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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1996
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ________ to __________
Commission File Number 0-35700
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WASATCH PHARMACEUTICAL, INC.
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(Exact name of registrant as specified in charter)
Utah 84-0854009
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State or other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization
714 East 7200 South, Midvale, Utah 84047
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code (801) 566-9688
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Securities registered pursuant to section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None N/A
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Securities registered pursuant to section 12(g) of the Act:
None
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(Title of class)
Check whether the Issuer (1) filed all reports required to be filed by
section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. (1) Yes
[X] No [ ] (2) Yes [X] No [ ]
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year: $117,265
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State the aggregate market value of the voting stock held by nonaffiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days:
At March 31, 1997, the aggregate market value of the voting stock held by
nonaffiliates was $2,792,138 (based on 2,127,343 shares held by nonaffiliates
multiplied by a average of the bid and ask price of $1.3125 per share).
As of March 31, 1997, the Registrant had 6,635,956 shares of common stock
issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by reference and
the part of the form 10-KSB (e.g., part I, part II, etc.) into which the
document is incorporated: (1) Any annual report to security holders; (2) Any
proxy or other information statement; and (3) Any prospectus filed pursuant to
rule 424(b) or (c) under the Securities Act of 1933:
NONE
PAGE
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TABLE OF CONTENTS
PART I PAGE
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ITEM 1. DESCRIPTION OF BUSINESS....................................... 4
ITEM 2. DESCRIPTION OF PROPERTIES..................................... 6
ITEM 3. LEGAL PROCEEDINGS............................................. 9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...........
9
PART II
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ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS...... 10
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION..... 11
ITEM 7. FINANCIAL STATEMENTS.......................................... 14
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE........................... 15
PART III
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ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE
ACT........................................................... 17
ITEM 10. EXECUTIVE COMPENSATION........................................
19
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT................................................ 21
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................
22
PART IV
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ITEM 13. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K........
23
PAGE
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
History and Organization
The Company was organized under the laws of the State of Utah as Ceron
Oil Company on March 25, 1980. In a series of transactions completed on
February 6, 1981, the Company acquired, merged with and became successor to
Folio One Productions, Ltd. ("Folio"), a publicly held, inactive Delaware
Corporation, the name of which was changed to Ceron Resources Corporation.
Since the Company's inception and until its acquisition of Medisys
Research Group, Inc. on December 29, 1995, the Company's revenue, operating
profit or loss, and identifiable assets have been attributable to only one
industry segment, the oil and gas industry. During December, 1985, the two
oil and gas wells the Company had an interest in were plugged and abandoned
due to the depletion of reserves and economic conditions in the industry.
Since that time, the business activity of the company, including the
acquisition, development and promotion of oil and gas properties, have been
conducted on a limited scale with primary emphasis on maintaining assets held
by the Company. Since December, 1985, the Company's principal resources have
been the sublease income from its office spaces, interest, and de minims film
royalties.
On December 29, 1995, the Issuer acquired all of the issued and
outstanding shares of Medisys Research Group, Inc., a Utah corporation
("Medisys"), through the issuance of shares of Common Stock of the Issuer.
Thereafter, on January 16, 1996, the Issuer merged with and into Wasatch
Pharmaceutical, Inc., a Utah corporation ("Wasatch"), wherein Wasatch became
the surviving corporation. The merger was performed for the purpose of
changing the domicile of the Registrant from Delaware to Utah, effecting a
name change to Wasatch Pharmaceutical, Inc. and changing the par value to
$0.001.
DERMATOLOGY OPERATIONS
Medisys is a research company in the field of Dermatology and was
incorporated in Utah in September, 1989. Prior research was conducted
primarily by Gary V. Heesch (currently President and CEO of Wasatch) through
a predecessor company called Dermacare Pharmaceutical, Inc. ("Dermacare")
beginning in the early 1980's. A substantial portion of Medisys's research
has been devoted to developing the 'Skin Fresh Methodology" for the treatment
of acne, eczema, psoriasis, contact dermatitis, seborrhea, and other less
serious skin disorders. The treatment program avoids the use of prescription
drugs taken internally and includes a regimen and the topical application of
FDA approved antibiotics. Clinical studies were conducted in 1983 and 1985
using the Skin Fresh Technology with very favorable results. In 1989, Dermacare
discontinued its operations and all of the rights to the technology were
assigned to Medisys in exchange for a 5% royalty on product sales being paid
to the former shareholders of Dermacare.
In addition, Medisys has developed a family of products, including
cleansers, astringents, and lotions that are sold as part of the treatment
regimen. These products are manufactured in an FDA approved laboratory
located in California. In connection with the sale of its products, Medisys
may offer other skin care products such as soaps and cosmetics.
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Through clinical studies and test marketing at doctors' offices, the
management of Medisys determined that optimum commercialization of the
treatments could be accomplished only in a uniform and consistent clinical
environment as opposed to the sale of the active prescription drug through
pharmacies. Further, management of Medisys believes that for its skin care
treatment to be successful (i.e., total or near total clearing of acne or
eczema condition), the treatments must be used under a prescribed topical
maintenance regimen. For this reason, Medisys created a wholly-owned
subsidiary, American Institute of Skin Care, Inc. ("AISC"), for the purpose of
operating medical skin care clinics. AISC set up three prototype clinics to
begin treating patients, to train a staff of medical and support personnel,
and to develop administrative procedures. The first clinic was established in
Salt Lake City, Utah in February, 1994. The second clinic was established in
Pocatello, Idaho in August, 1994, and a third clinic established in Provo,
Utah in November, 1994. Hundreds of patients were treated in these three
clinics through 1996 while medical and administrative procedures were
finalized. During this prototype clinic stage, a limited amount of advertising
was conducted by each clinic to experiment with different advertising media.
A national advertising company supervised these experiments and used the test
results to develop a comprehensive advertising and public relations plan to
launch with each new medical skin care clinic.
Having completed the purposes for establishing the prototype clinics, and
in an effort to reduce costs during the developmental stage, AISC closed its
Pocatello, Idaho clinic in February, 1996 and reduced its Provo, Utah clinic
operation to two days per week in March 1996. When adequate funds are raised,
Wasatch intends to launch its marketing campaign and to set up two more skin
care clinics. (See "ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION.")
OIL AND GAS OPERATIONS
The Company's oil and gas division commenced when the Company exchanged
2,000,000 of its common shares for a 25% interest in 50 oil and gas wells
located in West Virginia. Under the terms of the agreement, Wasatch is
entitled to 25% of the revenues and is obligated for 25% of the operating
expenses. Although currently minimally productive, the plan is to greatly
enhance production by using the improved technology and re-completion methods
of 1997 to rework wells.
PAGE
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ITEM 2. DESCRIPTION OF PROPERTIES
Dermatology and Administrative Operations
The Company's administrative and clinical offices are located at 714 East
7200 South, Midvale, Utah, and consists of 1,800 square feet. The Company
leases this space from 700 Union Partnership for $2.043 per month. The term
of the lease is 36 months, of which there are 33 months remaining. In
addition, the Company operates a part-time clinic at 777 North 500 West #206,
Provo, Utah, consisting of 1,000 square feet. The Company leases this space
from an unrelated third party for $700 per month. The term of the lease is 12
months, of which there are 10 months remaining.
Oil and Gas Properties and Operations
On November 20, 1996, the Company exchanged 2,000,000 of its common
shares for a 25% interest in 50 oil and gas wells. Under the terms of the
agreement, Wasatch is entitled to 25% of the revenues and is obligated for 25%
of the operating expenses. However, in any period where the operating
expenses exceed operating revenues, such excess is carried forward to be
recouped by the operator only to the extent there is future revenue in excess
of expenses.
The 50 wells are producing nominal amounts of oil and gas from one field
in three counties of West Virginia (Ritchie, Wood and Pleasants Counties). At
December 31, 1996, 100% of the Company's reserves were proved but undeveloped
and were located on 31 leases containing 1718 gross (428 net) acres. Although
currently minimally productive, the plan is to greatly enhance production by
using the improved technology and re-completion methods of 1997 to rework
wells that were originally drilled in the med-1980's.
All fifty wells are completed well bores that will require cleaning and
hookup or, in some instances, re-fracturing. It is estimated that
approximately 50% of the wells can become commercial producers by cleaning up
the well hole and replacing certain equipment.
The re-completion program planned by the developer is estimated to cost
between $35,000 and $125,000 per well. Such costs will be charged to other
interests with no such costs being borne by the Company.
In early 1997, the developer commenced the re-completion program that is
designed to increase daily production to over 100 MFC of gas, the potential
for other hydrocarbons is uncertain and not a part of the basic strategy. The
initial production is projected to continue for six to eight months before
commencing a downward trend to level off in the third year to 20 to 40 MCF
daily.
The acquired properties and interest were recorded at a fair market value
that was derived from the cash price of comparable reserves purchased in the
open market but is not in excess of the risk-discounted future net revenues of
the properties. The carrying value ($3,719,536) is approximately 30% of
future net revenues.
PAGE
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Production, Price and Cost History
The Company had only one month (December) of oil and gas operations in
1996. In that period it produced 709 MCF of gas which sold at an average
price of $4.50 per MCF while its operating cost were $16.76 per MCF. Detailed
information concerning the Company's gas producing activities is contained in
the Supplementary Financial Information included in Note 10 to the
Consolidated Financial Statements.
Dependency
As a joint owner of its oil and gas properties, the company has a right
to review, and in some cases audit and challenge, activities and costs billed
to its joint interest. Although, Wasatch intends to vigorously apply this
right, the Company is totally dependent on the property operator for the day
to day decisions effecting resources, profitability, and decisions on
environmental matters and compliance with governmental regulations.
Estimated Proved Reserves
General - Reserve estimates contained herein were prepared by Ultra
Engineering and Consulting, Inc. independent petroleum engineers, as of
December 31, 1996.
Quantities - The following table sets forth the estimated quantities of
proved and proved developed reserves of natural gas owned by the Company for
the year ended December 31, 1996 (its initial year of oil and gas operations)
and principal components of the changes in the quantities of reserves for the
period then ended. Proven developed reserves are reserves that can be
expected to be recovered from existing wells with existing equipment and
operating methods. Proved undeveloped reserves are proved reserves that are
expected to be recovered from new wells drilled to known reservoirs on
undrilled acreage for which the existence and recoverability of reserves can
be estimated with reasonable certainty, or from existing wells where a
relatively major expenditure is required from re-completion.
MCF
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Proved Reserves
Beginning balance -0-
Purchase of oil and gas property 3,275,584
Production 709
Ending Balance -0-
Producing
Non-producing 3,274,875
Total 3,274,875
PAGE
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Uncertainties in Estimating Reserves - Proved oil and gas reserves cannot
be measured exactly. Reserve estimates are inherently imprecise and may be
expected to change as additional information becomes available. Estimates of
oil and gas reserves, of necessity, are projections based on engineering data,
and there are uncertainties inherent in the interpretation of such data as
well as the projection of future rates of production and the timing of
development expenditures. Reserve estimates are based on many factors related
to reservoir performance, which require evaluation by the engineer
interpreting the available data, as well as price and other economic factors.
The reliability of these estimates at any point in time depends on the quality
and quantity of the technical and economic data, the production performance of
the reservoirs as well as extensive engineering judgment. Further, estimates
of the economically recoverable quantities of oil and natural gas attributable
to any particular group of properties, classifications of such reserves based
on risk of recovery and estimates of the future net revenues expected
therefrom prepared by different engineers or by the same engineers at
different times may vary substantially. Consequently, reserves estimates are
subject to revision as additional data becomes available during the producing
life of a reservoir. There also can be no assurance that the reserves set
forth herein will ultimately be produced or that the proved undeveloped
reserves set forth herein will be developed within the periods anticipated.
In addition, the estimates of future net revenues from proved reserves of the
Company and the present value thereof are based upon certain assumptions about
future production levels, prices and costs that may not be correct when judged
against actual subsequent experience. The Company has not filed any estimates
of reserves with any federal authority or agency during the past year other
than estimates contained in filings with SEC.
Competition
The Company operates in a highly competitive environment. Competition is
encountered in acquiring reserves; marketing oil and natural gas and securing
trained personnel. Many of the Company's larger competitors have financial
and personnel resources substantially greater than those available to the
Company. Such companies may be able to pay more for productive oil and
natural gas properties and to define, evaluate, bid for and purchase a greater
number of properties than the Company's financial or personnel resources
permit. The Company's ability to acquire additional reserves in the future
will be dependent upon its ability to evaluate and select suitable properties
and to consummate transactions in a highly competitive environment. In
addition, there is substantial competition for capital available for
investment in the oil and natural gas industry. There can be no assurance
that the Company will be able to compete successfully in the future in
acquiring reserves, developing reserves, marketing hydrocarbons, attracting
and retaining quality personnel, and raising additional capital.
Regulation of Oil and Gas Marketers
The Company's operations are subject to extensive and continually
changing regulation, as legislation affecting the oil and natural gas industry
is under constant review for amendment and expansion. Many departments and
agencies, both federal and state, are authorized by statute to issue and have
issued rules and regulations binding on the oil and natural gas industry and
its individual participants. The failure to comply with those rules and
regulation can result in substantial penalties. The regulatory burden on the
oil and natural industry increases the Company's cost of doing business and,
consequently, affects its profitability. However, the Company does not
believe that it is affected in a significantly different manner by these
regulations than are its competitors in the oil and natural industry.
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Environmental Regulations
General - Various federal, state and local laws and regulation governing
the discharge of materials into the environment, or otherwise relating to the
protection of the environment, affect the Company's operations and costs. In
particular, the Company's exploration, development and production operations
and its use of facilities for treating, processing or otherwise handling
hydrocarbons and wastes therefrom are subject to stringent environmental
regulation. As with the industry generally, compliance with existing
regulations increases the Company's overall cost of business. Affected areas
include unit production expenses primarily related to the control and
limitation of air emissions and the disposal of produced water, capital costs
to drill exploration and development wells resulting from expenses primarily
related to the management and disposal of drilling fluids and other oil and
gas exploration wastes and capital costs to construct, maintain and upgrade
equipment and facilities.
Additional Information
At December 31, 1996, due to a minimal level of operations and the fact
that the re-completion program had not commenced, there are no comments to be
made concerning production performance, productive wells and acreage,
development and exploration or marketing.
ITEM 3. LEGAL PROCEEDINGS
On April 4, 1996, a judgement was obtained against the Company in the
amount of $21,954.83, by First Security Bank of Utah, N.A. (the "Plaintiff"),
in connections with a bank overdraft. On June 27, 1996, the Company received
a satisfaction of judgement as a result of completion of all payments owing on
the judgement.
On August 27, 1996, a Small Claims Affidavit and Order was filed in the
Third Circuit Court, State of Utah from Dr. Don Houston, M.D. for past
professional services in the amount of $4,100. The company is not disputing
the debt and has elected not to file an answer to the compliant. As of March
31, 1997, the Company had not received a Notice of Default Judgement with
respect to this matter.
On February 5, 1997, a complaint was filed against American Institute of
Skin Care, Inc. by Pacific Coast Publishers in the amount of $2,499.13. The
company is not disputing the debt and has elected not to file an answer to the
complaint. As of March 31, 1997, the Company had not received a Notice of
Default Judgement with respect to this matter.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
No matters were submitted to a vote of shareholders of the Company during
the fourth quarter of the fiscal year ended December 31, 1996.
PAGE
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
During the past three fiscal years there was no "established trading
market" for shares of the Company's common stock until September 30, 1996.
The table on the following page sets forth, for the respective periods
indicated, the prices for the Company's common stock in the over-the-counter
market as reported by the NASD's OTC Bulletin Board. The bid prices represent
inter-dealer quotations, without adjustments for retail mark-ups, mark-downs
or commissions and may not necessarily represent actual transactions.
At March 31, 1997, the Company's Common Stock was quoted on the OTC
Bulletin Board at a bid and asked price of $1.25 and $1.50, respectively.
Fiscal Year Ended December 31, 1994 High Bid Low Bid
First, Second, Third and Fourth Quarter N/A N/A
Fiscal Year Ended December 31, 1995
First, Second, Third and Fourth Quarter N/A N/A
Fiscal Year Ending December 31, 1996
First, Second and Third Quarter N/A N/A
Fourth Quarter $4.50 $1.25
Since its inception, the Company has not paid any dividends on its Common
Stock, and the Company does not anticipate that it will pay dividends in the
foreseeable future. At March 31, 1997, the Company had approximately 455
shareholders of record based on information provided by the Company's transfer
agent.
PAGE
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Overview
At this time, the operation of Wasatch consists of the operation of its
two wholly owned subsidiaries, Medisys Research Group, Inc. ("Medisys") and
American Institute of Skin Care, Inc. ("AISC"), the operation of its oil and
gas operations and the fund raising efforts of Wasatch..
Medisys owns all the rights to the technology developed by Mr. Heesch
through Dermacare and Medisys, and has licensed AISC to operate clinics and
sell products that relate to this technology and any future technology
developed by Medisys. The technology has been used in prototype clinics for
the past three years and has proven to be effective in its present form
without additional development. Currently, other research and development has
been limited due to limited financial resources. However, as funds become
available, Medisys will conduct additional research in the field of
dermatology and other related medical fields, and will market its technology
and products through AISC clinics and other marketing channels. Although the
Company may choose to market its technology through licencing agreements,
Medisys is not actively promoting the licensing of its technology.
AISC currently operates a clinic in Salt Lake City, Utah and a clinic in
Provo, Utah. As funds are available for expansion of its clinical operations,
AISC plans to open and operate medical skin care clinics across the country
using the "Skin Fresh Methodology". These company owned clinics, which are
patterned after the prototype clinics, would be established in large
metropolitan areas under the supervision of a licensed physician. Because the
treatment approach to these common skin problems is mainly topical and doesn't
rely on hard prescription drugs taken internally, medical assistants are used
for most of the treatment follow-up. Physicians are used only when it is
medically necessary. The treatment programs offered through the clinics for
these common skin disorders are at a substantially lower cost than
traditional treatments programs because they are primarily topical, they don't
rely on the expensive hard prescription drugs taken internally and the
majority of patients are effectively cleared in 2-3 months. The very high
success rates experienced in the clinics and the cost savings over traditional
treatment programs should provide a distinct advantage in the medical market
place which is being driven by cost reductions and cost containment.
Due to the lack of advertising and marketing, the two existing clinics
are operating at approximately 10% of capacity. In the past, the clinics have
required patients to pay for their services at the time they are provided and
the patient is given a standard claim form to submit for insurance
reimbursement. This policy of not accepting direct reimbursement from
insurance companies has had a somewhat negative impact on the clinic's ability
to attract new patients. The prototype clinics have recently made the
transition to where they will accept direct reimbursement from most insurance
carriers. This should have a positive effect on the clinic's ability to
attract new patients. An important strategy in our marketing program is to
develop contract relationships with insurance companies that highlight the
cost savings of our treatment program. An initial step would be to
participate in a controlled study with a pilot insurance company to identify
these cost savings.
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The market in the United States for those suffering from these common
skin disorders is substantial, accounting for over 70% of the patients that
seek medical treatment from dermatologists. In addition, a much larger market
has opened up with the recent development of a skin rejuvenation treatment
program that can be administered through the skin care clinics. The Company
believes the key to successful clinic operation and to introduce the Skin
Fresh Technology into the market place is an aggressive advertising and public
relation campaign which includes a physician referral program, working closely
with HMO's and insurance companies to become a contract provider, and various
media advertising.
The main activity of Wasatch has been to raise the funds necessary to
establish medical skin care clinics all over the country. In the short term,
Wasatch plans is to raise sufficient capital to begin its marketing program to
increase revenue in the two existing clinics to the point where they are
profitable and also to set up two or three additional clinics and make them
profitable. Once there are 4-5 clinics operating at a profitable level,
Wasatch would pursue a public offering to raise sufficient capital to set up
clinics all over the country.
At the present time and for the foreseeable future, the primary source of
revenue and profits will come from the clinic operations of AISC. Wasatch
will continue to seek funding for AISC. In addition, Wasatch is looking for
other business opportunities which would further enhance shareholder value.
Liquidity and Capital Resources
Because the Company is in the development stage, it has limited working
capital and limited internal financial resources. The Company has had an
operating loss of $1,584,379 since its inception due to the research and
development effort, the cost of starting up and operating the three prototype
clinics and costs involved in a fund raising effort. At December 31, 1996 the
Company had a working capital deficit of $1.25 million which has not allowed
the Company to borrow funds through conventional lending institutions. The
report of the Company's auditor contains a going concern modification as to
the ability of the Company to continue. The Company is currently operating at
a loss of approximately $42,000 per month with approximately 30% of the loss
attributed to the clinic operation. The Company expects operating expenses to
continue at approximately the same rate until bridge funding is received.
Once bridge funding is received, advertising and marketing expenses will
increase as the Company launches its marketing program. The Company has not
been able to secure funding from commercial lenders and has had to rely on
cash flow from its clinic operations and loans from individuals to meet its
current obligations.
In the fall of 1996, the Company entered into three transactions which
were intended to provide cash flow to the Company in the short term to meet
its working capital requirements and to provide a long term return on
investment.
PAGE
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On November 1 and 15, 1996, the Company entered into two similar
agreements, each of which resulted in issuing 6,000,000 shares of the
Company's stock to an insurance company for a $30,000,000 note payable to
Wasatch (total of 12,000,000 shares for $60,000,000). The shares are being
held in escrow pending payment of the note and the voting rights will remain
with the Company's Board of Directors on a pro-rata basis until the note is
paid. Payment on the notes will come from premiums generated by using the
Wasatch stock in the capital and surplus account of an insurance company. The
Company is entitled to 10% of the premiums generated on a monthly basis.
Minimum payments were due under these two agreements within ninety days from
the date of the agreement, however no payments were received within that time
period. The insurance company has requested a 90 day extension for payment of
this minimum amount, but the Company has not responded yet to the request.
On November 20, 1996, the Company exchanged 2,000,000 of its common
shares for a 25% interest in 50 oil and gas wells located in western West
Virginia. Under the terms of the agreement, Wasatch is entitled to 25% of the
revenues and is obligated for 25% of the operating expenses. However, in any
period where the operating expenses exceed operating revenues, such excess is
carried forward to be recouped by the operator only to the extent there is
future revenue in excess of expenses. Although currently minimally
productive, the plan is to greatly enhance production by using the improved
technology and re-completion methods of 1997 to rework wells that were
originally drilled in the mid-1980's. The re-completion program planned by
the developer is estimated to cost between $35,000 and $125,000 per well.
Such costs will be charged to other interests with no such costs being borne
by the Company. This acquisition has given the Company a positive equity
position by adding $3,719,000 to Shareholders Equity while providing the
potential for increased cash flow as the wells are reworked and production
increases.
On November 29, 1996, the Company exchanged 750,000 shares of common
stock for 12,000 shares of $250 par value preferred stock of an insurance
company. The preferred stock has a 6% per annum dividend payable quarterly
with the first dividend due February 28, 1997. No dividend has been paid and
the Company has granted a 90 day extension on the payment of the dividend.
Results of Operations
Revenues
The purpose of the development stage was to establish medical and
administrative procedures. During this period, revenues from operations have
been limited because substantial funds have not been available to AISC to
launch a major advertising and public relations campaign to promote the Skin
Fresh Methodology.
Revenues from clinic operations consist of professional fees charged for
the services of the physician and trained medical assistants and product sales
from the sale of products through the clinics. During the fiscal year ending
December 31, 1996, revenues from operations were $114,244, a 49% drop from
revenues for the fiscal year ending December 31, 1995. The drop in revenues
is due to the closing of the Pocatello, Idaho clinic in March 1996, the
reduction in advertising expense during the year and cutting back the Provo
clinic to two days a week. Plans are to bring the Provo clinic back into full
time service in the Spring of 1997 and to begin to do some light
advertising. The company expects a slight increase in revenues during 1997
as a result of the transition to accepting insurance reimbursement direct from
insurance companies. However, revenues from the clinic operations should not
significantly increase during 1997 until the additional funds are raised which
would allow the company to launch its marketing program.
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Expenses
Operating expenses for the clinics in fiscal 1996 were lower than fiscal
1995 by $196,001 or 46%. This drop in operating expenses was due primarily
to reductions in advertising, physician services and employee expenses as
AISC was trying to reduce its operating losses during a time of declining
revenues.
The General & Administrative expenses of Wasatch increased $108,573 or
59% from fiscal 1995 to fiscal 1996 due mainly to increases in officer's
compensation expense, and legal and accounting expense associated with the
fund raising activity of Wasatch and the cost of being a public company.
The Company had a combined operating loss of $1,584,378 since inception
due to the costs of research and development during the early stages, the
start-up and operating cost of the three prototype clinics for the past three
years and the fund raising activities of Wasatch. Fixed monthly expenses to
operate the clinics and the support staff of Wasatch amount to approximately
$43,800 per month. Without additional funding from equity or debt sources, of
which there can be no assurance that additional funds will be received, there
is substantial doubt as to the Company's ability to satisfy its current
obligations and continue in business.
Plan of Operations
The results of operations during the first three years of operating the
prototype clinics are not indicative of future operating results because the
purpose of the prototype clinics was to establish operational procedures and
the Company did not have the funding available to launch the appropriate
related advertising and marking campaign necessary properly promote the
Company's technology. Working capital requirements for the past three years
were financed through loans from private individuals. In order to continue
operating the prototype clinics and pay the staff of the Company, additional
funding will be needed until revenues from professional fees and the sale of
product increase to the point to cover such costs.
If the Company can obtain additional funding, the Company plans to open
three additional clinics in strategic metropolitan areas and to begin a
related advertising and marketing campaign to support the new clinics and the
two clinics currently in operation. The Company's goal would be to expand
clinical operations to other locations once the five clinics were operating
profitability. The Company estimates that it will need approximately $500,000
to establish the three additional clinics and to launch the related marketing
campaign. The Company will, for the time being, be dependent on the contract
from the insurance company, the oil and gas investment and other investments
to fund the expansion of the its clinical operations. If the existing
investments are not able to produce the anticipated revenue needed, the
Company will not have sufficient funds to carry out its plan without looking
to other sources for funding.
In the opinion of management, inflation has not had a material effect on
the Company's financial position.
ITEM 7. FINANCIAL STATEMENTS
The financial statements of the Company are set forth immediately
following the signature page to this form 10-KSB.
<PAGE> 15
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
On February 6, 1997, by mutual consent, the Company terminated its
relationship with its independent auditors by accepting the resignation of
Jones, Jensen & Company, Certified Public Accountants.
During the Company's two most recent fiscal years and all interim periods
leading up to the date of Jones, Jensen & Company's resignation, they did not
issue any adverse opinions or disclaimer of opinion or qualify an opinion as
to uncertainty, audit scope, or accounting principles, except as to the
following:
1. A limitation in the scope of audit procedures performed with respect
to the Company's supplies inventory ($9,374) at December 31, 1995, due to the
fact that the auditors were not engaged in time to observe the opening
inventory; and
2. A modified opinion relating to the fact the Company is a "development
stage enterprise" and its ability to continue as a "going concern".
Further, during the Company's two most recent fiscal years and all
interim periods leading up to the date of Jones, Jensen & Company's
resignation, the Company has had no disagreements with its former auditors as
to any matter of accounting principles or practices, financial statement
disclosure or auditing scope or procedure except as to the following:
In preliminary discussions concerning the Company's audit for its fiscal
year ended December 31, 1996, the Company and its former auditors reviewed the
Company's Report on Recoverable Reserves the Company had obtained relating to
a 25% working interest in 50 oil and gas wells acquired by the Company in
exchange for shares of the Company's common stock.
Following such discussions a disagreement arose concerning the Company's
proposed valuation of the oil and gas properties. As a result, the former
auditors asked the Company to provide it with further geological studies
relating to the properties to substantiate the Company's proposed valuation.
After consultation with other professionals knowledgeable in the oil and
gas industry, the Company's management concluded that the independent
geologist's report based upon volumetric determinations was an adequate
analysis of recoverable oil and gas and could be used as a basis for recording
the acquired asset to support Company's proposed valuation.
The Company discussed the former auditors request with the geologist who
prepared the reserve report and he indicated that an individual well by well
analysis would cost the Company at least $50,000 and take two to three months
to complete. Consequently, the Company engaged another reserve expert to
analyze and evaluate the oil and gas properties. The principal of the expert
retained, Clifford Budd, is a petroleum engineer and experienced in reservoir
analysis and reporting. Mr. Budd concluded that a determination based upon
volumetric methods to support the Company's proposed valuation was appropriate
for this group of wells for the following reasons:
1. The wells, although completed, are technically nonproducing proven
reserves, due to the major rework required; and
<PAGE> 16
2. According to the Society of Petroleum Engineers "Standards Pertaining
to the Estimating and Auditing of Oil and Gas Reserve Information", the
volumetric method and analogous reserve modeling are acceptable basis for
estimating recoverable reserves.
The Company's management and board of directors, after discussing the
delay that would occur and the additional costs related to obtaining a well by
well analysis as requested by its former auditors and after considering its
effect on the Company's impending programs to raise working capital, concluded
that it was in the best interest of the Company and its shareholders to
terminate its relationship with its former auditors and commence a search for
a successor independent accounting firm. The decision to terminate the
auditor's relationship was recommended and approved by the Company's board of
directors.
Gary V. Heesch, the C.E.O. and director of the Company discussed the
subject matter of the disagreement with the Company's former auditors and the
former auditors have been authorized to fully respond to inquires by others
concerning the subject disagreement.
The Company has requested that Jones, Jensen & Company review the
foregoing disclosures and provide a letter addressed to the Securities and
Exchange Commission stating whether they agree with the above statements and,
if not, stating in what respects they do not agree. Jones, Jensen &
Company's letter is included as an exhibit to the Company's Current report on
Form 8-K/A, filed with the Commission on February 27, 1997.
On February 13, 1997, the Registrant, with the concurrence of its board
of directors engaged Thomas Leger & Co., L.L.P. as its principal independent
auditors.
PAGE
<PAGE> 17
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The following table sets forth as of December 31, 1996, the name, age,
and position of each executive officer and director and the term of office of
each director of the Company.
Name Age Position Director or Officer Since
---- --- -------- -------------------------
Gary V. Heesch 60 President & Director December 29, 1995
David K. Giles 51 C.F.O. & Secretary December 29, 1995
Craig Heesch 59 Director December 29, 1995
Jack D. Brotherson 58 Director December 29, 1995
Robert Arbon, M.D. 60 Director December 29, 1995
W.A. Gary 55 Director April 13, 1996
Ronald J. Hollberg 64 Director October 1, 1996
Biographical Information
Set forth below is certain biographical information for each of the
Company's Officers and Directors:
Gary V. Heesch. Mr. Heesch has been a director of Medisys Research Group,
Inc. since its incorporation in 1989 and its president since January, 1993.
Mr. Heesch has been president and a director of Wasatch since December 1995.
Since 1983, Mr. Heesch has developed technology in the field of Dermatology
resulting in medical therapies directed at the treatment of acne, eczema and
other common skin disorders.
David K. Giles, MBA. Mr. Giles has been a consultant with Medisys since 1993
and a vice president and secretary/treasurer of Medisys since June, 1994 and
vice president and secretary of Wasatch since December 1995. Prior to coming
to Medisys, Mr. Giles worked from 1981 to 1993 for EFI Electronics
Corporation, Salt Lake City, Utah, a Utah public corporation [NASDAQ: EFIC],
serving for most of that time as CFO and Vice President of Finance and
Administration. Mr. Giles received his BS degree from the University of Utah
(1970) and an MBA from the University of Utah (1971).
Craig Heesch. Mr. Heesch has been a director of Medisys since 1989 and a
director of Wasatch since December 1995. Since 1975, Mr. Heesch has been a
senior partner at CV Associates, Vancouver, Washington, a technical consulting
firm assisting in the development of technologies for disposition into the
marketplace.
Jack D. Brotherson, Ph.D. Dr. Brotherson has been a director of Medisys since
1991, a director of Wasatch since December 1995 and has worked full time for
Brigham Young University , Provo, Utah since 1969. Dr. Brotherson is
currently a professor of Resource Management in the Department of Botany and
Range Sciences, having earned several degrees including a BS from B.Y.U.
(1964), a MS from Iowa State University (1967), and a Ph. D. from Iowa State
University (1969).
Robert Arbon, M.D. Dr. Arbon has been a director of Medisys since 1991 and a
director of Wasatch since December 1995. Dr. Arbon is an ear, nose and throat
specialist, and has for in excess of the past five years been practicing in
Provo, Utah. Dr. Arbon received his BS degree from the University of Utah
(1961) and M.D. from the University of Utah, College of Medicine (1964).
<PAGE> 18
W.A. Gary. Mr. Gary has been a director of the Company since April 13, 1996.
Since February 5, 1996, Mr. Gary has been the President of Lindberg-Hammar
Associates, Inc., a holding company for a surplus lines insurance carrier.
For four years prior to that, Mr. Gary was self-employed as a consultant
working in the oil and gas, real estate, and mobile home industries.
Ronald J. Hollberg, Jr. Mr. Hollberg was a director of Ceron Resources
Corporation, the company that merged into Medisys to form Wasatch and has been
a director of Wasatch since October 1, 1996. Mr. Hollberg has been president
and sole shareholder of Arjay Oil Company for more than five years and devotes
full time to the business of Arjay Oil Company and other personal interests.
Each director of the company serves for a term of one year and until his
successor is elected at the Company's annual shareholders' meeting and is
qualified, subject to removal by the Company's shareholders. Each officer
serves, at the pleasure of the board of directors, for a term of one year and
until his successor is elected at the annual meeting of the board of directors
and is qualified.
Except as indicated below, to the knowledge of management, during the
past five years, no present or former director, executive officer or person
nominated to become a director or an executive officer of the Company has:
(1) filed a petition under the federal bankruptcy laws or any state
insolvency law, nor had a receiver, fiscal agent or similar officer appointed
by a court for the business or property of such person, or any partnership in
which he was a general partner at or within two years before the time of such
filing, or any corporation or business association of which he was an
executive officer at or within two years before the time of such filing.
(2) was convicted in a criminal proceeding or named subject of a
pending criminal proceeding (excluding traffic violations and other minor
offenses):
(3) was the subject of any order, judgment or decree, not
subsequently reversed, suspended or vacated, of any court of competent jurisdict
ion, permanently or temporarily enjoining him or otherwise limiting, the
following activities:
(i) acting as a futures commission merchant, introducing broker,
commodity trading advisor, commodity pool operator, floor broker, leverage
transaction merchant, associated person of any of the foregoing, or as an
investment advisor, underwriter, broker or dealer in securities, or as an
affiliate person, director or employee of any investment company, or engaging
in or continuing any conduct or practice in connection with such activity;
(ii) engaging in any type of business practice; or
(iii) engaging in any activity in connection with the purchase
or sale of any security or commodity or in connection with any violation of
federal or state securities laws or federal commodities laws;
(4) was the subject of any order, judgment, or decree, not
subsequently reversed, suspended, or vacated, of any federal or state
authority barring, suspending, or otherwise limiting for more than 60 days the
right of such person to engage in any activity described above under this
Item, or to be associated with persons engaged in any such activity;
<PAGE> 19
(5) was found by a court of competent jurisdiction in a civil action
or by the Securities and Exchange Commission to have violated any federal or
state securities law, and the judgment in such civil action or finding by the
Securities and Exchange Commission has not been subsequently reversed,
suspended, or vacated.
(6) was found by a court of competent jurisdiction in a civil action
or by the Commodity Futures Trading Commission to have violated any federal
commodities law, and the judgment in such civil action or finding by the
Commodity Futures Trading Commission has not been subsequently reversed,
suspended or vacated.
Compliance with Section 16(a) of the Exchange Act
The Company is not subject to section 16(a) of the Exchange Act.
ITEM 10. EXECUTIVE COMPENSATION
The following tables set forth certain summary information concerning the
compensation paid or accrued for each of the Company's last three completed
fiscal years to the Company's or its principal subsidiaries chief executive
officer and each of its other executive officers that received compensation in
excess of $100,000 during such period (as determined at December 31, 1996, the
end of the Company's last completed fiscal year):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Compensation
- ----------------------
Annual Compensation Awards Payouts
Other Restricted
Name and Annual Stock Options
LTIP All other
Principal Position Year Salary Bonus($) Compensation Awards /SARs
Payout Compensation
- ------------------ ---- ------ -------- ------------ ------ -------
- ------ ------------
<S> <C> <C> <C> <C> <C> <C>
<C> <C>
Gary V. Heesch, 1996 -0- -0- $53,668 $ 125(1) -0-
- -0- -0-
President & CEO 1995 -0- -0- $36,595 -0- -0-
- -0- -0-
(Wasatch 1994 -0- -0- $49,720 -0- -0-
- -0- -0-
Pharmaceutical)
</TABLE>
(1) Represent value of options to purchase 125,000 shares of common stock at
$0.001 per share exercised in December 1996.
The Company estimates that Mr. Heesch will receive annual compensation of
approximately $70,000 for fiscal year 1997.
Employment Contracts and Termination of Employment and Changes in Control
Arrangements
There are no compensatory plans or arrangements, including payments to be
received from the Company, with respect to any person named as a director,
executive officer, promoter or control person above which would in any way
result in payments to any such person because of his resignation, retirement,
or other termination of such person's employment with the Company or its
subsidiaries, or any change in control of the Company, or a change in the
person's responsibilities following a changing in control of the Company,
except as noted below:
<PAGE> 20
Gary V. Heesch, President and Chief Executive Officer,
At a board meeting held April 13, 1996, the board agreed to pay to Mr.
Heesch, as additional compensation, up to $25,000 as a performance bonus to be
paid when monies are available.
David K. Giles, Vice President and Secretary,
At a board meeting held April 13, 1996, the board agreed to pay to Mr.
Giles, as additional compensation, up to $35,000 as a performance bonus to be
paid when monies are available.
Board Compensation
The Company may, from time to time, retain certain of its directors to
provide consulting or other professional services to the Company at standard
industry rates or enter into transactions in which non-salaried directors
receive compensation as sellers, brokers, or is some other capacity. Any
decision to retain such individuals or to enter into such transaction will be
subject to the approval of a majority of the disinterested directors.
The Company has not established a cash payment to the directors for board
of director's meetings. However, all directors are entitled to be reimbursed
for travel and other out of pocket expenses for their attendance at board
meetings. During the year, only Mr. Craig Heesch was reimbursed for travel
from out of state for board meetings.
Termination of Employment and Change of Control Arrangement
There are no compensatory plans or arrangements, including payments to be
received from the Company, with respect to any person named in Cash
Compensation set out above which would in any way result in payments to any
such person because of his resignation, retirement, or other termination of
such person's employment with the Company or its subsidiaries, or any change
in control of the Company, or a change in the person's responsibilities
following a changing in control of the Company.
PAGE
<PAGE> 21
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of December 31, 1996, the name and the
number of shares of the Company's Common Stock, par value $0.001 per share,
held of record or beneficially by each person who held of record, or was known
by the Company to own beneficially, more than 5% of the 6,635,956* issued and
outstanding shares of the Company's Common Stock, and the name and the
shareholdings of each director and of all officers and directors as a group.
*[12,000,000 shares of the Company's common stock issued to Lindbergh-Hammer
Associates, Inc. in exchange for a promissory note have been excluded from the
issued and outstanding shares in the Company's financial statement
presentation because the payment due on the promissory note is based on
significant contingencies, none of which, at December 31, 1996, had occurred.
Therefore, the 12,000,000 shares have been excluded from the total issued and
outstanding shares of the Company's common stock in calculating the percentage
ownership in the table below.]
Security Ownership of Certain Beneficial Owners
Title
of Name and Address Amount and Nature of Percentage
Class Beneficial Owner Beneficial Ownership(1) of Class
- ----- ---------------- -------------------- ----------
Common International Casualty D 2,000,000 30.1
& Surety Co., Ltd, 5th Floor
General Buildings
29-33 Shortland Street
Auckland, New Zealand
Common Gary V. Heesch 784,171 (2) 11.8
1614 East 5600 South
Salt Lake City, UT 84121
Common Condor Insurance Limited 750,000 11.3
504 Candado Place
El Paso, TX 79912
Common Craig Heesch 395,455 6.0
P.O. Box 15
Yacolt, WA 98675
Security Ownership of Management of the Company
Title
of Name and Position of Amount and Nature of Percentage
Class Officer and/or Director Beneficial Ownership(1) of Class
- ----- ----------------------- -------------------- ----------
Common Gary V. Heesch, Pres., CEO,
and Director D 784,171 (2) 11.8
Common Craig Heesch, Director D 395,455 6.0
Common David K. Giles, VP, Sec. D 325,000 4.9
[Table continues on next page]
<PAGE> 22
Security Ownership of Management of the Company (Continued)
Title
of Name and Position of Amount and Nature of Percentage
Class Officer and/or Director Beneficial Ownership(1) of Class
- ----- ----------------------- -------------------- ----------
Common Robert Arbon, Director D 75,000 1.1
Common Jack Brotherson, Director D 50,000 .8
Common Ronald J. Hollberg, Jr.
Director D 128,987 1.9
Common W.A. Gary, Director I -0-(3) -
--------- ----
All Officers and Directors
as a Group (7 person) D 1,758,613 26.5
I -0-(3)
=========
(1) Indirect and direct ownership are referenced by an "I" or "D",
respectively. All shares owned directly are owned beneficially and of record
and such shareholder has sole voting, investment, and dispositive power,
unless otherwise noted.
(2) Includes 299,875 held in trust for the benefit of the children of Gary V.
Heesch, with Dan Roberts as the trustee. Also included are 25,000 shares held
in trust for the benefit of Carol Lee Poulton, with Mr. Heesch as trustee.
All of these shares are deemed to be controlled by Mr. Heesch.
(3) 12,000,000 shares of the Company's common stock have been issued to
Lindbergh-Hammer Associates, Inc., of which W.A. Gary is the President and
principal shareholder. The 12,000,000 shares have been excluded from the
total issued and outstanding shares of the Company's common stock in
calculating the percentage ownership in the table below.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Transactions with Management and Others.
On November 1, 1996 and November 15, 1996, the Company entered into two
similar agreements with Lindbergh-Hammar Associates, Inc.
("Lindbergh-Hammar"), a holding company controlled by W.A. Gary, a Director of
the Company, wherein, the Company issued an aggregate of 12,000,000 shares of
its Common Stock in exchange for a note payable of $60,000,000, based on a
valuation of $5.00 per share of common stock. The Company's board of
directors has retained the voting rights to such shares until paid for by
Lindbergh-Hammar. Payment on the promissory notes are to come from premiums
generated by Lindbergh-Hammar's affiliated companies The Company is entitled
to 10% of the premiums generated on a monthly basis. Since entering into the
agreement with Lindbergh-Hammar no payments have been received by the Company.
PAGE
<PAGE> 23
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a)(1)FINANCIAL STATEMENTS. The following financial statements are included
in this report:
Title of Document Page
- ----------------- ----
Independent Auditor's Report of Thomas Leger & Co.,
Certified Public Accountants............................................ 25
Consolidated Balance Sheets as of December 31, 1996...................... 26
Consolidated Statements of Operations for the years ended
December 31, 1996, 1995, and from inception (September 7, 1989)
through December 31, 1996.............................................. 28
Consolidated Statements of Changes in Common Stockholders' Equity
(Deficit) from inception (September 7, 1989) through December
31, 1996................................................................ 29
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995, and from inception (September 7, 1989)
to December 31, 1996.................................................... 30
Notes to Consolidated Financial Statements............................... 32
(a)(2)FINANCIAL STATEMENT SCHEDULES. The following financial statement
schedules are included as part of this report:
None.
(a)(3)EXHIBITS. The following exhibits are included as part of this report:
SEC
Exhibit Reference
Number Number Title of Document Location
- ------- --------- ----------------- ------------
27 27 Financial Data Schedule This Filing
(b) Reports on Form 8-K.
On December 16, 1996, the Company filed a Current Report on Form 8-K with
the Commission reporting the Company's acquisition of a 25% working interest
in 50 gas wells. This report was amended on Form 8-K/A on February 24,
1997.PAGE
<PAGE> 24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated:
WASATCH PHARMACEUTICAL, INC.
Date: April 8, 1997 By /S/ Gary V. Heesch, President and CEO
Date: April 8, 1997 By /S/ David K. Giles, Secretary and CFO
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated.
Date: April 8, 1997 By /S/ Gary V. Heesch, Director
Date: April __, 1997 By ___ Craig Heesch, Director
Date: April 8, 1997 By /S/ Jack D. Brotherson, Director
Date: April 8, 1997 By /S/ Robert Arbon, MD, Director
Date: April __, 1997 By ___ Ronald J. Hollberg, Director
Date: April __, 1997 By ___ W.A. Gary, Director
Date: April 8, 1997 By /S/ Cecil Wall, Director
PAGE
<PAGE> 25
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Wasatch Pharmaceutical, Inc.
Salt Lake City, Utah
We have audited the accompanying consolidated balance sheet of Wasatch
Pharmaceutical, Inc. (formerly Ceron Resources Corporation) (a Utah
corporation in the development stage) as of December 31, 1996, and the related
consolidated statements of operations, shareholders' equity, and cash flows
for the year then ended, and for the period from September 7, 1989 (date of
inception and incorporation of the principal developmental activity) through
December 31, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit. The Company's consolidated financial
statements as of and for the year ended December 31, 1995 and for the period
September 7, 1989 (date of inception and incorporation of the principal
developmental activity) through December 31, 1995 were audited by other
auditors whose report, dated May 14, 1996, included an explanatory paragraph
describing conditions that raise substantial doubt about the Company's ability
to continue as a going concern. The financial statements for the period
September 7, 1989 (date of inception and incorporation of the principal
development activity) through December 31, 1995 reflect total revenues and net
loss of $337,700 and $1,080,270, respectively, of the related totals. The
other auditors' report has been furnished to us, and our opinion, insofar as
it relates to the amounts included for such prior period, is based solely on
the report of other such auditors.
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 and the report of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audit and the report of other auditors, such
financial statements referred to in the first paragraph present fairly, in all
material respects, the financial position of the Company, as of December 31,
1996, and the results of its operations and its cash flows for the year then
ended, for the period from September 7, 1989 (date of inception and
incorporation of the principal development activity) to December 31 ,1996 in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company is a development stage
enterprise which has suffered recurring losses from operations and has a net
working capital deficiency, which raise substantial doubt about its ability to
continue as a going concern. Management's plans regarding those matters also
are described in Note 2. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/S/THOMAS LEGER & CO. L.L.P.
Houston, Texas
March 19, 1996
<PAGE> 26
WASATCH PHARMACEUTICAL, INC.
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------
ASSETS
<S> <C>
Current Assets:
Cash.....................................................$ 11,990
Accounts receivable, trade............................... 2,926
Due from officers (Note 3)............................... 6,600
Inventory (Note 1)....................................... 8,586
-------------
Total current assets................................ 30,102
-------------
Property and Equipment (Notes 1 and 5)
Oil and gas properties, successful efforts method:
Property subject to amortization....................... 3,719,536
Clinic furniture and fixtures............................ 39,750
-------------
3,759,286
Less accumulated depreciation............................ (15,668)
-------------
Total property and equipment, net........................ 3,743,618
-------------
Other Assets
Deposits................................................. 600
Other (Note 6)........................................... 750
-------------
Total Other Assets....................................... 1,350
-------------
TOTAL ASSETS..................................................$ 3,775,070
=============
</TABLE>
The accompanying notes are an integral part of these financial statements.<PAGE>
<PAGE> 27
WASATCH PHARMACEUTICAL, INC.
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C>
Current Liabilities:
Cash overdraft...........................................$ 691
Account payable:
Trade.................................................. 104,424
Physicians............................................. 47,650
Related party (Note 3)................................. 6,500
Accrued oil and gas expenses............................. 8,011
Royalties payable (Note 4)............................... 883
Accrued interest......................................... 161,226
Accrued payroll taxes, interest and penalties............ 44,109
Current portion of notes payable (Note 5)
Vendors................................................ 117,333
Shareholders........................................... 794,387
-------------
Total current liabilities.......................... 1,285,214
-------------
Long-Term Debt
Notes payable - less current portion (Note 5)........... 5,000
-------------
Stockholders' Equity (Note 6)
Preferred stock, $0.001 par value, 1,000,000 shares
authorized, 49,258 shares issued and outstanding
($49,258 aggregate liquidating value).................. 2,463
Common stock, $0.001 par value, 50,000,000 shares
authorized, 6,635,956 shares issued and outstanding.... 6,636
Additional paid-in capital.............................. 4,360,135
Deficit accumulated during the development stage........ (1,584,378)
--------------
Total............................................... 2,784,856
Less Notes receivable option holder (Note 6)............ (300,000)
--------------
Total Shareholders' equity.............................. 2,484,856
--------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY...................$ 3,775,070
==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 28
WASATCH PHARMACEUTICAL, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the year ended
December 31, From
------------------ Inception to
1996 1995 Dec. 31, 1996
---------- ---------- -------------
<S> <C> <C> <C>
REVENUES
Professional fee income...........$ 31,529 $ 69,251 $ 145,866
Product sales..................... 82,715 155,790 306,078
Oil and gas sales................. 3,021 - 3,021
---------- ---------- ------------
Total Revenues.................... 117,265 225,041 454,965
---------- ---------- ------------
COSTS AND EXPENSES
Costs of clinic operations
Cost of product sold............. 7,072 17,664 37,294
Salaries......................... 99,116 83,663 183,079
Payroll taxes.................... 11,237 8,700 19,937
Employee leasing................. - 113,347 218,745
Physicians services.............. 46,200 77,893 154,468
Advertising...................... 21,234 86,250 206,302
Rent............................. 41,974 34,629 101,298
Depreciation..................... 6,811 7,499 17,200
---------- ---------- ------------
Clinic costs total................ 233,644 429,645 938,323
General and administrative expense
(See Note 10)..................... 291,965 183,392 860,631
Oil and gas operations expense..... 11,837 - 11,837
---------- ---------- ------------
Total operating expense........... 537,446 613,037 1,810,791
---------- ---------- ------------
LOSS BEFORE OTHER EXPENSES AND
PROVISION FOR INCOME TAXES......... (420,181) (387,996) (1,355,826)
---------- ---------- ------------
OTHER EXPENSES
Interest expense.................. 83,894 55,490 178,026
Other - net....................... 33 7,769 50,526
---------- ---------- ------------
Total other expenses.............. (83,927) (63,259) (228,552)
---------- ---------- ------------
LOSS BEFORE PROVISION FOR
INCOME TAXES....................... (504,108) (451,255) (1,584,378)
Provision for income taxes
(Note 7)......................... - - -
---------- ---------- ------------
NET LOSS............................$ (504,108) $ (451,255) $ (1,584,378)
========== ========== ============
NET LOSS PER COMMON SHARE...........$ (0.149) $ (0.199) $ (0.580)
========== ========== ============
AVERAGE SHARES OUTSTANDING.......... 3,380,960 2,265,275 2,689,946
========== ========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 29
WASATCH PHARMACEUTICAL, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN COMMON SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Additional Accumulated
Common Stock
Paid-in Development
Shares Amount
Capital Stage Deficit
---------- ----------
- ---------- -------------
<S> <C> <C>
<C> <C>
Balance, September 7, 1989..................... - $ - $
- - $ -
Stock issued at inception at approximately
$0.0005 to the Company's founders for
services rendered............................. 10,000,000 5,334
- - -
Contribution of capital by a shareholder....... - 23,509
- - -
Net loss from inception through December
31, 1992...................................... - -
- - (170,895)
---------- ----------
- ---------- ------------
Balance, December 31, 1992..................... 10,000,000 28,843
- - (170,895)
Contribution of capital by a shareholder....... - 20,000
- - -
Net loss for the year ended December 31, 1993.. - -
- - (92,931)
---------- ----------
- ---------- ------------
Balance, December 31, 1993..................... 10,000,000 48,843
- - (263,826)
Common stock issued in payment of loan fees
at $0.005 per share in December, 1994......... 75,000 375
- - -
Contribution of capital by a shareholder....... - 170,434
- - -
Redemption and cancellation of common stock
for cash and note payable..................... (600,000) (25,000)
- - -
Net loss for the year ended December 31, 1994.. - -
- - (365,189)
---------- ----------
- ---------- ------------
Balance, December 31, 1994..................... 9,475,000 194,652
- - (629,015)
Stock issued at $0.005 per share for
services rendered during 1995................. 837,216 4,186
- - -
Contribution of capital by a shareholder....... - 1,000
- - -
Equivalent shares exchanged in the
consolidation of Medisys Research Group, Inc.
& Wasatch Pharmaceutical, Inc................. 1,777,040 (187,749)
184,051 -
Net loss for the year ended December 31, 1995.. - -
- - (451,255)
---------- ----------
- ---------- ------------
Balance, December 31, 1995..................... 12,089,256 12,089
184,051 (1,080,270)
To give retro-active effect to a one for four
reverse stock split (Note 6).................. (9,066,924) (9,067)
9,067 -
---------- ----------
- ---------- ------------
Restated balance, December 31, 1995............ 3,022,332 3,022
193,118 (1,080,270)
Proceeds from the sale of common stock......... 57,500 58
137,442 -
Cash proceeds from the exercise of employee
stock options................................. 250,000 250
- - -
Stock issued in connection with the following:
Borrowing funds............................... 148,374 148
- - -
Consulting services........................... 100,000 100
- - -
Services rendered............................. 7,500 8
- - -
Cancellation of debt.......................... 250 -
12,339 -
Stock exchanged for the following assets:
Preferred stock of an insurance holding
company (Note 6)............................. 750,000 750
- - -
Oil and gas properties (Note 1)............... 2,000,000 2,000
3,717,536 -
Stock issued for a short-term note under a
November, 1996 stock option plan (Note 6)..... 300,000 300
299,700 -
Net loss for the year ended December 31, 1996.. - -
- - (504,108)
---------- ----------
- ---------- ------------
Balance, December 31, 1996 6,635,956 $ 6,636
$4,360,135 $ (1,584,378)
========== ==========
========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 30
WASATCH PHARMACEUTICAL, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the year ended
December 31, From
------------------ Inception to
1996 1995 Dec. 31, 1996
---------- ---------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITY
Net loss...........................$ (504,108) $ (451,255) $(1,584,378)
Adjustments to reconcile net loss
to net cash used in operating
activities-
Depreciation and amortization.... 7,617 7,861 18,366
Expenses paid by shareholder..... - 1,000 46,737
Loss on fixed asset disposal..... 3,513 - 3,513
Change in working capital........ 92,256 178,956 355,383
---------- ---------- -----------
Net cash used in operating
activities........................ (400,722) (263,438) (1,160,379)
---------- ---------- -----------
CASH FLOWS FROM INVESTING ACTIVITY
Purchase of clinic equipment....... (755) (7,814) (25,960)
(Increase) decrease in other assets 266 1,393 (600)
---------- ---------- -----------
Net cash used in investing
activities........................ (489) (6,421) (26,560)
---------- ---------- -----------
CASH FLOWS FROM FINANCING ACTIVITY
Proceeds from borrowings........... 382,100 233,831 1,034,452
Debt retired....................... (120,000) (2,349) (125,947)
Proceeds from sale of common stock. 137,500 - 137,500
Capital contributed by shareholder. - - 154,800
Services paid for with common stock 256 4,186 5,965
Common stock exchanged for debt.... 12,318 - 12,318
Exercised employee stock options... 250 - 250
Redemption of common stock......... - - (20,409)
---------- ---------- -----------
Net cash provided by financing
activities........................ 412,424 235,668 1,198,929
---------- ---------- -----------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................... 11,213 (34,191) 11,990
CASH AND CASH EQUIVALENTS, Beginning
of period.......................... 777 34,968 -
---------- ---------- -----------
CASH AND CASH EQUIVALENTS, Ending
of period..........................$ 11,990 $ 777 $ 11,990
========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 31
WASATCH PHARMACEUTICAL, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the year ended
December 31, From
------------------ Inception to
1996 1995 Dec. 31, 1996
---------- ---------- -------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN CASH FROM
CHANGES IN OPERATING ASSETS
AND LIABILITIES
Accounts receivable...............$ (844) $ 961 $ (2,925)
Due from officers................. (6,100) - (6,600)
Inventory......................... 788 6,190 (8,586)
Cash overdraft.................... (26,271) 26,874 691
Accounts payable:
Trade............................ 13,044 37,547 104,424
Physicians....................... 26,400 21,250 47,650
Related party.................... (1,000) - 6,500
Accrued expenses.................. 86,239 86,134 214,229
---------- ---------- -----------
Change in working capital......$ 92,256 $ 178,956 $ 355,383
========== ========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION
Cash paid for interest............$ 11,604 $ - $ 11,604
Cash paid for taxes...............$ - $ - $ -
SUPPLEMENTAL SCHEDULE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES
Common stock issued for assets
Acquire:
Clinical equipment and fixtures..$ - $ - $ 13,790
Oil and gas properties........... 3,719,536 - 3,719,536
Preferred stock of an insurance
Company......................... 750 - 750
For a short-term note............ 300,000 - 300,000
</TABLE>
The accompanying notes are an integral part of these financial statements.
PAGE
<PAGE> 32
WASATCH PHARMACEUTICAL, INC.
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
1 NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
History and Nature of Business - The consolidated financial statements include
Wasatch Pharmaceutical, Inc. (a development stage company) (Wasatch or the
Company), and its wholly owned subsidiaries, Medisys Research Group, Inc. and
American Institute of Skin Care, Inc.
On December 29, 1995, Wasatch (formerly Ceron Resources Corporation) and
Medisys Research Group, Inc. (Medisys) completed an Agreement and Plan of
Reorganization whereby Wasatch issued 85% of its then outstanding shares of
common stock in exchange for all of the issued and outstanding common stock of
Medisys and the name was changed to Wasatch Pharmaceutical, Inc.
Medisys Research Group, Inc. (Medisys) was incorporated on September 7, 1989
as a Utah corporation for the purpose of developing treatment programs for
various skin disorders. On January 21, 1994, American Institute of Skin Care,
Inc. (AISC) was incorporated as a wholly owned Utah subsidiary of Medisys to
administer the skin treatment programs developed by Medisys.
The acquisition of Medisys by Wasatch was accounted for as a purchase by
Medisys because the shareholders of Medisys control the surviving company and
Medisys becomes the acquiring entity. There was no adjustment to the carrying
value of the assets or liabilities of Wasatch in as much as its market value
approximated the net asset carrying value. In summary, Wasatch is the
acquiring entity for legal purposes and Medisys is the surviving entity for
accounting purposes.
On January 16, 1996, Wasatch (formerly Ceron Resources Corporation) merged
with and into Wasatch Pharmaceutical, Inc., which became the surviving
corporation. The merger was for the purpose of changing the domicile of
Wasatch from Delaware to Utah and modifying its capital structure.
Acquisition of Oil and Gas Properties - On November 20, 1996, Wasatch
exchanged 2,000,000 of its common shares for a 25% interest in fifty oil and
gas wells located in western West Virginia.
Under the terms of the agreement, Wasatch's is entitled to 25% of the revenues
and 25% of the operating expenses from the wells. However, the property
operator has a vendor's lien that entitles it to offset future revenues
against cumulative operating deficits.
At the time they were acquired, the properties were not economically
productive. The developer has commenced a program to re-complete each of the
wells in 1997. The Company does not bear any of the re-completion costs.
In accordance with generally accepted accounting principles for non-monetary
transactions, the acquired properties were recorded at a fair market value
that was derived from the cash price for comparable recoverable reserves but
is not in excess of risk discounted future net revenues.
PAGE
<PAGE> 33
WASATCH PHARMACEUTICAL, INC.
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
1 NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
All of the Company's oil and gas properties are located in the United States.
Under the successful efforts method adopted by the Company, the costs of
successful wells, development dry holes and leases containing productive
reserves are capitalized and amortized on a unit-of-production basis over the
life of the related reserves. Cost centers for amortization purposes are
determined on a field-by-field basis. Estimated future abandonment and site
restoration costs, net of anticipated salvage values, are taken into account
in depreciation, depletion and amortization. Exploratory drilling costs are
initially capitalized pending determination of proved reserves but are charged
to expense if no proved reserves are found. Other exploration costs, including
geological and geophysical expenses, leasehold expiration costs and delay
rentals, are expensed as incurred. Unproved properties are periodically
assessed for impairment in value, with any impairment charged to expense.
Use of Estimates - The presentation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of asset 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
estimated.
Statements of Cash Flows - Cash equivalents include short-term, highly liquid
investments with maturities of three months or less at the time of
acquisition.
Loss Per Share - The computations of loss per share of common stock are based
on the weighted average number of shares outstanding at the date of the
financial statements. The options outstanding at December 31, 1996 are not
common stock equivalents due to their anti-dilutive effect.
Income Taxes - The Company has adopted SFAS No. 109, "Accounting for Income
Taxes," which requires an asset and liability approach to financial accounting
and reporting for income taxes. The difference between the financial
statement and tax basis of assets and liabilities is determined annually.
Deferred income tax assets and liabilities are computed for those differences
that have future tax consequences using the currently enacted tax laws and
rates that apply to the periods in which they are expected to affect taxable
income. Valuation allowances are established, if necessary, to reduce the
deferred tax asset to the amount that will more likely than not be realized.
Income tax expense is the current tax payable or refundable for the period
plus or minus the net change in the deferred tax assets and liabilities.
See Note 7 for additional information about the Company's tax position.
Inventory - Inventory is recorded at the lower of cost or market, on a first
in, first out basis.
Property and Equipment - Property and equipment are stated at cost less
accumulated depreciation, which is computed using the straight-line method
over lives ranging from five to seven years. Expenditures for major
acquisitions and improvements are capitalized while expenditures for
maintenance and repairs are charged to operations. The cost of assets sold or
retired and any related accumulated depreciation are eliminated from the
accounts, and any resulting gain or loss is included in operations.
<PAGE> 34
WASATCH PHARMACEUTICAL, INC.
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
1 NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Principles of Consolidation - The consolidated financial statements include
the accounts of the Company's wholly owned subsidiaries, Medisys Research
Group, Inc. and American Institute of Skin Care, Inc. All material
inter-company transactions and balances have been eliminated.
Restatement of Share Amounts - All per share amounts in these financial
statements have been restated to the earliest period to give effect for a one
for four stock split approved by the Board of Directors in August, 1996.
Concentrations of Credit Risk - Wasatch maintains its cash accounts in two
banks located in the Salt Lake City, Utah metropolitan area. The cash
balances are insured by the FDIC up to $100,000 at each bank. At December 31,
1996 the Company did not have any deposits in excess of $100,000 in a bank.
Wasatch sells its products and services to individuals in the Salt Lake City
and Provo, Utah metropolitan areas. Sales are for cash and using major credit
cards, or through the extension of credit to the individual and/or their
insurance carrier. Wasatch maintains adequate reserves for potential credit
losses, and such losses have been within Management's estimates.
Stock Based Compensation - In October 1995, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standard No. 123, Accounting
for Stock Based Compensation ("FAS 123"), effective for Wasatch on January
1,1996. FAS 123 permits, but does not require, a fair value based method of
accounting for employee stock option plans, resulting in compensation expense
being recognized in the results of operations when stock options are granted.
Wasatch plans to continue the use of its current intrinsic value based method
of accounting for stock option plans where no compensation expense is
recognized.
Changes in Basis and Presentation - Certain financial statement presentations
for 1995 and for the period from inception on September 7, 1989 through
December 31, 1995 have been reclassified to conform to the 1996 presentation.
For the purpose of this financial presentation "Inception" shall mean
September 7, 1989, which was the commencement of Medisys operations.
Legal Matters - Wasatch is subject to other legal proceedings which have
arisen in the ordinary course of its business. In the opinion of management,
these actions will not have a material adverse effect upon the financial
position of Wasatch.
2 GOING CONCERN
Since inception, Wasatch has been a dual purpose development stage
enterprise. First, it has developed its clinic based protocol and treatment
programs for patient care and maintenance: in addition to the business
processes for such patient care. Secondly, Wasatch has been pursuing a
strategy to raise sufficient capital for nationwide expansion. At December 31,
1996, management projects that its business plan to commence the operational
phase of its clinic treatment activities will be implemented in 1997.
PAGE
<PAGE> 35
WASATCH PHARMACEUTICAL, INC.
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
2 GOING CONCERN, continued
Wasatch's financial statements are prepared using generally accepted
accounting principles applicable to a going concern which contemplates the
realization of assets and liquidation of liabilities in the normal course of
business. However, Wasatch in its development stage has not established a
source of revenues sufficient to cover its operating costs and allow it to
continue as a going concern. Wasatch plans to eventually seek long-term
funding through private and public stock offerings. Management believes that
sufficient funding will be raised to meet operating needs during the remainder
of its development stage.
3 RELATED PARTY TRANSACTIONS
Discussed below are related party transactions not included in other notes to
the financials statements.
During the years ended December 31, 1995, 1994 and 1993, shareholders
contributed $1,000, $170,434 and $20,000, respectively, to the Company for the
payment of expenses on its behalf. These contributed capital amounts were
recorded as additional paid-in capital.
On October 11, 1994, the Company entered into an agreement with a shareholder
to redeem 150,000 shares for $25,000. The Company paid the shareholder
$12,500 upon execution of the agreement, and an additional $5,000 and $1,000
during 1994 and 1996, respectively. The remaining balance of $6,500 is non
interest bearing and is due on demand.
During 1996, the Company loaned $6,600 to its principal officer and
shareholder. The amount bears interest at a rate of 7% per annum and is due
October 18, 1997.
In 1996, the board of directors approved performance bonuses of $35,000 and
$25,000 for two principal officers with the stipulation that the amounts are
to be paid only when sufficient cash is available. Management considers this
to be accruable additional compensation only when sufficient monies are
available to pay the bonuses. As of December 31, 1996 only one officer had
been paid (approximately $4,000) and the payment was recorded as compensation.
4 ROYALTIES PAYABLE
A subsidiary of the Company (Medisys) acquired the marketing rights to certain
skin care products during 1991. As part of the agreement, Medisys is required
to pay royalties equal to 5% of gross product sales. Once royalties totaling
$10,000,000 have been paid, Medisys will own the technology associated with
the skin care products. Annual royalty payments are due April 1 of the
following year.
PAGE
<PAGE> 36
WASATCH PHARMACEUTICAL, INC.
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
5 NOTES PAYABLE
Notes payable at December 31, 1996 are as follows:
Unsecured notes payable to shareholders dated at various
dates, accruing interest at 10%, generally are to be
repaid from the proceeds of a proposed share offering
and in some cases are past due by terms of the note.................$ 594,387
Unsecured notes payable to vendors dated various dates,
accruing interest at rates ranging from 6% to 10%.
Certain notes are guaranteed by an officer of the Company........... 117,333
Unsecured notes payable to a director of a subsidiary,
dated April 6, 1995 with interest at 10% due April 30, 1998......... 5,000
Notes payable to two shareholders, dated December 5, 1996,
due June 5, 1997, collateralized by the Company's interest
in the oil and gas properties, accruing interest at 20%.
In addition, the Company has agreed to reserve 20% of all
funds received from the sale of stock options and 20% of
the receipts received from an insurance company to be used
to pay off these notes (See Note 6 for further information
on the insurance company)........................................... 200,000
---------
916,720
Less current portion................................................ 911,720
---------
Total long-term liabilities.........................................$ 5,000
=========
6 CAPITAL STRUCTURE
The Company has authorized 50,000,000 shares of common stock with a par value
of $0.001 per share and up to 1,000,000 shares of preferred stock with a par
value of $0.001 per share. In establishing a preferred stock class or series,
the Board of Directors is vested with the authority to fix and determine the
powers, qualifications, limitations, restrictions, designations, rights,
preferences, and other variations of each class or series.
Common Stock - In August 1996, the Board of Directors authorized a 4-for-1
reverse split of common stock. All references in the financial statements to
the number of shares and per share amounts of Wasatch's common stock have been
retroactively restated to reflect the decrease in the number of common shares
outstanding.
Stock Options - Employees - In August 1996 the Company granted options to its
two principal officers to purchase 250,000 shares of common stock for $250.
The options were exercised in September and December, 1996. In November 1996,
Wasatch reserved 100,000 shares of the Company's stock as potential
compensation to consultants. The shares to be issued are to be determined by
the President. In September, 1996, the Company granted options to four
shareholders to purchase 750 shares of common stock for $2.00 per share. The
options expire in two years.
<PAGE> 37
WASATCH PHARMACEUTICAL, INC.
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
6 CAPITAL STRUCTURE, continued
Stock Options - Consultant - In November 1996, Wasatch granted the following
stock options to a capital markets consulting company in connection with
services rendered and to be rendered in the future (See Note 8 regarding this
consulting agreement). The stock options expire November 5, 1998.
Granted Option Shares Price per Share
--------------------- ---------------
400,000 $1.00
300,000 1.50
400,000 2.00
300,000 2.50
100,000 3.00
In December 1996, options for 300,000 shares were exercised by the consulting
firm and Wasatch was given a one year non-interest bearing note for $300,000.
The shares were issued and the outstanding balance of the note has been
recorded as a reduction to shareholders' equity.
Escrowed Share Agreement - On November 1 and 15, 1996, the Board of Directors
authorized two agreements, each of which resulted in issuing 6,000,000 shares
of the Company's stock to an insurance company for a $30,000,000 note payable
to Wasatch (total of 12,000,000 shares for $60,000,000). Each agreement
contains generally the same terms and conditions. The shares are being held in
escrow pending payment of the note and the voting rights will remain with the
Company's Board of Directors on a pro-rata basis until the note is paid.
The note payments can be made several different ways and are to some extent,
dependent on the price of the Company's stock. In addition, the agreement
provides for a minimum payment commencing February 15, 1997. This minimum
payment has not been made and the insurance company has requested an extension
of time for payment. The Board of Directors has not responded to that request
for an extension. The Company has an option to buy back 6,000,000 or
5,880,000 shares of the Company's common stock at $5.00 or $7.50 per share,
depending on the date of the agreement. The term of that option begins three
years and expires five years from the date of the agreement.
In as much as the transaction is dependent on significant contingencies, none
of which have occurred, nothing has been recorded by Wasatch.
Preferred Stock Purchase - On November 29, 1997, the Company exchanged 750,000
shares common stock for 12,000 shares of $250 par value preferred stock of the
parent of an insurance company. The preferred stock has a 6% per annum
dividend with the first dividend due February 28, 1997. In February, 1997,
the Company granted a 90 day extension for the initial dividend payment.
Management considered this to be a speculative investment and the exchange was
recorded at a nominal amount equal to the par value of the Company's common
stock ($750).
PAGE
<PAGE> 38
WASATCH PHARMACEUTICAL, INC.
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
6 CAPITAL STRUCTURE, continued
Contested Consulting Options - On June 7, 1996, Wasatch executed a consulting
agreement which granted the following stock options (See Note 8 regarding the
contested consulting agreement). The stock options expire June 1, 1999.
Granted Option Shares Price per Share
--------------------- ---------------
100,000 $0.25
100,000 0.50
100,000 0.625
In October, 1996 100,000 common shares were issued to the consultants in
accordance with the agreement. The company recorded these shares for a
nominal value equal to the par value of $100.
Non Qualified Stock Option Plan - On December 16, 1996, Wasatch adopted the
1996 Non Qualified Stock Option Plan ("Plan") with 1,700,000 shares of the
Company's common stock being issuable at the discretion of Board of
Directors. The terms, exercise price and vesting, as well as other rights,
will also be determined by the Board of Directors. The Plan would allow the
Company to provide stock as an incentive to employees, officers, directors and
consultants who provide services to the Company. As of December 31, 1996,
1,500,000 options have been granted under this plan.
Preferred Stock - The Company's preferred stock (Series A) entities the holder
to per-share annual dividends equal to 20% of the Company's net income divided
by 300,000, times the number of shares of preferred stock outstanding (3.28%
of net income based on preferred stock outstanding at December 31, 1996 and
1995). Dividends are required to the extent that there is net income and that
there are funds legally available. To the extent funds are not legally
available in net income years, the payment of the dividends calculated shall
be deferred until such time as there shall be funds legally available. The
shares are redeemable at the option of the Company at $2.00 per share plus
accrued and unpaid dividends. The shares have a liquidating value of $1 per
share plus accrued and unpaid dividends. There were no accrued and unpaid
dividends at December 31, 1996 and 1995.
On July 26, 1994, the shareholders of the Company passed a resolution to allow
the exchange of one share of preferred stock for two shares of common stock.
To date, no shares of preferred stock have been exchanged.
PAGE
<PAGE> 39
WASATCH PHARMACEUTICAL, INC.
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
6 CAPITAL STRUCTURE, continued
Preferred stock transactions for the two years ended December 31, 1996 were:
Shares Amount
------ ------
Balance, December 31, 1994................................ - $ -
Stock issued in the consolidation of Wasatch and Medisys..49,258 2,463
------ ------
Balance, December 31, 1995 and 1996.......................49,258 $2,463
====== ======
Options - Stock option activity for the Company during 1996 was (no options
were granted in 1995) as follows:
1996
----------
Stock options outstanding, beginning of year -
Granted during year:
Price per Share
---------------
$0.001 250,000
0.25 100,000
0.50 100,000
0.625 100,000
1.00 400,000
1.50 300,000
2.00 400,000
2.50 300,000
3.00 100,000
----------
2,050,750
----------
Exercised during year:
0.001 250,000
1.00 300,000
----------
550,000
----------
Expired during year: -
----------
Stock options outstanding, end of year (per share:
$0.25 to $3.00 at December 31, 1996 See Note 8
contested consulting agreement) 1,500,750
==========
PAGE
<PAGE> 40
WASATCH PHARMACEUTICAL, INC.
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
6 CAPITAL STRUCTURE, continued
During 1996 the Company issued stock under the two following stock option
agreements:
Issued Option Price Grant Date
------ ------------ ----------
To officers of the Company 250,000 $0.001 8/12/96
Under a consulting agreement 300,000 $1.00 11/18/96
There are not other stock purchase plans at December 31, 1996.
The estimated fair value of the options granted during 1996 was $.001 for the
officers plan and $.23 for the stock issued in connection with the consulting
agreement.
The fair value of options granted was estimated on the date of grant by using
the Black-Scholes options pricing model assuming a risk free interest rate of
5.82% and 6% for two and three year options, respectively, no expected
dividend yield, and expected life of two and three and zero expected
volatility. The zero volatility was assumed because the shares were not
tradeable in a secondary market system when the options to purchase were
granted.
The Company applies the Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for stock option and purchase plans.
Accordingly, no compensation cost has been recognized for the stock option
agreement. Had compensation cost been determined based upon the fair value at
the grant dates for awards under those plans consistent with the method of
FASB Statement 123, the Company's net loss and loss per share for the year
ended December 31, 1996 would have been as reflected in the pro forma amounts
indicated below:
Net loss $530,065
========
Net loss per common share $ 157
========
7 INCOME TAXES
The following table sets forth a reconciliation of the statutory federal
income tax:
1996 1995
---------- ----------
Loss before income taxes $ (504,108) $ (451,255)
========== ==========
Income tax benefit computed at statutory rates $ (171,397) $ (153,427)
Increase in valuation allowance 168,079 153,427
Permanent differences:
Nondeductible expenses 3,318 -
---------- ----------
Tax Benefit $ - -
========== ==========
No federal income taxes have been paid since the inception of the Companies.
<PAGE> 41
WASATCH PHARMACEUTICAL, INC.
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
7 INCOME TAXES, continued
Deferred Income Taxes - Deferred income tax provisions for the years ended
December 31, 1996 and 1995 result from the following temporary differences:
1996 1995
---------- ----------
Net operating loss carryforward benefit $ (168,079) $ (153,427)
Valuation allowance (168,079) (153,427)
---------- ----------
Total deferred tax benefit $ - $ -
========== ==========
The Company's deferred tax position reflects the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax reporting.
Significant components of the deferred tax liabilities and assets are as
follows:
1996 1995
---------- ----------
Deferred tax liabilities $ - $ -
Deferred tax assets:
Net operating loss carryforwards 535,371 367,292
Charitable contribution carryforwards - -
Alternative minimum tax credit carryforwards (535,371) (367,292)
---------- ----------
Total deferred tax assets - -
---------- ----------
Net deferred tax liability $ - $ -
========== ==========
Net Operating Loss Carryforwards - As of December 31, 1996, the Company had
cumulative net operating loss carryforwards ("NOL") for federal income tax
purposes of approximately $1,574,618, which expire in 2007 through 2011, and
net operating loss carryforwards for alternative minimum tax purposes of
approximately the same amount which expire in 2007 through 2011. Due to
ownership changes, future utilization of the net operating loss carryforwards
will be limited by Internal Revenue Code Section 382.
8 COMMITMENTS AND CONTINGENCIES
Lease Commitment - The Company has two leases for office space. One lease has
a rent of $650 per month through January 31, 1997 and $700 per month through
January 31,1998 with a one year option for rent of $725 per month. The second
lease has a rent of $2,050 per month and expires in October, 1999.
Consulting Agreement - On November 18, 1996, the Board of Directors ratified a
consulting agreement with a company to provide services consisting of
financial and business consulting for a period of one year (contract expires
November 5, 1997). In consideration for these services, the Company granted
stock options to the consulting company (See Note 6 for details of the option
granted).
<PAGE> 42
WASATCH PHARMACEUTICAL, INC.
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
8 COMMITMENTS AND CONTINGENCIES, continued
Contested Consulting Agreement - On June 7, 1996, Wasatch entered into an
agreement with a consulting company who was to provide financial and business
advice. In consideration for this service the Company granted stock option to
the consulting company (See Note 6 for detail of the options granted). Also
Wasatch agreed to pay a retainer of $3,000 per month and certain types of
expense not to exceed $1,000 per month. The monthly retainer and expense
reimbursements were to be paid back under certain conditions. As of December
31, 1996, Wasatch had paid $500 under this agreement. Also, the Company
issued the consulting firm 100,000 of its common shares of Company. Due to
lack of performance on the part of the consultants, the Company sent the two
principals in the consulting company an agreement to terminate the prior
agreement as of February 4, 1997. To date one principal has signed the
termination agreement, but the second principal has not.
9 SUBSEQUENT EVENT
In March, 1997, the Company authorized the issuance of 2,200,000 common shares
to key officers and directors as compensation for past services and
assistance.
10 GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expenses are as follows:
From
December 31, Inception
1996 1995 Dec. 31, 1996
---------- ---------- -------------
Officers compensation $ 143,149 $ 84,995 $ 382,584
Professional fees 49,159 2,910 174,757
Travel 20,435 13,209 34,360
Telephone 13,649 16,450 33,334
Other 65,573 65,828 235,778
---------- ---------- ------------
$ 291,965 $ 183,392 $ 860,631
========== ========== ============
PAGE
<PAGE> 43
WASATCH PHARMACEUTICAL, INC.
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
11 SUPPLEMENTARY FINANCIAL INFORMATION ON OIL AND GAS EXPLORATION, DEVELOPMENT
AND PRODUCTION ACTIVITIES (UNAUDITED)
This footnote provides unaudited information required by Statement of
Financial Accounting Standards No. 69, "Disclosures about Oil and Gas
Producing Activities."
Capitalized Costs - Capitalized costs and accumulated depreciation, depletion
and amortization relating to the Company's oil and gas producing activities,
all of which are conducted within the continental United States, are
summarized below.
Year Ended
December 31, 1996
-----------------
Capitalized costs, properties subject to amortization $3,719,536
Accumulated depreciation, depletion and amortization 806
----------
Net capitalized costs $3,718,730
==========
Costs Incurred - Costs incurred in oil and gas property acquisition,
exploration and development activities are summarized below.
Year Ended
December 31, 1996
-----------------
Property acquisition costs, proved $3,719,536
==========
Results of Operations - Results of operations for the Company's oil and gas
producing activities are summarized below.
Year Ended
December 31, 1996
-----------------
Oil and gas revenues $ 3,191
Production costs (11,201)
Depreciation, depletion and amortization (806)
----------
Results of Operations $ (8,816)
==========
Results of operations from oil and gas producing activities are determined
using actual historical revenues, production costs (including production
related taxes), depletion and amortization of the capitalized costs subject to
amortization. General and administrative expenses and interest expense are
excluded from this determination of results of operations. Income tax benefit
is computed by applying the statutory tax rates to earnings before income tax
expense with recognition of tax credits and allowances relating to oil and gas
producing activities. No income tax benefit was recognized during the
reported periods.
PAGE
<PAGE> 44
WASATCH PHARMACEUTICAL, INC.
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
11 SUPPLEMENTARY FINANCIAL INFORMATION ON OIL AND GAS EXPLORATION, DEVELOPMENT
AND PRODUCTION ACTIVITIES (UNAUDITED), continued
Reserves - The Company's net ownership interest in estimated quantities of
proved gas reserves and changes in net proved reserves, all of which are
located in the continental United States, are summarized below.
Natural Gas (Mcf)
1996
-----------------
Proved developed
Beginning of year -
Purchases of oil and gas properties 3,276
Production (1)
------
End of year 3,275
======
Proved developed reserves
at end of year 3,275
======
Standardized Measure - The table of the Standardized Measure of Discounted
Future Net Cash Flows relating to the Company's ownership interest in proved
gas reserves as of year-end is shown below.
Year Ended
December 31, 1996
-----------------
Future cash inflows $ 14,736,938
Future production costs 2,357,910
Future development costs -
Future income tax expenses -
- ------------- Future net cash
flows $ 12,379,028
10% annual discount for estimating timing of cash flows 8,002,684
-------------
Standardized measure of discounted future net cash flows $ 4,376,344
=============
Future cash inflows are computed by applying year-end prices of gas to
year-end quantities of proved gas reserves. Future production and development
costs are computed primarily by the Company's independent petroleum
consultants by estimating the expenditures to be incurred in developing and
producing the Company's proved gas reserves at the end of the year, based on
year-end costs and assuming continuation of existing economic conditions.
Future income taxes are based on year-end statutory rates and tax credits.
The tax credits equaled or exceeded the future income taxes. A discount
factor of 10% was used to reflect the timing of future net cash flows. The
standardized measure of discounted future net cash flows is not intended to
represent the replacement cost or fair market value of the Company oil and gas
properties.
The standardized measure of discounted future net cash flows as of December 31,
1996 was calculated using prices in effect as of those dates, which averaged
$4.50 per Mcf of natural gas.
<PAGE> 45
WASATCH PHARMACEUTICAL, INC.
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
11 SUPPLEMENTARY FINANCIAL INFORMATION ON OIL AND GAS EXPLORATION, DEVELOPMENT
AND PRODUCTION ACTIVITIES (UNAUDITED), continued
Change in Standardized Measure - Changes in standardized measure of future net
cash flows relating to proved oil and gas reserves are summarized below.
Year Ended
December 31, 1996
-----------------
Changes due to current year operations:
Production costs in excess of sales of oil and gas $ 8,816
Purchases of oil and gas properties 4,367,528
-----------
Net increase (decrease) 4,376,344
Beginning of year -
-----------
End of Year $ 4,376,344
===========
Sales of gas, net of production costs, are based on historical pre-tax
results. Purchases of minerals in place are reported on a pre-tax discounted
basis.
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<ARTICLE> 5
<CIK> 0000037848
<NAME> WASATCH PHARMACEUTICAL INC
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 11,990
<SECURITIES> 0
<RECEIVABLES> 9,526
<ALLOWANCES> 0
<INVENTORY> 8,586
<CURRENT-ASSETS> 30,102
<PP&E> 3,759,286
<DEPRECIATION> (15,668)
<TOTAL-ASSETS> 3,775,070
<CURRENT-LIABILITIES> 1,285,214
<BONDS> 0
0
2,463
<COMMON> 4,366,771
<OTHER-SE> (1,884,378)
<TOTAL-LIABILITY-AND-EQUITY> 3,775,070
<SALES> 114,244
<TOTAL-REVENUES> 117,265
<CGS> 7,072
<TOTAL-COSTS> 537,446
<OTHER-EXPENSES> 33
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 83,894
<INCOME-PRETAX> (504,108)
<INCOME-TAX> 0
<INCOME-CONTINUING> (504,108)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (504,108)
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