<PAGE>
Securities and Exchange Commission
Washington, D.C. 20549
FORM 8-K/A
AMENDMENT NO. 2 TO
Current Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of Earliest Event Reported):
July 21, 1000
-------------
IMX PHARMACEUTICALS, INC.
-------------------------
(Exact name of Registrant as specified in its charter)
Commission File Number 000-30294
---------
Utah 87-0394290
--------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
2295 Corporate Boulevard, Suite 131, Boca Raton, Florida 33431
--------------------------------------------------------------
(Address of Principal Executive Offices)
561.998.5660
------------
(Registrant's Telephone number, including area code)
<PAGE>
Item 7. Financial Statements and Exhibits
Consolidated Financial Statements 1999 (audited) and June 30, 2000
IMX Pharmaceuticals, Inc. (unaudited)
Consolidated Financial Statements 1999 and 1998 ETI International,
Inc. (audited) and June 30, 2000 (unaudited)
Consolidated Financial Statements 1999 and 1998 IMX Pharmaceuticals,
Inc. (audited)
Pro Forma Statements 1999
Pro Forma Statements June 30, 2000
Adjusting Journal Entries ETI International, Inc.
Adjusting Journal Entries IMX Pharmaceuticals, Inc.
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant has caused this report to be signed in its behalf by the
undersigned thereunto duly authorized on the 27th day of September 2000.
IMX PHARMACEUTICALS, INC.
By: /s/ Leonard F. Kaplan
----------------------
Leonard F. Kaplan, Chief Financial Officer
<PAGE>
IMX PHARMACEUTICALS, INC.
CONSOLIDATED FINANCIAL REPORT
JUNE 30, 2000
<PAGE>
IMX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Audited) (Unaudited)
December 31, June 30,
1999 2000
---------- ----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $2,497,791 $ 122,500
Securities available for sale 30,463 28,269
Accounts receivable (net of allowance for
doubtful accounts of $27,495 and $3,170) 110,525 63,641
Other receivables 0 16,440
Loan receivable - related party 31,153 30,125
Inventories 557,593 1,364,008
Refundable deposit 0 1,250,000
Vendor deposits 50,000 120,000
Prepaid expenses and other 46,731 47,237
---------- ----------
Total Current Assets 3,324,256 3,042,220
---------- ----------
PROPERTY AND EQUIPMENT:
Property and equipment (net of accumulated
depreciation of $179,216 and $210,422) 105,913 159,971
---------- ----------
OTHER ASSETS:
Goodwill 264,303
Deposits and other 67,646 112,646
---------- ----------
Total Other Assets 67,646 376,949
---------- ----------
TOTAL ASSETS $3,497,815 $3,579,140
========== ==========
1
<PAGE>
IMX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Audited) (Unaudited)
December 31, June 30,
1999 2000
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 436,398 $ 457,094
Accrued expenses and other current
liabilities 49,700 294,442
Notes payable, current portion 435,000
Capital lease payable, current portion 2,896 2,896
----------- -----------
Total Current Liabilities 488,994 1,189,432
----------- -----------
LONG-TERM LIABILITIES:
Notes payable, non-current portion 503,504
Capital lease payable, non-current portion 4,896 4,896
----------- -----------
Total Long Term Liabilities 4,896 508,400
----------- -----------
STOCKHOLDERS' EQUITY:
Common stock, $.001 par value, 50,000,000
shares authorized, 9,634,707 and 9,734,707
shares issued, 5,802,461 and 5,902,461 shares
outstanding 9,635 9,735
Additional paid-in capital 7,943,050 8,017,950
Retained earnings (deficit) (4,348,955) (5,555,302)
Treasury stock, at cost - 3,832,246 and
3,832,246 shares (578,054) (578,054)
Accumulated other comprehensive loss (21,751) (13,021)
----------- -----------
Total Stockholders' Equity 3,003,925 1,881,308
----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 3,497,815 $ 3,579,140
=========== ===========
2
<PAGE>
IMX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
Six Months Ended Three Months Ended
June 30, June 30,
1999 2000 1999 2000
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
NET SALES $ 50,718 $ 1,525,311 $ 50,351 $ 1,293,965
COST OF SALES 22,365 520,972 22,220 439,471
----------- ----------- ----------- -----------
GROSS PROFIT 28,353 1,004,339 28,131 854,494
----------- ----------- ----------- -----------
OPERATING EXPENSES:
Selling 486,796 1,283,981 271,443 891,677
Advertising 116,538 48,132 67,326 15,602
General and administrative 785,597 1,076,299 408,454 686,662
Supply agreement impairement loss 43,348 -- 43,348 --
Depreciation and amortization 27,204 31,883 14,204 13,789
----------- ----------- ----------- -----------
Total Operating Expenses 1,459,483 2,440,295 804,775 1,607,730
----------- ----------- ----------- -----------
LOSS FROM OPERATIONS (1,431,130) (1,435,956) (776,644) (753,236)
OTHER INCOME (EXPENSES):
Equity in loss of unconsolidated
subsidiary (12,887) -- (12,887) --
Medicis inventory recovery gain (loss) -- 180,162 -- (40,091)
Gain on sale of investment in unconsolidate -- -- -- --
subsidiary 3,356,005 -- 3,356,005 --
Other 82,341 49,447 23,749 24,207
----------- ----------- ----------- -----------
Income (Loss) before income taxes 1,994,329 (1,206,347) 2,590,223 (769,120)
Provision for Income Taxes -- -- -- --
----------- ----------- ----------- -----------
Net Income (loss) 1,994,329 (1,206,347) 2,590,223 (769,120)
Dividend on preferred stock (43,400) -- (43,400) --
----------- ----------- ----------- -----------
Net loss available to
common stockholders $ 1,950,929 $(1,206,347) $ 2,546,823 $ (769,120)
=========== =========== =========== ===========
===========================================================================================================================
Weighted average number of shares of
common stock outstanding:
Basic 5,430,340 5,811,252 5,884,951 5,820,043
Diluted 5,718,584 6,142,000 6,173,195 6,150,791
===========================================================================================================================
Net loss per common share:
Basic $ 0.36 $ (0.21) $ 0.43 $ (0.13)
Diluted $ 0.34 $ (0.20) $ 0.41 $ (0.13)
===========================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
IMX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Six Months Six Months Three Months Three Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
1999 2000 1999 2000
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 1,994,329 $(1,206,347) $ 2,590,223 $ (769,120)
Adjustments to reconcile net loss
to net cash used provided by operating activities:
Depreciation and amortization 27,204 31,206 14,204 13,112
Provision for doubtful accounts (13,647) (24,324) (8,113) 1,570
Deferred income tax (25,000) (25,000) --
Compensation, fair value of stock, stock options and warrents 46,308 46,308 --
Equity in loss off unconsolidated subsidiary 167,338 167,338
Accretion of investment in unconsolidated subsidiary (97,740) (97,740) --
Gain on sale of investment in unconsolidated subsidiary (3,356,005) (3,356,005) --
Impairement loss on suply and licensing agreements 43,348 43,348 --
(Increase) decrease in accounts receivable 105,451 54,767 333,771 295,838
Decrease (increase) in inventories (333,255) (806,415) (71,443) (653,380)
(Increase) in prepaid expenses (30,625) (506) (9,873) 17,541
Decrease (increase) in deposits 25,774 (1,320,000) 25,774 (970,000)
Decrease (increase) in other assets -- (45,000) 35,623 (35,000)
(Decrease) increase in accounts payable -- -- --
and accrued expenses 145,450 265,438 239,698 311,178
----------- ----------- ----------- -----------
Net cash used by operating activities (1,301,070) (3,051,181) (71,887) (1,788,261)
----------- ----------- ----------- -----------
Investing Activities:
Purchase of furniture and equipment (30,174) (85,263) (29,016) (68,872)
Loan repayment from (advance to) related party -- 1,028 352 (558)
Goodwill purchased (264,303) (264,303)
Sale of securities 2,194 2,194
Decrease in investment in securities 8,730 8,730
Decrease in investment in and advances to -- --
unconsolidated subsidiary -- 0 (339,194)
----------- ----------- ----------- -----------
Net cash (used) provided by investing activities (30,174) (337,614) (367,858) (322,809)
----------- ----------- ----------- -----------
Financing Activities:
Net proceeds (repayments) of notes payable -- 938,504 (9,390) 939,303
Purchase of securities available for sale (25,000) -- (1,714,200)
Stock issuance to purchase goodwill 75,000 75,000
Proceeds from maturity of securities 1,678,200 1,748,197 --
Purchase of treasury stock -- 0 --
----------- ----------- ----------- -----------
Net cash (used) provided by financing activities 1,653,200 1,013,504 24,607 1,014,303
----------- ----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 321,956 (2,375,291) (415,138) (1,096,767)
Cash and cash equivalents - beginning of period 623,860 2,497,791 1,360,954 1,219,267
----------- ----------- ----------- -----------
Cash and cash equivalents - end of period $ 945,816 $ 122,500 $ 945,816 $ 122,500
=========== =========== =========== ===========
====================================================================================================================================
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
Cash paid for interest $ 12,218 $ 7,843 $ 12,218 $ 166
Cash paid for income taxes $ 0 $ 0 $ 0 $ 0
====================================================================================================================================
====================================================================================================================================
SUPPLEMENTAL SCHEDULE OF NON CASH ACTIVITIES
Dividends on preferred stock:
Preferred stock issued in lieu of cash for dividends payable
on preferred stock $ 43,400 $ 0 $ 43,400 $ 43,400
Conversion of preferred stock to common stock $ 0 $ 0 $ 0 $ 0
====================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
IMX PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of June 30, 2000 and for the six and three month
periods ended June 30, 1999 and 2000 are unaudited)
NOTE 1 - NATURE OF BUSINESS
IMX Pharmaceuticals, Inc. (the "Company"), formerly IMX Corporation,
was organized under the laws of the State of Utah on June 2, 1982.
The Company changed its name to IMX Pharmaceuticals, Inc. on June
30, 1997. The consolidated financial statements include the accounts
of the Company and its subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation.
In 1995, the Company entered into an acquisition agreement (the
"Agreement'), with Interderm, Ltd., ("Interderm") for the assignment
of the exclusive marketing and distribution rights in the United
States for certain pharmaceutical products manufactured by
Meyer-Zall Laboratories of South Africa ("Meyer-Zall"). The products
included Exorex, an over-the-counter psoriasis medication.
In connection with the Agreement, the Company also acquired the
right of first refusal for distribution rights in the United States
for new pharmaceutical products developed or manufactured by
Meyer-Zall.
During 1996 and 1997, the Company began to market and distribute
Exorex and other related products in the retail market using capital
raised from private placements.
Effective June 24, 1998, the Company entered into an agreement (the
"Joint Venture Agreement") with various affiliates of Medicis
Pharmaceutical Corporation ("Medicis") to form a joint venture,
Medicis Consumer Products Company, LLC ("LLC"), to develop and
market skin care products. Under the terms of the Joint Venture
Agreement, Medicis contributed cash of $4,000,000 to the joint
venture in return for a 51% interest in the LLC. The Company
contributed all of the assets, property and associated rights in
connection with the Exorex product line, with an unamortized cost of
approximately $5,200, in return for a 49% interest in the LLC.
Effective June 30, 1999, the Company entered a Sale and Transfer
Agreement ("Sale Agreement") with Medicis, whereby the Company sold
its 49% interest in the LLC to Medicis for $3,600,000.
6
<PAGE>
IMX PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of June 30, 2000 and for the six and three month
periods ended June 30, 1999 and 2000 are unaudited)
NOTE 1 - NATURE OF BUSINESS (CONT'D)
On June 16, 2000 the Company signed an agreement with Pure
Distributors' Inc. d/b/a Envion International to become the
exclusive worldwide distributor of all Envion's products. The main
products include meal replacement bars and nutritional supplements
marketed under the labels of BioZone and Envitamins. Envion's
products are now marketed through its WellnessShop.com web site and
companion catalogue, both of which will now be operated by the
Company. The Company will pay a fee to Envion for the
distributorship of $185,000 during 2000, $86,000 during 2001, and
$66,000 during 2002 and each year thereafter.
The Company also acquired Envions entire current product inventory
for $750,000 payable monthly over two years. The Company has agreed
to purchase all of its requirements for Envion products from Envion.
The Company has an option to purchase all of Envion's rights to its
products, customer lists and various other contract rights for
$200,000. If the option is exercised, the fees paid in connection
with the Distribution Agreement would be cancelled; the Company
would no longer be required to purchase its requirements from
Envion, and would only pay Envion royalties based on its purchase of
Envion products from the manufacturers thereof.
The consolidated statement of operations for the six and three
months ended June 30, 2000 include sales of $69,994, cost of goods
sold of $16,252 and direct expenses of $36,520 relating to the sale
of Envion products
On June 15, 2000 the Company purchased all the stock of Select
Benefits Corporation for a three-year note in the amount of $189,510
and 100,000 shares of its common stock. Select Benefits has now
changed its name to IMX Select Benefits Corporation. Select Benefits
provides discount health care memberships that provide discounts of
10% to 60% for prescription drugs, vision care, dentistry,
chiropractic, hearing and other health related benefits. Sales and
expenses in connection with Select Benefits during the six and three
months ended June 30, 2000 were not material.
7
<PAGE>
IMX PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of June 30, 2000 and for the six and three month
periods ended June 30, 1999 and 2000 are unaudited)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Interim Financial Statements
The accompanying unaudited consolidated financial statements as of
June 30, 2000 and for the six and three month periods ended June 30,
1999 and 2000 have been prepared in accordance with generally
accepted accounting principles for interim financial information. In
the opinion of management, all adjustments consisting of normal
recurring accruals considered necessary for a fair presentation have
been included. Operating results for the six and three-month periods
ended June 30, 2000 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2000.
Cash and Cash Equivalents
For purposes of reporting cash flows, the Company considers all
highly liquid investments purchased with an original maturity of
three months or less to be cash equivalents.
Securities Available for Sale
Securities available for sale are carried at estimated market
values. Unrealized holding gains and losses on securities available
for sale are reported as a net amount in a separate component of
stockholders' equity until realized. Gains and losses realized from
the sale of investment securities are computed using the
specific-identification method.
Inventories
Inventories are stated at the lower of cost or market value. Cost is
determined using the first-in, first-out method.
Property and Equipment
8
<PAGE>
IMX PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of June 30, 2000 and for the six and three month
periods ended June 30, 1999 and 2000 are unaudited)
Property and equipment are recorded at cost. Depreciation and
amortization are computed using methods that approximate the
straight-line method over the assets' estimated useful lives.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
Revenue Recognition
Sales are generally recorded upon the shipment of goods to
customers.
Production Development Costs
Costs incurred for the development of new product lines are expensed
as incurred, as specified by SOP 98-5 issued by the American
Institute of Certified Public Accountants (Note 3).
Stock-Based Compensation
The Company accounts for stock based compensation as set forth in
Accounting Principles Board ("APB") Opinion 25, "Accounting for
Stock Issued to Employees," and discloses the proforma effect on net
income (loss) and income (loss) per share of adopting the full
provisions of Statement of Financial Accounting Standards ("SFAS")
No. 123 "Accounting for Stock-Based Compensation". Accordingly, the
Company has elected to continue using APB Opinion 25 and has
disclosed in the footnotes proforma income (loss) and income (loss)
per share information as if the fair value method had been applied.
Income Taxes
The Company files consolidated Federal and State of Florida income
tax returns. Income taxes are calculated using the liability method
specified by SFAS No. 109, "Accounting for Income Taxes".
Net Income (Loss) Per Common Share
Net income (loss) per common share is calculated according to SFAS
No.128,
9
<PAGE>
IMX PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of June 30, 2000 and for the six and three month
periods ended June 30, 1999 and 2000 are unaudited)
"Earnings Per Share" which requires companies to present basic and
diluted earnings per share. Net income (loss) per common share--
basic is based
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
Net Income (Loss) Per Common Share (Cont'd)
on the weighted average number of common shares outstanding during
the year. Net income (loss) per common share -- diluted is based on
the weighted average number of common shares and dilutive potential
common shares outstanding during the year.
Convertible preferred stock, certain common stock options and common
stock warrants were excluded from the computations of net loss per
share for the six and three month periods ended June 30, 1999 and
2000 because the effect of their inclusion would be anti-dilutive.
Fair Value of Financial Instruments
SFAS No. 107 requires the disclosure of the fair value of financial
instruments. The estimated fair value amounts have been determined
by the Company's management using available market information and
other valuation methods. However, considerable judgment is required
to interpret market data in developing the estimates of fair value.
Accordingly, the estimates presented herein are not necessarily
indicative of the amounts the Company could realize in a current
market exchange.
The following methods and assumptions were used in estimating the
fair value disclosure for financial instruments:
Cash and Cash Equivalents, Accounts and Loan Receivable, Accounts
Payable, Accrued Expenses and Notes Payable - the carrying amounts
reported in the consolidated balance sheets approximate fair value
because of the short maturity of those instruments.
Securities Available for Sale - the fair values are based on quoted
market prices at
10
<PAGE>
IMX PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of June 30, 2000 and for the six and three month
periods ended June 30, 1999 and 2000 are unaudited)
the reporting date of those or similar investments (Note 5).
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
Accounting Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain
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.
NOTE 3 - RECENT ACCOUNTING
In June, 1997, the Financial Accounting Standards Board (the
Pronouncements "FASB") issued SFAS No. 130, "Reporting Comprehensive
Income" which became effective in 1998. SFAS No. 130 establishes
standards for reporting and presentation of comprehensive income and
its components in a full set of general-purpose financial
statements. The Company adopted SFAS No.130 on January 1, 1998.
In June, 1997 the FASB issued SFAS No. 131, "Disclosure about
Segments of an Enterprise and Related Information" which became
effective in 1998. SFAS No. 131 establishes standards for the way
public enterprises are to report operating segments in annual
financial statements and requires reporting of selected information
about operating segments in interim reports. The Company's adoption
of SFAS No. 131 did not affect the Company's consolidated financial
statements.
In April,1998, the American Institute of Certified Public
Accountants issued Statement of Position No. 98-5, "Reporting for
the Costs of Start-Up Activities", ("SOP 98-5"). The Company is
required to expense all start-up costs related to new operations as
incurred. In addition, all start-up costs that were capitalized in
the past must be written off when SOP 98-5 is adopted. The Company's
adoption
11
<PAGE>
IMX PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of June 30, 2000 and for the six and three month
periods ended June 30, 1999 and 2000 are unaudited)
of SOP 98-5 did not have a material impact on its financial position
or results of operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities". The Company is
required to adopt SFAS
NOTE 3 - RECENT ACCOUNTING (CONT'D)
133, as amended by SFAS 137, for the year ending December 31, 2001.
SFAS 133 establishes methods of accounting for derivative financial
instruments and hedging activities related to those instruments as
well as other hedging activities. Because the Company currently
holds no derivative financial instruments and does not currently
engage in hedging activities, adoption of SFAS 133 is expected to
have no material impact on the Company's financial condition or
results of operations.
NOTE 4 - SECURITIES AVAILABLE FOR SALE
Securities available for sale consist of shares of common stock in
Hydron Technologies, Inc. ("Hydron"). At December 31,1999 and June
30, 2000, the cost basis of $30,463 and $28,269 of the common stock
in Hydron exceeded the market value by $21,751 and $13,021
respectively.
NOTE 5 - INVENTORIES
Inventories consisted of the following:
12
<PAGE>
IMX PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of June 30, 2000 and for the six and three month
periods ended June 30, 1999 and 2000 are unaudited)
December 31, June 30
----------- ----------
1999 2000
---------- ----------
Finished goods $ 237,195 $1,038,412
Work-in-process 16,969 25,431
Packaging supplies 303,429 300,165
---------- ----------
Total $ 557,593 $1,364,008
---------- ----------
NOTE 6 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
December 31, June 30,
------------ ---------
1999 2000
--------- ---------
Computers and office equipment $ 193,997 $ 257,174
Furniture, fixtures and improvements 91,132 113,219
--------- ---------
285,129 370,393
Less: accumulated depreciation and
amortization (179,216) (210,422)
--------- ---------
Property and equipment, net of
accumulated depreciation $ 105,913 $ 159,971
--------- ---------
NOTE 7 - INCOME TAXES
13
<PAGE>
IMX PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of June 30, 2000 and for the six and three month
periods ended June 30, 1999 and 2000 are unaudited)
The provision for income taxes in the consolidated statements of
operations is as follows:
December 31, June 30,
------------ ----------
1999 2000
----------- ----------
Current:
Federal $ 0 $ 0
State 0 0
----------- ----------
$ 0 $ 0
----------- ----------
Deferred:
Federal $ 0 $ 0
State 0 0
----------- ----------
$ 0 $ 0
----------- ----------
NOTE 7 - INCOME TAXES (CONT'D)
Applicable incomes taxes for financial reporting purposes differ
from the amounts computed by applying the statutory federal and
state income tax rates as follows:
December 31, June 30,
------------ ---------
1999 2000
--------- ---------
Tax (benefit) at statutory rate $ 185,800 $ 256,500
Increase (decrease) in tax
resulting from:
State income tax, net of federal tax benefit 31,500 44,000
Other 0 0
Increase (decrease) in
valuation allowance (217,300) (300,500)
--------- ---------
Income taxes $ 0 $ 0
========= =========
14
<PAGE>
IMX PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of June 30, 2000 and for the six and three month
periods ended June 30, 1999 and 2000 are unaudited)
The approximate tax effects of temporary differences that give rise
to the deferred tax assets and deferred tax (liabilities) are as
follows:
December 31, June 30,
------------ -----------
1999 2000
----------- -----------
Fair value of common stock options and
warrants $ 130,889 $ 130,889
Start-up costs 139,100 139,100
Depreciation and amortization (71,700) (71,700)
Other 12,000 12,000
Net operating loss carry forwards 641,700 1,440,236
----------- -----------
851,989 1,650,525
Less: valuation allowance (851,989) (1,650,525)
----------- -----------
Total net deferred tax asset $ 0 $ 0
=========== ===========
NOTE 7 - INCOME TAXES (CONT'D)
At December 31, 1999, the Company had net operating loss
carryforwards of approximately $1,700,000 for income tax purposes.
Those losses are available for carryforward for periods ranging from
fifteen to twenty years, and will expire beginning in 2011. Any
future significant changes in ownership of the Company may limit the
annual utilization of the tax net operating loss carryforwards.
NOTE 8 - CAPITAL STOCK
Common stock
Common stock has one vote per share for the election of directors.
All other matters are submitted to a vote of stockholders. Shares of
common stock do not have cumulative voting, preemptive, redemption
or conversion rights.
15
<PAGE>
IMX PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of June 30, 2000 and for the six and three month
periods ended June 30, 1999 and 2000 are unaudited)
At December 31, 1999 and June 30, 2000, the Company had reserved
3,538,216 and 3,538,216 shares of common stock respectively for
issuance relating to unexpired options and warrants.
NOTE 9 - STOCK OPTIONS
On January 21, 1996, the Company adopted a stock option plan with
2,000,000 shares of Common stock reserved for the grant of options
to key employees, non-employees, officers and directors of the
Company. On September 9, 1998, the Company adopted a stock option
plan with 1,200,000 shares of common stock reserved for grant of
options to key employees, non-employees, officers and directors of
the Company. Options under these plans are exercisable over a period
of ten years with various vesting terms. All shares granted are
subject to significant restrictions as to disposition by the
optionee.
NOTE 9- STOCK OPTIONS (CONT'D)
16
<PAGE>
IMX PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of June 30, 2000 and for the six and three month
periods ended June 30, 1999 and 2000 are unaudited)
A summary of the Company's stock option activity is as follows:
<TABLE>
<CAPTION>
Year ended Six and three months ended
December 31, 1999 June 30, 2000
------------------------------------ ----------------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Options outstanding,
beginning of period 1,350,000 $ 2.71 1,485,000 $ 2.46
Granted 234,500 1.73 0 --
Exercised (5,000) 1.75 0 --
Forfeited/canceled (94,500) 4.31 0 --
---------------------------------------------------------------------------------------------------
Outstanding at end of
period 1,485,000 $ 2.46 1,485,000 $ 2.46
---------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------
Exercisable at end of
period 1,560,100 $ 2.55 1,560,100 $ 2.55
---------------------------------------------------------------------------------------------------
Weighted average fair
market value of
options granted
period $ 0.85 $ 0.85
---------------------------------------------------------------------------------------------------
</TABLE>
NOTE 9- STOCK OPTIONS (CONT'D)
17
<PAGE>
IMX PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of June 30, 2000 and for the six and three month
periods ended June 30, 1999 and 2000 are unaudited)
A summary of the Company's fixed stock options outstanding is as
follows:
<TABLE>
<CAPTION>
Weighted
Average
Remaining Weighted Weighted
Range of Options Contractual Average Options Average
Exercise Price Outstanding Life in Years Exercise Price Exercisable Exercise Price
------------------------------------------------------------------------------------------------------------------
December 31, 1999
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$0.75 - 0.99 20,000 9.75 $ 0.75 20,000 $ 0.75
$1.00 - 3.00 1,175,500 7.24 1.64 1,021,750 1.62
3.87 - 4.00 270,000 7.99 4.00 270,000 4.00
4.78 - 6.50 256,475 7.56 5.03 248,350 4.97
------------------------------------------------------------------------------------------------------------------
$0.75 - 6.50 1,721,975 7.43 2.49 1,560,100 2.55
------------------------------------------------------------------------------------------------------------------
June 30, 2000
------------------------------------------------------------------------------------------------------------------
$0.75 - 0.99 20,000 9.50 $ 0.75 20,000 $ 0.75
$1.00 - 3.00 1,175,500 6.89 1.64 1,021,750 1.62
3.87 - 4.00 270,000 7.92 4.00 270,000 4.00
4.78 - 6.50 256,475 8.12 5.03 248,350 4.97
------------------------------------------------------------------------------------------------------------------
$0.75 - 6.50 1,721,975 7.27 2.49 1,560,100 2.55
------------------------------------------------------------------------------------------------------------------
</TABLE>
SFAS No. 123, "Accounting for Stock-Based Compensation", requires
the Company to provide pro forma information regarding net income
(loss) and income (loss) per share as if compensation cost for the
Company's employee stock option plans had been determined in
accordance with the fair value based method prescribed in SFAS No.
123. The Company estimates the fair value of each option at the
grant date by using the Black-Scholes option pricing model with the
following weighted-average assumptions used for grants in 1999 and
2000, expected volatility ranging from 45% to 46%; risk-free
interest rates ranging from 4.35% to 6% and expected lives ranging
from 2 to 10 years.
NOTE 9 - STOCK OPTIONS (CONT'D)
18
<PAGE>
IMX PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of June 30, 2000 and for the six and three month
periods ended June 30, 1999 and 2000 are unaudited)
Under the accounting provisions of SFAS 123, the Company's net
income (loss) and income (loss) per share would have changed to the
pro forma amounts indicated below:
Six Months Six Months
Ended June 30, Ended June 30,
-------------- --------------
1999 2000
-------------- --------------
Net income (loss) applicable to
common stockholders
As reported $ 1,950,929 $ (798,536)
Pro forma $ 1,748,000 $ (1,068,569)
Income (loss) per share - basic
As reported $ 0.36 $ (0.14)
Pro forma $ 0.32 $ (0.18)
Income (loss) per share - diluted
As reported $ 0.34 $ (0.13)
Pro forma $ 0.31 $ (0.17)
Three executives officers of IMX Pharmaceuticals, Inc. received a
total of 24,000 options to purchase shares of common stock of
Medicis Corporation. The options were granted in connection with the
formation of The Exorex Company LLC. The options vest over a
five-year period; twenty percent becoming vested each year. The
original purchase price was $24.67. Twenty percent has been
exercised. The remainder of the options are held by the officers for
the benefit of IMX Pharmaceuticals, Inc.
NOTE 10 - STOCK WARRANTS
19
<PAGE>
IMX PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of June 30, 2000 and for the six and three month
periods ended June 30, 1999 and 2000 are unaudited)
In connection with a 1996 private placement offering of common
stock, the Company issued 580,000 warrants, each redeemable for one
share of common stock, at any time during a period of three years,
commencing on July 9, 1996 for $5.00 per share. The warrants may be
redeemed by the Company with 30 days prior notice at a price of ten
cents per warrant at any time during the warrant exercise period,
under certain conditions (as defined). During July 1999, the Company
extended the exercise period one year to July 9, 2000.
In addition, 58,000 warrants, each to purchase one share of common
stock for $3.00 per share, and exercisable for the three year period
ending July 9, 1999, were issued to placement agents in connection
with the 1996 Private Placement. During July 1997, in connection
with a financial advisory agreement with the placement agents, the
exercise price of the 58,000 warrants was reduced to $2.50 per
share, and the exercise period was extended to February 9, 2001. The
Company recorded approximately $71,000 as deferred consulting
expense for the estimated fair value of warrants which are being
amortized over the two year term of the agreement.
On March 31, 1999, in connection with the Company's 1997 Private
Placement of convertible preferred stock (Note 13), 88,160 (76,750
original shares, plus 11,410 shares issued in lieu of cash as
preferred stock dividends) shares outstanding at March 31, 1999 were
converted into ten shares of common stock and warrants to purchase
ten shares of common stock at any time during the period ending July
2002 for $6.50 per share. As of December 31, 1999 no warrants to
purchase common stock have been exercised.
In addition to warrants issued to investors in the February, 1997
Private Placement, warrants to purchase 7,586.25 shares of
Convertible Preferred Stock were issued to placement and selling
agents with an exercise price of $30 per share, and are exercisable
for the five year period ending July, 2002. Each share of preferred
stock is convertible into 10 shares of common stock at $3.50 per
share and 10 warrants, each warrant to purchase one share of common
stock at $6.50 per share. Prior to the March 31, 1999 conversion, no
warrants to purchase preferred stock had been exercised.
20
<PAGE>
IMX PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of June 30, 2000 and for the six and three month
periods ended June 30, 1999 and 2000 are unaudited)
NOTE 10 - STOCK WARRANTS (CONT'D)
During July, 1997, in connection with an agreement with a financial
advisor, the Company issued warrants to purchase 50,000 shares of
common stock at $4.75 per share, exercisable prior to July 2002. The
Company recorded approximately $67,000 as deferred consulting
expense for the estimated fair value of the warrants, which is being
amortized over the two year term of the agreement.
In connection with notes payable issued during 1997 (Note 12), as of
December 31, 1998, warrants to purchase 85,120 shares of common
stock have been issued. Also, in connection with February, 1998
closing of the October, 1997 Private Placement, warrants to purchase
20,180 shares of common stock were issued to placement and selling
agents. Each of the warrants mentioned above has an exercise price
of $3.50 per share, and expires five years from the date of
issuance. As of December 31, 1998 and 1999, no warrants have been
exercised.
The aggregate number of common shares reserved for issuance upon the
exercise of warrants is 1,816,241 as of December 31, 1999. The
expiration date and exercise prices of the outstanding warrants are
as follows:
Outstanding Expiration Exercise
Warrants Date Price
----------- ---------- -----------
580,000 2000 $ 5.00
58,000 2001 2.50
1,007,463 2002 3.00-6.50
170,778 2003 3.50
21
<PAGE>
IMX PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of June 30, 2000 and for the six and three month
periods ended June 30, 1999 and 2000 are unaudited)
NOTE 11 - NET INCOME (LOSS) PER COMMON SHARE
The following table sets forth the computation of basic and diluted
net loss per common share:
<TABLE>
<CAPTION>
Six months ended Six months ended Three months ended Three months ended
June 30, 1999 June 30, 2000 June 30, 1999 June 30, 2000
---------------- ---------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Numerator:
Numerator for basic and diluted
Loss per share available
to common stockholders $ 1,950,929 $(1,206,347) $ 2,546,823 $ (769,120)
----------- ----------- ----------- -----------
Denominator:
Denominator for basic loss per
share-weighted-average shares 5,430,340 5,811,252 5,884,951 5,811,252
Effect of dilutive securities:
Common stock options 288,244 330,748 288,244 330,748
----------- ----------- ----------- -----------
Denominator for diluted loss per
share-adjusted weighted average
shares and assumed conversions 5,718,584 6,142,000 6,173,195 6,142,000
----------- ----------- ----------- -----------
Basic net loss per common share $ 0.36 $ (0.21) $ 0.43 $ (0.13)
----------- ----------- ----------- -----------
Diluted net loss per common share $ 0.34 $ (0.20) $ 0.41 $ (0.13)
----------- ----------- ----------- -----------
</TABLE>
22
<PAGE>
IMX PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of June 30, 2000 and for the six and three month
periods ended June 30, 1999 and 2000 are unaudited)
NOTE 11 - NET INCOME (LOSS) PER COMMON SHARE (CONT'D)
Net loss per common share is calculated by dividing the net loss by
the weighted-average shares of common stock and common stock
equivalents outstanding during the period. Excluded from the
computation of net loss per common share - diluted at June 30, 1999
and 2000, were outstanding options of 859,475 and1,679,475, and
warrants to purchase 1,816,241 and 1,816,241 shares of common stock
respectively, at exercise prices ranging from $2.50 to $6.50,
because to do so would be anti-dilutive.
NOTE 12 - RELATED PARTY TRANSACTIONS
During 1999, the Company made advances to a company affiliated to
the President. The balance due the Company at December 31, 1999 and
June 30, 2000 totaled $31,153 and $30,125 respectively. These
advances, together with interest at the rate of ten (10%) percent,
is due and payable prior to December 31, 2000.
NOTE 13 - COMMITMENTS AND CONTINGENCIES
The Company leases its facilities and certain equipment under
non-cancelable operating leases. The Company has a sublease
agreement for certain facilities and equipment. The future minimum
rental payments required under these operating leases that have
initial or remaining non-cancelable lease terms in excess of one
year, and the future minimum rental receipts required under
non-cancelable sub-leases of December 31, 1999 are approximately as
follows:
Future
Minimum
Rental
Year Payments
---- --------
2000 $128,000
2001 54,000
2002 36,000
2003 19,000
23
<PAGE>
IMX PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of June 30, 2000 and for the six and three month
periods ended June 30, 1999 and 2000 are unaudited)
NOTE 13 - COMMITMENTS AND CONTINGENCIES (CONT'D)
Total rent expense for all non-cancelable operating leases having a
term of more than one year was approximately $15,000 and $5,000 for
the six month periods ended June 30, 1999 and 2000, respectively.
On July 1, 1998, the Company entered into an employment agreement
for a period of three years with William Forster, the Company's
Chairman of the Board, President and Chief Executive Officer. Mr.
Forster is entitled to receive an annual salary of $225,000 and a
bonus based on a percentage of the Company's sales (as defined).
Effective July 1, and August 1, 1998, the Company entered into
employment agreements with two officers for annual salaries totaling
approximately $205,000, plus discretionary bonuses, and bonuses upon
the sale of the Company's interest in the LLC (as defined). The term
of each agreement is three years.
The Company has entered into a series of product development
agreements with a consultant that provide for compensation to the
consultant in the form of cash, options to purchase shares of the
Company's common stock which vest as products are developed,
royalties based upon net sales of products, a royalty based upon the
sale of the rights to the products developed, and an interest in any
patents granted on products developed by the consultant to the
Company.
In November 1999, Bioglan Pharma PLC and Bioglan Pharma, Inc.
(collectively, "Bioglan") commenced an arbitration action against
the Company, Medicis and the LLC, in which Bioglan claims damages
for breach of various contractual obligations arising out of the
sale of the LLC and the Exorex product line to Bioglan.
Specifically, Bioglan claims that Medicis, the LLC and the Company
breached an Asset Purchase Agreement by transferring inventories to
Bioglan that had a remaining shelf life less than 12 months and was
otherwise unmarketable. The Asset Purchase Agreement specified that
Bioglan was to take title to all inventories having a shelf life
greater than 12 months, and the Company was to take title to
inventories having a shelf life of 12 months or less. The products
were warehoused together. Management believes that Medicis, under an
interim
24
<PAGE>
IMX PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of June 30, 2000 and for the six and three month
periods ended June 30, 1999 and 2000 are unaudited)
management agreement with Bioglan, filled Bioglan orders with the
Company's inventories. In addition, the Company has filed a
counterclaim in the arbitration against Bioglan for damages relating
to the conversion of this property.
NOTE 13 - COMMITMENTS AND CONTINGENCIES (CONT'D)
In the second claim, Bioglan seeks unspecified damages from the
Company, Medicis and the LLC because it claims that the inventories
that it received had not been properly stored and therefore were
unmarketable. Management believes that this claim does not have any
merit. since it was never advised by the manufacturer, Meyer-Zall,
of any requirement for cold storage for the product. The Company
intends to vigorously defend this matter. However, management cannot
assess the likelihood of an unfavorable outcome, or the range of
potential loss, if any, which might result from this claim.
NOTE 14 - CAPITAL LEASE PAYABLE
The Company is a lessee under a capital lease of equipment from an
unrelated third party. The lease agreement calls for 36 equal
monthly payments of $241 with a final fixed purchase price of $1 at
the end of the lease. The asset and liability under this capital
lease is valued at a fair market value of approximately $8,000. The
asset is being depreciated over its estimated useful life of 5
years.
Total capital lease payable $7,792
Less: Current portion 2,896
------
Total capital lease
payable - non current $4,896
======
NOTE 15 - REFUNDABLE DEPOSIT
On May 2, 2000 the Company executed a letter of intent with
Dri-Kleen, Inc. d/b/a Enviro -Tech International (Enviro-Tech).
Pursuant to the letter of intent a refundable deposit of $400,000
has been paid to Enviro-Tech, a multi-level marketing company, for
the purchase of it's network sales and marketing division
25
<PAGE>
IMX PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of June 30, 2000 and for the six and three month
periods ended June 30, 1999 and 2000 are unaudited)
for the United States and Canada for all current products. An
additional refundable deposit of $850,000 was paid at the time of
signing. The market will be extended worldwide for any new products
developed by Enviro-Tech.
NOTE 16 - SUBSEQUENT EVENT
On July 21, 2000 the Company and Enviro-Tech signed a revised
agreement for the sale and purchase of assets. The revised agreement
provides that, in addition to purchasing the Distribution Network,
the Company will acquire all of Enviro-Tech's inventory of Dri-Wash
n' Guard, nutritional supplement products and its 45,000 square foot
factory, warehouse, and distribution center in Elbow Lake Minnesota.
The consideration for the purchase was changed to $1,900,000 in cash
(the balance of which was paid upon execution of the revised
agreement), 2,500,000 shares of the Company's common stock, a
ninety-day interest-free note and assumption of almost $1,000,000 in
various Enviro-Tech debts. In addition the Company and Enviro-Tech
signed a long-term supply agreement with respect to the Dri-Wash n'
Guard line of waterless car and home cleaning products. The Company
took control of the assets on July 24, 2000.
The proposed transaction is subject to approval by the Board of
Directors of each company and the execution of a definitive
agreement.
The Company assumed responsibility for (i) all payments to the first
and second mortgage holders of the Las Vegas property owned by
Enviro-Tech which is pending foreclosure and (ii) all operating
expenses of the Las Vegas property. The Company's responsibility for
items (i) and (ii), collectively, the "Las Vegas Expenses" commences
at the closing date and terminates after four months or until the
Company has expended $100,000, whichever occurs first. The Company
will be reimbursed for all amounts paid for the Las Vegas Expenses
from the proceeds of the Sale of the Las Vegas property after all
the obligations of the first and second trust deed notes are
satisfied.
During the first five contract years, (the Royalty period) The
Company has agreed to pay a royalty to Enviro-Tech equal to 20% of
the purchase price paid for the formulae (the Royalty fee). The
minimum guaranteed Royalty Fee (the Guaranteed Royalty Fee) for the
first contact year is $286,000 and $300,000 for the succeeding four
contract years. The Guaranteed Royalty Fee is due in monthly
installments of no less that $20,000 and the minimum quarterly
royalty fee is $61,000 for the first quarter and $75,000 for each
following quarter.
26
<PAGE>
IMX PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of June 30, 2000 and for the six and three month
periods ended June 30, 1999 and 2000 are unaudited)
Interest on any monthly or quarterly royalty fee deficiency will
accrue interest at an annualized rate of 12%
NOTE 16 - SUBSEQUENT EVENT
Upon notification of a royalty fee payment delinquency the Company
will have forty-five days to make payment. Should the Company fail
to cure the delinquency within the forty-five day period,
Enviro-Tech may at its sole discretion terminate the Company's right
to exclusively distribute Enviro-Tech products in North America and
the Caribbean Islands.
NOTE 17 - CASH BALANCES
The Company maintains its cash balances at various financial
institutions. The balances at these institutions are insured by the
Federal Deposit Insurance Corporation up to $100, 000 per account.
Uninsured balances as of December 31, 1999 and June 30, 2000 were
approximately $160,200 and $0 respectively.
NOTE 18 - GOODWILL
Goodwill is the total acquisition cost of Select Benefits
Corporation (see Note 1, page 7).
NOTE 19 - OTHER RECEIVABLES
Other receivables are as follows:
Due from Pure Distributors' Inc.
d/b/a Envion International-Note 1 $15,444
Due from Select Benefits Corporation - Note 1 554
Other 443
-------
$16,441
=======
27
<PAGE>
IMX PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of June 30, 2000 and for the six and three month
periods ended June 30, 1999 and 2000 are unaudited)
NOTE 20 - NOTES PAYABLE
Notes payable consist of the following as of June 30, 2000:
Promissory note payable, Pure Distributors, Inc.
d/b/a Envion International, payable in 24 monthly
installments of $31,250 principal only $750,000
Non-recourse note payable, Select Benefits, Inc.
Monthly installments equal to 15% of sales from a select
group of clients that pre-exisited the acquisition date
(Note 1, page 7) The note paydown is estimated
at $60,000 per year 188,504
--------
Total notes payable $938,504
Less: current portion 435,000
--------
Non-current portion $503,504
========
28
<PAGE>
ETI INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL REPORT
JUNE 30, 2000
<PAGE>
CONTENTS
--------------------------------------------------------
INDEPENDENT AUDITOR'S REPORT 1
--------------------------------------------------------
FINANCIAL STATEMENTS
Consolidated balance sheets 2
Consolidated statements of operations 3
Consolidated statements of stockholders' equity
(deficit) 4
Consolidated statements of cash flows 5
Notes to the consolidated financial statements 6-22
--------------------------------------------------------
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
ETI International, Inc. and Subsidiaries
Las Vegas, Nevada
We have audited the accompanying consolidated balance sheets of ETI
International, Inc. and Subsidiaries as of December 31, 1999 and 1998, and the
related consolidated statements of operations, stockholders' equity (deficit)
and cash flows for each of the years in the three year period ended December 31,
1999. These consolidated 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
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinions.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of ETI International,
Inc. and Subsidiaries as of December 31, 1999 and 1998 and the results of their
operations and their cash flows for each of the years in the three year period
ended December 31, 1999 in conformity with generally accepted accounting
principles.
The accompanying financial statements are prepared assuming the Company will
continue as a going concern. The Company has incurred losses from operations and
net losses for each of the three years ended December 31, 1999, and as of
December 31, 1999, its current liabilities exceed its current assets by
$5,173,333 and its total liabilities exceed its total assets by $1,744,057.
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 described in
Note 2.
McGLADREY & PULLEN, LLP
Las Vegas, Nevada
February 8, 2000, except for Note 2, paragraph (A) in Note 8 and the first
paragraph of Note 15, as to which the date is May 22, 2000, paragraph (D) in
Note 8 and the last paragraph of Note 15 as to which the date is July 17, 2000
and the third and fourth paragraphs of Note 2 as to which the date is July 31,
2000
1
<PAGE>
ETI INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 2000 (Unaudited), December 31, 1999 and 1998
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS (Note 8) 2000 1999 1998
------------------------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C>
Current assets
Cash and cash equivalents $ 171,067 $ 128,219 $ 266,915
Accounts receivable, less allowance of approximately $21,600,
$10,000 and $20,000, at June 30, 2000 and December 31, 1999
and 1998, respectively 93,527 17,165 32,081
Receivable from related parties (Note 13) -- -- 145,253
Inventories (Note 5) 663,091 1,159,151 1,332,566
Prepaid expenses and other assets 39,979 83,084 130,744
Refundable income taxes -- -- 53,175
Deferred tax assets (Note 11) 45,442 40,000 77,000
---------------------------------------------------
Total current assets 1,013,106 1,427,619 2,037,734
Note receivable (Note 4) 134,361 150,228 179,000
Property, plant and equipment, net (Notes 6 and 16) 3,245,026 3,319,048 3,571,902
---------------------------------------------------
Total assets $ 4,392,493 $ 4,896,895 $ 5,788,636
===================================================
LIABILITIES AND STOCKHOLDERS' DEFICIT
------------------------------------------------------------------------------------------------------------------------------------
Current liabilities
Lines of credit and notes payable (Notes 2 and 8) $ 2,805,915 $ 3,178,728 $ 2,050,786
Accounts payable 1,804,389 2,139,072 1,795,124
Taxes payable (Note 11) 50,397 60,179 --
Accrued expenses (Note 7) 686,206 859,522 1,029,059
Advance on purchase price (Note 2) 1,250,000 -- --
Payables due to related parties (Note 13) -- 234,500 117,000
Deferred revenue -- 128,951 567,088
---------------------------------------------------
Total current liabilities 6,596,907 6,600,952 5,559,057
Deferred tax liabilities (Note 11) 40,000 40,000 52,000
Note payable - major stockholder (Note 13) -- -- 234,500
---------------------------------------------------
Total liabilities 6,636,907 6,640,952 5,845,557
---------------------------------------------------
Commitments and Contingencies (Notes 2, 9, 10, 12, 14, 15 and 16)
Stockholders' deficit (Notes 2, 3 and 12)
Common stock, $.001 par value; authorized: 50,000,000 shares;
issued and outstanding: 13,319,820 shares in 2000, 10,440,820
shares in 1999 and 10,409,388 in 1998 13,319 10,440 10,409
Additional paid in capital 2,842,100 1,327,424 1,291,891
Accumulated deficit (5,142,250) (3,087,841) (1,394,388)
Accumulated other comprehensive income 42,417 5,920 35,167
---------------------------------------------------
Total stockholders' deficit (2,244,414) (1,744,057) (56,921)
---------------------------------------------------
Total liabilities and stockholders' deficit $ 4,392,493 $ 4,896,895 $ 5,788,636
===================================================
</TABLE>
See Notes to Consolidated Financial Statements.
2
<PAGE>
ETI INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Six Months Ended June 30, 2000 and 1999 (Unaudited), Each of the Years
in the Three Year Period Ended December 31, 1999
<TABLE>
<CAPTION>
June 30, December 31,
---------------------------- --------------------------------------------
2000 1999 1999 1998 1997
---------------------------- --------------------------------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Sales at suggested retail $ 6,686,196 $ 17,657,967 $ 29,876,465 $ 30,332,679 $ 42,960,964
Less distributor allowances 1,904,605 6,526,829 10,904,779 9,735,212 13,569,054
----------------------------------------------------------------------------
Net sales 4,781,591 11,131,138 18,971,686 20,597,467 29,391,910
----------------------------------------------------------------------------
Costs and expenses
Cost of products sold (Note 10) 1,531,016 3,320,480 5,429,147 5,667,287 9,203,369
Distributor commissions 1,604,828 3,598,710 5,882,885 6,885,176 10,117,798
Selling, general and administrative (Note 9) 3,493,580 4,670,542 8,717,155 8,648,219 10,526,709
Related party expenses (Note 13) 6,781 46,225 92,450 421,144 932,673
----------------------------------------------------------------------------
6,636,205 11,635,957 20,121,637 21,621,826 30,780,549
----------------------------------------------------------------------------
Loss from operations (1,854,614) (504,819) (1,149,951) (1,024,359) (1,388,639)
Other income (expense)
Other income 2,270 8,329 1,712 418,230 253,551
Other expense (Note 16) (3,200) -- (120,110) (2,105) (94,250)
Interest expense (Note 8) (152,976) (158,219) (350,060) (366,427) (282,096)
Related party interest expense (Note 13) (45,889) (25,022) (50,044) (4,457) --
----------------------------------------------------------------------------
Loss before income taxes (2,054,409) (679,731) (1,668,453) (979,118) (1,511,434)
Income tax expense (benefit) (Note 11) -- 25,000 25,000 15,000 (449,000)
----------------------------------------------------------------------------
Net loss $ (2,054,409) $ (704,731) $ (1,693,453) $ (994,118) $ (1,062,434)
============================================================================
Basic and dilutive net loss per common share $ (0.16) $ (0.07) $ (0.16) $ (0.10) $ (0.12)
============================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE>
ETI INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
For the Six Months Ended June 30, 2000 and 1999 (Unaudited), Each of the Years
in the Three Year Period Ended December 31, 1999
<TABLE>
<CAPTION>
Retained
Common Stock Additional Earnings
Comprehensive ---------------------------- Paid in (Accumulated
Loss Shares Amount Capital Deficit)
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 2,580,219 $ 25,802 $ 455,498 $ 662,164
Comprehensive loss:
Net loss $(1,062,434) -- -- -- (1,062,434)
Foreign currency translation adjustment 13,311 -- -- -- --
-----------
$(1,049,123)
===========
Repurchase 5,000 common shares for retirement (5,000) (50) (29,950) --
-------------------------------------------------------------
Balance at December 31, 1997 2,575,219 25,752 425,548 (400,270)
Recapitalization/exchange (Note 3) 7,584,169 (15,593) 366,593 --
Exercise of warrants (Note 3) 250,000 250 499,750 --
Comprehensive loss:
Net loss $ (994,118) -- -- -- (994,118)
Foreign currency translation adjustment 22,459 -- -- -- --
-------------------------------------------------------------------------
$ (971,659)
===========
Balance at December 31, 1998 10,409,388 10,409 1,291,891 (1,394,388)
Comprehensive loss:
Net loss $ (1,693,453) -- -- -- (1,693,453)
Foreign currency translation adjustment (29,247) -- -- -- --
-----------
$(1,722,700)
===========
Issuance of stock for compensation 16,432 16 35,548 --
Issuance of stock as gift 15,000 15 (15) --
-------------------------------------------------------------
Balance, December 31, 1999 10,440,820 10,440 1,327,424 (3,087,841)
Comprehensive loss:
Net loss (Unaudited) $(2,054,409) -- -- -- (2,054,409)
Foreign currency translation adjustment (Unaudited) 36,497 -- -- -- --
-----------
$(2,017,912)
===========
Issuance of stock for compensation (Unaudited) 1,204,000 1,204 600,796 --
Issuance of stock as to retire (Unaudited) 1,675,000 1,675 913,880 --
-------------------------------------------------------------
Balance, June 30, 2000 (Unaudited) 13,319,820 $ 13,319 $ 2,842,100 $(5,142,250)
=============================================================
<CAPTION>
Accumulated
Other Total
Comprehensive Stockholders'
Income Equity(Deficit)
------------------------------------------------------------------------------------
<S> <C> <C>
Balance at December 31, 1996 $ (603) $ 1,142,861
Comprehensive loss:
Net loss -- (1,062,434)
Foreign currency translation adjustment 13,311 13,311
Repurchase 5,000 common shares for retirement -- (30,000)
------------------------------
Balance at December 31, 1997 12,708 63,738
Recapitalization/exchange (Note 3) -- 351,000
Exercise of warrants (Note 3) -- 500,000
Comprehensive loss:
Net loss -- (994,118)
Foreign currency translation adjustment 22,459 22,459
------------------------------
Balance at December 31, 1998 35,167 (56,921)
Comprehensive loss:
Net loss -- (1,693,453)
Foreign currency translation adjustment 29,247) (29,247)
Issuance of stock for compensation -- 35,564
Issuance of stock as gift -- --
------------------------------
Balance, December 31, 1999 5,920 (1,744,057)
Comprehensive loss:
Net loss (Unaudited) -- (2,054,409)
Foreign currency translation adjustment (Unaudited) 36,497 36,497
Issuance of stock for compensation (Unaudited) -- 602,000
Issuance of stock as to retire (Unaudited) -- 915,555
------------------------------
Balance, June 30, 2000 (Unaudited) $ 42,417 $(2,244,414)
==============================
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE>
ETI INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 2000 and 1999 (Unaudited), Each of the Years
in the Three Year Period Ended December 31, 1999
<TABLE>
<CAPTION>
June 30, December 31,
------------------------- ------------------------------------------
2000 1999 1999 1998 1997
------------------------------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Cash Flows from Operating Activities
Net loss $(2,054,409) $ (704,731) $(1,693,453) $ (994,118) $(1,062,434)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation 70,822 138,185 271,502 276,077 258,714
Deferred income taxes (benefit) -- 25,000 25,000 16,000 (43,000)
Gain on sale of property, plant and equipment 3,200 -- -- (363,836) --
Loss on plant casualty (Note 16) -- -- -- 89,000
Provision for doubtful accounts 11,600 -- -- -- 84,995
Stock issued for compensation 602,000 -- 35,564 -- --
Change in working capital
(Increase) decrease in accounts and notes receivable (72,095) (10,398) 43,688 40,309 (315,826)
(Increase) decrease in inventories 496,060 56,216 173,415 (75,822) 3,920
(Increase) decrease in prepaid expenses and other assets 43,105 (60,130) 47,660 (52,965) (26,112)
(Increase) decrease in refundable income taxes (5,442) 10,961 53,175 354,514 (407,689)
Increase (decrease) in accounts payable (337,653) 112,714 578,772 (968,138) 1,293,454
Increase (decrease) in accrued expenses (123,718) (107,534) (169,537) (340,205) 429,866
Increase (decrase) in taxes payable (9,782) -- 60,179 -- (307,106)
Increase (decrease) in deferred revenue (128,951) (413,259) (438,137) 391,458 64,634
-----------------------------------------------------------------------
Net cash provided by (used in) operating activities (1,505,263) (952,976) (1,012,172) (1,716,726) 62,416
Cash Flows from Investing Activities
Proceeds from sale of property, plant and equipment -- -- -- 1,599,137 --
Purchases of property, plant and equipment -- (63,556) (18,648) (20,383) (1,035,236)
Insurance proceeds from plant casualty (Note 16) -- -- -- -- 816,000
Payments from related parties -- -- 145,253 89,614 20,197
-----------------------------------------------------------------------
Net cash provided by (used in) investing activities -- (63,556) 126,605 1,668,368 (199,039)
Cash Flows from Financing Activities
Increase (decrease) in accrued expenses -- -- (234,824) 116,076 (281,551)
Increase (decrease) from short term borrowing -- (46,426) (84,558) (440,970) 815,970
Proceeds from long-term borrowings 398,371 1,208,487 1,212,500 -- 246,570
Principal payments on long-term borrowings (139,727) (69,690) -- (350,069) (551,796)
Advances and loans from related parties, net 2,970 (117,000) (117,000) 163,107 (27,003)
Proceeds from advance on sale of assets (Note 2) 1,250,000 -- -- -- --
Proceeds from stock subscription receivable (Note 3) -- -- 100,000 --
Proceeds from exercise of warrants (Note 3) -- -- 500,000
Purchase and retirement of treasury stock -- -- -- (49,000) (30,000)
-----------------------------------------------------------------------
Net cash provided by financing activities 1,511,614 975,371 776,118 39,144 172,190
Effect of exchange rate changes on cash and cash equivalents 36,497 1,799 (29,247) 22,459 13,311
-----------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 42,848 (39,362) (138,696) 13,245 48,878
Cash and cash equivalents at beginning of period 128,219 266,915 266,915 253,670 204,792
-----------------------------------------------------------------------
Cash and cash equivalents at end of period $ 171,067 $ 227,553 $ 128,219 $ 266,915 $ 253,670
=======================================================================
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest $ 139,807 $ 158,219 $ 261,969 $ 344,104 $ 283,839
=======================================================================
Income taxes paid (received) $ -- $ -- $ -- $ (354,514) $ 307,628
=======================================================================
Supplemental Schedule of Noncash Investing and Financing
Activities
Exchange of stock subscription receivable for
short term borrowings (Note 3) $ -- $ -- $ -- $ 300,000 $ --
=======================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
5
<PAGE>
ETI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 and 1997 INFORMATION
RELATING TO JUNE 30, 2000 and 1999 is UNAUDITED
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of business
ETI International, Inc., (ETI or Company) was organized under the laws of the
State of Nevada on November 20, 1995. ETI had substantially no operations prior
to its exchange, on February 28, 1998, with Dri-Kleen, Inc., dba Enviro-Tech
International, (DKI), which was organized under the laws of the State of Nevada
on March 8, 1991 and is a network marketing company involved in the packaging
and distribution of premium waterless cleaning, personal care, and nutritional
products. These products are sold by the Company and its subsidiaries to a sales
force of independent distributors and licensees who, in turn, sell products
directly to consumers. The Company and its subsidiaries' business is comprised
of one industry segment, network marketing, which is conducted throughout the
United States, Canada, United Kingdom, Japan, Malaysia, Sweden, Poland, and
Finland. Segment information is not presented since all of the Company's revenue
is attributable to a single reportable segment.
A summary of the Company's significant accounting policies follows:
Interim financial information
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for the interim
financial information and with Article 10 of the Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In
management's opinion, the accompanying consolidated financial statements reflect
all material adjustments (consisting only of normal recurring accruals)
necessary for a fair statement of the results for the interim periods presented.
The results for the interim periods are not necessarily indicative of the
results which will be reported for the entire year.
Basis of presentation
On February 28, 1998, the Company acquired all of the stock of DKI in an
exchange (the Exchange) of the stock owned by DKI stockholders for newly issued
stock of the Company, representing 88% of the Company's outstanding stock after
the Exchange. For financial accounting and reporting purposes, the Exchange was
accounted for as a capital contribution of the net assets in the Company of
$351,000 to the historical statements of DKI. As a result, the historical
financial information presented is DKI's and not the Company's. The operating
results of the Company are included with those of DKI's after February 28, 1998.
See Note 3 for further discussion of the Exchange.
6
<PAGE>
ETI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 and 1997 INFORMATION
RELATING TO JUNE 30, 2000 and 1999 is UNAUDITED
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
Use of Estimates in the Preparation of Financial Statements
The preparation of these 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
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Significant estimates include reserves for product returns, obsolete
inventory, doubtful accounts, and income taxes. Accordingly, actual results
could differ from these estimates.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries DKI, ETI-UK and ETI-Canada. All significant
intercompany accounts and transactions have been eliminated.
Reclassification
Certain 1998 balances have been reclassified to correspond to the balance sheet
and statement of cash flows classifications adopted for 1999. These
reclassifications have no effect on previously reported net loss or
stockholders' deficit.
Cash Equivalents
The Company considers demand deposits and short-term investments purchased with
a maturity of three months or less to be cash equivalents. The Company maintains
cash balances that occasionally exceed federally insured limits. The Company has
experienced no losses in such accounts.
Revenue Recognition and Distributor Commissions
The Company records its retail sales based on suggested retail prices. The net
sales price is the suggested retail price less distributor discounts of 24
percent to 46 percent of such suggested retail prices. The Company generally
receives its net sales price in cash accompanying orders from independent
distributors and makes related commission payments to distributors in the
following month. Sales revenue and cost of sales are recorded when the products
are shipped. Deferred revenue represents prepayments on products that the
Company has not shipped.
The Company records distributor commissions when products are shipped and sales
are recorded. Generally, distributor commissions are calculated as a percentage
of the retail sales price that is based on the level of the distributor. In
addition, the Company makes discretionary commission payments. Included in
selling, general and administrative expenses in the accompanying consolidated
statements of operations are $0, $0 and $1,253,000 in discretionary commissions
for the years ended December 31, 1999, 1998 and 1997, respectively.
7
<PAGE>
ETI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 and 1997 INFORMATION
RELATING TO JUNE 30, 2000 and 1999 is UNAUDITED
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Expenditures for renovations
and betterments that extend the useful life of existing equipment are
capitalized; expenditures for maintenance and repairs are charged to expense
when incurred. Buildings are depreciated using the straight-line method over 39
years. Depreciation of furniture, fixtures, and equipment is computed using the
straight-line method over the estimated useful lives of the related assets,
which range from five to seven years.
Inventories
Inventories are stated at the lower of cost or market. Inventory cost is
determined by the average cost method and all costs incurred to prepare the
product for sale are included in the cost of inventory.
Foreign Currency Translation
The foreign subsidiaries' asset and liability accounts, which are originally
recorded in the appropriate local currency, are translated into United States
dollar amounts at the year-end exchange rates. Revenue and expense accounts are
translated at the average rates for the year. Transaction gains and losses, the
amounts of which are immaterial, are included in selling, general and
administrative expenses. Foreign exchange translation adjustments are recorded
as a component of other comprehensive income (loss).
Advertising
Costs of sales aids and promotional materials are capitalized as inventories.
These items are sold to distributors and are charged to costs of sales when
sold. All other advertising and promotional costs are expensed when incurred.
Other advertising costs were $120,585, $150,478 and $398,072 for the years ended
December 31, 1999, 1998 and 1997, respectively.
Income Taxes
Deferred taxes are provided on a liability method whereby deferred tax assets
are recognized for deductible temporary differences and operating loss and tax
credit carryforwards and deferred tax liabilities are recognized for taxable
temporary differences. Temporary differences are the differences between the
reported amounts of assets and liabilities and their tax bases. The Company's
temporary differences relate primarily to property and equipment, allowance for
doubtful accounts and deferred compensation accruals. Deferred tax assets are
reduced by a valuation allowance when, in the opinion of management, it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. Deferred tax assets and liabilities are adjusted for the effects of
changes in tax laws and rates on the date of enactment.
8
<PAGE>
ETI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 and 1997 INFORMATION
RELATING TO JUNE 30, 2000 and 1999 is UNAUDITED
NOTE 1 - NATURE OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
Long-Lived Assets
The Company has adopted Statement of Financial Accounting Standards No. 121
(SFAS 121), Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of, that requires impairment losses to be
recorded on long-lived assets used in operations when indicators of impairment
are present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amount. SFAS 121 also addresses the
impairment of long-lived assets that are expected to be disposed of. The Company
has determined that no such impairment losses exist as of December 31, 1999 and
1998, respectively.
Basic and Dilutive Net Loss Per Common Share
The Company adopted Statement of Financial Accounting Standards No. 128 (SFAS
128), Earnings per Share. SFAS 128 establishes standards for computing and
presenting earnings per share and replaces primary earnings per share with a
presentation of basic and dilutive earnings per share. Basic earnings per share
are based upon the weighted average number of common shares outstanding for the
period. Dilutive earnings per share are based upon the weighted average number
of common and potentially dilutive common shares outstanding for the period.
Weighted average shares outstanding for the six months ended June 30, 2000 and
1999 (unaudited) and the years ended December 31, 1999 and 1998 were 12,839,987,
10,427,666, 10,434,243 and 10,384,388, respectively.
Fair Value of Financial Instruments
The carrying amounts of financial instruments including cash and cash
equivalents, accounts receivable, receivable from related parties, short-term
borrowings, payables due to related parties and accounts payable approximate
their fair values because of their short maturities.
The carrying amounts of note receivable, long-term debt and note payable - major
stockholder approximate their fair values because the interest rates on these
instruments are at market rates.
Current Accounting Developments
In June 1999, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 133 (SFAS 133), Accounting for Derivative
Instruments and Hedging Activities. The Company will first be required to apply
SFAS 133 in the first quarter of 2000. SFAS 133 in general requires that
entities recognize all derivative financial instruments as assets or
liabilities, measured at fair value, and include in earnings the changes in fair
value of such assets and liabilities. SFAS 133 also provides that changes in the
fair value of assets or liabilities being hedged with recognized derivative
instruments be recognized and included in earnings. The Company does not utilize
derivative instruments, either for hedging or other purposes, and therefore
anticipates that the adoption of the requirements of SFAS 133 will not have a
material effect on its consolidated financial statements.
9
<PAGE>
ETI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 and 1997 INFORMATION
RELATING TO JUNE 30, 2000 and 1999 is UNAUDITED
NOTE 2 - GOING CONCERN AND SUBSEQUENT CORPORATE REORGANIZATION
The Company has incurred operating losses and net losses for each of the three
years ended December 31, 1999, and at December 31, 1999, the Company's current
liabilities exceed its current assets by $5,173,333, and its total liabilities
exceed its total assets by $1,744,057. The Company has continued to incur losses
subsequent to December 31, 1999. These matters raise substantial doubt about the
ability of the Company to continue as a going concern. The Company's continuance
will be dependent on the ability to restructure its operations to achieve
profitability in the near term, and its ability to raise sufficient debt or
equity capital to fund continuing operations until such restructuring is
completed.
Both prior to and subsequent to December 31, 1999, management has taken steps to
spin off its marketing and fulfillment divisions in an effort to make them
independent and allow the Company increased options in the restructuring of
operations. Management's initial plan was to separate the Company's assets
through a new entity, Enviro-Tech.Com PLC (PLC), a United Kingdom (UK) company
incorporated on January 12, 2000, for the purpose of completing a public
offering in the UK. The Board approved and received approximately $400,000 as a
bridge loan during the planning phase of the proposed UK offering (see Note 8).
The loan was signed on January 17, 2000, was due three months from the date of
the advance or three months from the date of listing. The loan accrued interest
at 8% and was secured by real property. The proposed offering was terminated by
DKI; the loan has not been repaid and a lien was filed against the Company, but
no formal foreclosure proceedings have commenced. Management is in discussions
for future fund raising with the individual who funded the bridge loan
subsequent to the IMX Pharmaceuticals, Inc. (IMX) sale discussed below. However,
there can be no assurance any such fund raising will be successful.
On May 17, 2000, ETI and DKI entered into an agreement for the sale and purchase
of certain assets with IMX. If consummated, the agreement called for IMX to
purchase the marketing division as well as all the assets related to supporting
the network marketing activities (i.e. patents, software, collateral marketing
material), estimated at approximately $250,000 at December 31, 1999, for $2.4
million cash and 2 million shares of IMX stock, $.001 par value per share. The 2
million shares would be registered as follows: the lesser of 25% of the number
of shares registered by IMX or 500,000; up to 1,000,000 shares after one year;
and up to 1,000,000 shares after two years. Per the agreement, IMX would
continue to operate the marketing division under the name of Enviro-Tech
International. As part of the agreement, the Company would enter into a sales
and supply agreement with IMX. On July 18, 2000, ETI, DKI and IMX entered into a
revised agreement for the sale and purchase of assets which rescinds and
replaces the May 17, 2000 agreement. Under this revised agreement, IMX will buy
substantially all the assets of ETI and DKI, with the exception of the Las
Vegas, Nevada distribution facility, with a net book value of approximately
$2,200,000 at December 31, 1999. In addition, IMX will assume the bank debt
associated with the Elbow Lake, Minnesota manufacturing facility and all
outstanding amounts due to ETI's primary supplier. The purchase price is
$1,900,000 in cash, of which $1,250,000 had been advanced as of the date of the
agreement and $650,000 will be paid at closing. In addition, ETI and DKI will
receive 2,500,000 shares of IMX common stock, of which 500,000 shares are being
held in escrow until ETI and DKI satisfy certain existing delinquent federal and
state tax obligations. ETI and DKI will have certain registration rights which
allow them to require registration whenever IMX registers additional shares in
the future. IMX will also purchase on hand inventory for approximately $600,000
in a non-interest bearing note to be paid no later than 90 days from the closing
date. IMX will receive a credit toward payments of $84,000 at the rate of
$28,000 per month.
10
<PAGE>
ETI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 and 1997 INFORMATION
RELATING TO JUNE 30, 2000 and 1999 is UNAUDITED
NOTE 2 - GOING CONCERN AND SUBSEQUENT CORPORATE REORGANIZATION (continued)
In association with this agreement, ETI, DKI and IMX have also entered into a
ten year revised supply agreement, with a ten year automatic extension unless
either party is in default. Under this agreement, IMX will purchase certain
proprietary product through DKI and pay a 20% royalty on the cost to DKI for a
five-year period. Minimum annual royalties under this agreement are $300,000,
representing approximately 5,000 gallons of product a month. Both revised
agreements contain non-competition clauses whereby IMX has agreed to market its
products only in North America (including the Caribbean Islands) and ETI and DKI
have agreed to only market their products outside of North America, or to
governmental units in or out of North America. For such sales, ETI and DKI will
purchase product from IMX at IMX's cost plus shipping and handling and 15% for
purchases of five gallons or more and 25% for purchases of less than five
gallons.
In addition to the reorganization of the Company, management is in the process
of implementing other restructuring and cost reductions, including significant
reductions in corporate overhead and consolidation of distribution facilities,
in order to match operating costs with future expected revenue as contemplated
given the pending IMX transaction.
Subsequent to December 31, 2000, as part of the Company's efforts to contain
cost, approximately $915,500 of debt owed to various parties was converted to
1,675,000 shares of ETI common stock. Management expects the reorganization of
its assets and operations and the planned cost reductions, coupled with the
funds being raised, will allow the Company to focus its efforts on internal
profit improvement. However, there can be no assurance that such restructuring
and cost reductions will be sufficient.
NOTE 3 - EXCHANGE
On February 28, 1998, DKI was merged into a subsidiary of International Health
Alliance Corporation (IHA) with DKI being the surviving entity (the Exchange).
All outstanding common shares of DKI (2,567,052) were exchanged for 9,000,000
newly issued shares of IHA, representing 88% of the outstanding common stock of
IHA subsequent to the Exchange. Concurrent with the Exchange, IHA changed its
name to ETI International, Inc. (ETI). For financial reporting and accounting
purposes, the Exchange was recorded as a reverse acquisition, with DKI as the
accounting acquirer.
Because DKI is the accounting acquirer, the assets and liabilities of DKI are
unchanged as a result of the Exchange. Accordingly, the historical financial
information presented is DKI's as previously reported and not the Company's. The
operating results of the Company are included with DKI after February 28, 1998,
the date of the Exchange. Neither the Company nor IHA had operations prior to
the acquisition of DKI. IHA's only assets prior to the Exchange were cash and a
stock subscription receivable from one of its promoters totaling $400,000, and
it had no liabilities. The Company received $100,000 of payments on the stock
subscription receivable. The remaining $300,000 balance was subsequently offset
against short-term borrowings of $300,000 from the same party. At the date of
the Exchange, IHA had approximately 292,000 of warrants outstanding to purchase
common stock of IHA at $2 per share, of which 250,000 were exercised shortly
following the Exchange and the remainder expired subsequent to the Exchange.
This merger with a public shell is not a business combination for reporting
purposes.
11
<PAGE>
ETI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 and 1997 INFORMATION
RELATING TO JUNE 30, 2000 and 1999 is UNAUDITED
NOTE 4 - NOTE RECEIVABLE
Note receivable at June 30, 2000, and December 31, 1999 and 1998 consists of an
unsecured installment note receivable from a distributor who pays the Company
principal monthly based on 35% of commissions earned, bearing interest at 10.5%.
As of June 30, 2000 (unaudited), December 31, 1999 and 1998, the principal
balance outstanding is $134,361, $150,228 and $179,000. The Company anticipates
annual principal payments of approximately $40,000 until paid in full; however;
because there are no specific payment amounts, the Company has classified the
entire balance as long term in the accompanying balance sheet.
NOTE 5 - INVENTORIES
Inventories as of June 30, 2000, December 31, 1999 and 1998 consist of the
following:
June 30, December 31,
2000 1999 1998
------------------------------------------
(Unaudited)
Packaging materials $ 296,193 $ 550,876 $ 573,200
Packaged finished goods 366,898 297,278 447,138
Sales aids -- 310,997 312,228
------------------------------------------
$ 663,091 $1,159,151 $1,332,566
==========================================
NOTE 6 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment as of June 30, 2000, December 31, 1999 and 1998
consist of the following:
June 30, December 31,
2000 1999 1998
-----------------------------------------
(Unaudited)
Land $ 412,224 $ 412,224 $ 20,000
Buildings 2,795,645 2,795,645 3,187,869
Furniture, fixtures, and equipment 1,436,499 1,450,219 1,426,702
-----------------------------------------
4,644,368 4,658,088 4,634,571
Less: accumulated depreciation (1,399,342) (1,339,040) (1,062,669)
-----------------------------------------
$ 3,245,026 $ 3,319,048 $ 3,571,902
=========================================
12
<PAGE>
ETI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 and 1997 INFORMATION
RELATING TO JUNE 30, 2000 and 1999 is UNAUDITED
NOTE 7 - ACCRUED EXPENSES
Accrued expenses as of June 30, 2000, December 31, 1999 and 1998 consist of the
following:
June 30, December 31,
2000 1999 1998
------------------------------------
(Unaudited)
Accrued commissions $ -- $ 239,379 $ 484,032
Accrued salaries and bonuses 44,870 50,623 78,722
Accrued vacation 49,054 56,728 51,158
Accrued sales taxes 351,489 327,427 303,498
Accrued interest 82,368 137,862 55,686
Other, primarily reimbursable costs
of PLC in 2000 (see Note 2) 158,425 47,503 55,963
------------------------------------
$ 686,206 $ 859,522 $1,029,059
====================================
13
<PAGE>
ETI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 and 1997 INFORMATION
RELATING TO JUNE 30, 2000 and 1999 is UNAUDITED
NOTE 8 - LINES OF CREDIT AND NOTES PAYABLE
Lines of credit and notes payable as of June 30, 2000, December 31, 1999 and
1998 consist of the following:
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999 1998
------------------------------------
(Unaudited)
<S> <C> <C> <C>
Notes payable, various, due on demand, interest rates at
8% for two notes and one note requires a payment of
$15,000 at maturity $ -- $ 172,500 $ 60,000
Note payable to a bank, monthly payments of $10,500 plus
interest at prime plus 2.5% (prime was 8.5% at December
31, 1999), secured by deed of trust on land, building,
and substantially all other assets of the Company, due
and payable September 22, 1999 (A) 650,000 738,768 798,772
Note payable to a bank, monthly payments of $6,071
including interest at prime plus 2%; secured by deed of
trust on land and building; guaranteed by major
stockholder; due May 2005 (B) 588,237 588,237 594,138
Note payable to a bank, monthly payments of $5,924
including interest at 8.22%; secured by deed of trust on
land and building; guaranteed by major stockholder; due
February 2015(B) 569,307 579,223 597,876
Line of credit with a bank to borrow up to $600,000,
interest at 6.95% and payable on demand, or if no demand
is made, in one payment of all outstanding principal
plus all accrued unpaid interest on April 14, 2000 (C) 600,000 600,000 --
Line of credit with a bank to borrow up to $500,000,
interest at 6.75% and payable on demand or if no demand
is made in one payment of all outstanding principal plus
all accrued unpaid interest on March 22, 2000 (D) -- 500,000 --
Note payable to PLC, accruing interest at 8%, secured by
a deed on a building, due three months from the date of
advance or the date stock is listed on the UK Exchange
(Note 2) 398,371 -- --
------------------------------------
2,805,915 3,178,728 2,050,786
Less current maturities 2,805,915 3,178,728 2,050,786
------------------------------------
$ -- $ -- $ --
====================================
</TABLE>
14
<PAGE>
ETI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 and 1997 INFORMATION
RELATING TO JUNE 30, 2000 and 1999 is UNAUDITED
NOTE 8 - LINES OF CREDIT AND NOTES PAYABLE (continued)
(A) The loan agreement requires written consent if there is a reorganization,
merger, consolidation, or significant change in ownership interests of the
Company (see Notes 1 and 3). The Company obtained written waivers of
compliance from the bank in 1998; no such activity occurred in 1999.
The note payable is past due. The Bank has demanded payment and applied an
$81,443 certificate of deposit that was held as collateral to the
outstanding balance on January 6, 2000. On May 8, 2000, the bank filed a
judgment against the Company. Removal of the lien will occur once $50,000
is wired in May, with another $200,000 paid over 120 days; payment of
outstanding real estate taxes of $82,045; bank receiving a first secured
position in a portion of IMX stock; and balance of the debt to be paid off
over two years.
(B) The loan agreements require written consent if there is a reorganization,
merger, consolidation, or significant change in ownership interests of the
Company (see Notes 1 and 3). The Company was not in compliance with this
covenant as of December 31, 1999 and the bank has not specifically waived
such violations; therefore, the outstanding debt was classified as current
on the December 31, 1999 consolidated balance sheets.
(C) The Company has borrowed the maximum amount on the line of credit. All
borrowings on this line of credit are collateralized by a certificate of
deposit from First Financial Network, a company owned by the Chairman of
the Board and a Director. ETI pays First Financial Network the rate of the
difference between 10% and the rate on the certificate. Interest expense
at December 31, 1999 includes $27,900 to the related party pursuant to
this agreement.
(D) The Company has borrowed the maximum amount on the line of credit. All
borrowings on this line of credit are collateralized by a certificate of
deposit from a shareholder and Director of the Company. ETI pays the
Director interest at the rate of the difference between 10% and the rate
on the certificate. Interest expense includes $17,745 to the Director
pursuant to this agreement. Subsequent to year end the shareholder
commenced foreclosure proceedings on the Las Vegas facility.
NOTE 9 - LEASES
The Company leases equipment and office space under non-cancelable operating
leases for terms of three to five years. Amounts paid for these leases are
included in selling, general and administrative expenses in the accompanying
statements of operations. Lease expense under all operating leases was $113,413,
$112,677 and $118,323 for the year ended December 31, 1999, 1998 and 1997,
respectively. Future minimum payments under these non-cancelable operating
leases as of December 31, 1999 total $19,000.
15
<PAGE>
ETI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 and 1997 INFORMATION
RELATING TO JUNE 30, 2000 and 1999 is UNAUDITED
NOTE 10 - LICENSE AND CONSULTING AGREEMENTS
The Company has entered into licensing agreements with product manufacturers and
consultants that are non-cancelable for a period of two to three years or are
annually renewable. Amounts paid for the license and consulting fees are
included in cost of products sold in the accompanying consolidated statements of
operations. The license fees have a minimum annual component and a component
contingent on the volume of licensed products sold.
License and consulting fees for the years ended December 31, 1999, 1998 and 1997
are as follows:
1999 1998 1997
----------------------------------------
Minimum license and
consulting fees $ 99,000 $243,000 $237,000
Contingent license and
consulting fees 15,561 74,924 110,000
----------------------------------------
$114,561 $317,924 $347,000
========================================
Future minimum license and consulting fees for non-cancelable agreements as of
December 31, 1999 total $20,000.
NOTE 11 - INCOME TAXES
The components of pretax income (loss) from operations for the years ended
December 31, 1999, 1998 and 1997 were taxed by the following jurisdictions:
1999 1998 1997
---------------------------------------------------
Domestic $(1,468,000) $ (714,000) $(1,050,000)
Foreign (201,000) (265,000) (461,000)
---------------------------------------------------
$(1,669,000) $ (979,000) $(1,511,000)
===================================================
16
<PAGE>
ETI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 and 1997 INFORMATION
RELATING TO JUNE 30, 2000 and 1999 is UNAUDITED
NOTE 11 - INCOME TAXES (continued)
The components of income tax expense (benefit) charged to operations for the
years ended December 31, 1999, 1998 and 1997 consist of approximately the
following:
1999 1998 1997
--------------------------------------
Current income tax expense (benefit)
Federal $ -- $ -- $(243,000)
Foreign -- -- (160,000)
State -- (1,000) (3,000)
--------------------------------------
Total current income tax expense
(benefit) -- (1,000) (406,000)
--------------------------------------
Deferred income tax expense (benefit)
Federal 25,000 6,000 (40,000)
Foreign -- 10,000 (3,000)
--------------------------------------
Total deferred income tax expense
(benefit) 25,000 16,000 (43,000)
--------------------------------------
Total income tax expense (benefit) $ 25,000 $ 15,000 $(449,000)
======================================
The reconciliation of expected income tax expense (benefit) computed at the U.S.
Federal statutory rate to actual income tax expense (benefit) for the years
ended December 31, 1999, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------------------------------------
<S> <C> <C> <C>
Expected income tax expense (benefit)
at the statutory rate $(584,000) $(343,000) $(529,000)
State income taxes, net of federal
tax benefit -- (1,000) (3,000)
Higher tax rates on foreign operations -- -- (85,000)
Nondeductible expenses 10,000 11,000 22,000
Increase in valuation allowance 568,000 332,000 179,000
Other 31,000 16,000 (33,000)
---------------------------------------
Total income tax expense (benefit) $ 25,000 $ 15,000 $(449,000)
=======================================
</TABLE>
17
<PAGE>
ETI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 and 1997 INFORMATION
RELATING TO JUNE 30, 2000 and 1999 is UNAUDITED
NOTE 11 - INCOME TAXES (continued)
Net deferred tax assets consist of the following components as of December 31,
1999 and 1998:
1999 1998
----------- -----------
Deferred tax assets
Accrued expenses $ 23,000 $ 38,000
Accounts receivable allowance 3,000 7,000
Accrued vacation 14,000 12,000
Charitable contribution carryforward 25,000 20,000
Net operating loss carryforward 1,054,000 511,000
----------- -----------
1,119,000 588,000
Less valuation allowance (1,079,000) (511,000)
----------- -----------
40,000 77,000
Deferred tax liabilities
Excess of tax over book depreciation (40,000) (52,000)
----------- -----------
Net deferred tax assets $ -- $ 25,000
=========== ===========
The above components of net deferred tax assets have been included in the
accompanying consolidated balance sheets as of December 31, 1999 and 1998 as
follows:
1999 1998
-------- --------
Current assets $ 40,000 $ 77,000
Noncurrent liabilities (40,000) (52,000)
-------- --------
$ -- $ 25,000
======== ========
The Company has a net operating loss carryforward of $2,816,863 as of December
31, 1999 that is available to offset future taxable income. $385,130 of the net
operating loss carryforward is available through 2012, $938,452 is available
through 2018 and $1,493,281 is available through 2019. The Company has recorded
a valuation allowance of $1,079,000 and $511,000 during 1999 and 1998 due to the
uncertainty of having sufficient future taxable income to realize this operating
loss carryforward.
NOTE 12 - STOCK OPTIONS AND WARRANTS
Stock Options
In July 1998, the Company's Board of Directors adopted the 1998 Employee Stock
Option Plan that permits the granting of nonqualified stock options that do not
meet the requirements of Section 422 of the Internal Revenue Code. A total of
700,000 shares of the Company's common stock have been reserved for issuance
under this plan. Each option is exercisable 6 months after grant. No options
were granted under this plan in 1999 or 1998.
18
<PAGE>
ETI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 and 1997 INFORMATION
RELATING TO JUNE 30, 2000 and 1999 is UNAUDITED
NOTE 12 - STOCK OPTIONS AND WARRANTS (continued)
Also in July 1998, the Company's Board of Directors adopted an outside directors
stock option plan for the purpose of compensating outside directors with grants
of stock options. Each eligible outside director may annually be granted options
to purchase 5,000 shares at a price equal to the fair market value of the stock
on the grant date. A total of 400,000 shares of the Company's stock have been
reserved for issuance under this plan. No options were granted under this plan
in 1999. 40,000 options were granted in 1998 pursuant to this plan and these
options become exercisable 6 months after grant and expire in July 2008. The
fair value of the underlying stock was less than the exercise price at June 30,
2000, December 31, 1999 and 1998.
A summary of stock option activity is as follows for the years ended December
31:
Shares: 2000 1999 1998
-----------------------------------------
Outstanding at beginning of year 40,000 40,000 --
Granted -- 40,000
-----------------------------------------
Outstanding at end of year 40,000 40,000 40,000
=========================================
Options exercisable, end of year 40,000 40,000 --
=========================================
Available to grant, end of year 1,060,000 1,060,000 1,060,000
=========================================
Weighted - average exercise price:
Outstanding options, end of year $3.13 $3.13 $3.13
Options granted, during the year N/A N/A $3.13
Weighted average expiration (in years) 8.0 8.5 9.5
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 123, (SFAS 123) Accounting for Stock-Based Compensation, pursuant
to which the Company has elected to follow the guidance of Accounting Principles
Board Opinion No. 25 for measurement and recognition of stock-based compensation
with employees and directors. No options were issued in 1999. No compensation
cost has been recognized for stock options issued by the Company in 1998, since
the exercise price for all options was at least equal to the value of the common
stock on the date of grant. If compensation cost for the Company's stock option
plans had been determined based on the fair value at the grant dates under the
method provided in SFAS 123, the Company's net loss and earnings per common
share would have been as follows for the ten months ended December 31, 1998:
Net Loss
As reported $ (677,000)
Pro forma $ (733,000)
Basic and dilutive earnings per common share
As reported $(0.06)
Pro forma $(0.07)
Weighted average fair value of options granted
during the year $1.41
19
<PAGE>
ETI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 and 1997 INFORMATION
RELATING TO JUNE 30, 2000 and 1999 is UNAUDITED
NOTE 12 - STOCK OPTIONS AND WARRANTS (continued)
There would have been no proforma compensation costs in 1999 and for the six
months ended June 30, 2000 as no options were granted in these periods.
The fair value of options granted under the Company's option plans was estimated
on the date of the grant using the Black-Scholes option pricing model with the
following weighted average assumptions and results:
Dividend yield None
Expected volatility 44%
Risk-free interest rate 4.75%
Expected life of options 5 years
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock based compensation has characteristics
significantly different from those of traded options and because changes in the
subjective input assumptions can significantly affect the fair value estimate,
in management's opinion, use of existing option valuation models does not
necessarily provide a reliable measure of the fair value of its employee stock
based compensation.
Warrants
As of December 31, 1998, there were 42,000 warrants outstanding to purchase
common stock at $2.00 per share. These warrants expired on March 31, 1999 (see
Note 3).
NOTE 13 - RELATED PARTIES
During 1999 and 1998, the major stockholder and an entity related to the major
stockholder advanced to the Company $0 and $481,500, respectively, and the
Company made $0 and $330,478, respectively, in repayments to these related
parties. In 1999, the major stockholder agreed to forego a portion of his
distributor commission in lieu of debt repayment totaling $234,500. Advances
owed to these related parties as of December 31, 1999 and 1998 consist of
$42,000 and $276,500, respectively. The note bore interest at 12% and was
unsecured. For the years ended December 31, 1999 and 1998, interest expense
totaled $28,140 and $2,660, respectively.
Other stockholders advanced to the Company $256,500 and $375,000 in 1999 and
1998, respectively, for working capital purposes under 8% interest bearing
notes, payable on demand. Amounts outstanding under other stockholder notes were
$192,500 and $75,000, as of December 31, 1999 and 1998, respectively. For the
years ending December 31, 1999 and 1998, interest expense totaled $21,904 and
$1,797, respectively.
Additionally, the Company made certain lease, insurance premium, and
discretionary distributor commission payments to certain stockholders and
distributors. The total of these payments was $92,450, $421,144, and $932,673 in
1999, 1998 and 1997, respectively.
20
<PAGE>
ETI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 and 1997 INFORMATION
RELATING TO JUNE 30, 2000 and 1999 is UNAUDITED
NOTE 13 - RELATED PARTIES (continued)
The major stockholder also guarantees payment of sales taxes with numerous
taxing jurisdictions and guarantees repayment of substantially all of the
Company's indebtedness with financial institutions and numerous trade vendors.
The Company made unsecured advances to the major stockholder in 1998. The net
advances of $145,253 are non-interest bearing and are due on demand. There were
no unsecured advances in 1999.
NOTE 14 - ENTERPRISE WIDE DISCLOSURES
The following table presents revenue from external customers for each the
Company's groups of products.
1999 1998 1997
-------------------------------------------
Waterless cleaning products $10,592,622 $ 9,842,497 $15,294,963
Sales aids, freight and other 3,555,425 5,118,737 7,921,684
Personal care products 1,696,379 2,568,968 2,728,241
Nutritional aids 3,127,260 3,067,265 3,447,022
-------------------------------------------
$18,971,686 $20,597,467 $29,391,910
===========================================
The following table presents information about the Company's revenue
attributable to countries based on the location of the distribution, and
long-lived assets by geographic area:
Revenue 1999 1998 1997
-------------------------------------------------
United States $16,473,988 $17,510,029 $24,687,624
Canada 2,497,698 3,087,438 4,704,286
-------------------------------------------------
$18,971,686 $20,597,467 $29,391,910
=================================================
December 31,
Long-Lived Assets 1999 1998
---------------------------------
United States $3,292,603 $3,538,145
Canada 26,445 33,757
---------------------------------
$3,319,048 $3,571,902
=================================
Operating loss from Canadian operations in 1999, before income taxes, was
approximately $82,000.
21
<PAGE>
ETI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 and 1997 INFORMATION
RELATING TO JUNE 30, 2000 and 1999 is UNAUDITED
NOTE 15 - SUBSEQUENT EVENTS
On May 22, 2000, the Company entered into an option and product purchase
agreement with the manufacturer of the Dri Wash N' Guard products. As part of
the agreement, the Company is required to purchase 5,000 gallons a month for two
years, and has the option to buy 100% of the stock of the manufacturer for $6.2
million by March 2, 2002. The price increases $500,000 for each six-month period
that passes without the purchase option being exercised beyond the contract date
of May 22, 2000, with a ceiling purchase price of $7.2 million.
On July 14, 2000, a vendor filed a complaint for payment of outstanding amounts
of approximately $310,000. As of December 31, 1999 approximately $346,000 was
accrued.
NOTE 16 - CONTINGENCIES
Litigation
In January 1997 the Company's newly constructed Minnesota manufacturing plant
for mixing and packaging the Company's largest volume product line collapsed
during a heavy snowstorm. This plant casualty resulted in a complete destruction
of the building; however, as the plant was not operating at the time, no
personal injuries occurred.
During 1997, the total amount of insurance proceeds received for property
damages and plant replacement was $816,000, The Company applied these insurance
proceeds in 1997 toward the rebuilding of the plant, which cost $746,000, and
the replacement of equipment, which cost $70,000. Since the net book value of
the destroyed plant and equipment exceeded insurance proceeds received, the
Company has recorded a casualty loss of $89,000 in other expense in the
accompanying 1997 consolidated statement of operations. The Company has not
recognized any insurance proceeds in the accompanying financial statements
beyond what the insurer has paid.
In addition to proceeds received under the Company's insurance coverage,
management has submitted claims to the insurer for additional property damage
under its property and casualty coverage as well as for additional loss of
revenue and related damages under its business interruption coverage. To date
the insurer has denied these claims. On October 14, 1998, the Company filed a
lawsuit against the insurer claiming additional business interruption damages of
$3,500,000 and additional property damages of $500,000. While the ultimate
outcome of this contingency cannot now be determined, management believes it has
a reasonable basis for the determination of, and can support the amount of the
damages claimed in this lawsuit. Any amount received under this lawsuit will be
recorded at the time the funds are collected.
22
<PAGE>
IMX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
FINANCIAL STATEMENTS
FOR THE YEARS ENDED
DECEMBER 31, 1999 AND 1998
<PAGE>
IMX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
TABLE OF CONTENTS
Reports of Independent Certified Public Accountants:
For the year ended December 31, 1999 ......................... 1
For the year ended December 31, 1998 ......................... 2
Balance Sheets ....................................................... 3 - 4
Statements of Operations ............................................. 5
Statements of Changes in Stockholders' Equity ........................ 6
Statements of Cash Flows ............................................. 7 - 8
Notes to Financial Statements ........................................ 9 - 31
<PAGE>
Report of Independent Certified Public Accountants
To the Board of
Directors and Stockholders
IMX Pharmaceuticals, Inc.
Boca Raton, Florida
We have audited the balance sheet of IMX Pharmaceuticals, Inc., and Subsidiaries
(the "Company") a Florida corporation, as of December 31, 1999 and the related
statements of operations, changes in stockholders' equity and cash flows for the
year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit. The financial statements of IMX
Pharmaceuticals, Inc. as of December 31, 1998 and for the year then ended was
audited by other auditors whose report dated April 21, 1999, expressed an
unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1999 financial statements referred to above present fairly,
in all material respects, the financial position of IMX Pharmaceuticals, Inc. as
of December 31, 1999 and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting principles.
Miami, Florida Berenfeld, Spritzer, Shechter & Sheer
March 3, 2000
<PAGE>
IMX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
ASSETS
1999 1998
---------- ----------
CURRENT ASSETS:
Cash and cash equivalents $2,497,791 $ 623,860
Securities available for sale 30,463 1,689,200
Accounts receivable (net of allowance for
doubtful accounts of $27,494 and $13,647) 110,525 194,405
Other receivables 31,153 0
Inventories 557,593 160,152
Loan receivable - related party 0 120,000
Vendor deposits 50,000 0
Prepaid expenses and other 46,731 38,858
---------- ----------
Total Current Assets 3,324,256 2,826,475
---------- ----------
PROPERTY AND EQUIPMENT:
Property and equipment (net of accumulated
depreciation of $179,216 and $111,261) 105,913 119,176
---------- ----------
OTHER ASSETS:
Deposits and other 67,646 42,720
Licensing and supply agreements, net 0 44,598
Investment in and advances to unconsolidated
subsidiary 0 348,016
---------- ----------
Total Other Assets 67,646 435,334
---------- ----------
TOTAL ASSETS $3,497,815 $3,380,985
========== ==========
See accompanying notes to consolidated financial statements.
<PAGE>
IMX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
1999 1998
----------- -----------
CURRENT LIABILITIES:
Accounts payable $ 436,398 $ 267,208
Accrued expenses and other current
liabilities 49,700 214,414
Capital lease payable, current portion 2,896 0
Recourse obligation 0 269,705
----------- -----------
Total Current Liabilities 488,994 751,327
----------- -----------
LONG-TERM LIABILITIES:
Capital lease payable, non-current portion 4,896 0
----------- -----------
Redeemable common stock 0 70,000
----------- -----------
STOCKHOLDERS' EQUITY:
Series A convertible preferred stock, $.001 par
value, 1,000,000 shares authorized,
0 and 86,424 shares issued and outstanding 0 86
Common stock, $.001 par value, 50,000,000
shares authorized, 9,634,707 and 8,728,108
shares issued, 5,811,076 and 5,003,351 shares
outstanding 9,635 8,728
Additional paid-in capital 7,943,050 7,780,988
Retained earnings (deficit) (4,348,955) (4,883,487)
Treasury stock, at cost - 3,823,631 and
3,724,757 shares (578,054) (357,657)
Accumulated other comprehensive income (loss) (21,751) 11,000
----------- -----------
Total Stockholders' Equity 3,003,925 2,559,658
----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 3,497,815 $ 3,380,985
=========== ===========
See accompanying notes to consolidated financial statements.
<PAGE>
IMX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED
DECEMBER 31, 1999 AND 1998
1999 1998
----------- -----------
NET SALES $ 203,334 $ 3,942,371
COST OF SALES 80,466 1,106,261
----------- -----------
GROSS PROFIT 122,868 2,836,110
----------- -----------
OPERATING EXPENSES:
Selling 1,337,485 1,594,588
Advertising 181,709 1,006,557
General and administrative 1,486,261 1,412,841
Supply agreement impairment loss 0 884,199
Depreciation and amortization 67,956 172,106
----------- -----------
Total Operating Expenses 3,073,411 5,070,291
----------- -----------
LOSS FROM OPERATIONS (2,950,543) (2,234,181)
OTHER INCOME (EXPENSES):
Equity in earnings (loss) of unconsolidated
subsidiary (12,887) 81,474
Gain on sale of investment in
unconsolidated subsidiary 3,357,807 0
Other 183,555 135,664
----------- -----------
Income (Loss)
Before Income Taxes 577,932 (2,017,043)
Provision for Income Taxes 0 0
----------- -----------
Net Income (Loss) 577,932 (2,017,043)
Dividends on preferred stock (43,400) (168,850)
----------- -----------
Net income (loss) available to
common stockholders $ 534,532 $(2,185,893)
=========== ===========
================================================================================
Weighted average number of shares of
common stock outstanding:
Basic 4,998,508 4,879,622
Diluted 5,329,256 4,879,622
================================================================================
Net income (loss) per common share:
Basic $ 0.11 $ (0.45)
Diluted $ 0.10 $ (0.45)
================================================================================
See accompanying notes to consolidated financial statements.
<PAGE>
IMX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFFERED STOCK COMMON STOCK
----------------------- --------------------------- ADDITIONAL
NUMBER NUMBER PAID-IN
OF SHARES AMOUNT OF SHARES AMOUNT CAPITAL (DEFICIT)
----------- ---------- -------------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance - December 31, 1997 76,750 77 7,741,166 7,741 4,662,168 (2,697,594)
Comprehensive income:
Net loss (2,017,043)
Other comprehensive income -
unrealized gain on securities available
for sale
Total comprehensive income (loss)
Preferred stock dividend declared 9,674 9 168,841 (168,850)
Purchase of treasury stock
Compensation - fair value of common
stock options issued to non-employees 78,332
Issuance of common stock for
consulting services 24,286 24 96,176
Issuance of common stock to
settle supply agreements payable 271,714 272 950,727
Original issue discount for fair value of
warrant issued with notes payable 108,595
Net proceeds from sale of common stock 710,941 711 1,786,129
Reclassification of redeemable common stock (19,999) (20) (69,980)
----------- ---------- -------------- ----------- ----------- ------------
Balance - December 31, 1998 86,424 86 8,728,108 8,728 7,780,988 (4,883,487)
Comprehensive Income:
Net income 577,932
Change in other comprehensive income
Total comprehensive income
Preferred stock dividend declared 1,736 2 43,398 (43,400)
Compensation - fair value of common
stock options issued to non-employees 44,483
Conversion of preferred stock to
common stock (88,160) (88) 881,600 882 (794)
Exercise of common stock options 5,000 5 4,995
Transfer of redeemed common stock to
treasury stock 19,999 20 69,980
Conversion of loan receivable to
treasury stock
Purchase of treasury stock
----------- ---------- -------------- ----------- ----------- ------------
Balance - December 31, 1999 0 $ 0 9,634,707 $ 9,635 $7,943,050 $(4,348,955)
=========== ========== ============== =========== =========== ============
<CAPTION>
ACCUMULATED
OTHER TOTAL
TREASURY COMPREHENSIVE STOCKHOLDERS'
STOCK INCOME EQUITY
------------ ---------------- --------------
<S> <C> <C> <C>
Balance - December 31, 1997 (200,000) 0 1,772,392
Comprehensive income:
Net loss (2,017,043)
Other comprehensive income -
unrealized gain on securities available
for sale 11,000 11,000
--------------
Total comprehensive income (loss) (2,006,043)
Preferred stock dividend declared 0
Purchase of treasury stock (157,657) (157,657)
Compensation - fair value of common
stock options issued to non-employees 78,332
Issuance of common stock for
consulting services 96,200
Issuance of common stock to
settle supply agreements payable 950,999
Original issue discount for fair value of
warrant issued with notes payable 108,595
Net proceeds from sale of common stock 1,786,840
Reclassification of redeemable common stock (70,000)
------------ ---------------- --------------
Balance - December 31, 1998 (357,657) 11,000 2,559,658
Comprehensive Income:
Net income 577,932
Change in other comprehensive income (32,751) (32,751)
--------------
Total comprehensive income 545,181
Preferred stock dividend declared 0
Compensation - fair value of common
stock options issued to non-employees 44,483
Conversion of preferred stock to
common stock 0
Exercise of common stock options 5,000
Transfer of redeemed common stock to
treasury stock (70,000) 0
Conversion of loan receivable to
treasury stock (125,400) (125,400)
Purchase of treasury stock (24,997) (24,997)
------------ ---------------- --------------
Balance - December 31, 1999 $ (578,054) $ (21,751) $ 3,003,925
============ ================ ==============
</TABLE>
<PAGE>
IMX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 577,932 $ (2,017,043)
Adjustments to reconcile net income (loss)
to net cash (used) provided by operating activities:
Depreciation and amortization 67,956 172,106
Provision for doubtful accounts 13,847 3,647
Amortization of original issue discount 0 185,437
Compensation, fair value of stock, stock options
and warrants 44,483 174,532
Equity in income (loss) - net of accretion of
unconsolidated subsidiary 28,452 (3,628)
Gain on sale of investment in
unconsolidated subsidiary (3,357,734) 0
Impairment loss on supply and licensing agreement 44,598 884,199
Changes in assets and liabilities:
Decrease in accounts receivable 38,880 1,166,456
Decrease (increase) in inventories (397,441) 1,204,235
(Increase) in prepaid expenses (7,873) (15,530)
Decrease (increase) in deposits (20,864) 104,704
Decrease (increase) in other assets (54,062) 17,839
(Decrease) increase in accounts payable
and accrued expenses 4,476 (672,361)
------------ ------------
Net cash (used) provided by operating activities (3,017,350) 1,204,593
------------ ------------
Investing Activities:
Purchase of furniture and equipment (54,692) (65,022)
Unrealized loss on securities available for sale (21,751) 0
Loan to related party 120,000 (120,000)
Decrease in investment in and advances to
unconsolidated subsidiary 348,016 0
Proceeds from sale of investment in
unconsolidated subsidiary 3,189,281 0
------------ ------------
Net cash (used) provided by investing activities 3,580,854 (185,022)
------------ ------------
</TABLE>
<PAGE>
IMX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (continued)
FOR THE YEARS ENDED
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Financing Activities:
Net proceeds (repayments) of notes payable 0 (372,000)
Proceeds from sale of common stock 0 1,786,840
Net proceeds from capital lease payable 7,792
Conversion of loan receivable to treasury stock (125,400) 0
Purchase of securities available for sale (30,463) (1,678,200)
Proceeds from maturity of securities available for sale 1,678,200 0
Release from recourse obligation (269,705) 0
Transfer of redeemed common stock to treasury stock 70,000 0
Proceeds from exercise of common stock options 5,000 0
Purchase of treasury stock (24,997) (157,657)
------------ ------------
Net cash (used) provided by financing activities 1,310,427 (421,017)
------------ ------------
Net increase in cash and cash equivalents 1,873,931 598,554
Cash and cash equivalents - beginning of year 623,860 25,306
------------ ------------
Cash and cash equivalents - end of year $ 2,497,791 $ 623,860
============ ============
=============================================================================================
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
Cash paid for interest $ 13,584 $ 38,265
Cash paid for income taxes $ 19,264 $ 0
=============================================================================================
=============================================================================================
SUPPLEMENTAL SCHEDULE OF NON CASH ACTIVITIES
Common stock issued to settle supply agreement payable $ 0 $ 950,999
Dividends on preferred stock:
Preferred stock issued in lieu of cash for dividends payable
on preferred stock 43,400 168,850
Contribution of non cash assets to unconsolidated subsidiary 0 5,194
Conversion of loan receivable to treasury stock 125,400 0
Conversion of preferred stock to common stock 882 0
=============================================================================================
</TABLE>
<PAGE>
IMX PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
NOTE 1 - NATURE OF BUSINESS
IMX Pharmaceuticals, Inc. (the "Company"), formerly IMX Corporation,
was organized under the laws of the State of Utah on June 2, 1982.
The Company changed its name to IMX Pharmaceuticals, Inc. on June
30, 1997. The consolidated financial statements include the accounts
of the Company and its subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation.
In 1995, the Company entered into an acquisition agreement (the
"Agreement'), with Interderm, Ltd., ("Interderm") for the assignment
of the exclusive marketing and distribution rights in the United
States for certain pharmaceutical products manufactured by
Meyer-Zall Laboratories of South Africa ("Meyer-Zall"). The products
included Exorex, an over-the-counter psoriasis medication.
In connection with the Agreement, the Company also acquired the
right of first refusal for distribution rights in the United States
for new pharmaceutical products developed or manufactured by
Meyer-Zall.
During 1996 and 1997, the Company began to market and distribute
Exorex and other related products in the retail market using capital
raised from private placements.
Effective June 24, 1998, the Company entered into an agreement (the
"Joint Venture Agreement") with various affiliates of Medicis
Pharmaceutical Corporation ("Medicis") to form a joint venture
Medicis Consumer Products Company, LLC ("LLC") to develop and market
skin care products.
Under the terms of the Joint Venture Agreement, Medicis contributed
cash of $4,000,000 to the joint venture in return for a 51% interest
in the LLC. The Company contributed all of the assets, property and
associated rights in connection with the Exorex product line, with
an unamortized cost of approximately $5,200 in return for a 49%
interest in the LLC (Note 8).
Effective June 30, 1999, the Company entered a Sale and Transfer
Agreement ("Sale Agreement") with Medicis, whereby the Company sold
its 49% interest in the LLC to Medicis (Note 9) in return for
$3,600,000.
9
<PAGE>
IMX PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
For purposes of reporting cash flows, the Company considers all
highly liquid investments purchased with an original maturity of
three months or less to be cash equivalents.
Securities Available for Sale
Securities available for sale are carried at estimated market value.
Unrealized holding gains and losses on securities available for sale
are reported as a net amount in a separate component of
stockholders' equity until realized. Gains and losses realized from
the sale of investment securities are computed using the
specific-identification method.
Inventories
Inventories are stated at the lower of cost or market value. Cost is
determined using the first-in, first-out method.
Property and Equipment
Property and equipment are recorded at cost. Depreciation and
amortization are computed using methods that approximate the
straight-line method over the assets' estimated useful lives.
Licensing and Supply Agreements
Licensing and supply agreements are recorded at cost, including the
estimated fair value of common stock issued by the Company to
acquire the agreements. The agreements are amortized over their
estimated useful lives from 5 to 20 years.
The Company reviews the carrying values of its long-lived and
identifiable intangible assets for possible impairment whenever
events or changes in circumstances indicate that the carrying
amounts of the assets may not be recoverable.
Investment in Unconsolidated Subsidiary
The Company's 49% interest in the LLC was accounted for using the
equity method.
10
<PAGE>
IMX PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
Revenue Recognition
Sales are generally recorded upon shipment of goods to customers,
except for goods shipped to certain retail customers under holdback
arrangements. Under such holdback arrangements, the Company has
agreed to allow these retail customers to hold payment for goods
shipped until a review of the retail sales of the Company's products
has been performed. Goods shipped under the holdback arrangements
are accounted for as consigned inventories until the holdback
payment is received, at which time sales are recorded.
Production Development Costs
Costs incurred for the development of new product lines are expensed
as incurred as specified by SOP 98-5 issued by the American
Institute of Certified Public Accountants (Note 3).
Stock-Based Compensation
The Company accounts for stock based compensation as set forth in
Accounting Principles Board ("APB") Opinion 25, "Accounting for
Stock Issued to Employees," and discloses the proforma effect on net
income (loss) and income (loss) per share of adopting the full
provisions of Statement of Financial Accounting Standards ("SFAS")
No. 123 "Accounting for Stock-Based Compensation". Accordingly, the
Company has elected to continue using APB Opinion 25 and has
disclosed in the footnotes proforma income (loss) and income (loss)
per share information as if the fair value method had been applied.
Income Taxes
The Company files consolidated Federal and State of Florida income
tax returns. Income taxes are calculated using the liability method
specified by SFAS No. 109, "Accounting for Income Taxes".
Net Income (Loss) Per Common Share
Net income (loss) per common share is calculated according to
Accounting SFAS No.128, "Earnings Per Share" which requires
companies to present basic and diluted earnings per share. Net
income (loss) per common share-- basic is based on the weighted
average number of common shares outstanding during the year. Net
income (loss) per common share -- diluted is based on the weighted
average number of common shares and dilutive potential common shares
outstanding during the year.
11
<PAGE>
IMX PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
Net Income (Loss) Per Common Share (Cont'd)
Convertible preferred stock, certain common stock options and common
stock warrants were excluded from the computations of net loss per
share for the years ended December 31, 1998 and 1999 because the
effect of their inclusion would be anti-dilutive.
Fair Value of Financial Instruments
SFAS No. 107 requires the disclosure of the fair value of financial
instruments. The estimated fair value amounts have been determined
by the Company's management using available market information and
other valuation methods. However, considerable judgment is required
to interpret market data in developing the estimates of fair value.
Accordingly, the estimates presented herein are not necessarily
indicative of the amounts the Company could realize in a current
market exchange.
The following methods and assumptions were used in estimating the
fair value disclosure for financial instruments:
Cash and Cash Equivalents, Accounts and Loan Receivable, Accounts
Payable, Accrued Expenses and Notes Payable - the carrying amounts
reported in the consolidated balance sheets approximate fair value
because of the short maturity of those instruments.
Securities Available for Sale - the fair values are based on quoted
market prices at the reporting date of those or similar investments
(Note 5).
Accounting Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain
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.
NOTE 3 - RECENT ACCOUNTING
In June, 1997, the Financial Accounting Standards Board (the
Pronouncements "FASB") issued SFAS No. 130, "Reporting Comprehensive
Income" which became effective in 1998. SFAS No. 130 establishes
standards for reporting and presentation of comprehensive income and
its components in a full set of general-purpose financial
statements. The Company adopted SFAS No.130 on January 1, 1998.
12
<PAGE>
IMX PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
NOTE 3 - RECENT ACCOUNTING (CONT'D)
In June, 1997 the FASB issued SFAS No. 131, "Disclosure about
Segments of an Enterprise and Related Information" which became
effective in 1998. SFAS No. 131 establishes standards for the way
public enterprises are to report operating segments in annual
financial statements and requires reporting of selected information
about operating segments in interim reports. The Company's adoption
of SFAS No. 131 did not affect the Company's consolidated financial
statements.
In April,1998, the American Institute of Certified Public
Accountants issued Statement of Position No. 98-5, "Reporting for
the Costs of Start-Up Activities", ("SOP 98-5"). The Company is
required to expense all start-up costs related to new operations as
incurred. In addition, all start-up costs that were capitalized in
the past must be written off when SOP 98-5 is adopted. The Company's
adoption of SOP 98-5 did not have a material impact on its financial
position or results of operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities". The Company is
required to adopt SFAS 133, as amended by SFAS 137, for the year
ending December 31, 2001. SFAS 133 establishes methods of accounting
for derivative financial instruments and hedging activities related
to those instruments as well as other hedging activities. Because
the Company currently holds no derivative financial instruments and
does not currently engage in hedging activities, adoption of SFAS
133 is expected to have no material impact on the Company's
financial condition or results of operations.
NOTE 4 - EXOREX PRODUCT LINE PROFORMA INFORMATION
The following consolidated proforma statement of operations for the
year ended December 31, 1998 illustrates the effect on the statement
of operations if the Joint Venture Agreement of June 24, 1998 (Note
1), and the Consulting Agreement (Note 9) occurred effective January
1, 1998. The proforma statement of operations sets out revenues and
expenses related to the Exorex product line for the period from
January 1, 1998 to June 24, 1998, and adjusts for the equity in
earnings from unconsolidated subsidiary that the LLC would have
contributed to the Company during that same period. This statement
of operations has been prepared to substantially comply with rules
and regulations of the U.S. Securities and Exchange Commission.
13
<PAGE>
IMX PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
NOTE 4 - EXOREX PRODUCT LINE PROFORMA INFORMATION (CONT'D)
Proforma Consolidated Statement of Operations (unaudited)
Year ended December 31, 1998
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Historical Exorex
Statement of Product
Operations Line Adjustments Pro Forma
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 3,942,371 $(3,745,994) $ 0 $ 196,377
Cost of sales 1,106,261 (953,263) 0 152,998
----------- ----------- ----------- -----------
Gross profit 2,836,110 (2,792,731) 0 43,379
----------- ----------- ----------- -----------
Operating expenses:
Selling 1,594,588 (989,817) 0 604,771
Advertising 1,006,557 (744,091) 0 262,466
General and administrative 1,412,841 (614,795) 0 798,046
Supply agreement impairment loss 884,199 0 0 884,199
Depreciation and amortization 172,106 (30,000) 0 142,106
----------- ----------- ----------- -----------
Total operating expenses 5,070,291 (2,378,703) 0 2,691,588
----------- ----------- ----------- -----------
(Loss) from operations (2,234,181) (414,028) 0 (2,648,209)
Other income (expenses):
Equity in earnings (loss) of
unconsolidated subsidiary 81,474 0 (240,850) (159,376)
Other 135,664 (2,565) 0 133,099
----------- ----------- ----------- -----------
Net (loss) (2,017,043) (416,593) (240,850) (2,674,486)
Dividends on preferred stock (168,850) 0 0 (168,850)
----------- ----------- ----------- -----------
Net (loss) applicable to
common stockholders $(2,185,893) $ (416,593) $ (240,850) $(2,843,336)
=========== =========== =========== ===========
Weighted average number of shares
of common stock outstanding 4,879,622 4,879,622
=========== ===========
Net loss per common share - basic
and diluted $ (0.45) $ (0.58)
----------- -----------
</TABLE>
The adjustment assumes the provisions of the Joint Venture Agreement
were in place for the period January 1, 1998 through June 24, 1998,
and includes a 12% management fee expense on net sales ($449,500),
management fee income of $224,750 to the Company, and 49% of the
equity in loss of the product line, after the $449,500 management
fee expense ($16,100), for a total of $240,850.
14
<PAGE>
IMX PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
NOTE 5 - SECURITIES AVAILABLE FOR SALE
Securities available for sale consists of Federal Home Loan Bank
discount notes that matured in January, 1999 and 69,630 shares of
common stock in Hydron Technologies, Inc. At December 31, 1998, the
estimated market value of $1,689,200 of the Federal Home Loan Bank
discount notes securities exceeded their cost basis by $11,000. At
December 31, 1999, the cost basis of $52,214 of the common stock in
Hydron Tech, Inc. exceeded the market value by $21,751.
NOTE 6 - INVENTORIES
Inventories consisted of the following:
December 31,
----------------------
1999 1998
-------- --------
Finished goods $237,195 $ 64,333
Raw materials 16,969 0
Packaging supplies 303,429 95,819
-------- --------
Total $557,593 $160,152
======== ========
At December 31, 1999 and 1998 finished goods inventories included
approximately $0 and $64,000, respectively, of goods shipped to
retail customers on consignment.
15
<PAGE>
IMX PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
NOTE 7 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
December 31,
----------------------
1999 1998
--------- ---------
Computers and office equipment $ 193,997 $ 163,457
Furniture, fixtures and improvements 91,132 66,980
--------- ---------
285,129 230,437
Less: accumulated depreciation and
amortization (179,216) (111,261)
--------- ---------
Property and equipment net of
accumulated depreciation $ 105,913 $ 119,176
========= =========
NOTE 8 - LICENSING AND SUPPLY AGREEMENTS
On September 30, 1997, the Company entered into an agreement for a
term of five years with IGI, Inc. ("IGI") to acquire exclusive
rights to market IGI's skin care products in exchange for $50,000 in
cash and $950,999 of the Company's Common stock (Note 13). A supply
agreement payable of $1,000,999 was recorded as of December 31,
1997, which was paid during March, 1998, with cash and Common stock
as described above. During 1998, approximately $116,800 of
amortization expense was recorded beginning with the first order of
goods in May, 1998. Effective December 31, 1998, due to limited
sales of such products, management cancelled this product line and
recorded an impairment loss of $884,199. During 1998 the Company
contributed its licensing rights to Exorex with an unamortized cost
of approximately $5,200 in exchange for a 49% interest in the LLC
(Notes 1 and 9).
December 31,
-------------------
1999 1998
-------- --------
Supply agreements $ 0 $ 0
Licensing agreements 0 50,000
-------- --------
0 50,000
Less: accumulated amortization 0 (5,402)
-------- --------
$ 0 $ 44,598
======== ========
16
<PAGE>
IMX PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
NOTE 9 - UNCONSOLIDATED SUBSIDIARY
The Company owned a 49% interest in the LLC (Note 1), a skin care
joint venture located in Phoenix, Arizona, which was sold effective
June 30, 1999.
December 31,
---------------------
1999 1998
--------- ---------
Company's share of net
loss on LLC $ 0 $ (96,970)
Investments in LLC 0 105,792
Advances to LLC $ 0 $ 339,194
--------- ---------
$ 0 $ 348,016
========= =========
At December 31, 1998, the unaccreted excess of the Company's equity
in the underlying net assets of the LLC over its investment at the
date of acquisition was approximately $1,859,000, which was netted
against the investment for balance sheet presentation purposes. The
excess was being accreted to income over a ten-year period. During
1998 and 1999, approximately $100,600 and $97,700 respectively, of
accretion was included in the caption "Equity in Earnings of
Unconsolidated Subsidiary" in the accompanying consolidated
statements of operations.
Under the terms of a Consulting Agreement with the LLC, the Company
received a management fee from the LLC equal to 6% of the LLC's Net
Sales (as defined) for certain consulting services related to their
specialized knowledge of the Exorex line. The Company recorded
management fee income of approximately
17
<PAGE>
IMX PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
NOTE 9 - UNCONSOLIDATED SUBSIDIARY (CONT'D)
$159,000 and $77,000 for the years ended December 31, 1998 and 1999
respectively, of which approximately $77,800 and $37,600 (49%) is
included in the caption "Equity in Earnings of Unconsolidated
Subsidiary" in the accompanying consolidated statements of
operations.
Effective June 30, 1999, the Company entered into the Sale Agreement
with Medicis, whereby the Company sold its 49% interest in the LLC
to Medicis. The Company received $3,600,000 on July 1, 1999 for its
interest and has recorded a gain of approximately $3,358,000 from
the sale, net of the Company's basis of ($36,000) and expenses of
approximately $278,000.
NOTE 10 - INCOME TAXES
The provision for income taxes in the consolidated statements of
operations is as follows:
December 31,
-------------------
1999 1998
-------- --------
Current:
Federal $ 0 $ 0
State 0 0
-------- --------
$ 0 $ 0
-------- --------
Deferred:
Federal $ 0 $ 0
State 0 0
-------- --------
$ 0 $ 0
-------- --------
18
<PAGE>
IMX PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - INCOME TAXES (CONT'D)
Applicable incomes taxes for financial reporting purposes differ
from the amounts computed by applying the statutory federal and
state income tax rates as follows:
December 31,
---------------------
1999 1998
--------- ---------
Tax (benefit) at statutory rate $ 185,800 $(685,800)
Increase (decrease) in tax
resulting from:
State income tax, net of federal tax benefit 31,500 (73,200)
Other 0 3,600
Increase (decrease) in
valuation allowance (217,300) 755,400
--------- ---------
Income taxes $ 0 $ 0
========= =========
The approximate tax effects of temporary differences that give rise
to the deferred tax assets and deferred tax (liabilities) are as
follows:
December 31,
--------------------------
1999 1998
----------- -----------
Supply agreement impairment loss $ 0 $ 332,700
Fair value of common stock options and
warrants 130,889 95,200
Start-up costs 139,100 97,200
Depreciation and amortization (71,700) (26,600)
Other 12,000 6,800
Net operating loss carry forwards 641,700 840,800
----------- -----------
851,989 1,346,100
Less: valuation allowance (851,989) (1,346,100)
----------- -----------
Total net deferred tax asset $ 0 $ 0
=========== ===========
At December 31, 1998, the Company had net operating loss
carryforwards of approximately $2,234,000 for income tax purposes.
Those losses are available for carryforward for periods ranging from
fifteen to twenty years, and will expire beginning in 2011. During
1999, the Company utilized approximately $578,000 of the net
operating loss carryfowards. Any future significant changes in
ownership of the Company may limit the annual utilization of the tax
net operating loss carryforwards.
19
<PAGE>
IMX PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
NOTE 11 - RECOURSE OBLIGATION
Effective June 18, 1998 the Company sold approximately $2,509,000 of
accounts receivable related to Exorex to the LLC for cash of
approximately $2,259,000 (90%), and Exorex inventories with a cost
of approximately $1,367,000. The LLC had the right to assign any
accounts receivable not collected by August 18, 1998 back to the
Company. As of December 31, 1998, the LLC had made no such
assignments. However, the Company recorded a recourse obligation of
approximately $269,700 for the amount of accounts receivable that
were uncollected. Pursuant to the Sale Agreement (Note 9), the
Company was relieved of the recourse obligation effective June 30,
1999.
NOTE 12 - NOTES PAYABLE
At December 31, 1997, the Company had notes payable to six
individuals totaling $372,000. The notes bear interest at 18% per
annum. Included in this amount are two notes to two officers of the
Company totaling $75,000 (Note 17). In addition, for each $25,000
borrowed, the Company issued warrants with a five year exercise
period from the origination date of the notes, to purchase 1,750
shares of the Company's common stock for $3.50 per share, for each
month the notes were outstanding (Note 13). The Company repaid all
of the notes during 1998, and 150,598 of such warrants were issued.
Using the Black-Scholes option pricing model, the fair market value
of the warrants was calculated as $249,700 with the following
assumptions: 45% volatility, 5 year expected life, and a 6%
risk-free interest rate. The fair value of the warrants represents
an original issue discount of which approximately$64,300 and
$185,400 were amortized during 1997and 1998 respectively.
NOTE 13 - CAPITAL STOCK
Common stock
Common stock has one vote per share for the election of directors.
All other matters are submitted to a vote of stockholders. Shares of
common stock do not have cumulative voting, preemptive, redemption
or conversion rights.
At December 31, 1998 and 1999, the Company had reserved 3,385,856
and 3,538,216 shares of Common stock respectively for issuance
relating to unexpired options and warrants.
On October 30, 1997, and as amended on November 24, 1997, the
Company
20
<PAGE>
IMX PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
NOTE 13 - CAPITAL STOCK (CONT'D)
offered to sell, through a private placement, 100 units at a price
of $50,000 per unit (A unit consisted of 14,285 shares of Common
stock at $3.50 per share), with no requirement for a minimum number
of units to be sold. At December 31, 1997 net proceeds of
approximately $160,600 had been received ($162,500 of proceeds less
expenses of approximately $1,900). The closing date of the offering
was extended to February 28, 1998, at which time the gross proceeds
totaled approximately $1,088,000, less offering costs of
approximately $141,000.
On March 20, 1998, the Company completed the supply agreement
transaction with IGI (Note 8), for the issuance of 271,714 shares of
common stock valued at $3.50 per share to IGI.
In August, 1999 the Company entered into an agreement with IGI,
whereby the Company agreed to register certain shares of common
stock of the Company held by IGI for resale, and IGI agreed to
return certain other shares of the Company's common stock it holds
according to a schedule, commencing upon the sale of certain IGI
products by the Company. No assurances can be given that any such
products will be commercially acceptable.
1998 Stock Purchase Agreement
As a condition of the Joint Venture Agreement (Note 1) in June,
1998, Medicis purchased 400,000 shares of common stock at the
estimated fair value of $2.50 per share.
Rescission Offer
The State of Maryland requested that the Company offer to repurchase
up to 69,998 of the Company's common stock from residents of
Maryland that purchased common stock in the 1997 Private Placement.
The Company commenced a rescission offer to repurchase these shares
for $3.50 per share ending on February 26, 1999. Two stockholders
with a total of 19,999 shares accepted the offer by the expiration
date and were paid approximately $70,000. At December 31, 1998,
$70,000 is reflected as redeemable common stock in the accompanying
consolidated balance sheet. During 1999 these shares were
transferred to treasury stock.
21
<PAGE>
IMX PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
NOTE 13 - CAPITAL STOCK (CONT'D)
Preferred Stock
On February 28, 1997, the Company offered to sell, through a private
placement, 200 units at a price of $25,000 per unit without any
requirement that a specified number of units be sold. Each unit
consisted of 1,000 shares of Series A Convertible Preferred Stock,
$.001 par value, with a price of $25 per share. The preferred stock
accrued cumulative annual dividends of 8% per annum ($2 per share)
payable quarterly. Initial dividends accrued from July 10, 1997, the
date of issuance, and are payable in cash or additional shares of
preferred stock, at the option of the Company. In the event of
liquidation, each holder of preferred stock is entitled to a
liquidating distribution of $25 per share, after payment of
liabilities. Each share of the preferred stock is convertible at the
option of the holder into ten shares of common stock (at a price of
$2.50 per share) and ten warrants to purchase common stock. Each
warrant is exercisable until July 10, 2002 and entitles the holder
to purchase one share of common stock at a price of $6.50 per share.
Holders of each share of preferred stock are entitled to ten votes
and both the common and preferred classes of stock will vote as a
single class. As of July 10, 1997 the Company sold 76,750 shares of
preferred stock and received gross proceeds of $1,918,750, less
costs of approximately $217,000. On March 31, 1999, each of the
outstanding shares of this series was converted into ten shares of
common stock and ten warrants to purchase common stock.
At December 31, 1998, and March 31, 1999, the Company accrued
dividends payable on the preferred stock of approximately $169,000,
and $43,400 for the years ended December 31, 1998 and 1999,
respectively. The Company elected to pay the dividends by issuing
additional shares of preferred stock.
NOTE 14 - STOCK OPTIONS
On January 21, 1996, the Company adopted a stock option plan with
2,000,000
22
<PAGE>
IMX PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
NOTE 14 - STOCK OPTIONS (CONT'D)
shares of Common stock reserved for the grant of options to key
employees, non-employees, officers and directors of the Company. On
September 9, 1998, the Company adopted a stock option plan with
1,200,000 shares of common stock reserved for grant of options to
key employees, non-employees, officers and directors of the Company.
Options under these plans are exercisable over a period of ten years
with various vesting terms. All shares granted are subject to
significant restrictions as to disposition by the optionee.
A summary of the Company's stock option activity is as follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------------
1998 1998 1999 1999
-------------------------------------------------------------------------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Options outstanding,
beginning of period 1,350,000 $ 2.72 1,586,975 $ 2.71
Granted 246,975 2.73 234,500 1.73
Exercised -- -- (5,000) 1.75
Forfeited/canceled (10,000) 4.06 (94,500) 4.31
-------------------------------------------------------------------------------------------
Outstanding at end of
period 1,586,975 $ 2.71 1,721,975 $ 2.49
-------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------
Exercisable at end of
period 1,235,725 $ 2.49 1,560,100 $ 2.55
-------------------------------------------------------------------------------------------
Weighted average fair
market value of
options granted
period $ 0.87 $ 0.85
-------------------------------------------------------------------------------------------
</TABLE>
23
<PAGE>
IMX PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
NOTE 14 - STOCK OPTIONS (CONT'D)
A summary of the Company's fixed stock options outstanding is as
follows:
<TABLE>
<CAPTION>
Weighted
Average
Remaining Weighted Weighted
Range of Options Contractual Average Options Average
Exercise Price Outstanding Life in Years Exercise Price Exercisable Exercise Price
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
December 31, 1998
------------------------------------------------------------------------------------------------------------------------------
$1.00 - 3.00 1,006,000 7.34 1.60 834,750 $ 1.56
3.87 - 4.00 270,000 8.17 4.00 270,000 4.00
4.78 - 6.50 310,975 7.64 5.18 130,975 5.32
------------------------------------------------------------------------------------------------------------------------------
$1.00 - 6.50 1,586,975 7.54 $ 2.71 1,235,725 $ 2.49
------------------------------------------------------------------------------------------------------------------------------
December 31, 1999
------------------------------------------------------------------------------------------------------------------------------
$0.75 - 0.99 20,000 9.75 $ 0.75 20,000 $ 0.75
$1.00 - 3.00 1,175,500 7.24 1.64 1,021,750 1.62
3.87 - 4.00 270,000 7.99 4.00 270,000 4.00
4.78 - 6.50 256,475 7.56 5.03 248,350 4.97
------------------------------------------------------------------------------------------------------------------------------
$0.75 - 6.50 1,721,975 7.43 2.49 1,560,100 2.55
------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SFAS No. 123, "Accounting for Stock-Based Compensation", requires
the Company to provide pro forma information regarding net income
(loss) and income (loss) per share as if compensation cost for the
Company's employee stock option plans had been determined in
accordance with the fair value based method prescribed in SFAS No.
123. The Company estimates the fair value of each option at the
grant date by using the Black-Scholes option pricing model with the
following weighted-average assumptions used for grants in 1998 and
1999, expected volatility ranging from 45% to 46%; risk-free
interest rates ranging from 4.35% to 6% and expected lives ranging
from 2 to 10 years.
24
<PAGE>
IMX PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
NOTE 14 - STOCK OPTIONS (CONT'D)
Under the accounting provisions of SFAS 123, the Company's net
income (loss) and income (loss) per share would have changed to the
pro forma amounts indicated below:
For the year ended
December 31,
-------------------------
1999 1998
----------- -----------
Net income (loss) applicable to
common stockholders
As reported $ 534,532 $(2,185,893)
Pro forma $ 264,499 (2,555,000)
Income (loss) per share - basic
As reported $ 0.11 $ (0.45)
Pro forma $ 0.05 $ (0.52)
Income (loss) per share - diluted
As reported $ 0.10 $ (0.45)
Pro forma $ 0.05 $ (0.52)
NOTE 15 - STOCK WARRANTS
In connection with a 1996 private placement offering of common
stock, the Company issued 580,000 warrants, each redeemable for one
share of common stock, at any time during a period of three years,
commencing on July 9, 1996 for $5.00 per share. The warrants may be
redeemed by the Company with 30 days prior notice at a price of ten
cents per warrant at any time during the warrant exercise period,
under certain conditions (as defined). During July 1999, the Company
extended the exercise period one year to July 9, 2000.
In addition, 58,000 warrants, each to purchase one share of common
stock for $3.00 per share, and exercisable for the three year period
ending July 9, 1999, were issued to placement agents in connection
with the 1996 Private Placement. During July 1997, in connection
with a financial advisory agreement with the placement agents, the
exercise price of the 58,000 warrants was reduced to $2.50 per
share, and the exercise period was extended to February 9, 2001. The
Company recorded approximately $71,000 as deferred consulting
expense for the estimated fair value of warrants which is being
amortized over the two year term of the agreement.
On March 31, 1999, in connection with the Company's 1997 Private
Placement of convertible preferred stock (Note 13), 88,160 (76,750
original
25
<PAGE>
IMX PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
NOTE 15 - STOCK WARRANTS (CONT'D)
shares, plus 11,410 shares issued in lieu of cash as preferred stock
dividends) shares outstanding at March 31, 1999 were converted into
ten shares of common stock and warrants to purchase ten shares of
common stock at any time during the period ending July 2002 for
$6.50 per share. As of December 31, 1999 no warrants to purchase
common stock have been exercised.
In addition to warrants issued to investors in the February 1997
Private Placement, warrants to purchase 7,586.25 shares of
Convertible Preferred Stock were issued to placement and selling
agents with an exercise price of $30 per share, and are exercisable
for the five year period ending July 2002. Each share of preferred
stock is convertible into 10 shares of common stock at $3.50 per
share and 10 warrants, each warrant to purchase one share of common
stock at $6.50 per share. Prior to the March 31, 1999 conversion, no
warrants to purchase preferred stock had been exercised.
During July, 1997, in connection with an agreement with a financial
advisor, the Company issued warrants to purchase 50,000 shares of
common stock at $4.75 per share, exercisable for the period ending
July 2002. The Company recorded approximately $67,000 as deferred
consulting expense for the estimated fair value of the warrants,
which is being amortized over the two year term of the agreement.
In connection with notes payable issued during 1997 (Note 12), as of
December 31, 1998, warrants to purchase 85,120 shares of common
stock have been issued. Also, in connection with February, 1998
closing of the October 1997 Private Placement, warrants to purchase
20,180 shares of common stock were issued to placement and selling
agents. Each of the warrants mentioned above has an exercise price
of $3.50 per share, and expires five years from the date of
issuance. As of December 31, 1998 and 1999, no warrants have been
exercised.
The aggregate number of common shares reserved for issuance upon the
exercise of warrants is 1,816,241 as of December 31, 1999. The
expiration date and exercise prices of the outstanding warrants are
as follows:
Outstanding Expiration Exercise
Warrants Date Price
----------- ---------- ---------
580,000 2000 $ 5.00
58,000 2001 2.50
1,007,463 2002 3.00-6.50
170,778 2003 3.50
26
<PAGE>
IMX PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
NOTE 16 - NET INCOME (LOSS) PER COMMON SHARE
The following table sets forth the computation of basic and diluted
net income (loss) per common share:
<TABLE>
<CAPTION>
Year ended Year ended
December 31, 1999 December 31, 1998
----------------- -----------------
<S> <C> <C>
Numerator:
Numerator for basic and diluted
Earnings per share-income (loss) available
to common stockholders $ 534,532 $ (2,185,893)
----------------- -----------------
Denominator:
Denominator for basic earnings per
share-weighted-average shares 4,998,508 4,879,622
Effect of dilutive securities:
Common stock options 330,748 0
----------------- -----------------
Denominator for diluted earnings per
share-adjusted weighted average
shares and assumed conversions 5,329,256 4,879,622
----------------- -----------------
Basic net income (loss) per common share $ 0.11 $ (0.45)
----------------- -----------------
Diluted net income (loss) per common share $ 0.10 $ (0.45)
----------------- -----------------
</TABLE>
Net income (loss) per common share is calculated by dividing the net
income (loss) by the weighted-average shares of common stock and
common stock equivalents outstanding during the period. Excluded
from the computation of net loss per common share - diluted at
December 31, 1998 and 1999, were convertible preferred stock of
864,240 and 0, outstanding options of 1,586,975 and 1,679,475, and
warrants to purchase 1,798,881 and 1,816,241 shares of common stock
respectively, at exercise prices ranging from $1.00 to $6.50, and
from $2.50 to $6.50, because to do so would be anti-dilutive.
27
<PAGE>
IMX PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
NOTE 17 - RELATED PARTY TRANSACTIONS
The Company purchased inventories from Meyer-Zall of approximately
$569,000 for the year ended December 31, 1998.
During July 1998, the Company loaned $120,000 to Meyer-Zall. The
loan was secured by all of Meyer-Zall's accounts receivable in sales
of products to the LLC and 900,000 shares of the Company's common
stock. In addition, the Company reserved the right, pursuant to the
terms of the loan agreement, at any time within six months of
execution of the loan agreement, to convert all of the principal
amount of the loan into 2% of Meyer-Zall's outstanding voting
securities. Initially, interest at a rate of 18% per annum was due
on the principal amount of the loan, and the principal was due in
four equal monthly installments of $30,000 to be paid commencing
February 1, 1999. However, after November 11, 1998, interest no
longer accrued, and repayment of the principal amount was postponed
indefinitely. In September 1999, Meyer-Zall returned to the Company
76,000 shares of the Company's common stock which Meyer-Zall held,
in return for cancellation of the outstanding debt of $125,400
($1.65 per share), inclusive of accrued interest.
See Notes 9 and 11 regarding transactions during 1998 and 1999 with
Medicis and the LLC.
At December 31, 1997, the Company advanced approximately $17,800 to
companies affiliated to the President. The advances were repaid
during 1999.
During 1997 the Company issued notes payable and warrants of
approximately $175,000 to officers and directors. The notes and
warrants were issued under the same terms as those to unrelated
parties. One note payable in the amount of $ 100,000 to a director
was repaid during December, 1997. The remaining $75,000 of notes
were repaid during 1998.
During 1999, the Company made advances to a company affiliated to
the President. The balance due the Company at December 31, 1999
totaled $31,153. These advances together with interest at the rate
of ten (10%) percent is due and payable prior to December 31, 2000.
28
<PAGE>
IMX PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
NOTE 18 - COMMITMENTS AND CONTINGENCIES
The Company leases its facilities and certain equipment under
non-cancelable operating leases. The Company has a sublease
agreement for certain facilities and equipment. The future minimum
rental payments required under these operating leases that have
initial or remaining non-cancelable lease terms in excess of one
year, and the future minimum rental receipts required under
non-cancelable sub-leases of December 31, 1999 are approximately as
follows:
Future
Minimum
Rental
Year Payments
------ ----------
2000 $ 128,000
2001 54,000
2002 36,000
2003 19,000
Total rent expense for all non-cancelable operating leases having a
term of more than one year was approximately $61,000 and $91,000 for
the years ended December 31, 1998 and 1999 respectively.
On July 1, 1998, the Company entered into an employment agreement
for a period of three years with William Forster, the Company's
Chairman of the Board, President and Chief Executive Officer. Mr.
Forster is entitled to receive an annual salary of $225,000 and a
bonus based on a percentage of the Company's sales (as defined).
Effective July 1, and August 1, 1998, the Company entered into
employment agreements with two officers for annual salaries totaling
approximately $205,000, plus discretionary bonuses, and bonuses upon
the sale of the Company's interest in the LLC (as defined). The term
of each agreement is three years. In connection with the Sale
Agreement, bonuses of approximately $258,000 are included as an
expense of sale of the investment in unconsolidated subsidiary in
the accompanying consolidated statement of operations for the year
ended December 31, 1999.
29
<PAGE>
IMX PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
NOTE 18 - COMMITMENTS AND CONTINGENCIES (CONT'D)
The Company has entered into a series of product development
agreements with a consultant that provide for compensation to the
consultant in the form of cash, options to purchase shares of the
Company's common stock which vest as products are developed,
royalties based upon net sales of products, a royalty based upon the
sale of the rights to the products developed, and an interest in any
patents granted on products developed by the consultant to the
Company.
In November 1999, Bioglan Pharma PLC and Bioglan Pharma, Inc.
(collectively, "Bioglan") commenced an arbitration action against
the Company, Medicis and the LLC, in which Bioglan claims damages
for breach of various contractual obligations arising out of the
sale of the LLC and the Exorex product line to Bioglan.
Specifically, Bioglan claims that Medicis, the LLC and the Company
breached an Asset Purchase Agreement by transferring inventories to
Bioglan that had a remaining shelf life less than 12 months and was
otherwise unmarketable. The Asset Purchase Agreement specified that
Bioglan was to take title to all inventories having a shelf life
greater than 12 months, and the Company was to take title to
inventories having a shelf life of 12 months or less. The products
were warehoused together. Management believes that Medicis, under an
interim management agreement with Bioglan, filled Bioglan orders
with the Company's inventories. In addition, the Company has filed a
counterclaim in the arbitration against Bioglan for damages relating
to the conversion of this property.
In the second claim, Bioglan seeks unspecified damages from the
Company, Medicis and the LLC because it claims that the inventories
that it received had not been properly stored and therefore was
unmarketable. Management believes that this claim does not have any
merit. since it was never advised by the manufacturer, Meyer-Zall,
of any requirement for cold storage for the product. The Company
intends to vigorously defend this matter. However, management cannot
assess the likelihood of an unfavorable outcome, or the range of
potential loss, if any, which might result from this claim.
NOTE 19 - SALES TO ONE CUSTOMER
During 1998 the Company had net sales to a retail drug chain
representing approximately 10% of net sales for the year. During
1999 the Company had net sales to two customers representing
approximately 25% and 16% of net sales.
30
<PAGE>
IMX PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
NOTE 20 - CAPITAL LEASE PAYABLE
The Company is a lessee under a capital lease of equipment from an
unrelated third party. The lease agreement calls for 36 equal
monthly payments of $241 with a final fixed purchase price of $1 at
the end of the lease. The asset and liability under this capital
lease is valued at a fair market value of approximately $8,000. The
asset is being depreciated over its estimated useful life of 5
years.
Total capital lease payable $7,792
Less: Current portion 2,896
------
Total capital lease
payable - non current $4,896
======
31
<PAGE>
IMX PHARMACEUTICALS, INC.
PROFORMA BALANCE SHEETS
31-Dec-99
<TABLE>
<CAPTION>
DRI-KLEEN, INC. NOT PURCHASED NET IMX TOTAL
PURCHASED PHARMACEUTICALS
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
CASH AND
CASH EQUIVALENTS $ 128,219 $ 128,219 $ 2,497,791 $ 2,626,010
SECURITIES AVAILABLE
FOR SALE $ 30,463 $ 30,463
ACCOUNTS RECEIVABLE,
NET OF ALLOWANCE $ 17,165 $ 17,165 $ 110,525 $ 127,690
RECEIVABLE FROM
RELATED PARTY $ 31,153 $ 31,153
INVENTORIES $ 1,159,151 $ 1,159,151 $ 557,593 $ 1,716,744
PREPAID EXPENSES $ 83,084 $ 83,084 $ 46,731 $ 129,815
REFUNDABLE INCOME TAX
DEFERRED TAX ASSETS $ 40,000 $ 40,000 $ 40,000
PROPERTY HELD FOR RESALE
LOAN RECEIVABLE
OTHER ASSETS $ 50,000 $ 50,000
----------- -----------------------------------------
TOTAL CURRENT ASSETS $ 1,427,619 $ 1,427,619 $ 3,324,256 $ 4,751,875
NOTES RECEIVABLE,LESS
CURRENT PORTION $ 150,228 $ 150,228 $ 150,228
PROPERTY AND EQUIPMENT $ 3,319,048 $ 2,174,806 $ 1,144,242 $ 105,913 $ 1,250,155
OTHER ASSETS $ 67,646 $ 67,646
-------------------------- -----------------------------------------
TOTAL ASSETS $ 4,896,895 $ 2,174,806 $ 2,722,089 $ 3,497,815 $ 6,219,904
========================== =========================================
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
CURRENT PORTION OF LONG-
TERM DEBT $ 3,178,728 $ 1,134,578 $ 2,044,150 $ 2,896 $ 2,047,046
ACCOUNTS PAYABLE $ 2,139,072 $ 2,139,072 $ 436,398 $ 2,575,470
TAXES PAYABLE $ 60,179 $ 60,179 $ 60,179
ACCRUED LIABILITIES $ 859,522 $ 859,522 $ 49,700 $ 909,222
SHORT-TERM BORROWINGS
PAYABLES DUE TO RELATED
PARTIES $ 234,500 $ 234,500 $ 234,500
DEFERRED REVENUE $ 128,951 $ 128,951 $ 128,951
SUPPLY AGREEMENT PAYABLE
-------------------------- -----------------------------------------
TOTAL CURRENT LIABILITIES $ 6,600,952 $ 1,134,578 $ 5,466,374 $ 488,994 $ 5,955,368
-------------------------- -----------------------------------------
REDEEMABLE COMMON STOCK
LONG-TERM LIABILITIES:
LONG-TERM DEBT
LESS CURRENT PORTION $ 4,896 $ 4,896
DEFERRED TAX $ 40,000 $ 40,000 $ 40,000
SUPPLY AGREEMENT PAYABLE $ --
-------------------------- -----------------------------------------
TOTAL LIABILITIES $ 6,640,952 $ 1,134,578 $ 5,506,374 $ 493,890 $ 6,000,264
-------------------------- -----------------------------------------
STOCKHOLDERS' EQUITY
PREFERRED STOCK
COMMON STOCK $ 10,440 $ 10,440 $ 9,635 $ 20,075
ADDITIONAL PAID-IN CAPITAL $ 1,327,424 $ 1,327,424 $ 7,943,050 $ 9,270,474
RETAINED EARNINGS
(DEFICIT) $(3,087,841) $ 1,040,228 $(4,128,069) $(4,348,955) $(8,477,024)
ACCUM. OTHER COMP. INCOME $ 5,920 $ 5,920 $ (21,751) $ (15,831)
TREASURY STOCK $ (578,054) $ (578,054)
-------------------------- -----------------------------------------
TOTAL STOCKHOLDERS' EQUITY $(1,744,057) $ 1,040,228 $(2,784,285) $ 3,003,925 $ 219,640
-------------------------- -----------------------------------------
$ 4,896,895 $ 2,174,806 $ 2,722,089 $ 3,497,815 $ 6,219,904
========================== =========================================
</TABLE>
<PAGE>
IMX PHARMACEUTICALS, INC.
PROFORMA PROFIT & LOSS
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
ETI INTERNATIONAL NET IMX TOTAL
INC. NOT PURCHASED PURCHASED PHARMACEUTICALS
<S> <C> <C> <C> <C> <C>
SALES AT SUGGESTED RETAIL $ 29,876,465
LESS DISTRIBUTOR ALLOWANCES $ 10,904,779
------------
NET SALES $ 18,971,686 $ 284,671 $ 18,687,015 $ 203,334 $ 18,890,349
COST OF SALES $ 5,429,147 $ 99,179 $ 5,329,968 $ 80,466 $ 5,410,434
----------------------------------------------------------------------------------
GROSS PROFIT $ 13,542,539 $ 185,492 $ 13,357,047 $ 122,868 $ 13,479,915
----------------------------------------------------------------------------------
OPERATING EXPENSES:
Distributor commissions $ 5,882,885 $ 5,882,885 $ 5,882,885
Selling, general and administrative $ 8,717,155 $ 374,497 $ 8,342,658 $ 2,823,746 $ 11,166,404
Advertising $ 181,709 $ 181,709
Depreciation and amortization $ 67,956 $ 67,956
Related party expenses $ 92,450 $ 92,450 $ 92,450
----------------------------------------------------------------------------------
Total Operating Expenses $ 14,692,490 $ 374,497 $ 14,317,993 $ 3,073,411 $ 17,391,404
----------------------------------------------------------------------------------
LOSS FROM OPERATIONS $ (1,149,951) $ (189,005) $ (960,946) $ (2,950,543) $ (3,911,489)
OTHER INCOME (EXPENSES):
Equity in earnings (loss) of
unconsolidated subsidiary $ (12,887) $ (12,887)
Gain on sale of
unconsolidated subsidiary $ 3,357,807 $ 3,357,807
Other income $ 1,712 $ 1,712 $ 183,555 $ 185,267
Other expense $ (120,110) $ (120,110) $ (120,110)
Related party interest expense $ (50,044) $ (50,044) $ (50,044)
Interest expense $ (350,060) $ (350,060) $ (350,060)
----------------------------------------------------------------------------------
Income (loss) before taxes $ (1,668,453) $ (189,005) $ (1,479,448) $ 577,932 $ (901,516)
Income tax expense $ 25,000 $ 25,000 $ 25,000
Dividends on preferred stock $ (43,400) $ (43,400)
----------------------------------------------------------------------------------
Net income (loss) $ (1,693,453) $ (189,005) $ (1,504,448) $ 534,532 $ (969,916)
==================================================================================
Earnings (loss) per share $ (0.16) $ 0.11
</TABLE>
<PAGE>
IMX PHARMACEUTICALS, INC.
PROFORMA BALANCE SHEETS
30-Jun-00
<TABLE>
<CAPTION>
AUDITORS
ETI INTERNATIONAL, INC. NOT PURCHASED J/E'S NET
PURCHASED
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
CASH AND
CASH EQUIVALENTS $ 171,067 $ 171,067
NOTES RECEIVABLE $ 134,361 $ 134,361
SECURITIES AVAILABLE
FOR SALE
ACCOUNTS RECEIVABLE,
NET OF ALLOWANCE $ 115,127 $(21,600) $ 93,527
OTHER RECEIVABLES
RECEIVABLE FROM
RELATED PARTY
INVENTORIES $ 663,091 $ 663,091
PREPAID EXPENSES $ 39,979 $ 39,979
DEFERRED INCOME TAXES $ 5,442 $ 40,000 $ 45,442
-------------- ----------------------------
TOTAL CURRENT ASSETS $1,129,067 $ 18,400 $1,147,467
LAND
BUILDING-NET OF DEPRECIATION
PROPERTY AND EQUIPMENT $3,245,026 $3,245,026
OTHER ASSETS:
INVESTMENT IN SELECT BENEFITS
DEPOSITS AND OTHER
GOODWILL
VALUE OF DISTRIBUTION NETWORK
--------------------------------- ----------------------------
TOTAL ASSETS $4,374,093 $ -- $ 18,400 $4,392,493
================================= ============================
<CAPTION>
IMX TOTAL
PHARMACEUTICALS
<S> <C> <C>
ASSETS
CURRENT ASSETS:
CASH AND
CASH EQUIVALENTS $ (131,380) $ 39,687
NOTES RECEIVABLE $ 134,361
SECURITIES AVAILABLE
FOR SALE $ 28,269 $ 28,269
ACCOUNTS RECEIVABLE,
NET OF ALLOWANCE $ 63,641 $ 157,168
OTHER RECEIVABLES $ 16,440 $ 16,440
RECEIVABLE FROM
RELATED PARTY $ 30,125 $ 30,125
INVENTORIES $1,964,008 $ 2,627,099
PREPAID EXPENSES $ 47,237 $ 87,216
DEFERRED INCOME TAXES $ 45,442
$ --
-------------------------------
TOTAL CURRENT ASSETS $2,018,340 $ 3,165,807
LAND $ 150,000 $ 150,000
BUILDING-NET OF DEPRECIATION $ 836,000 $ 836,000
PROPERTY AND EQUIPMENT $ 789,971 $ 4,034,997
OTHER ASSETS:
INVESTMENT IN SELECT BENEFITS $ 384,303 $ 384,303
DEPOSITS AND OTHER $ 77,646 $ 77,646
GOODWILL $1,259,637 $ 1,259,637
VALUE OF DISTRIBUTION NETWORK $2,000,000 $ 2,000,000
-------------------------------
TOTAL ASSETS $7,515,897 $11,908,390
===============================
</TABLE>
<PAGE>
IMX PHARMACEUTICALS, INC.
LIABILITIES AND SHAREHOLDERS' EQUITY
30-Jun-00
<TABLE>
<CAPTION>
AUDITORS
ETI INTERNATIONAL, INC. NOT PURCHASED J/E'S NET
LIABILITIES AND STOCKHOLDERS' EQUITY PURCHASED
<S> <C> <C> <C> <C>
CURRENT LIABILITIES:
CURRENT PORTION OF LONG-
TERM DEBT $ 687,029 $ 687,029
NOTES PAYABLE-CURRENT $ 600,000 $ 600,000
EQUITY BRIDGE LOAN $ 1,648,358 $ 1,648,358
NOTE PAYABLE-ENVION
NOTE PAYABLE-AMERIPLAN
NOTE PAYABLE-COMMUNITY FIRST
NOTE PAYABLE-VITAQUEST
ACCOUNTS PAYABLE $ 1,801,419 $ 1,801,419
ACCRUED LIABILITIES $ 516,582 $ 169,624 $ 686,206
DUE TO ETI
INCOME TAXES PAYABLE $ 50,397 $ 50,397
DUE TO SHAREHOLDERS $ 2,970 $ 2,970
----------------- -----------------------------------
TOTAL CURRENT LIABILITIES $ 5,306,755 $ 169,624 $ 5,476,379
----------------- -----------------------------------
LONG-TERM LIABILITIES:
LONG-TERM DEBT $ 1,120,528 $ 1,120,528
NOTE PAYABLE-ENVION
NOTE PAYABLE-AMERIPLAN
NOTE PAYABLE-COMMUNITY FIRST
NOTE PAYABLE-VITAQUEST
NOTE PAYABLE-DRI-KLEEN, INC.
DEFERRED TAX $ 40,000 $ 40,000
----------------- -----------------------------------
TOTAL LIABILITIES $ 6,427,283 $ 40,000 $ 6,636,907
----------------- -----------------------------------
STOCKHOLDERS' EQUITY:
COMMON STOCK $ 13,292 $ 27 $ 13,319
ADDITIONAL PAID-IN CAPITAL $ 2,240,127 $ 601,973 $ 2,842,100
RETAINED EARNINGS (DEFICIT) $(4,343,106) $(799,144) $(5,142,250)
ACCUM. OTHER COMP. INCOME
FOREIGN CURRENCY ADJ. $ 36,497 $ 5,920 $ 42,417
TREASURY STOCK
----------------- -----------------------------------
TOTAL STOCKHOLDERS' EQUITY $(2,053,190) $(191,224) $(2,244,414)
----------------- -----------------------------------
$ 4,374,093 $ 18,400 $ 4,392,493
================= ===================================
<CAPTION>
IMX TOTAL
PHARMACEUTICALS
<S> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES: $ 2,896 $ 689,925
CURRENT PORTION OF LONG- $ 600,000
TERM DEBT $ 1,648,358
NOTES PAYABLE-CURRENT $ 375,000 $ 375,000
EQUITY BRIDGE LOAN $ 60,000 $ 60,000
NOTE PAYABLE-ENVION $ 400,000 $ 400,000
NOTE PAYABLE-AMERIPLAN $ 72,000 $ 72,000
NOTE PAYABLE-COMMUNITY FIRST $ 467,214 $ 2,268,633
NOTE PAYABLE-VITAQUEST $ 787,442 $ 1,473,648
ACCOUNTS PAYABLE
ACCRUED LIABILITIES $ 50,397
DUE TO ETI $ 2,970
INCOME TAXES PAYABLE ----------------------------------
DUE TO SHAREHOLDERS $ 2,164,552 $ 7,640,931
----------------------------------
TOTAL CURRENT LIABILITIES
$ 4,896 $ 1,125,424
LONG-TERM LIABILITIES: $ 375,000 $ 375,000
LONG-TERM DEBT $ 128,504 $ 128,504
NOTE PAYABLE-ENVION $ 307,637 $ 307,637
NOTE PAYABLE-AMERIPLAN $ 188,000 $ 188,000
NOTE PAYABLE-COMMUNITY FIRST $ 600,000 $ 600,000
NOTE PAYABLE-VITAQUEST $ 40,000
NOTE PAYABLE-DRI-KLEEN, INC. ----------------------------------
DEFERRED TAX $ 3,768,589 $ 10,405,496
----------------------------------
TOTAL LIABILITIES
$ 12,335 $ 25,654
STOCKHOLDERS' EQUITY: $ 9,965,350 $ 12,807,450
COMMON STOCK $(5,639,302) $(10,781,552)
ADDITIONAL PAID-IN CAPITAL $ (13,021) $ (13,021)
RETAINED EARNINGS (DEFICIT) $ 42,417
ACCUM. OTHER COMP. INCOME $ (578,054) $ (578,054)
FOREIGN CURRENCY ADJ. ----------------------------------
TREASURY STOCK $ 3,747,308 $ 1,502,894
----------------------------------
TOTAL STOCKHOLDERS' EQUITY $ 7,515,897 $ 11,908,390
==================================
</TABLE>
<PAGE>
IMX PHARMACEUTICALS, INC.
PROFORMA PROFIT & LOSS
FOR THE SIX MONTHS ENDED JUNE 30, 2000
<TABLE>
<CAPTION>
AUDITORS NET
ETI INTERNATIONAL, INC. NOT PURCHASED J/E'S PURCHASED
<S> <C> <C> <C> <C>
SALES AT SUGGESTED RETAIL $ 6,686,196 $ 6,686,196
LESS DISTRIBUTOR ALLOWANCES $ 1,904,605 $ 1,904,605
------------ ----------------
NET SALES $ 4,781,591 $ 4,781,591
------------ ----------------
COST OF SALES $ 1,531,016 $ 1,531,016
------------ ----------------
GROSS PROFIT $ 3,250,575 $ 3,250,575
------------ ----------------
OPERATING EXPENSES:
Distributor commissions $ 1,604,828 $ 1,604,828
Selling, general and administrative $ 2,720,306 $ 780,055 $ 3,500,361
Advertising
Depreciation and amortization $ --
--------------------------------------------------------------------------
Total Operating Expenses $ 4,325,134 $ -- $ 780,055 $ 5,105,189
--------------------------------------------------------------------------
LOSS FROM OPERATIONS $(1,074,559) $(178,055) $(1,854,614)
OTHER INCOME (EXPENSES):
Other income $ 2,270 $ 2,270
Interest expense $ (185,696) $ (13,169) $ (198,865)
Inventory recovery gain
Gain (loss) on dispostion of assets $ (3,200) $ (3,200)
--------------------------------------------------------------------------
Income (loss) before taxes $(1,261,185) $(191,224) $(2,054,409)
--------------------------------------------------------------------------
Net income (loss) $(1,261,185) $ -- $(191,224) $(2,054,409)
==========================================================================
Earnings (loss) per share
<CAPTION>
IMX TOTAL
PHARMACEUTICALS
<S> <C> <C>
SALES AT SUGGESTED RETAIL $ 1,525,311 $ 8,211,507
LESS DISTRIBUTOR ALLOWANCES $ 1,904,605
-------------------------------------
NET SALES $ 1,525,311 $ 6,306,902
-------------------------------------
COST OF SALES $ 520,972 $ 2,051,988
-------------------------------------
GROSS PROFIT $ 1,004,339 $ 4,254,914
-------------------------------------
OPERATING EXPENSES:
Distributor commissions $ 1,604,828
Selling, general and administrative $ 2,360,280 $ 5,860,641
Advertising $ 48,132 $ 48,132
Depreciation and amortization $ 115,883 $ 115,883
-------------------------------------
Total Operating Expenses $ 2,524,295 $ 7,629,484
-------------------------------------
LOSS FROM OPERATIONS $(1,519,956) $(3,374,570)
OTHER INCOME (EXPENSES):
Other income $ 49,447 $ 51,717
Interest expense $ (198,865)
Inventory recovery gain $ 180,162 $ 180,162
Gain (loss) on dispostion of assets $ (3,200)
-------------------------------------
Net income (loss) $(1,290,347) $(3,344,756)
=====================================
Earnings (loss) per share $ (0.15) $ (0.30)
</TABLE>
<PAGE>
IMX PHARMACEUTICALS, INC.
PRO FORMA BALANCE SHEETS
30-Jun-00
<TABLE>
<CAPTION>
PRIOR TO ACQUISITION TOTAL
ACQUISITION ENTRIES
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
CASH AND
CASH EQUIVALENTS $ 122,500 $ (253,880) $ (131,380)
SECURITIES AVAILABLE
FOR SALE $ 28,269 $ 28,269
ACCOUNTS RECEIVABLE
NET OF ALLOWANCE $ 63,641 $ 63,641
OTHER RECEIVABLES $ 424,251 $ (407,811) $ 16,440
RECEIVABLE FROM
RELATED PARTY $ 30,125 $ 30,125
INVENTORIES $ 1,364,008 $ 600,000 $ 1,964,008
PREPAID EXPENSES $ 47,237 $ 47,237
REFUNDABLE DEPOSIT $ 1,250,000 $(1,250,000) $ --
OTHER ASSETS $ 120,000 $ (120,000) $ --
-----------
TOTAL CURRENT ASSETS $ 3,450,031 $(1,431,691) $ 2,018,340
LAND $ 150,000 $ 150,000
BUILDING-NET OF DEPRECIATION $ 836,000 $ 836,000
PROPERTY AND EQUIPMENT-NET $ 159,971 $ 630,000 $ 789,971
OTHER ASSETS:
INVESTMENT $ 384,303 $ 384,303
DEPOSITS AND OTHER $ 77,646 $ 77,646
$ --
OTHER ASSETS:
GOODWILL $ 1,259,637 $ 1,259,637
VALUE OF DISTRIBUTION NETWORK $ 2,000,000 $ 2,000,000
TOTAL ASSETS $ 4,071,951 $ 3,443,946 $ 7,515,897
</TABLE>
<PAGE>
IMX PHARMACEUTICALS, INC.
PROFORMA BALANCE SHEETS
30-Jun-00
<TABLE>
<CAPTION>
PRIOR TO ACQUISITION TOTAL
ACQUISITION ENTRIES
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
CURRENT PORTION OF LONG-
TERM DEBT $ 2,896 $ 2,896
NOTE PAYABLE-ENVION $ 375,000 $ 375,000
NOTE PAYABLE-AMERIPLAN $ 60,000 $ 60,000
NOTE PAYABLE-COMMUNITY FIRST $ 400,000 $ 400,000
NOTE PAYABLE-VITAQUEST $ 72,000 $ 72,000
ACCOUNTS PAYABLE $ 457,094 $ 10,120 $ 467,214
ACCRUED LIABILITIES $ 379,442 $ 408,000 $ 787,442
DUE TO ETI
-------------------------- -----------
TOTAL CURRENT LIABILITIES $ 1,274,432 $ 890,120 $ 2,164,552
-------------------------- -----------
LONG-TERM LIABILITIES:
LONG-TERM DEBT
LESS CURRENT PORTION $ 4,896 $ 4,896
NOTE PAYABLE-ENVION $ 375,000 $ 375,000
NOTE PAYABLE-AMERIPLAN $ 128,504 $ 128,504
NOTE PAYABLE-COMMUNITY FIRST $ 307,637 $ 307,637
NOTE PAYABLE-VITAQUEST $ 188,000 $ 188,000
NOTE PAYABLE-DRI-KLEEN, INC $ 600,000 $ 600,000
-------------------------- -----------
TOTAL LIABILITIES $ 1,782,832 $ 1,985,757 $ 3,768,589
-------------------------- -----------
STOCKHOLDERS' EQUITY:
COMMON STOCK $ 9,735 $ 2,600 $ 12,335
ADDITIONAL PAID-IN CAPITAL $ 8,017,950 $ 1,947,400 $ 9,965,350
RETAINED EARNINGS (DEFICIT) $(5,147,491) $ (491,811) $(5,639,302)
ACCUM. OTHER COMP. INCOME (LOSS) $ (13,021) $ (13,021)
TREASURY STOCK $ (578,054) $ (578,054)
-------------------------- -----------
TOTAL STOCKHOLDERS' EQUITY $ 2,289,119 $ 1,458,189 $ 3,747,308
-------------------------- -----------
$ 4,071,951 $ 3,443,946 $ 7,515,897
========================== ===========
</TABLE>
<PAGE>
IMX PHARMACEUTICALS, INC.
PROFORMA PROFIT & LOSS
FOR THE SIX MONTHS ENDED JUNE 30, 2000
PRIOR TO ACQUISITION TOTAL
ACQUISITION ENTRIES
NET SALES $ 1,933,122 $ (407,811) $ 1,525,311
COST OF SALES $ 520,972 $ 520,972
GROSS PROFIT $ 1,412,150 $ (407,811) $ 1,004,339
OPERATING EXPENSES:
Selling, general and administrative $ 2,360,280 $ 2,360,280
Advertising $ 48,132 $ 48,132
Depreciation and Amortization $ 31,883 $ 84,000 $ 115,883
-------------------------- -----------
Total Operating Expenses $ 2,440,295 $ 84,000 $ 2,524,295
-------------------------- -----------
LOSS FROM OPERATIONS $(1,028,145) $ (491,811) $(1,519,956)
OTHER INCOME (EXPENSES):
Inventory recovery gain (loss) $ 180,162 $ 180,162
Other $ 49,447 $ 49,447
-------------------------- -----------
$ 229,609 $ 229,609
-------------------------- -----------
Income (loss) before taxes $ (798,536) $ (491,811) $(1,290,347)
-------------------------- -----------
Net income (loss) $ (798,536) $ (491,811) $(1,290,347)
========================== ===========
Earnings (loss) per share $ (0.14) $ (0.36)
<PAGE>
The pro forma statements reflect the acquisition as if it occurred at the
beginning of the current calendar year as required by SEC.
<PAGE>
ETI
ADJUSTING JOURNAL ENTRIES
1) Bad debt expense 21,600.00
Accounts receivable 21,600.00
To write off bad accounts receivable.
2) Offering expense 156,455.00
Accrued liabilities 156,455.00
To accrue expenses due UK for halted offering.
3) Deferred tax asset 40,000.00
Deferred tax liability 40,000.00
To gross up tax accounts for recording purposes.
4) Salaries expense 602,000.00
Common stock 154.00
Apic 1,050.00
Apic 600,796.00
To record shares given to employees and President
for services performed. Stock valued at
$.50 per share.
5) Interest expense 13,169.00
Accrued interest 13,169.00
To record interest on PLC debt.
6) Common stock 127.00
Apic 127.00
To reclassify common stock and Apic.
7) Retained earnings 5,920.00
Foreign currency adjustment 5,920.00
To record foreign currency adjustment.
<PAGE>
IMX
ADJUSTING JOURNAL ENTRIES
1) Inventory 750,000.00
Note payable-Envion 750,000.00
To record inventory and note.
2) Investment in Select Benefits 189,303.50
Note payable-Ameriplan 189,303.50
To record investment and note.
3) Investment in Select Benefits 75,000.00
Common stock 100.00
Paid in capital 74,900.00
To record 100,000 sh. at $.75.
4) Investment in ETI 35,000.00
Commission 20,000.00
Professional fees 15,000.00
To properly record investment.
5) Investment in ETI 85,000.00
Due to broker 85,000.00
To record brokerage fees.
6) Investment in ETI 650,000.00
Due to broker 120,000.00
Due to/from ETI 266,000.00
Sales tax payable 10,120.00
Cash 253,880.00
To record investment in ETI.
7) Investment in ETI 707,636.72
Note payable- Community First 707,636.72
To record note to bank.
8) Investment in ETI 260,000.00
Note payable-Vitaquest 260,000.00
To record note payable.
9) Investment in ETI 1,250,000.00
Deposit 1,250,000.00
To record investment in ETI.
<PAGE>
10) Investment in ETI 75,000.00
Common stock 100.00
Paid in capital 74,900.00
To record 100,000 sh. to broker at $.75.
11) Investment in ETI 1,875,000.00
Common stock 2,500.00
Paid in capital 1,872,500.00
To record 2,500,000 sh. to ETI at $.75.
12) Inventory 600,000.00
Note payable-Dri-Kleen, Inc. 600,000.00
To record inventory and note.
13) Land 150,000.00
Building 850,000.00
Machinery & equipment-MN 400,000.00
Machinery & equipment-LV
and Canada 300,000.00
Value of distribution network 2,000,000.00
Goodwill 1,259,636.72
Investment in ETI 4,959,636.72
To record assets purchased.
14) Investment in ETI 22,000.00
Due to Portman-Harmony 22,000.00
To record liability.
15) Depreciation 84,000.00
Accumulated depreciation 84,000.00
To record depreciation on assets.
16) Sales 407,811.00
Other receivables 407,811.00
To properly allocate sales.
