NutraStar's President from December 14, 2001 to May 1, 2002.
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
26
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 NTI. 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.
Joseph Ferrara joined NutraStar on May 1, 2002 as its new President, assuming
his duties from Ms. McPeak. Mr. Ferrara is an entrepreneur, businessman,
technologist and sales and marketing executive with over twenty years of
experience in leading start-up, turnaround, and fast track growth of regional,
national and global sales/marketing organizations. Mr. Ferrara is the founder of
Meridian Partners Ltd. (dba Saltmine, Inc.), which helps businesses understand
the Internet and its potential. Mr. Ferrara took Saltmine as a start-up
enterprise in 1992, to $50 million in annual sales in slightly more than three
years. During his tenure as president and CEO, Saltmine became one of the
leading Internet consulting companies in the United States and Europe with 650
employees worldwide. He left Saltmine in 1999 to become an independent
consultant specializing in Internet-based sales and marketing strategies. While
developing Meridian Partners, Mr. Ferrara also served as a general manager in
the OS/2 Division of IBM in Austin, Texas from 1993 to 1995. At IBM, his
responsibilities included sales, marketing and engineering. From 1982 to 1991,
Mr. Ferrara worked at Apple Computer as a software engineer which included
product development, product marketing, operations and sales. Mr. Ferrara is a
graduate of Central Washington University with a BA in Quantitative Economics
and an MBA from the University of North Carolina.
Edward G. Newton has been NutraStar'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 NutraStar 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 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 became NutraStar's Chief Science Officer on February 1,
2002. She is a leading researcher in the therapeutic effects of rice bran and
rice bran oil for over 30 years, has been NTI's Chief Science Officer since
March 2000. Prior to joining NTI, she served as the Director of Research and
27
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.
Dr. Reddy Sastry V. Cherukuri is NTI's Director of Science and Technology since
March 2000. Prior to joining NTI, he served as the Director of Science and
Technology of The RiceX Company from April 1996 to March 2000. From May 1995 to
April 1996, Dr. Cherukuri served as a Laboratory Supervisor at Customs Coatings,
Inc., New York, a pharmaceutical company. From December 1994 to January 1995, he
was a chemist at DuPont Merck Pharmaceutical Company, New York. From May 1992 to
November 1994, Dr. Cherukuri was a consultant to several pharmaceutical
companies in India. From January 1967 to May 1992, he served for the Indian
Drugs and Pharmaceutical, Ltd., Hyderabad, India, a premier drugs and
pharmaceuticals manufacturing company, under the federal government of India.
Dr. Cherukuri retired in 1992 as the Senior Research Manager, Chief of Medicinal
Chemistry and Group Leader of New Drug Development division of the company. Dr.
Cherukuri received his Bachelor of Science (Honors) Degree in 1958, Master of
Science Degree (Organic Chemistry) in 1959 and Ph.D. degree (Organic Chemistry
of Synthetic and Natural Plant Products) in 1967, all from the Andhra
University, Waltair, India. Dr. Cherukuri has more than 75 peer- reviewed
scientific publications and 12 patents to his credit. He served as a member of
several scientific Boards and as a reviewer for several scientific journals.
Danny Lowell joined NutraStar in January 2002 as Chief Information Officer. He
previously worked with NutraStar as a technology and enterprise architecture
consultant from October 2000 through the end of 2001. Mr. Lowell is leading our
Information Technology strategic planning, development, and management. He is
responsible for implementing enterprise architecture and business systems,
including development of Internet sites. Mr. Lowell's diverse 22-year career in
Information Technology includes demonstrated proficiency and success across all
facets of the industry, including Internet, client-server, and mainframe
environments. Mr. Lowell is highly experienced with complex business systems,
process re-engineering, enterprise resource planning, and business/system
analysis. He is also familiar with software development and project management
life cycle methodologies, data analysis and design, and a multitude of technical
platforms, programming languages and databases. Mr. Lowell previously served as
an independent consultant where he led teams of technology consultants in
developing software applications, data models, enterprise architecture, and
28
methodologies for the state of California and private industry. He also served
as Vice President of Information Technology for K-Data Inc., and held positions
with EDS and several other technology companies. Mr. Lowell holds a Bachelor of
Science degree in Computer Science from California State University, Sacramento.
He is also a member of the Project Management Institute and is a certified
Project Management Professional.
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. Our executive officers are appointed by the Board of
Directors and serve at the discretion of the Board.
Family Relationships
There are no family relationships between any director or executive officer.
EXECUTIVE COMPENSATION
The following table sets forth the compensation of NutraStar's Chief Executive
Officer during the last three complete fiscal years. One other officer received
annual compensation in excess of $100,000 during the last completed fiscal year.
SUMMARY COMPENSATION TABLE
Annual Compensation Long Term Compensation
---------------------------------------- -----------------------------------------
Awards Payout
--------------------------- ----------
Restricted Securities
Other Annual Stock Underlying LTIP All Other
Bonus Compensation Award(s) Options Payout Compensation
Year Salary ($) ($) ($) (#) ($) ($)
------------ -------------- --------- --------------- ------------- ------------- ---------- ------------
Radd Barrett 2/21/01 to
(FormerCEO) 12/14/01 -0- -0- -0- -0- -0- -0- -0-
2000(1)
1999(1)
Patricia McPeak 2001 $241.667(2) $8,333 $12,000(3) -0- 28,820 -0- (4)
(CEO)
2000 $182,692(2) -0- $12,000(3) -0- -0- -0- -0-
Edward Newton (VP) 2001 $100,000(2) -0- -0- -0- 304,124 -0- (4)
_____________________________
(1) From July, 1999 through February 21, 2001, Alliance was in bankruptcy.
(2) Amount includes payments received from both NTI and NutraStar.
(3) Includes a monthly car allowance of $1,000.
(4) Ms. McPeak and Mr. Newton are provided with paid disability insurance benefits.
29
Stock Option Plan
NutraStar does not have a formal stock option plan currently in place. Options
to date have been granted on an individual basis pursuant to individual option
agreements. NutraStar expects to adopt a formal stock option plan during this
current fiscal year.
As a result of the Exchange Transaction, a total of 655,480 options previously
issued to employees of NTI converted into 935,564 options exercisable into
NutraStar common stock. A total of 1,050,000 options previously issued by NTI to
various consultants and advisors were converted into 1,498,660 options
exercisable into NutraStar common stock.
Options/SAR Grants in Last Fiscal Year
The following table sets forth certain information with respect to options or
SAR grants in NutraStar through May 30, 2002 to the Executive Officers named in
the Summary Compensation Table above ("Named Executive Officers").
--------------------- ---------------------- -------------------- ------------------- -------------------
Percent of Total
Number of Securities Options Granted to Exercise or Base
Underlying Options Employees at May Price
Name Granted 30, 2002 ($ Per Share) Expiration Date
--------------------- ---------------------- -------------------- ------------------- -------------------
Patricia M. McPeak 28,820 1.0% $0.28 December 3, 2011
--------------------- ---------------------- -------------------- ------------------- -------------------
Edward G. Newton 304,124 7.1% $0.25 December 3, 2011
--------------------- ---------------------- -------------------- ------------------- -------------------
Aggregated Option/SAR Exercises Year-End Table.
-----------------------------------------------
As of May 30, 2002, none of the Named Executive Officers had exercised any
options/SARs issued by NutraStar. The following table sets forth information
regarding the stock options held as of May 30, 2002 by the Named Executive
Officers.
---------------------- ----------------------------------- ------------------------------------
Name Number of Securities Underlying Value of Unexercised
Unexercised Options at In-the-Money Options at
May 30, 2002 May 30, 2002
---------------------- ----------------------------------- ------------------------------------
Exercisable Unexercisable Exercisable Unexercisable
---------------------- ---------------- ------------------ ---------------- -------------------
Patricia McPeak (1) 5,764 23,056 $ 2,940 $11,758(3)
---------------------- ---------------- ------------------ ---------------- -------------------
Edward G. Newton (2) 304,124 -0- $155,,103 $ -0-
---------------------- ---------------- ------------------ ---------------- -------------------
______________________________________
(1) As of May 30, 2002 5,764 options were vested.
(2) As of May 30, 2002 all options were vested.
(3) Based on closing price of $0.51 per common share as of May 30, 2002.
Employee Pension, Profit Sharing or Other Retirement Plans
We do not have a defined benefit pension plan or profit sharing or other
retirement plan, however, we have established a 401(k) retirement plan.
30
Compensation of Directors
NutraStar's directors are also officers of NutraStar and do not receive any
additional compensation for their services as members of the Board of Directors.
NutraStar intends to appoint additional directors in the future who may or may
not be employees. For the non-employee directors, NutraStar 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.
Employment/Consulting Contracts
Patricia M. McPeak ("McPeak") has an employment contract with NTI which has been
assigned to NutraStar (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 NutraStar achieves $25
million in annual gross sales or its 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 NutraStar achieves $50 million in
annual gross sales. Ms. McPeak will be entitled to quarterly bonuses of $25,000
upon achievement of certain benchmarks that will be set and determined by
NutraStar's Board of Directors. The agreement provides that McPeak shall
participate in NutraStar's stock bonus plans, and that NutraStar shall provide
McPeak with medical, life, and disability insurance benefits, additional
executive level benefits, and an annual automobile allowance of $12,000.
NutraStar 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 McPeak Employment Agreement expires on
October 31, 2009. We are renegotiating the employment agreement with McPeak.
NutraStar anticipates that the compensation arrangement will remain
substantially the same, but that NutraStar's obligations on termination of the
new agreement or a change in control will increase.
Joseph Ferrara ("Ferrara") is currently negotiating an employment agreement with
NutraStar (the "Ferrara Employment Agreement"). The proposed Ferrara Employment
Agreement is expected to provide for a base salary of $12,500 per month with 5%
annual increases. Ferrara would be entitled to quarterly bonuses of $12,500 upon
achievement of certain benchmarks that will be set and determined by NutraStar's
Board of Directors and would be entitled to an annual incentive compensation if
certain annual earnings projections are achieved. The proposed Employment
Agreement would also provide that Ferrara would be provided with medical, life
and disability insurance benefits and additional executive level benefits. It is
also contemplated to grant Ferrara a ten year option to purchase 1,200,000
shares of NutraStar's common stock at an exercise price of $0.50 per share, such
options to vest over the life of the Employment Agreement. The Employment
Agreement is expected to have a term of four years and if terminated
involuntarily without cause, Ferrara will be paid twenty-four months of salary
plus quarterly bonuses.
Edward Newton ("Newton") has an employment contract with NTI, which has been
assigned to NutraStar (the "Newton Employment Agreement"). The Newton Employment
Agreement provides that Newton receive an annual base salary of $100,000. The
31
Agreement provides that Newton shall participate in NutraStar's stock bonus
plans. The Newton Employment Agreement expires on March 31, 2003.
Danny Lowell ("Lowell") has an employment contract with NTI (the "Lowell
Employment Agreement"). The Lowell Employment Agreement provides for Lowell to
receive an annual base salary of $120,000. He will also be paid a $15,000
Start-up Bonus if certain benchmarks are achieved. Lowell was also issued a
total 155,000 stock options which vest over a four year period. The Agreement
also provides that Lowell will be provided with medical, life and disability
insurance benefits. The Lowell Employment Agreement expires January 7, 2007.
Limitation of Liability and Indemnification Matters
NutraStar'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 NutraStar 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 NutraStar. 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
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 NutraStar'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 shareholders (excluding any
shareholders who were parties to such action) to provide such indemnification.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
Except as otherwise indicated below, we have not been a party to any
transaction, proposed transaction, or series of transactions in which the amount
involved exceeds $60,000, and in which, to our knowledge, any of our directors,
officers, five percent beneficial security holders, or any member of the
immediate family of the foregoing persons has had or will have a direct or
indirect material interest.
32
Distribution Agreement with The RiceX Company
Patricia McPeak, NutraStar's Chief Executive Officer, a director, and a
principal shareholder, is a co-founder, a principal shareholder, and the former
President and a former director of RiceX, and Daniel L. McPeak, her husband, is
a co-founder, the current Chairman of the Board and Chief Executive Officer, a
director, and a principal shareholder of RiceX. See "Business - Product Supply."
On December 12, 2001, NTI 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 and to have the exclusive rights to various patents and
trademarks owned by RiceX. Under the terms of this agreement, NutraStar will pay
RiceX a royalty equal to 2% of gross receipts received by NutraStar from the
sale of NutraStar products that incorporate any RiceX products, less selling
expenses. At March 31, 2002, NutraStar recorded patents and licenses in the
amount of $114,027 related to these exclusive rights. In conjunction with the
above agreement, RiceX has agreed to cancel certain indebtedness by NTI 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. On January 15, 2002, RiceX and NutraStar entered
into a Put/Call Agreement whereby RiceX can require NutraStar to repurchase the
130,000 shares of Series A preferred stock after July 15, 2002 in exchange for
$130,000. NutraStar may also voluntarily repurchase the 130,000 shares of Series
A preferred stock for $130,000 plus any accrued dividends thereon if NutraStar
desires and is able to do so.
During the year ended December 31, 2001, NutraStar recorded commissions revenue
totaling $317,668 from RiceX related to sales made by RiceX to customers of
NutraStar. Purchases from RiceX were $471,126 (20% of total purchases) and
$620,000 (96% of total purchases) for the years ended December 31, 2001 and
2000, respectively.
During the year ended December 31, 2001, NutraStar issued 300,000 Series A
preferred shares 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. This exchange was made at the then fair market value of $1.00
per share of Series A preferred.
During the year ended December 31, 2001, NutraStar entered into a
non-interest-bearing loan agreement with Patricia McPeak, the Chief Executive
Officer of NutraStar. Related to this agreement, NutraStar recorded a Due to
Officer in the amount of $12,759 at March 31, 2002. On March 4, 2002, NutraStar
issued a note payable to Patricia McPeak in the amount of $100,000 which bears
interest at 10% per annum and is due on March 3, 2003.
During the year ended December 31, 2001, certain operating expenses of NTI
totaling $111,313 were paid by RiceX. NutraStar reimbursed these expenses, and
at March 31, 2002, there were no amounts owed to RiceX.
Radd Barrett could be deemed a promoter of Alliance. Mr. Barrett served as the
CEO and sole Director of Alliance until his resignation on December 14, 2001 in
conjunction with the Exchange Transaction with NTI. Mr. Barrett, through a
controlled company, Home Marketing Enterprises, LLC owns 286,000 shares of
NutraStar common stock.
33
Patricia McPeak and Edward Newton could be deemed promoters of NTI and now
NutraStar. Ms. McPeak is the CEO of NutraStar and NTI and is the founder of NTI.
She owns 13,999,337 shares of NutraStar common stock (excluding convertible
preferred stock and exercisable options). Mr. Newton is a Vice President and
Director of NutraStar and NTI and is the Corporate Secretary of NTI. Mr. Newton
has been an officer and Director of NTI since its formation.
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the number of shares of NutraStar's common stock
beneficially owned as of April 20, 2002 by, (i) each executive officer and
director of NutraStar; (ii) all executive officers and directors of NutraStar as
a group; and (iii) owners of more than 5% of NutraStar's Common Stock.
-------------------------------------- ------------------------ ------------------------- -----------------
Name and Address of Beneficial Owner Position Number of Shares Percent
Beneficially Owned
-------------------------------------- ------------------------ ------------------------- -----------------
Officers and Directors
-------------------------------------- ------------------------ ------------------------- -----------------
Patricia McPeak Chairman and CEO 14,005,101(1) 63.3%
1261 Hawk's Flight Court
El Dorado Hills, CA 95762
-------------------------------------- ------------------------ ------------------------- -----------------
Joseph Ferrara
1261 Hawk's Flight Court President 165,000(3) *
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 14,474,225 64%
group (3 individuals)
-------------------------------------- ------------------------ ------------------------- -----------------
____________________________
* Represents less than 1%.
(1) Amount includes 5,764 shares issuable under stock options exercisable
within 60 days of May 30, 2002 and 300,000 shares of convertible Series A
Preferred Stock.
(2) Amount represents shares issuable under stock options exercisable within 60
days of May 30, 2002.
(3) Amount includes 120,000 shares issuable under stock options exercisable
within 60 days of May 30, 2002.
LEGAL PROCEEDINGS
We are involved from time to time in various lawsuits that arise in the course
of its business.
34
NTI 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.
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.
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 contract payment of $204,405 plus interest of $32,031
as well as damages for alleged conversion and misappropriation of trade secrets.
Additionally, MISI has stated that it will move the court to amend its Complaint
to add a cause of action for negligent and intentional interference with an
employment agreement between MISI and one of its programmers. 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 either will
appeal the Court's action or attempt to settle this matter. Discovery is just
beginning and it is too early to opine upon the possible outcome of the
litigation. Settlement of this case could have a material affect on NutraStar's
cash flow depending on how quickly any settlement would need to be paid.
Conversely, litigating this matter could also have a material adverse affect on
NutraStar's operations and financial results.
35
PLAN OF DISTRIBUTION
The selling shareholders may, from time to time, sell all or a portion of the
shares of common stock on any market upon which the common stock may be quoted
(currently the OTC Bulletin Board), in privately negotiated transactions or
otherwise. Such sales may be at fixed prices that may be changed, at market
prices prevailing at the time of sale, at prices related to the market prices or
at negotiated prices. The shares of common stock may be sold by the selling
shareholders by one or more of the following methods, without limitation:
(a) block trades in which the broker or dealer so engaged will attempt to
sell the shares of common stock as agent but may position and resell a
portion of the block as principal to facilitate the transaction;
(b) purchases by broker or dealer as principal and resale by the broker or
dealer for its account pursuant to this prospectus;
(c) an exchange distribution in accordance with the rules of the exchange;
(d) ordinary brokerage transactions and transactions in which the broker
solicits purchasers;
(e) privately negotiated transactions;
(f) market sales (both long and short to the extent permitted under the
federal securities laws); and
(g) a combination of any aforementioned methods of sale.
In effecting sales, brokers and dealers engaged by the selling shareholders may
arrange for other brokers or dealers to participate.
Brokers or dealers may receive commissions or discounts from the selling
shareholders or, if any of the broker-dealers act as an agent for the purchaser
of said shares, from the purchaser in amounts to be negotiated which are not
expected to exceed those customary in the types of transactions involved.
Broker-dealers may agree with the selling shareholders to sell a specified
number of the shares of common stock at a stipulated price per share. Such an
agreement may also require the broker-dealer to purchase as principal any unsold
shares of common stock at the price required to fulfill the broker-dealer
commitment to the selling shareholders if said broker-dealer is unable to sell
the shares on behalf of the selling shareholders. Broker-dealers who acquire
shares of common stock as principal may thereafter resell the shares of common
stock from time to time in transactions which may involve block transactions and
sales to and through other broker-dealers, including transactions of the nature
described above. Such sales by a broker-dealer could be at prices and on terms
then prevailing at the time of sale, at prices related to the then-current
market price or in negotiated transactions. In connection with such resales, the
broker-dealer may pay to or receive from the purchasers of the shares,
commissions as described above. The selling shareholders may also sell the
shares of common stock in accordance with Rule 144 under the Securities Act,
rather than pursuant to this prospectus.
36
A selling shareholder and any broker-dealers or agents that participate with the
selling shareholders in the sale of the shares of common stock may be deemed to
be "underwriters" within the meaning of the Securities Act in connection with
these sales. In that event, any commissions received by the broker-dealers or
agents and any profit on the resale of the shares of common stock purchased by
them may be deemed to be underwriting commissions or discounts under the
Securities Act. Furthermore, selling shareholders are subject to Regulation M of
the Securities Exchange Act of 1934. Regulation M prohibits any activities that
could artificially influence the market for NutraStar's common stock during the
period when shares are being sold pursuant to this prospectus. Consequently,
selling shareholders, particularly those who are officers and directors of
NutraStar, must refrain from directly or indirectly attempting to induce any
person to bid for or purchase the common stock being offered pursuant to this
prospectus. Regulation M also prohibits any bids or purchases made in order to
stabilize the price of NutraStar's common stock in connection with the stock
offered pursuant to this prospectus.
A selling shareholder may enter into hedging transactions with broker-dealers
and the broker-dealers may engage in short sales of our common stock in the
course of hedging the positions they assume with such selling shareholder,
including, without limitation, in connection with the distribution of our common
stock by such broker-dealers. A selling shareholder may also enter into option
or other transactions with broker-dealers that involve the delivery of the
common stock to the broker-dealers, who may then resell or otherwise transfer
such common stock. A selling shareholder may also loan or pledge the common
stock to a broker-dealer and the broker-dealer may sell the common stock so
loaned or upon default may sell or otherwise transfer the pledged common stock.
All expenses of the registration statement including but not limited to, legal,
accounting, printing and mailing fees are and will be paid by us.
SELLING SHAREHOLDERS
Set forth below is a list of all shareholders who may sell shares pursuant to
this prospectus. The number of shares column represents the number of shares
owned by the selling shareholder and the "No. of Shares Underlying Series A
Preferred stock" column represents the number of shares that may be acquired by
such selling shareholder within sixty days upon conversion of the Series A
Preferred stock. The "Total" column represents the number of shares beneficially
owned by the selling shareholders and is the sum of the "No. of Shares" and "No.
of Shares Underlying Series A Preferred Stock" columns. The common shares
beneficially owned following the offering column assumes all shares registered
are sold by the selling shareholder.
37
Common Shares
Beneficially Owned
Common Stock Beneficially Following
Owned Prior to the Offering Number of the Offering
--------------------------- Common --------------------
No. of Shares Shares
No. of Underlying Series Offered No. of
Name of Shareholder Shares A Preferred Stock Total % Hereby Shares %
------------------------------- ------------ -------------------- --------------- --------- ---------------- --------- ----------
Agard, Stephanie & Berry 15,000 -0- 15,000 100% 15,000 -0- -0-
------------------------------- ------------ -------------------- --------------- --------- ---------------- --------- ----------
ASDi, Inc. -0- 100,000 100,000 100% 100,000 -0- -0-
------------------------------- ------------ -------------------- --------------- --------- ---------------- --------- ----------
Ashmore, Mark Stevens 65,000 -0- 65,000 100% 65,000 -0- -0-
------------------------------- ------------ -------------------- --------------- --------- ---------------- --------- ----------
Building Momentum, Inc. 11,000 -0- 11,000 100% 11,000 -0- -0-
------------------------------- ------------ -------------------- --------------- --------- ---------------- --------- ----------
Churchill Reinsurance Co. Ltd. 200,000 -0- 200,000 100% 150,000 50,000 0.2%
------------------------------- ------------ -------------------- --------------- --------- ---------------- --------- ----------
Faraday Financial, Inc. -0- 735,700 735,700 100% 735,000 -0- -0-
------------------------------- ------------ -------------------- --------------- --------- ---------------- --------- ----------
Gillen, Frank 103,125 -0- 103,125 100% 103,125 -0- -0-
------------------------------- ------------ -------------------- --------------- --------- ---------------- --------- ----------
Karpel, Miguel Retirement Plan 60,000 -0- 60,000 100% 60,000 -0- -0-
------------------------------- ------------ -------------------- --------------- --------- ---------------- --------- ----------
Kelley, Marilyn -0- 30,000 30,000 100% 30,000 -0- -0-
------------------------------- ------------ -------------------- --------------- --------- ---------------- --------- ----------
Khorsandi, Jack 5,000 -0- 5,000 100% 5,000 -0- -0-
------------------------------- ------------ -------------------- --------------- --------- ---------------- --------- ----------
Konski Family Trust 25,000 -0- 25,000 100% 25,000 -0- -0-
------------------------------- ------------ -------------------- --------------- --------- ---------------- --------- ----------
Kanter, Lewis -0- 100,000 100,000 100% 100,000 -0- -0-
------------------------------- ------------ -------------------- --------------- --------- ---------------- --------- ----------
Luft, Brian 15,000 -0- 15,000 100% 15,000 -0- -0-
------------------------------- ------------ -------------------- --------------- --------- ---------------- --------- ----------
Mackay, Edward -0- 45,000 45,000 100% 45,000 -0- -0-
------------------------------- ------------ -------------------- --------------- --------- ---------------- --------- ----------
Maclesfield Holdings Ltd. 135,000 -0- 135,000 100% 135,000 -0- -0-
------------------------------- ------------ -------------------- --------------- --------- ---------------- --------- ----------
McPeak, Patricia. -0- 300,000 300,000 100% 300,000 -0- -0-
------------------------------- ------------ -------------------- --------------- --------- ---------------- --------- ----------
Saunders, Steven W. -0- 131,477 131,477 100% 131,477 -0- -0-
------------------------------- ------------ -------------------- --------------- --------- ---------------- --------- ----------
SV Star Investments, LLC -0- 25,000 25,000 100% 25,000 -0- -0-
------------------------------- ------------ -------------------- --------------- --------- ---------------- --------- ----------
TMG Consultants LLC 914,393 13,000 927,393 100% 927,393 -0- -0-
------------------------------- ------------ -------------------- --------------- --------- ---------------- --------- ----------
Weintraub Genshlea Chediak
Sproul 50,000 -0- 50,000 100% 50,000 -0- -0-
------------------------------- ------------ -------------------- --------------- --------- ---------------- --------- ----------
Willens, Ron 358,333 -0- 358,333 100% 358,333 -0- -0-
------------------------------- ------------ -------------------- --------------- --------- ---------------- --------- ----------
Williams, Nancy 302,000 -0- 302,000 100% 302,000 -0- -0-
------------------------------- ------------ -------------------- --------------- --------- ---------------- --------- ----------
Woodruff, Joe 20,000 -0- 20,000 100% 20,000 -0- -0-
------------------------------- ------------ -------------------- --------------- --------- ---------------- --------- ----------
------------------------------- ------------ -------------------- --------------- --------- ---------------- --------- ----------
TOTAL 2,228,851 1,480,177 3,709,028
------------------------------- ------------ -------------------- --------------- --------- ---------------- --------- ----------
DESCRIPTION OF SECURITIES
Our authorized capital stock consists of 50,000,000 shares of common stock, no
par value, and 3,000,000 shares of preferred stock, no par value. As of May 30,
2002, there were 21,802,853 shares of common stock outstanding and 2,084,707
shares of Series A preferred stock outstanding.
Common Stock
Holders of our common stock are entitled to receive ratably dividends when, as,
and if declared by the Board of Directors out of funds legally available
therefor, subject to any preferential dividend rights of outstanding shares of
the preferred stock. We have never paid a dividend on the common stock and have
no plans to do so in the foreseeable future. Upon the liquidation, dissolution,
or winding up of NutraStar, the holders of the common stock are entitled to
receive ratably the net assets of NutraStar available after the payments of all
debts and other liabilities and subject to the prior rights of any outstanding
preferred shares. However, there are no assurances that upon any such
38
liquidation or dissolution, there will be any net assets to distribute to the
holders of the Common Stock.
The holders of our Common Stock are entitled to one vote for each share held on
all matters submitted to a vote of shareholders. Under certain circumstances,
California law permits the holders to cumulate their votes for the election of
directors in which case holders of less than a majority of the outstanding
Common Stock could elect one or more of the directors. Holders of Common Stock
have no preemptive, subscription, or redemption rights. The outstanding shares
of Common Stock are fully paid and nonassessable. The rights and privileges of
holders of the Common Stock are subject to, and may be adversely affected by,
the rights of holders of shares of any outstanding series of the Preferred Stock
and any series which NutraStar may designate and issue in the future.
See "Description of Securities - Series A Preferred Stock" below."
Common Stock Units
A common stock unit ("Unit") consists of (1) one share of the common stock (the
"Common Stock") and (2) a warrant to purchase one share of the Common Stock (the
"Warrant"). The exercise price (the "Exercise Price") of a Warrant is subject to
change based on 120% of the price per share of the last trade of the Common
Stock as reported on the NASD electronic bulletin board on the business day
immediately prior to the date the investor tenders his or her funds and
subscription materials to NutraStar or its placement agent. As of March 4, 2002,
the date of the only sale of Units, the last reported trade was $1.00 and the
exercise price per Warrant was $1.20. See "Description of Securities - Common
Stock" and "Description of Securities - Common Stock Purchase Warrants."
Common Stock Purchase Warrants
Each Warrant entitles the holder to purchase a designated number of shares of
Common Stock at the Exercise Price stated in the Warrant. The term in which the
holder may exercise the Warrant is the earlier of two years from the issuance
date and one year from the date the Common Stock trades, as reported on the NASD
electronic bulletin board, at the Exercise Price or higher for a period of 20
consecutive trading days. The number of shares into which an option is
exercisable will be adjusted for stock splits, stock combinations,
reorganizations, mergers and other types of business combination and sales
transactions. A holder of a Warrant has no rights as a shareholder of NutraStar
and is not entitled to vote on any matter submitted to a vote of NutraStar's
shareholders. Subject to compliance with various state and federal securities
laws, title to a Warrant may be transferred by endorsement and delivery in the
same manner as a negotiable instrument transferable by endorsement and delivery
or by assignment.
Common Stock Options
Each option entitles the holder to purchase one share of our Common Stock at the
Exercise Price stated in the Option Agreement. The term in which the holder may
exercise the option is set forth in the Option Agreement but are typically
exercisable for a period of five (5) years. The number of shares into which an
option is exercisable will be adjusted for stock splits, stock combinations,
reorganizations, mergers and other types of business combination and sales
transactions. Options have been issued to date to NutraStar employees and to
consultants and advisors. Options issued to employees typically include a
vesting schedule. A holder of an option has no rights as a shareholder of
39
NutraStar and is not entitled to vote on any matter submitted to a vote of
NutraStar's shareholders. Options are generally not transferable except to heirs
or beneficiaries.
Series A Preferred Stock
Pursuant to NutraStar's Articles of Incorporation, as amended,
NutraStar is authorized to issue 3,000,000 shares of Preferred Stock, no par
value.
Immediately following the Exchange Effective Date, the Board of
Directors designated a series of the Preferred Stock as the Series A Preferred
Stock of which there are 3,000,000 authorized shares (the "Series A"). NutraStar
will accrue dividends on the Series A at the annual rate of 7%, or $0.07 per
share. If declared by the Board of Directors, NutraStar will pay the accrued
dividends on the redemption of the Series A or upon the liquidation of
NutraStar. If dividends on the Series A are in default, NutraStar may not pay
any dividends on or redeem, purchase, or otherwise acquire any Common Stock or
other series of the Preferred Stock that is junior to the Series A as to
dividend rights or rights upon the liquidation, dissolution, or winding up of
NutraStar.
NutraStar at its option may redeem all or any portion of the Series A
at any time upon 30 days advance written notice to the holders of the shares
being redeemed. NutraStar must redeem all of the Series A on the fifth
anniversary of their date of issuance. In either event, the redemption price is
$1.00 per share plus accrued and unpaid dividends. A holder may convert the
Series A into Common Stock after the Series A has been called for redemption but
before it has been redeemed.
Holders of the Series A are entitled to receive, upon any voluntary or
involuntary dissolution, liquidation, or winding up of NutraStar, before any
distribution may be made to holders of the Common Stock or any other series of
Preferred Stock that is junior to the Series A, $1.00 per share plus accrued
dividends. The holders of the Series A will have the right to convert, at any
time, each share of Series A into one share of Common Stock. Each share of
Series A will automatically be converted into one share of Common Stock if the
Common Stock is listed for sale on a national stock exchange, has its sales
price quoted on the NASDAQ National Market System with a minimum sales price of
at least twice the then conversion price, or is quoted on the Over-the-Counter
Bulletin Board at an average bid price of at least $1.25 over any thirty day
consecutive period.
Holders of the Series A will be entitled to vote for the election of
directors and on all other matters upon which holders of the Common Stock are
entitled to vote. Each share of Series A will be entitled to the number of votes
equal to the number of shares of Common Stock into which it is then convertible.
Except as required by law, the Series A will vote with the Common Stock and not
as a separate class.
Dividends and Redemptions
California law prohibits us from paying any dividends on or redeeming our equity
securities if, after the payment of such dividend or redemption, we would be
likely to be unable to meet our liabilities as they mature. In addition, we are
40
prohibited from paying any dividends or redeeming any equity securities unless
the amount of our retained earnings exceeds the sum of the amount of the
dividend plus the aggregate amount, if any, of the cumulative dividends in
arrears on all outstanding securities (the "Retained Earnings Test"), or unless
our assets (excluding goodwill and deferred charges) ("Tangible Assets") are
greater than 1 1/4 times our liabilities (the "Assets Test"), our Tangible
Assets are greater than the sum of our liabilities plus the liquidation
preference of all outstanding securities, if any (the "Second Assets Test"), and
our current assets are greater than 1 1/4 times our current liabilities (the
"Current Assets Test"). As of March 31, 2002, we did not satisfy the Retained
Earnings Test, the Assets Test or the Second Assets Test. Because of such
restrictions, there are no assurances that we will be able to pay any dividends
on the Common Stock. See "Risk Factors - Dividend and Redemption Restrictions."
Registration Rights
Pursuant to the Subscription Agreement with NutraStar, the holders of certain
Units will have incidental or "piggy back" registration rights with respect to
the shares of Common Stock purchased. NutraStar will pay all costs connected
with any such registration, but the holder will pay all sales commissions or
brokers' discounts, and the fees and expenses of the holders' legal counsel or
accountants, if any. The Subscription Agreement also provides that if
NutraStar's underwriter or investment banker determines that there are more
shares included in a registration statement than the market can support, then
all shareholders exercising incidental registration rights (but not NutraStar)
must proportionally reduce their number (up to the total number if required) of
shares being registered. The Subscription Agreement further provides that, upon
request by NutraStar, no holder will sell shares of Common Stock for 180 days
after the effective date of a registration statement, except for shares included
in that registration statement.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is Fidelity Transfer
Company, Salt Lake City, Utah.
LEGAL MATTERS
The validity of the shares of common stock offered by the selling shareholders
will be passed upon by the law firm of Weintraub Genshlea Chediak Sproul,
Sacramento, California.
EXPERTS
Our consolidated balance sheet as of December 31, 2001 and the related
consolidated statements of operations, shareholders' deficit and cash flows for
the year then ended have been included herein in reliance on the report of
Singer Lewak Greenbaum & Goldstein, LLP, Independent Accountants, given on the
authority of that firm as experts in accounting and auditing.
Change in Our Certifying Accountant
After the exchange transaction with NTI, the newly constituted board of
directors of NutraStar, by resolution adopted March 7, 2002, dismissed Andersen
Andersen & Strong L.L.C., the independent accountants for Alliance, and Hood &
Strong, LLP, the independent accountants for NTI. The Board retained the
accounting firm of Singer Lewak Greenbaum & Goldstein, LLP as the independent
41
accountants for NutraStar and its subsidiaries, commencing with the fiscal year
ended December 31, 2001. These changes were previously reported in NutraStar's
Form 8-K filed March 14, 2002 and the Amended Form 8-K filed March 25, 2002.
AVAILABLE INFORMATION
We have filed a registration statement on Form SB-2, together with all
amendments and exhibits, with the Securities and Exchange Commission. This
prospectus, which forms a part of that registration statement, does not contain
all information included in the registration statement. Certain information is
omitted and you should refer to the registration statement and its exhibits.
With respect to references made in this prospectus to any of our contracts or
other documents, the references are not necessarily complete and you should
refer to the exhibits attached to the registration statement for copies of the
actual contracts or documents. You may review a copy of the registration
statement at the SEC's public reference room in Washington, DC, and at the SEC's
regional offices located in Chicago, Illinois and New York, New York. Please
call the Securities and Exchange Commission at 1-800-SEC-0330 for further
information on the operation of the public reference rooms. Our filings and the
registration statement can also be reviewed by accessing the SEC's website at
http://www.sec.gov.
FINANCIAL STATEMENTS
The financial statements filed with this Prospectus are listed below:
NUTRASTAR INCORPORATED AND SUBSIDIARIES
CONTENTS
December 31, 2001 and March 31, 2002 (unaudited)
________________________________________________________________________________
Page
INDEPENDENT AUDITOR'S REPORTS F-2 - F-3
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets F-4 - F-5
Consolidated Statements of Operations F-6
Consolidated Statements of Shareholders' Deficit F-7 - F-9
Consolidated Statements of Cash Flows F-10 - F-13
Notes to Consolidated Financial Statements F-14 - F-33
F-1
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Shareholders
NutraStar Incorporated and subsidiaries
We have audited the accompanying consolidated balance sheet, as restated (see
Note 2) of NutraStar Incorporated and subsidiaries as of December 31, 2001, and
the related consolidated statements of operations, shareholders' deficit, and
cash flows, as restated (see Note 2) for the year then ended. 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 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 audit provides a
reasonable basis for our opinion.
In our opinion, the restated, 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 the year then
ended 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 SHEETS
December 31, 2001 and March 31, 2002 (unaudited)
________________________________________________________________________________
ASSETS
(restated)
March 31, December 31,
2002 2001
---------- ----------
(unaudited)
Current assets
Cash $ 43,620 $ 405,502
Accounts receivable 34,485 1,593
Inventory 193,966 93,886
Prepaid expenses 22,661 8,788
---------- ----------
Total current assets 294,732 509,769
Property and equipment, net 225,133 210,955
Patents and trademarks, net 114,027 109,505
Goodwill 250,001 250,001
Deposits 136,495 181,071
---------- ----------
Total assets $1,020,388 $1,261,301
========== ==========
The accompanying notes are an integral part of these financial statements.
F-4
NUTRASTAR INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2001 and March 31, 2002 (unaudited)
___________________________________________________________________________________________
LIABILITIES AND SHAREHOLDERS' DEFICIT
(restated)
March 31, December 31,
2002 2001
----------- -----------
(unaudited)
Current liabilities
Accounts payable $ 524,398 $ 382,117
Accrued salaries and benefits 88,577 61,014
Accrued expenses 85,654 87,369
Due to officer 12,759 32,029
Note payable to officer 100,000 --
----------- -----------
Total current liabilities 811,388 562,529
Put option 130,000 130,000
----------- -----------
Total liabilities 941,388 692,529
----------- -----------
Commitments and contingencies
Convertible, redeemable series A preferred stock,
no par value, $1 stated value
3,000,000 shares authorized
2,084,707 (unaudited) and 2,084,707 shares issued
and outstanding 1,850,802 1,850,802
----------- -----------
Shareholders' deficit
Common stock, no par value
50,000,000 shares authorized
21,649,520 (unaudited) and 21,649,520 shares issued
and outstanding 4,925,845 4,572,845
Common stock committed 636,424 399,174
Deferred compensation (936,174) (925,875)
Accumulated deficit (6,397,897) (5,328,174)
----------- -----------
Total shareholders' deficit (1,771,802) (1,282,030)
----------- -----------
Total liabilities and shareholders' deficit $ 1,020,388 $ 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 and 2000 and
for the Three Months Ended March 31, 2002 and 2001 (unaudited)
_________________________________________________________________________________________________
For the Three Months Ended For the Years Ended
March 31, December 31,
---------------------------- ----------------------------
2002 2001 2001 2000
------------ ------------ ------------ ------------
(unaudited) (unaudited)
(restated) (restated)
Net sales $ 294,357 $ 468,320 $ 1,610,222 $ 127,954
Cost of goods sold 182,472 404,425 945,633 157,170
------------ ------------ ------------ ------------
Gross profit (loss) 111,885 63,895 664,589 (29,216)
Operating expenses 1,181,468 419,993 3,356,904 1,513,021
------------ ------------ ------------ ------------
Loss from operations (1,069,583) (356,098) (2,692,315) (1,542,237)
------------ ------------ ------------ ------------
Other income (expense)
Interest income 600 769 1,443 2,304
Interest expense (740) (4,898) (1,080,602) (16,767)
------------ ------------ ------------ ------------
Total other income (expense) (140) (4,129) (1,079,159) (14,463)
------------ ------------ ------------ ------------
Net loss $ (1,069,723) $ (360,227) $ (3,771,474) $ (1,556,700)
============ ============ ============ ============
Basic and diluted loss per share $ (0.05) $ (0.02) $ (0.20) $ (0.10)
============ ============ ============ ============
Basic and diluted weighted-
average shares outstanding 21,649,520 15,346,340 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' DEFICIT
For the Years Ended December 31, 2001 and 2000 and
for the Three Months Ended March 31, 2002 (unaudited)
____________________________________________________________________________________________________________________________________
Convertible, Redeemable
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 registered trademark 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
The accompanying notes are an integral part of these financial statements.
F-7
NUTRASTAR INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
For the Years Ended December 31, 2001 and 2000 and
for the Three Months Ended March 31, 2002 (unaudited)
____________________________________________________________________________________________________________________________________
Convertible, Redeemable
Series A Preferred Stock Common Stock Committed Deferred
------------------------ ---------------------------- Common Compen- Accumulated
Shares Amount Shares Amount Stock sation Deficit Total
------------ --------- -------------- ------------ --------- ---------- -------------- ------------
Balance, February 4,
Committed stock for
conversion of
notes payable $ $ $ 399,174 $ $ $ 399,174
Preferred stock
issued during 2001
as settlement of
litigation 100,000 100,000
for payment for
accounts payable 130,000 130,000
for conversion of
notes payable
and accrued
interest 1,775,707 1,671,802
for services
rendered 13,000 13,000
for deposits
payable 56,000 56,000
as interest
expense 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
The accompanying notes are an integral part of these financial statements.
F-8
NUTRASTAR INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
For the Years Ended December 31, 2001 and 2000 and
for the Three Months Ended March 31, 2002 (unaudited)
____________________________________________________________________________________________________________________________________
Convertible, Redeemable
Series A Preferred Stock Common Stock Committed Deferred
------------------------ ---------------------------- Common Compen- Accumulated
Shares Amount Shares Amount Stock sation Deficit Total
------------ --------- -------------- ------------ --------- ---------- -------------- ------------
Warrants issued
with convertible
debt $ - $ 114,083 $ $ $ $ 114,083
Put option - (130,000)
Net loss (3,771,474) (3,771,474)
------------ --------- -------------- ------------ --------- ---------- -------------- ------------
Balance, December
31, 2001 (restated) 2,084,707 1,850,802 21,649,520 4,572,845 399,174 (925,875) (5,328,174) (1,282,030)
Stock options
issued for (unaudited)
compensation - 193,750 (145,312) 48,438
consulting expense - 159,250 159,250
Committed stock
issued for (unaudited)
cash 100,000 100,000
consulting expense 137,250 137,250
Amortization of
deferred
compensation
(unaudited) 135,013 135,013
Net loss (unaudited) (1,069,723) (1,069,723)
------------ --------- -------------- ------------ --------- ---------- -------------- ------------
Balance, March 31,
2002 (unaudited)
(restated) 2,084,707 $1,850,802 21,649,520 $ 4,925,845 $636,424 $(936,174) $ (6,397,897) $(1,771,802)
============ ========== ============== =========== ======== =========== ============== ============
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 and 2000 and
for the Three Months Ended March 31, 2002 and 2001 (unaudited)
______________________________________________________________________________________________________
For the Three Months Ended For the Years Ended
March 31, December 31,
-------------------------- --------------------------
2002 2001 2001 2000
----------- ----------- ----------- -----------
(unaudited) (unaudited)
(restated) (restated)
Cash flows from operating activities
Net loss $(1,069,723) $ (360,227) $(3,771,474) $(1,556,700)
Adjustments to reconcile net loss to
net cash used in operating activities
Depreciation and amortization 29,982 16,910 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 342,702 -- 1,102,462 --
Non-cash issuances of
warrants -- -- 10,178 --
Non-cash issuances of
committed stock 137,250 -- 130,487 --
(Increase) decrease in
Accounts receivable (32,892) 21,071 114,043 (115,636)
Inventory (100,080) 261,311 421,886 (515,772)
Prepaid expenses (13,873) 3,977 6,597 (15,385)
Deposits 44,576 100,000 (80,546) (100,525)
Increase (decrease) in
Accounts payable 142,280 (234,011) (333,773) 904,407
Accrued salaries and benefits 27,563 5,247 36,079 --
Accrued expenses (1,715) 3,986 157,670 --
Due to officer (19,270) -- 32,029 --
----------- ----------- ----------- -----------
Net cash used in operating activities (513,200) (181,736) (855,316) (1,388,462)
----------- ----------- ----------- -----------
Cash flows from investing activities
Purchase of property and equipment (41,124) (179,975) (234,348) (70,692)
Purchase of patents and trademarks (7,558) (2,940) (30,199) (65,381)
----------- ----------- ----------- -----------
Net cash used in investing activities (48,682) (182,915) (264,547) (136,073)
----------- ----------- ----------- -----------
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, 2001 and 2000 and
for the Three Months Ended March 31, 2002 and 2001 (unaudited)
_______________________________________________________________________________________________
For the Three Months Ended For the Years Ended
March 31, December 31,
-------------------------- ---------------------------
2002 2001 2001 2000
----------- ----------- ----------- -----------
(unaudited) (unaudited)
(restated) (restated)
Cash flows from financing activities
Proceeds from the issuance of
common stock $ -- $ 31,000 $ 1,020,000 $ 378,900
Proceeds from the issuance of
common stock committed 100,000 -- -- --
Proceeds from deposits payable -- -- -- 896,500
Refunds of deposits payable -- -- (240,500) --
Proceeds from notes payable -- 406,356 -- --
Principal payments on convertible
notes payable -- -- (490,000) --
Proceeds from convertible note
payable -- -- 1,230,000 255,000
Proceeds from note payable to
officer 100,000 -- -- --
----------- ----------- ----------- -----------
Net cash provided by financing
activities 200,000 437,356 1,519,500 1,530,400
----------- ----------- ----------- -----------
Net increase (decrease) in cash (361,882) 72,705 399,637 5,865
Cash, beginning of period 405,502 5,865 5,865 --
----------- ----------- ----------- -----------
Cash, end of period $ 43,620 $ 78,570 $ 405,502 $ 5,865
=========== =========== =========== ===========
Supplemental disclosures of
cash flow information
Interest paid $ -- $ -- $ -- $ --
=========== =========== =========== ===========
Income taxes paid $ 1,600 $ -- $ -- $ --
=========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements.
F-11
NUTRASTAR INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2001 and 2000 and
for the Three Months Ended March 31, 2002 and 2001 (unaudited)
________________________________________________________________________________
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 and subsequently executed a put/call option with the related
party (see Note 9).
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 registered trademark 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 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.
The accompanying notes are an integral part of these financial statements.
F-12
NUTRASTAR INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2001 and 2000 and
for the Three Months Ended March 31, 2002 and 2001 (unaudited)
________________________________________________________________________________
Supplemental schedule of non-cash investing and financing activities (Continued)
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.
Supplemental schedule of non-cash investing and financing activities for the
three months ended March 31, 2002 and 2001 (unaudited)
On January 7, 2002, the Company entered into a five-year employment agreement
with an employee. In relation to this agreement, the Company issued options to
purchase 155,000 shares of common stock. The options vest over four years in
increments of 80,000, 25,000, 25,000, and 25,000, have an exercise price of $1
per share, and expire on January 7, 2012. As of March 31, 2002, the Company
recorded compensation expense and deferred compensation totaling $48,438 and
$145,312, respectively, in relation to this transaction.
On January 10, 2002, the Company entered into a six-month consulting services
agreement for marketing services. In relation to this agreement, the Company
issued options to purchase 25,000 shares of common stock at an exercise price of
$1 per share. The options expire in 10 years. The Company recorded consulting
expense of $47,250 in relation to this transaction.
On February 4, 2002, the Company entered into a three-month marketing services
agreement for public relations and advertising services. In relation to this
agreement, the Company paid a retainer of $35,000 upon execution of the
agreement, issued 35,000 shares of restricted common stock, and issued options
to purchase 50,000 shares of the Company's common stock at an exercise price of
$3 per share. The options expire in two years. The Company recorded consulting
expense totaling $90,250 in relation to this transaction.
On February 21, 2002, the Company entered into a one-year financial advisory
services agreement. In relation to this agreement, the Company paid a
non-refundable retainer of $20,000, issued 200,000 restricted shares of common
stock, and issued options to purchase 100,000 restricted shares of common stock
at $1 per share, 100,000 at $2.50 per share, and 100,000 at $4 per share. The
Company recorded consulting expense totaling $159,000 in relation to this
transaction.
The accompanying notes are an integral part of these financial statements.
F-13
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 - RESTATEMENT
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. Related to these issuances, on
January 15, 2002, these holders executed a put/call agreement with the
Company (see Note 9). The Company previously had not recorded the put
option on its financial statements. The Company has also reclassified
its convertible Series A preferred stock to convertible, redeemable
Series A preferred stock to conform with the accounting requirements of
the United States Securities and Exchange Commission.
This restatement does not have any effect on the Company's reported
earnings. Its impact on the previously reported total liabilities and
convertible, redeemable Series A preferred stock as of December 31,
2001 are as follows:
As Previously
Reported Restatement As Restated
---------- ----------- -----------
Total liabilities $ 562,529 $ 130,000 $ 692,529
Total convertible, redeemable Series
A preferred stock $1,980,802 $ (130,000) $ 1,850,802
F-14
NOTE 3 - 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 and the three months ended March 31, 2002,
the Company incurred net losses of $3,771,474 and $1,069,723
(unaudited), respectively, and it had negative cash flows from
operations of $855,316 and $513,200 (unaudited), respectively. In
addition, the Company had an accumulated deficit of $5,328,174 and
$6,397,897 (unaudited) at December 31, 2001 and March 31, 2002,
respectively. These factors raise substantial doubt about the Company's
ability to continue as a going concern.
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.
F-15
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Basis of Presentation (Continued)
---------------------
The accompanying March 31, 2002 and 2001 financial statements have been
prepared in conformity with generally accepted accounting principles
for interim financial information and with the instructions to Form
10-QSB and Regulation S-B. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of
management, all normal, recurring adjustments considered necessary for
a fair presentation have been included. The financial statements should
be read in conjunction with the audited financial statements and notes
thereto included in the Company's Annual Report on Form 10-KSB for the
year ended December 31, 2001. The results of operations for the three
months ended March 31, 2002 are not necessarily indicative of the
results that may be expected for the year ended December 31, 2002.
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.
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 and March 31, 2002, 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.
F-16
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
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.
F-17
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 and the three months ended March 31,
2002 and 2001 was $24,369, $17,640, $20,346 (unaudited), and $7,326
(unaudited), 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.
Reclassifications
-----------------
Certain amounts included in the March 31, 2001 financial statements
have been reclassified to conform with the March 31, 2002 presentation.
Such reclassification did not have any effect on reported net loss.
F-18
NOTE 3 - 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-19
NOTE 3 - 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.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections." SFAS No. 145 updates, clarifies, and
simplifies existing accounting pronouncements. This statement rescinds
SFAS No. 4, which required all gains and losses from extinguishment of
debt to be aggregated and, if material, classified as an extraordinary
item, net of related income tax effect. As a result, the criteria in
APB No. 30 will now be used to classify those gains and losses. SFAS
No. 64 amended SFAS No. 4 and is no longer necessary as SFAS No. 4 has
been rescinded. SFAS No. 44 has been rescinded as it is no longer
necessary. SFAS No. 145 amends SFAS No. 13 to require that certain
lease modifications that have economic effects similar to
sale-leaseback transactions be accounted for in the same manner as
sale-lease transactions. This statement also makes technical
corrections to existing pronouncements. While those corrections are
not substantive in nature, in some instances, they may change
accounting practice. The Company does not expect adoption of SFAS No.
145 to have a material impact, if any, on its financial position or
results of operations.
NOTE 4 - 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.
F-20
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment at December 31, 2001 and March 31, 2002
consisted of the following:
2002 2001
----------- -----------
(unaudited)
Furniture and equipment $ 18,417 $ 16,714
Software 327,747 288,326
----------- -----------
346,164 305,040
Less accumulated depreciation 121,031 94,085
----------- -----------
Total $ 225,133 $ 210,955
=========== ===========
Depreciation expense was $89,026, $5,059, $26,946 (unaudited), and
$15,604 (unaudited) for the years ended December 31, 2001 and 2000 and
the three months ended March 31, 2002 and 2001, respectively.
NOTE 6 - PATENTS AND TRADEMARKS
Patents and trademarks at December 31, 2001 and March 31, 2002
consisted of the following:
2002 2001
----------- -----------
(unaudited)
Patents $ 72,738 $ 84,439
Trademarks 51,809 32,550
----------- -----------
124,547 116,989
Less accumulated amortization 10,520 7,484
----------- -----------
Total $ 114,027 $ 109,505
=========== ===========
Amortization expense was $5,371, $2,113, $3,036 (unaudited), and $1,306
(unaudited) for the years ended December 31, 2001 and 2000 and the
three months ended March 31, 2002 and 2001, respectively.
NOTE 7 - 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.
F-21
NOTE 7 - PROMISSORY NOTES PAYABLE (Continued)
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.
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 8 - NOTE PAYABLE TO OFFICER
On March 4, 2002, the Company entered into a note payable agreement
with an officer of the Company, which bears interest at 10% per annum
and is due on March 3, 2003.
F-22
NOTE 9 - PUT OPTION
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. On January 15, 2002, these holders
of the Series A preferred stock executed a put/call agreement. The put
allows for the holder to sell to the Company all, but not less than
all, of the 130,000 shares of the Company's Series A preferred stock,
or common stock if any of the Series A preferred stock were converted,
for $130,000, plus all accumulated, but unpaid dividends, at any time
after six months from January 15, 2002. Related to the put option and
the related conversion of debt, the Company has recorded a liability of
$130,000.
In addition, the Company maintains the right to call the option and
purchase back the shares of the Series A preferred stock for $130,000,
plus any unpaid and accrued dividends at any time, subject to certain
provisions.
NOTE 10 - 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, $74,550, $15,975 (unaudited), and $17,825
(unaudited) for the years ended December 31, 2001 and 2000 and the
three months ended March 31, 2002 and 2001, respectively.
F-23
NOTE 10 - 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-24
NOTE 10 - 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.
From February through July 2000, a third party solicited funds on
behalf of an undetermined public shell company, into which it was
contemplated that the Company might merge. In this regard, the Company
received approximately $320,000 in deposits to be used for such
purpose. As a result of these solicitations, there may have been
violations of federal and/or state securities laws by such third party.
The Company never proceeded with the contemplated merger. Instead, the
Company applied such funds to a subsequent private placement that the
Company conducted, in which shares of the Company's common stock were
issued for the $320,000 investment. The Company has offered full
refunds to all people who provided monies to the Company. There are not
any assurances that federal and/or state securities authorities will
not investigate and possibly bring an action against the third party
who solicited the funds and the Company.
NOTE 11 - SHAREHOLDERS' DEFICIT
Convertible, Redeemable Series A Preferred Stock
------------------------------------------------
In December 2001, the Company approved the issuance of 3,000,000 shares
of convertible, redeemable 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.
The Company may redeem any and all outstanding shares of Series A
preferred stock. Upon the five-year anniversary of the date of
issuance, the Company is required to redeem all of its outstanding
shares of Series A preferred stock at $1 per share, plus all accrued
and unpaid dividends declared.
F-25
NOTE 11 - SHAREHOLDERS' DEFICIT (Continued)
Convertible, Redeemable Series A Preferred Stock (Continued)
------------------------------------------------
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 and subsequently executed a put/call
option with the related party (see Note 9).
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.
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.
F-26
NOTE 11 - SHAREHOLDERS' DEFICIT (Continued)
Common Stock (Continued)
------------
During the year ended December 31, 2001, the Company issued 21,409
shares of common stock to acquire a registered trademark 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.
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 Committed
----------------------
On March 15, 2002, the Company committed to issue 153,333 shares
(unaudited) of common stock with a detachable purchase warrant to
purchase 153,333 shares (unaudited) of common stock at an exercise
price of $1.20 per share in exchange for $100,000 (unaudited). As of
March 31, 2002, the Company had not issued the stock and has recorded
the transaction as committed stock.
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
F-27
NOTE 11 - SHAREHOLDERS' DEFICIT (Continued)
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.
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
=============== ===============
F-28
NOTE 11 - SHAREHOLDERS' DEFICIT (Continued)
Options (Continued)
-------
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.
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.
F-29
NOTE 11 - SHAREHOLDERS' DEFICIT (Continued)
Options Issued during the Three Months Ended March 31, 2002 and 2001
--------------------------------------------------------------------
(unaudited)
-----------
On January 7, 2002, the Company entered into a five-year employment
agreement with an employee. In relation to this agreement, the Company
issued options to purchase 155,000 shares of common stock. The options
vest over four years in increments of 80,000, 25,000, 25,000, and
25,000, have an exercise price of $1 per share, and expire on January
7, 2012. As of March 31, 2002, the Company recorded compensation
expense and deferred compensation totaling $48,438 and $145,312,
respectively, in relation to this transaction.
On January 10, 2002, the Company entered into a six-month consulting
services agreement for marketing services. In relation to this
agreement, the Company issued options to purchase 25,000 shares of
common stock at an exercise price of $1 per share. The options expire
in 10 years. The Company recorded consulting expense of $47,250 in
relation to this transaction.
On February 4, 2002, the Company entered into a three-month marketing
services agreement for public relations and advertising services. In
relation to this agreement, the Company paid a retainer of $35,000 upon
execution of the agreement, issued 35,000 shares of restricted common
stock, and issued options to purchase 50,000 shares of the Company's
common stock at an exercise price of $3 per share. The options expire
in two years. The Company recorded consulting expense totaling $90,250
in relation to this transaction.
On February 21, 2002, the Company entered into a one-year financial
advisory services agreement. In relation to this agreement, the Company
paid a non-refundable retainer of $20,000, issued 200,000 restricted
shares of common stock, and issued options to purchase 100,000
restricted shares of common stock at $1 per share, 100,000 at $2.50 per
share, and 100,000 at $4 per share. The Company recorded consulting
expense totaling $159,000 in relation to this transaction.
NOTE 12 - 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-30
NOTE 12 - 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 13 - 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-31
NOTE 13 - 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 14 - 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-32
NOTE 15 - SUBSEQUENT EVENTS
On April 12, 2002, the Company entered into a two-year marketing
agreement, whereby the Company is to pay a commission of 10% of gross
receipts on sales from customers introduced to the Company by the
consultant, subject to certain requirements. In relation to this
agreement, the Company granted to the consultants five-year options to
purchase up to 150,000 shares of the Company's common stock at an
exercise price of $0.75 per share, vesting according to the achievement
of certain levels of gross receipts. The agreement automatically renews
after the initial two-year term.
On May 6, 2002, the Company entered into a one-year finder's and
advisory agreement, whereby the finder is to seek businesses that are
consistent with the Company's business and strategic plans or to
introduce the Company to investors. The fees paid to the finder for
finding investors to fund the Company are based upon certain
percentages, ranging from 2% to 10%, plus unaccountable expenses,
depending on the amount funded by the investors. In addition, 10% of
the transaction value will be paid in cashless warrants. If the finder
arranges a credit line or other types of debt placement, the fees paid
to the finder will be 2% of the total debt placement. If the finder
introduces a business or entity and the Company engages in a merge-type
transaction or other similar transactions, the fees paid to the finder
are based upon certain percentages, ranging from 3% to 7%, depending on
the transaction value. In addition, 10% of the transaction value will
be paid in cashless warrants. This agreement is automatically renewed
after the initial one-year term.
F-33
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Officers and Directors
The California General Corporation Law and our Articles of Incorporation and
Bylaws provide that we may indemnify any and all of our officers, directors,
employees or agents or former officers, directors, employees or agents, against
expenses actually and necessarily incurred by them, in connection with the
defense of any legal proceeding or threatened legal proceeding, except as to
matters in which such persons shall be determined to not have acted in good
faith and in our best interest.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers, or persons controlling us pursuant
to the foregoing provisions, we have been informed that, in the opinion of the
SEC, that type of indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable.
Item 25. Other Expenses of Issuance and Distribution.
The following table sets forth the costs and expenses payable by us in
connection with the issuance and distribution of the securities being registered
hereunder. No expenses for the preparation of this Registration Statement shall
be borne by the selling shareholders. All of the amounts shown are estimates,
except for the SEC Filing Fee.
SEC Filing Fee $ 177
Blue Sky Fees and Expenses 2,000
Printing and Engraving Expenses 1,000
Legal Fees and Expenses 20,000
Accounting Fees and Expenses 10,000
Miscellaneous Expenses 2,000
TOTAL $35,177
=======
Item 26. Recent Sales of Unregistered Securities.
The following information sets forth all securities, which have been sold during
the last three years by us and which securities were not registered under the
Securities Act of 1933, as amended. Unless otherwise indicated, the
consideration paid for the shares was cash. All historical share data in this
prospectus has been adjusted to reflect the various recapitalizations of our
common stock.
On December 14, 2001, Alliance 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. Alliance 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
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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.
In conjunction with the Exchange Transaction, NutraStar issued shares of its
Series A Preferred Stock in the following transactions:
(i) 100,000 shares were issued to one entity 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
NutraStar. The services were valued at $13,000;
(iv) 56,000 shares were issued for conversion of $50,000 of NTI debt plus
interest. These shares were issued to two individuals and valued at $1.00
per share;
(v) 1,785,707 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 owed by NTI. The
shares were issued to thirteen creditors.
All of the above issuances of Series A preferred stock 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
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.
On December 27, 2001, NutraStar 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 legend stating the restrictions on resale.
On March 4, 2002, NutraStar commenced a private placement of up to 6,666,667
Units, each Unit consisting of one share of common stock and one Warrant to
purchase an additional share of common stock. The Units were being offered at
$0.65 per Unit. The Warrants have an exercise price of 120% of the current
market value of NutraStar's common stock at the time of exercise. The offering
expired on April 30, 2002 having sold 153,333 Units, raising $100,000. The Units
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 Units were issued pursuant to the exemptions provided by
Rule 506 of Regulation D and Section 4(6) of the 1933 Act. These Units are
deemed to be "restricted securities" as defined in Rule 144 under the 1933 Act
and the certificates evidencing the shares and Warrants bear a legend stating
the restrictions on resale.
II-2
In conjunction with retaining employees and consultants, NutraStar issued share
and options to purchase shares in the following transactions:
(i) On January 7, 2002, we entered into a five-year employment agreement with
an employee. In relation to this agreement, we issued options to purchase
155,000 shares of NutraStar's common stock. The options vest over four
years in increments of 80,000, 25,000, 25,000, and 25,000, have an
exercise price of $1 per share, and expire on January 7, 2012. As of March
31, 2002, we recorded compensation expense and deferred compensation
totaling $48,438 and $145,312, respectively, in relation to this
transaction.
(ii) On January 10, 2002, we entered into a six-month consulting services
agreement for marketing services. In relation to this agreement, we issued
options to purchase 25,000 shares of NutraStar's common stock at an
exercise price of $1 per share. The options expire in 10 years. We
recorded consulting expense of $47,250 in relation to this transaction.
(iii) On February 4, 2002, we entered into a three-month marketing services
agreement for public relations and advertising services. In relation to
this agreement, we paid a retainer of $35,000 upon execution of the
agreement, issued 35,000 shares of NutraStar's restricted common stock,
and issued options to purchase 50,000 shares of NutraStar's common stock
at an exercise price of $3 per share. The options expire in two years. We
recorded consulting expense totaling $90,250 in relation to this
transaction.
(iv) On February 21, 2002, we entered into a one-year financial advisory
services agreement. In relation to this agreement, NutraStar paid a
non-refundable retainer of $20,000, issued 200,000 restricted shares of
NutraStar's common stock, and issued options to purchase 100,000 restricted
shares of NutraStar's common stock at $1 per share, 100,000 at $2.50 per
share, and 100,000 at $4 per share. NutraStar recorded a consulting expense
totaling $159,000 in relation to this transaction.
All of the above issuances of common stock or options were made without any
public solicitation, to a limited number of employees or consultants who had
access to complete information pertaining to NutraStar and were acquired for
investment purposes only. The shares and options 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 and options bear a legend stating the
restrictions on resale.
Prior to the Exchange Transaction and private placements referred to above, NTI
issued shares of its common stock in the following transactions:
(i) A total of 28,546 shares were issued to two individuals for cash
investments totaling $20,000;
(ii) 21,409 shares were issued to acquire the rights to a registered trademark
valued at $21,409;
II-3
(iii)356,824 shares were issued to one individual to extend the term of a note
payable and payment of principal and interest thereon owed by NTI. The
shares were valued at $356,824;
(iv) A total of 249,314 shares were issued to one individual for services
rendered to NTI. The services were valued at $249,314.
All of the above issuances of NTI common stock 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. These shares were subsequently exchanged for Alliance common stock
pursuant to the Exchange Transaction.
From July 25, 2000 through December 3, 2001, NTI issued options to purchase
1,050,000 shares of its common stock to seven (7) consultants in partial payment
for services rendered to NTI. The issuances were deemed to be private placements
exempt from registration by section 4(2) of the 1933 Act. As a result of the
Exchange Transaction, these options were converted into options to purchase
1,498,660 of NutraStar's common stock.
From February through July of 2000, a third party solicited funds on behalf of
an undetermined public shell company, into which it was contemplated that NTI
might merge. In this regard, NTI received approximately $320,000 in deposits to
be used for such purpose. As a result of these solicitations, there may have
been violations of federal and/or state securities laws by such third party. NTI
never proceeded with the contemplated merger. Instead, NTI applied such funds to
a subsequent private placement that NTI conducted in which shares of NTI common
stock were issued for the $320,000 investment. NTI has offered full refunds to
all persons who provided monies to NTI. There are no assurances that federal
and/or state securities authorities will not investigate and possibly bring an
action against the third party who solicited the funds and NTI.
In conjunction with its incorporation, NTI issued or authorized the issuance of
(i) 9,358,000 shares of its common stock to Patricia McPeak, NTI's Chief
Executive Officer, a director and founder, for payment of incorporation expenses
and for pre- and post-incorporation services rendered to NTI, (ii) 1,983,000
shares to SV Star Investments, LLC for management consulting services, (iii)
372,000 shares to RiceX to induce it to enter into its agreements with and
provide product to NTI, and (iv) 447,000 shares to three shareholders for
management, financial, and public relations consulting services.
All of the above issuances of NTI's common stock 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 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. These shares were subsequently exchanged for Alliance
common stock pursuant to the Exchange Transaction.
II-4
Item 27. Exhibits
The following Exhibits are filed with this prospectus:
Exhibits Page
-------- ----
2(1) Plan and Agreement of Exchange .................................... -
3.1(2) Restated Articles of Incorporation filed March 28, 2001 ........... -
3.2(5) Restated Articles of Incorporation dated December 11, 2001 -
3.3(2) Bylaws ............................................................ -
4.1 Certificate of Designation of Series A Preferred .................. Filed Herewith
5 Opinion of Counsel ................................................ To Be Filed
10.1(5) Employment Agreement for Patricia McPeak .......................... -
10.2(5) Employment Agreement for Edward Newton ............................ -
10.3 Employment Agreement for Joe Ferrara .............................. To Be Filed
16.1(3) Letter Regarding Change in Certifying Accountant Dated
March 13, 2002 .................................................... -
16.2(4) Updated Letter on change of Certifying Accountant Dated
March 25, 2002 .................................................... -
16.3(4) Letter on Change in Certifying Accountant Dated
March 21, 2002 .................................................... -
23.1(3) Consent of Weintraub Genshlea Chediak Sproul ...................... See Exhibit 5
23.2 Consent of Singer Lewak Greenbaum & Goldstein, LLP ................ Filed Herewith
23.3 Consent of Hood & Strong, LLP...................................... Filed Herewith
____________________
(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.
(5) Incorporated by reference to exhibits previously filed on Form 10-KSB filed
on April 16, 2002.
Item 28. Undertakings
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section l0(a)(3) of the
Securities Act of l933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement;
(iii)To reflect in the prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement;
II-5
(iv) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or
any material change to such information in the Registration Statement,
including (but not limited to) any addition or deletion of a managing
underwriter.
(2) That, for the purpose of determining any liability under the Securities
Act of l933, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of
the offering.
(4) Insofar as indemnification for liabilities arising under the Securities
Act of l933 (the "1933 Act") may be permitted to directors, officers and
controlling persons of the Registrant, the Registrant has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of
expenses incurred or paid by a director, officer or controlling person of
the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will,
unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question of whether such indemnification by it is against public policy
as expressed in the 1933 Act and will be governed by the final
adjudication of such issue.
II-6
SIGNATURES
In accordance with the requirements of the Securities Act of l933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this Registration
Statement to be signed on its behalf by the undersigned in the city of
Sacramento, State of California, on May 31, 2002.
NUTRASTAR INCORPORATED
By /s/ Patricia McPeak
-------------------------------------------------
Patricia McPeak,
Chief Executive Officer
By /s/ James Kluber
-------------------------------------------------
James Kluber, Principal Financial and Accounting
Officer
In accordance with the requirements of the Securities Act of l933, this
Registration Statement was signed by the following persons in the capacities and
on the dates indicated.
Title Date
----- ----
/s/ Patricia McPeak Director May 31, 2002
-----------------------
Patricia McPeak
/s/ Edward G. Newton Directors May 31, 2002
-----------------------
Edward G. Newton
II-7