U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
X Annual report under section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended September 30, 1997
or
__ Transition report under section 13 or 15(d) of the Securities Exchange
Act of 1934 for transition period from to .
Commission file number 0-23153
VOLU-SOL, INC.
(Name of small business issuer in its charter)
UTAH 87-0543981
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5095 West 2100 South
Salt Lake City, Utah 84120
(Address of principal executive offices) (Zip Code)
(Issuer's telephone number: (801) 974-9474)
Securities registered under Section 12(b) of the Act: None
Name of each exchange on which registered: None
Securities registered under Section 12(g) of the Act:
Common Stock $.0001 par value
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities 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 No X
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B contained in this form, and no disclosure will be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ X ]
Issuer's revenues for the fiscal year ended September 30, 1997 were $493,754.
Registrant's Common Stock has not traded and there is no market for the
registrant's Common Stock at this time.
The number of shares of common stock of the Registrant outstanding as of
December 18, 1997 was 2,111,216.
Transitional Small Business Disclosure
Format (Check one):
Yes ___ No X
<PAGE>
PART I
ITEM 1. BUSINESS
Introduction
Volu-Sol, Inc. (the "Company" or "Volu-Sol") was incorporated in Utah on
July 27, 1995, as a wholly owned subsidiary of Biomune Systems, Inc., a Nevada
corporation ("Biomune"). The Company was organized to engage in the business
of manufacturing and marketing medical diagnostic stains and solutions and
related equipment, which business operations were conducted prior to that time
as an unincorporated division of Biomune called the Volu-Sol Medical Division.
Biomune purchased the assets comprising the Volu-Sol Medical Division in
December 1991 from Logos Scientific, Inc. After the Company's incorporation,
Biomune transferred all of the net assets of the Volu-Sol Medical Division to
the Company. Through fiscal 1995, Volu-Sol operated out of leased facilities
in Henderson, Nevada. On October 16, 1995, the Company relocated to West
Valley City, Utah (a suburb of Salt Lake City, Utah), where it continues to
have its manufacturing facility and corporate offices.
On or about December 31, 1997, approximately 2,111,216 shares of the
Company's $.0001 par value Common Stock, constituting all of the issued and
outstanding shares of the Company's Common Stock, are to be distributed pro
rata as a stock dividend to the holders of the Common Stock of Biomune as of
March 5, 1997 (the "Distribution"). In addition, the Company will reserve
1,302,278 shares of Common Stock comprised of (i) 323,118 shares for issuance
upon conversion of the Biomune Preferred Stock outstanding at March 5, 1997,
(ii) 732,101 shares issuable upon exercise of certain options, and (iii)
247,059 shares issuable upon exercise of certain warrants. As a consequence
of the Distribution, the Company, effective October 1, 1997, ceased to be a
subsidiary of Biomune and commenced operations as a separate, independent
company. The Company continues to conduct the same operations it did while it
was a subsidiary of Biomune.
Special Note Regarding Forward-looking Information
Certain statements in this Item 1 - "Business" and in Item 6 -
"Management's Discussion and Analysis or Plan of Operation" constitute
"forward-looking statements" within the meaning of Section 27A of the
Securities Act and Section 21E of the Exchange Act. For this purpose, any
statements contained herein or incorporated herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without
limiting the foregoing, the words "believes," "plans," "anticipates,"
"expects" and similar expressions are intended to identify forward-looking
statements. There are a number of important factors that could cause the
results of the Company to differ materially from those indicated by such
forward-looking statements. These factors include those set forth in "Risk
Factors" in Item 6 - "Management's Discussion and Analysis or Plan of
Operation."
Business Strategy
The Company's primary business strategy is to capitalize on the global
medical diagnostic industry by providing "building block" stains and reagents
and to grow through the selective acquisition of medical distributors, and
complementary devices and product lines. The Company's strategy includes the
following elements:
Acquire Complementary Businesses, New Products and Technologies. The Company
intends to evaluate potential acquisitions of distributors and complementary
products and businesses from time to time and to consummate transactions in
those situations where there is an appropriate economic and strategic fit.
Expand Distribution. The Company intends to increase its distribution base
through acquisition of distributors and through agreements with independent
distributors. The Company expects to increase sales through the addition of
more focused and committed sales personnel who work only for the Company,
thereby eliminating up to 35 percent in mark-up presently paid to independent
distributors. The payroll and related costs of in-house sales personnel will
offset to some degree the savings expected to be achieved from eliminating the
mark-up associated with the use of an outside sales force.
Develop Broader Product Lines. The Company offers over 70 products in four
major product lines in an effort to serve effectively a diverse and highly
decentralized industry. The Company believes that its many and diverse
products economically and reliably address the needs of medical diagnosticians
and laboratory technicians. Nevertheless, the Company has determined that it
can improve its revenue-generating capacity by adding to its existing product
line.
Offer Top Quality Products. The Company constantly strives to offer products
with the greatest purity and reliability possible through its quality control
system. It intends to continue to assure the quality of its product line.
Outsource Non-Stain Manufacturing. To minimize capital requirements
associated with the manufacture of products other than stains, solutions and
other chemicals, the Company intends to continue to take advantage of
strategic alliances with third-party manufacturers.
Esprit de Corps. The Company seeks to create a team spirit among its
employees, foster awareness of the Company's objectives and strategies at all
levels within the Company, and reward meritorious performance with
compensation and other incentives. The Company believes this creates loyalty
to the Company and pride in its products, which translates into greater
product quality and enhanced customer service.
Business Plan
The Company intends to continue to implement its Business Strategy by
completing a private placement of preferred stock (the "Offering"). The
Offering is intended to provide the Company with gross proceeds of up to
$2,400,000. The offering is to accredited investors as that term is defined
by Rule 501 of Regulation D, promulgated under the Securities Act. These
proceeds will be used to repay debt to Biomune (approximately $390,500 as of
the date of this Report), pay the expenses of the Offering and the
Distribution (including legal and accounting fees, estimated to be $75,000),
and finance the Company's operations within the framework of the Business
Strategy. The primary focus will be on the acquisition of distributors and
additional products to expand the current product line. As of December 15,
1997, the Company had received subscriptions for $1,300,000 for which cash of
$400,000 had been received. Payments for the remaining subscriptions are due
as follows: $300,000 immediately, $300,000 on or before January 15, 1998, and
$300,000 on or before March 1, 1998.
During the time the Company operated as a division and subsidiary of
Biomune, its chief focus was to manufacture and sell products to a distinct
segment of a much larger market. As a separate entity, the Company will seek
to broaden its base in the medical supply industry through adding in-house
distribution capacity to its present business. Specifically, the Company will
look to acquire small medical distributors, having 3-5 representatives and
annual sales of between $2.0 and $3.5 million. The Company expects that such
acquisitions will expand the capacity for distributing the Company's products,
as well as add to the number of products being sold by or through the
Company. The Company has not had discussions or entered into negotiations
with any acquisition candidates. Sales through in-house representatives are
expected to reduce the cost of distribution by as much as 35 percent thereby
increasing profitability. The primary focus will continue to be the medical
diagnostic stain business. With its own distribution, the Company believes it
can expand sales much more quickly than if it continues relying upon large
independent distributors who may sell or represent many other products or
manufacturers, including some that are unrelated to the Company's product
line.
Volu-Sol's Medical Diagnostic Industry Operations
The Company provides supplies to certain segments of the medical
diagnostics industry, which the Company believes to be a $6 to $8 billion
industry globally. An important aspect of the medical diagnostic industry is
the ability of medical professionals to diagnose pathologies and otherwise
assess conditions of body fluids and other tissue by microscopically analyzing
slides containing samples of the fluids or tissue. To enhance the ability of
medical practitioners and researchers to accurately assess samples and render
diagnoses based on those samples, microscope slides are prepared by smearing a
suspension containing the target biological sample on the slide. The slide is
then allowed to dry or is heated on a slide warmer to affix the sample to the
slide. The slide is then treated with one or more chemical stains or
reagents, according to the type of stain used and the types of conditions
being assessed. The effect of this staining process is to highlight or detect
certain properties of or abnormalities in the sample.
Stains are of two general types: (1) simple stains consisting of the
addition to the slide-mounted sample of one dye that serves to delineate
certain characteristics, but leaves all of the microscopic structures the same
hue; and (2) differential stains consisting of more than one dye added in
multiple steps, which has the effect of highlighting different structures or
properties of the sample with different colors. A host of different medical
diagnostic stains, solutions and chemical agents are used with different
tissue samples and to highlight or detect different tissue characteristics or
abnormalities. The Company estimates that the current global market for such
staining products is over $75 million annually.
Current Product Line
Stains, Solutions, Reagents, and Related Equipment. The Company
manufactures and markets a diversified line of simple and differential stains
and solutions as well as related equipment used by commercial and research
laboratories as well as medical clinics, hospitals, physician-operated
laboratories ("POLs") and veterinary clinics. Volu-Sol's staining product
line includes over 70 separate products that are marketed to the hematology,
microbiology, mycology and histology/cytology segments of the medical
diagnostics industry. The Company's stain solutions and related products are
sold separately in various quantities or as integrated kits configured to the
requirements of specified diagnostic devices produced by a variety of
manufacturers. In addition to sales of its own stains, solutions and other
chemical products, Volu-Sol has contracted with several original equipment
manufacturers ("OEMs") with respect to manufacturing and packaging medical
diagnostic stains for distribution by these OEMs.
The Definitive Slide Stainer Device. In addition to manufacturing and
selling stains, solutions buffers and other biochemical products and related
equipment, in fiscal 1997, the Company introduced and commenced the contract
manufacturing and marketing of the Definitive Slide Stainer Device (the
"Definitive"), an automated staining device that improves the efficiency and
accuracy of small to medium-scale slide staining laboratory operations. The
Definitive is capable of staining up to three slides simultaneously under
controlled conditions. The Definitive's chief advantages are its small size
(having a footprint of just 12 inches wide by 14 inches long), its
self-containment allowing it to be placed anywhere in the laboratory (as
opposed to other staining devices which require placement in close proximity to
drains and water supplies), its efficiency and reliability when compared to
the chief alternative--manually preparing slides, and its relatively low
cost. The Definitive achieves increased accuracy, reliability and consistency
through the use of a proprietary microchip which regulates with exact
precision the amount of reagent timing. That chip also automatically
activates an alarm on the Definitive when the stain pack needs to be
replaced. Although other automated staining devices are commercially
available that are capable of staining as many as 70 to 100 slides
simultaneously, such equipment is cost-prohibitive for smaller laboratories,
research institutions and hospitals. The Company believes that the Definitive
will fill an important market need for smaller laboratories, clinics and POLs,
whose only alternative is labor-intensive, inefficient and less-reliable
manual preparation of slides by laboratory technicians. The Company estimates
that there is a $250 million market for automated staining devices.
The Company manufactures and markets various custom-designed stainer
packs for use with the Definitive. The Company anticipates that as more units
are sold over time, the provision of stainer packs for the devices will create
a substantial opportunity to capitalize on a continuing stream of revenues.
The Definitive is covered by a one-year manufacturer's warranty that is
serviced by Volu-Sol. Under that warranty arrangement, Volu-Sol will repair
or replace any defective unit without charge to the end-purchaser. The same
warranty is extended by the manufacturer to Volu-Sol. Consequently, the
Company incurs no expense on repairs or replacements made under warranty.
Manufacturing
The Company historically has manufactured the majority of the stains,
solutions, reagents, powders and other chemical compounds that make up its
product line, and intends to continue to do so for the foreseeable future.
Volu-Sol's chemical manufacturing process consists of the purchase by Volu-Sol
of certain raw materials, including bulk chemicals such as alcohol, ethanol,
methanol and various powders and stains. These chemicals are purchased from
different suppliers and are widely available. The ingredients are then mixed
in vats on Volu-Sol's premises in accordance with certain non-proprietary
formulas. The finished stains are then bottled and appropriately labeled and
sold through medical supply distributors and OEMs. Since it has been engaged
in the medical diagnostic stain industry, the Company has refined its
production capabilities such that it presently is able to manufacture its
products to exacting clinical standards. It also has developed a quality
control program that allows it to maintain the reliability, integrity and
uniformity of its product line and to quickly and accurately identify and
resolve any potential problem by keeping detailed production records by lot.
With respect to the ancillary equipment sold by the Company in connection with
its stains, solutions, reagents, and other chemicals, such as glass slides,
manual staining equipment, and other related laboratory equipment and
supplies, such products are manufactured by third parties and can easily be
obtained from a number of suppliers.
With respect to the Definitive, on October 21, 1996, the Company entered
into a worldwide exclusive licensing agreement (the "License Agreement") with
GG&B Engineering, Inc. ("GG&B"), a Texas corporation with its principal place
of business in Wichita Falls, Texas. GG&B owns the technology underlying the
proprietary microchip that is packaged with the stain packs used with the
Definitive. Under the License Agreement, GG&B manufactures the Definitive on
an as-needed basis. GG&B also provides the proprietary microchip that is
packaged with the stain packs. Other than copyright protection as to the code
incorporated in the proprietary microchips, neither the Company nor GG&B claim
any proprietary interest in the technology incorporated into the Definitive.
Under the License Agreement, Volu-Sol is obligated to use its best efforts to
promote the sale and distribution of the Definitive, in return for which GG&B
must provide Volu-Sol with its requirements for the Definitive and microchips
during the term of the Agreement, with a minimum purchase requirement of 600
units per year. As of September 30, 1997, the Company had purchased a total
of 228 units. If it fails to meet its purchase obligations, the Company's
business may be adversely affected. Upon a default by the Company, GG&B has
the right, under the License Agreement, to convert the license into a
nonexclusive license and grant to others the right to distribute the
Definitive upon written notice to Volu-Sol. The Company has advised the
manufacturer that it will not meet the minimum purchase requirements for
1997. Consequently, the manufacturer may convert the exclusive license and
distributorship to a nonexclusive license and distributorship, which may
adversely affect the Company's business and results of operations. Unless it
is terminated earlier in accordance with its terms, the License Agreement is
perpetual. The Company has no experience in manufacturing hardware devices
such as the Definitive and does not have any manufacturing facilities for such
products. Consequently, the Company is presently dependent and will continue
to depend on third parties such as GG&B to manufacture products other than
stains, solutions and other related chemical products. In the event that the
Company's relationship with GG&B is disrupted or is no longer viable due to
financial or other difficulties of GG&B or the Company, or otherwise, or if
the Company is unable to obtain third-party manufacturing for any products it
may add to its line in the future, its operations and ability to generate
revenue would be adversely affected.
The manufacture of the Company's products is subject to the Food and Drug
Administration's current Good Manufacturing Practices ("cGMP") regulations.
These regulations require that the Company manufacture its products and
maintain its documents in a prescribed manner with respect to manufacturing,
testing and control activities. No assurance can be given that the Company's
third-party manufacturers will comply with cGMP regulations or other
regulatory requirements now or in the future. The Company's current dependence
upon third parties for the manufacture of its products may adversely affect
its profit margin, if any, on the sale of future products and the Company's
ability to deliver products on a timely and competitive basis. The Company is
inspected on a routine basis for compliance with applicable FDA laws and
regulations, in particular the extent to which it observes cGMP regulations in
connection with the manufacture of its chemical products. Further, the Company
is required to comply with various FDA requirements for labeling. If the FDA
believes the Company is not in compliance with the applicable laws or
regulations, it can institute proceedings to detain or seize the Company's
products, issue a recall, enjoin future violations and assess civil and
criminal penalties against the Company, its officers or its employees. The FDA
may proceed to ban, or request recall, repair, replacement or refund of the
cost of, any product manufactured or distributed by the Company.
Quality Control
The Company places great emphasis on providing quality products to its
customers. An integrated network of quality systems result in strict
requirements for manufacturing and packaging materials. On a statistical
sampling basis, a quality assurance organization tests components and finished
goods at different stages in the manufacturing process to assure that exacting
standards are met. Customers may return defective merchandise for credit or
replacement. In recent years, such returns have been insignificant.
Marketing and Sales
The Company markets and sells its products through a network of
regionally located medical diagnostic laboratory supply distributors. The
Company also employs in-house sales personnel who are involved in sales
through direct personal contact with potential customers and attending
industry and trade shows. The Company intends to expand its in-house
distribution capacity through acquisition of small medical product
distributors. The Company intends to increase its marketing and sales
efforts, capital permitting, by attending more trade shows, establishing
distributor relationships in Europe, South America and Asia, and placing
advertisements in periodic trade journals and publications.
Availability of Raw Materials
The principal raw materials for the stains, solutions and other chemical
products of the Company are "off-the-shelf" bulk chemicals that can be
purchased from any of a number of chemical companies. The Company believes
that it maintains adequate supplies of raw materials on hand to allow it to
continue to manufacture products and meet customer demand, and that those
materials that it does not produce internally are readily available from
multiple sources.
Competition
The Company believes that Volu-Sol's products have a good reputation in
the marketplace and are competitively priced. However, the medical diagnostic
industry in general and the medical diagnostic stain industry in particular
are, or potentially could be, very competitive. Several large chemical,
medical and laboratory supply companies could dominate the market, many if not
all of which have vastly greater manufacturing capabilities, financial
resources, scientific expertise, research resources and much more pervasive,
mature and experienced marketing operations. Accordingly, Volu-Sol is subject
to intense competition and is subject to the pricing and distribution policies
of these large competitors. Currently, Volu-Sol's sales amount to less than 1
percent of total industry sales. There can be no assurance that, in light of
the level of competition in the industry in which the Company operates, it
will be able to achieve or sustain profitable operations.
Patents and Proprietary Rights
The Company does not own any patents and does not believe that patent
protection is available for any of its products or processes. To the extent
that the Definitive and the stain packs that are marketed for use with that
device incorporate proprietary technologies, the Company licenses such
technologies from GG&B under the License Agreement. The Company claims the
name "Volu-Sol" as a trademark. The Company also believes that certain aspects
of its manufacturing, production and marketing operations are proprietary and
has generally sought to protect its interests by treating its know how as
trade secrets and by requiring all employees to execute confidentiality
agreements with the Company. The Company believes that its processes can only
be understood from direct observation and are not ascertainable by examination
of the end product. However, there can be no assurance that others will not
independently develop the same or similar information, obtain unauthorized
access to the Company's proprietary information or misuse information to which
the Company has granted access.
Government Regulation
Following are brief summaries of some of the Federal laws and regulations
which may have an impact on the Company's business. These summaries are only
illustrative of the extensive regulatory requirements of the Federal, state
and local governments and are not intended to provide the specific details of
each law or regulation.
The Clean Air Act, as amended, and the regulations promulgated thereunder,
regulates the emission of harmful pollutants to the air outside of the work
environment. Federal or state regulatory agencies may require companies to
acquire permits, perform monitoring and install control equipment for certain
pollutants.
The Clean Water Act, as amended, and the regulations promulgated thereunder,
regulates the discharge of harmful pollutants into the waters of the United
States. Federal or state regulatory agencies may require companies to acquire
permits, perform monitoring and to treat waste water before discharge to the
waters of the United States or a Publicly Owned Treatment Works (POTW).
The Occupational Safety and Health Act of 1970, including the Hazard
Communication Standard ("Right to Know"), and the regulations promulgated
thereunder, requires the labeling of hazardous substance containers, the
supplying of Material Safety Data Sheets ("MSDS") on hazardous products to
customers and hazardous substances the employee may be exposed to in the
workplace, the training of the employees in the handling of hazardous
substances and the use of the MSDS, along with other health and safety
programs.
The Resource Conservation and Recovery Act of 1976, as amended, and the
regulations promulgated thereunder, requires certain procedures regarding the
treatment, storage and disposal of hazardous waste.
The Comprehensive Environmental Response, Compensation and Liability Act of
1980 and the Superfund Amendments and Reauthorization Act of 1986, and the
regulations promulgated thereunder, require notification of certain chemical
spills and notification to state and local emergency response groups of the
availability of MSDS and the quantities of hazardous materials in the
Company's possession.
The Toxic Substances Control Act of 1976, requires reporting, testing and
pre-manufacture notification procedures for certain chemicals. Exemptions are
provided from some of these requirements with respect to chemicals
manufactured in small quantities solely for research and development use.
The Department of Transportation has promulgated regulations pursuant to
the Hazardous Materials Transportation Act, referred to as the Hazardous
Material Regulations, which set forth the requirements for hazard labeling,
classification and packaging of chemicals, shipment modes and other goods
destined for shipment in interstate commerce.
Without limiting the generality of the foregoing, a summary of how
certain specific governmental regulations affect the Company's operations is
as follows. The Company engages principally in the business of selling
products which are not foods or food additives, drugs or cosmetics within the
meaning of the Federal Food, Drug and Cosmetic Act, as amended (the "FDC
Act"). Nevertheless, the chemicals used to produce the medical diagnostic
stains manufactured and sold by Volu-Sol have a methanol base and generally
are classified as hazardous materials the use of which subjects the Company to
one or more of the regulatory schemes described above. Additionally, the
manufacturing and shipping operations of Volu-Sol are heavily regulated by
federal, state and local environmental, health and safety authorities.
Volu-Sol is subject to the FDA's cGMP standards and applicable Occupational
Safety and Health Administration ("OSHA") regulations. Representatives of the
FDA periodically conduct inspections at Volu-Sol's facilities regarding the
cleanliness and safety standards followed in the manufacturing process.
Moreover, representatives of OSHA periodically conduct inspections of
Volu-Sol's facilities for compliance with applicable safety and health
regulations. The Company believes that Volu-Sol is in compliance in all
material respects with applicable environmental, health and safety laws, rules
and regulations. There can be no assurance, however, that the Company will not
in the future be found in violation of some or all of these regulations, which
could materially and adversely affect the Company and its operations.
Research and Development
The Company has not invested material amounts in research and development
because of the extent of the product line acquired when Biomune purchased the
assets comprising the Volu-Sol business. The Company does not presently
anticipate investing materially different amounts in research and development
activities for the foreseeable future.
Dependence on Major Customers
During the year ended September 30, 1996, sales to Barrett Healthcare
Corporation ("Barrett") accounted for approximately 12 percent of Volu-Sol's
total revenues. No other single customer accounted for more than 10 percent
of the Company's total revenues during fiscal year 1996. During the year
ended September 30, 1996, the Company discontinued selling products to Barrett
and wrote off outstanding accounts receivable balances of approximately
$55,000. Almost 80 percent of Volu-Sol's sales are accomplished through
medical supply distributors who carry a large range of products for medical
laboratories.
During the year ended September 30, 1997, sales to Lab Supply, Infolab,
Inc. and Hardy Diagnostic accounted for approximately 13.5 percent, 12.7
percent and 11.4 percent, respectively, of the Company's total revenues. No
other single customer accounted for more than 10 percent of the Company's
total revenues during fiscal year 1997.
Employees
The Company has 9 full time employees. The Company will, as needed, hire
additional employees or sub-contract the balance of its personnel requirements
through independent contractors. The Company's manufacturing operations do
not require specially-skilled employees and the Company believes that it will
be able to satisfy its labor requirements for the foreseeable future. None of
the Company's employees are represented by a collective bargaining
arrangement, and the Company believes its relationship with its employees is
good.
ITEM 2. PROPERTIES
The Company leases approximately 11,500 square feet of laboratory
facilities at 5095 West 2100 South, West Valley City, Utah. The leased
premises serve as the Company's manufacturing, warehouse and shipping
facilities as well as its corporate headquarters and offices. Base monthly
rent payments are $4,620 until November 1997, after which the monthly base
rent amount will be adjusted according to changes in the Consumer Price
Index. The leased premises originally were leased by Biomune, but Biomune has
assigned its rights under the lease to the Company. The lessor of the
Company's facility is an unaffiliated third party. The lease was the product
of arms-length negotiations. The lease extends through November 2000. The
Company believes that its facilities will be adequate to meet its needs at
least through fiscal year 1998.
ITEM 3. LEGAL PROCEEDINGS
The Company currently is not a party to, and none of its property is
subject to, any pending or threatened legal proceedings which, in the opinion
of management, are likely to have a material adverse impact on the financial
condition, results of operations or cash flows of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of shareholders during the fourth
quarter of fiscal year 1997.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS
Market. Prior to the Distribution, all of the Company's Common Stock was
owned by Biomune and consequently there has been no public trading market for
the Company's securities. Although the Company anticipates that a public
market for over-the-counter trading of the Company's securities may develop in
the future, there can be no assurance that such a market will ever develop or
that it will be sustained. At such time, if any, as the Company satisfies
applicable entry or listing criteria, the Company may seek to include or list
its Common Stock on the NASDAQ Stock Market or a securities exchange. The
Company does not meet those listing qualifications at this time. There is
presently no market for the Company's Common Stock and there is no assurance
that a market will ever develop. There can be no assurance that the Company
will ever be able to satisfy such criteria or that its application for
inclusion or listing on the NASDAQ Stock Market or securities exchange will be
accepted. All of the Company's issued Common Stock is unrestricted and freely
salable, except to the extent such Common Stock is owned by affiliates of the
Company.
Holders. As of December 18, 1997, there were approximately, 1,070 record
holders of the Company's Common Stock.
Dividends. Since its incorporation, the Company has not declared any
dividend on any of its Common Stock. The Company does not anticipate
declaring a dividend on any of its Common Stock for the foreseeable future.
The Series A Preferred shares will be entitled to a 10 percent dividend
annually which may be paid in cash or additional shares of Preferred Stock at
the option of the Company.
Dilution. The Company has a large number of shares of Common Stock
authorized in comparison to the number of shares issued and outstanding. The
Board of Directors determines when and under what conditions and at what
prices to issue the stock of the Company. In addition, a significant number
of shares of Common Stock of the Company are reserved for issuance upon
exercise of purchase or conversion rights. The issuance of such shares,
whether in connection with new equity offerings, acquisitions, or the exercise
of option or conversion rights will result in dilution of the equity and
voting interests of existing shareholders, including those receiving their
shares in the Distribution.
Transfer Agent and Registrar. The transfer agent and registrar for the
Company's Common Stock will be American Stock Transfer & Trust Company, 40
Wall Street, New York City, NY 10005.
Recent Sales of Unregistered Securities
The following information sets forth certain information for all
securities the Company sold during the past three years without registration
under the Securities Act of 1933 (the "Securities Act").
On July 27, 1995, in connection with the incorporation of the Company as
a wholly owned subsidiary of Biomune, 10,000 shares of the Company's Common
Stock, consisting of all of the issued and outstanding shares of Common Stock
prior to the Distribution, were issued to Biomune. Such issuance was
accomplished without registration under the Securities Act in reliance on the
exemption afforded by Section 4(2) of the Securities Act. Prior to the
Distribution, such securities were subject to a forward split of approximately
211 for 1 to permit the issuance of a sufficient number of shares to the
shareholders of record of Biomune as of March 5, 1997. In addition, the
Company has reserved a total of 1,302,2778 shares of Common Stock comprised of
(i) 323,118 shares of Common Stock for issuance upon conversion of the Biomune
Preferred Stock outstanding at March 5, 1997, (ii) as well as 732,101 shares
for issuance upon the exercise of the Add-on Volu-Sol Options, and (iii)
247,059 shares for issuance upon exercise of the Biomune Warrants.
The Company has also determined it will issue up to 12,000 shares of its
Series A Preferred to accredited investors as described elsewhere herein.
Such offer and sale is to be made in accordance with exemptions under Section
4(2) and 3(b) of the Securities Act, including Rule 506 of Regulation D. As
of December 15, 1997, the Company had received subscriptions for a total of
$1,300,000. Of this amount, cash of $400,000 had been paid to the Company.
Payments for the remaining subscriptions are to be received as follows:
$300,000 immediately, $300,000 on or before January 15, 1998, and $300,000 on
or before March 1, 1998.
With respect to all of the foregoing offers and sales of restricted and
unregistered securities by the Company, the Company relied on the provisions
of Sections 3(b) and 4(2) of the Securities Act and rules and regulations
promulgated thereunder, including, but not limited to Rules 505 and 506 of
Regulation D, in that such transactions did not involve any public offering of
securities and were exempt from registration under the Securities Act. The
offer and sale of the securities in each instance was not made by any means of
general solicitation, the securities were acquired by the investors without a
view toward distribution, and all purchasers represented to the Company that
they were sophisticated and experienced in such transactions and investments
and able to bear the economic risk of their investment. A legend was placed
on the certificates and instruments representing these securities stating that
the securities evidenced by such certificates or instruments, as the case may
be, have not been registered under the Securities Act and setting forth the
restrictions on their transfer and sale. Each investor also signed a written
agreement that the securities would not be sold without registration under the
Securities Act or pursuant to an applicable exemption from such registration.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion and analysis should be read in conjunction with
the Company's financial statements and the notes thereto contained elsewhere
in this report. The discussion of these results should not be construed to
imply any conclusion that any condition or circumstance discussed herein will
necessarily continue in the future.
When used in this report, the words "believes," "anticipates," "expects,"
and similar expressions are intended to identify forward-looking statements.
Such statements are subject to certain risks and uncertainties that could
cause actual results to differ materially from those projected. Readers are
cautioned not to place undue reliance on these forward-looking statements,
which speak only as of the date hereof. The Company undertakes no obligation
to publicly release the results of any revisions to these forward-looking
statements that may be made to reflect events or circumstances after the date
of this report, or to reflect the occurrence of unanticipated events.
In order to provide greater production capacity and efficiencies and
enhanced customer service with a view to further increasing Volu-Sol's
revenues, in October 1996, the Company relocated Volu-Sol's production
facilities to the Salt Lake City, Utah metropolitan area, closer to its former
parent's (Biomune Systems, Inc.'s) current principal place of business.
Results of Operations
Fiscal Year Ended September 30, 1997 Compared to Fiscal Year Ended September
30, 1996
During the fiscal year ended September 30, 1997, the Company generated
revenues totaling $493,754 compared to $434,691 for fiscal year 1996. This
increase in revenues is attributable to the sale of the Definitive, which
accounted for additional revenues of approximately $68,800 during fiscal year
1997, offset in part by a decrease in revenues from the sale of stains and
reagents. The decline in sales of stains and reagents is mainly attributable
to the loss of the Company's largest customer during the fourth quarter of
fiscal 1996 and the Company not having sufficient resources to adequately
market its stain and reagent products. During the fourth quarter of fiscal
year 1997, the Company experienced technical complications with the design of
the Definitive, which have now been corrected. However, due to these
technical complications, sales during the fourth quarter of 1997, have been
negligible.
Cost of goods sold for the fiscal year ended September 30, 1997 totaled
$453,434 compared to $357,471 for fiscal year 1996. The overall gross margin
for fiscal year 1997 was 8.2 percent of revenues compared to 17.8 percent of
revenues for fiscal year 1996. The decrease in the gross margin is
attributable to a one-time charge for inventory write-down with respect to the
Definitive. The gross margin for fiscal year 1997, excluding the impact of
the Definitive, was approximately 15.3 percent. The decrease in the gross
margin on sales of stains and reagents is attributable to increases in raw
materials costs and increases in labor costs as a result of adding additional
manufacturing overhead labor.
Selling, general and administrative expenses totaled $747,434 in fiscal
year 1997, compared to $1,446,651 for the year ended September 30, 1996, an
overall decrease of $699,217. This decrease is due to: (1) decreases in the
level of marketing and advertising expenditures due to insufficient cash flows
to fund such activities, and (2) significant relocation costs which were
incurred in 1996 associated with the Company's move from Henderson, Nevada to
Salt Lake City, Utah. In addition, selling, general and administrative
expenses for fiscal year 1997 included amounts allocated from Biomune for
payroll-related and professional services of approximately $40,000, compared
to allocations of approximately $165,000 for the previous year. This decrease
resulted from an allocation in fiscal year 1996 of approximately $90,000 for
the granting of Biomune options to a former Volu-Sol consultant which was not
repeated in fiscal year 1997. After the Distribution, payroll costs with
respect to officers and key employees is not expected to be significantly
different (not greater than 10 percent) from the amounts allocated from
Biomune. Recurring financing costs and other operating costs as a result of
operating on a stand alone basis are not expected to be significantly
different from those allocated.
The Company incurred a net loss of $719,652 for the year ended September
30, 1997 compared to a net loss of $1,402,222 for fiscal year 1996. This
decrease in net loss is primarily due to decreased selling, general and
administrative expenses and to the loss on disposal of assets experienced
during fiscal year 1996 as a result of relocating to Salt Lake City, Utah.
It is anticipated that the net loss applicable to common shareholders
will increase in the future in connection with dividends and the impact of the
beneficial conversion feature associated with the Company's private placement
of its Series A Preferred Stock. Assuming the sale of Series A Preferred
Stock is limited to $1,300,000 (for which there are subscriptions receivable,
commission liabilities satisfied or cash receipts as of December 15, 1997),
the net loss applicable to common shareholders would increase by approximately
$326,650 for the one-time charge related to the beneficial conversion feature
and by approximately $130,660 per year for recurring dividends at 10 percent.
Sales of Series A Preferred Stock could be as high as $2,400,000, in which
case the dividends and the impact of the beneficial conversion feature would
increase accordingly.
Liquidity and Capital Resources
The Company currently is unable to finance its operations solely from its
cash flows from operating activities. From October 1, 1993 through September
30, 1997, Biomune financed the Company's operations through a series of loans
and other capital contributions totaling approximately $2,800,000. Of this
amount, $390,500 represents loans which bear interest at the rate of 10 percent
per year and which are payable on demand. After the Distribution, the Company
does not anticipate receiving additional amounts from Biomune in the form of
loans or equity contributions. The Company intends to sell up to 12,000
shares of its Series A Preferred in a private offering ("Offering"), for a
total of up to $2,400,000. The Series A Preferred is convertible to Common
Stock of the Company commencing January 1, 1998. The "conversion price" which
is the basis for such conversion is the lesser of (i) 80 percent of the
average closing bid price of the Company's Common Stock for the three trading
days immediately preceding the date of conversion or (ii) $1.25 per share.
As of the date of this Report, the Company had received subscriptions for
$1,300,000 of Series A Preferred, for which cash of $400,000 had been
received. Payments with respect to the remaining subscriptions are due as
follows: $300,000 immediately, $300,000 on or before January 15, 1998, and
$300,000 on or before March 1, 1998. The Company intends to keep the private
placement open through December 31, 1997 and may raise up to an additional
$1,100,000.
The Company intends to use the proceeds from the Offering described above
to repay its indebtedness to Biomune (approximately $390,500 as of the date of
this Report), pay the expenses of the Offering and the Distribution (including
legal and accounting fees estimated to be approximately $75,000), acquire
yet-to-be identified medical product distributors or product rights, and
supplement working capital. The Company believes that cash generated by
operations, together with the proceeds of the Offering will be sufficient to
meet its capital requirements for a minimum of 12 months.
As of September 30, 1997, the Company had cash and cash equivalents of
$337,691 and working capital of $38,083 as compared to cash of $12,167 and
working capital of $94,380 as of September 30, 1996.
During the fiscal year ended September 30, 1997, the Company's operating
activities used cash of $641,580, much of which was provided primarily by
loans and capital contributions from Biomune. Similarly, during fiscal year
1996, the Company's operating activities required cash in the amount of
$987,680, which was provided by capital contributions from Biomune.
The Company is obligated under a manufacturing agreement with the
supplier of the Definitive to purchase 600 automated slide stainers
("stainers") per calendar year. In the event the Company purchases fewer than
600 stainers, the manufacturer has the option to convert the Company's
exclusive worldwide license and distributorship to a non-exclusive license and
distributorship. As of September 30, 1997, the Company had purchased 228
stainers, of which 170 were in inventory. Subsequent to September 30, 1997,
the Company informed the manufacturer of the Definitive that the Company would
not meet the annual purchase commitment. It appears that the Company's
exclusive worldwide license and distributorship will be converted to a
non-exclusive license and distributorship, which could have a negative impact
on the number of units sold by the Company.
The Company presently has no credit facility with any commercial lending
institution. In the past, the Company has borrowed and received capital from
time to time from Biomune, but the Company has no formal financing
arrangement, agreement or understanding with Biomune or any other party to
provide debt financing in the future.
The Company has agreed to sell its Series A Preferred shares to raise
funds to finance operations, market the Definitive and acquire or develop
in-house distribution capacity and new products and devices. There can be no
assurance that additional financing will not be needed in the future.
Although the Company believes that the proceeds from the Offering of its
Series A Preferred Stock, together with revenues from operations, will be
sufficient to meet the needs of the Company for the next twelve months, there
is no assurance that this will be the case. The Company has suffered
recurring losses from operations in the past. Recently, the Company has
experienced certain technical difficulties with the operation of the
Definitive. Although these technical difficulties appear to have been
resolved, sales of the Definitive have not been as high as originally
expected. In addition, the Company has not met its minimum purchase
requirements under the exclusive license agreement, as described above. These
matters raise substantial doubt about the Company's ability to continue as a
going concern.
Recent Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board issued SFAS
No. 128, "Earnings per Share." This statement replaces Accounting Principles
Board ("APB") Opinion No. 15, "Earnings per Share." Effective for periods
ending after December 15, 1997, SFAS No. 128 requires companies to report both
"basic" and "diluted" earnings per share. "Basic" earnings per share does not
include the addition of common stock equivalents to the shares outstanding.
"Diluted" earnings per share requires the addition of dilutive common stock
equivalents to the shares outstanding. Average shares outstanding is the
denominator used in "basic" earnings per share calculations. Accordingly,
"basic" earnings per share will be higher than "diluted" earnings per share.
For the Company, "diluted" earnings per share under the new standard is
approximately equivalent to "primary" earnings per share under APB No. 15.
The impact of SFAS No. 128 on the Company's earnings per share is not expected
to be significant.
Risk Factors
This Report contains forward-looking statements which involve risks and
uncertainties. The Company's actual operating results could differ materially
from those anticipated in these forward-looking statements as a result of
certain factors, including those set forth in the following risk factors and
elsewhere in this Report.
Absence of Profitable Operations. Between the time Biomune acquired the
assets used in conducting its medical diagnostic supply business and July 1995
when the Company was incorporated and acquired those assets from Biomune,
Biomune's medical diagnostic division did not have profitable operations.
Moreover, from the Company's incorporation to date, the Company has not
achieved profitable operations and continues to operate at a loss. The
Company's present business strategy is to improve its profitability and cash
flows by adding to its existing product line and expanding its sales and
marketing efforts, including the addition of in-house sales personnel. These
expanded sales and marketing efforts are expected to be funded through sales
of the Company's securities and/or debt, including the Series A Preferred
Offering which will close by December 31, 1997. While management believes the
cash generated by operations together with the proceeds from the Offering will
satisfy the Company's ordinary cash requirements for at least 12 months, there
can be no assurance that the Company will ever be able to achieve profitable
operations or that it will not require additional financing to achieve its
business plan. See "Management's Discussion and Analysis or Plan of
Operation."
"Going Concern" Issues. The financial statements of the Company have
been prepared on the assumption that the Company will continue as a going
concern. The Company's independent public accountants have issued their
report dated December 5, 1997 that includes an explanatory paragraph stating
that the Company's recurring losses, accumulated deficit and recently
encountered technical difficulties with the Definitive raise substantial doubt
about the Company's ability to continue as a going concern. The Company's
product line is limited and it has been necessary to rely upon loans and
capital contributions from Biomune to sustain operations. The Company intends
to sell up to $2,400,000 of its Series A Preferred to unrelated accredited
investors. To date, subscriptions for $1,300,000 have been received, for
which cash of $400,000 has been received. Payments for the remaining
subscriptions are in installments through March 1998. Management believes the
proceeds from such Offering will provide sufficient capital when combined with
revenues from operations to meet the Company's operating cash needs for a
minimum of 12 months. Additional financing may be required if the Company is
to continue as a going concern. If such additional funding is needed and
cannot be obtained, the Company may be required to scale back or discontinue
its operations.
Uncertainty of Future Financial Results. Profitability depends upon many
factors, including the success of the Company's marketing program, the
Company's ability to identify and obtain the rights to additional products to
add to its existing product line, expansion of its distribution and customer
base, maintenance or reduction of expense levels and the success of the
Company's business activities. The Company (since its incorporation in July
1995) has an accumulated deficit as of September 30, 1997 of $2,228,838. The
Company anticipates that it will continue to incur operating losses in the
future or until such time as it is able to successfully market the Definitive
or other devices that it may yet add to its product line. The Company's
ability to achieve profitable operations will also depend on its ability to
develop and maintain an adequate marketing and distribution system. There can
be no assurance that the Company will be able to develop and maintain adequate
marketing and distribution resources. If adequate funds are not available, the
Company may be required to materially curtail or cease its operations. See
"Management's Discussion and Analysis or Plan of Operation."
Lack of Proprietary Technologies. The Company uses certain trademarks
and tradenames with certain of its products. Nevertheless, the Company's core
products, medical diagnostic stains and solutions and other biochemical
products, as well as the Definitive, are not based on technology proprietary
to the Company. Indeed, the majority of the Company's present product line is
based on technology that is in the public domain and therefore there are
effectively no entry barriers for potential competitors to the Company. The
Company has entered into an exclusive license agreement with the third-party
entity that owns the intellectual property rights associated with the
Definitive and manufactures the Definitive for the Company. There can be no
assurance that such third-party entity will be able in the future to
adequately protect its proprietary rights upon which the Definitive is based
or that such third party will continue to manufacture the Definitive on terms
favorable to the Company. If the third party fails to meet its obligations to
manufacture a sufficient number of units for any reason, the Company would be
forced to locate a new manufacturer for the Definitive which may disrupt and
adversely affect the Company's operations.
Intense Competition. The medical diagnostic supply and biochemical
industries, including those segments devoted to manufacturing and distributing
laboratory equipment, stain solutions and chemical reagents are characterized
by intense competition. The Company faces, and will continue to face,
competition in the stain solution, reagent and related equipment fields.
Many, if not most, of the Company's competitors and potential competitors are
much larger and consequently have greater access to capital as well as mature
and highly sophisticated distribution channels. Some of the Company's larger
competitors are able to manufacture chemical products on a much larger scale
and therefore presumably would be able to take advantage of economies of scale
not presently enjoyed by the Company. Moreover, many of the Company's
competitors have far greater name recognition and experience in the medical
diagnostic supply industry. There can be no assurance that competition from
other companies will not render the Company's products noncompetitive.
Uncertainties Related to Ability to License Proprietary Technology. The
Company historically has not been involved in research and development of new
technologies. Consequently, the Company's success in adding to its existing
product line will depend on its ability to acquire or otherwise license
competitive technologies and products and to operate without infringing the
proprietary rights of others, both in the United States and internationally.
No assurance can be given that any licenses required from third parties will
be made available on terms acceptable to the Company, or at all. If the
Company does not obtain such licenses, it could encounter delays in product
introductions while it attempts to adopt alternate measures, or could find
that the manufacture or sale of products requiring such licenses is not
possible. Litigation may be necessary to defend against claims of
infringement, to protect trade secrets or know-how owned by the Company, or to
determine the scope and validity of the proprietary rights of others. Such
litigation could have an adverse and material impact on the Company and its
operations.
Inability to Adequately Protect Proprietary Information. The Company
relies upon unpatented trade secrets and improvements, unpatented know-how and
continuing technological innovation to develop and maintain its competitive
position, which it seeks to protect, in part, by confidentiality agreements
with its employees and consultants. There can be no assurance that such
agreements will not be breached or that they will be enforceable by the
Company, or that the Company's trade secrets and know-how will not otherwise
be compromised.
Uncertainty of Ability to Attract and Retain Key Management, Employees
and Consultants. The Company is highly dependent on its executive officers
and certain of its scientific, technical and operations employees. The loss
of services of any of these personnel could impede the achievement of the
Company's objectives. There can be no assurance that the Company will be able
to attract and retain qualified executive personnel on acceptable terms.
Reliance on Third-Party Manufacturing. The Company's manufacturing
experience and capabilities are limited to the manufacture of staining
solution, reagent and certain related chemical compounds. With respect to the
manufacturing of devices and equipment related to the staining solution
products, including without limitation the Definitive, the Company has in the
past used, and intends to continue to use, third-party manufacturing
resources. Consequently, the Company is dependent on contract manufacturers
for the production of existing products and will depend on third-party
manufacturing resources to manufacture equipment and devices it may add to its
product line in the future. In the event that the Company is unable to obtain
or retain third-party manufacturing, it will not be able to continue its
operations as they relate to the sale of equipment and devices. The Company's
current dependence upon a third party for the manufacture of the Definitive
may adversely affect its profit margins and the Company's ability to deliver
products on a timely and competitive basis.
Environmental Risks. The chemical manufacturing processes of the Company
involve the controlled use of hazardous materials. The Company is subject to
federal, state and local laws and regulations governing the use, manufacture,
storage, handling and disposal of such materials and certain waste products.
Although the Company believes that its activities currently comply with the
standards prescribed by such laws and regulations, the risk of accidental
contamination or injury from these materials cannot be eliminated. In the
event of such an accident, the Company could be held liable for any damages
that result and any such liability could exceed the resources of the Company.
In addition, there can be no assurance that the Company will not be required
to incur significant costs to comply with environmental laws and regulations
in the future.
Sufficiency of Marketing and Sales Capabilities. The Company sells its
products to approximately 75 independent distributors who are free to resell
the products. In order to achieve profitable operations, the Company must
maintain its current base of sales staff and must expand that base in the
future. There can be no assurance that the Company will be able to enter into
arrangements with qualified sales staff if and when such additional staff are
required. The Company's sales staff will compete with other companies that
currently have experienced and well funded marketing and sales operations. To
the extent that the Company enters into co-promotion or other marketing and
sales arrangements with other companies, any revenues to be received by the
Company will be dependent on the efforts of others, and there can be no
assurance that such efforts will be successful.
Potential Product Liability Exposure and Limited Insurance Coverage. The
use of any of the Company's existing or potential products in laboratory or
clinical settings may expose the Company to liability claims. These claims
could be made directly by persons who assert that inaccuracies or deficiencies
in their test results were caused by defects in the Company's products.
Alternatively, the Company could be exposed to liability indirectly by being
named as a third-party defendant in actions brought against companies or
persons who have purchased the Company's products. The Company has obtained
limited product liability insurance coverage in the amount of $1 million per
occurrence and $2 million in the aggregate. The Company intends to expand its
insurance coverage on an as-needed basis as its sales revenue increases.
However, insurance coverage is becoming increasingly expensive, and no
assurance can be given that the Company will be able to maintain insurance
coverage at a reasonable cost or in sufficient amounts to protect the Company
against losses due to liability. There can also be no assurance that the
Company will be able to obtain commercially reasonable product liability
insurance for any products added to its product line in the future. A
successful product liability claim or series of claims brought against the
Company could have a material adverse effect on its business, financial
condition and results of operations.
Uncertainty Related to Health Care Reform Measures and Third-Party
Reimbursement. Political, economic and regulatory influences are likely to
lead to fundamental change in the health care industry in the United States.
Numerous proposals for comprehensive reform of the nation's health care system
have been introduced in Congress over the past years. In addition, certain
states are considering various health care reform proposals. The Company
anticipates that Congress and state legislatures will continue to review and
assess alternative health care delivery systems and payment methodologies, and
that public debate of these issues will likely continue in the future. Due to
uncertainties regarding the ultimate features of reform initiatives and their
enactment and implementation, the Company cannot predict which, if any,
reforms will be adopted, when they may be adopted, or what impact they may
have on the Company. The Company's ability to earn sufficient returns on its
products may also depend in part on the extent to which reimbursement for the
costs of such products will be available from government health administration
authorities, private health insurers and other organizations. Third-party
payors are increasingly challenging the price and cost effectiveness of
medical products and services, including medical diagnostic procedures. There
can be no assurance that adequate reimbursement will be available or
sufficient to allow the Company to sell its products on a competitive basis.
Dilution. A significant number of shares of the Company's Common Stock
are authorized but not issued. In addition, there are a substantial number of
shares of Common Stock of the Company reserved for issuance upon the exercise
of certain options, warrants and preferred stock conversion rights. If and to
the extent such options, warrants or rights are exercised, or if the Board of
Directors determines to issue authorized but previously unissued shares of
Common Stock in connection with acquisitions or other transactions, such
issuances could substantially dilute the voting power of the existing
shareholders of the Company. Furthermore, the possibility of such issuances
may adversely affect the market for the Company's Common Stock, should such a
market ever develop.
ITEM 7.FINANCIAL STATEMENTS
The Company's financial statements and associated notes are set forth on
pages F-2 through F-16.
PART III
ITEM 9.DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Executive Officers, Key Employees and Directors
The executive officers and directors of the Company are as follows:
Name Age Position
- -------------------- --- --------------------------------------
Michael G. Acton 34 Chairman, Chief Executive Officer and Chief
Financial Officer
James R. Derrick 53 President, Director
Jack W. Job 35 Director
Michael G. Acton, CPA
Mr. Acton has been Chairman, Chief Financial Officer, and Chief Executive
Officer of Volu-Sol since February 1997. He has also been Chief Financial
Officer and Controller of Biomune since October 1994. From June 1989 through
October 1994, Mr. Acton was employed by Arthur Andersen LLP in Salt Lake City,
Utah, where he performed various tax, audit and business advisory services.
Mr. Acton received a Bachelor of Science degree in Accounting in 1988 and a
Master of Professional Accountancy degree in 1989, both from the University of
Utah. He is a certified public accountant in the state of Utah. Biomune has
a class of securities registered under the Securities Exchange Act of 1934 and
was formerly the parent of the Company.
James R. Derrick
Mr. Derrick has been the Company's President since February 1997, and a
director since May 1997. Between July 1994 and February 1997, he was employed
as a business and engineering consultant by Derrick Consultants. From October
1979 to July 1994, Mr. Derrick was the Chief Executive Officer of Crib
Retaining Walls, Inc., a manufacturing and construction firm based in North
Salt Lake, Utah. Mr. Derrick received a Bachelor of Science degree in
Industrial Engineering from the University of Utah in 1971.
Jack W. Job
Mr. Job has been a director of the Company since May 1997. He presently is
the Chief Financial Officer of Utah Technology Finance Corporation located in
Salt Lake City, Utah. Prior to his present position with UTFC, from May 1990
to May 1995, Mr. Job was employed by Arthur Andersen LLP in its Salt Lake City
office as a senior accountant performing tax and audit functions. He is a
certified public accountant and a member of the Utah Association of Certified
Public Accountants and the American Institute of Certified Public
Accountants. Mr. Job received a Bachelor of Science degree and Masters of
Accountancy degree (Magna Cum Laude) from Brigham Young University.
In addition to the foregoing executive officers and directors, the
Company expects the following employee to make significant contributions to
the Company:
Dawn Perdue
Ms. Perdue, age 36, is Director of Operations and acts as the Company's
Compliance Officer for regulatory affairs. She came to the Company in October
1995 with more than 12 years experience in science and management positions in
clinical and industrial operations. Prior to joining the Company, Ms. Perdue
was Manager of Research and Development of Genzyme Corporation, a leading
biotechnical company. She graduated in biology from Western New England
College (Massachusetts) and has a Certificate of Special Studies in
Administration from Harvard University.
None of the Company's executive officers or directors are related to any
other executive officer or director of the Company.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers, directors and persons who beneficially own more than 10
percent of a registered class of the Company's equity securities to file
reports of ownership and changes in ownership with the Securities and Exchange
Commission. Officers, directors and greater than 10 percent shareholders are
required by regulation of the Securities and Exchange Commission to furnish
the Company with copies of all Section 16(a) forms they file.
Based solely upon its review of the copies of such forms furnished to it,
and representations made by certain persons subject to this obligation that
such filings were not required to be made, the Company believes that all
reports required to be filed by these individuals and persons under Section
16(a) were filed in a timely manner and the Company is not aware of any
transactions in its outstanding securities by or on behalf of any director,
executive officer or 10 percent holder, which would require the filing of any
report pursuant to Section 16(a) during the fiscal year ended September 30,
1997, that was not filed with the Commission.
ITEM 10.EXECUTIVE COMPENSATION
Since March 1997, the Company has paid Mr. Acton, its Chief Executive
Officer, Chief Financial Officer, and Chairman, a consulting fee of $6,000 per
month. No executive officer or employee of the Company is paid more than
$100,000 per year in salary and benefits. Mr. Acton provides his services on
a part-time basis. He also serves as Chief Financial Officer of Biomune. The
Company's President, James R. Derrick, receives an annual salary of $60,000.
Director Compensation
Members of the Board of Directors who are not employees of the Company
are paid $500 for each meeting of the Board of Directors attended. Following
the Distribution, this fee is to be paid $250 in cash and $250 in shares of
the Company's Common Stock.
Employment Agreements
Aside from the payments described above to Mr. Acton and to Mr. Derrick,
there are no consulting or employment contracts with management at this time.
Stock Plans
The 1997 Volu-Sol, Inc. Transition Plan. The Company has adopted the
1997 Volu-Sol, Inc. Transition Plan (the "Transition Plan") to govern the
issuance and exercise of certain options to purchase the Company's Common
Stock. Certain officers, directors and employees of Biomune have been granted
options to purchase shares of Biomune Common Stock (the "Biomune Options").
The Biomune Options have been granted pursuant to various stock plans of the
Company (the "Biomune Plans"). The Biomune Plans give the committee of the
Biomune Board that administers the plans (the "Biomune Plan Committee") the
authority to make equitable adjustments to outstanding Biomune Options in the
event of certain transactions, of which the Distribution is one.
The Biomune Plan Committee and the Biomune Board have determined that,
immediately prior to the Distribution, each Biomune Option will be divided
into two separately exercisable options: (i) an option to purchase Volu-Sol
Common Stock (the "Add-on Volu-Sol Option") in an amount that would have been
issued in the Distribution in respect of the shares of Biomune Common Stock
subject to the applicable Biomune Option, if such Biomune Option had been
exercised in full immediately prior to the Distribution Record Date, and
containing substantially equivalent terms as the existing Biomune Option, and
(ii) an option to purchase Biomune Common Stock (an "Adjusted Biomune
Option"), exercisable for the same number of shares of Biomune Common Stock as
the corresponding Biomune Option had been. The per share exercise price of
the Biomune Option will remain the same in the Adjusted Biomune Option, and
all other terms of such Biomune Option will remain the same in all material
respects. The Add-on Volu-Sol Option will carry an option exercise price per
share equal to the price per share of the exercise price under the Biomune
Option.
As a result of the foregoing, certain persons who remain Biomune
employees or non-employee directors after the Distribution will hold both
Adjusted Biomune Options and separate Add-on Volu-Sol Options. The
obligations with respect to the Adjusted Biomune Options and Add-on Volu-Sol
Options held by Biomune employees and non-employee directors following the
distribution will be obligations solely of Biomune. The Company will reserve
a total of 732,101 shares of Common Stock for issuance upon exercise of the
Add-on Volu-Sol Options.
The Transition Plan will be administered by the Board of Directors or a
Committee of the Board of Directors appointed by the Board.
The 1997 Volu-Sol, Inc. Stock Incentive Plan. The Company has adopted
the 1997 Volu-Sol, Inc. Stock Incentive Plan ("1997 Plan"). The 1997 Plan was
approved by action of Biomune, the sole shareholder of the Company, in August
1997. Under the 1997 Plan, the Company may issue stock options, stock
appreciation rights ("SARs"), restricted stock awards, and other incentives to
employees, officers and directors of the Company. The principal features of
the 1997 Plan are summarized below, but the following Summary is qualified in
its entirety by the written plan.
The 1997 Plan provides for the award of incentive stock options to key
employees and directors of the Company and the award of nonqualified stock
options, stock appreciation rights, bonus rights, and other incentive grants
to employees and certain non-employees who have important relationships with
the Company or its subsidiaries. 5,000,000 shares are available for issuance
pursuant to awards granted under the 1997 Plan. To date no awards of any kind
have been made under the 1997 Plan. The Board of Directors presently acts as
the committee that administers the 1997 Plan (the "Plan Committee").
Stock Option Grants. The Plan Committee may grant Incentive Stock
Options ("ISOs") and Non-Statutory Stock Options ("NSOs") under the 1997 Plan.
With respect to each option grant, the Plan Committee will determine the
number of shares subject to the option, the option price, the period of the
option, the time or times at which the option may be exercised (including
whether the option will be subject to any vesting requirements and whether
there will be any conditions precedent to exercise of the option), and the
other terms and conditions of the option.
Stock Appreciation Rights ("SARs") may be granted under the 1997 Plan.
Each SAR entitles the holder, upon exercise, to receive from the Company an
amount equal to the excess of the fair market value on the date of exercise of
one share of Common Stock of the Company over its fair market value on the
date of grant (or, in the case of a SAR granted in connection with an option,
the excess of the fair market value of one share of Common Stock of the
Company over the option price per share under the option to which the SAR
relates), multiplied by the number of shares covered by the SAR, may be made
in Common Stock, in cash, or in any combination of Common Stock and cash. No
SARs have been granted under the 1997 Plan.
Restricted Stock. The Plan Committee may issue shares of Common Stock
under the 1997 Plan subject to the terms, conditions, and restrictions
determined thereby. Upon the issuance of restricted stock the number of
shares reserved for issuance under the 1997 Plan will be reduced by the number
of shares issued. No restricted shares have been granted under the 1997 Plan.
Cash Bonus Rights. The Plan Committee may grant cash bonus rights under
the 1997 Plan in connection with (i) options granted or previously granted,
(ii) SARs granted or previously granted, (iii) stock bonuses awarded or
previously awarded and (iv) shares issued under the 1997 Plan. No bonus
rights have been granted under the 1997 Plan.
Changes in Capital Structure. The 1997 Plan provides that if the
outstanding Common Stock of the Company is increased or decreased or changed
into or exchanged for a different number or kind of shares or other securities
of the Company or of another corporation by reason of any recapitalization,
stock split or certain other transactions, appropriate adjustment will be made
by the Plan Committee in the number and kind of shares available for grants
under the 1997 Plan. In addition, the 1997 Plan Committee will make
appropriate adjustments in the number and kind of shares as to which
outstanding options will be exercisable. In the event of a merger,
consolidation or other fundamental corporate transformation, the Board may, in
its sole discretion, permit outstanding options to remain in effect in
accordance with their terms; to be converted into options to purchase stock in
the surviving or acquiring corporation in the transaction; or to be
exercised, to the extent then exercisable, during a period prior to the
consummation of the transaction established by the Plan Committee or as may
otherwise be provided in the 1997 Plan.
Other Stock Purchase Rights. Biomune has granted rights to purchase
Biomune Common Stock in the form of warrants (the "Biomune Warrants"). Under
the agreements governing the grant and exercise of the Biomune Warrants,
Biomune has agreed to issue to the holders of such rights securities otherwise
issuable with respect to the Biomune Common Shares underlying the Biomune
Warrants if and to the extent the Biomune Warrants are exercised.
Consequently, if the holders of the Biomune Warrants exercise their rights
thereunder, Biomune must issue to those holders one share of Volu-Sol Common
Stock for each share of Biomune Common Stock issued in connection with such
exercise. Volu-Sol has agreed to sell to Biomune the shares of Volu-Sol Common
Stock needed to meet this obligation of Biomune. The purchase price of such
shares of Volu-Sol Common Stock will be a sum equal to 10 percent of the
consideration received by Biomune in exercise of the Biomune Warrants. The
Company will reserve 247,059 shares of Common Stock for issuance upon exercise
of the Biomune Warrants. If all of such Biomune Warrants are exercised, the
Company will receive $588,000 from Biomune as consideration for the Volu-Sol
Common Stock sold to Biomune as described above.
ITEM 11.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
In the Distribution, each holder of Biomune Common Stock at March 5, 1997
received or will receive one share of Volu-Sol Common Stock for every ten
shares of Biomune Common Stock held at that date. In addition, the Company
will reserve a total of 323,118 shares of Common Stock for issuance in
connection with the conversion of the Biomune Preferred Stock outstanding at
March 5, 1997. The Company also will reserve a total of 732,101 shares of
Common Stock for issuance upon exercise of the Add-on Volu-Sol Options and
247,059 shares of Common Stock for issuance upon exercise of certain warrants
to acquire Biomune Common Stock.
The following table sets forth certain information on a pro forma basis
regarding beneficial ownership of the Company's Common Stock after giving
effect to the Distribution of 2,111,216 shares of Common Stock (i) by each
person (or group of affiliated persons) who is expected by the Company to own
beneficially more than 5 percent of the outstanding shares of Common Stock,
(ii) by each director and Named Executive Officer of the Company, and (iii) by
all of the directors and executive officers of the Company as a group. The
chart below does not give effect to the possible conversion of the Biomune
Preferred Stock or the Company's Series A Preferred.
Name and Address Shares of Common Stock Percentage of
of Beneficial Owner (1) Beneficially Owned (2) Class
- ----------------------- ---------------------- -------------
David G. Derrick (3) 169,850 7.60%
2401 S. Foothill Dr.
Salt Lake City, Utah 84109
Leviticus Trust (4) 210,755 9.98%
1233 Beech Street, #315
Atlantic Beach, NY 11509
Michael G. Acton (5) 23,544 1.10%
(Director and Executive
Officer)
James R. Derrick - -
(Director)
Jack W. Job - -
(Director)
All executive officers and
directors as a group (3 persons) 23,544 1.10%
(1) Unless otherwise indicated, such person's address is the same as the
Company's address.
(2) A person is deemed to be the beneficial owner of securities that can
be acquired by such person within 60 days from the date of this Report upon
the exercise of options or warrants. Each beneficial owner's percentage of
ownership is determined by assuming that options or warrants held by such
person (but not those held by any other person) and exercisable within 60 days
from the date of this Report have been fully exercised. Unless otherwise
noted, the Company believes the persons named in this table will possess sole
voting and investment power with respect to all shares of Common Stock shown
as being beneficially owned. Percentages are calculated based on 2,111,216
shares of Common Stock outstanding (as adjusted for shares deemed to be
beneficially owned by such shareholder).
(3) David Derrick will own 45,850 shares of Common Stock directly and
will receive options to purchase 124,000 shares of Common Stock. Mr. Derrick
is the CEO and Chairman of Biomune and the brother of the Company's President,
James R. Derrick.
(4) The Leviticus Trust will own approximately 210,755 shares of Common
Stock directly. The Leviticus Trust is an irrevocable trust established for
the benefit of its sole beneficiary, Genesis Investment Corporation, a Utah
corporation ("GIC"). The directors and executive officers of GIC are Jacob
"Jack" Solomon, President, Royden G. Derrick, Vice President and Secretary,
and Edna Ennise Richardson, Sam Pekeles and Jerry Pekeles, directors. The
beneficial owners of GIC are the Solomon family. Royden G. Derrick is the
father of James R. Derrick, the Company's President, and David G. Derrick,
Chief Executive Officer of Biomune and a significant shareholder of the
Company . The trustee of the Leviticus Trust is Robert Pomerantz, an
individual residing in New York. The trustee has the power to vote and to
dispose of the shares held by the Leviticus Trust, consistent with the terms
and subject to the conditions of the Trust Declaration establishing the
trust.
(5) Mr. Acton will own approximately 44 shares of Common Stock directly
and will hold options to purchase 23,500 shares of Common Stock.
Except for the matters described herein, there are no arrangements known
to the Company, the operation of which may, at a subsequent date, result in a
change of ownership or control of the Company.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has agreed to indemnify each of its directors and officers to
the fullest extent permitted by the Revised Utah Business Corporation Act.
The Company has supplemented its cash flow from operations by borrowings
from its former parent, Biomune. As of the date of this Report, the Company
owes Biomune a total of $390,500. These amounts are due on demand and bear
interest at the rate of ten percent per annum.
PART IV
ITEM 13.EXHIBITS AND REPORTS ON FORM 8-K
The following exhibits are filed herewith or are incorporated by
reference to exhibits previously filed with the Commission:
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit Number Title of Document
- -------------- -----------------
<S> <C>
3.01 Articles of Incorporation and Amendments thereto (incorporated by
reference to the Company's Registration Statement and Amendments thereto on
Form 10-SB, effective December 1, 1997).
3.02 Bylaws (incorporated by reference to the Company's Registration
Statement on Form 10-SB, effective December 1, 1997).
10.01 Distribution and Separation Agreement (incorporated by reference to
the Company's Registration Statement and Amendments thereto on Form 10-SB,
effective December 1, 1997).
10.02 1997 Stock Incentive Plan of the Company, (incorporated by reference
to the Company's Registration Statement and Amendments thereto on Form 10-SB,
effective December 1, 1997).
10.03 1997 Transition Plan (incorporated by reference to the Company's
Registration Statement and Amendments thereto on Form 10-SB, effective
December 1, 1997).
10.04 Securities Purchase Agreement for $1,200,000 of Series A Preferred
Stock (incorporated by reference to the Company's Registration Statement and
Amendments thereto on Form 10-SB, effective December 1, 1997).
27 Financial Data Schedule.
</TABLE>
(b) Reports on Form 8-K
The Company did not file any Current Reports on Form 8-K during the last
quarter of the period covered by this report.
<PAGE>
SIGNATURES
In accordance with Section 13 and/or 15(d) of the Securities Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Volu-Sol, Inc.
By: /s/ Michael G. Acton
-----------------------
Michael G. Acton, Chief Executive and
Chief Financial Officer
Dated: December 23, 1997
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Signature Title Date
- --------------------- --------------------- -----------------
/s/ Michael G. Acton Chairman of the Board December 23, 1997
- ---------------------
Michael G. Acton
/s/ James R. Derrick
- --------------------- Director and President December 23, 1997
James R. Derrick
/s/ Jack W. Job
- --------------------- Director December 23, 1997
Jack W. Job
<PAGE>
VOLU-SOL, INC.
FINANCIAL STATEMENTS AS OF
SEPTEMBER 30, 1997 AND FOR THE
YEARS ENDED SEPTEMBER 30, 1997 AND 1996
TOGETHER WITH REPORT OF
INDEPENDENT PUBLIC ACCOUNTANTS
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Volu-Sol, Inc.:
We have audited the accompanying balance sheet of Volu-Sol, Inc. ("Volu-Sol" or
the "Company"), a Utah corporation and formerly wholly owned subsidiary of
Biomune Systems, Inc., as of September 30, 1997, and the related statements of
operations, stockholders' equity and cash flows for the years ended September
30, 1997 and 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with 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
misstatements. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
As discussed in Notes 1 and 9 to the financial statements, during the periods
presented, Volu-Sol was operated as a wholly owned subsidiary of Biomune
Systems, Inc. Certain expenses presented in the financial statements are the
result of allocations of total expenses incurred by Biomune Systems, Inc.
Therefore, the accompanying financial statements may not necessarily be
indicative of the financial condition or the results of operations that would
have existed if Volu-Sol had been operated as an unaffiliated company.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Volu-Sol, Inc. as of September
30, 1997, and the results of its operations and its cash flows for the years
ended September 30, 1997 and 1996 in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations.
As of September 30, 1997, the Company has an accumulated deficit of $2,228,838.
Recently, the Company has experienced certain technical difficulties with the
operation of its new hematology staining instrument. As a result, total sales
of this instrument are significantly lower than expected. Further, subsequent
to September 30, 1997, the Company's worldwide exclusive license and
distributorship may be converted to a nonexclusive license and distributorship.
These matters raise substantial doubt about the Company's ability to continue
as a going concern. Management's plans in regard to these matters are also
described in Note 1. The accompanying financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Salt Lake City, Utah
December 5, 1997
F-1
<PAGE>
VOLU-SOL, INC.
BALANCE SHEET
AS OF SEPTEMBER 30, 1997
ASSETS
<TABLE>
<CAPTION>
CURRENT ASSETS:
<S> <C> <C>
Cash $ 337,691
Accounts receivable, less allowance for doubtful accounts of $13,000 64,211
Inventories 152,888
Series A preferred stock subscription receivable 25,000
-----------
Total current assets 579,790
-----------
PROPERTY AND EQUIPMENT, at cost:
Leasehold improvements 221,164
Machinery and equipment 170,025
Furniture and fixtures 30,924
-----------
422,113
Less accumulated depreciation and amortization (160,743)
-----------
Net property and equipment 261,370
-----------
OTHER ASSETS 22,074
-----------
Total assets $ 863,234
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable to Biomune Systems, Inc. $ 390,500
Accounts payable 46,966
Accrued liabilities 104,241
-----------
Total current liabilities 541,707
-----------
COMMITMENTS AND CONTINGENCIES (Notes 1 and 4)
STOCKHOLDERS' EQUITY:
Preferred stock, $.0001 par value; 10,000,000 shares authorized:
Series A - 1,908 shares outstanding and 4,500 shares subscribed 1,249,554
Series A preferred stock subscriptions receivable (900,000)
Common stock, $.0001 par value; 50,000,000 shares authorized, 2,111,216
shares outstanding 211
Additional paid-in capital 2,200,600
Accumulated deficit (2,228,838)
-----------
Total stockholders' equity 321,527
-----------
Total liabilities and stockholders' equity $ 863,234
===========
</TABLE>
The accompanying notes to financial statements are
an integral part of this balance sheet.
F-2
<PAGE>
VOLU-SOL, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------ -----------
<S> <C> <C>
SALES $ 493,754 $ 434,691
COST OF GOODS SOLD 453,434 357,471
----------- -----------
Gross margin 40,320 77,220
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 747,434 1,446,651
----------- -----------
LOSS FROM OPERATIONS (707,114) (1,369,431)
OTHER EXPENSE (12,538) (32,791)
----------- -----------
NET LOSS (719,652) (1,402,222)
DIVIDENDS RESULTING FROM BENEFICIAL CONVERSION
FEATURE ON SERIES A PREFERRED STOCK (Note 6) (4,000) -
----------- -----------
NET LOSS APPLICABLE TO COMMON SHARES $ (723,652) $(1,402,222)
=========== ===========
NET LOSS PER COMMON SHARE (Note 2) $ (.34) $ (.66)
=========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING (Note 2) 2,111,216 2,111,216
=========== ===========
</TABLE>
The accompanying notes to financial statements are
an integral part of these statements.
F-3
<PAGE>
VOLU-SOL, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1997 AND 1996
<TABLE>
<CAPTION>
Series A Series A
Preferred Stock Common Stock Additional Preferred Stock
---------------------- ----------------- Paid-in Accumulated Subscriptions
Shares Amount Shares Amount Capital Deficit Receivable Total
---------- ---------- --------- ------ ---------- ----------- --------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1995 - $ - 2,111,216 $211 $ 571,513 $ (102,964) $ - $ 468,760
Contributions from
Biomune Systems, Inc. - - - - 1,368,963 - - 1,368,963
Net loss - - - - - (1,402,222) - (1,402,222)
---------- ---------- --------- ---- ---------- ----------- -------------- ----------
Balance at September 30, 1996 - - 2,111,216 211 1,940,476 (1,505,186) - 435,501
Contributions from
Biomune Systems, Inc. - - - - 260,124 - - 260,124
Sale of Series A preferred
stock at $200 per share,
net of offering costs of
$36,096 6,375 1,238,904 - - - - (900,000) 338,904
Series A preferred stock
issued in payment of
commissions at $200 per
share 33 6,650 - - - - - 6,650
Dividends resulting from
beneficial conversion
feature on Series A
preferred stock - 4,000 - - - (4,000) - -
Net loss - - - - - (719,652) - (719,652)
---------- ---------- ---------- ------ ---------- ----------- -------------- ----------
Balance at September 30,
1997 6,408 $1,249,554 2,111,216 $211 $2,200,600 $(2,228,838) $(900,000) $ 321,527
========== ========== ========== ====== ========== ============ ============== ==========
</TABLE>
The accompanying notes to financial statements are
an integral part of these statements.
<PAGE>
VOLU-SOL, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1997 AND 1996
Increase (Decrease) in Cash
<TABLE>
<CAPTION>
1997 1996
------------ -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (719,652) $(1,402,222)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 77,576 57,540
Amortization of intangibles - 46,636
Write down of intangibles - 244,836
Loss on disposal of property and equipment - 32,791
Change in assets and liabilities-
Decrease in accounts receivable 10,573 20,618
Increase in inventories (40,162) (12,402)
Increase in other assets (15,825) (458)
Decrease in accounts payable (8,124) (9,050)
Increase in accrued liabilities 54,034 34,031
----------- -----------
Net cash used in operating activities (641,580) (987,680)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (4,074) (373,869)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contributions from Biomune Systems, Inc. 260,124 1,368,963
Proceeds from issuance of notes payable to Biomune
Systems, Inc. 390,500 -
Proceeds from sale of Series A preferred stock,
net of offering costs 320,554 -
----------- -----------
Net cash provided by financing activities 971,178 1,368,963
----------- -----------
NET INCREASE IN CASH 325,524 7,414
CASH AT BEGINNING OF THE YEAR 12,167 4,753
----------- -----------
CASH AT END OF THE YEAR $ 337,691 $ 12,167
=========== ===========
</TABLE>
Supplemental Disclosure of Noncash Financing Activities:
During fiscal year 1997, the Company recognized dividends of $4,000 resulting
from the beneficial conversion feature on the Series A preferred stock. These
dividends increased the recorded amount of the Series A preferred stock.
The accompanying notes to financial statements are
an integral part of these statements.
F-5
VOLU-SOL, INC.
NOTES TO FINANCIAL STATEMENTS
(1) NATURE OF OPERATIONS AND ORGANIZATION
Volu-Sol, Inc. (the "Company"),formerly a wholly owned subsidiary of Biomune
Systems, Inc. ("Biomune"), was incorporated on July 27, 1995 in the state of
Utah. Biomune contributed certain assets and operations to the Company that
had been previously acquired by Biomune in December 1991. Prior to its
incorporation, the Company had been operated as a division of Biomune. During
the periods presented in the accompanying financial statements, Volu-Sol was
operated as a wholly owned subsidiary of Biomune. Certain expenses presented
in the financial statements are the result of allocations of total expenses
incurred by Biomune. These reported results may not be indicative of the
financial condition and results of operations that would have existed if Volu-
Sol had been operated as an unaffiliated company.
The Company engages in the manufacturing, marketing and distribution of medical
diagnostic stains and the marketing and distribution of a related medical
instrument.
The board of directors of Biomune approved the divestiture and distribution of
the Company's common stock to the Biomune common stockholders of record as of
March 5, 1997 (the "Distribution"). This approval was subject to the
completion of certain definitive agreements. These agreements were finalized
in September 1997 and the Company filed a Form 10-SB with the Securities and
Exchange Commission on October 1, 1997, the effective date of the Distribution.
The Form 10-SB became effective December 1, 1997. Biomune stockholders of
record as of March 5, 1997 will receive one share of Volu-Sol, Inc. common
stock for every ten shares of Biomune common stock owned at that date. These
shares are expected to be delivered by the Company on or about December 31,
1997. As a result of the Distribution and a forward common stock split (see
Note 2), there were 2,111,216 shares of Volu-Sol, Inc. common stock outstanding
effective October 1, 1997.
The Company has experienced net losses of $719,652 and $1,402,222 and negative
cash flows from operating activities of $641,580 and $987,680 for the years
ended September 30, 1997 and 1996, respectively. As of September 30, 1997,
the Company has an accumulated deficit of $2,228,838. Historically, the
Company has depended upon funding from Biomune to finance its operations. As
a result of the Distribution, such funding is no longer available. The
Company's continued existence is dependent upon its ability to increase
revenues and profitability to a self-sustaining level and to obtain
debt or equity funding to meet its short-term and long-term liquidity needs.
The Company introduced a new hematology staining instrument during the latter
part of fiscal year 1997. This instrument (the "Definitive") contains a
microchip (proprietary to a third party) that regulates precise stain amounts.
The Company has experienced certain technical difficulties with respect to the
Definitive. The resulting negative publicity has caused total Definitive
sales to be significantly lower than initially expected (see Note 2). Further,
<PAGE>
license and distributorship may be converted to a nonexclusive license and
distributorship (see Note 9).
The conditions discussed in the previous two paragraphs raise substantial doubt
about the Company's ability to continue as a going concern. The accompanying
financial statements do not include any adjustments that might result from the
outcome of this uncertainty. Management's plans with respect to this
uncertainty include obtaining debt or equity funding to finance the Company's
operations. The Company is in the process of completing a private placement of
Series A 10% Convertible, Non-Voting Preferred Stock (the "Offering"). The
Offering is intended to provide the Company with gross proceeds of up to
$2,400,000. In connection with this offering, prior to September 30, 1997, the
Company received subscriptions to purchase $1,275,000 of Series A preferred
stock, for which cash of $350,000 had been collected prior to September 30,
1997 and for which $25,000 was received subsequent to September 30, 1997.
Payment with respect to the remaining $900,000 of subscribed shares is due in
installments (see Note 6).
The Company is subject to special risk factors. These risk factors include:
(a) The Company did not achieve profitable operations while it was operated
as a division of Biomune, nor has the Company achieved profitable operations
since the date of its incorporation. The Company's present business strategy
is to improve its profitability and cash flows by adding to its existing
product line and expanding its sales and marketing efforts. There can be no
assurance that the Company will be able to achieve profitable operations.
(b) The Company anticipates that it will continue to incur operating losses in
the future until such time as it is able to successfully market the Definitive
or other devices that it has yet to add to its product line. There can be no
assurance that the Company will be able to achieve profitable operations with
its existing product line or that the Company will be able to supplement its
existing product line with additional products that will allow it to achieve
profitable operations. The Company's ability to achieve profitable operations
will also depend on its ability to develop and maintain an adequate marketing
and distribution system. There can be no assurance that the Company will be
able to develop and maintain adequate distribution resources.
(c) The Company will require substantial additional funding in order to
acquire or license additional technologies and products to add to its existing
product line, for operational expenses, and for establishing and maintaining
manufacturing and marketing capabilities in the future. There can be no
assurance that the Company's cash reserves and other liquid assets, including
the proceeds of any future third-party financings will be adequate to satisfy
its capital and operating requirements.
(d) The Company uses trademarks and tradenames for certain of its products.
Nevertheless, the Company's core products, medical diagnostic stains and
solutions and other biochemical products, as well as the Definitive, are not
based on technology proprietary to the Company. The majority of the Company's
present product line is based on technology that is in the public domain and
therefore there are effectively no entry barriers to potential competitors of
F-7
<PAGE>
the Company. The Company has entered into a license agreement with the
third-party entity that owns the intellectual property rights associated with
the Definitive and manufactures the Definitive for the Company. There can be
no assurance that this third party will be able to adequately protect its
proprietary rights or to continue to manufacture the Definitive on terms
favorable to the Company.
(e) The medical diagnostic supply and biochemical industries are characterized
by intense competition. Many, if not most, of the Company's competitors and
potential competitors are much larger and consequently have greater access to
capital as well as mature and highly sophisticated distribution channels. Many
of the Company's larger competitors are able to manufacture chemical products
on a much larger scale and therefore presumably would be able to take advantage
of economies of scale not presently enjoyed by the Company. There can be no
assurance that competition from other companies will not render the Company's
products noncompetitive.
(f) The Company historically has not been involved in significant research and
development of new technologies. Consequently, the Company's success in adding
to its existing product line will depend on its ability to acquire or otherwise
license competitive technologies and products and to operate without infringing
the proprietary rights of others. No assurance can be given that any licenses
required from third parties will be made available on terms acceptable to the
Company, or at all.
(g) The Company is highly dependent on certain of its scientific, technical
and operations employees. The loss of services of any of these personnel could
impede the achievement of the Company's objectives. There can be no assurance
that the Company will be able to attract and retain qualified personnel on
acceptable terms.
(h) The use of any of the Company's existing or potential products in
laboratory or clinical settings may expose the Company to liability claims.
These claims could be made directly by persons who assert that inaccuracies
or deficiencies in their test results were caused by defects in the Company's
products. The Company has obtained limited product liability insurance
coverage. There can be no assurance that the Company will be able to obtain
commercially reasonable product liability insurance for any of its present
products or products added to its product line in the future. A successful
product liability claim or series of claims brought against the Company could
have a material adverse effect on its business, financial condition and results
of operations.
(i) Political, economic and regulatory influences are likely to lead to
fundamental change in the health care industry in the United States. Third-
party payors are increasingly challenging the price and cost effectiveness of
medical products and services, including medical diagnostic procedures. There
can be no assurance that adequate reimbursement will be available or sufficient
to allow the Company to sell its products on a competitive basis.
F-8
<PAGE>
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Revenue Recognition
Revenue from the sale of the Company's products, less reserves for returns, is
recognized upon shipment to the customer.
Allocation of Parent Company General and Administrative Expenses
Expenses specifically identifiable to the Company and paid by Biomune have been
presented as those of the Company. A portion of expenses which are not
specifically identifiable, consisting primarily of professional services and
payroll-related expenses, have been allocated to the Company based on estimates
of personnel and third-party involvement related to the respective activities.
These allocations totaled approximately $40,000 and $165,000 for the years
ended September 30, 1997 and 1996, respectively.
Inventories
Inventories include direct materials, direct labor and manufacturing overhead
costs and are recorded at the lower of cost (first-in, first-out method) or
market value and consist of the following as of September 30, 1997:
Instruments, biological stains
and reagents $106,477
Raw materials, packaging and
supplies 46,411
--------
$152,888
========
Sales of the Definitive have been significantly lower than initially expected
by the Company. Subsequent to September 30, 1997, the Company's worldwide
exclusive license and distributorship was converted to a nonexclusive license
and distributorship (see Notes 4 and 9). As a result of these factors, the
Company has written down a portion of the carrying cost of its Definitive
inventory to expected net realizable value.
F-9
<PAGE>
Property and Equipment
Property and equipment are recorded at cost and are depreciated using the
straight-line method over their estimated useful lives of 5 to 7 years.
Maintenance, repairs, minor renewals and betterments are expensed as incurred.
Major renewals and betterments are capitalized. The cost of property and
equipment sold or otherwise disposed of and the related accumulated
depreciation are relieved from the accounts, and any resulting gains or losses
are included in the determination of net loss.
Long-Lived Assets
The Company accounts for impairment of long-lived assets in accordance with
Statement of Accounting Standards ("SFAS") NO. 121, "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of".
SFAS No. 121 requires that long-lived assets be reviewed for impairment
whenever events or changes in circumstances indicate that the book value of
the assets may not be recoverable. The Company evaluates at each balance sheet
date whether events and circumstances have occurred which indicate possible
impairment.
Intangible Asset
The Company's intangible asset consisted of the contribution of medical
diagnostic technologies acquired by Biomune in its acquisition of the Company's
predecessor's net assets in 1991. During fiscal year 1996, the Company
determined that facts and circumstances warranted the write off of the
remaining net book value of approximately $245,000. The determination that
this asset was impaired was based on continuing operating losses and the
framework set out in SFAS No. 121.
Advertising
The Company expenses the cost of advertising the first time the advertising
takes place. For the years ended September 30, 1997 and 1996 advertising
expenses totaled approximately $50,000 and $82,000, respectively.
Income Taxes
The Company recognizes a liability or asset for the deferred tax consequences
of all temporary differences between the tax bases of assets and liabilities
and their reported amounts in the financial statements that will result in
taxable or deductible amounts in future years when the reported amounts of the
assets and liabilities are recovered or settled. These deferred tax assets or
liabilities are measured using the enacted tax rates and laws that will be in
effect when the differences are expected to reverse.
Concentrations of Credit Risk
Financial instruments that subject the Company to concentrations of credit risk
consist primarily of trade receivables. In the normal course of business, the
Company provides unsecured credit to its customers, which are located
throughout the United States. In connection with providing unsecured credit,
the Company performs ongoing credit evaluations of its customers and maintains
allowances for estimated losses.
F-10
<PAGE>
Fair Value of Financial Instruments
The book value of the Company's financial instruments approximates fair value.
The estimated fair values have been determined using appropriate market
information and valuation methodologies.
Net Loss Per Common Share and Common Stock Split
The Company computes net loss per common share based on the weighted average
number of common shares outstanding during the year. In connection with the
Distribution, 2,111,216 shares of the Company's $0.0001 par value common stock,
constituting all of the issued and outstanding shares of the Company's Common
Stock, were distributed (effective September 30, 1997) pro rata as a stock
dividend to the holders of the Common Stock of Biomune as of March 5, 1997.
As a consequence of the Distribution, the Company ceased to be a subsidiary of
Biomune. Effective August 14, 1997, the Company completed a forward common
stock split of approximately 211 for 1 to permit the issuance of a sufficient
number of shares to the stockholders of record of Biomune as of March 5, 1997.
All per share information in the accompanying statements of operations has been
based on the outstanding number of shares issued in connection with
the Distribution. Warrants and options outstanding have not been included in
the computations since any assumption of conversion would have an antidilutive
effect, thereby reducing the net loss per common share.
Recent Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128, "Earnings Per Share". This statement specifies requirements for
the computation, presentation and disclosure of earnings per share ("EPS") for
all periods ending after December 15, 1997. Early adoption is prohibited and
upon adoption, all prior period EPS data must be restated. SFAS No. 128
simplifies the standards for computing EPS and replaces the presentations of
Primary EPS and Fully Diluted EPS with Basic EPS and Diluted EPS. The Company
believes that SFAS No. 128 will not have a material impact on its financial
statement presentation when adopted.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income".
Under current reporting requirements, extraordinary and non-recurring gains and
losses are excluded from income from current operations. SFAS No. 130 requires
an "all-inclusive" approach which specifies that all revenues, expenses, gains
and losses recognized during the period be reported in income, regardless of
whether they are considered to be results of operations of the period. The
statement is effective for fiscal years beginning after December 15, 1997.
The Company believes that SFAS No. 130 will not have a material impact on its
financial statement presentation when adopted.
F-11
<PAGE>
(3) INCOME TAXES
The Company has previously filed a consolidated tax return with its parent,
Biomune. No tax sharing agreement exists between the Company and Biomune.
In connection with the Distribution, all net operating loss carryforwards and
credit carryforwards as of September 30, 1997 remain with Biomune and will not
be available to be utilized by the Company.
As of September 30, 1997, the Company has a net deferred tax asset of
approximately $75,000 resulting from reserves and depreciation recorded for
financial reporting purposes but not currently deductible for income tax
reporting purposes. In accordance with SFAS No. 109, a valuation allowance is
provided when it is more likely than not that all or some portion of the
deferred income tax asset will not be realized. Accordingly, the Company has
established a valuation allowance for the entire deferred income tax asset.
(4) COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases facilities under a noncancellable operating lease that
expires in November 2000. Lease expense for the years ended September 30, 1997
and 1996 was approximately $55,000 and $69,000, respectively. Future minimum
lease commitments are as follows:
Fiscal Year Amount
----------- ----------
1998 $ 55,400
1999 55,400
2000 55,400
2001 9,240
--------
$175,440
========
Purchase Commitments
The Company is obligated under a manufacturing agreement with the supplier of
the Definitive to purchase 600 automated slide stainers ("stainers") per
calendar year. In the event the Company purchases fewer than 600 stainers, the
manufacturer has the option to convert the Company's worldwide exclusive
license and distributorship to a nonexclusive license and distributorship. As
of September 30, 1997, the Company had purchased 228 stainers, of which 170
were still held in inventory at year-end. As of September 30, 1997, the Company
has a remaining unfilled purchase order for 47 Definitives, which will bring
total purchases for the year to 275.
Subsequent to September 30, 1997, the Company informed the supplier of the
Definitive that it would not meet the annual purchase commitment. As a result,
the Company's exclusive worldwide license and distributorship may be converted
to a nonexclusive license and distributorship.
The Company has agreed to pay the supplier of the Definitive a royalty of three
percent of the net sales price for all Definitive component parts sold by the
Company, exclusive of stainer sales.
F-12
<PAGE>
(5) NOTES PAYABLE TO BIOMUNE SYSTEMS, INC.
From March 5, 1997 through September 30, 1997, the Company obtained loans from
Biomune totaling $390,500 that remain outstanding. These loans bear an annual
interest rate of ten percent and are due on demand. The Company has accrued
interest payable of $12,538 related to these loans through September 30, 1997.
The related expense is included in "other expense" in the accompanying 1997
statement of operations. The Company anticipates repaying this debt from
proceeds raised in the private placement of Series A preferred stock.
(6) PARENT COMPANY CAPITAL CONTRIBUTIONS AND STOCKHOLDERS' EQUITY
Parent Company Capital Contributions
From the date of Volu-Sol's acquisition in 1991 through March 5, 1997, Biomune
made capital contributions, including expenses allocated or paid on behalf of
Volu-Sol, to the Company in order to fund the Company's cash flow needs.
Subsequent to March 5, 1997, all additional cash advances made by Biomune to
the Company were in the form of demand loans and as of September 30, 1997
totaled $390,500 (see Note 5).
Authorized Shares
The Company is authorized to issue 50,000,000 shares of common stock, $0.0001
par value per share, and 10,000,000 shares of preferred stock, $0.0001 par
value per share. The Company's board of directors has the authority to amend
the Company's Articles of Incorporation, without further stockholder approval,
to designate and determine, in whole or in part, the preferences, limitations
and relative rights of the preferred stock before any issuance of the preferred
stock and to create one or more series of preferred stock.
Preferred Stock
On September 8, 1997, the Company amended its Articles of Incorporation to
create a series of preferred stock, the Series A 10% Convertible Non-Voting
Preferred Stock (the "Series A Preferred"). The Company is attempting to sell
up to 12,000 shares of the Series A Preferred in a private placement for total
gross proceeds of up to $2,400,000. As of year-end, subscriptions for
$1,275,000 had been received by the Company for which cash of $350,000 had been
collected by year-end (see Note 9). Payments with respect to subscriptions
totaling $900,000 are due as follows: $300,000 upon the effective date of the
Company's Form 10-SB, $300,000 within 45 days of the effective date of the
Company's Form 10-SB and $300,000 within 90 days of the effective date of the
Company's Form 10-SB. The Series A Preferred will be convertible into common
stock commencing January 1, 1998. The "conversion price", which is the basis
for such conversion, is the lesser of (i) 80 percent of the average closing bid
price of the Company's common stock for the three trading days immediately
preceding the date of conversion or (ii) $1.25 per share. Of this discount,
estimated to be $95,400 based on the number of shares sold as of year-end,
$4,000 has been recognized as a dividend in the accompanying financial
statements. The remainder will be recognized as a dividend during the first
quarter of fiscal year 1998.
F-13
<PAGE>
Registration Rights Agreement
The Company has entered into an agreement with the Series A Preferred
stockholders that allows these stockholders to request the registration of the
shares of common stock into which the Series A Preferred is convertible.
Conversion of Biomune Preferred Stock
Upon conversion of the outstanding shares of Biomune's preferred stock, the
Biomune preferred shareholders will receive one share of the Company's common
stock for every ten shares of Biomune common stock received in the conversion.
The Company has reserved a total of 323,118 shares of common Stock for issuance
in connection with the conversion of the Biomune Series A, B and C preferred
stock outstanding at March 5, 1997.
(7) STOCK OPTIONS AND WARRANTS
Stock Incentive Plan
The Company has adopted the 1997 Volu-Sol, Inc. Stock Incentive Plan (the "1997
Plan"). The 1997 Plan was approved by action of Biomune, the original
stockholder of the Company, in August 1997. Under the 1997 Plan, the Company
may issue stock options, stock appreciation rights, restricted stock awards,
and other incentives to employees, officers and directors of the Company. The
1997 Plan provides for the award of incentive stock options to key employees
and directors of the Company and the award of nonqualified stock options and
other awards to employees and certain non-employees who have important
relationships with the Company. Five million shares are initially available
for grant under the 1997 Plan. To date, no awards of any kind have been made
under the 1997 Plan.
As permitted by SFAS No. 123, the Company will apply Accounting Principles
Board Opinion No. 25 and related interpretations in accounting for options
granted to employees and directors under its 1997 Plan.
Add-on Volu-Sol Options
In connection with the Distribution of the Company's common stock, the Board
of Directors of Biomune determined that each Biomune stock option ("Biomune
Option") would be divided into two separately exercisable options: an option
to purchase Biomune common stock and an option to purchase Volu-Sol common
stock (the latter being the "Add-on Volu-Sol Option"). The Add-on Volu-Sol
Options grant the holder the right to purchase the Company's common stock in
an amount that would have been issued in the Distribution in respect of the
shares of Biomune common stock subject to the applicable Biomune Option, if
such Biomune Option had been exercised in full immediately prior to
the Distribution, and containing substantially equivalent terms as the existing
Biomune Option. The Add-on Volu-Sol Options carry an option exercise price per
share equal to the price per share of the exercise price under the Biomune
Option.
As a result of the foregoing, certain persons who remain Biomune employees or
non-employee directors after the Distribution and certain persons who were
Biomune employees prior to the Distribution but become Volu-Sol employees after
the Distribution hold both Biomune Options and separate Add-on Volu-Sol Options.
F-14
<PAGE>
The obligations with respect to the Biomune Options and Add-on Volu-Sol Options
held by Biomune employees and non-employee directors following the Distribution
will be obligations solely of Biomune. Volu-Sol has agreed to sell to Biomune
from time to time shares of Volu-Sol common stock as necessary to satisfy
Biomune's obligations under the Distribution Agreement. The sales price of
such shares of Volu-Sol common stock will be a sum equal to the consideration
received by Biomune in exercise of the related option.
In connection with the Distribution, there are in existence Add-on Volu-Sol
Options (all exercisable) to purchase 732,101 shares of Volu-Sol common stock at
exercise prices ranging from $1.16 to $5.00 with a weighted average exercise
price of $1.76. The Company has reserved 732,101 shares of its common stock
for issuance upon exercise of these options.
Volu-Sol Warrants
Biomune has granted rights to purchase Biomune common stock in the form of
warrants (the "Biomune Warrants"). Under the agreements governing the grant
and exercise of the Biomune Warrants, Biomune has agreed to issue to the
holders of such rights, securities otherwise issuable with respect to the
Biomune common shares underlying the Biomune Warrants if and to the extent
the Biomune Warrants are exercised. Consequently, if the holders of the
Biomune Warrants exercise their rights thereunder, Biomune must issue
to those holders one share of Volu-Sol common stock for each share of Biomune
common stock issued in connection with such exercise. Volu-Sol has agreed to
sell to Biomune the shares of Volu-Sol common stock needed to meet this
obligation of Biomune. The sales price of such shares of Volu-Sol common stock
will be a sum equal to 10 percent of the consideration received by Biomune in
exercise of the Biomune Warrants.
In connection with the Distribution, there are in existence warrants (all
exercisable) to purchase 247,059 shares of Volu-Sol common stock at exercise
prices ranging from $2.13 to $3.00 with a weighted average exercise price of
$2.38. The Company has reserved 247,059 shares of its common stock for
issuance upon exercise of these warrants.
The following table presents the aggregate Add-on Volu-Sol options and warrants
existing as a result of the Distribution.
<TABLE>
<CAPTION>
Number of
Options
and Weighted Avg.
Warrants Exercise Price
--------- --------------
<S> <C> <C>
Granted 979,160 $1.97
Expired (82,500) 2.32
---------
Outstanding at September 30, 1997 896,660 1.93
=========
</TABLE>
F-15
<PAGE>
<TABLE>
<CAPTION>
Weighted Average
Range of Outstanding at Remaining Weighted Average
Exercise Prices September 30, 1997 Contractual Life Exercise Price
--------------- ------------------ ---------------- ----------------
<S> <C> <C> <C>
$1.25 to $5.00 600,468 2.1 years $ 2.27
$1.16 296,192 3.1 years 1.16
</TABLE>
(8) SIGNIFICANT CUSTOMER
During the year ended September 30, 1996 sales to Barrett Healthcare
Corporation ("Barrett") accounted for approximately 12 percent of the Company's
total revenues. No other single customer accounted for more than 10 percent of
the Company's total revenues during fiscal year 1996. During the year ended
September 30, 1996, the Company discontinued selling products to Barrett and
wrote off outstanding accounts receivable balances of approximately $55,000.
Almost 80 percent of Volu-Sol's sales are accomplished through medical supply
distributors who carry a large range of products for medical laboratories.
During the year ended September 30, 1997, sales to Lab Supply, Infolab, Inc.
and Hardy Diagnostic accounted for approximately 13.5 percent, 12.7 percent and
11.4 percent, respectively, of the Company's total revenues. No other single
customer accounted for more than 10 percent of the Company's total revenues
during fiscal year 1997.
(9) SUBSEQUENT EVENTS
Subsequent to September 30, 1997, the Company informed the supplier of the
Definitive that the Company would not meet its annual purchase commitment. As
a result, the Company's exclusive worldwide license and distributorship may be
converted to a nonexclusive license and distributorship.
Subsequent to September 30, 1997, the Company collected a $25,000 Series A
preferred stock subscription receivable existing at year-end and received an
additional $25,000 from the sale of 125 Series A preferred shares as part of
the private placement described in Note 1.
F-16
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<CASH> 337,691
<SECURITIES> 0
<RECEIVABLES> 64,211
<ALLOWANCES> 0
<INVENTORY> 152,888
<CURRENT-ASSETS> 579,790
<PP&E> 261,370
<DEPRECIATION> 0
<TOTAL-ASSETS> 863,234
<CURRENT-LIABILITIES> 541,707
<BONDS> 0
212
0
<COMMON> 345,554
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 863,234
<SALES> 493,754
<TOTAL-REVENUES> 493,754
<CGS> 453,434
<TOTAL-COSTS> 453,434
<OTHER-EXPENSES> 747,434
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,538
<INCOME-PRETAX> (719,652)
<INCOME-TAX> 0
<INCOME-CONTINUING> (719,652)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (719,652)
<EPS-PRIMARY> (.34)
<EPS-DILUTED> (.34)
</TABLE>
