<PAGE> 1
FORM 10-KSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
[ x ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended - June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission file number 0-27094
FIRST AMERICAN SCIENTIFIC CORP.
(Exact name of Company as specified in its charter)
Nevada 88-0338315
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
409 Granville Street
Suite 1003
Vancouver, British Columbia V6C 1V5
(Address of principal executive offices, including postal code.)
(604) 681-8656
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
Common Stock
Securities registered pursuant to Section 15(d) of the Act:
Title of each class
None
Indicate by check mark whether the Company (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the Company was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
YES [ ] NO [ x ]
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Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. [ ]
The number of shares outstanding each of the Registrant's classes
of Common Stock, as of March 29, 1999 was 54,946,018.
Documents Incorporated by Reference
1. Form S-8 Registration Statement filed with the Securities and
Exchange Commission on June 26, 1996.
2. Form 10-K for the period ending June 30, 1996.
3. Form 10-K for the period ending June 30, 1997.
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PART I
Item 1. BUSINESS
General
FIRST AMERICAN SCIENTIFIC CORP. (the "Company") is a Company
formed under the laws of the State of Nevada on April 12, 1995.
Initially the purpose of the Company was to promote an exclusive
license to develop, market, distribute, manufacture, and sell
equipment, technology, products, and services worldwide, using the
Kinetic Disintegration System (KDS), a highly refined micronizing
process using standing sound waves and kinetic energy technology. The
purpose of the technology was to use it in the areas of disintegrating
of industrial minerals such as gypsum, phosphates, sulfates, nitrates,
as well as in other applications for rubber, and sludge. The Company
also acquired the world wide rights to develop, market, and distribute
the KDS for micronizing any and all products.
The Company entered into three licencing agreements regarding the
micronizing process. The first agreement in June 1995 dealt with the
processing of rubber and glass. The second agreement in February 1996
covered gypsum and the third agreement in May 1996 covered any and all
other applications. By way of agreement dated July 2, 1997, the Company
acquired the rights to all patents to be issued or pending, as well as
all applicable CAD drawings, blueprints, and any other data pertaining
to the patent process, subject only to fulfillment of payment terms.
Business
The Company produces extremely fine powders, MICROFINE(TM)
comparable to talcum from a wide variety of recycled and raw materials.
Its Kinetic Disintegrator System (KDS), exclusively licensed to the
Company, utilizes a highly refined process using standing sound waves
and kinetic energy technology for disintegrating materials.
MICROFINE(TM) powders have a higher market value as they can be used as
cost effective, high performance fillers and additives in a wide
variety of compounds and emulsions.
The initial mandate of the Company was to produce fine rubber
powder. Because additional research was needed to enhance the
production cycle of fine rubber powder, the Company decided to focus
its efforts on industrial minerals and delay production of fine rubber
until other applications are generating profits and funds would then be
available for additional rubber research.
The Company decided to arrange for additional research in both the
rubber and sludge sectors and commenced with the development of a plant
operation in Bakersfield, California to process industrial minerals.
The Company ceased operations in Bakersfield and closed the plant on
June 30, 1998.
Currently, the Company is not producing any powders, nor does it
have any contracts to produce any powders. There is no assurance that
the Company will produce any powders in the future or will enter into
any contracts with anyone to produce any powders.
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The Company's micronizing system can cost effectively process any
of the industrial minerals such as gypsum, limestone, sulphur,
dolomite, and various phosphates and nitrates into MICROFINE(TM)
powders and has the unique capability of being able to
"prescription-blend" any combination of minerals for more optimal
results.
During the fiscal year ending June 30, 1998, the Bakersfield plant
produced gypsum but sales were below expectations because of
insufficient working capital to stockpile inventory to meet market
demands. Sales for the fiscal year ending June 30, 1998 amounted to
$665,638 and the gross margin for the year was $375,857. The Company
attempted to establish its own gypsum operation at Blythe, California,
but eventually abandoned this operation because of lack of working
capital and because of high royalty costs applicable to gypsum removed
from the site. All costs applicable to this operation have been written
off in the current year.
While the Company will continue with its development in the
industrial minerals field, steps have been taken to complete testing of
sludge, with proposed operations in the state of Washington. There is
no assurance, however, that any operations will ever be initiated in
the state of Washington.
On September 17, 1998 the Company granted a licensing agreement to
The Green Leaf Fibre Company Ltd. (hereinafter "GLF") of Northern
Ireland for GLF to conduct research and development testing within the
United Kingdom on the commercial viability of the Company's kinetic
disintegration system technology and equipment. Subject to GLF's
satisfaction with the test results, the two companies are expected to
form a joint venture for the commercialization of the KDS technology in
Europe.
Summary of Exclusive Agreements with Spectrasonic Corp.
On June 22, 1995, the Company entered into an Exclusive License
Agreement with Spectrasonic. The contract is for a period of 99 years.
Under the terms of the June 22, 1995 agreement, Spectrasonic granted
the Company the exclusive license to develop, market, manufacture
distribute, and sell equipment, technology, products, and services
worldwide using the KDS system as it relates to rubber and glass
disposal. The total contract price for this license was $550,000. The
Company issued 250,000 common shares to Spectrasonic at an aggregate
value of US$175,000. In addition, the Company paid a total of
US$375,000 in various payments bringing the total payout to US$550,000.
On February 22, 1996, the Company executed a License Agreement
with Spectrasonic Corp for a period of 99 years, whereby the Company
acquired the exclusive rights to exploit, develop, use, manufacture,
market, distribute and sell KDS systems as it relates to gypsum
disintegration, disposal, recycling, remanufacturing or manufacturing,
using used or new raw materials.
The total contract price for this license was $775,000. This
consists of the issuance of 1,000,000 common shares at $0.50 each, for
US$500,000 plus cash payments totaling US$275,000. This contract has
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been fully paid. This agreement is exclusive except for one small
operator located in the state of Washington, who has one machine, and
has the rights to use this machine in four states. The Washington
operator has not and will not have any significant impact on the
operation of the Company.
On May 17, 1996, the Company executed a further License Agreement
with Spectrasonic Corp wherein it acquired the world wide rights to all
and any kinds of materials not covered in previous agreements with
Spectrasonic. This agreement covers both used and new materials, and
covers disintegration, disposal, recycling, remanufacturing or
manufacturing or any and all kinds of materials using the Equipment
and/or Technology. One Canadian operator has a license which covers
feed or fertilizer, however, his license will not have a significant
impact on the operation of the Company.
The May 17, 1996 License Agreement is for a period of 99 years and
the total consideration for it is US$1,250,000 consisting of 1,000,000
shares of the Company's Common Stock at $0.50 per share for a total of
US$500,000 plus payment of $1,000,000 Canadian funds (converts to
US$740,000) by January 2, 1997. During the fiscal year, payments
totaling $174,250 were made to Spectrasonic, leaving a balance at June
30, 1998 of $537,000. A supplementary agreement dated October 24, 1996
provided for a revised payout schedule for the balance owing on this
Agreement. The Company is in default on this debt and is negotiating
revised terms of payment. Spectrasonic, with the concurrence of the
Company, has assigned all of its rights to Ashford Holdings Inc.
On July 2, 1997, the Company acquired all patents issued, to be
issued, or pending, as well as all manufacturing rights, drawings,
blueprints, CAD drawings, for the total consideration of 1,000,000
common shares at $0.25 per share plus $500,000, payable on the basis of
$50,000 per machine sold, until the Company has sold 10 machines. The
Company was advised that a patent was issued November 24, 1998 and
that the patent had been published. The patent number as issued is
5839671.
Market
While the Company believes that there is a market for its
products, currently the Company is not producing any Microfine(TM)
powders and there is no assurance that the Company will produce any
products in the future.
The Company competes with other corporation that produce microfine
powders, most of which have more financial resources than the Company.
Competition
The Company competes with other producers of gypsum and gypsum
powder who have superior financial and manufacturing capabilities.
Because the demand for gypsum in California is great, the Company
believes that superior competition will not effect the Company's
operations.
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Western Gypsum and U.S. Gypsum are established companies in the
industry with greater financial resources than the Company. Western
Gypsum's mill is located in Nevada and its mine is located in the
northeastern corner of Arizona. It also incurs additional shipping
costs being over 300 miles from the San Joaquin Valley. U.S. Gypsum is
primarily in the wallboard and plaster market with the agricultural
industry as a tertiary market.
Company's Facilities
The Company's corporate offices are relocated to Suite 1003 - 409
Granville Street, Vancouver, British Columbia, Canada V6C 1T2 in August
1998. The phone number of the Company is (604) 681-8656 and the fax
number is (604) 685-0698. The e-mail address for the Company is
[email protected].
The Company has a three year lease on these premises at $1,000 per
month. The Company also has a branch office located at 4100 Burr
Street, Bakersfield, California 93308. This is the location of its
plant for industrial minerals. The premises consist of 3 acres of land
and a 5,000 square foot building. This property is currently vacant and
the Company does not intend to renew its lease.
Employees
The Company currently has no employees other than Officers and
Directors. The Company engages personnel through consulting agreements
where necessary as well as outside consultants, attorneys, and
accountants.
Other
The Company entered into a loan agreement with LCM Equity Inc,
("LCM Equity"), located at 7811 Angus Drive, Vancouver, British
Columbia, Canada V6P 5K7. wherein LCM Equity Inc agreed to lend the
Company up to US$500,000 by way of a revolving line of credit. This
line of credit was available until February 16, 1997 at which time it
was terminated per agreement. At June 30, 1996, the loan balance
outstanding was US$274,141. In July 1996, loans totaling US$201,449
were converted to 452,376 shares of common stock, leaving a balance
outstanding of $72,692. On November 30, 1996, the balance of US$72,692
was converted into 181,730 shares of common stock in full settlement
of the debt. LCM Equity Inc also lent the company the sum of $192,260
which has been settled by the issuance of 480,650 common shares. There
have been no further loans from LCM Equity Inc.
On April 30, 1996, the Company entered into another loan
agreement, with Knowlton Capital, ("Knowlton"), a proprietorship
carrying on business in the Province of Quebec, and having its offices
at 329 Brill Road, Foster, Quebec J0E 1R0. Pursuant to thereto,
Knowlton agreed to loan the Company up to US$800,000 with interest
payable at 10% per annum. These loans were all converted to common
stock in March 1998 by issuance of common stock directly to the
participants in Knowlton Capital, none of whom owned more than 10% of
Knowlton. All recipients of common stock through Knowlton Capital
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received Reg "S" stock except Richard Camuso, who received Reg 144
common stock. The Knowlton Capital loan converted to common shares
amounted to $926,729. Interest of $87,022 has been accrued to the debt
to bring the total debt to Knowlton Capital Inc at March 20, 1998 to
$1,013,751. This in turn has been converted to 20,275,000 common shares
and was issued as follows:
Shares on
Debt Conversion
Magic Trading Ltd $ 200,000 4,000,000
Donna Lavigne 92,500 1,850,000
Knowlton Capital Inc 200,000 4,000,000
Jack E. Lovelock 161,861 3,237,000
Jacqueline K. Lovelock 160,000 3,200,000
East Street Management Ltd. 90,000 1,800,000
Richard Camuso 68,000 1,460,000
F.J.R. Resources 34,000 728,000
Totals $1,103,751 20,275,000
A loan received in 1997 from Meraloma Club in the amount of
$36,500 was converted at March 20, 1998 into common shares. The loan,
plus interest of $4,500, amounted to $41,000 and was converted into
820,000 common shares March 20, 1998.
In April 1997, Magic Trading Inc, ("Magic"), a foreign controlled
investment company, agreed to provide certain loans to the Company. As
consideration for the loan, Magic received the option of either
repayment by December 31, 1997 or conversion into common stock. At June
30, 1997, the loan outstanding amounted to $171,414. This debt was
settled subsequent to the year end by issuance of 1,278,414 shares of
common stock.
Magic also provided additional loans in the current fiscal year.
A loan of $116,188, in July 1997, was converted to 937,000 common
shares and a loan of $200,000 was converted in September 1997 into
1,000,000 common shares. As well, a loan of $35,441 was converted into
225,000 common shares in August 1997. There are no loans outstanding
with Magic at June 30, 1998.
Additional loans have been received from Jacqueline Lovelock, the
daughter of the Company's Chief Executive Officer and Chairman of the
Board, Jack Lovelock in the amount of $80,000. This loan carries
interest at 10% per annum and was converted into 1,870,000 common
shares in September 1998. There are no loans presently outstanding to
J.K. Lovelock.
From November 1997 to January 1998, various investors (7) lent
the Company funds totaling $135,816 in regard to commencement of mining
of gypsum at Blythe, California. Because of serious weather problems
in the winter and spring of 1998, it was not possible to deliver gypsum
from the mine site, and because of royalty commitments, it was decided
to cease operation at the mine site. The lenders, all of whom reside
outside of United States agreed to convert their loans to common shares
in the Company. The loans were converted into 2,716,320 shares at $0.05
per share on March 20, 1998. The participants in this agreement were:
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Loreada Partners $65,816 1,316,320 common shares
R.R. Rout 25,000 500,000 common shares
D. Henry 10,000 200,000 common shares
B. Boyer 10,000 200,000 common shares
H. Malin 10,000 200,000 common shares
R. Stone 10,000 200,000 common shares
J. Rush 5,000 100,000 common shares
On July 26, 1996, the Company entered into an agreement with Eco
Solutions LLC and Pacific Gypsum Products Inc, whereby the Company
acquired exclusive rights to Gypsum used for Agricultural purposes from
the mine site at Blythe, California for fifteen (15) years. Eco
Solutions LLC was unable to perform according to the contract and have
been, by mutual agreement of all parties, have been released from
performance thereof. Financing of the foregoing agreement was
assisted by a loan from Huntington Inc, a foreign controlled investment
company, in the amount of $100,000. On March 20, 1998, this loan plus
interest of $10,000 was converted into 2,200,000 common shares.
Risk Factors
1. Going Concern Opinion. During the fiscal year ended June 30,
1998, the Company had a net loss of $489,916 which reduced the
stockholder's equity to a deficit of $293,716. In addition, assets
decreased by $185,413 and liabilities increased by $304,503. As a
result of the foregoing, serious concerns have been raised as to the
ability of the Company to remain in business during the next twelve
(12) months.
2. Development and Market Acceptance of New Products. The
Company's success and growth will depend upon the Company's ability to
improve and market its existing products and to successfully develop,
manufacture and market new products. The Company's success may depend
in part upon the market's acceptance of, and the Company's ability to
deliver and support its products. See "Business - Products."
3. Liquidity; Need for Additional Financing. The Company
believes that it will need additional cash during the next twelve
months. If the Company is unable to generate a positive cash flow
before its cash is depleted, it will be required to curtail operations
substantially, and seek additional capital. There is no assurance that
the Company will be able to obtain additional capital if required, if
capital is available, or to obtain it on terms favorable to the
Company. The Company is currently suffering from a lack of liquidity
that it believes will impair its short-term marketing and sales efforts
and adversely affect its results for the current quarter and until the
offering proceeds are received. Because of the need for additional
financing described above, the Company's auditors have issued a going
concern opinion. See "Financial Statements."
4. Dependence Upon Suppliers. The Company relies on a number of
suppliers to provide certain raw materials for its products. The
interruption of certain sources of supply or the failure to adapt
materials to the Company's changing technological requirements could
disrupt the Company's ability to manufacture products or cause the
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Company to incur costs associated with the development of alternative
sources, either of which could adversely affect the Company's financial
performance. See "Company - Manufacturing."
5. Technology Risk. All manufacturers, including the Company,
utilize different applications of known technology. Should a
competitor develop a technological breakthrough that cannot be adapted
to the Company's systems or develop a more effective application of
existing technology, the Company's products would be at risk of
becoming obsolete.
6. Competition. Most of the Company's competitors have
substantially greater financial, technical and marketing resources than
the Company. In addition, the Company's products compete indirectly
with numerous other products. As the market for the Company's products
expand, the Company expects that additional competition will emerge and
that existing competitors may commit more resources to those markets.
See "Business - Competition."
7. Issuance of Additional Shares. Approximately 45,053,982
shares of Common Stock or 45.05% of the 100,000,000 authorized shares
of Common Stock of the Company are unissued. The Board of Directors
has the power to issue such shares, subject to shareholder approval, in
some instances. Although the Company presently has no commitments,
contracts or intentions to issue any additional shares to other
persons, other than in the exercise of options and warrants, the
Company may in the future attempt to issue shares to acquire products,
equipment or properties, or for other corporate purposes. Any
additional issuance by the Company, from its authorized but unissued
shares, would have the effect of diluting the interest of existing
shareholders. See "Description of Securities."
8. Indemnification of Officers and Directors for Securities
Liabilities. The Company's Articles of Incorporation provide that the
Company will indemnify any Director, Officer, agent and/or employee as
to those liabilities and on those terms and conditions as are specified
in the Company Act of the State of Nevada. Further, the Company may
purchase and maintain insurance on behalf of any such persons whether
or not the corporation would have the power to indemnify such person
against the liability insured against. The foregoing could result in
substantial expenditures by the Company and prevent any recovery from
such Officers, Directors, agents and employees for losses incurred by
the Company as a result of their actions. Further, the Company has
been advised that in the opinion of the Securities and Exchange
Commission, indemnification is against public policy as expressed in
the Securities Act of 1933, as amended, and is, therefore,
unenforceable.
9. Cumulative Voting, Preemptive Rights and Control. There are
no preemptive rights in connection with the Company's Common Stock.
Shareholders may be further diluted in their percentage ownership of
the Company in the event additional shares are issued by the Company in
the future. Cumulative voting in the election of Directors is not
provided for. Accordingly, the holders of a majority of the shares of
Common Stock, present in person or by proxy, will be able to elect all
of the Company's Board of Directors. See "Description of the
Securities."
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10. No Dividends Anticipated. At the present time the Company
does not anticipate paying dividends, cash or otherwise, on its Common
Stock in the foreseeable future. Future dividends will depend on
earnings, if any, of the Company, its financial requirements and other
factors. See "Dividend Policy."
11. Impact of Year 2000 Issue. The Company has reviewed its
internal computer systems and products and their capability of
recognizing the year 2000 and years thereafter. The Company expects
that any costs relating to ensuring such systems to be year 2000
compliant will not be material to the financial condition or results of
operations of the Company.
12. Lack of Current Operations. The Company currently is not
producing and products and has no contracts to produce any products.
13. Lack of Market Research. The Company has neither conducted
nor has the Company engaged other entities to conduct market research
such that management has assurance market demand exists for the
transactions contemplated by the Company. See "Business."
14. No Cash Dividends and None Anticipated. The Company has not
paid any cash dividends, nor does it contemplate or anticipate paying
any cash dividends upon its securities in the foreseeable future. The
Company anticipates that it will use all earnings generated from
operations to finance the growth of the Company. See "Description of
Securities" and "Dividends."
15. Product Liability. The Company could incur liability for
product defects which result in damage from the use of its equipment
and products. Any such claims, if successful, could result in
substantial losses to the Company.
16. No Insurance Coverage. The Company, like other companies in
its industry, is finding it increasingly difficult to obtain adequate
insurance coverage against possible liabilities that may be incurred in
conducting its business activities. At present, the Company has not
secured any liability insurance. The Company has potential liability
from its general business activities, and accordingly, it could be
rendered insolvent by a serious error or omission.
17. Non-arms Length Transactions and Conflicts of Interest. The
Company has engaged in transactions with its Officers, Directors and
principal shareholders. Such transactions may be considered as not
having occurred at arms length. The company will be engaged in
transactions with management and others involving conflicts of
interest, including conflicts on salaries and other payments to such
parties. See "Business."
18. Reliance Upon Current Management. The Company's current
operations and future success are greatly dependent upon the active
participation of its management employees, particularly its Chairman
and President, Jack Lovelock; and its Chief Financial Officer and
Secretary Robert Dinning. The Company does not have employment
agreements with any of these employees. If the employment of its key
employees terminates for any reason, such loss of personnel could have
a significant adverse effect upon the Company's operations.
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19. Lack of Key Man Insurance. The Company has not obtained key
man life insurance on the lives of any of the officers or directors of
the Company. The death or unavailability of one or all of the officers
or directors of the Company could have a material adverse impact on the
operation of the Company. See "Management."
ITEM 2. PROPERTIES
The Company owns no real property. It leases 1,000 square feet of
office space at 409 Granville Street, Suite 1003, Vancouver, British
Columbia V6C 1T2. The cost of the space is approximately $1,000 per
month. The lease is for three years and was effective August 1, 1998.
The Company leases industrial land at 4100 Burr Street,
Bakersfield, California 93303, for the operation of its plant. The
lease was for 12 months, commencing April 15, 1996 and expiring April
14, 1997. The lease has been extended and will expire on April 14,
1999. The land consists of 100,000 square feet. The rent for the
premises is US$1,500 per month with a security deposit of US$2,500.
The Company has vacated these premises and ceased operations in
California.
The Company owns two KDS systems at June 30, 1998 and leases an
additional two machines. The first two KDS systems were acquired as
part of its licensing agreement with Spectrasonic and are recorded at
a cost of US$872,246. In the fiscal period ending June 30, 1998, no
additional funds were expended on these systems. The two other KDS
machines are being used in research for the processing of sludge.
The Company has other fixed assets located in California. The cost
of these assets at June 30, 1998 is US$1,529,161 and consists of
hoppers, bagging equipment, electrical paneling and extensive site
preparation, paving, construction of a building, and general storage
bins. The Company has office equipment costing $24,740.
The Company also has expended costs of $2,155,000 for the
Technology License.
ITEM 3. LEGAL PROCEEDINGS
No material legal proceedings are pending to which the Company is
a party or of which any of the Company's property is the subject matter
other than as described below. Further no legal proceedings are known
to be contemplated by governmental authorities and no officer or
director of the Company is a party to any litigation other than as
described below:
PRIMECO V. FIRST AMERICAN SCIENTIFIC CORP., Kern County Municipal
Court, Bakersfield Judicial District Case No. 139650, filed on
approximately September 19, 1998. This complaint claims breach of
contract and accompanying causes of action seeking payment for rental
equipment. The claim is in the amount $21,231.54. The complaint has
been answered and a settlement agreement has been proposed and
accepted. The settlement will be for the amount of the claim paid out
<PAGE>
over 10 months to be paid in full by August 30, 1998. The Company has
not made full payment and plaintiff has entered a judgment pursuant to
a stipulation for entry of judgment executed in concurrence with the
settlement agreement in the amount of $16,231.54
DARCO EQUIPMENT VS. FIRST AMERICAN SCIENTIFIC CORP., Orange County
Superior Court, Case No. 786408, filed on approximately November 4,
1997. It is a complaint for Breach of contract and accompanying causes
of action seeking payment for equipment purchased. Management has
settle the matter out of court for $4,000.00 and the amount has been
paid in full.
KERN ROCK V. FIRST AMERICAN SCIENTIFIC CORP., Kern County
Municipal Court, Bakersfield Judicial District, Case No. 137938, filed
on approximately July 24, 1997. It is a complaint for breach of
contract and accompanying causes of action seeking payment for labor
performed. A settlement was reached in this matter whereby the Company
agreed to pay $2,000 per month until a total of $11,634.96 is paid to
plaintiff. The parties entered into a stipulation for entry of
judgment to be filed only if the Company defaulted on the payment plan.
The Company has not made full payment and plaintiff has entered a
judgment pursuant to a stipulation for entry of judgment executed in
concurrence with the settlement agreement in the amount of $5,060.14.
Plaintiff has offered to accept a settlement of $3,000, but the Company
has not accepted this offer.
TERRAIN TECHNOLOGY V. FIRST AMERICAN SCIENTIFIC CORP., Kern County
Municipal Court, Bakersfield Judicial District, Case No. 140950, filed
on approximately October 8, 1997. This complaint claims breach of
contract and accompanying causes of action seeking payment for roadwork
improvement. The total amount of the claim is $6,194.93. Judgment was
entered in this matter on June 4, 1998 in the amount of $6,278.31, plus
interest at the rate of 10% per annum from October 1, 1997 to May 7,
1998, totaling $374.98, plus attorneys' fees in the amount of
$2,765.00, plus costs in the sum of $231.00. No amount has been paid
toward satisfaction of this judgement.
GAHVEJJAN ENTERPRISES, INC. V. FIRST AMERICAN SCIENTIFIC CORP.,
Fresno Municipal Court, Consolidated Fresno Judicial District, Case No.
C97908858-4, filed on approximately November 17, 1997. This complaint
claims breach of contract and accompanying causes of action seeking
payment for goods delivered to the Company. This matter went to trial
on April 2, 1998 and judgment for plaintiff was rendered in the amount
$9,980.41. An abstract of judgment has been filed and the judgment has
not been satisfied.
Summan Material asserted a claim for $22,204 by demand letter of
February 12, 1997. The claim arises out of the processing of material
for Summa and the claim that product was lost and not delivered in
accordance with the time and size specifications set forth in the
contract. Management elected to vigorously oppose the claim and has
informally settled the matter.
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On October 1, 1997, Scientific American, Inc. sent a letter to the
Company claiming the it infringed on federal service marks belonging to
Scientific American, Inc. No claim for any dollar figure accompanied
the demand to cease and desist from doing business under the name First
American Scientific Corp. However, a claim may include damages,
profits and attorneys' fees. No assessment of this claim is possible
at this time and further research must be undertaken to determine the
validity of this claim.
COMMERCIAL TRADE BUREAU V. FIRST AMERICAN SCIENTIFIC CORP., Kern
County Municipal Court, Bakersfield Judicial District, Case No. 146019,
filed on June 26, 1998. This complaint seeks $17,353.76, plus costs
and attorneys' fees. An answer was filed and the matter was set for
trial on March 1, 1998. The Company has negotiated with the plaintiff
for a settlement and settlement out of court is likely to be the
outcome. If the matter is settled prior to trial and an offer has been
made by the plaintiff to settle for 30% of the claim.
WOOD V. FIRST AMERICAN SCIENTIFIC CORP., Kern County Municipal
Court, Bakersfield Judicial District, Case No. 146901, filed on August
7, 1998. This complaint seeks $16,200. The case was set for trial on
February 22, 1999, however, the matter was settled out of court
$16,200, whereby the Company agreed to a judgment in the amount stated.
No payment has been made toward satisfaction of this judgment.
FORD MOTOR CREDIT COMPANY V. FIRST AMERICAN SCIENTIFIC CORP.,
Kern County Municipal Court, Bakersfield Judicial District, Case No.
148129, filed on October 10, 1998. This complaint seeks $3,549.96, plus
attorneys' fees and costs for failure to pay on a lease executed by the
Company. No trial date has been set and discovery has been propounded
by plaintiff. Management would like to settle this matter prior to
trial. Plaintiff has made an offer to settle for $3,549.60 and this
offer was not accepted by the Company's management. It is likely that
plaintiff will prevail at trial and thus out of court settlement is
sought.
HARTWICK & HAND V. FIRST AMERICAN SCIENTIFIC CORP., Kern County
Municipal Court, Bakersfield Judicial District, Case No. 146948, filed
on August 10, 1998. This complaint seeks $18,246.44, plus costs and
attorney's fees for money not paid to plaintiff for services rendered
or goods sold. The matter has not been set for trial and plaintiff has
offered to settle this matter for 30% of the claim. The Company has
yet to accept the offer. It is likely that the plaintiff will prevail
at trial and thus the Company continues to pursue an out of court
settlement.
SMALL V. FIRST AMERICAN SCIENTIFIC CORP., Kern County Superior,
Case No. 235377 RA, filed on December 26, 1997. The plaintiff sought
damages for breach of contract in the amount of $29,235.48. The matter
was set for trial and prior to trial a settlement agreement was entered
into. The terms of the settlement required the Company to make payment
in a reduced amount by a certain dated and the Company was unable to
make the payments, thus pursuant to the agreement plaintiff can now, as
of January 1, 1999, enter a judgment, per stipulation, in the amount of
$29,037.71. To date plaintiff has not entered judgment and it is a
strong possibility that plaintiff will accept approximately $14,000 in
satisfaction of its claim.
<PAGE> 14
H. LIMA CO. V. FIRST AMERICAN SCIENTIFIC CORP., Kern County
Superior Court, Case No. 235647 AEW, filed on February 6, 1998. The
plaintiff sought $69,133.62, plus interest, costs and attorneys' fees.
The matter has been settled out of court of $18,000, of which the
Company has paid $13,000. The plaintiff can at any time file a
judgment for that amount pursuant to a stipulation entered into between
the parties.
L.A. COMMERCIAL V. FIRST AMERICAN SCIENTIFIC CORP., Kern County
Municipal Court, Bakersfield Judicial District, Case No. 144246, filed
on March 26, 1998. This complaint seeks damages for unpaid sums for
services rendered in the amount of $6,885.00, plus costs and attorneys'
fees. The matter was settled out of court on or about September 9,
1998 for $2,000, which has been paid in full.
ITO PACKING CO. V. FIRST AMERICAN SCIENTIFIC CORP., Fresno County
Municipal Court, Case No. C98906111-0, filed on August 10,1998. The
matter went to trial and judgment was rendered on January 7, 1999 in
favor of the plaintiff in the amount of $9,513.34. No amount has been
paid toward satisfaction of this judgment.
QUINN CO. V. FIRST AMERICAN SCIENTIFIC CORP., Fresno County
Municipal Court, Case No. 613896-0, filed on July 16, 1998. This
complaint seeks damages in the amount of $35,523.90 for breach of
contract. The Company filed an answer asserting various defenses to
the action. Discovery is ongoing. The plaintiff has offered to settle
the matter for 70% of the amount claimed. Management has elected to
pursue the matter and attempted to settle it for an amount less than
70% of the claim. If this matter does not proceed to trail, there is
a strong possibility that a judgment will be rendered in the full
amount of the claim plus attorneys' fees, costs and interest.
The Company has a number of commercial credit who have the ability
to being actions to recover money due them. Some of these claims will
entitle the creditor to attorneys' fees spent in recovering these
funds.
In the event all parties are successful in their claims, the
Company may be forced into bankruptcy, receivership and/or forced to
cease operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On June 19, 1998, the shareholders of the Company approved an
increase in authorized capital from 50,000,000 to 100,000,000 shares of
Common Stock, par value $0.001. The proposal was approved by
27,004,967 shares representing in excess of 54% of the outstanding
shares.
No other proposals have been submitted to the Company's
shareholders.
<PAGE> 15
ITEM 5. MARKET PRICE OF AND DIVIDENDS ON THE COMPANY'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS.
At June 30, 1998, the Company had 292 shareholders of record of
its Common Stock.
The Company has not paid any dividends since its inception and
does not anticipate paying any dividends on its Common Stock in the
foreseeable future.
The Company's securities are traded over-the-counter on the
Bulletin Board operated by the National Association of Securities
Dealers, Inc. under the symbol "FASC". The table shows the high and low
bid of the Company's Common Stock since February 29, 1996, when the
Company's securities began trading.
Quarter ended Bid
High Low
March 31, 1996 2 1/8 1 5/8
June 30, 1996 1 29/32 7/8
September 30, 1996 0.71 0.71
December 31, 1996 0.20 0.18
March 31, 1997 0.16 0.12
June 30, 1997 0.175 0.15
September 30, 1997 0.20 0.18
December 31, 1997 0.10 0.085
March 31, 1998 0.055 0.065
June 30, 1998 0.06 0.07
Sept 30, 1998 0.0225 0.0275
Dec 31, 1998 0.018 0.020
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected financial data presented below has been derived from
the financial statements of the Company. The following table
summarizes certain financial information and should be read in
conjunction with "Management's Discussion and Analysis of Results of
Operations and Financial Condition" and the Financial Statements and
related notes included elsewhere in this Statement.
<PAGE> 16
Statement of Operations and Accumulated Deficit Data:
Year ended Year ended Year ended
June 30, 1998 June 30, 1997 June 30, 1996
Income $ 665,638 $ 347,721 $ -
Cost of Sales $ 289,781 $ 157,974 $ -
Gross Profit $ 375,857 $ 189,747 $ -
Operating Expenses $ 1,268,965 $ 1,514,381 $ 473,369
Net Loss $ (893,108) $(1,324,634) $ (473,369)
Accumulated
Deficit Beginning
of Period $(1,798,055) $ (473,421) $ (52)
Accumulated Deficit,
End of Period $(2,691,163) $(1,798,055) $ (473,421)
Net Loss per share $ (0.02) $ (0.12) $ (0.07)
Weighted Average
Number of Common
Shares Outstanding 11,325,635 7,168,954
Balance Sheet Data:
Working Capital $ (863,909) $(2,320,026) $(1,987,273)
Total Assets $ 4,314,959 $ 4,422,427 $ 2,932,278
Long-term debt $ -0- $ -0- $ -0-
Shareholders'
Equity $ 3,367,531 $ 1,947,038 $ 935,902
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
Liquidity and Capital Resources
The Company completed construction and installation in April
1997, tested, and commenced operations in late May 1997. At June 30,
1998, the Company closed its Bakersfield offices because of continuing
working capital deficiencies. It continues to address the lack of
working capital but is also entertaining other methods of operating the
plant, including a possible joint venture arrangement. The unusually
wet winter seriously hampered delivery of gypsum and the season was
very late starting. The delay caused problems with the Royalty
Agreement on the Blythe property and the Company decided to terminate
its agreement.
The Company entered into another loan agreement with LCM Equity
dated March 1, 1996. The original loan agreement dated October 30, 1995
was terminated and replaced by the March 1, 1996 agreement. This
agreement provided financing up to US$500,000 to be repayable or
converted into common stock. At June 30, 1996, a balance of $274,141
was outstanding to LCM Equity and all of these loans were converted to
common stock in the current fiscal year. The funds raised through LCM
Equity were used to finance the construction of a plant in Bakersfield
and pay down the debt to Spectrasonic. All loans received from LCM
Equity have been converted into common stock.
<PAGE> 17
The Company also entered into a loan agreement with Knowlton
Capital on April 30, 1996 wherein Knowlton provided financing up to
US$800,000. The loan is repayable December 31, 1996 but has been
extended to June 30, 1998. Interest will be chargeable at 10% per
annum. Security to be provided is a collateral mortgage on the fixed
assets (a UCC filing) at the Bakersfield plant. The balance outstanding
at March 20, 1998 was $926,729 and with interest of $87,022, totaled
$1,013,751. These loans were converted into 20,275,000 common shares at
$0.05 per share. There are no further loans outstanding to Knowlton
Capital Inc.
In the three months ending June 30, 1998, the Company successfully
negotiated settlements on outstanding debt, thus reducing its trade
payables from $473,000 to $330,000. At June 30, 1998, the Company had
total debt of $947,428. Of this debt, $80,000 was converted to
1,870,000 common shares. This reduces total debt of the Company at
present to $867,428. The Company is currently negotiating with the
Licence granters who are owed $537,000. This agreement is currently in
default. The working capital deficiency at June 30, 1998 was $864,000
and this was further reduced in September 1998 with the conversion of
$80,000 of debt.
The Company feels there is a need for a fine grind soil amendment
products, especially gypsum, limestone, and sulphur. As the KDS
machines produce a very fine grind finished product, it passes through
the sprinkler systems without clogging and allows for an automated
distribution of these products over a wide area. These products are
used as soil additives because of the acid level in the water in the
San Joaquin valley. The Company anticipates that it can produce 5-6
tons of finished product per hour per machine. Because of losses
incurred in the start up of the plant, any tax liability will be nil.
The Company is pursuing a joint venture agreement whereby it can more
effectively operate the Bakersfield plant.
Marketing, strategic planning, expansion, financial planning and
general corporate management will be carried out by officers and
outside consultants where necessary. Remuneration will commence at the
same time the plant becomes fully operational. Stock option plans have
been established for the following officers and consultants:
Jack Lovelock 300,000 common shares
Robert Dinning 200,000 common shares
These options, at a price of $0.001 were approved by the Board of
Directors April 15, 1997. The Option granted to Mr Camuso was granted
when he was still an officer of the Company. He resigned as a Director
and Officer January 1, 1998.
The Company leases space at 4100 Burr Street in Bakersfield,
California 93303, for the operation of their plant. The lease is for 24
months, commencing April 15, 1996 and expiring April 14, 1998. The
lease has been extended for one year, as per the option agreement
contained in the lease. The land consists of 100,000 square feet. The
rent for the premises is US$1,500 per month with a security deposit of
$2,500. The Company has vacated these premises.
<PAGE> 18
Results of Operations - July 1, 1996 through June 30, 1998.
The Company became operational in March 1997, encountered some
setup problems and eventually became fully operational in late May
1997. During the fiscal year ending June 30, 1997, the Company had
operating revenues of $347,720 and had operating expenses of $1,514,381
for a loss for the year of $1,324,624. These losses include interest
and financing costs of $203,866 and research and development costs of
$91,897. In the fiscal year ending June 30, 1998, the Company had
operating revenues of $665,638, a gross margin of $375,857 and
operating expenses of $1,268,965, for a loss on operations for the year
of $893,108. As mentioned above, adverse weather conditions adversely
affected operations during the year. While the Company has not yet
generated a profit, its market analysis and the response of customers
has clearly demonstrated that processed industrial minerals will
continue to be in demand and will be very saleable at competitive
prices. As well, certain lease agreements for equipment have been
re-negotiated to lease/purchase agreements, resulting in lower monthly
charges. The current year's operations did not include the sale of any
broadcast gypsum because of unforseen problems with a proposed partner.
Foreign Operations
The Company has a foreign subsidiary, 5213245 B.C. LTD.,
("521345") British Columbia corporation, which is located in Vancouver,
British Columbia. Its operations are restricted to research and
development only. The directors of this Company are Jack Lovelock and
Robert Dinning, and the officers are Jack Lovelock - President, and
Robert Dinning - Secretary. Its operations are in the United States
and its expansion activities are also in the United States. Exchange
rates in the past year have varied very little and there has been no
impact on the financial statements because of foreign exchange losses.
In the future, such foreign exchange transactions will be recorded in
the Statement of Stockholders' Equity.
Inflation
Inflation is not a factor in the results for the year ending June
30, 1998. This is consistent with the previous year ending June 30,
1997. Inflation played no factor in capital costs incurred to date. No
further capital costs are contemplated, thus inflation will not be a
factor.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
TABLE OF CONTENTS
AUDITOR'S REPORT F-1
FINANCIAL STATEMENTS
Balance Sheets F-2
Statement of Operations and Accumulated Deficit F-3
Statement of Stockholders' Equity F-4
Statement of Cash Flows F-6
NOTES TO FINANCIAL STATEMENTS F-7
<PAGE> 19
Williams & Webster, P. S.
CERTIFIED PUBLIC ACCOUNTANTS
Seafirst Financial Center
601 W. Riverside, Suite 1970
Spokane, WA 99201-0611
Phone: (509) 838-5111 Fax: (509) 624-5001
Board of Directors
First American Scientific Corp.
INDEPENDENT AUDITOR'S REPORT
We have audited the accompanying balance sheets of First American
Scientific Corp. as of June 30, 1998 and 1997, and the related
statements of operations, stockholders' equity, and cash flows for the
years 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 audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion the financial statements referred to above present
fairly, in all material respects, the financial position of First
American Scientific Corp. at June 30, 1998 and 1997, and the results of
its operations, changes in stockholders' equity and its cash flows for
the years then ended, in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 4 to
the financial statements, as of June 30, 1998 the Company was in
default under its worldwide technology license agreement with
Spectrasonic Corp. Additionally, the Company's substantial working
capital deficit at June 30, 1998 raises substantial doubt about its
ability to continue as a going concern. Management's plans regarding
those matters are discussed in Note 2. The financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.
Williams & Webster, P.S.
Certified Public Accountants
Spokane, Washington
February 17, 1999
F-1<PAGE>
<PAGE> 20
FIRST AMERICAN SCIENTIFIC CORP.
BALANCE SHEETS
<TABLE>
<S> <C> <C>
ASSETS June 30, 1998 June 30, 1997
CURRENT ASSETS
Cash $ 1,133 $ 8,211
Accounts receivable 32,915 72,940
Inventory 5,500 55,376
Prepaid expenses - 18,836
---------- ----------
TOTAL CURRENT ASSETS 39,548 155,363
---------- ----------
PROPERTY AND EQUIPMENT
Ultrasound equipment 872,246 872,246
Plant assets and equipment 1,359,161 1,512,561
Office equipment 23,916 8,916
Leasehold improvements 5,476 5,476
---------- ----------
2,260,799 2,399,199
---------- ----------
Less: Accumulated depreciation (200,142) (31,535)
---------- ----------
2,060,657 2,367,664
---------- ----------
OTHER ASSETS
Technology licenses -
net of amortization 1,756,775 1,883,833
Patents and manufacturing
rights - net of
amortization 234,931 -
Deposits 13,735 15,568
---------- ----------
2,005,441 1,899,401
---------- ----------
$4,105,646 $4,422,428
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial
statements.
F-2a
<PAGE> 21
FIRST AMERICAN SCIENTIFIC CORP.
BALANCE SHEET
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<S> <C> <C>
CURRENT LIABILITIES
Bank overdraft $ 6,061 $ 4,754
Accounts payable and
accrued expenses 322,366 406,272
Litigation reserve - 62,061
Accrued interest - 85,159
Short term loans payable 80,000 589,914
Loan payable - Knowlton
Capital Inc. - 790,229
License agreement payable -
Spectrasonic Corp. 537,000 537,000
---------- ----------
TOTAL CURRENT LIABILITIES 945,427 2,475,389
---------- ----------
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY
Common stock - $.001 par value
50,000,000 shares authorized,
49,326,018 and 13,622,448
shares issued, respectively 49,326 13,623
Additional paid-in capital 6,027,370 3,731,471
Stock subscriptions
receivable (40,000) -
Stock options receivable (5,500) -
Accumulated deficit (2,870,977) (1,798,055)
---------- ----------
3,160,219 1,947,039
---------- ----------
$4,105,646 $4,422,428
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial
statements,
F-2b
<PAGE> 22
FIRST AMERICAN SCIENTIFIC CORP.
STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
<TABLE>
<S> <C> <C>
Year Ended Year Ended
June 30, 1998 June 30, 1997
Revenues $ 665,638 $ 347,721
Costs of sales 209,086 157,974
------------ ------------
Gross profit 375,552 189,747
General and administrative expenses 1,290,783 1,514,381
------------ ------------
Operating loss (915,231) (1,324,634)
Loss on abandonment 157,691 -
------------ ------------
Operating loss before income taxes (1,072,922) (1,324,634)
Provision for income taxes - -
------------ ------------
Net loss (1,072,922) (1,324,634)
Accumulated deficit
beginning of period (1,798,055) (473,421)
------------ ------------
Accumulated deficit
end of period $ (2,870,977) $ (1,798,055)
============ ============
Net loss per common share $ (0.05) $ (0.12)
============ ============
Weighted average number of
common shares outstanding 23,656,167 11,325,635
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial
statements.
F-3
<PAGE> 23
FIRST AMERICAN SCIENTIFIC CORP.
STATEMENT OF STOCKHOLDERS' EQUITY
June 30, 1998
<TABLE>
<CAPTION>
Additional
Common Stock Paid-in
Shares Amount Capital
<S> <S> <S> <S>
BALANCE
June 30, 1996 8,505,117 $ 8,505 $ 1,400,818
Issuance of stock at
$.050 per share for
payment on technology
license agreement 1,000,000 1,000 499,000
Issuance of stock at
$.40 - $.225 per share
for cash 1,057,000 1,057 691,343
Issuance of stock at
$0.0875 per share for
financing fees 107,440 107 9,293
Issuance of stock at
$.37 - $0.4453 per
share for loan payment 2,124,701 2,125 845,457
Issuance of stock at $0.04
per share for services 229,808 230 91,693
Issuance of stock at
$0.33 per share for
loan extensions 598,382 599 193,867
Net loss for the year
---------- --------- ------------
Balance
June 30, 1997 13,622,448 13,623 3,731,471
---------- --------- ------------
Issuance of stock at
$.05 - $.158 for
settlement of debt 27,919,250 27,919 1,606,268
Issuance of stock at
$.02 - $.20 for cash 3,000,000 3,000 237,000
Issuance of stock at
$.25 for purchase of
patent and manufacturing
rights 1,000,000 1,000 249,000
Issuance of stock at
$.10 for purchase of
Bakersfield assets 223,000 223 31,377
Issuance of stock at $.117
- $.05 for settlement of
royalty agreement 3,011,320 3,011 167,304
Exercise of stock options
at $.01 550,000 550 4,950
Net loss for the year
---------- ---------- ------------
BALANCE
June 30, 1998 49,326,018 $ 49,326 $ 6,027,370
========== ========== ============
</TABLE>
The accompanying notes are an integral part of these financial
statements.
F-4a
<PAGE> 24
FIRST AMERICAN SCIENTIFIC CORP.
STATEMENT OF STOCKHOLDERS' EQUITY
June 30, 1998
<TABLE>
<CAPTION>
Subscription Total
& Options Deficit Stockholders'
Receivable Accumulated Equity
<S> <C> <C> <C>
BALANCE
June 30, 1996 $ 0 $ (473,421) $ 935,902
Issuance of stock at
$.050 per share for
payment on technology
license agreement 500,000
Issuance of stock at $.40
$.225 per share for cash 692,400
Issuance of stock at
$0.0875 per share for
financing fees 9,400
Issuance of stock at
$.37 - $0.4453 per
share for loan payment 847,582
Issuance of stock at $0.04
per share for services 91,923
Issuance of stock at
$0.33 per share for
loan extensions 194,466
Net loss for the year (1,324,634) (1,324,634)
----------- ----------- -----------
Balance
June 30, 1997 (1,798,055) 1,947,039
----------- ----------- -----------
Issuance of stock at
$.05 - $.158 for
settlement of debt 1,634,187
Issuance of stock at
$.02 - $.20 for cash (40,000) 200,000
Issuance of stock at
$.25 for purchase of
patent and manufacturing
rights 250,000
Issuance of stock at
$.10 for purchase of
Bakersfield assets 31,600
Issuance of stock at $.117
- $.05 for settlement of
royalty agreement 170,315
Exercise of stock options
at $.01 (5,500)
Net loss for the year (1,072,922) (1,072,922)
----------- -----------
BALANCE
June 30, 1998 (45,500) $(2,870,977) $ 3,160,219
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial
statements.
F-4b
<PAGE> 25
FIRST AMERICAN SCIENTIFIC CORP.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended Year Ended
June 30, 1998 June 30, 1997
<S> <C> <C>
CASH FLOWS PROVIDED (USED) IN
OPERATING ACTIVITIES
Net income (loss) $ (1,072,922) $ (1,324,634)
Depreciation and amortization 323,041 52,703
Adjustments to reconcile net
loss to net cash used by operations:
Financing fees paid by issuance of stock - 203,867
Office services paid by issuance of stock 13,500 91,923
Decrease (Increase) in accounts receivable (5,475) (72,940)
Decrease (Increase) in inventory 49,876 (55,376)
Decrease (Increase) in prepaid expenses 18,836 (9,733)
(Decrease) Increase in accounts payable (63,683) 335,611
(Decrease) Increase in litigation reserve (62,061) 62,061
(Decrease) Increase in accrued interest - 72,397
Payment on license agreements payable - (193,000)
------------ ------------
Net cash (used) in operating activities (798,888) (837,121)
------------ ------------
CASH FLOWS PROVIDED (USED) IN
INVESTING ACTIVITIES
Purchase of plant, property and equipment - (1,389,534)
Deposits 1,833 (7,058)
------------ ------------
Net cash provided (used) in
investing activities 1,833 (1,396,592)
------------ ------------
CASH FLOWS PROVIDED (USED)
IN FINANCING ACTIVITIES
Short term borrowings 789,977 1,664,863
Payments on short-term borrowings (200,000) (110,000)
Proceeds from sales of stock 200,000 692,400
------------ ------------
Net cash provided by financing activities 789,977 2,247,263
------------ ------------
NET INCREASE (DECREASE) IN CASH $ (7,078) $ 13,550
------------ ------------
CASH - Beginning of Period 8,211 (5,339)
------------ ------------
CASH - End of period $ 1,133 $ 8,211
============ ============
</TABLE>
The accompanying notes are an integral part of these financial
statements.
F-5
<PAGE> 26
FIRST AMERICAN SCIENTIFIC CORP.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended Year Ended
June 30, 1998 June 30, 1997
<S> <C> <C>
SUPPLEMENTAL CASH FLOW DISCLOSURES
Interest $ 8,787 $ 21,314
Income Taxes $ - $ -
NON-CASH INVESTING ACTIVITIES
Common stock issued for payment
of fixed assets $ 31,600 $ -
Common stock issued for payment
on royalty agreements $ 170,315 $ -
NON-CASH FINANCING ACTIVITIES
Common stock issued for payment on
patents and manufacturing rights $ 250,000 $ -
Common stock issued for
services rendered $ - $ 91,923
Common stock issued for
exchange of debt $ 1,634,187 $ 847,581
Common stock issued for payment
on worldwide technology license $ - $ 500,000
Common stock issued for financing
fees $ $ 203,867
Common stock issued for commissions $ 13,500 $ -
</TABLE>
The accompanying notes are an integral part of these financial
statements.
F-6
<PAGE> 27
FIRST AMERICAN SCIENTIFIC CORP
June 30, 1998 and 1997
Notes to Financial Statements
NOTE I - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
First American Scientific Corp. (the Company) incorporated on April
12, 1995 under the laws of the State of Nevada, with a year-end of
June 30. The Company, originally organized to become a manufacturer
of rubber powder for industrial fillers, has acquired the rights to
process and sell industrial products such as gypsum, limestone, and
sulfur. Because of the speculative nature of the Company, there are
significant risks, some of which are summarized as follows:
* Company with limited sales and consecutive operating losses.
* Limited funds available for expansion, operations or debt
repayment.
* Assets principally consisting of technology, licenses and
related equipment, which are not patented.
The Company was formed on April 12, 1995 and was in the development
stage (as defined in Statement of Financial Accounting Standards No.
7) through the year ended June 30, 1996. Operations commenced May 1,
1997. The year ending June 30, 1997 was the first year in which First
American Scientific Corp. is considered an operating company.
Summary of Significant Accounting Principles
Depreciation began May 1, 1997, when the Company's property, plant and
equipment were placed in service. The cost of property, plant and
equipment is being depreciated over the estimated useful lives of the
related assets. During the year ended June 30, 1998 the Company
abandoned a portion of its assets at its Bakersfield location for
operating reasons. This transaction resulted in a loss on abandonment
of $153,632.
The cost of leasehold improvements is being depreciated over the lesser
of the length of the related leases or the estimated useful lives of
the assets. Depreciation is computed on the straight-line method for
financial reporting purposes and for income tax purposes.
Amortization of the Company's technology licenses began May 1, 1997,
when the Company's property, plant and equipment (which directly
originate from the licensed technology) were placed in service. The
cost of the Company's technology licenses is being amortized over the
estimated economic life of fifteen years.
Organizational costs, which are deemed immaterial, were expensed
when paid.
F-7
<PAGE> 28
FIRST AMERICAN SCIENTIFIC CORP
June 30,1998 and 1997
Notes to Financial Statements
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Provision for Taxes
At June 30, 1998, the Company had net operating loss carry forwards of
approximately $2,870,000 that may be offset against future taxable
income. No tax benefit has been reported in the financial statements
as the Company believes there is a 50% or greater chance the net
operating loss carry forwards will expire unused. Accordingly, the
potential tax benefits of the net operating loss carry forwards are
offset by a valuation allowance of the same amount.
Accounting Standards
In March 1995 the Financial Accounting Standards Board issued a
statement titled "Accounting for Impairment of Long-Lived Assets." This
standard is effective for years beginning after December 15, 1995. In
complying with this standard, the Company has reviewed its long-lived
assets at June 30, 1998 and concluded that no events or changes in
circumstances have transpired which indicate that the carrying value
of its assets may not be recoverable. The Company does not believe that
the adoption of this standard has had a material effect on its
financial statements in the current fiscal year.
In October 1995, the Financial Accounting Standards Board issued a
statement titled "Accounting for Stock-Based Compensation" (FAS 123).
The statement is effective for fiscal years beginning after December
15, 1995. FAS 123 encourages, but does not require, companies to
recognize compensation expense for grants of stock, stock options, and
other equity instruments to employees based on fair value. The Company
has adopted the fair value accounting rules to record all transactions
in equity instruments for goods and services.
NOTE 2 - GOING CONCERN
The Company's financial statements have been presented on a going
concern basis that contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The
liquidity of the Company has been adversely affected by net losses in
fiscal year-ends June 30, 1998 and 1997.
F-8
<PAGE> 29
FIRST AMERICAN SCIENTIFIC CORP
June 30,1998 and 1997
Notes to Financial Statements
NOTE 2 - GOING CONCERN (Continued)
The Company has reported a loss of $1,072,922 for the year ended June
30, 1998, and as of that date has a working capital deficit of
$905,879. These conditions raise substantial doubt about the Company's
ability to continue, as a going concern.
Management's plans to mitigate this issue are summarized as follows:
Management has taken a number of actions to acquire a joint venture
partner to operate the Company's gypsum plant. Management also intends
to seek new capital, both from borrowings and new equity securities
issuances as well as raising capital by the sale of licensing rights.
The above actions will provide funds needed to increase liquidity, make
strategic acquisitions, fund internal growth and fully implement the
Company's business plans.
NOTE 3 - LEASES
The Company owns no real property. It leased 1,000 square feet of
office space at Suite 409 Granville Street, Suite 303, Vancouver,
British Columbia V6C IT2 from LCM Equities, Inc. This lease expired
July 31, 1998. The Company negotiated a new three year lease for 740
square feet with Morguard Investments that commenced August 1, 1998 at
a monthly rental of $1,000 at Suite 1003, also at 409 Granville Street.
In May 1996, the Company signed a lease to rent facilities in
Bakersfield, California for the industrial processing of gypsum,
limestone and specialty products. The lease, which requires payments
of $2,000 per month, expired on April 14, 1998. Rent is being paid on
a month-to-month basis with rent at $2,000 until negotiations with a
proposed joint venture partner, who will take over this facility, are
completed. Although the lease requires the Company to carry insurance
on the facility, the Company has elected to self-insure this location
until the facility re-opens.
In October 1996, the Company signed a three-year lease for a 1996 Ford
truck. The lease, which required monthly payments of $766, was recorded
as an operating lease. During 1998, the Company cancelled the lease and
forfeited the deposit of $7,058.
F-9
<PAGE> 30
FIRST AMERICAN SCIENTIFIC CORP
June 30,1998 and 1997
Notes to Financial Statements
NOTE 4 - TECHNOLOGY LICENSE
On June 22, 1995, the Company entered into a license agreement with
Spectrasonic Corp. (hereinafter "Spectrasonic"), a related party, for
the worldwide license to its unpatented Sonic Disintegration Equipment
(SDM) for use in rubber and glass recycling and disposal, for a period
of ninety-nine years. The purchase price of this license and one SDM
machine was $550,000, with license rights valued at $250,000. Since
this initial agreement, modifications have been made to the first SDM
machine, bringing its total cost to $440,740 at June 30, 1997.
On February 22, 1996, the Company entered into an additional license
agreement with Spectrasonic for the worldwide license to its unpatented
Ultrasound Equipment for exclusive use in gypsum disintegration,
disposal, recycling, remanufacturing or manufacturing of used or new
raw materials. The purchase price of this license and one SDM machine
for gypsum-related use was $775,000, with the parties agreeing that the
technology license is valued at $425,000 and the gypsum SDM machine is
valued at $350,000.
On May 17, 1996, the Company executed another agreement with
Spectrasonic for the worldwide licenses to equipment (as yet
unpatented) developed by Spectrasonic for use in disintegration,
disposal, recycling, remanufacturing or manufacturing "any and all
kinds of materials" for a period of ninety-nine years. The purchase
price of this license was $1,230,000, which consisted of the Company
issuing to Spectrasonic 1,000,000 shares of First American common stock
(with an aggregate deemed value of $500,000) and agreeing to pay
$730,000 in varying installment amounts between June 30, 1996 and
January 2, 1997. The Company issued 1,000, 000 common stock shares to
Spectrasonic in July 1996. The Company made payments to Spectrasonic
in the amount of $193,000, but is in default on this agreement by its
failure to make the remaining installments totaling $537,000 before
January 2, 1997. However, Spectrasonic is a related party and no action
has been taken against the Company and the terms of the agreement have
been extended indefinitely without interest.
On July 2, 1997, the Company finalized negotiations with Spectrasonic
for all patents issued, to be issued or pending, including all data
pertaining to the patent process with respect to the Micronizing
Machine (SDM Machine) whose worldwide rights had been previously
acquired by the Company. In addition the Company acquired all
manufacturing rights applicable to the SDM machine technology. The
Company has sole right and responsibility for manufacturing the
machinery. Consideration to Spectrasonic will be the issuance of
1,000,000 common shares of the Company's stock at $0.25 per share plus
the payment of $500,000. The cash payment to Spectrasonic will be made
at $50,000 per machine manufactured and sold by the Company.
F-10
<PAGE> 31
FIRST AMERICAN SCIENTIFIC CORP
June 30,1998 and 1997
Notes to Financial Statements
NOTE 5 - TRANSLATION OF FOREIGN CURRENCY
The Company has adopted Financial Accounting Standard No. 52. Because
the Canadian foreign exchange rate has remained approximately the same
since inception, there are no material exchange rate transaction gains
or losses.
Common stock issued for payment on license agreements was recorded
in U.S. dollars.
NOTE 6 - EARNINGS (LOSS) PER SHARE
The net income (loss) per share is computed using the weighted average
number of shares outstanding and amounts to $(0.05) and $(0.12) per
share for the years ending June 30, 1998 and 1997, respectively.
NOTE 7 - STOCK COMPENSATION PLANS
The company has adopted a consultant and employee stock compensation
plan. The total number of shares eligible for inclusion in the Plan is
350,000. Any shares issued as a result of the exercise option
thereunder will be "restricted securities". Options may only be granted
to employees and consultants of the Company. The Board of Directors is
vested with authority and discretion to prescribe, amend and rescind
rules and regulations relating to the plan. No shares have been issued
under this plan as of June 30, 1998.
The Company has also adopted a directors' and officers' stock option
plan. Directors have approved a plan wherein 1,000,000 shares are
eligible for distribution. At June 30, 1997, 550,000 options were
issued to officers and directors, all of which were exercised and
converted into 550,000 common shares on June 30, 1998, at an exercise
price of $.01 per share. At June 30, 1998 the Company has recorded a
receivable of $5,500 for these common shares.
NOTE 8 - LOANS
On November 15, 1996, the Company entered into a loan agreement with
Huntingdon Limited in the amount of $100,000. This loan, including
accrued interest of $10,000, was settled for 2,200,000 shares of common
stock on March 20, 1998.
On February 20, 1997, the Company entered into a loan agreement with
834968 Ontario, Inc. in the amount of $200,000. This short-term note
was payable, interest only, at prime plus 5% until its due date of
August 20, 1997, at which time the loan was paid off.
During the year ended June 30, 1997, the Company entered into a
short-term loan agreement with Magic Trading in the amount of $171,414.
This uncollateralized loan was converted to common stock in October
1997 prior to its due date.
F-11<PAGE>
<PAGE> 32
FIRST AMERICAN SCIENTIFIC CORP
June 30,1998 and 1997
Notes to Financial Statements
NOTE 8 - LOANS (Continued)
During the year ended June 30, 1997, the Company entered into a
short-term loan agreement with Meraloma Club in the amount of $36,500.
The Company issued 820,000 shares of stock to Meraloma Club as payment
for this loan including accrued interest of $4,500.
On April 30, 1996, the Company entered into a loan agreement with
Knowlton Capital, Inc. wherein the lender agreed to provide a revolving
line of credit, which matures upon the Company's completion of a
preferred share offering. The loan agreement gave Knowlton Capital,
Inc. the option of converting its loan into First American common stock
at a deemed value of $0.075 per share on or before December 31, 1996.
During the year ended June 30, 1997, the Company obtained an extension
on this loan by the issuance of 398,836 shares of common stock, valued
at $131,617. This loan, with an interest rate of 10% and an outstanding
principal balance of $790,229 at June 30, 1997, was secured by a
collateral mortgage on the Company's Bakersfield plant and other
assets. During the year ended June 30, 1998, all debt to Knowlton
Capital, Inc. was converted to stock.
On January 21, 1997, the Company entered into a loan agreement with
Jacqueline Lovelock, daughter of the Company's Chairman, in the amount
of $82,000. This short-term note is subject to interest only at prime
plus 3%. The first interest payment was due ninety days after the date
of the loan. The entire amount of this note was due after six months.
This loan has been extended, and is considered a demand note, and at
June 30, 1998 the balance left owing on this loan is $80,000. On
September 4, 1998 the Company settled this short-term obligation in the
amount of $80,000 by issuing 1,600,000 shares of common stock to the
note holder.
NOTE 9 - RELATED PARTY TRANSACTIONS
Spectrasonic, Corp. is owned and controlled by Mr. John Sand and Mr.
John Martin, each of whom owns 50% of its outstanding stock.
Spectrasonic, a shareholder in the Company with 1,250,000 shares at
June 30, 1998, is a creditor of the Company (see Note 4).
The Company leases office space at Suite 409 Granville Street,
Vancouver, British Columbia V6C IT2 from LCM Equities, a shareholder
in the Company (see Note 3).
During the years ended June 30, 1997 and 1998, the Company borrowed
money from Jacqueline Lovelock (see Note 8). Ms. Lovelock is a related
party to the Chairman and Chief Executive Officer of the Company.
F-12
<PAGE> 33
FIRST AMERICAN SCIENTIFIC CORP
June 30, 1998 and 1997
Notes to Financial Statements
NOTE 9 - RELATED PARTY TRANSACTIONS (Continued)
During the year ended June 30, 1998, the Company retained a related
party to raise funds. A commission was paid to this individual based
upon the funds raised.
NOTE 10 - STOCKHOLDERS' EQUITY
Common Stock
All shares issued prior to August 14, 1995 have been adjusted for a
6-for- 10 reverse stock split at that date.
At June 30, 1998, there was a stock subscription receivable in the
amount of $40,000 for 2,000,000 common shares issued. This amount was
received subsequent to the year-end.
NOTE 11 - ROYALTY AGREEMENT
On October 15, 1995, the Company entered into a gross royalty agreement
with Strategic International, Inc. The agreement grants to Strategic
International, Inc. a gross perpetual royalty of $0.015 per pound on
all glass or rubber which is processed through, by or under the license
granted on June 22, 1995, to First American Scientific Corp. by
Spectrasonic Corp. Strategic International, Inc. was instrumental in
arranging the licensing agreements with Spectrasonic Corp. No royalties
were paid, or are yet payable, under this agreement.
NOTE 12 - LITIGATION RESERVE
During the year ended June 30, 1997, the Company agreed to out-of-court
settlements resulting from alleged breach of contract suits by
equipment and labor providers against the Company in the amount of
$44,366. This amount was aside as a litigation reserve and is included
in the Company's general and administrative expenses.
This same year, the Company was involved in two lawsuits resulting from
alleged breach of contract with two suppliers for payment of goods and
services. The Company is in the process of settling these claims in the
amount of $17,695. This amount was set aside as a litigation reserve
and was included in the Company's general and administrative expenses
for the year ended June 30, 1997. During 1998, these matters were
settled. See Note 13.
F-13
<PAGE> 34
FIRST AMERICAN SCIENTIFIC CORP
June 30,1998 and 1997
Notes to Financial Statements
NOTE 13 - SUBSEQUENT EVENTS
On July 19, 1998, the majority of the stockholders of the Company
approved a plan whereby the authorized capital of the Company was
increased to 100,000,000 shares of common stock.
Prior to the Company's June 30, 1998 year-end the Company incurred a
debt for goods and services performed. Subsequent to year-end, because
of the uncertainty of the Company's future, several of the creditors
have agreed to settle for less than the face amount owed. The remainder
of the creditors are being approached by the Company's counsel with
settlement options.
On September 17, 1998 the Company granted a licensing agreement to The
Green Leaf Fibre Company Ltd. (hereinafter "GLF") of Northern Ireland
for GLF to conduct research and development testing within the United
Kingdom on the commercial viability of the Company's kinetic
disintegration system technology and equipment.
Subject to GLF's satisfaction with the test results, the two companies
are expected to form a joint venture for the commercialization of the
KDS technology in Europe.
F-14
<PAGE> 35
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
(a) At its board meeting on September 16, 1996, the Board of
Directors of the Company engaged William & Webster, P.S., Certified
Public Accountants, as its independent auditor for 1996.
(b) The accounting firm of Robert Moe & Associates, P.S. was
replaced as a result of their resignation. There were no
disagreements with Robert Moe & Associates, P.S. on any matter of
accounting principles or practices, financial disclosure, or
auditing scope or procedure or any reportable events.
(c) Since inception of the Company, Robert Moe & Associates's
reports on the financial statements have contained no adverse
opinion or disclaimer of opinion and were not qualified or modified
as to uncertainty, audit scope or accounting principles.
(d) Robert Moe & Associates has provided a letter addressed to
the Securities and Exchange Commission stating its reason for
resignation. A copy of which was filed as an Exhibit to the
Company's Form 8-K filed on September 25, 1996.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL
PERSONS
Officers and Directors
The officers and directors of the Company are as follows:
Name Age Position
Jack E. Lovelock 67 Chairman of Board of Directors,
and Chief Executive Officer
Robert G. Dinning 59 Chief Financial Officer and
Secretary
All directors hold office until the next annual meeting of
shareholders and until their successors have been elected and
qualified. The Company's officers are elected by the Board of Directors
at the annual meeting after each annual meeting of the Company's
shareholders and hold office until their death, or until they resign
or have been removed from office.
Jack Lovelock - Chairman of the Board of Directors and Chief Executive
Officer.
Mr. Lovelock was a private consultant to financial and corporate
entities prior to joining the Board of Directors of the Company. Since
July 15, 1995 Jack E. Lovelock has been Chairman of the Board of
Directors and Chief Executive Officer of the Company and President
since January 1998. From August 1, 1991 to August 1994, Mr. Lovelock
<PAGE> 36
was a director of TMM, Inc, a electronic publishing firm located in
Thousand Oaks, California and from March 1991 to October 15, 1994, Mr.
Lovelock was Chairman of the Board of Directors and Chief Executive
Officer of Total Multimedia (Canada) Ltd. Total Multimedia (Canada) Ltd
was located in Vancouver, British Columbia and engaged in the business
of electronic publishing. From June 1987 to June 1989, Mr. Lovelock was
President of Roddy Resources Inc, a corporation whose securities were
listed for trading on the Toronto Stock Exchange. Roddy Resources Inc.
was engaged in the business of mining. Prior to this, Mr. Lovelock was
Director, Business Development - Bell Canada and Director, Corporate
Planning & Acquisitions, Tele-Direct (Yellow Pages).
Robert G. Dinning - Chief Financial Officer and Secretary
Since April 5, 1996, Mr. Dinning has been Chief Financial Officer
and Secretary of the Company. Since 1977, Mr Dinning has been a
business consultant providing management and financial advice to a
wide range of clients, including those engaged in mining and forestry,
and the hospitality and leisure industry. Prior to 1977, Mr. Dinning
was Vice President - Finance and Secretary of Western Broadcasting Ltd,
one of the largest public broadcasting companies in Canada. Mr. Dinning
is a Chartered Accountant.
David Annett died suddenly in February 1999. Richard Camuso
resigned as President and a member of the Board of Directors of the
Company on January 1, 1998.
Indemnification of Officers and Directors
The Nevada Revised Statues and certain provisions of the Company's
Bylaws under certain circumstances provide for indemnification of the
Company's Officers, Directors and controlling persons against
liabilities which they may incur in such capacities. A summary of the
circumstances in which such indemnification is provided for is
contained herein, but this description is qualified in its entirety by
reference to the Company's Bylaws and to the statutory provisions.
In general, any Officer, Director, employee or agent may be
indemnified against expenses, fines, settlements or judgments arising
in connection with a legal proceeding to which such person is a party,
if that person's actions were in good faith, were believed to be in the
Company's best interest, and were not unlawful. Unless such person is
successful upon the merits in such an action, indemnification may be
awarded only after a determination by independent decision of the Board
of Directors, by legal counsel, or by a vote of the shareholders, that
the applicable standard of conduct was met by the person to be
indemnified.
The circumstances under which indemnification is granted in
connection with an action brought on behalf of the Company is generally
the same as those set forth above; however, with respect to such
actions, indemnification is granted only with respect to expenses
actually incurred in connection with the defense or settlement of the
action. In such actions, the person to be indemnified must have acted
in good faith and in a manner believed to have been in the Company's
best interest, and have not been adjudged liable for negligence or
misconduct.
<PAGE> 37
Indemnification may also be granted pursuant to the terms of
agreements which may be entered in the future pursuant to a vote of
Shareholders or Directors. The statutory provision cited above also
grants the power to the Company to purchase and maintain insurance
which protects its Officers and Directors against any liabilities
incurred in connection with their service in such a position, and such
a policy may be obtained by the Company.
ITEM 11. EXECUTIVE COMPENSATION
The Company has not as yet entered into employment agreements with
its Officers or proposed executives. The Company anticipates entering
into employment agreements with its Officers and other consultants in
the near future, the terms of which are undecided at the present time.
Directors do not receive compensation for their services as directors
and are not reimbursed for expenses incurred in attending board
meetings. The Company has not paid salaries in the current fiscal year
but intends to do so once production has commenced at its plant.
The Company has adopted a consultant and employee stock
compensation plan ("the Plan"). The total number of shares included in
the Plan is 350,000. Shares issued as a result of the exercise of
options granted thereunder will be "restricted securities" as that term
is defined in Reg 144 promulgated under the Securities Act of 1933, as
amended. To date there have been no allotments to consultants,
employees, officers or directors.
The Company has adopted a directors and officers' stock option
plan ("the Plan") which has been registered on Form S-8 with the
Securities and Exchange Commission on June 26, 1996. The total number
of shares included in the Plan is 1,000,000. To date there have been
550,000 shares issued to directors or officers. In September 1998,
directors approved an additional plan for 15,000,000 shares.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following schedule sets forth the Common Stock ownership of
each person known by the Company to be the beneficial owner of five
percent or more of the Company's Common Stock, each director
individually, and all officers and directors of the Company as a group.
Each person has sole voting and investment power with respect to the
shares of Common Stock shown, and all ownership is of record and
beneficial.
<PAGE> 38
Name and address Number of Percent
of owner Shares Position of Class
Jack E. Lovelock 3,750,000 Chairman of Board 6.82%
1906 Nelson Street of Directors and
Vancouver, B.C. President
Canada V6G 1N2
Robert G. Dinning 250,000 Chief Financial 0.46%
3910 Indian River Drive Officer and Secretary
North Vancouver, B.C
Canada V7G 2G7
All officers and
directors as
a group (2) 4,000,000 7.28%
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On June 23, 1995, Jack Lovelock, Chairman of the Board of
Directors of First American, purchased 39,500 shares of the Company's
stock for $17,775.00, in an open market transaction in Manila, Republic
of the Philippines. The transaction was no more favorable than could
be obtained by a non-affiliated third party.
On June 23, 1995, Betty Lovelock, the wife of Jack Lovelock,
purchased 39,500 shares of the Company for $17,775.00 in an open market
transaction in Manila, Republic of the Philippines. The transaction was
no more favorable than could have been obtained by a non-affiliated
third party.
On July 27, 1995, Richard A. Camuso, the former President of the
Company, purchased 50,000 common shares of the Company's common stock
for $22,500 in an open market transaction in Manila, Republic of the
Philippines. The transaction was no more favorable than could have been
obtained by a non-affiliated third party.
On June 25, 1995, the Company entered into an Exclusive License
Agreement for rubber and glass, with Spectrasonic. The contract is for
a period of 99 years. Spectrasonic has developed and is the sole
proprietary owner of all of the proprietary rights to the SDM.
Spectrasonic has not made any patent applications as of the date hereof
and has further advised the Company that: "Applications for
protection of assets of (Spectrasonic) under laws for the protection
of intellectual property in Canada, and the United States of America,
and any other country in which Spectrasonic does business will be made
at such time as Spectrasonic shall determine is in its best interests."
This transaction was no more favorable than could have been obtained
by a non-affiliated third party.
On February 22, 1996, the Company entered into an Exclusive
License Agreement, with Spectrasonic. The contract is for a period of
99 years and covers the right to exploit, develop, manufacture, market,
distribute, and sell the ultrasound equipment as it relates exclusively
to gypsum. Any patent or other protection required will be the
<PAGE> 39
responsibility of the Company and to date, the Company has not made any
patent application. This transaction was no more favorable than could
have been obtained by a non-affiliated third party.
On May 17, 1996, the Company entered into an Exclusive License
Agreement with Spectrasonic. The contract is for a period of 99 years
and covers the production and operation of its disintegration machines
for any and all materials not previously licensed. Spectrasonic
reserve the right to manufacture the equipment. Any patent or other
protection is the responsibility of the Company and to date, they have
not made any patent application. This transaction was no more favorable
than could have been obtained by a non-affiliated third party.
The original contract price for one KDS and the license was
$550,000. The Company issued 250,000 common shares to Spectrasonic at
an aggregate value of $175,000. The balance of the debt was settled
by cash payments at varying times up to March 31, 1996. There are no
other payments due under this exclusive license. Payments were made
from the proceeds of a financing.
The License Agreement for gypsum required cash payments of
$275,000 to Spectrasonic plus the issuance by the Company of 1,000,000
shares of its common stock at $0.50 per share, for an aggregate value
of $500,000. The total purchase price, for this fully paid license was
$775,000 with the parties mutually agreeing that the value of the
Technology license was $425,000 and the KDS was $350,000.
The License Agreement dated May 17, 1996 requires payment of
CDN$1,000,000 (US$750,000) between June 30, 1996 and January 2, 1997.
The payments due January 2, 1997 have been deferred by mutual consent
of the parties involved.
The payment due June 30, 1996 was made subsequent to the year end
and $175,000 of the $450,000 was paid. By letter of understanding on
October 24, 1996, Spectrasonic deferred cash payments owing until a
private placement financing is completed sometime in 1997. This has not
happened yet.
On October 30, 1995 the Company entered into an agreement with
L.C.M. Equity, of Vancouver, British Columbia to provide a line of
credit up to a maximum of CDN$600,000 for a period of one year. This
agreement was subsequently terminated and replaced with a new agreement
with LCM dated March 1, 1996. This agreement provided a revolving line
of credit of a maximum of US$500,000 to be available until February 16,
1997. LCM converted all of its outstanding loans to common stock in
the Company. The conversion price was US$0.37 per share.
On April 1996, the Company entered into an agreement with Knowlton
Capital Corp, ("Knowlton") a private venture capital concern, located
at 329 Brill Road, Foster, Quebec, JOE 1RO. Knowlton agreed to provide
financing up to US$800,000 until December 31, 1996. This agreement was
extended to December 31, 1997. Interest was payable at 10% per annum.
This loan could be repaid at any time or convertible into common stock
of the Company at US$0.75 per share. The lender has the right to take
a collateral mortgage on the assets owned by the borrower. At June
30, 1997, the loan outstanding was US$790,229.
<PAGE> 40
Recent Sales of Unregistered Securities
On May 2, 1995, the Company sold 6,000,000 post-split shares
(10,000,000 pre-split shares) of its common stock in consideration of
$100,000 in cash to 12 individuals in the Republic of the Philippines
pursuant to Reg 504 promulgated under the Securities Act of 1933, as
amended. The sales of the foregoing shares in the Republic of the
Philippines was in accordance with Philippines laws and regulations.
On June 22, 1995, the Company sold 150,000 post-split shares
(250,000 pre-split) shares of its common stock to Spectrasonic as
partial consideration for the execution of the exclusive licensing
agreement. See "Item 1. - Summary of Exclusive Agreement with
Spectrasonic." The shares were valued at $175,000. The sale of the
foregoing securities was made pursuant to Reg 504 promulgated under the
Securities Act of 1933, as amended.
On August 14, 1995, the Company effected a 6 for 10 reverse
stock-split.
On September 18, 1995, the Company issued 600,000 shares of common
stock to two individuals who were residents of the Republic of the
Philippines in consideration of $270,000 in cash. The foregoing
individuals were not affiliates of the Company, Spectrasonic, or
Westmoreland. The sale of the foregoing stock in the Republic of the
Philippines was in accordance with Philippine laws and regulations. On
the same date the Company issued an additional 100,000 shares of common
stock to Spectrasonic in consideration of $50,000. The foregoing
shares were sold pursuant to Reg. 504 promulgated under the Securities
Act of 1933, as amended.
On October 20, 1995, the Company issued 200,000 "restricted"
shares of its common stock to Westmoreland Capital Corp, a British
Columbia corporation as partial consideration for the execution of its
agreement to supply management services, pursuant to Reg 701
promulgated under the Securities Act of 1933, as amended. See "Item 1.
Business - Employees." The 200,000 shares were valued at $100,000.
On February 29, 1996, the Company issued 1,000,000 "restricted"
shares of its common stock to Spectrasonic as partial consideration of
a license agreement, Gypsum, dated February 22, 1996. The shares were
valued at $0.50 per share for a total consideration of $500,000.
On March 20, 1996, the Company issued 74,400 shares of its common
stock to Astaire & Partners, in London, England. The shares were valued
at $1.25 per share for a total consideration of $93,000. The shares
were issued pursuant to a private placement.
On March 25, 1996, the Company issued 380,717 shares of its common
shares to LCM Equity Inc, in settlement of debt conversion, at $0.45
per share for a total consideration of $171,323.
On July 3, 1996, the Company issued 452,376 shares of its common
stock to LCM Equity Inc, regarding conversion of loans outstanding.
This stock was valued at $0.45 per share for loans of US$124,069 and
loans of CDN$106,000 (US$77,300) at $0.60 per share.
<PAGE> 41
On July 10, 1997, the Company issued 1,000,000 shares of its
common stock to Microsonic Disintegration regarding May 17, 1996
agreement for the purchase of rights. This stock was valued at $0.50
per share.
On July 10, 1996, the Company issued 7,440 shares of its common
stock to Astaire & Partners as settlement of a commission of $9,300.
The stock was issued at $1.25 per share.
On September 12, 1996, the Company issued 654,000 shares of its
common stock to Gerlach & Co. for the sum of $457,800. The stock was
sold under Reg "S" at a price of $0.70 per share.
On September 25, 1996, the Company issued 303,000 shares of its
common stock to Gerlach & Co for the sum of $212,100. The stock was
sold under Reg "S" at a price of $0.70 per share.
On October 24, 1996, the Company issued 100,000 shares of its
common stock to Gerlach & Co for the sum of $22,500. The stock was sold
under Reg "S" at a price of $0.225 per share.
On November 30, 1996, the Company issued a total of 1,142,188
shares of its common stock to:
Monarch Consulting 337,083 common shares
LCM Equity, Inc. 181,730 common shares
Somers & Co. 480,650 common shares
LCM Equity, Inc. 142,725 common shares
Total 1,142,188 common shares
All of the above stock was issued at $0.42 per share for a total
of $479,719.
On April 4, 1997, the Company issued a total of 759,945 shares of
its common stock to Magic Trading, Inc, in settlement of loans advanced
in the amount of $281,180. The loans were converted to common stock at
$0.37 per share.
On April 30, 1997, the Company issued a total of 598,382 shares
of its common stock to:
834968 Ontario, Inc. 100,000 common shares
Huntington, Inc. 45,455 common shares
Knowlton Capital, Inc. 398,836 common shares
Meraloma Club 16,818 common shares
Jacqueline Lovelock 37,273 common shares
All of the above stock was issued at $0.33 per share for a total
cost of $194,466.
On or about the 8th day of May, 1997, the Company sold 650,000
shares of Common Stock in consideration of $80,600 pursuant to
Regulation S of the Securities Act of 1933, as amended (the "ACT"); the
name of the non-U.S. purchaser was Huntingdon Limited and its address
<PAGE> 42
is 12/13 Hill Street, Douglas, Isle of Man, British Isles 1M9 IBW. The
applicable restricted period as to the shares under Regulation S was
forty (40) days since the Company is required to file reports with the
Securities and Exchange Commission.
On or about the 8th day of May, 1997, the Company sold 100,000
shares of Common Stock in consideration of $12,400 pursuant to
Regulation S of the Act; the name of the non-U.S. purchaser was F.J
Rigney Resources Ltd; and its address is 2200-609 Granville Street,
Vancouver, British Columbia, Canada V7Y 1T2. The applicable restricted
period as to the shares under Regulation S was forty (40) days since
the Company is required to file reports with the Securities and
Exchange Commission.
On or about the 8th day of May, 1997, the Company sold 187,000
shares of Common Stock in consideration of $23,188 pursuant to
Regulation S of the Act; the name of the non-U.S. purchaser was Magic
Trading Limited and its address is P.O. Box 107, Oceanic House, Duke
Street, Grand Turk, Turks and Caicos Islands, British West Indies. The
applicable restricted period as to the shares under Regulation S was
forty (40) days since the Company is required to file reports with the
Securities and Exchange Commission
On or about the 26th day of June, 1997, the Company sold 516,250
shares of Common Stock in consideration of $66,378 pursuant to
Regulation S of the Act; the name of the non-U.S. purchaser was
Huntingdon Limited and its address is 12/13 Hill Street, Douglas, Isle
of Man, British Isles 1M9 1BW. The applicable restricted period as to
the shares under Regulation S was forty (40) days since the Company is
required to file reports with the Securities and Exchange Commission.
On or about the 26th day of June, 1997, the Company sold 762,500
shares of Common Stock in consideration of $98,144 pursuant to
Regulation S of the Act; the name of the non-U.S. purchaser was Magic
Trading Limited and its address is P.O. Box 107, Oceanic House, Duke
Street, Grand Turk, Turks and Caicos Islands, British West Indies. The
applicable restricted period as to the shares under Regulation S was
forty (40) days since the Company is required to file reports with the
Securities and Exchange Commission.
On or about the 2nd day of July, 1997, the Company sold 225,000
shares of Common Stock in consideration of $38,025 pursuant to
Regulation S of the Act; the name of the non-U.S. purchaser was
Cavendish Investments International Ltd and its address is Abbey
Business Center, Digby Road, Sherborne Dorset, United Kingdom, DT9 3NL
. The applicable restricted period as to the shares under Regulation
S was forty (40) days since the Company is required to file reports
with the Securities and Exchange Commission.
On or about the 2nd day of July, 1997, the Company sold 500,000
shares of Common Stock in consideration of $75,000 pursuant to
Regulation S of the Act; the name of the non-U.S. purchaser was Bentley
Financial Inc. and its address is P.O. Box 107, Oceanic House, Duke
Street, Grand Turk, Turks and Caicos Islands, British West Indies. The
applicable restricted period as to the shares under Regulation S was
forty (40) days since the Company is required to file reports with the
Securities and Exchange Commission.
<PAGE> 43
On or about the 18th day of July, 1997, the Company sold 500,000
shares of Common Stock in consideration of $75,000 pursuant to
Regulation S of the Act; the name of the non-U.S. purchaser was
Cavendish Investments International Ltd and its address is Abbey
Business Center, Digby Road, Sherborne Dorset, United Kingdom, DT9 3NL.
The applicable restricted period as to the shares under Regulation S
was forty (40) days since the Company is required to file reports with
the Securities and Exchange Commission.
On August 18, 1997 the Company sold 1,100,000 shares of common
stock to Magic Trading Limited in consideration of US$ 220,092. The
foregoing shares were issued pursuant to Reg S of the Act.
On or about the 1st day of February, 1998, the Company sold
295,000 shares of Common Stock in consideration of $34,498 pursuant to
Regulation S of the Act; the name of the non-U.S. purchaser was
Knowlton Capital, Inc. and its address is 329 Brill Road, Foster,
Quebec. The applicable restricted period as to the shares under
Regulation S was forty (40) days since the Company is required to file
reports with the Securities and Exchange Commission
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K.
(a) Financial Statements are contained in Item 8.
(b) Reports on Form 8-K.
A form 8-K was filed with the Commission on or about August 27,
1997. The purpose of the Form 8-K was to notify the Commission of sales
of securities pursuant to Reg S of the Act.
A form 8-K was filed with the Commission on or about November 3,
1997. The purpose of the Form 8-K was to notify the Commission of sales
of securities pursuant to Reg S of the Act.
A form 8-K was filed with the Commission on or about March 9,
1998. The purpose of the Form 8-K was to notify the Commission of sales
of securities pursuant to Reg S of the Act.
(c) Exhibits
The following documents are incorporated herein by reference from
the Company's Form 10 as filed with the Securities and Exchange
Commission.
Exhibit No. Description
3.1 Articles of Incorporation of First American Scientific
Corporation.
3.2 Bylaws of First American Scientific Corporation.
4.1 Specimen Stock Certificate
<PAGE> 44
10.1 License Agreement with Spectrasonic Corp.
10.2 Westmoreland Capital Corp Agreement.
10.3 Gross Royalty Agreement between Strategic International
Inc. and the Company.
10.4 Lease between the Company and Spectrasonic.
10.5 Agreement between LCM Equity, Inc and the Company.
27 Financial Data Schedule
28.1 Consultant and Employee Stock Compensation Plan.
The following documents are incorporated herein by reference from
the Company's Form S-8 as filed with the Securities and Exchange
Commission.
10.1 Nonqualifiying Stock Option Plan.
The following documents are incorporated herein by reference from
the Company's Form 10-K for the period ending June 30, 1996.
10.1 Loan Agreement between Knowlton Capital, Inc and the
Company dated April 30, 1996 incorporated by reference
from the Company's Form 10-K for the period ending June
30, 1996.
10.2 License Agreement between the Company and Spectrasonic
Corp dated May 17, 1996 incorporated by reference from
the Company's Form 10-K for the period ending June 30,
1996.
The following documents are incorporated by reference from the
Company's Form 10-K for the period ending June 30, 1997:
3.3 Articles of Incorporation of 521345 B.C. Ltd.
The following documents are filed as part of this June 30, 1998
Form 10-K:
3.4 Amended Articles of Incorporation.
10.9 Agreement with Green Leaf Fibre Company Ltd. (GLF)
<PAGE> 45
SIGNATURE PAGE
Pursuant to the requirements of Section 13 or 15(d) of the
Securities and Exchange Act of 1934, the Company has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized on this 16th day of March, 1999.
FIRST AMERICAN SCIENTIFIC CORP
BY: /s/ Jack Lovelock
Jack Lovelock,
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the Company and in the capacities and on this 16th day of
March, 1999.
SIGNATURES TITLE
/s/ Jack Lovelock
Jack Lovelock Chairman of the Board of
Directors, and Chief Executive
Officer.
/s/ Robert Dinning
Robert Dinning Chief Financial Officer and
Secretary
<PAGE> 46
CERTIFICATE OF AMENDMENT OF ARTICLES OF INCORPORATION
(After Issuance of Stock)
FIRST AMERICAN SCIENTIFIC CORP.
We the undersigned, Jack Lovelock, President and Robert
Dinning, Secretary, of FIRST AMERICAN SCIENTIFIC CORP. do hereby
certify:
That the Board of Directors of said corporation at a
meeting duly convened, held on the 18th day of May, 1998, adopted
resolutions to amend the original articles as follows:
Article VI is hereby amended to read as follows:
The total authorized capitalization of this
Corporation shall be and is the sum of
100,000,000 shares of Common stock at $0.001
par value, said stock to carry full voting
power and the said shares shall be issued
fully paid at such time as the Board of
Directors may designate in exchange for cash,
property, services, the stock of other
corporations or other values, rights, or
things, and the judgment of the Board of
Directors as to the value thereof shall be
conclusive.
The number of shares of the corporation outstanding and
entitled to vote on an amendment to the Articles of Incorporation
is 49,326,018; that the said change and amendment have been
consented to and approved by a majority of the stockholders
holding at least a majority of each class of stock outstanding
and entitled to vote thereon.
Dated this 20th day of August, 1998.
/s/ Jack Lovelock, President
/s/ Robert Dinning, Secretary
<PAGE> 47
On August 20, 1998, personally appeared before me, a Notary
Public, Jack Lovelock, President, and Robert Dinning, Secretary,
who acknowledged that they executed the above instrument.
/s/ John P. Lakes
Barrister, Solicitor and Notary Public,
residing in the Municipality of West
Vancouver, British Columbia, Canada
My Commission Expires:
Lifetime in British Columbia
<PAGE> 48
MEMORANDUM OF AGREEMENT
BETWEEN:
FIRST AMERICAN SCIENTIFIC CORP. (FASC), a Company duly
incorporated under the laws of Nevada, and having its head
offices at #1003 - 409 Granville Street Vancouver, B.C., V6C
1T2.
AND
THE GREEN LEAF FIBRE COMPANY, LTD. (GLF), a company duly
incorporated In Northern Ireland, and having its head offices at
17 Hallynabraggett Road, Waringstown, Co Armagh, Northern
Ireland.
WHEREAS
FASC has filed a Patent application with the U.S. Patent Office
dealing with the technology known as the Kinetic Disintegration
System (KDS) (The Technology) and WHEREAS GLF is interested in
conducting research mad development on the commercial viability
of the Technology as it relates to the disintegration of rubber
and related rubber products (herein called the Application),
FASC and GLF agree that FASC will grant a licensing agreement to
GLF and such licensing agreement will contain the following
terms and conditions:
1. On the terms mad conditions herein contained, FASC licenses
to GLF for the territory of U.K. the Application for the
use of GLF to conduct a research made development program
(the Program) to analyze the performance of the KDS
machine.
2. GLF is solely responsible for all costs and expenses,
within the U.K., of the Program.
3. FASC makes no representations or warranties as is to the
success of the Program.
4. GLF is solely responsible for the cost of transportation of
the KDS machine to the U.K. and is solely responsible for
any modifications deemed not necessary during the Research
Program.
5. GLF agrees that it is responsible for the in installation
of suitable hydraulic and electronic components to enable
full functionality to U.K. standards. The Parties agree
that GLF will undertake to extract an understanding of the
KDS process by permitting the following academic and
government bodies to research facilities:
- Queens University Belfast
- University Of Ulster
- Manufacturing Technology Partnership
- Industrial Research on Technology Unit
<PAGE> 49
6. GLF will endeavor to brief FASC on a regular basis on the
progress of the Program and to make available the results
of the Program.
7. In event at GLF satisfied with the conclusion of the
Program, FASC, agrees to extend the license to permit GLF
to continue the Program towards achieving commercial
viability (the Operation). If GLF FASC are satisfied with
the the projected viability then both parties will enter
into a Joint Venture Agreement to manage the ongoing
Operation.
8. FASC and GLF agree on the following objectives and
management of the Joint Venture Company:
1. In the event that GLF does not feel that the Operation
is commercially viable; FASC and GLF cannot mutually
agree to the terms of the Joint Venture Agreement; and
GLF breaches any agreement with FASC, then GLF will
forthwith, upon receiving a demand from FASC , return
the KDS machine to FASC at the expense of GLF.
2. In the event the process is deemed to be commercially
viable in the rubber industry a Venture Company (JVC)
will be set up to operate, manage, and/or grant
licenses to businesses within the geographical
boundaries of Europe.
3. FASC agrees to give rights (license) to the JVC for
any enhanced technology developed as a result this
program or from any other program undertaken by FASC
as applied to the rubber and rubber related industry.
4. FASC will register the enhanced technology as it
applies to the new process.
5. The structure, management ad jurisdiction of the Joint
Venture Company will be subject to a separate
agreement which will include the following:
A. The Company will be a new special purpose
Company.
B. FASC will subscribe for 55% of the Share
Capital and GLF will subscribe for 45% of Share
Capital.
C. The Management team and their expenses will form
part of the admin budget.
6. Should the process not be commercially viable in
rubber industry, FASC will on mutually satisfactory
terms, provide GLF with a license for other
applications. In any event, GLF will be given
consideration on a right of first refusal basis, on
any application for the territory of the U.K. and
continental Europe.
<PAGE> 50
7. It is agreed that both parties are entitled to enforce
by specific performance, injunction or any other
equitable remedy its respective rights.
8. This Agreement shall be interpreted in accordance with
the laws of the Province of British Columbia and the
laws of Canada.
Agreed to this 17th day of September, 1998, as witnessed the
signatures below.
First American Scientific Green Leaf Fibre Company Ltd.
/s/ Jack E. Lovelock /s/ illegible
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Statement of Financial Condition at June 30, 1998 Audited and
the Consolidated Statement of Income for the twelve months ended June 30,
1998 Audited and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 1,133
<SECURITIES> 0
<RECEIVABLES> 32,915
<ALLOWANCES> 0
<INVENTORY> 5,500
<CURRENT-ASSETS> 39,548
<PP&E> 2,260,799
<DEPRECIATION> 200,142
<TOTAL-ASSETS> 4,105,646
<CURRENT-LIABILITIES> 945,427
<BONDS> 0
0
0
<COMMON> 49,326
<OTHER-SE> 3,110,893
<TOTAL-LIABILITY-AND-EQUITY> 4,105,646
<SALES> 665,638
<TOTAL-REVENUES> 665,638
<CGS> 290,086
<TOTAL-COSTS> 1,290,783
<OTHER-EXPENSES> 157,691
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,072,922)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,072,922)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,072,922)
<EPS-PRIMARY> (0.05)
<EPS-DILUTED> (0.05)
</TABLE>
