As filed with the Securities and Exchange Commission on October 6, 1999
File No. 000-27315
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Amendment No. 1 to
FORM 10-SB
General Form For Registration of Securities
of Small Business Issuers Under Section 12(b) or 12(g) of
The Securities Exchange Act of 1934
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CLIXHEALTH.COM, INC.
(Exact Name of Registrant as Specified in its Charter)
Nevada 23-2679963
(State or other jurisdiction (I.R.S. Employer Identification No.)
of organization)
999 Old Eagle School Road
Suite 108
Wayne, Pennsylvania 19087
(Address of principal executive offices and zip code)
(610) 293-7650
(Issuer's telephone number)
Securities to be registered pursuant to Section 12(b) of the Act: None
Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $.001 OTC Electronic Bulletin Board
(Title of each Class (name of each Exchange onto
be so registered) which each class is to be
registered)
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PART I
Item 1. Description of Business.
General
CLIXhealth.com, Inc., a Nevada corporation, ("CLIX" or the "Company") is a
holding Company with two wholly owned subsidiaries, Cardiovascular Laboratories,
Inc. of PA, a Pennsylvania corporation ("CLI"), and CLIX Information Systems,
Inc., a Pennsylvania corporation, doing business under the name VitalBody
("VitalBody"). In April 1999, the Company changed its name from Cardiovascular
Laboratories, Inc. to CLIXhealth.com, Inc. in order to reflect the new focus of
the Company in the e-commerce marketplace for preventive health care products.
All of the Company's 1997 and 1998 revenues were provided by CLI.
CLI specializes in the provision of non-invasive cardiovascular imaging and
the turnkey management of fixed site vascular and echocardiographic ultrasound
laboratories. CLI provides services with the highest clinical quality possible,
and strives to maintain those clinical standards. CLI has historically focused
on fixed- site imaging within community hospitals, although it currently
operates in, and intends to expand into additional independent fixed-site
imaging locations as well as into new community hospitals. CLI does not
presently perform mobile imaging services. It presently operates eleven
diagnostic imaging sites in ten fixed-site locations in Pennsylvania, New Jersey
and New York. At its locations, CLI performs a scope of services that can
include one or more of the following: hiring, training and clinical management
of ultrasound technologists; management and administration of laboratory
operations; and selection, leasing and deployment of ultrasound equipment.
VitalBody was incorporated in May 1998, and is a development stage
enterprise engaged in Internet-based sales of preventive health care products.
VitalBody has yet to generate more than nominal revenues from its activities. It
was formed to diversify the Company's source of revenue and profits. VitalBody's
principal objective is to create branded lines of "wellness" products sold
through interactive e-commerce and direct marketing. Brand awareness is to be
created through sponsorship provided by association with authoritative experts
who have an existing media presence, by aligning with existing and prospective
Internet retailers and by creating joint ventures and other programs to support
the overall marketing and sales effort.
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Historical Background
The Company was originally incorporated in Utah on August 8, 1983 as
Interstate Gold and Gas, Inc. The Company was in a development stage from
inception until 1992, engaged in the business of developing mining properties.
During 1992, the Company lost its remaining mining claims, and became inactive.
The Company remained inactive until March 31, 1998, when it acquired CLI. CLI
was incorporated in August 1991, and has been engaged in the provision of
non-invasive ultrasound diagnostic services since inception. Following the
acquisition of CLI, the name of the Company was changed to Cardiovascular
Laboratories, Inc., and the former management and Board of CLI assumed effective
control of the Company. In April 1999, the Company changed its name from
Cardiovascular Laboratories, Inc. to CLIXhealth.com, Inc.
Cardiovascular Laboratories, Inc. of PA
Market
Cardiovascular disease is responsible for nearly half of all deaths in the
United States. The aging process itself predisposes human beings to
cardiovascular disease. Approximately 65% of CLI's patients are covered by
Medicare, with the balance having commercial insurance or being included in a
managed care contract. According to the National Center for Health Statistics,
there are over 67 million people with some form of cardiac or vascular disease
in the United States. Cardiovascular disease can often be effectively treated if
detected early. Diagnostic ultrasound is the most cost effective, least painful
and least invasive method available for diagnosing vascular disease. It produces
no side effects. CLI believes its imaging revenues are not subject to the ebb
and flow of the economic cycle. CLI estimates that its core ultrasound imaging
marketplace generated approximately $2.5 billion in 1997 revenues, and expects
demand to increase at 8% per year as the population ages.
Diagnostic Ultrasound Imaging
Diagnostic ultrasound imaging helps doctors see inside the human body by
bouncing sound waves off of anatomy and blood flow. It works without the use of
dyes, injections, or catheters. These sound waves are received by the ultrasound
machine, interpreted by sophisticated imaging software and displayed on a video
monitor. The test results are captured on a videotape machine built into the
unit. After the technical component of the
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diagnostic test has been performed by a technologist, an interpreting physician
views the videotape and establishes test findings. Although most competing
diagnostic imaging techniques provide the physician a frozen-in-time snapshot
image, ultrasound imaging enables the diagnostician to study real-time blood
flow non-invasively. A dynamic tool, it allows the physician to make more
accurate diagnoses at earlier stages of the disease. This increases the
possibility of successful treatment.
Diagnostic ultrasound testing is broken into two components: technical and
professional. The technical component is the technologist's use of the
ultrasound equipment within strict clinical protocols, recording the visual and
auditory information onto videotape. The professional component consists of an
experienced physician reading the videotape, making a diagnosis of the patient's
condition, and dictating the diagnosis into a formal interpretation. The
critical difference in the two components is that the technologist does not
practice medicine, but performs a service for the physician who does practice
medicine.
Low Exposure to Malpractice
Because CLI does not practice medicine, or perform any invasive procedures,
CLI believes it carries a relatively low exposure to malpractice liability. Even
so, CLI insures its and its employee's exposure by coverage from the nation's
leading medical malpractice insurer. Since inception, neither CLI nor any of its
employees have been sued for professional negligence.
Testing Process
The testing process begins when a patient's physician orders a test and
refers the patient to one of CLI's labs. A specially trained and registered
technologist performs the test according to rigorously disciplined protocols
using sophisticated equipment, costing approximately $150,000 to $200,000 per
unit. Tests are then interpreted by an interpreting physician and a course of
treatment can be prescribed.
Ultrasound is a Well Established Diagnostic Imaging Technology
Ultrasound is a well accepted diagnostic tool for assessing the progression
of cardiovascular disease. As a dynamic medium using simple sound waves,
ultrasound technology is uniquely suited for the diagnoses of cardiovascular
disease. It offers important advantages in cost effectiveness over other
diagnostic methods.
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Despite advances in other imaging areas, ultrasound is likely to continue to be
an important diagnostic modality due to advances in hardware, software, and the
prospective use of ultrasound in conjunction with non-toxic contrast agents. The
Company believes that these advances, plus the inherent non-invasive nature of
ultrasound make its obsolescence as a diagnostic modality unlikely in the near
future.
Studies Performed
An example of a study performed by CLI is a cerebrovascular test. This
procedure examines blood flow to the brain to detect conditions which could lead
to stroke. The diagnosing physician uses the data produced by the technologist
to find plaque or stenosis in the carotid artery. This is a powerful and cost
effective first step to preventing stroke. As the United States population ages
(and age predisposes people to vascular disease) cerebrovascular tests will be
performed more frequently.
The most common cardiovascular imaging studies performed by CLI
include:
o Cerebrovascular evaluation
o Transcranial doppler procedures
o Lower arterial studies
o Lower venous studies
o Echocardiography
o Abdominal aorta studies
o Dialysis access site assessment
o Visceral vascular studies
o Graft surveillance
o Venous mapping
Emphasis On Clinical Quality
CLI is dedicated to the delivery of a superior level of quality in all of
its diagnostic testing. CLI concentrates on high-end ultrasound diagnostics,
providing tests that are usually available only through university hospitals in
major metropolitan centers. CLI insists on employing strict protocols and
self-policing auditing methods, which require technologists to spend more time
evaluating patients than current industry standards dictate. When the
comprehensive nature of these testing protocols are coupled with highly trained
technologists, diagnostic accuracy is measurably improved. And, when
sophisticated tests are executed with painstaking care, they become more cost
effective in
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diagnosing disease at an early stage, thereby reducing the cost of treatment.
Clinical Training Program
Cardiovascular ultrasound is a diagnostic imaging modality that is highly
dependent on the training and experience of the technologist performing the
procedure. Unlike many other types of diagnostic imaging, the technologist must
act as a clinician, and not merely the operator of a machine. This places a
premium on the technologist's skills. Historically, CLI has recruited its
technologists through contacts it has in the technologist community as well as
through the use of professional medical recruiting services. However, CLI is
embarking on a program to align itself with a world-class cardiovascular
ultrasound educational institution to create a more assured source for training
technologists, and remove one constraint to growing the business.
Additionally, as CLI expands its operations into new areas, with new
interpreting physicians, it will become more difficult to maintain
interpretations at the consistently high level of clinical quality it has come
to expect in the past. Accordingly, discussions have begun with prominent
educational institutions in diagnostic ultrasound to form an alliance to help
train new interpreting physicians and provide an ongoing program of clinical
quality assurance.
Business Strategy
Historically, CLI has concentrated on operation of imaging labs within
community hospitals. The Company currently has six such hospital contracts to
operate imaging facilities on-site. These contracts range from a full turn-key
management of an entire lab to the provision of specialized personnel to perform
diagnostic imaging within the hospital's own lab. These services benefit a
hospital by expanding the scope of services, increasing outpatient referrals,
creating positive cash flow and increasing surgery and ancillary procedures. CLI
gives the hospital access to a higher quality pool of technologists than might
otherwise be possible because it can hire, train and compensate its employees
without the institutional personnel constraints present in many hospitals.
Hospitals have a built-in source of referrals and thus a predictably high level
of volume. CLI invoices hospitals directly for imaging services. Hospital
receivables are generally easier to manage than receivables owed directly to CLI
from Medicare carriers and other insurers.
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In addition to hospital-based locations, CLI operates several
independently-owned site labs. Independently sited locations perform services
independently from a hospital, and invoice insurance carriers for studies
through an entity known as an Independent Diagnostic Testing Facility ("IDTF").
The Company is responsible for establishing clinical protocols and maintaining
quality control, leasing and maintaining equipment, hiring, training and
employing technologists, scheduling patients and general lab administration, and
billing and collection activity.
CLI believes that there will be opportunities to expand the hospital-based
business during the next few years. The Health care Financing and Health
Administration (HCFA), the financing arm of the federal Medicare program, has
announced that it intends to establish a new prospective payment system for
hospital outpatient services. This new payment system is similar to the
Diagnosis Related Group payment methodology introduced in 1984 for hospital
inpatient services. The new outpatient payment system will classify payments
into fixed Ambulatory Patient Groups (APG's). This development represents a
significant change in the way outpatient health care services are delivered, and
it is currently unclear whether CLI will be able to profit from such changes. It
is possible that existing hospital contracts will require re-structure and
modification in such a way that the profitability of the business is adversely
impacted.
Changing Regulations in Ultrasound Imaging
Beginning in 1999, Medicare carriers and intermediaries in many states,
(including Pennsylvania and New Jersey) are scheduled to stop reimbursing
vascular ultrasound imaging service providers who either provide services in a
lab that has not met the stringent accreditation standards set forth by the
Intersocietal Commission for the Accreditation of Vascular Laboratories
("ICAVL"), or provide services that are not performed or directly supervised by
a Registered Vascular Technologist ("RVT").
CLI estimates that fewer than 40% of vascular laboratories currently comply
with ICAVL accreditation standards. The reason for this non-compliance centers
on the level of training of the average technologist and the level of diligence
and sophistication of the average laboratory. CLI has always operated as if
ICAVL standards were in effect. All of CLI's technologists are Registered
Vascular Technologist (or registry eligible). All of its facilities currently
meet, or in the case of new labs, are on track to meet the new ICAVL standards.
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There may be additional changes in regulations that have a material
negative impact on the imaging business as currently performed by CLI. These
changes may have to do with the acceptable means of structuring relationships
with hospitals and physicians, or there may be adverse changes in the
reimbursement regulations that govern CLI's operations.
Technology
CLI uses laboratory imaging and other equipment supplied by a number of
different equipment manufacturers. The equipment is typically acquired on an
operating lease basis, and CLI believes it will be able to upgrade its fleet of
diagnostic machines on an as-needed basis to accommodate new technology as it
becomes available.
Notwithstanding the belief that the Company will be able to upgrade its
equipment on an as-needed basis, CLI does enter into multi-year lease agreements
that may not be able to be modified should new technology emerge.
Competition
CLI faces substantial competition in its imaging business from numerous
competitors. The most significant competitor is usually the community hospital
within CLI's immediate market areas. The facilities operated by these hospitals
vary widely in terms of the quality and training of their personnel, equipment
and clinical protocols. Notwithstanding these potential negative attributes,
however, it is often difficult to compete with established patterns of medicine
evident between a hospital's lab and the physicians who practice in that
hospital and refer patients into the lab.
Other competition comes from physicians and group practices of physicians
who have set up ultrasound diagnostic imaging capabilities within their own
practices. While these imaging locations may have some of the same drawbacks
presented by the hospital labs, the physicians who operate their own labs will
not refer any of their patients to a CLI lab.
CLI competes with hospital-based and physician practice-based labs by
offering a superior clinical service, and by being a non-aligned third party
provider of services that is not necessarily affiliated with either a hospital
or a specific physician.
Additionally, CLI faced significant competition during 1998 from a company
formed by its former Chief Executive Officer who
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resigned in November 1997. This competition was successful in causing the loss
of four contracts maintained by the Company. Together, these contracts accounted
for annualized revenue of approximately $2,000,000. While the Company was able
to expand existing operations to mitigate the overall impact of the loss of
these hospital contracts, it lost a significant number of trained employees to
this competitor.
Seasonality
CLI's results of operations may vary significantly from quarter to quarter,
for reasons particular to each quarter. For instance, hospital admissions and
doctor visits (and, therefore, CLI's imaging revenues) are typically lower
during holiday periods, and at other times when physicians traditionally take
their own vacations.
Suppliers
Although CLI has historically acquired most of its imaging and related
equipment from a small number of suppliers, CLI does not believe it is dependent
upon any one supplier or group of suppliers. While CLI has a preference for the
equipment manufactured by certain manufacturers, there are a number of
manufacturers of imaging equipment adequate for CLI's purposes, and an even
greater number of companies from whom such equipment can be leased. CLI believes
that alternate sources for its equipment and supply needs are readily available
at comparable costs, and that its relationships with its equipment suppliers are
satisfactory.
Patents Or Trademarks
Although CLI relies upon sophisticated equipment, instrumentation and
technology, CLI does not own, license or otherwise rely upon any patents or
trademarks for the operation of its business. Other than corporate names, CLI
does not own or utilize any trade names in its business.
Governmental Regulation
Many aspects of the health care industry in the United States are presently
subject to extensive federal and state governmental regulation. Certain of these
laws and regulations are applicable to CLI's business. CLI believes that its
operations are in material compliance with all applicable laws.
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Federal Kickback Law
Federal law prohibits the offer, solicitation, payment or receipt of any
remuneration (direct or indirect, overt or covert, in cash or in kind) which is
intended to induce, or is in return for, the referral of patients for, or the
ordering of, items or services reimbursable by Medicare or Medicaid. The law
also prohibits remuneration intended to induce the purchasing of, or arranging
for, or recommending the purchase or order of any item, good, facility or
service for which payment may be in whole or in part under those programs. Under
this statute, known as the "kickback law," an offense may be punished by
criminal prosecution or by excluding any of the parties to the transaction or
arrangement from participation in Medicare and Medicaid. The law is very broad
and has been interpreted to apply to otherwise legitimate investment interests
if one purpose of the offer of an opportunity to invest is to induce referrals
from the investors. Regulations implemented under the kickback law provide
certain "safe harbors" giving protection for certain categories of
relationships. The breadth of the kickback law is such that virtually any
financial relationship between a practitioner and a health care provider, such
as an independent physiological laboratory (IPL) or an independent diagnostic
testing facility (IDTF), involving the offering of Medicare and Medicaid
services may trigger the application of the law. A portion of CLI's business
arrangements involves the management and staffing of in-house diagnostic
laboratories at hospitals. CLI does not bill Medicare or Medicaid for the
technical services provided at the hospitals' laboratories and is in compliance
with the Federal kickback law.
Federal Stark Laws
Federal law also prohibits physicians from ordering or prescribing certain
designated health care services or items if the service or item is reimbursable
by Medicare or Medicaid and is provided by an entity with which the physician
has a financial relationship (including investment interests and compensation
arrangements). Payment for a service provided in violation of these laws, known
as the "Stark Laws," may be denied, or money paid may be recouped. The services
specified by the Stark Laws include ultrasound procedures and other designated
services, which are provided by CLI as the result of referrals from physicians
who purchase the tests from CLI. CLI believes that its relationships with
referring physicians are in compliance with the Stark Laws. A number of states,
including states in which CLI does business, have laws and regulations similar
to the federal kickback laws and
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Stark Laws. CLI believes that it is in compliance with all of such laws,
although, as is the case with federal law, there can be no assurance that
changes in such laws or the interpretation or enforcement of such laws will not
have a material effect on CLI.
IDTFs
CLI must satisfy certain rules set forth by the Health Care Financing
Administration ("HCFA") relating to the payment of services to Medicare or
Medicaid beneficiaries. These rules state that the carriers will pay for
services under the Medicare fee schedule only when performed by a physician, a
group practice of physicians, an approved supplier of portable x-ray services,
or an IDTF. The current effective date for IDTF status is March 15, 1999. CLI
believes that its services provided outside of the hospital environment are
provided according to the rules and specifications of an IDTF.
Potential National Health Care Reform
Both the Clinton Administration and the Congress have periodically asserted
a need to overhaul or reform the nation's health care system. Such legislative
initiatives, if enacted, could impose pressures on the pricing structures
applicable to CLI's services. In particular, there is a possibility that an even
greater portion of health care services will be rendered and administered
through "managed care" systems, which could have the effect of forcing pricing
concessions and reductions on the part of service providers such as CLI.
Moreover, health care reform could also entail a greater analysis of each
patient's need for diagnostic testing, with the aim of reducing the total volume
of testing and the overall cost of medical care. CLI is unable to predict
whether, when or to what extent any new laws or regulations may be enacted, or
existing laws or regulations may be modified, any of which could have a material
adverse effect on CLI's revenues, operating margins and profitability.
Environmental Matters
CLI's existing operations do not entail the handling, storage, use,
transport or disposal of any hazardous substances or hazardous materials within
the meaning of any environmental laws. Should CLI enter into nuclear cardiology
imaging services, it will be required to implement a radioactive waste disposal
program consistent with state and federal regulations. In this event, CLI
intends to contract with a nuclear medicine physicist to develop a full
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compliance program for the proper handling and disposal of any waste generated
in the performance of nuclear cardiology studies.
Year 2000 Compliance
CLI recognizes the need to ensure that its operations will not be adversely
impacted by Year 2000 computer and systems failures. Year 2000 failures due to
processing errors potentially arising from calculations using the Year 2000 date
are a known risk. CLI is addressing this risk to the availability and integrity
of financial systems and the reliability of operational systems. During the
first quarter of 1999, CLI upgraded its internal accounting and administrative
computer hardware and software. CLI believes that its administrative computer
systems are now sufficiently compliant with year 2000 compatibility issues, and
that any incompatibility will be able to be managed at a nominal cost and have
minimal potential to adversely impact the business. To date, the year 2000
compliance issues have generated little or no cost to CLI.
It is possible that third party vendor software may pose unanticipated
incompatibilities that are not presently under consideration, and there may be
unanticipated negative consequences to the operations and administration of
CLI's business. It is not possible to quantify these uncertainties, nor the
potential for disruption of CLI's business. CLI has consulted with its
diagnostic equipment vendors and has been advised that certain items will be
supported at no cost, and that older items will be supported on a fee basis. CLI
believes that all of the equipment it uses in a clinical setting will be able to
be upgraded at nominal cost and without a material impact to the operations of
the business.
Certain of the CLI's customers and vendors may be dependent on year 2000
non-compliant computer or other embedded information systems to conduct business
transactions. Although CLI has undertaken certain steps to determine the nature
or extent of any Year 2000 issues that may be posed by customer or vendor
unpreparedness, CLI cannot be sure that its customers or vendors will not cause
interruptions in CLI's business. In particular, the systems of the hospitals and
physicians with whom CLI does business may not be fully compliant with year 2000
compatibility. Moreover, there can be no assurance that such systems will not
interfere with the ability of the hospitals to pay CLI for its services, either
through direct or indirect problems caused by year 2000 incompatibility.
CLI cannot be certain that the operations of private insurance
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companies, health maintenance organizations, Medicare, and other third party
payers will not adversely effect CLI's business because of year 2000
incompatibilities. It is possible that one or more third-party payer will face
serious disruption to its business as a consequence of unanticipated year 2000
compliance problems. If this happens, CLI may be deprived of cash flows due for
its services, and may not have the financial resources or have access to the
financial resources to support its operations, with potentially serious
ramifications for the survival of the business, depending on how long it took
for the incompatibility problems to be resolved.
VitalBody
The Market
VitalBody is a development stage business formed in May 1998 to sell
products and services using the Internet and by other, more traditional channels
to customers in the health care market. This market is both large and diverse
and includes numerous subsets including, but not limited to, nutritional
supplements, exercise equipment and videos, books, magazines, health clubs and
resort spas. VitalBody has selected nutritional supplements as its initial
target market.
Nutritional supplements consist of vitamins, minerals, herbs and sports
supplements. According to the Nutrition Business Journal, vitamins are the
largest category of nutritional supplements, with 43% of 1997 sales, while herbs
held 33% of 1997 sales. Herbs are the fastest growing segment of the market, and
the industry has been adept at finding and promoting new herbal products
aggressively. According to the Nutrition Business Journal, in 1997, there were
four main distribution channels: retail; mail order; multi-level marketing
(sometimes referred to as direct sales or network sales); and health
practitioners.
During 1998, the Internet emerged as a distribution channel. Although
figures are not available for on-line sales of supplements, a few relatively
well established firms have staked out territory including Vitamin Shoppe,
Mother's Nature, GreenTree and VitaSave. These companies have augmented their
existing mail order and retail store business by going on-line. The largest
domestic retail supplement chain, General Nutrition Centers, has not yet
established a significant presence on-line, perhaps over a potential concern for
cannibalizing their existing retail storefronts.
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According to the Nutrition Business Journal, national surveys estimate that
54% of Americans take some sort of nutritional supplements. An estimated 25
million Americans consume supplements regularly, with approximately 2.5 million
people spending over $50 per month, with the remaining 22.5 million spending
approximately $20-$25 per month. Increasing awareness of the health benefits of
nutritional supplements caused both the number of regular consumers to increase.
Information concerning herbal-based supplements has also pushed up the average
purchase per month, as these herbal preparations are often more expensive than
more conventional vitamins and minerals.
Business Strategy
In 1998, the Company made a strategic decision to enter into the
Internet-based wellness and preventive health care market, initially by means of
selling nutritional supplements and other products and services through its
VitalBody subsidiary in conjunction with joint venture partners. The intention
is to diversify the Company's business and to provide a new source of revenue
and profitability. It is currently in a development stage, and there can be no
assurance that it will develop significant revenues or profits in the future.
In February 1999, VitalBody entered into a sales and marketing agreement
with Global Connections, Inc., an e-commerce sales and technology firm. Pursuant
thereto, Global Connections has agreed to design and maintain a number of
e-commerce web sites with VitalBody joint venture partners; establish and
maintain secure e-commerce capabilities, including the facility for processing
credit cards; manage shipping and warehousing; and provide sales support
services including the maintenance of direct marketing databases and staffing an
800 number for customer service. The agreement provides that Global Connections
will receive a fixed percentage of the gross margins earned from products sold.
The agreement has a five year term.
The initial product line introduced by VitalBody is in the area of
nutritional supplements. In March 1999, VitalBody entered into an agreement with
The National Anti-Aging Institute ("NAAI") located in Los Angeles, California.
NAAI is headed by its Medical Director, Arnold Fox, MD, a cardiologist who, for
the past 20 years, has had an alternative medicine practice. Dr. Fox has
published nine books on alternative medicine, several of them best-sellers. He
also has a weekly radio show broadcast on a FM station in Los Angeles. The
agreement provides that VitalBody and the NAAI
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shall work together to establish a line of nutritional supplements. Among
other provisions, the agreement calls for the use of the radio show to promote
an e-commerce site established for the purpose of selling nutritional supplement
products. VitalBody intends to attempt to expand Dr. Fox's radio presence into
other markets to further promote the e-commerce site. The agreement provides
that NAAI shall receive a fixed percentage of any net revenues generated from
products sold. The agreement provides that the Company is responsible for
marketing, manufacture, and development of all products, including operating and
maintaining an e-commerce site. The agreement has a five year term.
VitalBody intends to add value to its products through innovative
marketing, and custom formulations. The NAAI is the initial partner for the
intended commercialization of a line of 40 to 50 nutritional supplements and 5
to 10 custom formulations. In this fashion, products quickly obtain a level of
credibility that would otherwise be difficult to achieve. VitalBody launched its
first e-commerce site May 1999. The web address for the primary e-commerce site
that VitalBody manages for the NAAI is: http://www.theanti-aginginstitute.com.
Subsequent contracts with joint venture partners other than the NAAI are
anticipated. None of these additional prospective agreements have been
finalized, and it is possible that none of the agreements will ultimately be
consummated.
Few Internet-based businesses are profitable, and there is no assurance
that VitalBody will be able to grow either its revenues or derive profitability
from what revenues are generated. The Company is in the process of testing its
marketing strategies, and has not generated significant sales revenues to date.
It is possible that the development stage business undertaken by VitalBody will
change its focus several times in the future in the search for a successful
sales and marketing approach. There is no assurance that any of these approaches
will actually produce revenues and profits.
Governmental Regulation and Legal Uncertainties
The Federal Trade Commission (FTC) and the Food and Drug Administration
(FDA) have complementary jurisdiction to address the marketing of dietary
supplements broadly governed by the framework of the Dietary Supplement Health
and Education Act of 1994 (DSHEA). Under the terms of a liaison agreement
governing the division of responsibilities between the two agencies, the FTC has
primary
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responsibility for advertising and the FDA has primary responsibility for
labeling. Under a liaison agreement between the two agencies, they work closely
in regulating the industry.
The market for nutritional supplements has grown rapidly since the passage
of the Dietary Supplements and Health Education Act of 1994 (known as DSHEA)
that largely deregulated sale of these products. While nutritional supplements
are still subject to labeling requirements, and may make certain benefit claims
only when there is research to support the claim, the FDA does not require
formal approval prior to sale of these products.
The DSHEA legislation established a new regulatory framework for
supplements, ensuring continued access to safe products that are made to quality
standards. DSHEA essentially deregulated the nutritional supplement business.
This stands in sharp contrast to the regulatory environment that exists in
CLIX's imaging division. DSHEA also allowed for the dissemination of information
about the health benefits of these products. The legislation defined dietary
supplements; established a framework for ensuring safety; provided for use of
claims and nutritional support statements; required ingredient and labeling
requirements; provided for good manufacturing processes; and established new
governmental entities for review and research.
One of the critical distinctions made by DSHEA has to do with product
claims. No claim can be made about the use of supplements to diagnose, prevent,
mitigate or cure specific diseases except under very specific circumstances.
However, the legislation does permit so-called structure-function claims. For
example, one may not claim the calcium prevents osteoporosis. However, one may
claim that calcium builds strong bones.
In the past, the FDA attempted to define supplements as drugs or as food
additives and as a result often removed them from the market. The DSHEA
legislation makes it clear that supplement products may not be regulated as
drugs or food additives in most cases. While the FDA still maintains the
authority to remove products they deem dangerous, they are required to do so
only after careful evaluation and consideration.
Claims made in supplement advertising are addressed primarily under the
Federal Trade Commission Act (FTC Act). Section 5 of the FTC Act broadly
prohibits deceptive and unfair acts or practices in or affecting commerce,
including deceptive advertising. In addition, supplement advertising falls under
Sections 12 and 15 of
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the FTC Act. These two sections prohibit false advertisements of foods, drugs,
devices, services and cosmetics, which are defined as advertisements that are
misleading in a material respect The FTC has developed a legal framework for
assessing advertising claims pursuant to these provisions. This framework, set
out in the FTC's Deception Policy Statement and its Substantiation Policy
Statement, can be distilled into two principles: advertising must be truthful
and not misleading; and advertisers must have substantiation for all objective
claims before the claims are disseminated.
Competition
The markets for VitalBody's nutritional products are intensely competitive.
Many of VitalBody's competitors have much greater name recognition and financial
resources than the Company, which may give them a competitive advantage. There
can be no assurance that the Company's business and results of operations will
not be affected materially by market conditions and competition in the future.
Although the Company intends to distribute certain products it considers
proprietary, neither it nor NAAI have patent protection for any current or
planned products. Because of restrictions under regulatory requirements
concerning claims that can be made with respect to dietary supplements, the
Company may have a difficult time differentiating its products from those of
competitors.
There is no assurance that the joint venture marketing strategy in
conjunction with existing media figures will prove successful. Neither can there
be any assurance that VitalBody will be able to successfully establish other
joint venture arrangements with new joint venture partners. Moreover, the
Internet is an unknown distribution channel, and its future is inherently
unpredictable. Currently there are numerous e-commerce sites selling nutritional
supplements over the Internet. Many of these sites are believed to have limited
traffic. However, a number of these sites have well-developed customer bases,
and offer substantially larger product lines than VitalBody.
Suppliers
VitalBody has identified several manufacturers who will serve as the
initial suppliers for the product to be sold in its joint venture with the NAAI.
These suppliers have been selected for the price, quality and range of their
product offerings. Should any one of these suppliers not be able to satisfy
VitalBody's requirements,
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it is not anticipated to be difficult to find alternate manufacturers to supply
products at competitive prices. However, there can be no assurance that
VitalBody will be able to find alternate suppliers in the event its currently
selected suppliers are unable to provide product at attractive prices, high
quality and favorable delivery terms.
Employees
As of July 31, 1999, CLIX had an aggregate of 22 full-time employees. Of
such employees, one is an employee of CLIX and the remainder are employees of
CLI.
Item 2. Management's Discussion and Analysis Or Plan Of Operation.
Forward Looking Statements
Certain Statements contained in this Form 10-SB, including, without
limitation, statements containing the words "believes," "anticipates,"
"intends," "expects" and words of similar import, constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause the actual results, performance
or achievements of the Company or industry results to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Such factors include, among others, the regions
in which the Company operates; industry capacity; demographic changes; existing
governmental regulations; legislative proposals for health care reform; changes
in Medicare and Medicaid payment levels; liability and other claims asserted
against the Company; competition; the loss of any significant ability to attract
and retain qualified personnel; the availability and terms of capital to fund
acquisitions or the development of new business. Given these uncertainties,
prospective investors are cautioned not to place undue reliance on such
forward-looking statements. The Company disclaims any obligation to update any
such factors or to publicly announce the results of any revision to any of the
forward-looking statements contained herein to reflect future events or
developments.
Overview
CLIXhealth.com, Inc. (formerly Cardiovascular Laboratories,
18
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Inc.) has two subsidiaries, Cardiovascular Laboratories, Inc. of PA("CLI"),
and CLIX Information Services, Inc. (doing business under the name of
VitalBody). All of the revenue generated by CLIX during fiscal years 1997 and
1998 came from CLI. VitalBody did not commence operations until May 1999 and has
not generated any meaningful revenues as of July 31, 1999. CLIX is not an
operating entity, and does not generate operating revenues.
Results Of Operations
Years ended December 31, 1997 and December 31, 1998
Revenues. Revenues were $3,404,460 for the year ended December 31, 1997 and
$3,327,216 million for the year ended December 31, 1998. The slight decrease in
revenues resulted from the loss of revenue from certain hospital contracts. In
this regard, during 1998 and 1999, CLI lost four such contracts to a competitive
organization formed by CLI's former Chief Executive Officer. The lost revenues
amounted to approximately $2,000,000 on an annualized basis. However, the
Company was able to open new locations and recoup approximately one-half of the
lost revenue. Despite an increase in the number of studies performed in
accordance with hospital contracts, fees received from certain hospitals were
lower in 1998 than in 1997.
Salaries, Payroll Taxes and Employee Benefits. Salaries, payroll taxes and
employee benefits were $1,651,326 for the year ended December 31, 1997 and
$1,587,527 for the year ended December 31, 1998. The reduction was due to a
smaller workforce, primarily in administrative personnel.
Equipment Leasing and Laboratory Costs. Equipment leasing and laboratory
costs were $716,260 for the year ended December 31, 1997 and $902,030 for the
year ended December 31, 1998. The increase in machine lease and laboratory costs
was due to an expansion of the CLI hospital-based laboratory business during the
last two months of 1997, which resulted in additional laboratory costs for
ultrasound supplies, parts and service for the ultrasound equipment, and
additional ultrasound machines.
Consulting and Professional Fees. Consulting and professional fees costs
were $534,620 for the year ended December 31, 1997 and $500,876 for the year
ended December 31, 1998. The reduction in fees was due to the elimination of
certain consulting arrangements during 1998.
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Administrative and Other Expenses. Administrative and other expenses were
$354,637 for the year ended December 31, 1997 and $323,337 for the year ended
December 31, 1998. The decrease was due to various measures taken by management
during 1998 to manage the administration of the business more effectively than
during 1997.
Rent and Occupancy Costs. Rent and occupancy costs were $106,138 for the
year ended December 31, 1997 and $135,980 for the year ended December 31, 1998.
The increase was due to moving the corporate headquarters during 1998 while
sub-letting the previous corporate headquarters space at a price that was less
than the entire amount of the lease payment due.
Depreciation. Depreciation expenses were $32,935 for the year ended
December 31, 1997 and $23,028 for the year ended December 31, 1998. The decrease
was due to the sale of depreciable assets.
Interest. Interest expenses were $23,248 for the year ended December 31,
1997 and $35,379 for the year ended December 31, 1998. The increase was due to
an increase in the amount of borrowing undertaken by CLI during 1998.
Non Recurring Expenses. The $240,360 in nonrecurring expenses incurred
during 1998 were due to the former Chief Executive Officer of CLI organizing a
company to compete with CLI after he resigned from the Company in November 1997.
This former executive induced the resignation of multiple technical and
administrative personnel of CLI. In order to perform its obligations under the
terms of certain of CLI's hospital contracts, CLI was required to pay remaining
employees overtime and bonuses plus travel expenses to service the contracts,
hire technical personnel on a temporary basis to service the contracts, recruit
additional technical staff to service the contracts and pay the attendant legal
and personnel-related expenses incurred during this process.
Net Gain (Loss). During 1997, the Company lost $3,700 and during 1998 the
Company lost $312,027. During 1997, the Company lost $14,704 from operations and
during 1998 lost $180,941 from operations.
Three Months Ended March 31, 1998 and March 31, 1999
Revenues. Revenues decreased by $253,282 in the first quarter of 1999
compared to the first quarter of 1998 due to the loss of hospital contracts.
This decrease in revenues also resulted in a decrease in operating expenses in
the effort to restore the Company
20
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to profitability.
Salaries, Payroll Taxes and Benefits. Salaries and payroll decreased by
$188,464 as a result of fewer personnel being employed at the Company by the end
of the first quarter of 1999 compared to 1998. The reduction in personnel was a
consequence of the loss of certain hospital contracts.
Equipment Leasing and Laboratory Costs. Equipment leasing and laboratory
costs decreased by $199,875 in the first quarter of 1999 compared to the first
quarter of 1998 due to the loss of certain hospital contracts.
Other Administrative Expenses. Other administrative expenses increased by
$149,464 in the first quarter of 1999 compared to the first quarter of 1998 due
to the extraordinary expenses related to the loss of certain hospital contracts.
Rent and Occupancy Costs. Rent and occupancy costs increased by $6,153 in
the first quarter of 1999 compared to the first quarter of 1998 due to moving
the corporate headquarters while subletting the previous corporate headquarters
space at a price that was less than the entire amount of the lease payment due.
Interest. Interest expenses increased by $2,278 in the first quarter of
1999 compared to the first quarter of 1998 due to an increase in the amount of
borrowing undertaken by CLI during the first quarter of 1999.
Net Gain (Loss). The Company lost $6,359 during the first quarter of 1999
compared to a gain of $16,481 during the first quarter of 1998. This loss was
due to the winding down of certain operations due to the loss of certain
hospital contracts.
Three Months Ended June 30, 1998 and June 30, 1999
Revenues. Revenues decreased by $216,288 in the second quarter of 1999 as
compared to the second quarter of 1998 due to the loss of hospital contracts.
Salaries, Payroll Taxes and Benefits. Salaries and payroll decreased by
$74,203 as a result of fewer personnel being employed at the in the second
quarter of 1999 as compared to the second quarter of 1998. The reduction in
personnel was a continued consequence of the loss of certain hospital contracts.
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Equipment Leasing and Laboratory Costs. Equipment leasing and laboratory
costs decreased by $36,304 in the second quarter of 1999 as compared to the
second quarter of 1998 due to the loss of certain hospital contracts.
Other Administrative Expenses. Other administrative expenses decreased by
$79,890, in the second quarter of 1999 as compared to the second quarter of 1998
due to the decrease in expenses associated with the loss of certain hospital
contracts.
Interest. Interest expenses increased by $13,964 in the second quarter of
1999 as compared to the second quarter of 1998 due to an increase in the amount
of borrowing undertaken by CLI during the second quarter of 1999.
Net Gain (Loss). The Company earned $14,853 in the second quarter of 1999
as compared to $57 during the second quarter of 1998.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5, "Reporting on the Costs of Start-Up
Activities." Statement of Position 98-5, which is effective for fiscal years
beginning after December 15, 1998, provides guidance on the financial reporting
of start-up costs and organization costs. It requires costs of start up
activities and organization costs to be expensed as incurred. As the Company has
expensed these costs historically, the adoption of this standard is not expected
to have a significant impact on the results of operations, financial position or
cash flows.
Liquidity and Capital Resources.
During the 1998 calendar year, net cash of $274,410 was used by operating
activities, primarily due to the net loss of $312,027. The net cash provided by
financing activities of $244,182 was principally due to the proceeds from
promissory notes and issuance of long term debt. As of December 31, 1998, the
Company had negative working capital of $47,928.
For the six month period ended June 30, 1999, cash of $76,715 was generated
by operating activities, primarily due to the decrease in accounts receivable.
On June 30, 1999, the Company had working capital of $128,371. The increase in
working capital is attributable in part to the extension of the maturity date of
outstanding short-term debt.
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On May 21, 1999, the Company received a Notice of Default from ATL
Financial Services, Inc., one of its equipment leasing companies. This default
was related to the loss of several hospital contracts to a competitive company
formed by the former Chief Executive Officer of CLI. Prior to the default being
declared, CLI claimed that the leasing company had interfered with certain of
the lost hospital contracts and actively assisted CLI's competitor to cause
these contracts to be breached. CLI further claimed that the leasing company had
extended the equipment leases in question based, in part, on the very hospital
contracts that had been interfered with. On July 29, 1999, the matter was
settled by the return of certain leased equipment to the leasing company and the
purchase of certain leased equipment by CLI from the leasing company.
Concurrent with the settlement and release with the equipment leasing
company, CLI entered into a 38 month term loan agreement with DVI Financial
Services ("DVI") in the amount of $440,000 for the purchase of three ultrasound
systems and related peripheral equipment from ATL Financial Services pursuant to
the settlement agreement.
On June 30, 1999, CLI entered into a Loan and Security Agreement with DVI
for a revolving line of credit up to a maximum of $1,000,000 collateralized by
the accounts receivable and related assets of CLI. Under the terms of the
agreement, 80% of the calculated collectable receivables under 120 days old are
eligible to be borrowed. The term of the agreement is two years, with annual
renewal thereafter. The interest rate is the prime rate plus 2.25% per annum,
plus additional expenses related to maintaining the line of credit. Initial
proceeds from this line of credit were used to pay off the outstanding
obligation under the terms of CLI's commercial line of credit with Prime Bank.
As of June 30, 1999, the total amount outstanding under the DVI line of credit
was approximately $254,000. The line of credit is guaranteed by CLIX.
In June 1999, the holders of $125,000 of promissory notes originally due in
March 1999, agreed to extend the maturity date thereof until July 1, 2002. As
part of the extension, the interest rate was increased from 7% to 11% per annum.
The holders of the notes have also subordinated the notes to the debt financing
provided by DVI.
Management believes that the Company's cash and capital resources, together
with cash flow from operations, will be sufficient to finance current and
forecasted operations including
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its capital spending and expansion plans. The Company is, however, actively
seeking additional equity financing. No assurance can be given that such
financing efforts will be successful.
Item 3. Description of Property.
The Company's Wayne executive offices consist of approximately 1,900 square
feet. The lease agreement expires in April 2000. The lease provides for a base
rental of approximately $2,400 per month. During April 1998, the Company moved
from its prior executive offices located in Doylestown, Pennsylvania to its
current Wayne office. The prior location is currently subleased by the Company
for $2,200 per month which is less than the base monthly rental due of $2,500.
The Doylestown lease expires in April 2000.
Item 4. Security Ownership Of Certain Beneficial Owners And Management
The following table sets forth information concerning the beneficial
ownership of CLIX's Common Stock as of July 31, 1999, by each person known to
CLIX to be the beneficial owner of five percent or more of its outstanding
Common Stock, by each Director and executive officer of CLIX, and all Directors
and executive officers as a group.
Amount
Name and Address of Beneficially Beneficially
Beneficial Owner Owned Owned Percentage(1)
- ---------------- ------------ -------------------
Timothy W. Cunningham
999 Old Eagle School Rd.
Wayne, PA 19087 2,546,837(2) 28.1%
Nathan Drage, Trustee
4505 South Union Park Center
Suite 600
Salt Lake City, UT 84047 1,500,000 16.5%
John R. Drexel, IV
300 Park Avenue
Suite 1700
NY, NY 10022 700,000(3) 7.7%
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Francis X. Dillon
54 Canal Run West
Washington Crossing, PA 18977 540,238 6.0%
Paul A. Toomey
999 Old Eagle School Rd.
Wayne, PA 19087 428,760 4.7%
James Wiley
999 Old Eagle School Rd.
Wayne, PA 19087 100,000(4) 1.1%
All Directors and Officers
As a Group (4 persons) 3,775,597 41.6%
- ----------------
(1) Based upon the 7,799,793 shares of Common Stock issued and outstanding as
of July 31, 1999, as well as the following shares, all as required by Rule
13d-3 promulgated under the Securities Exchange Act of 1934: (i) shares
owned by a spouse, minor child or by relatives sharing the same home; (ii)
shares owned by entities owned or controlled by the named person; and (iii)
shares the named person has the right to acquire within 60 days by the
exercise of any right or option. Unless otherwise noted, shares are owned
of record and beneficially by the same person. In accordance with the
foregoing, for purposes of this table, CLIX had 9,069,793 shares issued and
outstanding as of July 31, 1999, consisting of the shares of Common Stock
actually issued and outstanding as well as the 1,270,000 shares of Common
Stock issuable upon exercise of vested options (or options which become
vested within 60-days of July 31, 1999).
(2) Includes 2,546,837 shares owned by Mr. Cunningham's wife, Ann B.
Cunningham.
(3) Includes 700,000 shares issuable upon exercise of stock options.
(4) Includes 100,000 shares issuable upon exercise of stock options.
ITEM 5. Directors, Executive Officers, Promoters and Control Persons.
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The executive officers and Directors of the Company are as follows:
Name Age Position
---- --- --------
Timothy W. Cunningham 46 Chairman of the Board of
(1)(2) Directors
Paul A. Toomey 43 Director, President and Chief
Executive Officer
John R. Drexel, IV 54 Director
(1)(2)
James A. Wiley 50 Vice President and Chief
Financial Officer
- -------------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
Each Director holds office until the next annual meeting of shareholders
and until his successor has been elected and qualified. The following is a
summary of the business experience of each executive officer and Director.
Timothy W. Cunningham has been Chairman of CLIX since the acquisition of
CLI in April 1998. Prior to the acquisition event, he was Chairman of CLI. Mr.
Cunningham has served as President of Springhouse Associates, Inc., a consulting
firm, from 1989 to the present, and as President of Benson White & Company, an
asset management firm, from 1984 through April 1998. From 1984 through 1988, Mr.
Cunningham was Vice President of Keystone Venture Capital, a venture capital
organization headquartered in Philadelphia. From 1976 through 1983 he worked in
various management capacities with Bucyrus-Erie Co., a manufacturer of mining
machinery. Mr. Cunningham is the co-author of two books on investing. He earned
a Master of International Management from the American Graduate School of
International Management (with honors), and a B.A. from Williams College (magna
cum laude, with highest honors).
Paul A Toomey has served as a Director since the acquisition of CLI in
April 1998. Prior to the acquisition, he was President of CLI commencing in
November 1997. From 1993 to November 1997, he was employed in a variety of
managerial capacities at CLI, including Vice President of Sales and Marketing.
He was Director of
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Physician Services at the Valley Medical Center in San Diego from 1991 to 1993.
He served as the Director of Marketing for Diagnostic Imaging Services and
American Medical Imaging Corp from 1987 to 1991. Mr. Toomey earned a Master of
Health Science; Finance & Management from Johns Hopkins University and a BA from
the University of Pennsylvania. He is a member of the American College of Health
Care Executives and the Society of Vascular Technology.
John R. Drexel, IV, became a member of the Board of Directors in November
1998. Mr. Drexel is President of Drexel Associates, Inc., a diversified
financial services firm. From 1995 to 1999, he was Managing Director of Trainer
Wortham & Company, Inc., a registered investment advisor. From 1988 to 1995 he
was President of Concord International Investments. From 1975 to 1988, he was
employed by Kidder, Peabody & Company in various management capacities,
including Managing Director of Kidder Peabody & Company and President and Chief
Executive of Kidder Peabody International Investments. He is on the Advisory
Board of The Venture Capital Fund of America, Inc. He serves as a Director of
the Woods Hole Oceanographic Institute and is a Trustee of Drexel University.
James A. Wiley began working for CLI in 1992 in the capacity of Chief
Financial Officer. He left CLI in 1995 and worked for J.M. Patton Associates, an
insurance brokerage. In 1998, he rejoined CLI and CLIX as its Chief Financial
Officer. From 1987 to 1992, he was the Manager of Sales for American Medical
Imaging Corporation. Previously, from 1985 to 1987 he was employed by Council
for Labor and Industry, a Philadelphia-based government sponsored economic
development Company. From 1972 to 1985 he was employed as an auditor for the
U.S. General Accounting Office. He is a Certified Public Accountant and received
his BS in accounting from LaSalle University and his MBA from Temple University.
Directors' Fees
CLIX does not pay directors' fees. Rather, the Compensation Committee of
the Board of Directors is authorized to grant, and has granted non-qualified
stock options to certain members of the Board of Directors.
Item 6. Executive Compensation.
The following table sets forth the amount of all compensation paid or
accrued by the Company during the calendar year ended December 31, 1998, to the
individual acting in the capacity of
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Chief Executive Officer. No other individual who was serving as an executive
officer at the end of the 1998 calendar year received salary and bonus in excess
of $100,000 in such year.
Name and Position Year Salary Other Total Compensation
- ----------------- ---- ------ ----- ------------------
Paul A. Toomey
Chief Executive Officer
and President 1998 $120,00 $0 $120,000
Employment Agreements
The Company does not have employment agreements with any of its executive
officers.
Item 7. Certain Relationships And Related Transactions.
In January 1998, the Company and Springhouse Associates, Inc.
("Springhouse") entered into a Consulting Services Agreement pursuant to which
Springhouse is to provide corporate advisory services to the Company. The
Agreement has a term of five years and is non-cancelable. Under the agreement,
Springhouse receives the amount of $54,500 per year. The agreement does not
obligate Springhouse to spend any specific amount of time providing services to
CLIX. Springhouse is wholly-owned by Timothy W. Cunningham, Chairman of the
Board of CLIX.
Item 8. Description Of Securities.
The Company is authorized to issue up to 50,000,000 shares of Common Stock,
par value $.001 ("Common Stock"). As of July 31, 1999, there were 7,799,793
shares of Common Stock issued and outstanding. As of such date, there were also
issued and outstanding options to acquire 1,660,000 shares of Common Stock at
exercise prices ranging from $.01 to $2.00 per share.
Common Stock
The holder of each share of Common Stock is entitled to one vote on all
matters submitted to a vote of the shareholders of the Company, including the
election of directors. There is no cumulative voting for directors. The holders
of Common Stock are entitled to receive such dividends as the Board of Directors
may from time to time declare out of funds legally available for payment of
dividends. Upon any liquidation, dissolution or winding up of the Company,
holders of shares of Common Stock are entitled
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to receive pro rata all of the assets of the Company available for distribution.
The holders of the Common Stock do not have any preemptive rights to subscribe
for or purchase shares, obligations, or other securities of the Company.
PART II
Item 1. Market for Common Equity and Other Stockholder Matters.
The Common Stock of the Company is quoted on the OTC Electronic Bulletin
Board under the symbol "CLIX." Prior to the acquisition of CLI, trading in the
Company's stock was nominal, as the Company had been inactive since 1992.
Commencing June 1, 1998, the Common Stock began trading more actively. As of the
date hereof, however, there is no established trading market for the Common
Stock.
The following table sets forth, for the periods indicated, the range of
high and low bid prices of the Common Stock as reported on the OTC Electronic
Bulletin Board for each calendar quarter commencing June 1, 1998:
Quarter
Ended 9-30-98 12-31-98 3-31-99 6-30-99
- ----- ------- -------- ------- -------
High $0.94 $0.63 $1.19 $0.44
Low $0.18 $0.12 $0.22 $0.19
Such quotations reflect inter-dealer prices, without mark-up, mark down or
commissions and may not represent actual transactions.
On September 2, 1999, the closing bid price of the Common Stock as reported
on the OTC Electronic Bulletin Board was $.16 per share.
The Company's transfer agent is Standard Registrar And Transfer, 12528
South 1840 East, Draper, Utah 84020.
As of July 31, 1999, CLIX had 429 holders of record of its Common Stock.
CLIX has never paid any dividends on its Common Stock and does not
anticipate paying any cash dividends for the foreseeable future. The current
loan agreement with the Company's secured lender prohibits the payment of
dividends on the Common Stock without the prior written consent of such lender.
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1998 Stock Option Plan
CLIX has established a stock option plan entitled the 1998 CLI Stock Option
Plan (the "Plan"). Under the terms of the Plan, the Company's Board of
Directors, at its sole discretion, may grant either incentive stock options
within the meaning of Section 422 of the Internal Revenue Code or non-qualified
stock options. All persons employed by the Company or retained as independent
contractors are eligible for the award of stock options. The aggregate maximum
number of shares available under the Plan is 1,750,000. As of July 31, 1999,
there were a total of 260,000 options outstanding under the Plan at an exercise
price of $0.10 per share, with 170,000 of such options being fully vested as of
July 31, 1999. All of such options are non-qualified stock options and expire on
December 31, 2009.
The Company has also issued to certain Directors, employees, and
consultants, options to purchase an aggregate of 1,400,000 shares of Common
Stock. Of such options, 725,000 expire in May 2002, 50,000 expire in June 2002,
500,000 expire in July 2002, and 125,000 expire in April 2003. Of such options,
700,000 are exercisable at $.01 per share, and 700,000 are exercisable at $2.00
per share. As of July 31, 1999, an aggregate of 1,100,000 of such options are
vested. All of the foregoing options are non-qualified stock options and not
part of a qualified stock option plan and do not constitute incentive stock
options as such term is defined under Section 422 of the Internal Revenue Code,
as amended, and are not part of an employee stock purchase plan as described in
Section 423 thereunder.
As part of the issuance of 50,000 shares of Common Stock to a financial
advisor in December 1998, the Company granted to such financial advisor certain
registration rights under the Act in connection with such shares.
Item 2. Legal Proceedings.
In May 1998, the Company commenced an action entitled Cardiovascular
Laboratories, Inc. of New Jersey and Cardiovascular Laboratories, Inc. of
Pennsylvania vs. Robert T. Kane, Phoenix Cardiovascular, Inc., Warren Hospital,
and Albert Estrada, M.D.; Superior Court of New Jersey, Warren County (Docket
No. WRN-L-428-98).
This litigation arises out of Warren Hospital's breach of the agreement
between CLI and Warren Hospital pursuant to which CLI
30
<PAGE>
would provide vascular diagnostic services at Warren Hospital. The Complaint
also alleges that Phoenix Cardiovascular, Inc. ("Phoenix") and it founder and
principal, Robert T. Kane ("Kane"), tortiously interfered with and civilly
conspired to induce Warren Hospital to breach the agreement. Kane is the former
Chief Executive Officer and President of CLI. Between the filing of this action
and December 1998, Warren Hospital continued to honor the terms of the
agreement. In December 1998, Warren Hospital notified the Company that it would
no longer use the services of CLI and commenced using the services of Phoenix.
CLI initially filed a request for a preliminary injunction seeking to enjoin any
further interference with the Company's contract. The request was denied. CLI
seeks judgement against the defendants, jointly and severally, for compensatory
damages in excess of $500,000 as well as punitive damages, interest, attorneys'
fees and costs.
The Company is a defendant in an action entitled Devendra K. Amin, M.D. vs.
Warren Hospital, Cardiovascular Laboratories, Inc. of Pennsylvania, and Robert
T. Kane; Superior Court of New Jersey, Warren County (Docket No. WRN-L-172-95).
This litigation was filed in late May 1995 by a cardiologist at Warren
Hospital who sought but was not granted the privilege of interpreting vascular
studies at Warren Hospital's vascular laboratory, which was then managed by the
Company. Plaintiff brought claims against Warren Hospital, CLI, and its then
President, Robert T. Kane, and other persons. Plaintiff's claims against Warren
Hospital are for breach of contract, breach of implied duty of good faith and
fair dealing, and specific performance. Plaintiff's claims against the other
defendants, including CLI, are for intentional interference with prospective
economic advantage, conspiracy, and violation of state and federal antitrust
laws. Plaintiff seeks compensatory and punitive damages, attorney's fee, and
costs, as well as treble damages in the antitrust counts. Each of the defendants
has filed cross claims for contribution and indemnification against the other
unrelated defendants. From the outset of the litigation, CLI provided counsel to
Kane, its former Chief Executive Officer, but in 1998, CLI advised him that it
would no longer do so and would not indemnify him in connection with plaintiff's
claims in this action. Kane has asserted cross claims for contribution and
indemnification against CLI. The case is presently in discovery and it is
anticipated that trial will be scheduled during the Fall of 1999.
Item 3. Changes In And Disagreements With Accountants.
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None.
Item 4. Recent Sale of Unregistered Securities.
In February 1998, the Company issued 30,000 shares of Common Stock in
exchange for the conversion of an existing $30,000 promissory note into equity
and the payment of $5,000 cash. All of such shares of Common Stock constituted
restricted securities as defined in Rule 144 under the Act and were issued
pursuant to the exemption from registration set forth in Section 4(2) of the
Act.
In March 1998, CLIX issued an aggregate of 3,515,835 shares of Common Stock
in exchange for all of the securities of CLI. Such shares were issued as
follows: 2,546,837 to Timothy Cunningham; 540,238 to Francis X. Dillon; and
428,760 to Paul A. Toomey. All of such shares of Common Stock constituted
restricted securities as defined in Rule 144 under the Act and were issued
pursuant to the exemption from registration set forth in Section 4(2) of the
Act.
In March 1998, the Company issued 1,500,000 shares of Common Stock
for $.001 per share into an escrow trust controlled by Timothy Cunningham which
shares were subsequently transferred to a special purpose trust, Nathan Drage,
Trustee. All of such shares of Common Stock constituted restricted securities as
defined in Rule 144 under the Act and were issued pursuant to the exemption from
registration set forth in Section 4(2) of the Act.
In April 1998, the Company sold an aggregate of 2,250,000 shares of Common
Stock to three individuals for an aggregate of $22,500. The shares were sold
pursuant to the exemption from registration set forth in Rule 504 promulgated
under the Act.
During April 1998, the Company issued to certain employees and consultants
options to acquire up to 160,000 of Common Stock. The options are exercisable at
any time through December 2009 at $.10 per share. The options and the Common
Stock issuable thereunder constitute restricted securities as such term is
defined under Rule 144 promulgated under the Act and were issued pursuant to the
exemption from registration provided in Rule 701 promulgated under the Act.
In April 1998, the Company issued to a consultant fully vested options to
acquire up to 125,000 shares of Common Stock. The options are exercisable at
$.10 per share and expire in April 2003. The options and the Common Stock
issuable thereunder constitute restricted securities as such term is defined
under Rule 144 promulgated the Act and were issued pursuant to the exemption
from registration provided in Rule 701 promulgated under the Act.
32
<PAGE>
In May 1998, the Company issued to a consultant options to acquire up to
500,000 share of Common Stock. As of the date hereof, 200,000 options are vested
and 100,000 options become vested in May 2000, and 200,000 options become vested
in May 2001. The options are exercisable at $2.00 per share and expire in May
2002. The options and the Common Stock issuable thereunder constitute restricted
securities as such term is defined under Rule 144 promulgated under the Act and
were issued pursuant to the exemption from registration provided in Rule 701
promulgated under the Act.
In June 1998, the Company issued to certain consultants fully vested
options to purchase an aggregate of up to 75,000 shares of Common Stock. The
options are exercisable at $.01 per share and expire in June 2002. The options
and the Common Stock issuable thereunder constitute restricted securities as
such term is defined under Rule 144 promulgated under the Act and were issued
pursuant to the exemption from registration provided in Rule 701 promulgated
under the Act.
In August 1998, the Company issued to John R. Drexel, IV, a Director, fully
vested options to purchase up to 500,000 shares of Common Stock at $.01 per
share. The options expire in July 2002. In June 1998, the Company granted to Mr.
Drexel options to purchase up to 200,000 shares of Common Stock at $2.00 per
share. The options expire in May 2002. The options and the Common Stock issuable
thereunder constitute restricted securities as such term is defined under Rule
144 promulgated under the Act and were issued pursuant to the exemption from
registration provided in Rule 701 promulgated under the Act.
In May 1998, the holder of options to purchase 250,000 shares exercised
such options at the option price of $.01 per share for an aggregate purchase
price of $2,500. All of such shares of Common Stock constituted restricted
securities as defined in Rule 144 under the Act and were issued pursuant to the
exemption from registration set forth in Section 4(2) of the Act.
In May 1998, the Company issued an aggregate of 134,000 shares of
Common Stock at $.01 per share, or an aggregate of $1,340, to certain management
consultants in exchange for services rendered. The options and the Common Stock
issuable thereunder constitute restricted securities as such term is defined
under Rule 144 promulgated under the Act and were issued pursuant to the
exemption from registration provided in Rule 701 promulgated under the Act.
33
<PAGE>
In August 1998, the Company granted to James J. Wiley, Vice President and
Chief Financial Officer of the Company, options to acquire up to 100,000 shares
of Common Stock. As of the date hereof, 75,000 options are vested and 25,000
options become vested in August 2000. The options are exercisable at $.10 per
share and expire in December 2009. The options and the Common Stock issuable
thereunder constitute restricted securities as such term is defined under Rule
144 promulgated under the Act and were issued pursuant to the exemption from
registration provided in Rule 701 promulgated under the Act.
In December 1998, the Company issued an aggregate of 50,000 shares of
Common Stock to a financial advisor for services to be rendered to the Company.
All of such shares of Common Stock constituted restricted securities as defined
in Rule 144 under the Act and were issued pursuant to the exemption from
registration set forth in Section 4(2) of the Act.
Item 5. Indemnification of Directors and Officers.
The Company's Articles of Incorporation provide that the Board of Directors
may from time to time provide in the By-laws or by resolution such
indemnification of officers and directors as the Board deems appropriate to the
fullest extent permitted by the laws of the State of Nevada. Nevada law, under
which CLIX is incorporated, allows a corporation to indemnify its directors and
officers if such director or officer acted in good faith and in a manner such
director or officer reasonably believed to be in, or not opposed to, the best
interests of the Company and, with respect to any criminal action or proceeding,
had no reasonable cause to believe his conduct was unlawful.
Pursuant to authorization of the Board of Directors in 1998, the Company
entered into separate indemnification agreements with each of Timothy W.
Cunningham, John R. Drexel, IV, and Paul A. Toomey. The agreements provide that
CLIX shall indemnify such persons and hold them harmless from and against, and
shall reimburse him for, any and all demands, claims, losses, damages, costs and
expenses whatsoever, including without limitation, reasonable attorney's fees,
which may be incurred by such person by reason of his faithful discharge of his
fiduciary obligations as an officer of or director of CLIX. The agreement also
provides that such person shall not be personally liable for monetary damages
for any action taken or any failure to act unless the breach or failure to
perform constitutes self-dealing, willful misconduct or recklessness and such
person had breached or failed to perform the
34
<PAGE>
duties of his or her office. The agreement provides that the foregoing shall not
apply to the responsibility or liability of such person pursuant to any criminal
statute, or the liability of such person for the payment of taxes pursuant to
local, state or federal law.
PART F/S FINANCIAL STATEMENTS
Index to Financial Statements
Audited:
Independent Auditors' Report F - 1
Consolidated Balance Sheets as of
December 31, 1997 and December 31, 1998 F - 2
Consolidated Statement of Operations for
the years ended December 31, 1997 and
December 31, 1998 F - 3
Consolidated Statement of Stockholders'
Equity for the years ended December 31,
1997 and December 31, 1998 F - 4
Consolidated Statement of Cash Flows for
the years ended December 31, 1997 and
December 31, 1998 F - 5
Notes to the Consolidated Financial
Statements F - 6
Unaudited:
Consolidated Balance Sheets as of
December 31, 1998 and June 30, 1999 F - 16
Consolidated Income Statements for
the three months ended March 31, 1998
and March 31, 1999 and three months ended
June 30, 1998 and June 30, 1999 F - 17
Consolidated Statement of Stockholders' Equity for
the period December 31, 1998 to June 30, 1999 F - 18
Consolidated Statement of Cash Flows for
the six months ended June 30, 1998 and June 30, 1999 F - 19
Notes to Consolidated Financial Statements
for the period ended June 30, 1999 F - 20
35
<PAGE>
PART III
Index to Exhibits.
Exhibit
Number Description
- -------------------------------------------------------------------------------
3.1 Articles of Incorporation of Interstate Gold and Gas, Inc.,
filed in the State of Nevada on March 31, 1998.
3.1.1 First Amendment to Articles of Incorporation of Interstate
Gold and Gas, Inc., filed on May 29, 1998.
3.1.2 Second Amendment to Articles of Incorporation of CLI dated
April 15, 1999.
3.2 Bylaws of CLI.
4.1 Promissory Note between CLI and Anchor Investment Partnership
Ltd. dated March 30, 1998.
4.1.1 Amendment #1 dated June 28, 1999, to Promissory Note between
CLI and Anchor Investment Partnership Ltd.
4.2 Promissory Note between CLI and James W. Porter, Jr.,
dated March 30, 1998.
4.2.1 Amendment #1 dated June 28, 1999, to Promissory Note
between CLI and James W. Porter, Jr.
4.3 Promissory Note between CLI and F. Stanton Moyer dated
March 30, 1998.
4.3.1 Amendment #1 dated June 10, 1999, to Promissory Note
between CLI and F. Stanton Moyer.
4.4 Loan and Security Agreement between CLI and DVI Business
Credit Corporation dated June 30, 1999.
4.5 Loan and Security Agreement between CLI and DVI Financial
Services Inc. dated July 14, 1999.
10.1 Corporate Indemnification Agreement between CLI and
36
<PAGE>
Timothy W. Cunningham dated May 15, 1998.
10.1.1 Corporate Indemnification Agreement between CLI and Paul A.
Toomey dated May 15, 1998.
10.1.2 Corporate Indemnification Agreement between CLI and John R.
Drexel, IV, dated November 2, 1998.
10.2 John R. Drexel, IV, Common Stock Options dated as of June
1, 1998.
10.2.1 John R. Drexel, IV, Common Stock Options dated as of August 1,
1998.
10.3 James J. Wiley Common Stock Options dated August 5, 1998.
10.4 CLI Stock Option Plan dated April 17, 1998.
10.5 Agreement between CLI and Brennan Dyer & Company, LLC,
dated May 6, 1998.
10.5.1 Amendment dated December 15, 1998, to Agreement between CLI
and Brennan Dyer & Company, LLC.
10.6 Consulting Services Agreement between CLI and Springhouse
Associates, Inc. dated January 4, 1998.
10.7 Settlement and Release Agreement between CLI and ATL
Financial Services, Inc. dated July 29, 1999.
21 The Company is a holding company with two wholly-owned
subsidiaries, Cardiovascular Laboratories, Inc. of PA, a
Pennsylvania corporation, and CLIX Information Systems, Inc.,
a Pennsylvania corporation.
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934, the
registrant caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized.
CLIXHEALTH.COM, INC.
Date: October 6, 1999 By: /s/ Timothy W. Cunningham
--------------------------
Timothy W. Cunningham,
Chairman
37
<PAGE>
[Parente, Randolf, Orlando, Carey & Associates LOGO]
INDEPENDENT AUDITORS' REPORT
Board of Directors
Cardiovascular Laboratories, Inc. and Subsidiaries
Wayne, Pennsylvania:
We have audited the accompanying consolidated balance sheet of
Cardiovascular Laboratories, Inc. and subsidiaries (collectively, the "Company")
as of December 31, 1998, and the related consolidated statements of operations,
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 consolidated financial statements of Cardiovascular Laboratories,
Inc. and subsidiaries as of December 31, 1997, were audited by other auditors
whose report dated May 13, 1998, 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 1998 consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Cardiovascular Laboratories, Inc. and subsidiaries as of December 31, 1998, and
the results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles.
/s/ Parente, Randolf, Orlando, Carey & Associates, LLC
--------------------------------------------------
Parente, Randolf, Orlando, Carey & Associates, LLC
Philadelphia, Pennsylvania
March 2, 1999
- F-1 -
<PAGE>
CARDIOVASCULAR LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
--------- ---------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash $ 17,642 $ 48,433
Accounts receivable, net of allowance for doubtful
accounts of $32,390 in 1998 653,542 738,056
Prepaid expenses 7,982 4,401
--------- ---------
Total current assets 679,166 790,890
FURNITURE, EQUIPMENT AND VEHICLES, Net 51,781 71,931
DEFERRED INCOME TAXES 126,562 36,884
OTHER ASSETS 2,560 34,725
--------- ---------
TOTAL $ 860,069 $ 934,430
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable, demand $ 244,724 $ 251,523
Promissory notes payable 125,000 --
Current portion of long-term debt 53,948 23,598
Accounts payable and accrued expenses 175,973 165,251
Deferred income taxes 127,449 144,687
--------- ---------
Total current liabilities 727,094 585,059
LONG-TERM DEBT 100,527 38,705
--------- ---------
Total liabilities 827,621 623,764
--------- ---------
STOCKHOLDERS' EQUITY:
Common stock, par value $0.001; 50,000,000 shares
authorized; 7,499,781 and 34,972,899 shares issued
and outstanding in 1998 and 1997 7,500 34,973
Additional paid-in capital 91,282 --
Less promissory note receivable (30,000) --
Deficit (36,334) 275,693
--------- ---------
Total stockholders' equity 32,448 310,666
--------- ---------
TOTAL $ 860,069 $ 934,430
========= =========
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements
- F-2 -
<PAGE>
CARDIOVASCULAR LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
REVENUES,
Net patient service revenues $ 3,327,216 $ 3,404,460
----------- -----------
OPERATING EXPENSES:
Salaries, payroll taxes and employee benefits 1,587,527 1,651,326
Equipment leasing and laboratory costs 902,030 716,260
Consulting and professional fees 500,876 534,620
Administrative and other 323,337 354,637
Rent and occupancy costs 135,980 106,138
Depreciation 23,028 32,935
Interest 35,379 23,248
----------- -----------
Total operating expenses 3,508,157 3,419,164
----------- -----------
LOSS FROM OPERATIONS (180,941) (14,704)
----------- -----------
OTHER (EXPENSE) INCOME:
Non-recurring expenses related to multiple employee
resignations caused by a former executive (240,360) --
Gain on sale of vehicles 2,315 7,580
Interest income 43 737
----------- -----------
Other (expense) income, net (238,002) 8,317
----------- -----------
LOSS BEFORE INCOME TAX BENEFIT (418,943) (6,387)
INCOME TAX BENEFIT 106,916 2,687
----------- -----------
NET LOSS $ (312,027) $ (3,700)
=========== ===========
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements
- F-3 -
<PAGE>
CARDIOVASCULAR LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL PROMISSORY RETAINED
----------------------- PAID-IN NOTE EARNINGS
SHARES AMOUNT CAPITAL RECEIVABLE (DEFICIT) TOTAL
----------- -------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
BALANCES, JANUARY 1, 1997 34,972,899 $ 34,973 $ -- $ -- $ 279,393 $ 314,366
Net loss for 1997 -- -- -- -- (3,700) (3,700)
---------- -------- -------- -------- --------- ---------
BALANCES, DECEMBER 31, 1997 34,972,899 34,973 -- -- 275,693 310,666
Common stock issued for cash and
promissory note receivable 15,000,000 15,000 20,000 (30,000) -- 5,000
Reverse stock split, 1 share for every
500 shares held (49,872,953) (49,873) 49,873 -- -- --
----------- -------- -------- -------- --------- ---------
BALANCES BEFORE REVERSE
MERGER ACQUISITION AND
REORGANIZATION 99,946 100 69,873 (30,000) 275,693 315,666
Common stock issued to CLI-PA
stockholders to effect the reverse
merger acquisition and reorganization 2,546,837 2,547 (47) -- -- 2,500
Common stock issued against options 968,998 969 -- -- -- 969
Common stock issued into escrow
trust 1,500,000 1,500 -- -- -- 1,500
Common stock issued in Rule 504
public offering 2,250,000 2,250 20,250 -- -- 22,500
Common stock issued for services
rendered 134,000 134 1,206 -- -- 1,340
Net loss for 1998 -- -- -- -- (312,027) (312,027)
----------- -------- -------- -------- --------- ---------
BALANCES, DECEMBER 31, 1998 7,499,781 $ 7,500 $ 91,282 $(30,000) $ (36,334) $ 32,448
=========== ======== ======== ======== ========= =========
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements
- F-4 -
<PAGE>
CARDIOVASCULAR LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(312,027) $ (3,700)
Adjustments to reconcile net loss to cash used in
operating activities:
Depreciation 23,028 32,935
Deferred income taxes (106,916) (2,687)
Gain on sale of vehicles (2,315) (7,580)
Changes in assets and liabilities:
Accounts receivable 84,514 (68,426)
Prepaid expenses (3,581) (4,401)
Other assets 32,165 (27,500)
Accounts payable and accrued expenses 10,722 59,774
--------- ---------
Net cash used in operating activities (274,410) (21,585)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES,
Purchases of furniture, equipment and vehicles (17,943) (43,076)
Proceeds from sale of vehicles 17,380 17,500
--------- ---------
Net cash used in investing activities (563) (25,576)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Decrease) increase in note payable, demand (6,799) 94,140
Proceeds from promissory notes payable 125,000 --
Proceeds from issuance of long-term debt 147,121 24,760
Repayment of long-term debt (54,949) (47,894)
Issuance of common stock 33,809 --
--------- ---------
Net cash provided by financing activities 244,182 71,006
--------- ---------
(DECREASE) INCREASE IN CASH (30,791) 23,845
CASH, BEGINNING 48,433 24,588
--------- ---------
CASH, ENDING $ 17,642 $ 48,433
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION,
Cash paid during the year for interest $ 28,816 $ 21,797
========= =========
SUPPLEMENTAL SCHEDULE OF NONCASH
FINANCING ACTIVITY,
Issuance of promissory note receivable $ 30,000 $ --
========= =========
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements
- F-5 -
<PAGE>
CARDIOVASCULAR LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. ORGANIZATION AND NATURE OF OPERATIONS
Cardiovascular Laboratories, Inc. is a for-profit, Nevada holding company
located in Wayne, Pennsylvania.
The subsidiaries of Cardiovascular Laboratories, Inc. and their primary
activities are as follows:
Cardiovascular Laboratories, Inc. of Pennsylvania: Cardiovascular
Laboratories, Inc. of Pennsylvania ("CLI-PA") is a wholly-owned,
for-profit business corporation and subsidiary of Cardiovascular
Laboratories, Inc. CLI-PA owns and operates independent vascular
laboratories in hospitals and private clinics.
CLIX: CLIX is a wholly-owned, for-profit business corporation and
subsidiary of Cardiovascular Laboratories, Inc. CLIX was established
to provide billing services; however, there was no substantial
activity through December 31, 1998.
Cardiovascular Laboratories, Inc. (formerly, Interstate Gold and Gas, Inc.)
("IG&G") was incorporated in the state of Utah on August 8, 1983. IG&G has
been in the development stage since inception and has been engaged in the
business of developing mining properties. During 1992, IG&G lost its
remaining mining claims and since that date has been inactive.
On March 9, 1998, a special shareholders meeting was held at which a
resolution was approved to effectuate a reverse split of IG&G's common
stock whereby all shareholders of record as of February 27, 1998 would
receive one share of IG&G's common stock for each 500 shares owed. Also on
this date, IG&G reincorporated as a Nevada corporation and changed its name
to Cardiovascular Laboratories, Inc. ("CLI").
Pursuant to an Acquisition Agreement dated March 26, 1998, CLI acquired all
of the outstanding stock of CLI-PA by exchanging 2,546,837 unregistered
shares of CLI for 1,000,000 shares of CLI-PA, exchanging 968,998
unregistered shares of CLI for two option agreements to purchase
substantially similar option agreements of CLI-PA, and issuing 1,500,000
unregistered shares of CLI into an escrow trust. Additionally, CLI
completed a public offering on April 30, 1998 under Regulation D of Rule
504 of the Securities and Exchange Commission for a total of 2,250,000
registered shares of CLI's common stock for total consideration of $22,500.
- F-6 -
<PAGE>
CARDIOVASCULAR LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of
Cardiovascular Laboratories, Inc. and its subsidiaries, CLI-PA and
CLIX (collectively, the "Company"). All material intercompany
transactions and balances have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
NET PATIENT SERVICE REVENUES AND RECEIVABLES
Net patient service revenues and receivables are derived from
hospitals and patients who reside primarily in the Company's regional
geographical region (i.e., states of Pennsylvania, New Jersey and New
York) and are reported at the estimated net realizable amounts from
hospitals, patients, third party payors, and others for services
rendered.
Significant concentrations of revenues and accounts receivable, net
include various hospitals and Medicare.
FURNITURE, EQUIPMENT, AND VEHICLES
Furniture, equipment and vehicles are recorded at cost. Depreciation,
including amortization of capital lease obligations, is computed using
the straight-line method based on the estimated useful life of each
classification of depreciable asset.
INCOME TAXES
Deferred tax assets and liabilities are reflected at currently enacted
income tax rates applicable to the period in which the deferred tax
assets and liabilities are expected to be realized or settled. As
changes to the tax laws or rates are enacted, deferred tax assets and
liabilities are adjusted through the provision for income taxes.
- F-7 -
<PAGE>
CARDIOVASCULAR LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
RECLASSIFICATIONS
Certain reclassifications have been made to the 1997 financial
statements to conform with the 1998 reporting format.
3. BASIS OF PRESENTATION AND CERTAIN
SIGNIFICANT RISKS AND UNCERTAINTIES
The Company's financial statements have been presented on the basis that it
is a going concern, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business.
The Company had a loss from operations of $180,941 in 1998 and $14,704 in
1997 and a working capital deficiency of $47,928 at December 31, 1998.
Additionally, the Company's operations were financed from proceeds of
short-term promissory notes payable and long-term debt.
These factors, among others, indicate that the Company's ability to
continue in existence is dependent upon its ability to achieve profitable
operations. The financial statements do not include any adjustments
relating to the recoverability and classification of recorded assets and
amounts that might be necessary should the Company be unable to continue in
existence.
Management's plans in connection with these matters are to continue to
refine its operations, eliminate unprofitable contracts, expand sources of
revenues, control operating expenses, refinance the note payable, demand
and long-term lease agreements.
4. NET PATIENT SERVICE REVENUES AND RECEIVABLES
The Company has agreements with hospitals and third party payors that
provide for payments to the Company at amounts different from its
established rates. A summary of major payment arrangements with hospitals
and third party payors is as follows:
HOSPITALS
Patient services rendered to various hospitals are paid on a
fee-for-service basis. These rates vary based on negotiated fee
schedules.
- F-8 -
<PAGE>
CARDIOVASCULAR LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
MEDICARE, BLUE SHIELD, AND MEDICAID
Patient services rendered to Medicare, Blue Shield, and Medicaid
program beneficiaries are paid based on various fee schedules. These
rates vary according to patient classification systems that are based
on clinical, diagnostic and other factors.
OXFORD
Patient services rendered to Oxford program beneficiaries are paid on
a fee-for-service basis. These rates vary according to a patient
classification system that is based on clinical, diagnostic, and other
factors.
5. FURNITURE, EQUIPMENT AND VEHICLES
Furniture, equipment and vehicles and accumulated depreciation at December
31, 1998 and 1997 are as follows:
1998 1997
---- ----
Vehicles $ 63,542 $ 88,604
Computer equipment 28,561 28,561
Office furniture 13,169 13,169
Office equipment 703 703
-------- --------
Total 105,975 131,037
Less accumulated depreciation 54,194 59,106
-------- --------
Furniture, equipment and vehicles, net $ 51,781 $ 71,931
======== ========
6. NOTE PAYABLE, DEMAND
Note payable, demand represents borrowings under the terms of a line of
credit agreement. The Company can borrow up to $250,000. Borrowings bear
interest at the bank's prime rate plus 1.5% (9.25% at December 31, 1998).
The note is secured by substantially all assets of the Company. The
outstanding balance under this agreement was $244,724 at December 31, 1998.
At December 31, 1997, the Company had various line of credit agreements
with an aggregate limit of $310,000 and a total outstanding balance of
$251,523.
- F-9 -
<PAGE>
CARDIOVASCULAR LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The loan agreement requires, among other things, that the Company maintain
tangible net worth of $400,000, a net worth ratio of 1.5 and a current
ratio of 2.0. The Company was in violation of these debt covenants during
1998. However, the Company has a commitment from another lender and plans
to refinance this loan agreement in May 1999.
7. PROMISSORY NOTES PAYABLE
The Company has promissory notes payable dated March 30, 1998 and maturing
on March 30, 1999. The promissory notes bear interest at 7.0%. The notes
are secured by accounts receivable of the Company. Promissory notes payable
were $125,000 at December 31, 1998.
8. LONG-TERM DEBT
Long-term debt at December 31, 1998 and 1997 consists of the following:
1998 1997
---- ----
Term loan payable in monthly installments of
$2,075, including interest at
13.7% through October 16, 2001 $ 58,217 $ --
Term loan payable in monthly installments of
$1,908, including interest at
9.0% through June 1, 2001 51,123 --
Equipment loan payable in monthly installments
of $557, including interest
at 10.0% through May 27, 2003 23,822 --
Equipment loan payable in monthly installments
of $598, including interest
at 7.5% through January 15, 2001 13,809 20,570
Equipment loan payable in monthly installments
of $529, including interest
at 8.5% through March 28, 2000 7,504 12,931
- F-10 -
<PAGE>
CARDIOVASCULAR LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1998 1997
---- ----
Other -- 28,802
-------- -------
Total 154,475 62,303
Less current portion 53,948 23,598
-------- -------
Long-term debt $100,527 $38,705
======== =======
The aggregate amount of future principal repayments at December 31, 1998 is
as follows:
YEARS ENDING DECEMBER 31
------------------------
1999 $ 53,948
2000 54,950
2001 36,773
2002 6,085
2003 2,719
--------
Total $154,475
========
The loans are secured by liens on equipment and accounts receivable.
9. RETIREMENT PLAN
The Company sponsors a 401(k) retirement plan. The Company did not make any
contributions in 1998 and 1997.
10. INCOME TAXES
The income tax benefit is comprised of the following:
1998 1997
---- ----
Deferred:
Federal $ 63,736 $ 1,959
State 43,180 728
-------- -------
Total $106,916 $ 2,687
======== =======
- F-11 -
<PAGE>
CARDIOVASCULAR LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The deferred income tax benefit in 1998 and 1997 results primarily from
temporary differences in the recognition of accounts receivable, accounts
payable and accrued expenses.
The following represents the tax effects of temporary differences that
result in the net deferred income tax liability at December 31, 1998 and
1997:
1998 1997
---- ----
Deferred income tax assets:
Furniture, equipment and vehicles $ 1,973 $ 1,970
Accounts payable 23,116 21,175
Accrued expenses 4,837 8,552
Net operating loss carryforwards 124,589 34,914
-------- --------
Total deferred income tax assets 154,515 66,611
-------- --------
Deferred income tax liabilities:
Accounts receivable 153,527 173,380
Prepaid expense 1,875 1,034
-------- --------
Total deferred income tax liabilities 155,402 174,414
-------- --------
Net deferred income tax liability $ 887 $107,803
======== ========
Net deferred income taxes are classified in the accompanying consolidated
financial statements at December 31, 1998 and 1997 as follows:
1998 1997
---- ----
Noncurrent assets $126,562 $ 36,884
Current liabilities 127,449 144,687
-------- --------
Net deferred income tax liability $ 887 $107,803
======== ========
At December 31, 1998 and 1997, the Company has approximately $500,000 of
net operating losses available to carry forward for federal and state
income tax purposes. The federal net operating loss carryforwards will
expire between 2004 and 2010 and the state net operating loss carryforwards
will expire between 2000 and 2002.
The expected income tax benefit using the statutory federal income tax rate
differs from the actual income tax benefit primarily because of
contributions and meals and entertainment.
- F-12 -
<PAGE>
CARDIOVASCULAR LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The Company files separate federal and state income tax returns for each
entity.
11. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases equipment and offices, under long-term lease
agreements expiring through 2002, which are classified as operating
leases.
The future minimum lease payments as of December 31, 1998 are as
follows:
Equipment Offices Total
--------- ------- ----------
YEARS ENDING DECEMBER 31
------------------------
1999 $578,053 $59,136 $ 637,189
2000 237,988 19,712 257,700
2001 96,354 -- 96,354
2002 25,884 -- 25,884
-------- ------- ----------
Total $938,279 $78,848 $1,017,127
======== ======= ==========
Lease expense for equipment and offices was $744,944 in 1998 and $666 in
1997.
CONTINGENCIES
The health care industry is subject to numerous laws and regulations
of federal, state and local governments. Compliance with these laws
and regulations can be subject to future government review and
interpretation as well as regulatory actions unknown or unasserted at
the time. Recently, government activity has increased with respect to
investigations and allegations concerning possible violations by
health care providers of fraud and abuse statutes and regulations,
which could result in the imposition of significant fines and
penalties as well as significant repayments for net patient service
revenues previously billed. Compliance with such laws and regulations
are subject to future government review and interpretations as well as
regulatory actions unknown or unasserted at this time.
12. COMMON STOCK TRANSACTIONS
On May 8, 1998, the Company issued 134,000 shares of unregistered common
stock to management consultants engaged by the Company and recognized
$1,340 in consulting fees (based on the fair value of services performed).
- F-13 -
<PAGE>
CARDIOVASCULAR LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
13. STOCK OPTIONS AND AWARDS
The Company has stock awards outstanding at December 31, 1998 granted under
a stock option plan. The 1998 Stock Plan provides for the granting of stock
awards to employees and qualified independent contractors in the form of
options to purchase shares of common stock at a price equal to fair market
value on the date of the grant. Options generally become exercisable at
such time or times and subject to such terms and conditions as shall be
determined by the Company at or after the grant.
The total number of stock options granted to employees were for 260,000
shares at an exercise price of $0.01 per share. The total number of stock
options granted to independent contractors were for 1,075,000 shares at
exercise prices ranging from $0.01 per share to $2.00 per share. No option
or restricted stock award may be granted under the plan after December 31,
2008.
No compensation cost has been recognized for these stock options.
14. YEAR 2000 RISKS (UNAUDITED)
Like virtually every organization, the Company is subject to risks
associated with the Year 2000 Issue (the "Issue"). The Issue is the result
of shortcomings in electronic data processing systems which affect computer
software and hardware, transactions with customers, vendors and other
organizations; and equipment dependent on microchips. The Company is in the
process of assessing and implementing necessary changes related to the
Issue but has not completed the process of identifying and remediating
potential year 2000 problems. It is not possible for any organization to
guarantee the results of its own remediation efforts or to accurately
predict the impact of the Issue on third parties with which the Company
does business.
Because of the unprecedented nature of the Issue, its effects and the
success of related remediation efforts will not be fully determinable until
the year 2000 and thereafter. Management cannot assure that the Company is
or will be year 2000 ready, that the Company's remediation efforts will be
successful in whole or in part, or that entities with whom the Company does
business will be year 2000 ready. If the Company's efforts or those of
third parties with which it does business are not successful, the Issue
could adversely affect the Company's operations and financial condition.
- F-14 -
<PAGE>
CARDIOVASCULAR LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
15. SUBSEQUENT EVENTS
In January 1999, the Company was approached by a prospective acquirer with
an unsolicited offer to acquire all its outstanding stock. The Company
presented a Letter of Intent to the prospective acquirer that valued the
transaction on the basis of approximately $1.25 per share of the Company's
common stock. The Letter of Intent has a number of restrictions, the most
important of which is the Company's ability to raise additional equity
capital.
The Company has hired an investment banker to represent it in the search
for equity capital. The Company has also been in ongoing discussions with
other groups concerning potential equity investment. None of these
discussions has resulted in a firm commitment.
In February 1999, the Company entered into a marketing services agreement
with this same prospective acquirer. This agreement would provide the
Company with access to proprietary interactive e-commerce software,
databases and tools along with technical and marketing assistance. In
return, the Company would pay a fee to this company based on its gross
margin derived from such e-commerce business.
In March 1999, the Company entered into a marketing agreement with another
company. The Company would develop an e-commerce business with this company
to sell preventative healthcare products, starting with nutritional
supplements. In return, the Company would pay a royalty based on a
percentage of revenues.
- --------------------------------------------------------------------------------
- F-15 -
<PAGE>
CLIXhealth.com, Inc.
Unaudited Balance Sheet
12-31-98 and 6-30-99
12/31/98 6/30/99
-------- -------
ASSETS
CURRENT ASSETS
Cash $ 17,642 $ 35,565
Accounts Receivable 653,542 502,785
Prepaid Expense 7,982 28,470
Receivable from Shareholders 0 9,690
-------- --------
Total Current Assets 679,166 576,510
Furniture, Equipment And Vehicles 51,781 43,055
Deferred Income Taxes 126,562 126,562
Other Assets 2,560 2,560
-------- --------
TOTAL ASSETS $860,069 $748,687
======== ========
LIABILITIES & STOCKHOLDERS EQUITY
Notes Payable $244,724 $254,069
Promissory Notes Payable 125,000 39,902
Accounts Payable And Accrued Expenses 175,973 100,220
Current Maturities Of Long Term Debt 53,948 53,948
-------- --------
Total Current Liabilities 599,645 448,139
LONG TERM DEBT 100,527 35,288
Promissory Notes payable 125,000
Deferred Income Taxes 127,449 127,449
-------- --------
Total Liabilities 827,621 735,876
STOCKHOLDERS EQUITY
Common Stock 7,500 7,500
Additional Paid-In Capital 91,282 100,232
Less promissory note receivable (30,000) (30,000)
Retained Earnings (36,334) (64,971)
-------- --------
Total Equity 32,448 12,811
-------- --------
TOTAL EQUITY & LIABILITIES $860,069 $748,687
======== ========
- F-16 -
<PAGE>
CLIXhealth.com, Inc.
Unaudited Income Statements
3-31-98 and 6-30-99
<TABLE>
<CAPTION>
3 mos 3 mos 3 mos 3 mos
3/31/98 3/31/99 6/30/98 6/30/99
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUES $939,364 $686,082 $769,385 $553,097
EXPENSES
Salaries, Payroll taxes and Benefits 492,833 304,369 364,053 289,850
Equipment leasing and Laboratory costs 333,962 134,087 128,968 92,664
Other Administrative expenses 83,117 232,581 212,702 132,812
Rent and occupancy costs 2,326 8,479 65,255 10,606
Interest expense 10,647 12,925 -1,652 12,312
-------- -------- -------- --------
Total Expense $922,884 $692,441 $769,327 $538,244
-------- -------- -------- --------
Net Gain (Loss) $ 16,481 $ (6,359) $ 57 $ 14,853
======== ======== ======== ========
</TABLE>
- F-17 -
<PAGE>
Consolidated Statement of Stockholders' Equity
For the Period Ending June 30, 1999
<TABLE>
<CAPTION>
Common Stock Additional Promissory Retained
Paid-in Note Earnings
Shares Amount Capital Receivable (Deficit) Total
------ ------ ---------- ---------- --------- -----
<S> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1998 7,499,780 $7,500 $91,282 $(30,000) $(36,334) $32,448
Common Stock issued for
Services Rendered-prior period adjustment 50,000 50 8,950 (9,000) 0
Common Stock Reclassified to Reflect
Notes Receivable 9,690 9,690
Prior Period Adjustments (33,458) (33,458)
Net Gain 6/30/99 4,131 4,131
--------- ------ -------- -------- -------- -------
Balances, June 30, 1999 7,549,780 $7,550 $100,232 $(30,000) $(64,971) $12,811
========= ====== ======== ======== ======== =======
</TABLE>
- F-18 -
<PAGE>
CLIXhealth.com, Inc.
Unaudited Statement of Cash Flows
Six Months Ended 6-30-98 and 6-30-99
6/30/1998 6/30/1999
--------- ---------
Net Income $ (96,199) $ 4,131
Depreciation $ 16,465 $ 8,725
Deferred Income taxes $ (32,000)
Accounts Receivable 49,291 150,758
Expense Advances 1,201 (11,249)
Prepaid Expenses (9,240)
Other Assets 27,398
Accounts Payable 44,705 (57,039)
Prime Credit Line (244,724)
Working Capital Line 254,069
Accrued Wages & Taxes (18,716)
Total Adjustments $ 72,584
--------- ---------
Net Cash Provided By Operations $ 10,861 $ 76,715
Cash Flows From Financing Activities 62,946 0
Notes Payable (18,441)
Company Vehicles (6,895)
Net Cash Used In Financing 62,946 (25,336)
Cash Balance At End Of Period 104,297 30,565
Cash Balance At Beginning Of Period 48,433 (12,644)
--------- ---------
Net Increase In Cash $ 55,864 $ 17,922
========= =========
- F-19 -
<PAGE>
CARDIOVASCULAR LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD ENDING JUNE 30, 1999
- --------------------------------------------------------------------------------
1. ORGANIZATION AND NATURE OF OPERATIONS
Cardiovascular Laboratories, Inc. is a for-profit, Nevada holding company
located in Wayne, Pennsylvania.
The subsidiaries of Cardiovascular Laboratories, Inc. and their primary
activities are as follows:
Cardiovascular Laboratories, Inc. of Pennsylvania: Cardiovascular Laboratories,
Inc. of Pennsylvania ("CLI-PA") is a wholly-owned, for-profit business
corporation and subsidiary of Cardiovascular Laboratories, Inc. CLI-PA owns and
operates independent vascular laboratories in hospitals and private clinics.
CLIX Information Services, Inc: CLIX Information Services, Inc. ("CLIX") is a
wholly-owned, for-profit business corporation and subsidiary of Cardiovascular
Laboratories, Inc. CLIX is a development stage business that was established to
pursue opportunities in medical-related information businesses; however, there
was no substantial activity through June 30, 1999.
Cardiovascular Laboratories, Inc. (formerly, Interstate Gold and Gas, Inc.)
("IG&G") was incorporated in the state of Utah on August 8, 1983. IG&G has been
in the development stage since inception and has been engaged in the business of
developing mining properties. During 1992, IG&G lost its remaining mining
claims and since that date has been inactive.
On March 9, 1998, a special shareholders meeting was held at which a resolution
was approved to effectuate a reverse split of IG&G's common stock whereby all
shareholders of record as of February 27, 1998 would receive one share of IG&G's
common stock for each 500 shares owed. Also on this date, IG&G reincorporated as
a Nevada corporation and changed its name to Cardiovascular Laboratories, Inc.
("CLI").
Pursuant to an Acquisition Agreement dated March 26, 1998, CLI acquired all of
the outstanding stock of CLI-PA by exchanging 2,546,837 unregistered shares of
CLI for 1,000,000 shares of CLI-PA, exchanging 968,998 unregistered shares of
CLI for two option agreements to purchase substantially similar option
agreements of CLI-PA, and issuing 1,500,000 unregistered shares of CLI into an
escrow trust. Additionally, CLI completed a public offering on April 30, 1998
under Regulation D of Rule 504 of the Securities and Exchange Commission for a
total of 2,250,000 registered shares of CLI's common stock for total
consideration of $22,500.
F-20
<PAGE>
CARDIOVASCULAR LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
In the opinion of management, the accompanying unaudited financial statements
contain all adjustments (consisting only of normal recurring adjustments)
necessary to present fairly the financial position of the Company and its
results of operations and cash flow for the interim periods presented.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Cardiovascular
Laboratories, Inc. and its subsidiaries, CLI-PA and CLIX (collectively, the
"Company"). All material intercompany transactions and balances have been
eliminated in consolidation.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NET PATIENT SERVICE REVENUES AND RECEIVABLES
Net patient service revenues and receivables are derived from hospitals and
patients who reside primarily in the Company's regional geographical region
(i.e., states of Pennsylvania, New Jersey and New York) and are reported at the
estimated net realizable amounts from hospitals, patients, third party payors,
and others for services rendered.
Significant concentrations of revenues and accounts receivable, net include
various hospitals and Medicare.
FURNITURE, EQUIPMENT, AND VEHICLES
Furniture, equipment and vehicles are recorded at cost. Depreciation, including
amortization of capital lease obligations, is computed using the straight-line
method based on the estimated useful life of each classification of depreciable
asset.
INCOME TAXES
Deferred tax assets and liabilities are reflected at currently enacted income
tax rates applicable to the period in which the deferred tax assets and
liabilities are expected to be realized or settled. As changes to the tax laws
or rates are enacted, deferred tax assets and liabilities are adjusted through
the provision for income taxes.
F-21
<PAGE>
CARDIOVASCULAR LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
3. BASIS OF PRESENTATION AND CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES
The Company's financial statements have been presented on the basis that it is a
going concern, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business.
Since the December 31, 1998 fiscal year end, the Company has continued to refine
its operations, has eliminated unprofitable contracts, expanded sources of
revenues, controlled operating expenses, refinanced its note payable, and
refinanced its long-term lease agreements.
4. NET PATIENT SERVICE REVENUES AND RECEIVABLES
The Company has agreements with hospitals and third party payors that provide
for payments to the Company at amounts different from its established rates. A
summary of major payment arrangements with hospitals and third party payors is
as follows:
HOSPITALS
Patient services rendered to various hospitals are paid on a fee-for-service
basis. These rates vary based on negotiated fee schedules.
MEDICARE, BLUE SHIELD, AND MEDICAID
Patient services rendered to Medicare, Blue Shield, and Medicaid program
beneficiaries are paid based on various fee schedules. These rates vary
according to patient classification systems that are based on clinical,
diagnostic and other factors.
OXFORD
Patient services rendered to Oxford program beneficiaries are paid on a
fee-for-service basis. These rates vary according to a patient classification
system that is based on clinical, diagnostic, and other factors.
5. WORKING CAPITAL LINE
The Working Capital Line is a $1,000,000 facility entered into with DVI
Financial Services, Inc. on June 27, 1999. The line secured by substantially all
assets of the Company, with the actual allowable borrowing base calculated in
accordance with borrowing formulas applied
F-22
<PAGE>
CARDIOVASCULAR LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
to the Company's various accounts receivable. The outstanding balance under this
agreement was $254,068.93 at June 30, 1999.
The working capital line agreement caries an interest rate 2.25% above the Prime
Rate, plus a monthly maintenance fee of $850., and an unused line fee amounting
to .0025 per year of the amount of the total facility not actually borrowed.
6. PROMISSORY NOTES PAYABLE
The Company has promissory notes payable dated March 30, 1998 which begin twenty
equal repayments of principal beginning on December 1, 2000. The promissory
notes bear interest at 11.0%. The notes are secured by a secondary interest in
the accounts receivable of the Company. Promissory notes payable were $125,000
at June 30, 1999.
7. INCOME TAXES
At June 30, 1999, the Company has approximately $500,000 of net operating losses
available to carry forward for federal and state income tax purposes. The
federal net operating loss carryforwards will expire between 2004 and 2010 and
the state net operating loss carryforwards will expire between 2000 and 2002.
The expected income tax benefit using the statutory federal income tax rate
differs from the actual income tax benefit primarily because of contributions
and meals and entertainment.
The Company files separate federal and state income tax returns for each entity.
8. COMMON STOCK TRANSACTIONS
On May 8, 1998, the Company issued 134,000 shares of unregistered common stock
to management consultants engaged by the Company and recognized $1,340 in
consulting fees (based on the fair value of services performed).
On December 15, 1998, the Company issued 50,000 shares of unregistered common
stock to Brennan Dyer & Company, LLC, a financial consultant hired for the
purpose of raising equity capital for the Company. Due to an oversight, the
Company did not recognize this issuance of stock as financial consulting fees in
its financial statements dated December 31, 1999, and is making a prior period
adjustment to reflect $9,000 in such fees, based on the closing market price for
the Company's common stock on December 15, 1999.
F-23
<PAGE>
CARDIOVASCULAR LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
9. RETAINED EARNINGS
An adjustment to Retained Earnings was made in 1999 to properly reflect $9,690
of notes receivable from shareholders. These note were accepted as payment for
968,998 shares of unregistered common stock issued in exchange for options for
the purchase of the same number of shares at a price of $.01 per share in April,
1998.
An adjustment to retained earnings was made in 1999 to show $33,458 of
previously improperly categorized expenses that were incurred during 1998 but
paid for in 1999.
10. STOCK OPTIONS AND AWARDS
The Company has stock awards outstanding at December 31, 1998 granted under a
stock option plan. The 1998 Stock Plan provides for the granting of stock awards
to employees and qualified independent contractors in the form of options to
purchase shares of common stock at a price equal to fair market value on the
date of the grant. Options generally become exercisable at such time or times
and subject to such terms and conditions as shall be determined by the Company
at or after the grant.
The total number of stock options granted to employees were for 260,000 shares
at an exercise price of $0.01 per share. The total number of stock options
granted to independent contractors were for 1,075,000 shares at exercise prices
ranging from $0.01 per share to $2.00 per share. No option or restricted stock
award may be granted under the plan after December 31, 2008.
No compensation cost has been recognized for these stock options.
11. YEAR 2000 RISKS (UNAUDITED)
Like virtually every organization, the Company is subject to risks associated
with the Year 2000 Issue (the "Issue"). The Issue is the result of shortcomings
in electronic data processing systems which affect computer software and
hardware, transactions with customers, vendors and other organizations; and
equipment dependent on microchips. The Company is in the process of assessing
and implementing necessary changes related to the Issue but has not completed
the process of identifying and remediating potential year 2000 problems. It is
not possible for any organization to guarantee the results of its own
remediation efforts or to accurately predict the impact of the Issue on third
parties with which the Company does business.
Because of the unprecedented nature of the Issue, its effects and the success of
related remediation efforts will not be fully determinable until the year 2000
and thereafter. Management cannot assure that the Company is or will be year
2000 ready, that the Company's remediation efforts will be successful in whole
or in part, or that entities with whom the Company does business will be year
2000 ready. If the Company's efforts or
F-24
<PAGE>
CARDIOVASCULAR LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
those of third parties with which it does business are not successful, the Issue
could adversely affect the Company's operations and financial condition.
12. SUBSEQUENT EVENTS
In January 1999, the Company was approached by a prospective acquirer with an
unsolicited offer to acquire all its outstanding stock. The Company presented a
Letter of Intent to the prospective acquirer that valued the transaction on the
basis of approximately $1.25 per share of the Company's common stock. The Letter
of Intent has a number of restrictions, the most important of which is the
Company's ability to raise additional equity capital.
The Company has hired an investment banker to represent it in the search for
equity capital. The Company has also been in ongoing discussions with other
groups concerning potential equity investment. None of these discussions has
resulted in a firm commitment.
In February 1999, the Company entered into a marketing services agreement with
this same prospective acquirer. This agreement would provide the Company with
access to proprietary interactive e-commerce software, databases and tools along
with technical and marketing assistance. In return, the Company would pay a fee
to this company based on its gross margin derived from such e-commerce business.
In March 1999, the Company entered into a marketing agreement with another
company. The Company would develop an e-commerce business with this company to
sell preventative healthcare products, starting with nutritional supplements.
In return, the Company would pay a royalty based on a percentage of revenues.
F-25
