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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 1997
Commission file number: 0-28154
SIMPLEX MEDICAL SYSTEMS, INC.
(Formerly "Music Tones Ltd.")
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(Name of small business issuer in its Charter)
Colorado 84-1337509
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
430 Ansin Boulevard, Suite G, Hallandale, Florida 33009
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(Address of principal executive offices, including zip code)
(954) 455-0110
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(Issuer's telephone number)
Securities Registered Pursuant to Section 12(b) of the Act: None.
Securities Registered Pursuant to Section 12(g) of the Act: Common Stock,
No Par Value
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes [X]
No [ ]
Check if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
The Issuer's revenues for its most recent fiscal year were $71,461.
As of April 21, 1998, 7,500,000 shares of the Registrant's common stock were
outstanding, and the aggregate market value of the shares held by
non-affiliates was approximately $3,665,000.
DOCUMENTS INCORPORATED BY REFERENCE: None.
Transitional Small Business Disclosure Format (check one): Yes __ No X
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
BACKGROUND
Simplex Medical Systems, Inc. (the "Company") was incorporated under the
laws of the State of Colorado on October 26, 1987, under the name The Trader's
Edge Ltd. On March 28, 1996, the name was changed to Music Tones Ltd. The
Company was generally inactive through December 31, 1996. On March 28, 1997,
the Company's shareholders approved a proposal to change the Company's name to
Simplex Medical Systems, Inc.
In April 1996, the Company filed a registration statement with the
Securities and Exchange Commission on Form 10-SB, wherein it registered its
common stock under Section 12(g) of the Securities Exchange Act of 1934, as
amended (the "34 Act"). As a result, the Company became a fully reporting
company under the 34 Act.
On March 5, 1997, the Company completed a reverse acquisition of 100% of
the outstanding common stock of Simplex Medical Systems, Inc., a Florida
corporation ("Simplex-Florida") in exchange for 3,453,000 shares of the
Company's Common Stock which resulted in the shareholders of Simplex-Florida
acquiring approximately 46.04% of the shares outstanding in the Company. In
connection with the closing of this transaction, several shareholders
submitted for cancellation a total of 31,953,000 shares of common stock. As a
result, after the acquisition of Simplex-Florida there were a total of
7,500,000 shares outstanding.
Unless the context otherwise requires, the term "Company" as used herein
refers to the Company and its wholly-owned subsidiary, Simplex-Florida, and
its wholly-owned subsidiary Analyte Diagnostics, Inc. ("ADI").
Simplex-Florida was incorporated in Florida in September 1995, and ADI was
incorporated in Florida on June 6, 1995.
DESCRIPTION OF BUSINESS
GENERAL
The Company is engaged in the development, acquisition, manufacturing
and marketing of medical diagnostic products for point-of-care testing. The
Company offers a diagnostic test for HIV which screens saliva instead of
blood or urine. The countries which have approved or permitted the sale of
these test kits include Hong Kong, Venezuela, Spain, Costa Rica, Italy,
Bahamas, New Zealand and Argentina. The Company was also issued an approval
in Brazil, but due to a change in their government and a consequent change in
the certifying hospital, the Company had to resubmit the documents and redo
the clinical trials. This has been completed and the Company expects
re-approval during May 1998.
The Company has acquired, through internal development, assignment,
acquisition, and a series of joint development agreements, certain rights to
technology for non-invasive diagnostic products, specifically products for
detection of HIV antibodies in saliva, and for the testing of diabetics to
monitor their daily dietary and insulin requirements. The non-invasive
collection and analysis of biological fluids, specifically, the devices for
collection of saliva and biological fluids extracted through the skin of a
sample donor, are expected to replace many of the present test regimes for
diagnostics products that are currently in use.
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THE COMPANY'S PRODUCTS
Public Health officials, including specifically the agencies that are
responsible for testing defined populations in prisons, military and
registered prostitutes, have become increasingly concerned with the need for a
rapid and accurate diagnostic test for detection of infectious disease,
including specifically HIV, hepatitis and the like. The prospective customers
of the Company's saliva collector and diagnostic products require that such
diagnostic products be relatively simple to use, and capable of use outside
the laboratory (on-site diagnostic testing). In relatively undeveloped
countries the on-site testing is of paramount importance to acceptance of such
tests.
Because the Company's initial marketing and sales efforts are directed
outside the United States, FDA approval of certain of the Company's products
may not be as restrictive compared to domestic requirements. The customers of
the Company's products generally favor products that are manufactured in
facilities which are subject to FDA regulation (FDA registered establishment)
and thus the Company has had its facilities registered.
A. THE SALIVA COLLECTION DEVICE, was designed for the collection,
recovery, dispensing and on the spot testing of a fluid sample, including
vital biological fluids such as saliva. Other aspects of the technology
include an optical window integrated with the device to provide analysis of
the sample within the device.
The device consists of a recovery container in the shape of a small
plastic test tube which embodies a tubular member having an open end and
closed end and includes an absorbent element comprised of a polymer foam to
absorb a fluid sample in sufficient quantity to permit analysis and testing
without elaborate sample preparation or laboratory equipment. In certain
designs, by applying a pressure to the flexible tube the fluid can be squeezed
into a reservoir which can then be collected for analysis. The volume of
saliva collected by the absorbent element is a function of both the size of
the element and the time the element is in contact with the donor. The test
kit for this technology includes an analyte sensitive element and one sample
collection device along with instructions for performance of an analysis of
the collected fluid sample.
The Company's saliva sample collector is to be used in place of the more
traditional, and intrusive, sample collection methodologies (e.g. drawing
blood by venous puncture or finger stick) to obtain a biological fluid sample,
which, in most instances, is comparable, or preferable, to biological fluids
such as blood, urine or fecal matter, for constituent analysis. The market for
the Company's fluid sample collector is not restricted by international
boundaries and, depending upon the diagnostic test used in conjunction
therewith, will be made available to any business or individual having a need
to collect a fluid sample by untrained personnel and without the need or
assistance of elaborate and intrusive equipment.
In clinical tests, it has proven both safe and effective for the
collection of a clinically acceptable sample of saliva from a donor's mouth;
and the recovery thereof for constituent analysis. Because of the metabolic
constituents of saliva, the sample collector can be used with a number of
diagnostic tests, including analysis for antibodies indicative of disease
states (HIV, hepatitis, measles and mumps) and, for drugs of abuse.
During April 1998 the Company received a letter from the FDA that the
FDA had reviewed the Company's 510(k) notification regarding the saliva
collector and had approved marketing of the product in the United States. The
Company next
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intends to submit a 510(k) premarket notification for one of the Company's
test kits which incorporate the saliva collector.
The fluid collection device to be manufactured and distributed by the
Company is also suitable for use with any one of a variety of screening tests
for on-site determination of the presence of pollutants in drinking water,
waste streams and in environmentally sensitive habitats.
The countries which have approved or permitted the sale of these test
kits include Hong Kong, Venezuela, Spain, Costa Rica, Italy, Bahamas, New
Zealand and Argentina. The Company was also issued an approval in Brazil, but
due to a change in their government and a consequent change in the certifying
hospital, the Company had to resubmit the documents and redo the clinical
trials. This has been completed and the Company expects re-approval during
May 1998.
During March 1997, the Company signed a Memorandum of Understanding with
Sun Biomedical Laboratories, Inc. ("Sun") to collaborate on the development of
a new saliva-based diagnostic test for mumps, rubella and pertussis (whooping
cough). Sun is a bio-tech product development and manufacturing company
located in Cherry Hill, New Jersey.
B. DENTAL AIRBRATOR. The Company has developed and applied for
patents and FDA approval on a disposable handpiece which attaches to standard
air abrasive etching devices used by dentists for tooth bonding procedures.
The product effectively abrades the surface of teeth, but has no effect at all
on soft tissue. Because it is disposable and there is no need for extensive
sterilization procedures, the product increases patient through-put.
During April 1997 the Company received a letter from the FDA that the
FDA had completed the scientific review portion of the Company's 510(k)
premarket notification regarding the airbrator, and the airbrator is approved
for marketing in the United States for the use of abrading the surface of
teeth.
During July 1997, the Company entered into a Distribution Agreement with
Sybron Dental Specialties, Inc. ("Sybron") pursuant to which the Company
appointed Sybron as the exclusive worldwide distributor for the airbrator.
Several of the terms of this agreement were amended during December 1997. The
agreement, as amended, provides that, subject to the Company satisfying its
obligations under the agreement, Sybron will purchase from the Company at
least three million airbrators per year commencing on December 1, 1998, and
continuing for the five year term of the agreement. Sybron paid a $30,000
one-time license fee to the Company during 1997 for the grant of this
distributorship. Pursuant to the agreement, the Company is responsible for
using commercially reasonable efforts to produce, supply and ship the
airbrators in accordance with Sybron's orders.
C. THE NON-INVASIVE GLUCOSE TEST is a formulation and method for the
analysis of interstitial fluids to determine the presence and/or concentration
of an analyte of interest such as glucose. The test kit comprises one or
more reagents for the extraction and collection of the fluid, a collection
device and an analyte sensitive element integrated with the collection device
that is responsive to and capable of identifying the analyte contained in the
extracted fluid. This product configuration is clearly in the research and
development stage as no final commercial embodiment has been created. Nor can
the Company determine with certainty if it infringes upon patents and other
claims inasmuch as this is an area of active development by a number of
competing companies. Neither the Company nor ADI have a patent pending for
this technology.
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D. BIOVEN ANTI-INFLAMMATORY/ANTI-ARTHRITIC TREATMENT is a powerful
and safe treatment for the symptomatic treatment of Rheumatoid Arthritis
("RA"). The Company's principal scientist developed BIOVEN after fifteen years
of extensive research in the field of immunology. BIOVEN has undergone
significant clinical trials in several foreign countries and has gained
approval for administration in Hong Kong and Nicaragua, but not in the United
States.
BIOVEN is a result of years of experimentation, evaluation and
historical study in the field of peptide use. The product is currently
administered as an injectable solution made under the strict guidelines of the
FDA, however, the FDA has not approved BIOVEN for use in the United States.
The BIOVEN mode of action is believed to function by reversing the body's
chemical/immunological imbalances that are present in RA. Hospital studies and
laboratory data have confirmed that in the typical case where the RA test is
positive, the treatment with BIOVEN returns test results to normal. The
immunoglobulin fractions of patients' blood with RA that are abnormal are
returned to baseline normal levels after treatment with BIOVEN. The biological
results are quantifiable. After treatment with BIOVEN, the joint inflammation
is reduced, the joint pain is removed and a general feeling of well-being is
reported by most patients. Patients who have previously required high doses of
pain medication, such as aspirin, can reduce the amount of medication needed
and, in many instances, stop taking all secondary pain medications.
BIOVEN has been shown not to have any adverse side effects. In over
2,000 case histories, to the Company's knowledge, there has not been one
adverse reaction reported in clinical use. The LD50 studies that have been
done along with the other safety tests confirmed BIOVEN's safety and efficacy.
BIOVEN has been used to treat Early Onset Rheumatoid Arthritis and to
the Company's knowledge in all cases has resulted in a marked and to date,
permanent, beneficial result. There are many children today who are leading a
normal life due to BIOVEN treatment. The mode of action of BIOVEN has led
other scientific groups to use it to develop a clearer understanding of how
the RA process works and how it affects the body.
Research into the uses of BIOVEN has been an on-going project that has
not ended with the anti-inflammatory properties of the drug. New research over
the past several years has led to a modified version of BIOVEN with very
potent and effective antiviral properties. The modified BIOVEN (BIOVEN-H) has
been used to treat Herpes zoster (Shingles), Herpes keratitis (Herpes of the
eye) and Herpes varicella (cold sores). All three conditions responded with a
100% cure rate in all cases. Over 100 cases to date have been treated and all
report the disappearance of the virus and its effects. BIOVEN-H works in three
to five days and has no side effects.
BIOVEN-H has been used by the Director of Medicine at the Eye Institute
of Nicaragua on dozens of patients with Herpes infections of the eye and found
it to be effective in preventing blindness in the patients. The Institute used
BIOVEN-H for many years prior to the political changes that restricted trade
with the United States and thus made the drug unavailable there. This
situation has reversed itself and the Company is planning to reestablish a
manufacturing plant in the country as soon as adequate funding becomes
available.
BIOVEN can be made available for clinical trials worldwide and for sale
in countries where approval is currently in force. The Company believes the
market for both BIOVENs in the countries where it is currently licensed is
very significant. Major steps have been undertaken to gain approval in the
European Economic Community and the Company has recently received approval of
BIOVEN for
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veterinary use in France. The Company has not applied for FDA approval for
Bioven for use in the United States due to the significant expenditure which
would be required for the product since it must be injected. If approval was
applied for, there be no assurance that such approval would be forthcoming.
It should be emphasized that no market test studies have been undertaken by
the Company and no patents have been acquired nor are any pending for this
product.
E. FLAVOR ENHANCEMENT. The Company has developed a proprietary
process which allows for the incorporation of flavor essences into an edible
support material using food grade materials and approved printable inks. This
process has given rise to a new form of advertising sampler which will enable
a consumer to sample new food and beverages through newspaper ads, point of
sale displays or direct mailings. The encapsulation process and method of
manufacturing are proprietary and the Company has applied for patent
protection for this technology.
RESEARCH AND DEVELOPMENT
The Company spent $103,324 on research and development of new products
during the year ended December 31, 1997.
THE MARKET
The Company believes that the general state of the saliva diagnostic
market with regard to the products available, the size of the market and the
number of competitive manufacturers can be described as in the infancy of an
extremely large industry. It must be emphasized that no market or feasibility
study has been undertaken by the Company. Commercial development of
immunoassays in diagnostic medicine commenced in the 1960's and has increased
significantly since then, due principally to the high degree of sensitivity
and specificity of such techniques.
Tests for hepatitis, HIV, mumps, measles, cancer tumor markers, EBV,
CMV, and many others are currently using blood as the source of the specimen.
These tests, while effectively performed in the clinical setting, are
expensive, time consuming and, at the least, painful for the recipient of the
blood collection needle. The skill and expertise of the physician or other
highly trained individual needed to obtain the sample of blood for these tests
is also adding to the high cost of the testing.
The saliva collection and test system not only tends to solve the
aforementioned problems but is easy to use and lends itself to home or "point
of care" style testing. These advantages effectively reduce the overall cost
of immunological testing and allow for the immediate results to be made
available to the practitioner or individual. The Company believes that testing
with saliva specimens has many potential advantages compared to testing with
blood and urine specimens. Unlike obtaining blood specimens, saliva specimens
can be collected at any time in any location and the sampling procedure is
easy to administer and monitor, and may be conducted on a group basis. The
Company believes, that unlike self-administered blood collection, the use of
its products will not require special training. Blood specimen testing
requires the use of needles, which may accidentally injure or infect the
technician collecting the specimen or the subject giving the specimen. Saliva
specimen collection does not require the use of sharp objects. Additionally,
after collection, blood specimens remain potentially infectious (can contain
live HIV virus) whereas saliva specimens are believed not to be infectious.
The use of saliva specimens also has advantages compared to the use of urine
specimens inasmuch as the integrity of the saliva specimen can be maintained,
chain of custody concerns can be addressed and saliva collection can be used
without significant invasion of privacy.
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Disadvantages of saliva collection include the stability of saliva as a
specimen and the impact of the subject's diet and enzymes on saliva.
Provisions must be made to assure that a sufficient amount of saliva is
collected, the specimen is adequately stabilized and bacterial growth does not
cause test interference.
Saliva based testing has been recognized by the World Health
Organization ("WHO") and the FDA as efficacious and practical. Several tests
have been approved to be used in the clinical market based on saliva samples.
Countries such as Thailand, Brazil, Mexico, Russia and many others have
already made policy changes which allow for the use, and even encourage the
use, of saliva tests for HIV in their overall health programs. The immunoassay
diagnostic testing market began in 1960, and, in 1990 was approximately a $2.8
billion market. The immunoassay diagnostic test market in the United States
was estimated at $900 million in 1990, with annual growth estimated between 7%
and 8%.
The overall market currently is divided into three major components;
first, the "government" sector, second, the "captive audience" sector
(military, criminal, institutional, etc.) and lastly, the "private" sector or
individual patient.
The international markets for the Company's products include both the
government and the private business sectors. More specifically, subject to
government approvals, the Company's introduction of its saliva collector will
be with an HIV diagnostic screening test. The HIV test kit is initially
planned for distribution and use by governmental public health agencies and by
the foreign military establishment. In certain foreign markets, the Company's
HIV test kits are expected to be advertised for sale directly to the private
physicians and to the consuming public.
The Company already has products under evaluation in several countries,
including Russia, Thailand, Paraguay, Mexico and Venezuela. Several countries
have begun testing the ADI HIV saliva test with the goal of introducing the
product to the military to replace the currently used blood test. Public
Health institutions in several foreign countries have reviewed and tested the
Company's HIV saliva collectors. Their goal is to use the test to screen the
"at risk" populations present in the major cities and tourist areas. These
include the legal prostitutes, the drug addicts, the homosexual population and
the prison population. Results of this testing will be used to develop policy
for the education programs which must be implemented along with testing to
halt the rapid spread of this infection. Additionally, many of these countries
will use the results of this testing and mass screening to plan for the future
health needs of their country.
The tremendous publicity of the HIV/AIDS epidemic has created a very
large demand by individuals who would like to have a test. However,
individuals are reluctant to submit to organized testing because of a fear of
being "reported" and the social consequences even if negative. The testing of
partners is a common concern in the socially active. The simple and
confidential nature of saliva testing allows for the individual to perform the
Company's test in the privacy of his own home at his convenience. As a
screening test this will reduce the unnecessary burden on the clinical labs as
only the positives must be retested. Doctors office visits will be reduced and
a substantial savings in time will be realized. All of this will lead to
lower overall health costs for the individual.
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GOVERNMENT REGULATION
The development, manufacture, testing and marketing of the Company's
diagnostic products are subject to regulation by the FDA and other federal,
state and foreign agencies. Under the FDC Act, the FDA regulates almost all
aspects of development, marketing and sale, including the introduction,
clinical trials, advertising, manufacturing, labeling, distribution of and
record keeping for the products in the United States.
Diagnostic products marketed for testing drugs of abuse are regulated as
medical devices under the FDC Act for which FDA approval is required. The
Company may attempt to obtain marketing clearance through 510(k) Premarket
Notification for certain of its products used in connection with testing for
drugs of abuse. Following submission of a 510(k) Premarket Notification, the
manufacturer or distributor may not place the device into commercial
distribution until an order is issued by the FDA. The FDA has no specific time
limit by which it must respond to a 510(k) Premarket Notification. The FDA may
declare that the device is "substantially equivalent" to another
legally-marketed device, and allow the device to be marketed in the United
States. The FDA may, however, determine that the proposed device is not
substantially equivalent, or may require future information, such as
additional test data, before the FDA is able to make a determination regarding
substantial equivalence. There can be no assurance that the Company will
receive approval for any of its products under 510(k) Premarket Notification.
There can be no assurance that marketing clearance will be obtained for any of
its products.
Other than as described below, no FDA approval has yet been received for
any of the Company's products and there can be no assurance that such approval
will ultimately be obtained. In this regard, special attention should be given
to the Company's primary product, the saliva collection device. Although the
saliva collection device received FDA approval in April 1998 (See "The
Company's Products" above), the test kit which incorporates the collection
device has not been approved by the FDA for sale within the United States. It
is however, the Company's proposal to export the test kit in compliance with
the applicable laws and regulations administered by the FDA. Initially,
because the test device has not been approved for use in the United States,
the Company would have to comply with the FDC Act, if it wishes to export the
device in its finished form. To export the completed saliva test kit from the
United States, the Company does not only need to receive permission to export
the product into the foreign country, it also had to submit to the FDA, basic
data regarding the safety of the finished device in order for the agency to
determine that export is not contrary to public health and safety. The FDA
has approved the export of both the saliva collection device and the test kit
for hepatitis B, provided that the appropriate regulatory agency of the
country to which the product is exported has approved the importation and use
of the product.
During April 1997 the Company received a letter from the FDA that the
FDA had completed the scientific review portion of the Company's 510(k)
premarket notification regarding the airbrator, and the airbrator is approved
for marketing in the United States for the use of abrading the surface of
teeth.
FOREIGN REGULATION
Agencies similar to the FDA regulate medical devices in some foreign
countries, whereas other countries allow unregulated marketing of such
devices. The Company's products will be required to meet the regulations, if
any, of the foreign countries in which they are marketed.
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MANUFACTURING
The Company believes that most components used in the manufacture of its
current and proposed products are currently available from numerous suppliers
located in the United States, Europe and Asia. However, certain components are
available only from a limited number of suppliers. Although the Company
believes that it will not encounter difficulties in obtaining these
components, there can be no assurance that the Company will be able to enter
into satisfactory agreements or arrangements for the purchase of commercial
quantities of such components.
The Company anticipates that it will not be required to maintain
significant inventory levels of products until the Company's products are
deemed acceptable for sale. The Company does not currently have any material
backlog. Until the Company is able to market its products on a broad basis, it
does not anticipate that its backlog or inventory level will be material. At
that time, the Company intends to cause these products to be manufactured for
it shortly before they are required for shipment. The Company does not foresee
that an extensive period of time will be required from the time of its
manufacturing order to the time of final delivery of its products.
COMPETITION
The market in which the Company participates, saliva-based collection
and diagnostic testing, is highly competitive. The Company is aware of certain
other entities, specialized biotechnology firms, as well as universities and
other research institutions, which have patented, developed, or are developing
technologies and products which are competitive with the Company's products
and technologies. These entities, most of which are established, have
substantially greater research, marketing and financial resources than the
Company. The Company expects that the number of products competing with its
products will increase as the potential benefits of saliva-based testing
become more widely recognized.
The Company is attempting to develop strategic alliances with companies
to jointly develop diagnostic tests which use saliva and/or blood as the
testing specimen.
PATENTS AND PROPRIETARY INFORMATION
The Company presently has pending, two (2) patent applications in the
United States, on certain aspects of its saliva collection testing device.
Inasmuch as the Company intends to sell its products in foreign markets it
intends to seek foreign patent protection on such products and technologies,
although it has not yet obtained such protection. The patent laws of other
countries may differ from those of the United States as to the patentability
of the Company's products and technologies and the degree of protection
afforded.
The Company also has one pending patent application in the United States
relating to the dental air abrasion device (airbrator), and three other
applications for other technologies which the Company is developing.
Much of the technology developed or owned by the Company is subject to
trade secret protection. To reduce the risk of loss of trade secret protection
through disclosure, the Company generally enters into confidentiality
agreements with its employees. There can be no assurance that the Company will
be successful in maintaining such trade secret protection or that others will
not capitalize on certain of the Company is technology.
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EMPLOYEES
The Company currently has five employees. The Company is not subject to
any collective bargaining agreement and believes that its relationships with
its employees are good.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company maintains its corporate offices at 430 Ansin Boulevard,
Suite G, Hallandale, Florida 33009. Until February 1998, the Company rented
approximately 3,700 square feet at this location and paid approximately $1,675
per month for rent pursuant to a lease which was scheduled to expire August
31, 1998. The Company also rented approximately 1,900 square feet of lab
space in the same building pursuant to a lease which required monthly payments
of approximately $900 and which was scheduled to expire September 30, 1998.
On February 11, 1998, the Company entered into a new lease with the same
landlord for office and warehouse space at a new nearby location. The five
year lease commenced April 1, 1998, and requires monthly rental payments of
$4,000 plus tax. The Company has the option to renew the lease for five
additional years. This new lease replaces and cancels the two lease
agreements described above.
The Company expects to move to its new offices during May or June 1998.
ITEM 3. LEGAL PROCEEDINGS.
Other than the law suit described below, there are no pending legal
proceedings in which the Company is a party, and the Company is not aware of
any threatened legal proceedings involving the Company.
On or about August 11, 1995, Americare Transtech, Inc. ("Americare"),
Americare Biologicals, Inc. and International Medical Associates, Inc.,
through their principal, Joseph D'Angelo ("D'Angelo"), instituted suit against
six parties in the Broward County circuit court under case no. 95-011256 (21).
The complaint was dismissed and subsequently amended on or about May 17, 1996,
and included Simplex-Florida as a defendant in one count of the amended
complaint. The complaint alleges that ADI misappropriated Americare's
proprietary and trade secret technology relating to the saliva sample
collection system and non-invasive glucose detection technology. No specified
amount of damages was alleged other than to claim that the amount exceeded
$15,000. Nine affirmative defenses have been filed in response to the
allegations. Simplex intends on aggressively defending the case and believes
that the action lacks merit and has been filed as a retaliatory measure by
D'Angelo as a result of an earlier action filed against D'Angelo and Americare
by one of Simplex's principals. The suit is currently in the discovery stage
and it is expected to go to trial late in 1998.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year ended December 31, 1997.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
(a) MARKET INFORMATION. The Company's Common Stock trades in the
over-the-counter market, under the symbol "SMLX". Other than a few sporadic
trades during November 1996, the trading commenced during February 1997. The
following table sets forth the high and low bid prices for the Company's
Common Stock for the periods indicated as reported by the OTC Bulletin Board.
These prices are believed to be inter-dealer quotations and do not include
retail mark-ups, mark-downs, or other fees or commissions, and may not
necessarily represent actual transactions.
QUARTER ENDED HIGH BID LOW BID
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March 31, 1997 $3.3125 $.03125
June 30, 1997 $3.0625 $1.75
September 30, 1997 $2.875 $1.4375
December 31, 1997 $2.3125 $1.1875
March 31, 1998 $1.78125 $ .75
(b) HOLDERS. As of March 31, 1998, the Company had approximately 85
shareholders of record. This does not include shareholders who hold stock in
their accounts at broker/dealers.
(c) DIVIDENDS. The Company has never paid a cash dividend on its
common stock and does not expect to pay a cash dividend in the foreseeable
future.
(d) RECENT SALES OF UNREGISTERED SECURITIES. None.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
RESULTS OF OPERATIONS
The Company s revenues during the year ended December 31, 1997 were
$71,461 as compared to $25,840 during the year ended December 31, 1996. The
increased revenues were due to increased sales of the Company's saliva test
kits to distributors in foreign countries for the purpose of testing the
products and obtaining approvals to sell the products in these countries.
Costs of goods sold increased from $25,269 in the year ended December
31, 1996 to $48,121 in the year ended December 31, 1997 due to the increased
sales. Cost of goods sold as a percentage of sales dropped from 98% in 1996
to 67% in 1997. The margin on the Company s saliva test kits will increase
significantly once the Company starts manufacturing the kits in commercial
quantities.
Selling, general and administrative expenses increased from $403,049 in
the year ended December 31, 1996 to $485,086 in the year ended December 31,
1997 due to the increased level of activity in the Company s business, and the
fact that the Company completed a reverse acquisition with a public company
during March 1997 which caused the Company s legal and accounting expenses to
increase.
During the year ended December 31, 1997 the Company received other
income of $167,360 from the forfeiture of customer deposits for marketing
rights to the Company s HIV test kits, and the Company received $30,000 from
Sybron Dental Specialities, Inc. pursuant to the distribution agreement
relating to the Airbrator.
-11-
<PAGE>
Interest expense increased from $6,469 in the year ended December 31,
1996 to $19,505 in the year ended December 31, 1997 due to the increased
amount of debt outstanding during 1997.
The net loss for the year ended December 31, 1997 declined to $309,944
from $434,640 for the year ended December 31, 1996 due primarily to the other
income received during 1997 related to the forfeiture of customer deposits and
the license fees.
The Company has reviewed the effect that the year 2000 will have on its
essential computer systems, especially those related to its ongoing operations
and its internal control systems, including the preparation of financial
information. The Company has plans underway to ensure that there will be no
significant adverse effect on its operations or accounting records related to
the year 2000.
CAPITAL RESOURCES AND LIQUIDITY
The Company's working capital was a negative $19,021 at December 31,
1997 as compared to a positive $32,577 at December 31, 1996. The decrease in
working capital was primarily due to the net loss for 1997 of $309,944.
During the year ended December 31, 1997, cash used in operating
activities was $303,861 as compared to $532,289 of cash used in operating
activities for the year ended December 31, 1996. The principal contributing
factor was the 1997 loss of $309,944.
During the year ended December 31, 1997 net cash used in investing
activities was $50,581 as compared to $101,084 in the prior year.
During the year ended December 31, 1997 the net cash provided by
financing activities was $342,336 as compared to $607,781 in the prior year.
In 1997 the Company received $294,990 in loans from a shareholder and an
additional $50,000 loan from an investor. The Company has prepared the
financial statements on a going concern basis with the assumption that the
Company will secure additional financing from the sale of the Company's common
stock for up to $1,000,000 in proceeds. The Company also expects to generate
revenues from the sale of its test kits in countries where the products have
been approved for sale.
During March 1998 the Company signed a letter of intent with Automated
Health Technologies, Inc. ("AHT") and an investment partnership pursuant to
which the Company will acquire a 19% interest in AHT. The Company will also
grant a put option for the remaining 81% of AHT whereby the Company would be
required to issue its common stock for the remaining 81%. Pursuant to this
letter of intent Mr. Colin Jones, the CEO of AHT has become the President and
Chairman of the Company. The letter of intent also provides that the
investment partnership will raise $1 million for a number of shares which
approximates 20% of the Company on a fully diluted basis. The definitive
agreement has not been executed as of the filing of this Report, however, the
partnership has loaned the Company $200,000 during March and April 1998.
The Company has no material commitments for capital expenditures at the
time of the filing of this Report.
ITEM 7. FINANCIAL STATEMENTS.
The financial statements are set forth on pages F-1 through F-6 hereto.
-12-
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
No response required.
-13-
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
The directors and executive officers of the Company and its wholly-owned
subsidiary, their ages and positions held in the Company are as follows:
NAME AGE POSITIONS HELD AND TENURE
- ----------------------------- --- ----------------------------------
Colin N. Jones 77 President and Chairman of the Board
Nicholas G. Levandoski, Ph.D. 61 Vice President - Research and
Development, Secretary, Treasurer
and Director of the Company;
and Director of Research and
Development for Simplex-Florida
Henry B. Schur 53 Vice President - Business Development
and Director of the Company; Vice
President and a Director of
Simplex-Florida
Joel Marcus 58 Director
There are no family relationships between any officers and directors of
the Company. The Company presently has no audit, compensation or nominating
committees.
BUSINESS EXPERIENCE
The following is a brief account of the education and business
experience during at least the past five years of the Company's directors,
executive officers, and key employees, indicating the principal occupation and
employment during that period, and the name and principal business of the
organization in which such occupation and employment were carried out.
COLIN N. JONES has served as the President and Chairman of the Board of
the Company since April 10, 1998. Mr. Jones has served as CEO and Chairman of
Automated Health Technologies since November 1996 and was a consultant to that
firm from February 1996 to November 1996. From July 1994 until January 1996,
he served as Chairman, International of INTEC, an international consulting
firm specializing in reengineering. From February 1983 until March 1988, he
served as Chairman of Proximity Technologies and continued as Vice President,
International until July 1994 for Franklin Electronics, which had purchased
Proximity Technologies. From June 1974 until February 1983, he owned and
operated his own merger and acquisition firm. From January 1970 until June
1974, he was President and CEO of Sensormatic Electronics and remained a
consultant until June 1974. From September 1950 until January 1970, he was
employed by IBM in various positions with his final position being Manager of
Sales Programs for the Office Products Division. Mr. Jones received a BSME
Degree from the University of Texas in 1949.
DR. NICHOLAS LEVANDOSKI has served as the Vice President of Research and
Development, Secretary, Treasurer and a director of the Company since March 5,
1997. He also served as acting President from March 5, 1997 until April 10,
1998. He has served as Director of Research and Development for
Simplex-Florida since June 1995. Dr. Levandoski has extensive research and
clinical experience,
-14-
<PAGE>
including military, industry and hospital environments. Dr. Levandoski
received a B.S. degree in Chemistry/Biology from the University of Notre Dame
in 1958. After a brief period in private industry (Abbott Laboratories, N.
Chicago, Illinois), Dr. Levandoski enlisted and served in the Medical Service
Corps. of the U.S. Army from 1959 to 1962. While on active duty in Medical
Service Corps., Dr. Levandoski enrolled and attended the graduate school of
the University of Denver where he continued his studies in organic chemistry.
Upon release from active duty in 1962, Dr. Levandoski was hired as the
Director of Laboratory of Metabolic Division of the U.S. Army Research and
Nutrition Laboratory, Denver, Colorado, from 1962 to 1964, and he completed
his graduate studies in 1964. He thereafter held responsible positions in
industry, including Cordis Corps., Miami, Florida, from 1965 to 1971, in the
Diagnostic Products Division; Benasil Corporation, Miami, Florida from 1977 to
1979; and Director of Corporate Compliance (FDA) for North American
Biologicals, Miami, Florida. In 1979, Dr. Levandoski returned to active duty
in the U.S. Army as Executive Officer and Hospital Administrator for a
1,000-bed general hospital in Miami, Florida. In 1982, Dr. Levandoski was
selected to attend the National War College, Ft. McNair, Washington, D.C.; and
was thereafter assigned to the Pentagon in Washington, D.C., Division of
Reserve Affairs, where he remained until his retirement as a full Colonel in
1984.
MR. HENRY SCHUR has served as the Company's Vice President of Marketing
and a Director since March 5, 1997. He has served as President of Analyte
Diagnostics, Inc., a wholly owned subsidiary of Simplex-Florida since June
1995. He is the Company's principal scientist and one of the principal
inventors of the Company's products. Mr. Schur has an undergraduate degree in
Health Sciences from Florida International University and post graduate
studies in Business Management at the University of Oklahoma. In the course
of Mr. Schur's professional career, he has occupied responsible positions with
companies engaged in the manufacture of diagnostics products and biochemicals,
including specifically, Arcade, Inc., Chattanooga, Tennessee (1986 to 1987),
and Cordis Corporation, Miami, Florida (1966 to 1968). Mr. Schur, in 1991,
was formerly employed by Americare, with whom Mr. Schur is now in litigation.
Mr. Schur is a principal inventor of a number of the Company's products and
has a number of issued U.S. and foreign patents to his credit.
JOEL MARCUS has served as a Director of the Company since December 1997.
He has been self-employed as a certified public accountant in Florida since
1974 when he became a licensed CPA. Mr. Marcus received a Bachelor of Science
Degree in Business Administration from Hofstra University in New York in 1960
and completed graduate studies at CW Post Tax Institute in 1963.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Based solely on a review of Forms 3 and 4 and amendments thereto
furnished to the Company during its most recent fiscal year, and Forms 5 and
amendments thereto furnished to the Company with respect to its most recent
fiscal year and certain written representations, no persons who were either a
Director, Officer or beneficial owner of more than 10% of the Company's Common
Stock, failed to file on a timely basis reports required by Section 16(a) of
the Exchange Act during the most recent fiscal year except as follows:
International Technologies Ltd., a principal shareholder, failed to file a
Form 3 and one Form 4 reporting its initial ownership position and one
transfer during 1997. The shareholder has also not filed a Form 5 for 1997.
-15-
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION.
The following table sets forth information regarding the executive
compensation for the Company's President and each other executive officer
whose total annual salary and bonus exceeded $100,000 for the year ended
December 31, 1996 and December 31, 1997:
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
- -----------------------------------
ANNUAL COMPENSATION AWARDS
PAYOUTS
----------------------- --------------------------
- -------
SECURI-
TIES
UNDERLY-
OTHER RE- ING
ALL
ANNUAL STRICTED OPTIONS/
OTHER
NAME AND PRINCIPAL COMPEN- STOCK SARs LTIP
COMPEN-
POSITION YEAR SALARY BONUS SATION AWARD(S) (NUMBER) PAYOUTS
SATION
- ------------------ ---- ------- ----- ------ -------- -------- -------
- ------
<S> <C> <C> <C> <C> <C> <C> <C>
<C>
Nicholas G. 1997 $43,500 -- $19,400 -- 250,000 --
--
Levandoski, Ph.D., 1996 $ -- -- $21,956 -- -- --
--
President
</TABLE>
AGGREGATED OPTION EXERCISES IN YEAR ENDED
DECEMBER 31, 1997 AND DECEMBER 31, 1997 OPTION VALUES
SECURITIES UNDER- VALUE OF UNEXER-
SHARES LYING UNEXERCISED CISED IN-THE
ACQUIRED OPTIONS MONEY OPTIONS/
ON AT 12/31/97 AT 12/31/97
EXERCISE VALUE EXERCISABLE/ EXERCISABLE/
NAME (NUMBER) REALIZED UNEXERCISABLE UNEXERCISABLE
---- -------- -------- ---------------- ----------------
Nicholas Levandoski -0- $ -0- 250,000/250,000 0/0
OPTIONS GRANTS IN LAST FISCAL YEAR
Individual Grants
NUMBER OF % OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO EXERCISE OR
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION
NAME GRANTED(#) FISCAL YEAR ($/SH) DATE
---- ------------ ------------ ----------- ----------
Nicholas Levandoski 250,000 54.3% $1.58 8/27/02
STOCK OPTION PLAN
During March 1997, the Board of Directors adopted a Stock Option Plan
(the "Plan"), and on March 28, 1997, the Corporation's shareholders approved
the Plan. The Plan authorizes the issuance of options to purchase up to
2,000,000 shares of the Company's Common Stock.
-16-
<PAGE>
The Plan allows the Board to grant stock options from time to time to
employees, officers, directors and consultants of the Company. The Board has
the power to determine at the time that the option is granted whether the
option will be an Incentive Stock Option (an option which qualifies under
Section 422 of the Internal Revenue Code of 1986) or an option which is not an
Incentive Stock Option. Vesting provisions are determined by the Board at the
time options are granted. The option price for any option will be no less
than the fair market value of the Common Stock on the date the option is
granted.
Since all options granted under the Plan must have an exercise price no
less than the fair market value on the date of grant, the Company will not
record any expense upon the grant of options, regardless of whether or not
they are incentive stock options. Generally, there will be no federal income
tax consequences to the Company in connection with Incentive Stock Options
granted under the Plan. With regard to options that are not Incentive Stock
Options, the Company will ordinarily be entitled to deductions for income tax
purposes of the amount that option holders report as ordinary income upon the
exercise of such options, in the year such income is reported.
During 1997 the Company granted options to seven persons to purchase a
total of 490,000 shares of common stock at a price of $1.58 per share.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth, as of March 31, 1998, the 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 officer and director
individually, and all officers and directors as a group. Each person has sole
voting and investment power over the shares except as noted.
<TABLE>
<CAPTION>
AMOUNT AND
NAME AND ADDRESS NATURE OF BENE- PERCENT
OF BENEFICIAL OWNERS FICIAL OWNERSHIP OF CLASS
- ------------------------- ---------------- --------
<S> <C> <C>
Henry B. Schur 1,042,500<FN1> 13.9%
430 Ansin Boulevard, Suite G
Hallandale, Florida 33009
Debra L. Ross 1,042,500<FN2> 13.9%
430 Ansin Boulevard, Suite G
Hallandale, Florida 33009
John E. Trafton 878,000 11.7%
285 Sunrise Drive, Apt. 16
Key Biscayne, Florida 33149
Colin N. Jones -- --
1025 N.W. 17th Avenue
Delray Beach, Florida 33445
Nicholas G. Levandoski 0<FN3> -0-
430 Ansin Boulevard, Suite G
Hallandale, Florida 33009
Joel Marcus 90,000<FN4> 1.2%
676 West Prospect Road
Fort Lauderdale, Florida 33309
-17-
<PAGE>
International Technologies Ltd. 1,300,000 17.3%
c/o William Smith
P.O. Box F-40729
Freeport, Bahamas
All Directors and Officers 1,312,500<FN1> 17.5%
as a Group (4 Persons)
_______________________
<FN>
<FN1>
Includes 862,500 shares held of record by Mr. Schur's wife, Debra Ross, 80,000
shares held by Mr. Schur's daughter, and 100,000 shares held in trust for Mr.
Schur's daughter. Does not include options to purchase 100,000 shares since
the Company's stock option plan is awaiting shareholder approval.
<FN2>
Includes 862,500 shares held directly by Ms. Ross, 80,000 shares held by Ms.
Ross' daughter, and 100,000 shares held in trust for Ms. Ross' daughter.
<FN3>
Does not include options to purchase 250,000 shares since the Company's stock
option plan is awaiting shareholder approval.
<FN4>
Does not include options to purchase 100,000 shares since the Company's stock
option plan is awaiting shareholder approval.
</FN>
</TABLE>
The Company knows of no arrangement or understanding, the operation of
which may at a subsequent date result in a change of control of the Company.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
ACQUISITION OF SIMPLEX-FLORIDA
On March 5, 1997, the Company completed the acquisition of 100% of the
outstanding common stock of Simplex Medical Systems, Inc. ("Simplex-Florida")
in exchange for 3,453,000 shares of the Company's Common Stock (approximately
46.04% of the shares now outstanding). The shares were exchanged on the basis
of one share of the Company's common stock for one share of Simplex-Florida
common stock. In connection with the closing of this transaction, several
current shareholders submitted for cancellation a total of 31,953,000 shares
of common stock. As a result, after the acquisition of Simplex-Florida, there
are a total of 7,500,000 shares outstanding.
The stock issuances were made pursuant to an Agreement ("Agreement")
between the Company and Simplex-Florida. The terms of the Agreement were the
result of negotiations between the managements of the Company and
Simplex-Florida. However, the Board of Directors did not obtain any independent
"fairness" opinion or other evaluation regarding the terms of the Agreement,
due to the cost of obtaining such opinions or evaluations.
TRANSACTIONS INVOLVING THE COMPANY
On March 20, 1996, the Company issued to each of Mesdames Colleen E.
Schmidt, a Director of the Company, and a Company Director, and Sandra S.
Steinberg, a Director of the Company, 15,000,000 shares of the Company's
common stock, $.0001 par value per share (a total of 30,000,000 shares of
common stock), in consideration, in each case, for the sum of $5,000 in cash
(a total of $10,000 in cash). These shares collateralized two non-interest
bearing promissory notes in the principal amount of $2,500 each (an aggregate
face amount of $5,000), due and payable on May 31, 1996, of which each of
Mesdames Schmidt and Steinberg are the makers and the Company is the holder.
-18-
<PAGE>
During the year ended December 31, 1997, the Company entered into
several short term notes payable with Joel Marcus, a director of the Company,
totaling $294,990, bearing interest at 10% per annum. Joel Marcus
subsequently assigned these notes to International Technologies Ltd., a
shareholder. As a of December 31, 1997, $284,990 of these notes payable had
expired terms. On April 2, 1998, the Company entered into an agreement with
International Technologies Ltd. to extend the terms of the notes for a three
year period with interest at 10% per annum. These notes will be amortized
over the three year period with payments on principal to be made only if the
Company records pre-tax earnings in excess of the principal amount due. If an
additional extension of time is necessary, this agreement grants an extension
until such time as pre-tax profits are sufficient to amortize the loans over
the three year period.
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) 3. EXHIBITS.
EXHIBIT
NUMBER DESCRIPTION LOCATION
3.1 Articles of Incorporation, Incorporated by reference to
as Amended Exhibits 2.1, 2.2 and 2.3 to
the Registrant's Form 10-SB
Registration Statement filed
on April 4, 1996
3.2 Bylaws Incorporated by reference to
Exhibit 2.4 to the Registrant's
Form 10-SB Registration State-
ment filed on April 4, 1996
10.1 Promissory Note dated Incorporated by reference to
March 20, 1996 of Exhibit 10.1 to the Registrant's
Sandra S. Steinberg Form 10-SB Registration State-
ment filed on April 4, 1996
10.2 Promissory Note dated Incorporated by reference to
March 20, 1996 of Exhibit 10.2 to the Registrant's
Colleen E. Schmidt Form 10-SB Registration State-
ment filed on April 4, 1996
(b) REPORTS ON FORM 8-K. No Reports on Form 8-K were filed during the
fourth quarter of the Company's fiscal year ended December 31, 1997.
INDEX TO FINANCIAL STATEMENTS
Independent Auditor's Report F-1
Financial Statements:
Balance Sheets F-2
Statements of Operations F-3
Statements of Stockholders' Equity (Deficit) F-4
Statements of Cash Flows F-5
Notes to Financial Statements F-6
-19-
<PAGE>
SCHMIDT, RAINES, TRIEST, DICKENSON & ADAMS, P.L.
Certified Public Accountants and Consultants to Business
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
Board of Directors
Simplex Medical Systems, Inc.
and Subsidiary
Hallandale, Florida
We have audited the accompanying consolidated balance sheets of Simplex
Medical Systems, Inc. and Subsidiary (a development stage company) as of
December 31, 1997, and the related statements of operations, changes in
stockholders' equity (deficit) and cash flows for the year then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit. The consolidated financial
statements of Simplex Medical Systems, Inc. and Subsidiary as of December 31,
1996 were audited by other auditors whose report dated May 16, 1997 included
an explanatory paragraph describing conditions that raised substantial doubt
about the Company's ability to continue as a going concern.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the December 31, 1997 consolidated financial statements
referred to above present fairly, in all material respects, the financial
position of Simplex Medical Systems, Inc. and Subsidiary as of December 31,
1997 and the results of their operations and their cash flows for the year
then ended in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As shown in the
consolidated financial statements, the Company incurred a net loss of $309,944
during the year ended December 31, 1997, and, as of that date, had a negative
net worth of $146,949. Those conditions raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans
regarding these matters are described in Note 2. The consolidated financial
statements do not include any adjustments that might result from the outcome
of this uncertainty.
/s/ Schnmidt & Co.
SCHMIDT, RAINES, TRIESTE,
DICKENSON & ADAMS, P. L.
Boca Raton, Florida
March 26, 1998
F-1
<PAGE>
SIMPLEX MEDICAL SYSTEMS, INC. AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
1997 1996
ASSETS
Current assets:
Cash $ 41,743 $ 53,849
Accounts receivable, net of allowance for
uncollectible accounts of $2,321 for
1997 and 1996 3,882 3,416
Inventory 141,565 140,827
--------- ---------
Total current assets 187,190 198,092
--------- ---------
Equipment, less accumulated depreciation
1997 $51,897; 1996 $25,804 87,451 111,316
--------- ---------
Other assets:
Patents and trademarks, less accumulated
amortization 1997 and 1996 $504 66,861 18,508
Deposits 6,692 5,580
--------- ---------
73,553 24,088
--------- ---------
$ 348,194 $ 333,496
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses $ 75,074 $ 24,062
Current portion of notes payable 61,044 2,654
Customer and other deposits 70,093 138,799
--------- ---------
Total current liabilities 206,211 165,515
--------- ---------
Notes payable, net of current portion 288,932 4,986
--------- ---------
Commitments and contingencies
Stockholders' equity (deficit):
Common stock, $.0001 par value, 100,000,000
shares authorized, 7,500,000 and 3,453,000
shares issued and outstanding at December 31,
1997 and 1996, respectively 750 345
Preferred stock, $.0001 par value, 10,000,000
shares authorized, no shares issued or
outstanding -0- -0-
Additional paid-in capital 658,197 658,602
Deficit accumulated during the development stage (805,896) (495,952)
--------- ---------
(146,949) 162,995
--------- ---------
$ 348,194 $ 333,496
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
<PAGE>
SIMPLEX MEDICAL SYSTEMS, INC. AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE PERIOD JUNE 6, 1995 (DATE OF INCEPTION) THROUGH DECEMBER 31, 1997
AND FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
June 6, 1995
(date of inception)
through
December 31, 1997 1997 1996
----------------- --------- ---------
Revenues, net $ 119,431 $ 71,461 $ 25,840
Cost of goods sold 83,298 48,121 25,269
---------- --------- ---------
Gross profit 36,133 23,340 571
Operating expenses:
Selling, general and
administrative expenses 961,084 485,086 403,049
Depreciation and amortization expense 52,401 26,093 26,229
---------- --------- ---------
Total operating expenses 1,013,485 511,179 429,278
---------- --------- ---------
Net loss from operations (977,352) (487,839) (428,707)
Other income (expense):
Forfeiture of customer deposits 167,360 167,360 -0-
License fees 30,000 30,000 -0-
Other income 576 40 536
Interest expense (26,480) (19,505) (6,469)
---------- --------- ---------
Total other income (expense) 171,456 177,895 (5,933)
---------- --------- ---------
Net loss before income taxes (805,896) (309,944) (434,640)
Income taxes -0- -0- -0-
---------- --------- ---------
Net loss $ (805,896) $(309,944) $(434,640)
=========== ========= =========
Loss per common share $ (0.05) $ (0.15)
========= =========
Weighted average number of shares 6,790,389 2,866,651
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
SIMPLEX MEDICAL SYSTEMS, INC. AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE PERIOD JUNE 6, 1995 (DATE OF INCEPTION) THROUGH DECEMBER 31, 1997
AND FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
Total
Stock-
holders'
Common stock Paid-in Accumulated Equity
Issued Amount Capital Deficit (Deficit)
Analyte Diagnostics, Inc. ----------- ------ ------- ----------- --------
Common stock issued on
July 29,1995 24,750,000 $2,475 $ -0- $ -0- $ 2,475
1 for 200 reverse stock
split October 31, 1995 (24,626,250)(2,462) -0- -0- (2,462)
Merger on October 31, 1995
of Analyte Diagnostics,
Inc. into Simplex Medical
Systems, Inc. (123,750) (13) -0- -0- (13)
Simplex Medical Systems, Inc. and Subsidiary
Issuance of one share
Simplex Medical Systems,
Inc. $.0001 common stock
for each two shares of
Analyte Diagnostics, Inc.
common stock on October
31, 1995 61,875 6 -0- -0- 6
Shares issued for cash at
par on October 31, 1995 1,053,625 105 -0- -0- 105
Cancellation of stock on
October 31, 1995 (239,375) (24) -0- -0- (24)
Net loss -0- -0- -0- (61,312) (61,312)
----------- ----- ------- --------- ---------
Balance, December 31, 1995 876,125 87 -0- (61,312) (61,225)
Shares issued for cash at
par in February 1996 16,475 2 -0- -0- 2
Shares issued for equipment
in February 1996 214,375 21 53,198 -0- 53,219
Issuance of shares for
private placement on
June 7, 1996 619,525 62 605,577 -0- 605,639
Shares issued for 2 for 1
stock split on September
25, 1996 1,726,500 173 (173) -0- -0-
Net loss -0- -0- -0- (434,640) (434,640)
----------- ----- -------- --------- ---------
Balance, December 31, 1996 3,453,000 345 658,602 (495,952) 162,995
Issue of shares in merger
with Music Tones on
March 5, 1997 4,047,000 405 (405) -0- -0-
Net loss -0- -0- -0- (309,944) (309,944)
----------- ------ -------- --------- ---------
Balance, December 31, 1997 7,500,000 $ 750 $658,197 $(805,896) $(146,949)
=========== ====== ======== ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
SIMPLEX MEDICAL SYSTEMS, INC. AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE PERIOD JUNE 6, 1995 (DATE OF INCEPTION) THROUGH DECEMBER 31, 1997
AND FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
June 6, 1995
(date of inception)
through
December 31, 1997 1997 1996
OPERATING ACTIVITIES ------------------ --------- ---------
Net loss $ (805,896) $(309,944) $(434,640)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation and amortization 52,401 26,093 26,229
(Increase) decrease in:
Accounts receivable (3,882) (466) (2,608)
Inventory (141,565) (738) (131,741)
Deposits (6,692) (1,112) (2,188)
Increase (decrease) in:
Accounts payable and accrued
expenses 75,074 51,012 (15,706)
Customer and other deposits 70,093 (68,706) 28,365
---------- --------- ---------
Net cash used in operating activities (760,467) (303,861) (532,289)
---------- --------- ---------
INVESTING ACTIVITIES
Proceeds from the sale of equipment 290 290 -0-
Acquisition of fixed assets and patents (207,003) (50,871)(101,084)
---------- --------- ---------
Net cash provided by (used in)
Investing activities (206,713) (50,581)(101,084)
---------- --------- ---------
FINANCING ACTIVITIES
Proceeds from private placement 658,947 -0- 605,641
Payments on notes payble (8,154) (2,654) (5,500)
Proceeds from notes payable 358,130 344,990 7,640
---------- --------- --------
Net cash provided by financing
activities 1,008,923 342,336 607,781
---------- --------- -------
Net increase (decrease) in cash 41,743 (12,106) (25,592)
Cash - beginning of period -0- 53,849 79,441
---------- --------- -------
Cash - end of period $ 41,743 $ 41,743 $53,849
========== ========= =======
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
SIMPLEX MEDICAL SYSTEMS, INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Simplex Medical Systems, Inc. has been in the development stage since its
inception on June 6, 1995. Since inception, the Company has been engaged in
the development, acquisition, marketing and manufacture of medical diagnostic
products, biological products for blood banking, bulk pharmaceuticals, and
specialty chemicals, as well as seeking regulatory clearance, patent
protection, and raising capital to fund operations.
The Company has patented and proprietary technology in the fields of: point
of use medical and veterinary diagnostics; dental therapeutic devices;
pharmaceutical products; and consumer products. The Company utilizes its own
manufacturing facilities for the production of proprietary or quality
sensitive materials and contracts out the other products and final packaging
to third parties. The Company currently has products approved in several
foreign countries and is actively marketing its products in those areas.
Within the United States, the Company has received FDA registration on one of
its major products and anticipates approval on its second major product during
1998.
The financial statements include the accounts of the Company s subsidiary,
Analyte Diagnostics, Inc., from the date of its inception, June 6, 1995.
Analyte Diagnostics, Inc. was a predecessor corporation to Simplex Medical
Systems, Inc. which was formed on September 15, 1995. The two companies were
merged into Simplex Medical Systems, Inc., on October 31, 1995, with all
account balances recorded at cost. At the time, the Company had a 1 to 200
reverse stock split. Subsequently, the Company had a 2 for 1 stock split.
All share references give effect to the post split plans.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Simplex Medical
Systems, Inc., and its wholly owned subsidiary, Analyte Diagnostics, Inc. All
intercompany accounts and transactions have been eliminated in consolidation.
INVENTORY
Inventory consists of finished goods as of December 31, 1997 and 1996 and is
stated at the lower of cost (first-in, first-out method) or market.
EQUIPMENT
Equipment is stated at cost and is depreciated using the straight-line method
over the estimated useful lives of the respective assets. Expenditures for
maintenance and repairs are charged against operations as incurred.
ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles require management to make estimates and assumptions
that affect certain reported amounts and disclosures. Accordingly, actual
results could differ from those estimates.
F-6
<PAGE>
SIMPLEX MEDICAL SYSTEMS, INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
PATENTS AND TRADEMARKS
The cost of patents and trademarks acquired are being amortized on a
straight-line basis over their estimated useful lives, ranging from 17 to 40
years, beginning when the trademarks and patents are approved.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to operations when incurred and are
included in operating expenses. The amounts charged to operations for the
year ended December 31, 1997 totaled $103,324.
REVENUE RECOGNITION
Revenue from sales is recognized upon shipment of goods to the customer.
License fee revenue is recognized upon receipt.
Revenue is recognized from the forfeiture of customer deposits based upon the
individual terms contained in the International Distribution agreements with
each customer. These deposits are non-refundable and are considered forfeited
when the customer fails to perform certain requirements as described in their
contract.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
121, "Accounting for the Impairment of Long-Lived Assets and For Long-Lived
Assets to be Disposed Of" ("SFAS 121") in 1996. SFAS 121 establishes
accounting standards for recording the impairment of long-lived assets,
certain identifiable intangibles, and goodwill related to those assets to be
held and used and for long-lived assets and certain identifiable intangibles
to be disposed of. The adoption of SFAS 121 did not have a material impact on
the Company s financial position or results of its operations.
STOCK BASED COMPENSATION
The Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation" in
1996. SFAS 123 allows either the adoption of a fair value method of
accounting for stock-based compensation plans or continuation of accounting
under Accounting Principles Board ("APB") Opinion No. 25 Accounting for Stock
Issued to Employees, and related interpretations with supplemental
disclosures. The Company has chosen to account for all stock based
arrangements under which employees receive shares of the Company s stock under
APB 25 and make the related disclosures under SFAS 123. Since the method of
accounting prescribed under SFAS 123 is not to be applied to options granted
prior to January 1, 1995, there is no resulting pro forma compensation cost to
be disclosed.
F-7
<PAGE>
SIMPLEX MEDICAL SYSTEMS, INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
EARNINGS PER SHARE
The Company adopted SFAS No. 128, "Earnings Per Share", in 1997. SFAS 128
establishes accounting standards for the computation, presentation, and
disclosure of earnings per share information for entities with publicly held
common stock or potential common stock.
CAPITAL STRUCTURE
The Company adopted SFAS No. 129, "Disclosure of Information about Capital
Structure", in 1997. SFAS 129 establishes disclosure requirements within the
financial statements of the pertinent rights and privileges of the various
securities outstanding.
RECENTLY ISSUED ACCOUNTING STANDARDS
COMPREHENSIVE INCOME
The Financial Accounting Standards Board recently issued SFAS No. 130,
"Comprehensive Income: Financial Statement Presentation". SFAS 130
establishes accounting standards for reporting and presenting comprehensive
income and its components in a set of financial statements. For the purpose
of this standard, comprehensive income is defined as the change in equity of a
company arising from transactions and other events and circumstances from
nonowner sources. It includes all changes in equity during a period except
those resulting from investments by and distributions to owners. This
standard is applicable to financial statements with fiscal years beginning
after December 15, 1997. The adoption of SFAS 130 is not expected to have a
material impact on the Company s financial position or results of its
operations.
SEGMENT REPORTING
The Financial Accounting Standards Board recently issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information". This
standard requires that public companies report certain information about
operating segments, products and services, the geographic areas in which they
operate, and their major customers. This standard is applicable to financial
statements with fiscal years beginning after December 15, 1997. The adoption
of SFAS 131 is not expected to have a material impact on the Company s
financial position or results of its operations.
NET LOSS PER SHARE
Net loss per share is computed on the basis of the weighted average number of
shares actually outstanding during the years ended December 31, 1997 and 1996.
Options to purchase 490,000 shares of common stock and bonds convertible into
50,000 shares of common stock were not included in computing net loss per
share because the effect of such inclusion would be to decrease the reported
net loss per share.
F-8
<PAGE>
SIMPLEX MEDICAL SYSTEMS, INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
INCOME TAXES
The Company accounts for income taxes under the liability method in accordance
with Statement of Financial Accounting Standards No. 109 "Accounting for
Income Taxes". Deferred income taxes are determined based upon the difference
between the financial statement carrying amount and the tax basis of assets
and liabilities using tax rates expected to be in effect in the years in which
the differences are expected to reverse.
NOTE 2 - BASIS OF PRESENTATION AND CONTINUED EXISTENCE
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. Since inception, the Company has
experienced losses aggregating $805,896 and has been dependent upon loans from
stockholders and other third parties in order to satisfy operations to date.
As described in Note 15, "Subsequent Events", the Company has signed a letter
of intent with Robertson & Partners, LLC ("Robertson") and Automated Health
Technologies, Inc. ("AHT") in which the Company will purchase 19% of AHT
common stock and issue a five year put option on the purchase of the remaining
81% of AHT s common stock. Furthermore, the chairman of AHT will become the
Chairman and Chief Executive Officer of the Company. In addition, the letter
of intent calls for the sale of 20% of the Company s stock to investors being
sought by Robertson for $1,000,000.
Management believes that the funds raised through the sale of stock and income
generated from the sale of several recently developed products will provide
the Company with sufficient cash flow resources to fund the operations of the
Company. Furthermore, management believes that the expertise gained through
the employment of AHT s chairman will provide the Company with the
non-financial resources necessary to efficiently and effectively operate the
Company.
The financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
the amounts and classifications of liabilities that may result from the
possible inability of the Company to continue as a going concern.
NOTE 3 - BUSINESS ACQUISITION AND MERGER
On March 5, 1997, the shareholders of the Company received 3,453,000 shares of
the outstanding common stock of Music Tones, Ltd. ("MTL"), a publicly traded
inactive company, in exchange for the same number of the Company s common
stock in a reverse acquisition whereby the Company was deemed to be the
acquirer. As of the date of the transaction, MTL had 36,000,000 shares of
common stock issued and outstanding. Pursuant to the terms of the merger, MTL
canceled 31,953,000 shares of its common stock which reduced its issued and
outstanding shares to 4,047,000. After the closing, the Company s
shareholders owned approximately 46.04% of the then issued and outstanding
shares of MTL. This transaction has been accounted for as a pooling of
interests. The combined and separate results of MTL and the Company as of the
date of the merger have not been presented and the consolidated financial
statements for the periods presented have not been
F-9
<PAGE>
SIMPLEX MEDICAL SYSTEMS, INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 3 - BUSINESS ACQUISITION AND MERGER (CONTINUED)
restated to include the accounts of MTL because management believes they are
immaterial.
NOTE 4 - EQUIPMENT
Equipment consists of the following at December 31, 1997 and 1996
Useful Life
(in Years) 1997 1996
----------- -------- --------
Computer equipment 5 $ 11,215 $ 11,215
Office furniture and equipment 5-7 6,922 4,512
Shop equipment 5-7 80,291 80,579
Computer software 3 1,246 1,140
Molds 5 39,674 39,674
-------- --------
139,348 137,120
Less: accumulated depreciation (51,897) (25,804)
-------- --------
$ 87,451 $111,316
======== ========
Depreciation expense totaled $26,093 and $25,704 for the years ended December
31, 1997, and 1996, respectively.
NOTE 5 - NOTES PAYABLE
During the year ended December 31, 1997, the Company entered into several
short term notes payable with a shareholder totaling $294,990, bearing
interest at 10% per annum. These notes were subsequently assigned to another
shareholder. As of December 31, 1997, $284,990 of these notes payable had
expired terms. On April 2, 1998, the Company entered into an agreement with
the shareholder to extend the terms of the notes for a three year period with
interest at 10% per annum. These notes shall be amortized over the three year
period with payments on principal to be made only if the Company records
pre-tax earnings in excess of the principal amount due. If an additional
extension of time is necessary, this agreement grants an extension until such
a time as pre-tax profits are sufficient to amortize the loans over the three
year period. Accordingly, a portion of these notes payable has been
classified as long-term debt as of December 31, 1997.
F-10
<PAGE>
SIMPLEX MEDICAL SYSTEMS, INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 5 - NOTES PAYABLE (CONTINUED)
Notes payable as of December 31, 1997 and 1996 consisted of the following:
1997 1996
Note payable, vendor, due in monthly payments -------- --------
of $318, including interest which is calcu-
ated at 18% per annum, final payment due July,
1999; collateralized by equipment with a net
book value of $7,714 as of December 31, 1997. $ 4,986 $ 7,640
Note payable, shareholder, interest payable
at 10% per annum; payable as described above. 294,990 -0-
Convertible note payable, individual,
interest payable at 10% per annum on
December 18, 1998 and upon maturity on
June 18, 1999; convertible into common
stock at $1.00 per share (See Note 13). 50,000 -0-
-------- -------
349,976 7,640
Less: current maturities 61,044 2,654
-------- -------
$288,932 $ 4,986
======== =======
Aggregate annual maturities of the notes payable at December 31, 1997 are as
follows:
During the year ending December 31, 1998 $ 61,044
- ---------------------------------- 1999 146,905
2000 104,733
2001 37,294
--------
$349,976
========
Interest expense totaled $19,505 and $6,469 during the years ended December
31, 1997 and 1996, respectively.
NOTE 6 - CUSTOMER AND OTHER DEPOSITS
Included in customer and other deposits at December 31, 1997 is $16,100
received from an individual as a deposit on stock to be issued.
NOTE 7 - LEASES
The Company is currently renting office and warehouse space in Hallandale,
Florida pursuant to two lease agreements which expire in August and September
1998. See Note 15, "Subsequent Events", for disclosure of new lease
arrangement.
Rent expense for the years ended December 31, 1997 and December 31, 1996
amounted to $27,791 and $27,418, respectively.
F-11
<PAGE>
SIMPLEX MEDICAL SYSTEMS, INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 8 - RELATED PARTY TRANSACTIONS
A director and shareholder loaned the Company a total of $294,990 at various
times during the year ended December 31, 1997 that were subsequently assigned
to another shareholder of the Company. These notes were outstanding as of
December 31, 1997 and are discussed in Note 5. Interest expense incurred in
connection with these loans totaled $17,057 during 1997.
NOTE 9 - SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING
ACTIVITIES
During the years ended December 31, 1997 and 1996 cash paid by the Company for
interest totaled $1,163 and $749, respectively.
In addition, equipment increased by $8,800 during the year ended December 31,
1996 due to the recording of a related note payable.
NOTE 10 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate
that value:
NOTES PAYABLE
The carrying amount approximates fair value because the same terms and
interest rates could be obtained for similar maturities.
STOCK OPTIONS
It is not practicable to estimate the fair value of the Company s stock
options because they are subject to trading restrictions and lack quoted
market prices.
NOTE 11 - STOCK OPTIONS
In August 1997, the Board of Directors granted certain employees, directors
and consultants of the Company stock options pursuant to the Company s 1997
Stock Option Plan. A total of 2,000,000 shares of the Company s stock have
been reserved for the options to be granted under this plan. Eligible
participants include any employee, officer, director or consultant that the
Board of Directors, in its sole discretion, designates is eligible to
participate in this Plan. The option exercise price is stated on the option
grant and shall not be less than 100% of the fair market value of the shares
on the date of the grant or the par value, whichever is greater. Unless
otherwise stated on the option, each option is exercisable for ten years. As
of December 31, 1997, the options granted under this plan totaled 490,000
shares exercisable within ten years at a price of $1.58 per share.
The following summarizes the status of the Company s stock options for the
year ended December 31, 1997:
F-12
<PAGE>
SIMPLEX MEDICAL SYSTEMS, INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 11 - STOCK OPTIONS (CONTINUED)
Weighted-Average
Shares Exercise Price
------- ----------------
Outstanding at January 1, 1997 - 0 -
Granted and exercisable 490,000 $1.58
Exercised - 0 -
Forfeited - 0 -
Outstanding at December 31, 1997 490,000 $1.58
The Company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees", and related interpretations in accounting for its stock options.
Accordingly, no compensation cost has been recognized in the accompanying
financial statements related to stock options. The weighted average fair
value of options granted during the year ended December 31, 1997 was $0.97,
which was computed using the Black-Scholes option pricing model with the
following assumptions: expected life of 3 years; expected volatility of 75%;
and a risk free interest rate of 6%. Had compensation cost for the Company's
stock options been determined based on the fair value at the grant dates
consistent with the method of FASB No. 123, "Accounting for Stock-Based
Compensation", the Company's net loss and net loss per share for the year
ended December 31, 1997 would have been $785,244 and $0.12, respectively.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the use of
highly subjective assumptions. Because the Company s stock options have
characteristics that are significantly different from traded options and
because changes in the valuation assumptions can materially affect the fair
value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its
employee stock options.
NOTE 12 - INCOME TAXES
The Company has incurred tax operating losses and therefore has generated no
income tax liabilities. As of December 31, 1997, the Company has generated
net tax operating loss carryforwards totaling $805,896 which are available to
offset future taxable income, if any. These loss carryforwards expire
beginning in 2010. Due to limitations on the utilization of loss
carryforwards resulting from ownership changes and separate return limitations
and the uncertainty that the Company and its subsidiaries will be able to
utilize the net operating losses, a 100% valuation allowance has been recorded
against the deferred tax assets.
The following summarizes the components of the net deferred tax asset at
December 31, 1997 and 1996:
1997 1996
Deferred tax assets: -------- --------
Net operating loss carryforward $274,005 $147,778
Valuation allowance (274,005) (147,778)
-------- --------
Net deferred tax asset $ - 0 - $ - 0 -
======== ========
F-13
<PAGE>
SIMPLEX MEDICAL SYSTEMS, INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 13 - STOCKHOLDERS' EQUITY (DEFICIT)
PRIVATE PLACEMENT
During 1996, the Company completed a private placement of 619,525 shares of
common stock for $1 per share and received net proceeds of $605,639.
SHARES USED FOR EQUIPMENT
In February 1996, the Company issued 214,375 shares of its common stock to a
director of the company in exchange for his 100% interest in a private company
which was not active. This company manufactured specialty chemicals for the
pharmaceutical and agricultural industries. The Company received primarily
laboratory equipment as a result of this acquisition. The transaction has
been recorded at the fair value of assets acquired.
CONVERTIBLE NOTES PAYABLE
On December 18, 1997 the Company issued an unsecured convertible note payable
to an individual. This note bears interest at 10% per annum and matures on
June 18, 1999. Upon issuance and at any time on or prior to the maturity
date, any unpaid principal and accrued interest is convertible into fully paid
and nonassessable shares of $0.0001 par value common stock at $1.00 per share.
NOTE 14 - LEGAL PROCEEDINGS
The Company has been named as one of six co-defendants in a lawsuit filed by
the Company's principal scientist's previous employer, Americare Transtech,
Inc. Americare Transtech, Inc. alleges damages for violation of Florida's
Trade Secret Act with regard to the rights to the patent of the Company's
saliva sample collection system. The Company has aggressively defended its
position in the case and believes that the litigation lacks merit.
NOTE 15 - SUBSEQUENT EVENTS
LETTER OF INTENT
On February 20, 1998, the Company signed a letter of intent with Robertson &
Partners, LLC ("Robertson") and Automated Health Technologies, Inc. ("AHT").
According to this letter of intent, the Company has agreed to buy 19% of AHT
common stock for 500,000 shares of the Company's common stock and give AHT
shareholders a 5 year put option on an additional 1,000,000 shares of the
Company's common stock for the remaining 81% of AHT's common stock. In
addition, the Company has agreed to issue 20% of its stock to investors being
sought by Robertson in exchange for $1,000,000 to be raised during 1998. The
Company received $200,000 of this additional capital in March and April 1998.
Robertson's fee for raising this additional capital is 100,000 shares of the
Company's common stock.
LETTER OF INTENT FOR JOINT VENTURE
On February 5, 1998, the Company signed a letter of intent for joint venture
with S.S. White Technologies, Inc. in which the two companies will work
together to introduce and market one of the Company's major products for
industrial application.
F-14
<PAGE>
SIMPLEX MEDICAL SYSTEMS, INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 15 - SUBSEQUENT EVENTS (CONTINUED)
NOTES PAYABLE
On January 21, 1998, the Company executed two unsecured convertible 10% note
agreements totaling $75,000. These notes mature on July 21, 1999 with
interest payable on January 21 and July 21, 1999. These notes are convertible
into shares of the Company s common stock at a price of $1.00 per share.
LEASE
On February 11, 1998, the Company entered into a lease agreement for office
and warehouse space at a new location. This five year lease begins on April
1, 1998 and requires monthly rental payments of $4,000 plus tax. The Company
has the option at the end of the lease term to renew the lease for an
additional five years. This lease replaces and cancels the Company's existing
lease agreements which expire in August and September, 1998.
F-15
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Date: April 28, 1998 SIMPLEX MEDICAL SYSTEMS, INC.
By:/s/ Colin J. Jones
Colin N. Jones, President
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
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ Colin N. Jones President (Chief Executive April 28, 1998
Colin N. Jones Officer) and Director
/s/ Henry B. Schur Vice President of Marketing April 28, 1998
Henry B. Schur and Director
/s/ Nicholas G. Levandoski President, Vice President April 28, 1998
Nicholas G. Levandoski, of Research and Development,
Ph.D. Secretary, Treasurer and
Chief Financial and Accounting
Officer) and Director
/s/ Joel Marcus Director April 28, 1998
Joel Marcus
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
balance sheets and statements of operations found on pages F-2 and F-3 of the
Company's Form 10-KSB for the fiscal year ended December 31, 1997 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 41,743
<SECURITIES> 0
<RECEIVABLES> 3,882
<ALLOWANCES> 0
<INVENTORY> 141,565
<CURRENT-ASSETS> 187,190
<PP&E> 87,451
<DEPRECIATION> 0
<TOTAL-ASSETS> 348,194
<CURRENT-LIABILITIES> 206,211
<BONDS> 0
0
0
<COMMON> 750
<OTHER-SE> (147,699)
<TOTAL-LIABILITY-AND-EQUITY> 348,194
<SALES> 71,461
<TOTAL-REVENUES> 71,461
<CGS> 48,121
<TOTAL-COSTS> 511,179
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 19,505
<INCOME-PRETAX> (309,944)
<INCOME-TAX> 0
<INCOME-CONTINUING> (309,944)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (309,944)
<EPS-PRIMARY> (.05)
<EPS-DILUTED> (.05)
</TABLE>
