UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10KSB
(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, 1999
[ ] 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 0-22899
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:
None
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(Title of class)
Securities registered pursuant to section 12(g) of the Act:
Title of each class Name of each exchange on which registered
Common Stock Par Value .001 N/A
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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
SB 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 10KSB or any amendment to this Form 10KSB. [ ] State
issuer's revenues for its most recent fiscal year: $44,619
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State the aggregate market value of the voting stock held by
non-affiliates 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 April 5, 2000 the aggregate market value of the voting stock held by
non-affiliates was $23,650,033 (based on 22,311,352 shares held by
non-affiliates multiplied by a average of the bid and ask price of $1.06 per
share).
As of April 5, 2000, the Registrant had 23,455,282 shares of common
stock issued and outstanding. (This includes 10,044 shares paid for but unissued
awaiting appropriate issue documentation; includes 576,978 shares committed to
officers under the Exchange Agreement; excludes 750,000 shares issued as
collateral to secure the Registrant's obligations.
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by reference and
the part of the form 10KSB (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
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TABLE OF
CONTENTS
PART I Page
ITEM 1. DESCRIPTION OF BUSINESS.................................... 4
ITEM 2. DESCRIPTION OF PROPERTY.................................... 8
ITEM 3. LEGAL PROCEEDINGS.......................................... 8
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........ 8
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS... 9
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.. 11
ITEM 7. FINANCIAL STATEMENTS....................................... 19
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE...................... 19
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE
ACT...................................................... 20
ITEM 10. EXECUTIVE COMPENSATION..................................... 21
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT........................................... 23
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............. 24
PART IV
ITEM 13. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K..... 27
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
This form 10KSB for fiscal year ended December 31, 1999 is being filed
on April 18, 2000, and should be read in conjunction with the Company's periodic
reports, including the Form 10KSB for December 31, 1998 and December 31, 1997,
which are being contemporaneously filed or have been filed immediately prior to
the date of this report.
History and Organization
The Company was organized under the laws of the State of Utah as Ceron
Oil Company on March 25, 1980. On February 6, 1981, pursuant to a merger
transaction, the Company became successor to Folio One Productions, Ltd.
("Folio"), a publicly held, inactive Delaware corporation that changed its name
to Ceron Resources Corporation.
Since the Company's inception and until its acquisition of Medisys
Research Group, Inc. ("Medisys") on December 29, 1995, the Company's revenue,
operating profit or loss, and identifiable assets have been attributable to one
business 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 income has been derived from
sublease income from its office spaces and de minimis film royalties.
On December 29, 1995, the Company acquired all of the issued and
outstanding shares of Medisys Research Group, Inc., ("Medisys") a Utah
corporation, through the issuance of shares of common stock, $.001 par value
("Common Stock") of the Company. On January 16, 1996, the Company merged with
and into Wasatch Pharmaceutical, Inc., a Utah corporation. That merger was for
the purpose of changing the domicile of the Company from Delaware to Utah,
effecting a name change to Wasatch Pharmaceutical, Inc. and changing the par
value of its common stock to $0.001.
Dermatology Operations
Medisys, a research and development company in the field of
dermatology, was incorporated in Utah in September, 1989. Prior research was
conducted primarily by Gary V. Heesch (currently CEO of the Company) through a
predecessor company, 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 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.
Medisys has developed an additional family of products, including
cleansers, astringents, and lotions that are sold as part of the overall
treatment regimen. These products are manufactured in an FDA approved,
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independent third party, laboratory located in California. In connection with
the sale of its products, Medisys may offer skin care products such as soaps and
cosmetics.
Through clinical studies and test marketing at doctors' offices, the
management of Medisys believes that the most successful treatment regimen will
include a uniform and consistent clinical surrounding (the so called virtual
clinic) as opposed to sale of the active prescription drug kits 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 in a supervised 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 and interacting with the Internet online patients
through the "virtual clinic" environment.
AISC has opened two 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 and the second clinic was established in Provo, Utah in November 1994.
Patients were treated in these clinics through 1997 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.
AISC currently operates the two Utah clinics. As funds are available
for expansion of its clinical operations, AISC plans to open and operate medical
skin care clinics using the "Skin Fresh Methodology" including utilizing the
treatment centers established to market and treat through the "Internet". The
company intends to establish these brick and mortar and electronic clinics,
which are patterned after the prototype clinics, in large metropolitan areas
under the supervision of a licensed physician. The Company's plan to open
additional clinics is dependent upon raising additional capital and there can be
no assurance that such capital will be available.
Because the treatment approach to these common skin problems is mainly
topical and does not rely on 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. The
treatments do not rely on the expensive, harsh 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 that is being driven by cost reductions and cost
containment.
Medisys owns all the rights to the technology developed by Mr. Gary V.
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 four years and management of the Company believes that the "Skin Fresh"
technology is effective in its present form without additional development.
Currently, other research and development has been limited due to the
Company's limited financial resources. As funds become available, Medisys
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intends to 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 licensing agreements, Medisys is not actively pursuing
other licensing arrangements.
The market in the United States for those suffering from these common
skin disorders is substantial, which the Company believes accounts for over 70%
of the patients that seek medical treatment from dermatologists. In addition,
the Company believes there exists the potential for a larger market with the
recent development of a skin rejuvenation treatment program that can be
administered through the skin care clinics and service centers. The Company
believes the key to successful Internet and clinic operations is to introduce
the Skin Fresh Technology into the market place with an aggressive advertising
campaign that targets a physician referral program, working closely with HMO's
and insurance companies to become a contract provider and through emphasizing
the appropriate Internet demographic.
Market Position and Competition
The "Skin Fresh" technology is used to treat acne, eczema, contact
dermatitis and other common skin disorders. Approximately 10% of those that
suffer from acne seek medical treatment, while the majority use over-the-counter
medications or simply live with the problem. With other common skin disorders, a
much higher percentage seek medical attention, usually from a dermatologist. At
the present time, the "Skin Fresh" technology is available only through the
Company's two prototype clinics because it requires a doctor to diagnose the
skin disorder and to prescribe a topical antibiotic that is part of the
treatment regimen. In the clinics, the patients learn the treatment regimen and
are monitored in frequent follow up visits to insure strict compliance. The
Company believes that a high success rate results when the patient follows the
treatment regimen very closely.
For the clinic operation, the primary competitors are primary care
physicians who treat common skin disorders and licensed dermatologists who have
existing practices and receive referrals from various primary care physicians.
Since the Company's technology represents an alternative treatment, the medical
community and the public at large must be educated about the benefits of the
"Skin Fresh" technology. Until this technology becomes more medically accepted
and the benefits of providing a safer and more cost effective method of treating
these skin disorders become more widely understood, the Company must compete
with the reputations, technical expertise and large financial resources of the
medical community.
The Company is developing an Internet marketing program and a strategy
to introduce over-the-counter products through retail outlets. The competition
in these areas will come from large pharmaceutical companies with large and
sophisticated distribution channels and fully developed marketing strategies.
Patents, Trademarks and Copyrights
The Company's brochures that describe the treatment regimen have been
copyrighted. There are no patents or patents pending for the Company's products.
The Company has prepared and filed U.S. trademarks applications for certain of
its trademarks including SILHOUETTE OF A FACE, WASATCH PHARMACEUTICAL, AMERICAN
INSTITUTE OF SKIN CARE and MEDYSIS. The formulas for the products are maintained
as trade secrets with the appropriate internal controls and security.
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Government Regulations
Because a physician is involved, the clinic operations are subject to
local, state and federal laws concerning medical practices. The FDA regulates
the Company's prescription drugs and all of the prescription drugs currently
used in the existing treatment program are FDA approved. The Company has made
application to the FDA for approval of five over-the-counter products. The
Company anticipates that these products would be sold through retail outlets and
through the Internet marketing program. However, there is no assurance the
products will be approved and if they are approved they may not be completed
until 2001.
Research and Development
The treatment regimen and products have been developed over the past
fifteen years with limited capital resources. As funds become available, the
Company intends to aggressively develop additional complimentary products that
can be distributed through the clinics, the Internet and through retail
distribution channels.
Oil And Gas Operations
On November 26, 1996, the Company's oil and gas division commenced when
the Company exchanged 2,000,000 shares of its Common Stock for a 25% net profits
interest in 50 oil and gas wells located in West Virginia. Under the terms of
the agreement, the Company is entitled to 25% of the revenues and is obligated
for 25% of the operating expenses but only to the extent there is revenue.
Although practically non-productive, the manager/operator for the properties
planned to enhance well production by utilizing improved technology and
re-completion methods to rework wells. The well owner and operator was obligated
to raise funds for the enhanced production program. After one year of no well
improvement activity, the Company requested that the operator complete his
commitment or commence negotiations for the return of The Company shares
exchanged originally.
Negotiations culminated in consummation of an exchange agreement and,
on February 8, 1998, the Company exchanged title in the fifty West Virginia
wells acquired in 1996 for 1,800,000 shares of its Common Stock and a release
from all past and future obligations pertaining to the aforementioned
properties. The Company currently undertakes no oil and gas activity.
During the fifteen months the Company held title to the West Virginia
oil and gas wells, revenues were minimal and the recorded losses from operations
were $26,800. The Company experienced $40,000 in cash costs (principally legal
and accounting fees) and a financial loss of $382,000 (attributable to the value
of the shares retained in the exchange) associated with the venture.
Employees
The Company has seven full time employees and two part-time employees
and believes its relations with its employees to be good.
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ITEM 2. DESCRIPTION OF PROPERTY
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 $1,889 per month. The term of
the lease is 12 months and renewable annually. In addition, the Company operates
a 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 $725 per
month. The lease is a month-to-month arrangement.
ITEM 3. LEGAL PROCEEDINGS
On August 27, 1996, a Small Claims Affidavit and Order was filed in the
Third Circuit Court, State of Utah from Dr. Don Houston, and 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. Payments have been
made with a balance of $450 owing December 31, 1999.
On November 1 and 15, 1996 the Company entered into certain contractual
arrangements with Lindbergh-Hammar, Inc. ("Lindbergh") which resulted in the
Company issuing 12 million shares of restricted Common Stock in exchange for a
note issued by Lindbergh with a face value of $60 million. The Company retained
voting rights on the Common Stock issued. Upon default of the note, the Company
made demand for payment and, failing to receive payment, proceeded to terminate
the contract and instructed its transfer agent to cancel the shares. After the
contract was terminated, Lindbergh transferred the 12 million shares of the
Common Stock issued in the transaction to a newly formed offshore corporation,
Crestport Insurance, which the Company believed had been organized by the owner
and CEO of Lindbergh.
On October 15, 1997, Crestport filed a lawsuit against the Company and
its stock transfer agent seeking damage arising out of the cancellation the 12
million shares. Crestport claimed that it was an innocent third party and a
holder in due course who had paid Lindbergh for the shares. As of December 31,
1997, the lawsuit was in the discovery stage. Crestport has asserted a claim for
$5,000,000 in damages arising out of cancellation of the share certificate. On
July 20, 1999, the Company moved for summary judgment in the proceeding and
requested that the plaintiff's claim be dismissed. The presiding judge denied
the Company's request for summary judgment and scheduled the matter for trial,
which is now set for May 2000.
The Company believes that the claim by Crestport is without merit and
intends to vigorously defend the proceedings. An adverse determination in these
proceedings would have a material adverse effect on the Company.
The Company is a party to other legal proceedings that are covered by
liability insurance, the outcome of which will not have a material adverse
effect on the Company.
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 fiscal year ended December 31, 1999.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The following table 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 Electronic Bulletin Board. The bid prices represent
interdealer quotations, without adjustments for retail mark-ups, markdowns or
commissions and may not necessarily represent actual transactions.
At April 5, 2000, the Company's Common Stock was quoted on the OTC
Electronic Bulletin Board at a bid and asked price of $1.03 and $1.09,
respectively.
High Bid Low Bid
Fiscal Year Ending December 31, 1997
First Quarter $2.50 $ .625
Second Quarter $3.75 $ .063
Third Quarter $3.375 $ .875
Fourth Quarter $1.125 $ .130
Fiscal Year Ending December 31, 1998
First Quarter $ .219 $ .13
Second Quarter $ .375 $ .17
Third Quarter $ .41 $ .13
Fourth Quarter $ .301 $ .13
Fiscal Year Ending December 31, 1999
First Quarter $ .32 $ .35
Second Quarter $ .75 $ .84
Third Quarter $ .75 $ .80
Fourth Quarter $ .55 $ .58
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 April 5, 2000 the Company had approximately 1039
shareholders of record based on information provided by the Company's transfer
agent.
Change in Securities
The following changes in securities occurred in the 4th quarter of
1999. Changes in securities for the first three quarters of 1999 were recorded
in the appropriate 10Qs for those periods.
1. Issued 50,000 restricted shares of Common Stock for an extension
on a repurchase agreement of shares.
2. Issued 65,000 restricted shares of Common Stock for extension on
loans.
3. Issued 135,000 restricted shares of Common Stock for consulting
services.
4. Issued 145,000 restricted shares of Common Stock in settlement of
$64,250 of debt.
5. Issued 11,076 restricted shares of Common Stock for finder's fees.
6. Issued 17,000 restricted shares of Common Stock for cash totaling
$290.
7. Issued 553,300 restricted shares of Common Stock in exchange for
stock transferred to a third party.
8. Issued 2,000,000 restricted shares of Common Stock into a trust,
out of which 135,357 shares have been sold for cash totaling
$48,762. 1,864,643 shares remain in trust and are not considered
outstanding.
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9. Issued 1,500,000 restricted shares of Common Stock in anticipation
of a loan transaction. The loan transaction was not completed and
the shares were cancelled January 20, 2000. These shares were not
considered outstanding as of December 31, 1999.
Each of the foregoing transactions was executed as an exempt transaction under
Section 4(2) of the Securities Act of 1933, involving a private sale not
utilizing public solicitation.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATION
Overview
At the end of 1999, the continuing operations of the Company consists
of the operation of its two wholly owned subsidiaries, Medisys Research Group,
Inc. ("Medisys") and American Institute of Skin Care, Inc. ("AISC").
Due to the lack of advertising and marketing, the two AISC clinics are
operating at approximately 5% to 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 negative impact on its clinics ability to attract new
patients. The prototype clinics have made the transition to accepting direct
reimbursement from most insurance carriers. An important strategy in the
clinic's marketing program is to develop contract relationships with insurance
companies that highlight the cost savings of the Company's treatment program. An
initial step would be to participate in a controlled study with a pilot
insurance company to identify these cost savings.
Since January, 1994, the Company's primary source of revenue has been
the prototype clinics. Revenues since inception have been small ($679,882) which
the Company believes is the result of limited resources for market development.
The Company's best revenue period was $225,000 for the twelve months of 1995.
Management estimates that the average patient revenue is $600 with 40% of the
charges attributable to doctor's fees. The clinics are operating at 5% to 10% of
capacity and the revenues have been decreasing which the Company believes is a
result of a lack of media exposure and advertising.
The main management activity of the Company has been devoted to
attempting to raise the funds necessary to establish medical skin care service
throughout the United States. In the short term, the Company's plan is to raise
sufficient capital to establish its Internet presence and begin its marketing
program to increase revenue in the existing clinics to continuing profitability.
Once there are 4-5 clinics and a network of Internet physicians operating at a
profitable level, the Company intends to pursue a public offering to raise
sufficient capital to establish clinics in other locations in the United States
and Europe.
At December 31, 1999, the Company has a cumulative operating loss of
$5,393,384 since its inception. The loss is attributable to product research and
development, the cost of starting up and operating the prototype clinics, the
losses from the oil and gas segment and costs incurred in financing efforts.
Liquidity and Capital Resources
Because the Company is in the development stage, it has limited working
capital and limited internal financial resources. At December 31, 1999 the
Company had a working capital deficit of $3,363,000 that 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 to operate.
The Company is currently operating at a cash loss of approximately
$80,000 per month with approximately 20% of the loss attributed to its clinic
operations and the balance attributed to debt service and costs involved in fund
raising activities. The Company expects operating expenses to continue at
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approximately the same rate until funding is received necessary for the
promotion of its products. Once adequate funding is received, advertising and
marketing expenses will increase as the Company launches its e-commerce and
marketing programs. 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, including management, to meet its current
obligations.
In 1996, the Company executed a series of transactions designed to add
corporate value and operating net income in the future. These transactions were
speculative but the direct cash cost was minimal. During 1997, it was apparent
that the value added, approximately $3,800,000 in equity, was not going to be
realized through operating profits and cash flows. Consequently, in transactions
occurring late 1997 and early 1998, the Company disposed of the operating assets
associated these businesses. The financial impact of these management decisions
was to reduce shareholders equity approximately $4,000,000 and limit the
Company's revenue producing operation to two prototype treatment clinics.
For the calendar year ended December 31, 1999 the Company's operating
expenses exceeded operating revenues. The cumulative deficit since inception has
been funded by open account creditor debt ($409,163), shareholder and other
loans ($1,855,000 in principal and $463,400 in interest), shareholders' cash
investment ($1,295,352)and common shares exchanged for property and services
($500,000). In addition, the Company is obligated to repay approximately $45,000
in funds loaned by certain officers and directors. Although the Company has
continued to operate with the above sources of funds, it is uncertain whether
these same or comparable sources will be available until the completion of the
development stage and commencement of commercial operations.
During 1999 and 1998 the Company's activities were financed with cash
from new borrowings $702,900 and $1,183.173, respectively, net of repayments
$294,000 and 334,000, and the sale of Common Stock $383,520 and 204,000,
respectively. Those monies were used to fund the unsuccessful attempt to raise
capital, $700,000 to Berkshire-Halifax, and the operations of the Company,
$353,000.
The Company's financial information is prepared using generally
accepted accounting principles applicable to a going concern that contemplates
the realization of assets and liquidation of liabilities in the normal course of
business. However, the Company 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. The Company intends to 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.
Following is a recapitulation of sources of working capital utilized to
finance the Company's operations:
Preferred Stock Purchase - On November 29, 1996, the Company exchanged
750,000 shares of its Common Stock for 12,000 shares of $250 par value preferred
stock of the parent of an insurance company. The preferred stock bears 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). There was no activity and in an agreement between the parties and
the transaction was rescinded in February of 1998.
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Profession Services - During 1998 and 1997, various individuals and
companies were issued 848,750 and 30,000 common shares, respectively, as
compensation for service ranging from accounting to insurance consulting.
Shares Issued Note Holders - In September 1998, the Company issued
500,000 shares of Common Stock to long-term note holders who had not previously
been compensated for extending credit and allowing the forbearance of interest.
During 1998 and 1997, the Company issued 852,368 and 16,666 common shares,
respectively, to certain other shareholder/creditors as compensation for
extending the due date on their obligations and in lieu of principal payments
and interest. In addition, two creditor/shareholders elected to add the interest
earned to date to their notes principal balance.
Unsuccessful Joint Venture to Raise Long-term Capital - During 1998,
the Company entered into a joint venture arrangement with Beehive International,
Inc. in an attempt to raise long-term capital from a foreign lender. The foreign
lender committed to loaning $20 million each to the Company and Beehive. Beehive
received 750,000 shares of common stock as a fee for securing the loan source.
Under the terms of the proposed loan, the lender required a $10 million good
faith deposit. The Company obtained the funds for its share of the fee through
the sale of common stock ($100,000), a loan from Beehive ($100,000) and a loan
from a third party ($300,000) Collier Management & Development Company
Inc.(Collier).
Collier required the Company to issue to it, but held in trust, a
majority of the outstanding common stock as collateral on the loan and, on
August 31, 1998; 25.5 million shares of restricted common stock were issued. In
early September 1998, the Company and Beehive forwarded $700,000, representing
the first year's fee for the accommodation deposit. The advance was made with
the understanding that Berkshire would be able to meet the requirements of the
lender and close the transaction within five days.
The Company was assured by Berkshire that the funds advanced for the
loan fee would be held in a Merrill Lynch trust account until Berkshire had met
its commitments. Company personnel received a verbal commitment of the
arrangement from Merrill Lynch. Subsequently, there were multiple monthly
attempts to get Berkshire to close the transaction. But in each case, Berkshire
could not meet the requirements of the lender. Because of the delays in closing
the loan with the foreign lender, Berkshire agreed to advance the Company
$200,000 and did so through an affiliate -Assured Capital Corporation.
In late 1998, the Company demanded the return of the escrowed fee
because Berkshire had been unable to perform. Berkshire refused to return the
funds claiming they had performed in accordance with the contract. At that point
it was discovered that the Merrill Lynch account was actually under the control
of Berkshire and the funds were no longer on deposit.
In February 1999, the Company escrowed an additional $200,000 in a
final attempt to compel Berkshire to perform, Once again, the documentation and
arrangements of Berkshire did not satisfy the foreign lender, who proceeded to
withdraw his commitment. Berkshire continued to contend it had met the
requirements of the escrow agreement and had earned the fee. The Company
contested Berkshire's position. However, in May 1999, the Company agreed to
release the funds escrowed in February in exchange for a release on the
indebtedness from the funds advanced the Company by Assured Capital Corporation.
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<PAGE>
Although management believes it has a solid case and legal counsel is
optimistic about the outcome, there is a major uncertainty due to the Company's
lack of resources to aggressively pursue timely legal remedies. In light of the
uncertainties, management concluded to charge-off the $500,000 in fees advanced
Berkshire. That amount is included in general and administrative expenses in the
statement of operations for the year ended December 31, 1998. The Company is
currently reviewing and evaluating its legal remedies.
Debt for Stock - On the first anniversary date of the loan, two of the
Company's note holders, with an aggregate debt of $60,000, have the option to
convert the principal and interest into common stock of the Company. The
conversion value equals 200% of the amount owing and is converted at the bid
price defined by the note.
Results of Operations
Revenues
One purpose of the Company's development stage enterprise was to
establish proven 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, 1999, revenues from operations were $81,476, a 20% decrease
from revenues of $101,843 for the fiscal year ending December 31, 1998. The
decrease in revenues, which the Company believes, is due to the limited
marketing efforts during the year. The Company does not believe that revenues
from the clinic operations will significantly increase until the additional
funds are raised which would allow the company to launch its marketing program,
although there are no assurances of the level of magnitude of any increases.
Expenses
Operating expenses for the clinics in fiscal 1999 were higher than
fiscal 1997 by $60,000 or 20%. This increase in operating expenses was due
primarily to increases in personnel costs and clinics personnel salaries.
The general and administrative expenses of the Company decreased
$490,000 or 50% from fiscal 1998 to fiscal 1999 due primarily to a large charge
for an unsuccessful fund raising effort,($500,000) in 1998, offset by a 1999
increase in legal and accounting costs ($76,000) because of the Lindberg-Hammar
case and the audit costs and a decrease in officer's compensation with the
resignation of the former President ($54,000).
The carrying costs of loans increased $100,000 because of the new debt
incurred and a full year's interest charge on the prior years new debt.
Plan of Operations
The results of operations during the first five years of 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
14
<PAGE>
did not have the funding available to launch the appropriate related advertising
and marketing campaign necessary to properly promote the "Skin Fresh"
technology.
Working capital required for operation of the Company over the past
five years has been obtained through loans from private individuals. In order to
continue operating the prototype clinics and pay the staff of the Company,
additional funding and working capital will be required until revenues from
professional fees and the sale of product increase to a level adequate to pay
for costs of operations.
If the Company is able to obtain additional funding, the Company
intends to open clinics in strategic metropolitan areas and to develop a network
of attending physicians to service a nation wide group of patients obtained in
the e-commerce environment. In addition, the Company intends to commence a
related advertising and marketing campaign to support the new network of clinics
and the two clinics currently in operation. The Company estimates that it will
need approximately $10 million to establish the additional clinics, to enable it
to deliver Internet services in a medically sound and efficacious manner and to
launch the related marketing campaign for product and service identity. The
implementation of the Company's plan is dependent on raising long-term capital
to fund the expansion of its clinical operations.
Risk Factors - In addition to other information contained in or
incorporated by reference in this Annual Report, the following Risk Factors
should be considered carefully in evaluating the financial information and other
data that is contained herein.
The Company currently has a significant and material working capital
shortfall that continues to adversely affect its business. Although the Company
has secured modest working capital infusions from a variety of sources that has
enabled it to continue in business, there are no assurances that it will be able
to do so in the future. In the event the Company is unable to locate and secure
additional sources of working capital in the near future it will be unable to
pursue its business. Because of the Company's limited asset base and poor
financial condition the Company is not able to secure working capital from
traditional sources of capital and is dependent upon identifying sources of
equity capital that may necessitate significant dilution of the existing common
stockholders' equity position.
The Company's future success depends in part on the acceptance of the
Company's treatment products and methods that have not been widely promoted or
accepted by consumers. The Company's future operating results will largely
depend upon the commercial success of the "Skin Fresh" treatment process and
products. In the future the Company may not be successful in marketing existing
products or any new or enhanced products or services.
Product development delays could harm the Company's business. If the
Company fails to release new products, its business may suffer one or more of
the following consequences:
* customer dissatisfaction;
* negative publicity;
* loss of revenues; or
* slower market acceptance.
The Company's business will suffer if its products or treatment
contains imperfections or errors in judgment. The Company's products are
inherently complex. Despite testing and quality control, the Company cannot be
certain that imperfections will not be found in the Company's products after
15
<PAGE>
commencement of commercial shipments. Moreover, the Company could face possible
claims and higher development costs if its treatment products contain undetected
inappropriate materials or if the Company fails to meet customers' expectations.
In addition, a product liability claim, whether or not successful, could harm
the Company's business by increasing the Company's costs and distracting the
Company's management. The Company does not carry products liability insurance
and therefore any product liability claim, if successful, would have a material
adverse effect on the Company. Significant defense costs would also adversely
affect the Company.
The Company's products currently contain components manufactured by
third-party vendors. Any significant interruption in the availability of these
third-party products or defects in these products could harm the Company's
business unless and until the Company can secure an alternative source.
The Company's success depends on its ability to hire and retain
qualified medical and technical personnel. Management's ability to significantly
increase revenues in the future depends on the success of its medical and
technical staff and management's success in recruiting, training and retaining
additional staff people. In this regard, management intends to continue to
expand the Company's technical and medical treatment forces. There has in the
past been, and there may in the future be, a shortage of such personnel with the
skills and expertise necessary to effectively sell the Company's products and
services. Also, it will take the Company's new personnel and personnel that are
hired in the future several months before they become productive. The Company's
business will be harmed if it fails to continue to hire or retain qualified
treatment personnel, or if newly hired staff fail to develop the necessary
technical skills or develop these skills more slowly than management
anticipates.
Difficulties the Company may encounter managing growth could adversely
affect its business. The Company expects a period of rapid growth in its
operations that could place a strain on management, administrative, operational
and financial infrastructure. The Company's ability to manage its operations and
growth requires management to continue to improve operational, financial and
management controls, and reporting systems and procedures. In addition, the
Company will be required to hire additional management, financial, and sales and
marketing personnel to manage the Company's expanding operations. If management
is unable to manage this growth effectively, the Company's business, operating
results and financial condition may be materially adversely affected.
Substantially increasing sales of products and services. Substantially
expanding the Company's penetration of the skin treatment market places is a
formidable task considering the number of competitors in that space. The Company
is competing against vendors who have significantly larger, well-developed
distribution channels and significantly greater resources for sales development.
Acquisitions of companies or technologies may result in disruptions to
the Company's business and diversion of management attention. The Company
expects to make acquisitions of complementary companies, products or
technologies although the Company currently lacks adequate working capital or
financial resources to effect acquisitions requiring cash and given the
uncertainty involving the Company's outstanding Common Stock it may encounter
difficulty in effecting transactions utilizing its equity as purchase
consideration. Currently, the company has not identified any acquisition
candidates and no acquisitions are contemplated. If the Company makes any
acquisitions, it will be required to assimilate the operations, products and
16
<PAGE>
personnel of the acquired businesses and train, retain and motivate key
personnel from the acquired businesses. Management may be unable to maintain
uniform standards, controls, procedures and policies if it fails in these
efforts. Similarly, acquisitions may cause disruptions in operations and divert
management's attention from day-to-day operations, which could impair
relationships with current employees, customers and strategic partners. The
Company may have to incur debt or issue equity securities to pay for any future
acquisitions. The issuance of equity securities for any acquisition could be
substantially dilutive to the Company's shareholders. In addition, profitability
may suffer because of acquisition-related costs or amortization costs for
acquired goodwill and other intangible assets. If management is unable to fully
integrate acquired businesses, products or technologies with existing
operations, the Company may not receive the intended benefits of acquisition.
Failure to develop strategic relationships could harm the Company's
business. The Company's or potential collaborative relationships with medical
treatment groups (HMO's or PPO's) and insurance companies may not prove to be
beneficial in the future, and they may not be sustained. The Company also may
not be able to enter into successful new strategic relationships in the future,
which could have a material adverse effect on the Company's business, operating
results and financial condition. The Company could lose sales opportunities if
it fails to work effectively with these parties. Moreover, management expects
that maintaining and enhancing these and other relationships will become a more
meaningful part of the Company's business strategy in the future. However, many
of the Company's current partners are either actual or potential competitors. In
addition, the Company may not be able to maintain these existing relationships,
due to the fact that these relationships are informal or, if written, are
terminable with little or no notice.
The Company's future success will depend on its ability to adapt to
rapid technological change. The Company's future success will depend on its
ability to continue to enhance its current products and to develop and introduce
new products on a timely basis that keep pace with technology and satisfy
increasingly sophisticated customer requirements. Rapid technical change,
frequent new product introductions and enhancements, uncertain product life
cycles, changes in customer demands and evolving industry standards characterize
the market for the Company's products and services. The introduction of products
embodying new technologies and the emergence of new industry standards can
render the Company's existing products obsolete and unmarketable. As a result of
the complexities inherent in today's medical environments, new products and
product enhancements can require long development and testing periods. As a
result, significant delays in the general availability of such new releases or
significant problems in the implementation of such medicines and treatment
processes could have a material adverse effect on the Company's business,
operating results and financial condition. The Company may not be successful in:
o developing and marketing, on a timely and cost-effective basis, new
products or new product enhancements that respond to changes in technology,
evolving industry standards or customer requirements;
o avoiding difficulties that could delay or prevent the successful
development, introduction or marketing of these products; or
o achieving market acceptance for the Company's new products and
product enhancements.
The Company's proprietary rights may be inadequately protected, and
there is risk of infringement claims in the Company's business. The Company's
success and ability to compete are dependent on the ability to develop and
17
<PAGE>
maintain the proprietary aspects of its technology. The Company relies on a
combination of trademark, trade secret, and contractual restrictions to protect
the proprietary aspects of its technology. The Company presently has no patents
on its products. The Company has filed for some trademark registrations in the
United States but not foreign. Finally, the Company seeks to avoid disclosure of
its intellectual property by requiring employees with access to the Company's
proprietary information to execute confidentiality agreements and by restricting
access to the Company's product and treatment secrets.
Despite the Company's efforts to protect the Company's proprietary
rights, unauthorized parties may attempt to copy aspects of the Company's
products or to obtain and use information that the Company regards as
proprietary. Litigation may be necessary in the future to enforce the Company's
property rights, to protect the Company's trade secrets, and to determine the
validity and scope of the proprietary rights of others. Any such resulting
litigation could result in substantial costs and diversion of resources and
would materially adversely affect the Company's business, operating results and
financial condition.
The Company cannot assure that its means of protecting the Company's
proprietary rights will be adequate or that competition will not independently
develop similar or superior technology. Policing unauthorized use of the
Company's products is difficult, and the Company cannot be certain that the
steps it has taken will prevent misappropriation of the Company's technology,
particularly in foreign countries where the laws may not protect the Company's
proprietary rights as fully as in the United States.
The Company's success and ability to compete are also dependent on the
Company's ability to operate without infringing upon the proprietary rights of
others. There can be no assurance that third parties will not claim infringement
by the Company of their property rights. Management expects that skincare
product developers will increasingly be subject to infringement claims as the
number of products and competitors in the Company's industry segment grows. Any
such claims, with or without merit, could be time consuming to defend, result in
costly litigation, divert management's attention and resources, cause product
usage delays or require the Company to enter into royalty or licensing
agreements. Such royalty or licensing agreements, if required, may not be
available on terms acceptable to the Company, if at all. In the event of a
successful claim of product infringement against the Company and the failure or
inability to either license the infringed or similar technology or develop
alternative technology on a timely basis, the Company's business, operating
results and financial condition could be materially adversely affected.
The Company has incurred significant losses in prior period and expects
to incur significant increases in operating expenses in the foreseeable future.
The Company's independent auditors have questioned the Company's ability to
continue as a "going concern" and unless the Company is able to achieve
profitable operations, which it has not achieved to date, its business and
financial condition will be materially adversely affected. The Company intends
to substantially increase its operating expenses for the foreseeable future as
the Company:
o Increases its sales and marketing activities, including expanding its
sales force and incurring advertising expenses;
o Increase its research and development activities; and
o Expand its general and administrative activities.
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<PAGE>
Accordingly, the Company will be required to significantly increase its
revenues in order to achieve profitability. These expenses will be incurred
before the Company generates any revenues by this increased spending. If the
Company does not significantly increase revenues from these efforts, its
business and operating results would be negatively impacted.
ITEM 7. FINANCIAL STATEMENTS
The financial statements of the Company are set forth immediately
following the signature page to this form 10KSB.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
NONE
19
<PAGE>
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, 1999, the name, age,
and position of each executive officer and director and the term of office of
each director of the Company.
Director or Officer Age Position Since
- ------------------- ---- ------------------- ------------------
Gary V. Heesch 63 CEO & Director December 29, 1995
David K. Giles 54 CFO & Secretary December 29, 1995
Craig Heesch 61 Director December 29, 1995
Robert Arbon, M.D. 62 Director December 29, 1995
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 the Company 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 Pharmaceutical, the parent company
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 the majority 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 the Company 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.
Robert Arbon, M.D. Dr. Arbon has been a director of Medisys since 1991
and a director of the Company 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).
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.
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Beneficial Owner Reporting Compliance with Section 16(a) of the Exchange Act
Based on a review of the forms submitted to the company, with respect
to this fiscal year, as of the date of this annual report, Gary Heesch has not
filed his Form 4, "Statement of Changes in Beneficial Ownership" for 18
transactions nor his Form 5, "Annual Statement of Change in Beneficial
Ownership" for 1999. Upon notice of this oversight, Mr. Heesch advised the
company that he has filed all of the forms required by Section 16(a).
Based on a review of the forms submitted to the company, with respect
to this fiscal year, as of the date of this annual report, David Giles has not
filed his Form 4, "Statement of Changes in Beneficial Ownership" for 15
transaction nor his Form 5, "Annual Statement of Change in Beneficial Ownership"
for 1999. Upon notice of this oversight, Mr. Giles advised the company that he
has filed all of the forms required by Section 16(a).
Based on a review of the forms submitted to the company, with respect
to this fiscal year, as of the date of this annual report, Craig Heesch has not
filed his Form 4, "Statement of Changes in Beneficial Ownership" for 1
transaction nor his Form 5, "Annual Statement of Change in Beneficial Ownership"
for 1999. Upon notice of this oversight, Mr. Heesch advised the company that he
will file all of the forms required by Section 16(a).
Based on a review of the forms submitted to the company, with respect
to this fiscal year, as of the date of this annual report, Robert Arbon has not
filed his Form 4, "Statement of Changes in Beneficial Ownership" for 1
transaction nor his Form 5, "Annual Statement of Change in Beneficial Ownership"
for 1999. Upon notice of this oversight, Mr. Arbon advised the company that he
will file all of the forms required by Section 16(a).
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 $100,000 during such period (as determined at December 31, 1999, the
end of the Company's last completed fiscal year):
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term Compensation
-------------------------------------
Annual Compensation Awards Payouts
----------------------------- --------------- -----
Other Restricted
Name and Annual Stock Options LTIP All other
Principal Position Year Salary Bonus($) Compensation Awards /SARs Payout Compensation
- ------------------ ---- ------ ------- ------------ ------ -------- ------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gary V. Heesch, 1999 -0- -0- $32,368 -0- -0- -0- $ 118,132(2)
President & CEO 1998 -0- -0- 37,530 -0- -0- -0- 115,000(2)
(Wasatch Pharm) 1997 -0- -0- 53,668 $500(3) $42,500(4) -0- 73,000(2)
1996 -0- -0- 36,595 125(1) -0- -0-
David Giles, 1999 -0- -0- -0- -0- -0- -0- 150,500(2)
V.P.& Sec"y 1998 -0- -0- 96,876 -0- -0- -0- 56,124(2)
Wasatch Pharm. 1997 -0- -0- 119,034 500(3) 25,000(5) -0- 45,000(2)
</TABLE>
(1) Represent value of options to purchase 125,000 shares of common stock at
$0.001 per share exercised in December 1996.
(2)These amounts represent back pay and the reimbursement of payroll taxes and
other costs paid by the officers for the benefit of the Company. The amounts
will not be disbursed until adequate funds are available.
(3)Represents 500,000 shares issued at $.001 per share.
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<PAGE>
(4)Represent value of options to purchase 850,000 shares of common stock at
$0.05 per share
(5)Represent value of options to purchase 500,000 shares of common stock at
$0.05 per share
The Board of Directors have approved salaries of $150,000 but the
Company estimates that Mr. Heesch, and Mr. Giles will each receive annual cash
compensation of less than $100,000 for fiscal year 1999.
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:
Gary V. Heesch, Chief Executive Officer, through actions taken during
1999,1998 and 1997, the board agreed to reimburse Mr. Heesch $306,602 as
compensation for payroll and income taxes he incurred for the benefit of the
Company. This amount is to be paid when monies are available.
David K. Giles, Vice President and Secretary, Through actions taken
during 1998, the board agreed to reimburse Mr. Giles $251,124 as compensation
for payroll and income taxes he incurred for the benefit of the Company. This
amount is to be paid when monies are available.
Non-Qualified Stock Option Plan - On December 16, 1996, the Company
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 Board of Directors will determine the terms, exercise price and
vesting, as well as other rights. The Plan is designed to allow the Company to
provide stock as an incentive to employees, officers, directors and consultants
who provide services. As of December 31, 1997, 1,500,000 options have been
granted under this plan.
1997 Options Granted Officers - The Board of Directors approved an
incentive stock option plan for the benefit of officers and key employees and
set aside 2,000,000 shares for this purpose. In 1997, 5 year options were
granted to the two principal officers (1,350,000) at $.05 per share, 50% are
exercisable on December 31, 1998 and 50% on December 31, 1999. The Company did
not formalize the incentive stock option plan within the one year time period
required by the Internal Revenue Service.
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.
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<PAGE>
In 1997, the Company issued 2,200,000 common shares to certain of its
officers and directors for notes totaling $110,000. In 1999, the stock was
revalued and the consideration was reduced to the par value of the shares
issued, or $2,200, based upon the continuing losses and lack of liquidity of the
Company's stock. During 1999, the Company issued 193,500 common shares to
certain shareholder/creditors as compensation for extending the due date on
their obligations.
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.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of December 31, 1999, 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 20,912,391* 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.
* On March 31, 2000, the settlement with Collier returned 23,200,000 shares to
the treasury with Collier retaining 2,300,000 plus 400,000 shares obtained at
the closing of the loan. The issued and outstanding shares as of December 31,
2000 reflect this transaction.
Title
of Name and Address Amount and Nature of Percentage
Class Beneficial Owner Beneficial Ownership(1) of Class
Common Collier Management and D 2,580,000(2) 12.3%
Development Company
880 South Main Street
Bountiful, Utah 84010
Common Corazon Vedar, Trustee D 1,500,000 7.2
for Karlo Agustin
900 Palmito Dr.
Millbrae CA 94030
Common Officers & Directors D 1,653,828 7.9
As a group
(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 2,300,000 shares of restricted stock received in settlement
and compromise of a $300,000 short-term note of the Company dated
August 31, 1998 and 400,000 shares received as a loan fee when the loan
was made. 120,000 shares were transferred to 3rd parties (See ITEM 12.
Certain Relationships And Related Transactions-Transactions with
Management and Others - Loans Collateralized with Company Stock.)
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<PAGE>
Litigation on Cancelled Common Stock - On November 1, 1996 and November
15, 1996, the Company entered into two similar agreements with Lindbergh-Hammar
Associates, Inc. ("Lindbergh"), a holding company controlled by W.A. Gary, a
former 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. Payment on the promissory notes was to come from premiums
generated by Lindbergh's affiliated companies The Company is entitled to 10% of
the premiums generated on a monthly basis. Since entering into the agreement
with Lindbergh no payments have been received by the Company.
The note payments can be made several different ways and were 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 was not paid and the insurance company requested an extension of
time for payment. The Company's management concluded, under the circumstances,
the insurance company could not perform in accordance with the agreement. The
shares issued were cancelled for a lack of consideration and because of certain
fraudulent acts of the insurance company's management. Cresport Insurance,
believed to be an affiliate of the insurance company, has filed suit asserting
it was an innocent party who had acquired ownership to the Company's stock and,
consequently, a holder in due course. Management and counsel believe that the
results of a pending trial will be in their favor. See "Legal Proceedings." This
was a highly speculative transaction and, consequently, no asset value was
recorded.
On October 15, 1997, Crestport filed a lawsuit against the Company and
its stock transfer agent for canceling the 12 million shares. Crestport claimed
that it was an innocent third party and a holder in due course who had paid
Lindbergh for the shares. As of December 31, 1997, the lawsuit was in the
discovery stage. Crestport has asserted a claim for $5,000,000 in damages
arising out of cancellation of the share certificate.
On July 20, 1999, the Company moved for summary judgment in the
proceeding and requested that the plaintiff's claim be dismissed. The presiding
judge did not accept the summary judgment pleading and scheduled the matter for
trial, which is now set for May 2000.
If the courts find in favor of Crestport, the claim and the Company's
common shares in the hands of parties adverse to current management could
jeopardize the financial stability of the Company.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Transactions with Management and Others.
Disposition of Discontinued Business - Oil and Gas Operations - In
November 1997, after determining the oil and gas developer of the Company's West
Virginia oil and gas properties would not be able to meet their contractual
commitments. An acceptable resolution of differences was reached in February
1998. Under the agreed upon exchange arrangement, the Company would return title
to the fifty oil and gas wells acquired in exchange for 1,800,000 of the shares
issued and a release from all obligations associated with the oil and gas
operations.
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<PAGE>
The transaction results in a material asset impairment from the
exchange is included, retroactively, in the loss from discontinued operations at
December 31, 1997.
Associated with the principals of the oil and gas transaction were
certain notes receivable taken for the Company's issued common shares. It was
agreed that the amount due on shares issued at the time of the exchange,
$520,390, would be forgiven. This reduction in the obligation was reflected in
the financial statements as a charge to additional paid in capital during the
year ended December 31, 1998.
Loans Collateralized with Company Stock - Two note holders have been
issued 450,000 common shares as collateral on notes payable with an aggregate
value of $79,900. Generally, the security agreements provide that the Company
will retain the voting rights to the collateral until such time as a default of
the loan agreement occurs at which time the rights will pass to the note
holders.
At December 31, 1999, the two notes were in default under the loan
agreements but neither of the note holders had taken action to seize control of
their collateral.
Collier Loan Compromise and Settlement - In 1998, in connection with an
18%, $300,000 loan made by Collier Management & Development Company, the Company
issued 25,500,000 shares of the Company's Common Stock as collateral for the
loan, and, as additional payment in consideration of the loan, 400,000 shares of
Common Stock. The loan from Collier was due March 1, 1999 and a default resulted
when the principal balance went unpaid. As a result of subsequent comprises, the
Company made payments of $146,250 in 1999 and was able to reach a compromise and
resolution dated March 31, 12000.
Under the settlement agreement, Collier received $214,750 in cash for
principal and interest and 2,300,000 shares of common stock and the Company
received the return of 23,200,000 shares of its common stock and the
extinguishment of $165,972 of principal debt.
Control of Management - The Company's management group and directors
will own and control approximately 7.9% of the shares of Company's Common Stock
and therefore be able to significantly influence the management and affairs of
the Company and have the ability to control all matters requiring stockholder
approval.
Stock Exchange Arrangement with Principal Officers - To assist the
Company in raising capital, its two principal officers entered into a series of
transactions where by they exchange Company shares they own so that a financial
intermediary, ProVision Capital Funding, Inc. (ProVision), an exclusive agent,
can act as a "finder" for the Company and raise up to $7 million in long-term
capital.
Under the arrangement, the officers transfer shares to be held in
escrow by the Company's transfer agent. ProVision sells the restricted shares
held in escrow to qualified investors in exempt transactions. The proceeds from
the sale are deposited into an Attorney Trust Account with 50% forwarded to
ProVision and 50% forwarded to the officers. These funds are deposited by the
officers directly for the Company and shares are released out of escrow to the
investors.
The transaction is predicated upon an exchange agreement executed by
the Company and the officers which directs that the funds generated from the
sales of securities go directly to the Company and stipulates that for each
share sold from the shares provided, by the officers, be replaced with 1.1 new
25
<PAGE>
restricted shares of the Company. The arrangement commenced in October 1999 with
the initial transfer and by December 31, 1999, the two officers had transferred
800,000 to the escrow agent.
At December 31, 1999, the Company had replaced 500,000 shares
transferred with 550,000 new shares. ProVision had placed 646,475 of the 800,000
shares rendered with investors. Under the terms of the placement, the parties
have established a share sales price floor that will yield not less than $.30
per share to the Company.
The funds raised through December 1999 amounted to $168,622. The
program is continuing and with over 500,000 shares sold during the three months
ended March 31, 2000.
Equity Advisor Agreement - On October 27 1999, the Company executed an
"Equity Advisor" agreement with European Equity and Guarantee Corporation (EEG).
In addition, the Company entered into a third party escrow agreement
for the control of the EEG transaction. The Company has committed 2,000,000
shares to the EEG sales and marketing plan. During 1999, EEG sold 135,357 shares
of the Company's Common Stock and the net proceeds to the Company, after
deducting EEG commissions of 50%, was $48,762. EEG has agreed to purchase Common
Stock from the company at an amount to be not less than 50% of the mid price
between bid and ask values at the time of sale.
26
<PAGE>
(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
(a)(3)EXHIBITS. The following exhibits are included as part of this report:
None
(b) Reports on Form 8-K.
On April 9, 1999, the Company filed a report on Form 8K describing a
consulting agreement with The Vector Group for investment banking services and
will receive 1.5 million shares of Common Stock.
27
<PAGE>
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 18, 2000 By /S/ Gary V. Heesch, President and CEO
Date: April 18, 2000 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 18, 2000 By /S/ Gary V. Heesch, Director
Date: April 18, 2000 By ___ Craig Heesch, Director
Date: April 18, 2000 By /S/ Jack D. Brotherson, Director
(Resigned February 1999)
Date: April 18, 2000 By /S/ Robert Arbon, MD, Director
Date: April 18, 2000 By ___ Ronald J. Hollberg, Director
(Resigned February 1999)
28
<PAGE>
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 development stage
company) as of December 31, 1999, 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, 1999. 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 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,
1999, and the results of its operations and its cash flows for the year then
ended, and for the period from September 7, 1989 (date of inception and
incorporation of the principal development activity) to December 31, 1999, in
conformity with generally accepted accounting principles.
F-1
<PAGE>
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, has a net
working capital deficiency, which raises substantial doubt about its ability to
continue as a going concern. Management's plans regarding those matters are
described in Note 2. The financial statements do not include any adjustments
that might result from the outcome of these uncertainties.
THOMAS LEGER & CO. L.L.P.
Houston, Texas
April 5,2000
F-2
<PAGE>
<TABLE>
<CAPTION>
WASATCH PHARMACEUTICAL, INC.
(A Development Stage Company)
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999
ASSETS
CURRENT ASSETS
<S> <C>
Cash $ 10,038
Accounts receivable - trade 2,616
Inventory 3,673
Prepaid expenses 8,305
----------
Total Current Assets 24,632
----------
PROPERTY AND EQUIPMENT
Clinic and office equipment 44,819
Less accumulated depreciation 35,122
----------
Net Property and Equipment 9,697
----------
OTHER ASSETS 10,200
----------
TOTAL ASSETS $ 44,529
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable - trade $ 239,812
Accrued interest 463,375
Other accrued expenses 718,163
Notes and advances currently due:
Short-term shareholder advances 45,171
Vendors 112,333
Stockholders 1,808,708
----------
Total Liabilities 3,387,562
----------
STOCKHOLDERS' DEFICIT
Preferred stock, $0.001 par value, 1,000,000
shares authorized 49,258 issued and outstanding 49
Common stock, $0.001 par value, 50,000,000 shares
authorized, 23,162,391 shares issued and outstanding 23,162
Additional paid-in capital 2,029,388
Accumulated development stage deficit (5,393,382)
----------
(3,340,783)
Less shares issued for future transactions (2,250)
----------
Total Stockholders' Deficit (3,343,033)
----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 44,529
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
WASATCH PHARMACEUTICAL, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENT OF OPERATIONS
For the Year Ended
December 31, From
------------------------------- Inception To
1999 1998 Dec. 31, 1999
----------- ----------- -----------
REVENUES
<S> <C> <C> <C>
Professional fee income 14,315 29,239 228,401
Product sales 30,305 52,237 451,481
----------- ----------- -----------
Total Revenues 44,620 81,476 679,882
----------- ----------- -----------
OPERATING EXPENSES
Cost of products sold 3,486 4,931 51,492
Salaries 171,185 154,849 650,755
Employee leasing - - 218,745
Payroll taxes 38,664 13,159 84,983
Physicians fees 30,000 40,200 267,868
Rent 37,009 34,790 206,942
Advertising 2,045 - 214,597
Depreciation 5,254 5257 34,510
Other 25,152 607 82,641
----------- ----------- -----------
Total Operating expenses 312,795 253,793 1,812,533
GENERAL AND ADMINISTRATIVE EXPENSE 542,999 1,032,251 2,943,060
INTEREST 357,576 254,115 907,954
----------- ----------- -----------
Total Expenses 1,213,370 1,540,159 5,663,547
---------- ---------- ---------
LOSS BEFORE DISCONTINUED OPERATIONS AND
THE PROVISION FOR INCOME TAXES (1,168,750) (1,458,683) (4,983,665)
----------- ----------- -----------
LOSS FROM DISCONTINUED OPERATIONS
Loss from operations - - (26,786)
Loss from asset disposition - - (382,933)
----------- ----------- -----------
Total Loss From Discounted Operations - - (409,719)
----------- ----------- -----------
NET LOSS BEFORE INCOME TAXES (1,168,750) (1,458,683) (5,393,384)
PROVISION FOR INCOME TAXES - - -
----------- ----------- -----------
NET LOSS $(1,168,750) $(1,458,683) $ (5,393,384)
=========== =========== ============
Loss per share before discounted operations $ (0.067) $ (0.141) $ (0.343)
Loss per share from discounted operation - - (0.028)
----------- ----------- -----------
BASIC LOSS PER COMMON SHARE $ (0.067) $ (0.141) $ (0.371)
=========== =========== ============
BASIC WEIGHTED AVERAGE SHARES OUTSTANDING 17,515,837 10,358,889 14,526,805
=========== =========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
WASATCH PHARMACEUTICAL, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
Preferred Common Stock Additional Accumulated Total
Stock ------------ Paid - In Development Stockholders'
Amount Shares Amount Capital Stage Deficit Equity
------ ------ ------ ------- ------------- ------
<S> <C> <C> <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 - - 5,334
Contribution of capital by
a shareholder - - 23,509 - - 23,509
Net loss from inception
through December 31, 1992 - - - - (170,895) (170,895)
--------- ---------- --------- ------- ---------- ----------
Balance, December 31, 1992 - 10,000,000 28,843 - (170,895) (142,052)
Contribution of capital by
a shareholder - - 20,000 - - 20,000
Net loss for the year ended
December 31, 1993 - - - - (92,931) (92,931)
--------- ---------- --------- ------- ---------- ----------
Balance, December 31, 1993 - 10,000,000 48,843 - (263,826) (214,983)
Common stock issued in
payment of loan fees at
$0.005 per share in
December, 1994 - 75,000 375 - - 375
Contribution of capital by
a shareholder - - 170,434 - - 170,434
Redemption and cancellation
of common stock for cash
and note payable - (600,000) (25,000) - - (25,000)
Net loss for the year ended
December 31, 1994 - - - - (365,189) (365,189)
--------- ---------- --------- ------- ---------- ----------
Balance, December 31, 1994 $ - $9,475,000 $ 194,652 $ - $ (629,015) $ (434,363)
========= ========== ========= ======= ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
WASATCH PHARMACEUTICAL, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
Preferred Common Stock Additional Accumulated Total
Stock ------------ Paid - In Development Stockholders'
Amount Shares Amount Capital Stage Deficit Equity
------ ------ ------ ------- ------------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance forward January 1, 1995 $ - 9,475,000 $ 194,652 $ - $ (629,015) $ (434,363)
Stock issued at $.005 per share for
services rendered during 1995 - 837,216 4,186 - - 4,186
Contribution of capital by a shareholder - - 1,000 - - 1,000
Equivalent shares exchanged in the consolidation
of Medisys Research Group, Inc &
Wasatch Pharmaceutical, Inc 9,852 1,777,040 (187,749) 184,051 - 6,154
Net loss for the year ended
December 31, 1995 - - - - (451,255) (451,255)
--------- ---------- --------- ------- ---------- ----------
Balance, December 31, 1995 9,852 12,089,256 12,089 184,051 (1,080,270) (874,278)
To give retro-active effect to a one for
four reverse stock split (7,389) (9,066,924) (9,067) 9,067 - (7,389)
--------- ---------- --------- ------- ---------- ----------
Restated balance, December 31, 1995 2,463 3,022,332 3,022 193,118 (1,080,270) (881,667)
Proceeds from the sale of common stock - 57,500 58 137,442 - 137,500
Cash proceeds from the exercise of
employee stock options - 250,000 250 - - 250
Stock issued in connection with the following:
Borrowing funds - 148,374 148 - - 148
Consulting agreement - 100,000 100 - - 100
Services rendered - 7,500 8 - - 8
Cancellation of debt - 250 - 12,339 - 12,339
Stock exchanged for the following assets:
Preferred stock of an insurance
holding company - 750,000 750 - - 750
Oil and gas properties - 2,000,000 2,000 3,717,536 - 3,719,536
Stock issued for a short-term note under a
November, 1996 stock option plan - 300,000 300 299,700 - 300,000
Net loss for the year ended
December 31, 1996 - - - - (504,108) (504,108)
--------- ---------- --------- ------- ---------- ----------
Balance, December 31, 1996 $ 2,463 6,635,956 $ 6,636 $4,360,135 $(1,584,378) $2,784,856
========= ========= ========= ========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
<TABLE>
<CAPTION>
WASATCH PHARMACEUTICAL, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
Preferred Common Stock Additional Accumulated Total
Stock ------------ Paid - In Development Stockholders'
Amount Shares Amount Capital Stage Deficit Equity
------ ------ ------ ------- ------------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance forward December 31, 1996 $ 2,463 6,635,956 $ 6,636 $4,360,135 $(1,584,379) $ 2,784,855
Retroactive adjustment to the merged
Preferred Stock Amount (2,414) - - 2,414 - -
------- ---------- -------- ----------- ------------ ------------
Restated balance, December 31, 1996 49 6,635,956 6,636 4,362,549 (1,584,379) 2,784,855
Proceeds from the exercise of stock options:
Cash - 125,000 125 124,875 - 125,000
Notes - 500,000 500 319,500 - 320,000
Shares issued in connection with:
Past services of officers and directors - 2,200,000 2,200 107,800 - 110,000
Acquisition of West Virginia oil & gas properties - 151,000 151 - - 151
Services rendered in connection with raising
development stage funds - 180,000 180 - - 180
Note extensions - 26,666 27 - - 27
Services rendered for operations - 30,000 30 2,721 - 2,751
Conversion of debentures - 270,758 271 18,065 - 18,336
Shares returned with cancelled contract - (50,000) (50) - - (50)
Exchange of oil and gas properties for originally
issued shares - (1,800,000) (1,800) (3,347,583) - (3,349,383)
Proceeds from sale of shares - 456,383 456 139,494 - 139,950
Shares issued for notes - 500,000 500 65,000 - 65,500
Net loss for the year ended December 31, 1997 - - - - (1,181,570) (1,181,570)
------- ---------- -------- ----------- ------------ ------------
Balance, December 31, 1997 $ 49 $9,225,763 $ 9,226 $ 1,792,421 $ (2,765,949) $ (964,253)
======= ========== ======== =========== ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
<TABLE>
<CAPTION>
WASATCH PHARMACEUTICAL, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
Preferred Common Stock Additional Accumulated Total
Stock ------------ Paid - In Development Stockholders'
Amount Shares Amount Capital Stage Deficit Equity
------ ------ ------ ------- ------------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance forward December 31, 1997 $ 49 9,225,763 $ 9,226 $1,792,421 $(2,765,949) $ (964,253)
Shares issued in connection with:
Note extensions - 1,352,368 1,352 - - 1,352
Securities sold for cash - 1,695,940 1,696 135,565 - 137,261
Exercise of stock options - 500,000 500 24,500 - 25,000
Services rendered - 848,750 849 - - 849
Shares issued as interim loan collateral to
be return at debt satisfaction - 25,950,000 25,950 - - 25,950
Exchange of preferred shares held for
investment for originally issued shares - (750,000) (750) - - (750)
Charge for per share price reduction of
shares held under subscription notes - - - (630,390) - (630,390)
Net loss for the ended December 31, 1998 - - - - (1,458,683) (1,458,683)
---- ----------- --------- ---------- ----------- ------------
Balance December 31, 1998 49 38,822,821 38,823 1,322,096 (4,224,632) (2,863,664)
Shares issued in connection with:
Note extensions - 249,810 250 2,990 - 3,240
Securities sold for cash - 799,257 799 214,098 - 214,897
Services rendered - 3,331,076 3,331 - - 3,331
Retirement of debt and interest - 422,304 422 185,843 - 186,265
Correction to sales price of shares sold officer - - - (24,500) - (24,500)
Shares issued in stock exchange arrangement
Replacement shares issued - 550,000 550 139,817 - 140,367
Replacement shares to be issued - 161,123 161 28,094 - 28,255
Share transactions with Collier Development
Contingent shares returned (25,500,000) (25,500) - - (25,500)
Settlement shares issued - 2,300,000 2,300 160,976 - 163,276
Cost of funds 26,000 26 (26) -
Shares issued as collaterial 2,000,000 2,000 2,000
Net loss for the ended December 31, 1998 - - - - (1,168,750) (1,168,750)
---- ----------- --------- ---------- ----------- ------------
Balance December 31, 1999 of stockholders'
equity-per committed contracts 49 23,162,391 23,162 2,029,388 (5,393,382) (3,340,783)
Stock issued for future transactions - (2,250,000) $ (2,250) - - (2,250)
---- ----------- --------- ---------- ----------- ------------
Net equity December 31, 1999 $ 49 20,912,391 $ 20,912 $2,029,388 $(5,393,382) $ (3,343,033)
===== =========== ========= ========== ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-8
<PAGE>
<TABLE>
<CAPTION>
WASATCH PHARMACEUTICAL, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Year Ended From
December 31, Inception To
---------------------- Dec. 31,
1999 1998 1998
-------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C> <C>
Net loss $(1,168,750) $(1,458,683) $(5,393,383)
Adjustments to reconcile net (Loss) to net cash
used by operating activities:
Depreciation and depletion 6,630 6,829 35,122
Loss on fixed asset disposal
Clinic assets - - 15,234
Oil and gas assets - - 4,189
Loss on disposal of oil and gas properties - - 382,933
Increase (decrease) in working capital
(Increase) decrease in receivables 4,559 664 (2,616)
(Increase) decrease in inventory 3,486 (3,516) (3,673)
(Increase) decrease in prepaid expenses (7,705) 15,063 (8,305)
Increase in accounts payable 2,203 8,375 239,814
Increase in accrued interest 107,115 126,776 463,375
Increase in other accruals 281,285 238,585 718,163
-------- ---------- ----------
Net cash used by operating activities (771,178) (1,065,907) (3,549,147)
-------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets (3,265) - (31,029)
(Increase) decrease in other assets (10,000) 675 (10,200)
-------- ---------- ----------
Net cash provided (used) by investing activities (13,265) 675 (41,229)
-------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings 702,915 1,183,173 3,079,121
Expenses paid by shareholder - - 38,323
Repayment of loans (294,542) (334,038) (751,333)
Proceeds from sale of common shares 383,519 162,261 893,984
Capital contributed by shareholder - - 154,800
Collection of share subscriptions - 42,166 141,726
Common shares exchanged for debt - - 12,318
Exercised stock options - - 125,250
Redemption of common shares - - (20,409)
Cost of raising capital - - (73,366)
-------- ---------- ----------
Net cash provided by financing activities 791,892 1,053,562 3,600,414
-------- ---------- ----------
NET INCREASE (DECREASE) IN CASH 7,449 (11,670) 10,038
At beginning of period 2,589 14,259 -
-------- ---------- ----------
At end of period $ 10,038 $ 2,589 $ 10,038
======== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-9
<PAGE>
<TABLE>
<CAPTION>
WASATCH PHARMACEUTICAL, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Year Ended From
December 31, Inception To
1999 1998 Dec. 31, 1999
-------- ---------- ----------
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION
<S> <C> <C> <C>
Cash paid for interest $ 350 $ 49,975 $ 111,879
Cash paid for taxes - - -
SUPPLEMENTAL SCHEDULE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES
Common stock for assets' aquired or (exchanged)
Clinical equipment and fixtures - - 13,790
Oil and gas properties
Acquired - - 3,732,316
Exchanged - - (3,349,383)
Preferred stock of an insurance company
Acquired - - 750
Exchanged - (750) (750)
Stock issued for future transactions
Amount on issuance of common stock 2,000 25,950 1,262,950
Adjustment to subscriptions receivable (24,500) (110,000) (621,423)
Write - off of subscriptions receivable - (520,391) (520,391)
Common stock for
Goods and services 3,331 849 13,179
Interest 102,833 1,352 104,212
Retirement of debt 221,206 - 221,206
Loan extensions 3,240 - 3,240
Accrued interest added to principal 52,646 41,156 93,802
Reduction of debt due to settlement (200,000) - (200,000)
Payment of consulting fees directly by noteholder 22,500 - 22,500
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-10
<PAGE>
WASATCH PHARMACEUTICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
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, (the Company), and
its wholly owned subsidiaries, Medisys Research Group, Inc. and American
Institute of Skin Care, Inc.
Medisys Research Group, Inc., the original company, was incorporated on
September 7, 1989(date of inception). On December 29, 1995, Ceron Resources
Corporation, a company with publicly traded common stock and Medisys completed
an Agreement and Plan of Reorganization whereby Ceron issued 85% of its
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. In 1994, American Institute of Skin Care, Inc. was
incorporated to administer the skin treatment programs developed by Medisys.
Skin Treatment and Care - The Company was created to advance and replicate the
successful treatment of serious skin diseases, accomplished in clinical trials
by American Institute of Skin Care, Inc., plus develop strategies for rapid
nationwide growth. The strategy is to reduce medical costs related to the
treatment of skin disorders for patients, employers, and health insurance
providers.
American Institute of Skin Care Inc. has operated two prototype clinics for the
last six years. The products and medical therapies have been tested successfully
on hundreds of patients. The Company's activities have been centered on research
in the area of serious skin diseases such as Cystic Acne, Eczema, Seborrhea,
Contact Dermatitis, Molluscum, Folliculitis, and Acne Rosacea with substantial
success in the area of skin rejuvenation.
Oil and Gas Business - In 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.
At the time they were acquired, the properties were not economically productive.
In November 1997, after determining the oil and gas developer of Wasatch's West
Virginia oil and gas properties would not be able to meet their commitments in
accordance the contractual arrangements, negotiations commenced and an
acceptable solution was reached in February 1998. Under the agreed upon exchange
arrangement, Wasatch would return title to the fifty oil and gas wells acquired
in exchange for 1,800,000 of the shares issued and a release from all
obligations associated with the oil and gas operations. The transaction resulted
in a material loss on disposal of a segment of business.
F-11
<PAGE>
WASATCH PHARMACEUTICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
(Continued).
Associated with the principals of the oil and gas transaction were certain notes
receivable taken for the Company's common shares issued. It was agreed that the
amount due on shares issued at the time of the exchange, $520,390, would be
forgiven. This reduction in the obligation was reflected in the financial
statements as a charge to Additional Paid In Capital during the year ended
December 31, 1998.
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 - In 1997, the Company adopted the Financial Accounting Standards
Board Statement No. 128, "Earnings per Share". Statement 128 replaced the
calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, the calculation
of basic earnings per share excludes any dilutive effects of options, warrants
and convertible securities. All prior period loss per share amounts have been
recalculated in accordance with the earnings per share requirements under SFAS
No. 128; however, such recalculation did not result in any change to the
Company's previously reported loss per share for all periods presented.
Certain note holders and potential lenders have been issued 2,250,000 shares of
the Company's common stock, which would be used as collateral for loans. Since
the shares are contingently returnable, they are not included in the average
shares outstanding for the earnings per share computation.
The Company has issued approximately 1,704,536 shares for the period January 1,
2000 through March 31, 2000 for cash, note extensions, services and other equity
transactions.
F-12
<PAGE>
WASATCH PHARMACEUTICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
(Continued).
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 assure full realization. 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 is eliminated from the accounts, and any resulting gain
or loss is included in operations.
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.
F-13
<PAGE>
WASATCH PHARMACEUTICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
(Continued).
Concentrations of Credit Risk - Wasatch maintains its cash accounts in two banks
located in the Salt Lake City, Utah metropolitan area. The FDIC insures the cash
balances of $100,000 or less at each bank. At December 31, 1999 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 1998 and for the period from inception on September 7, 1989 through December
31, 1998 have been reclassified to conform to the 1999 presentation.
Legal Matters - Wasatch is subject to legal proceedings that 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.
Advertising - Advertising costs are expensed as incurred.
F-14
<PAGE>
WASATCH PHARMACEUTICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
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, 1999, management projects that
their businesses plan to commence the operational phase of its clinic treatment
activities will be implemented in 2000.
As more fully explained elsewhere in these footnotes, in 1996 the Company
entered into a series of transactions to add corporate value and operating net
income in the future. These transactions were speculative, but the direct cash
cost was nominal. During 1997, it was apparent that the value added,
approximately $3,800,000 in equity, was not going to be realized through
operating profits and cash flows. Consequently, in transactions occurring late
1997 and early 1998, the Company disposed of the operating assets associated
these businesses. The financial impact of these management decisions was to
reduce shareholders equity approximately $4,000,000 and limit the Company's
revenue producing operation to two prototype treatment centers that are
operating at 10% of capacity.
At December 31, 1999, the Company's operating expenses have exceeded operating
revenues. This cumulative deficit has been funded by open account creditor debt,
shareholder loans, shareholders' cash investment and common shares exchanged for
property and services. Although the Company has continued to operate with the
above sources of funds through March 2000, it is uncertain whether these same or
comparable sources will be available until the completion of the development
stage.
Wasatch's financial statements are prepared using generally accepted accounting
principles applicable to a going concern that 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 supported by its cash flow from operations. 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.
F-15
<PAGE>
WASATCH PHARMACEUTICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
3. RELATED PARTY TRANSACTIONS
Discussed below are related party transactions not included in other notes to
the financial statements.
During 1999, a principal officer of the Company sold 200,000 shares of his
personal holdings of the Company's common stock and lent the Company
approximately $139,000. A note was set up and periodic payments have been made.
At December 31, 1999, the remainder of this note and another advance made to the
Company totaled $47,171 and is in the accompanying balance as directors and
shareholders loans.
In 1994, the Company entered into an agreement with a shareholder to redeem
150,000 shares for $25,000. The remaining balance of $5,500 is non-interest
bearing and is due on demand.
During the three years ending December 31, 1999, the board of directors approved
specific compensation totaling $557,726 for two principal officers with the
stipulation that the amounts are to be paid only when sufficient cash is
available. The liability represents back pay and the payroll costs paid by the
officers for the benefit of the Company.
In 1997, the Company issued 2,200,000 common shares to certain of its officers
and directors for consideration in the form of notes totaling $110,000. In 1999,
the stock was revalued and notes were reduced to $2,200 (par value).
During 1998, five Directors holding Wasatch notes with a face value of $47,500
agreed to fore-go interest payments for the debt reduction described in the
previous paragraph. In 1999 and 1998, several creditor/shareholders elected to
add the interest earned to date to their notes principal balance.
During 1999 and 1998, the Company issued 539,699 and 1,342,368 common shares,
respectively, to certain shareholder/creditors as compensation for extending the
due date on their obligations and in lieu of interest. In 1999, shares totaling
132,415 were issued for principal reduction of debt.
F-16
<PAGE>
WASATCH PHARMACEUTICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
4. ROYALTIES PAYABLE
Medisys, a subsidiary of the Company 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.
5. NOTES PAYABLE
Notes payable at December 31, 1998 are as follows:
Unsecured notes payable to shareholders dated at various
dates, generally accruing interest at 6.5% to 120%,
annually, 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. $1,760,194
Collateralized note payable dated August 31, 1998 and
due six months after funding with interest at 18% per
annum. During the six-month period, interest only is
payable monthly with the entire principal balance due
March 31, 1999. Collateral includes all the tangible
assets of the Company and its subsidiaries, 25,500,000
shares of Wasatch common stock and the joint and
several guarantees of the two principal officers.
During 1999, the note became delinquent, but was
subsequently fully paid. See Note 6 for additional
information. 36,514
Unsecured notes payable to vendors dated various dates,
accruing interest at 10%. Certain notes are guaranteed
by an officer of the Company. 112,333
Advances from officer and shareholder to meet cash
shortfall, payable on demand with interest ranging
from 10% to 30% 57,171
TOTAL $1,966,212
==========
F-17
<PAGE>
WASATCH PHARMACEUTICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
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 - At December 31, 1999, according to the transfer agents records,
there were 48,055,867 shares of common stock issued, but 24,893,477 shares were
not considered outstanding. For financial statement purposes, 23,162,391 shares
of common stock were considered to be both issued and outstanding. The
difference is equal to (1) including 10,044 shares that were sold and paid for
in a private placement but lacked the appropriate documentation to allow the
transfer agent to physically issue; (2) including 161,123 shares due to the two
principal officers of the Company under a sale and exchange agreement discussed
elsewhere both of which are considered as issued and outstanding for financial
presentation purposes; (3) excluding 1,864,653 shares that were issued to an
overseas dealer to cover a placement commitment but held by the transfer agent
awaiting completion of the individual sales under the commitment and (4)
excluding 23,200,000 shares returned in a settlement agreement with a lender of
a delinquent loan which are not considered as outstanding.
Preferred Stock - Preferred stock dividends on Series A 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. The Company
has not declared or paid preferred dividends since inception.
Stock Exchange Arrangement with Principal Officers - To assist the Company in
raising capital, its two principal officers initiate a series of transactions
where by they transfer Company shares they own to a financial intermediary,
ProVision Capital Funding, Inc. (ProVision), which is an exclusive agent "to
find" the Company up to $7 million in long-term capital.
F-18
<PAGE>
WASATCH PHARMACEUTICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
6. CAPITAL STRUCTURE (Continued)
The officers transfered shares to ProVision in a private placement that is
exempt from registration under the federal securities law. ProVision then sells
the common stock it has received from the officers to qualified investors in an
exempt transaction and remits 50% of the collected proceeds to the officers who
deposit the funds in the Company.
To complete the transaction process, the Company and the officers executed an
exchange agreement, which directs that the funds generated from the sales of
securities go directly to the Company. The officers will receive 1.1 restricted
shares of the Company stock for each share exchanged with ProVision. The
transactions commenced in October 1999 with the transfer of 500,000 shares to
ProVision by the officers. In December 1999, the two officers transferred an
additional 300,000 shares to ProVision.
At December 31, 1999, the Company had replaced the original 500,000 with 550,000
new shares. ProVision had placed with investors 646,475 of the 800,000 shares
rendered. Under the terms of the placement, ProVision retains 50% of the net
proceeds from share sales. The parties have established a share sales price
floor that will yield not less than $.30 per share to the Company.
The funds raised to date amount to $168,622. The program is continuing with
533,298 shares sold through the three month ended March 31, 2000.
Equity Advisor Agreement - On October 27 1999, the Company executed an "Equity
Advisor" agreement with European Equity and Guarantee Corporation (EEG).
According to the agreement an "Equity Advisor" is one who sells stocks, shares
or other financial instruments.
In addition, the Company entered into a third party escrow agreement for the
control of the EEG transaction. The Company has committed 2,000,000 shares to
the EEG sales and marketing plan. During 1999, EEG sold 135,357 shares of the
company's stock and the net proceeds to the Company, after deducting EEG
commissions of 50%, was $48,762. EEG has agreed to purchase stock from the
company at an amount to be not less than 50% of the mid price between bid and
ask values at the time of sale.
F-19
<PAGE>
WASATCH PHARMACEUTICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
6. CAPITAL STRUCTURE (Continued)
Stock Issued for Future Transactions - At December 31, 1999, the Company had two
types of stock transactions that are dependent on future events for their
consummation. Two separate note holders have been issued 750,000 common shares
as collateral on notes payable with an aggregate value of $319,700. Generally,
the security agreements provide that Wasatch will retain the voting rights to
the collateral until such time as a default of the loan agreement occurs, then
those rights will pass to the note holders. At December 31, 1999, the Company
has defaulted under one loan agreement, but the note holder has not taken any
action to enforce control over the collateral. The second loan defaulted in
March 2000.
Concession and Compromise with Note Holder - During 1999, Collier Development &
Management, Inc. the note holder with 25,500,000 common shares as collateral
called for a shareholders' meeting. The Company was in a position whereby the
Federal securities law prohibits solicitation of proxies. The result is that the
Company will not be able to have a shareholders meeting until all of its
Securities and Exchange Commission compliance filings have been submitted on a
timely basis.
Negotiations commenced and the parties reached a compromise and resolution in
March 2000. Under the settlement agreement, Collier received $214,750 in cash
for principal and interest and 2,300,000 shares of common stock and the Company
received the return of 23,200,000 shares of its common stock and the
extinguishment of $165,972 of debt.
The above transactions have been reflected in these financial statements.
Capital Markets Fund Raising Efforts - During 1999 and 1998, various individuals
and companies were issued 3,112,700 and 848,750 common shares, respectively, as
compensation for their attempts to raise capital for the Company.
Special Issue of Common Shares to Note Holders - In September 1998, the Company
issued 500,000 common Shares to long-term note holders, who had not previously
been compensated for extending credit and allowing interest to accumulate. This
compensation factor did not change or reduce the company's obligations for
principal and interest.
Share Sale To Officers and Directors - In 1997, the board authorized the sale of
2,200,000 common shares to the two principal officers (500,000 shares each) and
six directors (200,000 each) at $.25 per share. In 1999, the price per share was
reduced to $.001 per share and the fair value of the shares was reported to the
IRS as compensation.
F-20
<PAGE>
WASATCH PHARMACEUTICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
6. CAPITAL STRUCTURE (Continued)
Joint Venture to Raise Long-Term Capital - During 1998, the Company entered into
a joint venture arrangement with Beehive International, a Nevada corporation, in
an attempt to raise long-term capital from a foreign lender. The foreign lender
was committed to advance $20 million each to Wasatch and Beehive. Under the
terms of the proposed loan, the lender required a $10 million good faith deposit
for a period of 24 months.
Through its sources, Wasatch made arrangements with Berkshire Halifax
Corporation of Palm Beach, Florida to provide the good faith deposit. Berkshire
was to receive a $700,000 loan fee for providing the funds and the bank interest
earned on the funds deposited. The loan fee was to be provided by Wasatch
($500,000) and Beehive ($200,000).
Wasatch obtained the funds for its share of the fee through the sale of common
stock ($100,000), a loan from Beehive ($100,000) and a loan from a third party
($300,000) Collier Management & Development Company, Inc of Bountiful Utah.
Collier required a majority of the common stock as collateral on the loan and,
on August 31, 1998; 25,500,000 shares of restricted common stock were issued.
Wasatch and Beehive forwarded $700,000 with the understanding that Berkshire
would be able to meet the requirements of the lender and close the transaction
within five days. Wasatch was assured that the funds advanced for the loan fee
would be held in a Merrill Lynch trust account until Berkshire had met its
commitments. Subsequently there were several attempts to close the transaction
but in each case Berkshire could not meet the requirements of the lender. Unable
to close the loan, Berkshire agreed to advance Wasatch $200,000 and did so
through an affiliate - Assured Capital Corporation.
In late 1998, Wasatch demanded the return of the escrowed fee because Berkshire
had been unable to perform. Berkshire refused to return the funds claiming they
had performed in accordance with the contract. At that point it was discovered
that the Merrill Lynch account was actually under the control of Berkshire and
the funds were no longer on deposit.
In a final attempt to get Berkshire to perform, Wasatch escrowed an additional
$200,000 in February 1999. Once again, the documentation and arrangements of
Berkshire did not satisfy the foreign lender. At this point the lender withdrew
his commitment. Berkshire continued to contend they had met the requirements of
the escrow agreement and had earned the fee. Wasatch contested that and in May
1999 agreed to release the funds escrowed in February in exchange for a release
on the indebtedness under the funds advanced Wasatch by Assured Capital
Corporation. At the time of the offset, the accrued interest on the note
($13,000) was credited to operations as other income.
F-21
<PAGE>
WASATCH PHARMACEUTICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
6. CAPITAL STRUCTURE (Continued)
Although management believes it has a solid case and legal counsel is optimistic
about the outcome, there is a major uncertainty due to the Company's lack of
resources to aggressively pursue timely legal remedies. In light of the
uncertainties, management concluded to charge-off the $500,000 in fees advanced
Berkshire. That amount is included in general and administrative expenses of the
statement of operations for the year ended December 31, 1998. The Company is
currently reviewing and evaluating its legal remedies.
Escrowed Share Agreement - In 1996, the Company executed 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). Following a failure to meet commitments, Wasatch
management concluded the insurance company could not perform in accordance with
the agreement. The shares issued were cancelled for lack of consideration and
because of certain fraudulent acts of the insurance company's management. A
third party, believed to be an affiliate of the insurance company, has filed
suit asserting it was an innocent party who had acquired ownership to the
Company's stock. Management and counsel believe that the pending trial will
reveal the meritorious nature of their defense. In as much as the transaction
was dependent on significant contingencies, none of which occurred, Wasatch has
not recorded the transaction in its books and records.
Stock Options
General - In November 1996, Wasatch reserved 100,000 shares of the Company's
stock as potential compensation to consultants and other parties. The shares to
be issued are to be determined by the President. In June 1999, the Company
extended the options of four shareholders to purchase 750 shares until June 2000
and changed the option price to $.50 per share.
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 Board
of Directors will determine the terms, exercise price and vesting, as well as
other rights. The Plan is designed to allow the Company to provide stock as an
incentive to employees, officers, directors and consultants who provide
services. As of December 31, 1999, 265,000 shares remain to be granted under
this plan.
F-22
<PAGE>
WASATCH PHARMACEUTICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
6. CAPITAL STRUCTURE (Continued)
1997 Options Granted Officers - The Board of Directors approved an incentive
stock option plan for the benefit of officers and key employees and set aside
2,000,000 shares for this purpose. At December 31, 1997, options were granted to
the two principal officers (1,350,000) at $.05 per share, 50% are exercisable on
December 31, 1998 and 50% on December 31, 1999. The expiration date is open. The
Company did not formalize the incentive stock option plan within the one year
time period required by the Internal Revenue Service. The options granted are
considered outstanding by the Company.
1999 Options Granted Officers and Directors- The Board of Directors approved on
March 4, 1999 an incentive stock option plan for the benefit of officers and
directors and set aside 5,000,000 shares for this purpose. On March 4, 1999,
five year fully vested options were granted to the two principal officers
(4,000,000) and two directors (700,000) at $.001 per share. Generally the plan
calls for the vesting period to be determined by the Board of Directors and will
have a term of two years. The Company did not formalize the incentive stock
option plan within the one year time period required by the Internal Revenue
Service. The options granted are considered outstanding by the Company.
F-23
<PAGE>
WASATCH PHARMACEUTICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
6. CAPITAL STRUCTURE (Continued)
Options - Stock option activity for the Company during 1999 was as follows:
<TABLE>
<CAPTION>
Expired or Ending Expiration
Price Per Share Granted Exercised 1999 Date
- ------------------- ----------- --------- ---------- -----------
Granted 1999
<S> <C> <C> <C> <C>
Consultants
1.00 25,000 - 25,000 June 19, 2000
Employees and
directors
.001 4,700,000 - 4,700,000 March 4, 2004
Shareholder
.50 750 - 750 June 30, 2000
1.00* 50,000 - 50,000 December 4, 2001
Granted 1997
Consultants
1.00 65,000 65,000 - April 10, 1999
Others
1.00 25,000 - 25,000 June 19, 2000
1.00 10,000 10,000 - April 10, 1999
Employees and
directors
.001 1,350,000 - 1,350,000 December 31, 2002
--------- ------------ ---------
Total 6,225,750 75,000 6,150,750
========= ============ =========
Expired 75,000
============
</TABLE>
*There are escalations based upon increases in the trading price.
F-24
<PAGE>
WASATCH PHARMACEUTICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
6. CAPITAL STRUCTURE (Continued)
Incentive Based Compensation - The fair value of options granted will be
estimated on the date of grant using the Black-Scholes options pricing model,
assuming a risk free interests rates ranging from 6.15% for one year options to
6.56% for five year options, no expected dividend yield, the expected life of
the options and zero expected volatility. The zero volatility will be assumed
because the shares are not currently tradable in a secondary market system.
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 any stock option agreements. No
options were granted in 1998 and options totaling 4,775,000 shares were granted
in 1999. 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, 1999 and 1998 would have been as reflected in the pro forma amounts
indicated below:
1999 1998
------------ ------------
Net loss $ (1,503,245) $ (1,458,683)
============ ============
Net loss per common share $ (.086) $ (.077)
============ ============
F-25
<PAGE>
WASATCH PHARMACEUTICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
7. INCOME TAXES
The following table sets forth a reconciliation of the statutory federal income
tax at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Loss before income taxes $ (1,168,750) $ (1,458,683)
============ ============
Income tax benefit computed at statutory rates
$ (397,375) $ (495,952)
Increase in valuation allowance
395,216 492,585
Permanent differences:
Nondeductible expenses 2,159 3,367
------------ ------------
Tax benefit $ - $ -
============ ============
</TABLE>
No federal income taxes have been paid since the inception of the Company.
Deferred Income Taxes - 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:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Deferred tax liabilities $ - $ -
------------ ------------
Deferred tax assets:
Net operating loss carry forwards 1,822,613 1,427,397
Valuation allowance (1,822,613) (1,427,397)
------------ ------------
Total deferred tax assets - -
------------ ------------
Net deferred tax asset (liability) $ - $ -
============ ============
</TABLE>
F-26
<PAGE>
WASATCH PHARMACEUTICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
7. INCOME TAXES (Continued)
Deferred income tax provisions for the years ended December 31, 1999 and 1998
result from the following temporary differences:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Net operating loss carryforward benefit $ (395,216) $ (492,585)
Valuation allowance 395,216 492,585
------------ ------------
Total deferred tax benefit $ - $ -
============ ============
</TABLE>
Net Operating Loss Carryforwards - As of December 31, 1999, the Company had
cumulative net operating loss carryforwards ("NOL") for federal income tax
purposes of approximately $ 5,360,626, which expire in 2007 through 2019, and
net operating loss carryforwards for alternative minimum tax purposes of
approximately the same amount which expire in 2007 through 2019. Due to
ownership changes, Internal Revenue Code Section 382 will limit future
utilization of the net operating loss carryforwards.
8. COMMITMENTS AND CONTINGENCIES
Lease Commitment - The Company has two leases for office space. One lease has
rent of $725 per month through February 2000 and is currently on a
month-to-month lease. The second lease has a rent of $1,765 per month and
expires in September 2000. Rent expense was approximately $37,000 and $35,000
for 1999 and 1998, respectively.
Litigation Involving Contingent Shares - A former director is affiliated with a
company that is contending they are legitimate holders in due course of
12,000,000 of the Company's common shares. Wasatch asserted that consideration
was never received and, consequently, the shares were cancelled. See Note 6
Capital Structure.
9. SUBSEQUENT EVENTS
The Company reached a settlement in March 2000 with the lender of a delinquent
loan, which was secured by 25,500,000 share of the Company's common stock. See
Note 6 - Capital Structure.
F-27
<PAGE>
WASATCH PHARMACEUTICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
10. GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses are as follows:
<TABLE>
<CAPTION>
From
December 31, Inception To
1999 1998 Dec. 31, 1999
--------- ----------- -----------
<S> <C> <C> <C>
Officers compensation $ 311,602 $ 365,605 $ 1,287,127
Loss on capital raising venture - 500,000 500,000
Professional fees 146,443 70,535 390,377
Travel 6,350 9,127 79,471
Telephone 7,234 13,208 68,310
Other 71,370 73,776 617,775
--------- ----------- -----------
Total $ 542,999 $ 1,032,251 $ 2,943,060
========= =========== ===========
</TABLE>
F-28
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 10,038
<SECURITIES> 0
<RECEIVABLES> 2,616
<ALLOWANCES> 0
<INVENTORY> 3,673
<CURRENT-ASSETS> 24,632
<PP&E> 44,819
<DEPRECIATION> 35,122
<TOTAL-ASSETS> 44,529
<CURRENT-LIABILITIES> 3,387,561
<BONDS> 0
0
49
<COMMON> 23,162
<OTHER-SE> 2,029,388
<TOTAL-LIABILITY-AND-EQUITY> 44,529
<SALES> 30,305
<TOTAL-REVENUES> 44,619
<CGS> 3,486
<TOTAL-COSTS> 312,794
<OTHER-EXPENSES> 542,999
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 357,577
<INCOME-PRETAX> (1,168,750)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,168,750)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,168,750)
<EPS-BASIC> (0.067)
<EPS-DILUTED> (0.067)
</TABLE>
