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, 1997
[ ] 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.
----------------------------
(Exact name of registrant as specified in charter)
Utah 84-0854009
---------- -----------------
State or other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization
714 East 7200 South, Midvale, Utah 84047
----------------------------------------
Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code (801) 566-9688
--------------
Securities registered pursuant to section 12(b) of the Act:
None
----
(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
---------------------------- -------------------------------
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: $101,843
--------
<PAGE>
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 March 31, 1998 the aggregate market value of the voting stock held
by non-affiliates was $1,182,660 (based on 5,500,747 shares held by
non-affiliates multiplied by a average of the bid and ask price of $.215 per
share).
As of March 31, 1998, the Registrant had 8,535,960 shares of common
stock issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by reference and
the part of the form 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
<PAGE>
TABLE OF CONTENTS
PART I
Page
ITEM 1. DESCRIPTION OF BUSINESS.................................... 4
ITEM 2. DESCRIPTION OF PROPERTIES.................................. 8
ITEM 3. LEGAL PROCEEDINGS.......................................... 9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........ 9
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS... 10
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.. 11
ITEM 7. FINANCIAL STATEMENTS........................................ 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........... 19
ITEM 10.EXECUTIVE COMPENSATION....................................... 21
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 23
ITEM 12.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................. 25
PART IV
ITEM 13. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K..... 26
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
This form 10KSB for fiscal year ended December 31, 1997 is being filed
on April 14, 2000, and should be read in conjunction with the Company's periodic
reports, including the Form 10KSB for December 31, 1998 and December 31, 1999.
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. ("Medysis") 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.
<PAGE>
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,
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 effective in its present form without additional development.
<PAGE>
Currently, other research and development has been limited due to the
Company's limited financial resources. As funds become available, Medisys will
conduct additional research in the field of dermatology and other related
medical fields, and will market its technology and products through AISC clinics
and other marketing channels. Although the Company may choose to market its
technology through 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 a host of 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 which 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 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 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.
<PAGE>
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.
<PAGE>
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 36 months, of which there are 21 months remaining. In
addition, the Company operates a part-time clinic at 777 North 500 West #206,
Provo, Utah, consisting of 1,000 square feet. The Company leases this space from
an unrelated third party for $725 per month. The term of the lease is 12 months,
of which there is one month remaining.
Oil and Gas Properties
On November 20, 1996, the Company exchanged 2,000,000 shares of its
Common Stock for a 25% interest in 50 oil and gas wells. Under the terms of the
agreement, the Company was entitled to 25% of the net revenues. As a net profits
interest owner, the Company was allocated a portion of operating expenses but
was not responsible for their payment if they exceeded allocable revenues. In
any period where the operating expenses exceed operating revenues, such excess
is carried forward to be recouped by the operator only to the extent there is
future revenue in excess of expenses.
The 50 wells produced small amounts of oil and gas from one field in
three counties of West Virginia (Ritchie, Wood and Pleasants Counties). At
December 31, 1997, 100% of the Company's reserves were proved but undeveloped
and were located on 31 leases containing 1718 gross (428 net) acres. Although
currently minimally productive, the manager/operator for the properties planned
to enhance production by using the improved technology and re-completion methods
to rework wells that were originally drilled in the mid-1980s. During the period
the properties were held by the Company, the developer/operator was unable to
obtain sufficient capital to commence the re-completion program.
The acquired properties and mineral interest were recorded at a fair
market value that was derived from the cash price of comparable reserves
purchased in the open market but is not in excess of the risk-discounted future
net revenues of the properties. The carrying value ($3,719,536) is approximately
30% of future net revenues of the Company's projected 25% interest.
Production, Price and Cost History
The Company's oil and gas operations in 1997 were immaterial with
$6,814 in revenue and $24,783 in expenses. In that period it produced less than
2000 MCF of gas and its operating cost were $13.156 per MCF. In November 1997,
after determining the oil and gas developer would not be able to meet their
commitments in accordance with the contractual arrangements, the Board of
Directors authorized management to exchange the Company's oil and gas properties
for the shares of Common Stock issued by the Company.
In February 1998 the Company returned title to the 50 oil and gas wells
acquired in 1996 in exchange for 1,800,000 of the shares of Common Stock
originally issued and a release from all obligations associated with the oil and
gas operations.
<PAGE>
The transaction resulted in a loss on the disposition of a business at
December 31, 1997. Consequently, the loss from the exchange is included,
retroactively, in the financial statements as a loss from discontinued
operations at December 31, 1997. There were 200,000 fewer shares received in the
exchange than were originally issued in connection with the property
acquisitions. This share difference and other miscellaneous acquisition costs
results in a loss of $409,700, which was recorded and reflected in the financial
statements as a loss from discontinued operations at December 31, 1997. For
financial reporting purposes, the shares returned were retroactively deducted
from the shares issued and outstanding at December 31, 1997.
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, M.D. for past
professional services in the amount of $4,100. The company is not disputing the
debt and has elected not to file an answer to the compliant. As of December 31,
1997, the Company had not received a Notice of Default Judgement with respect to
this matter.
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 of the 12
million shares. Crestport claimed that it was an innocent third party and 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 judgement in the proceeding and
requested that the plaintiff's claim be dismissed. The presiding judge denied
the Company's request for summary judgement 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 which 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, 1997.
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
During the three years prior to September 30, 1996 there was no
"established trading market" for shares of the Company's Common Stock and no
prices are provided for such periods. The following table sets forth, for the
subsequent 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 inter-dealer quotations, without adjustments for retail
mark-ups, markdowns or commissions and may not necessarily represent actual
transactions.
At April 11, 2000, the Company's Common Stock was quoted on the OTC
Electronic Bulletin Board at a bid and asked price of $.94 and $1.00,
respectively.
Fiscal Year Ended December 31, 1994 High Bid Low Bid
First, Second, Third and Fourth Quarter N/A N/A
Fiscal Year Ended December 31, 1995
First, Second, Third and Fourth Quarter N/A N/A
Fiscal Year Ending December 31, 1996
First, Second and Third Quarter N/A N/A
Fourth Quarter $4.50 $1.25
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
Since its inception, the Company has paid no 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 1,039
shareholders of record based on information provided by the Company's transfer
agent.
Changes in Securities
1. Issued 185,789 restricted shares for cash totaling $117,293. This
dollar amount included payment for 148,913 restricted shares unissued
that were waiting for proper paper work.
2. Issued 10,000 restricted shares as payment on a loan fee.
3. Issued 270,758 restricted shares on a convertible debenture in payment
of debt totaling $50,767.
4. Issued 500,000 restricted shares to a company on a note for $65,500.
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATION
Overview
At the end of 1997, 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"). The
Company's oil and gas business had been discontinued.
Due to the lack of advertising and marketing, AISC's two existing
clinics are operating at approximately 10% of capacity. In the past, the clinics
have required patients to pay for their services at the time they are provided
and the patient is given a standard claim form to submit for insurance
reimbursement.
The Company's 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 recently made the transition to
accepting direct reimbursement from most insurance carriers. This should have a
positive effect on the clinics' ability to attract new patients. An important
strategy in the Company's marketing program is to develop contract relationships
with insurance companies that highlight the cost savings of our treatment
program. An initial step would be to participate in a controlled study with a
pilot insurance company to identify these cost savings.
Since January, 1994, the Company's primary source of revenue has been
the prototype clinics, Revenues since inception have been small ($553,800)
because of limited resources for advertising and 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 10% of
capacity and the revenues have been decreasing because of a lack of publicity
and advertising.
The main activity of the management of the Company has been fund raising
efforts 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 a marketing program to increase
revenue in the existing clinics to the point where they are profitable. There
can be no assurances that these efforts will be successful. Once there are 4-5
clinics and a network of Internet physicians operating at a profitable level,
the Company would pursue a public offering to raise sufficient capital to
establish additional clinics in the United States and Europe.
At December 31, 1997, the Company has a cumulative operating loss of
$2,766,000 since its inception. The loss is attributable to product research and
development, the cost of starting up and operating the three prototype clinics,
the losses from the oil and gas segment and costs incurred in financing efforts.
<PAGE>
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, 1997 the Company had a working capital deficit of
$1,681,000 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
$40,500 per month with approximately 18% of the loss attributed to its clinic
operations. The Company expects operating expenses to continue at approximately
the same rate until additional capital resources are received necessary for the
promotion of its products. If the Company is successful in its funding efforts,
advertising and marketing expenses will increase as the Company launches its
e-commerce and marketing programs. Since the Company has not been able to secure
funding from commercial lenders it 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, would not 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 with those businesses. The financial impact of these management
decisions was to reduce shareholders equity approximately $4,000,000 and limit
the Company's revenue producing operations to two prototype treatment clinics
that are operating at 10% of capacity.
For the period ended December 31, 1997, the Company's operating
expenses exceeded operating revenues. The cumulative deficit since inception has
been funded by open account creditor debt ($540,000), shareholder loans
($1,182,000), shareholders' cash investment ($766,000) and shares of Common
Stock exchanged for property and services ($277,500). Although the Company has
continued to operate with the above sources of funds through December 1999, it
is uncertain whether these same or comparable sources will be available until
the completion of the development stage.
Through December 31, 1997 the Company had direct loans from
shareholders of $916,388 in principal with $200,000 in interest received. In
addition, the Company is obligated repay approximately $31,000 in funds loaned
by certain officers, directors and the son of the CEO.
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 has not established a source of revenues
sufficient to cover its operating costs and allow it to continue as a going
concern. The Company plans to seek long-term funding through either private or
public stock offerings, although there can be no assurance that any of such
efforts will be successful. Management believes that sufficient funding will be
raised to meet operating needs during the remainder of its development stage.
<PAGE>
On November 29, 1996, the Company exchanged 750,000 shares common stock
for 12,000 shares of $250 par value preferred stock of the parent of an
insurance company. The preferred stock has a 6% per annum dividend with the
first dividend due February 28, 1997. In February 1997, the Company granted a
90-day extension for the initial dividend payment. Management considered this to
be a speculative investment and the exchange was recorded at a nominal amount
equal to the par value of the Company's common stock ($750). There was no
activity and in an agreement between the parties the transaction was rescinded
in February of 1998. Results of Operations
Revenues
The primary purpose of the Company's efforts during its development
stage was to establish proven medical and administrative procedures. During this
period, revenues from operations have been limited because sufficient funds have
not been available to AISC to launch a major advertising and public relations
campaign to promote the Company's Skin Fresh Methodology.
Revenues from clinic operations consist of professional fees charged
for the services of the staff physician and trained medical assistants and
product sales from the sale of products through the clinics. During the fiscal
year ending December 31, 1997, revenues from operations were $101,844, an 11%
drop from revenues of $114,244 for the fiscal year ending December 31, 1996.
The drop in revenues is due to the limited marketing efforts during the
year and reduction in operation of the Provo clinic to two days a week. Revenues
from the clinic operations should not significantly increase until additional
funds are raised which would allow the Company to launch its marketing program.
Expenses
Operating expenses for the clinics in fiscal 1997 were marginally
higher than fiscal 1996 by $23,400 or 10%. This slight increase in operating
expenses was due primarily to reductions in advertising, physician services and
employee expenses with an offsetting increase in clinic salaries.
The general and administrative expenses of the Company increased
$215,000 or 73% from fiscal 1996 to fiscal 1997 due mainly to increases in
officer's compensation expense ($82,000) and increases in professional services
and travel expense associated with the Company's fund raising activity
($102,000).
Plan of Operations
The results of operations during the first four years of operating the
prototype clinics are not indicative of future operating results because the
purpose of the prototype clinics was to establish operational procedures and the
Company did not have the funding available to launch the appropriate related
advertising and marketing campaign necessary properly promote the "Skin Fresh"
technology.
Working capital requirements for the past four years were obtained
through loans from private individuals. In order to continue operating the
prototype clinics and pay the staff of the Company, additional funding will be
required until revenues from professional fees and the sale of product increase
to the point covering such costs.
<PAGE>
If the Company is able to secure additional funding, the Company plans
to open three additional 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 will 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 require approximately $5,000,000 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 Company will, for the time being,
be dependent on raising long-term capital to fund the expansion of the its
clinical operations.
In the opinion of management, inflation has not had a material effect
on the Company's financial position.
Following is a recapitulation of various methods and vehicles used to
finance the Company's operations:
Capital Markets Fund Raising Efforts - During 1997, various individuals
and companies were issued 180,000 common shares as compensation for their
attempts to raise capital for the Company.
Profession Services - During 1997, various individuals and companies
were issued 30,000 common shares as compensation for service ranging from
accounting to insurance consulting.
Short-term Warrants - In connection with plans to raise funds through
the private placement of convertible debentures, the Company issued to the
selling investment sponsor group, 90 day warrants for the purchase of 100,000
shares of its Common Stock at an exercise price of $2 per share. The warrants
expired June 7, 1998.
General - In November 1996, the Company 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 September 1996,
the Company granted options to four shareholders to purchase 750 shares of
common stock for $2.00 per share. The options expire in two years.
Stock Options - Consultant - In November 1996, the Company granted stock
options for 1,500,000 shares of Common Stock under the non-qualified stock
option plan to a capital markets consulting company in connection with services
rendered and to be rendered in the future The stock options expire November 5,
1998. In December 1996, options for 300,000 shares were exercised by the
consulting firm and the Company was given a one-year non-interest bearing note
for $300,000. The shares were issued and the outstanding balance of the note has
been recorded as a reduction to shareholders' equity. During 1997, $99,560 was
collected on the subscription note. In 1997, the Company granted an additional
190,000 stock options for $1.00, which expire in 1999 to the same consulting
company. The holder of the options exercised options totaling 125,000 shares in
1997.
Based on its analysis and inquiries of the operating methods and
processes, management has concluded the Company has no potential Y2K disruption
or interruption of service problems.
<PAGE>
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's future success depends in part on the acceptance of the
Company's treatment products and methods. 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:
o customer dissatisfaction;
o negative publicity;
o loss of revenues; or
o slower market acceptance.
The Company's business will suffer if its products or treatment
contains imperfections or errors in judgement. 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
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 incorporates compounds and medicines manufactured by third
parties into some of its products and any significant interruption in the
availability of these third party products or defects in these products could
harm the Company's business. 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 deliver and sell the Company's
treatment program, 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.
<PAGE>
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 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. If the Company makes any acquisitions, it will be required to
assimilate the operations, products and 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 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.
<PAGE>
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
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 currently holds no trademark registrations in the
United States and foreign countries. 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.
<PAGE>
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 expects to incur significant increases in operating
expenses in the foreseeable future. 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 direct
sales and forces and incurring advertising expenses;
o increase its research and development activities; and
o expand its general and administrative support activities.
Accordingly, the Company will be required to significantly increase its
revenues in order to maintain 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.
The Company's management group and directors will own and control
approximately 30% of the 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.
Cautionary Statement for Purposes of Forward-Looking Statements
Certain information contained in this Annual Report on Form 10KSB
(including statements contained in Item 1. "Business", Item 3. "Legal
Proceedings" and Item 7. "Management Discussion and Analysis of Results of
Operation and Financial Condition"), as well as other written and oral
statements made or incorporated by reference from time to time by the Company
and its representatives in other reports, filings with the Securities and
Exchange Commission, press releases, conferences, or otherwise, may be deemed to
be forward-looking statements within the meaning of Section 21E of the
Securities Exchange Act of 1934 and are subject to the "Safe Harbor" provisions
of that section. This information includes, without limitation, statements
concerning future results of operation, future revenues, future costs and
expenses, future margins and future write downs and special charges; anticipated
product releases and technological advances; contingent liabilities; the
Company's Year 2000 issues; the inherent unpredictability of adversarial
proceedings; demand for the Company's products, future capital expenditures and
future financial condition of the Company; industry conditions; and world
economic conditions.
<PAGE>
These statements are based on current expectations and involve a number
of risks and uncertainties, including those set forth above and elsewhere in
this Annual Report on Form 10KSB. Although the Company believes that the
expectations reflected in such forward-looking statements are reasonable, it can
give no assurance that such expectations will prove to be correct.
When used in this report, the words "believes," "intends,"
"anticipate," "estimate," "expect," "may," "project" and similar expressions are
intended to be among the statements that identify forward-looking statements.
Important factors which could affect the Company's actual results and cause
actual results to differ materially from those results which might be projected,
forecast, estimated or budgeted by the Company in such forward-looking
statements include, but are not limited to, the risk factors identified above.
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
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, 1997, the name, age, and
position of each executive officer and director and the term of office of each
director of the Company.
Name Age Position Since .
- --------------- --- ----------------- ------------------
Gary V. Heesch 60 CEO & Director December 29, 1995
Leland Hale (1) 50 President October 31, 1997
David K. Giles 51 C.F.O. & Secretary December 29, 1995
Craig Heesch 59 Director December 29, 1995
Jack D. Brotherson(2) 58 Director December 29, 1995
Robert Arbon, M.D. 60 Director December 29, 1995
Ronald J. Hollberg(2) 64 Director October 1, 1996
(1) Appointed President October 1997. Resigned in May 1999.
(2) Resigned in February 1999.
Biographical Information
Set forth below is certain biographical information for each of the
Company's officers and directors:
<PAGE>
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.
Mr. Leland Hale served as President of the Company from October 31,
1997 until May 31, 1999. From 1987 to October 1995, Mr. Hale was Vice President
of U.S. operations for Tecsyn International, Inc., a manufacturer of industrial
cable. From October 1995 until he joined the Company, Mr. Hale was independently
employed and was involved in the evaluation of acquisition and merger
opportunities.
David K. Giles, MBA. Mr. Giles has been a consultant with the Company
since 1993 and a vice president and secretary/treasurer of the Company since
June, 1994. Prior to joining the Company, Mr. Giles was employed from 1981 to
1993 for EFI Electronics corporation, Salt Lake City, Utah, a Utah public
corporation [NASDAQ: EFIC], serving for a 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 the Company since 1989.
Since 1975, Mr. Heesch has been a senior partner at CV Associates, Vancouver,
Washington, a technical consulting firm assisting in the development of
technologies for disposition into the marketplace.
Jack D. Brotherson, Ph.D. Dr. Brotherson has been a director of Medisys
since 1991, a director of the Company since December 1995 and has worked full
time for Brigham Young University , Provo, Utah since 1969. Dr. Brotherson is
currently a professor of Resource Management for the Botany and Range Sciences
Department, having earned a BS from B.Y.U. (1964), a MS from Iowa State
University (1967), and a Ph. D. from Iowa State University (1969). Dr.
Brotherson resigned from the board of directors in February 1999.
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 physician 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).
Ronald J. Hollberg, Jr. Mr. Hollberg was a director of Ceron Resources
Corporation, the predecessor of the Company and has been a director of the
Company since October 1, 1996. Mr. Hollberg has been president and sole
shareholder of Arjay Oil Company for more than five years and devotes full time
to the business of Arjay Oil Company and other personal interests. Mr. Hollberg
resigned from the board of directors in February 1999.
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.
<PAGE>
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 1997 fiscal year, as of the due date of this annual report, Gary Heesch has
not filed his Form 4, "Statement of Changes in Beneficial Ownership" for 21
transactions nor his Form 5, "Annual Statement of Change in Beneficial
Ownership" for 1997. 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 due date of this annual report, David Giles has
not filed his Form 4, "Statement of Changes in Beneficial Ownership" for 3
transaction nor his Form 5, "Annual Statement of Change in Beneficial Ownership"
for 1997. 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 due 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 1997. 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 due 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 1997. Upon notice of this oversight, Mr. Arbon advised the company that he
has filed 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 $100,000 during such period (as determined at December 31, 1997, the
end of the Company's last completed fiscal year):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Awards Long Term Compensation
Other Restricted Payouts
Name and Annual Stock Options LTIP All other
Principal Position Year Salary Bonus($) Compensation Awards /SARs Payout Compensation
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gary V. Heesch, 1997(3) -0- -0- $37,530 $500(3) $42,500(4) -0- -0-
President & CEO 1996 -0- -0- $53,668 $125(1) -0- -0- -0-
(The Company) 1995 -0- -0- $36,595 -0- -0- -0- -0-
Leland Hale, 1997(2) -0- -0- $nil -0- -0- -0- -0-
President
(The Company)
David Giles, 1997 -0- -0- $119,034 $500(3) $25,000(5) -0- -0-
V.P. Sec'y
(The Company)
</TABLE>
<PAGE>
Summary Compensation Table Notes
(1) Represent value of options to purchase 125,000 shares of common stock at
$0.001 per share exercised in December 1996.
(2) Mr. Hale was appointed President in October 1997.
(3) Represents 500,000 shares issued at $.001 per share.
(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, Mr. Hale and Mr. Giles will each receive
annual cash compensation of less than $100,000 for fiscal year 1998.
Employment Contracts and Termination of Employment and Changes in Control
Arrangements
As a result of actions taken during 1997, the Company agreed to
reimburse Mr. Heesch $73,000 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.
As a result of actions taken during 1997, the Company agreed to
reimburse Mr. Giles $45,000 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.
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.
In 1997, the Company issued 2,200,000 common shares to certain of its
officers and directors for notes totaling $110,000. In 1998, 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
Compnay's stock. During 1997, the Company issued 16,666 common shares to certain
shareholder/creditors as compensation for extending the due date on their
obligations. .
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.
<PAGE>
1997 Options Granted Officers - The Board of Directors approved a
nonqualified 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 nonqualified
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.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of December 31, 1997, 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 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.
Security Ownership of Certain Beneficial Owners
Title
of Name and Address Amount and Nature of Percentage
Class Beneficial Owner Beneficial Ownership(1) of Class
Common International Casualty 2,000,000 (2) 16.6
& Surety Co., Ltd, 5th Floor
General Buildings
29-33 Shortland Street
Auckland, New Zealand
Common Gary V. Heesch 815,455 (3) 7.5
1614 East 5600 South
Salt Lake City, UT 84121
Common Condor Insurance Limited 750,000 (5) 6.9
504 Candado Place
El Paso, TX 79912
Common David K. Giles 713,600 (4) 6.6
1365 Kristie Lane
Salt Lake City, UT 84108
Common Craig Heesch 395,455 5.5
2542 Cerritos Lane
Fallbrook CA 92028
(2) 12,000,000 shares of the Company's Common Stock issued to
Lindbergh-Hammer Associates, Inc. in exchange for a promissory note
have been excluded from the issued and outstanding shares in the
Company's financial statement presentation because the payment due on
the promissory note is based on significant contingencies, none of
which, at December 31, 1997, had occurred. Management has taken the
position, which it believes is reasonable, that the transaction was
voidable and instructed the transfer agent to cancel the shares. There
has been a lawsuit filed by a third party that claims to be a holder in
due course and seeks to have the shares reissued. Therefore, the
12,000,000 shares have been excluded from the total issued and
outstanding shares of the Company's common stock in calculating the
percentage ownership in the table below.
<PAGE>
(2) The shares issued include 1,800,000 shares issued for the
West Virginia properties, which were reconveyed to the holder in
February of 1998. The shares issued do not include 148,913 shares that
had been paid for but unissued at December 31, 1997. For financial
presentation purposes, the two issues above were retroactively
recorded to December 31, 1997.
(3) Includes 150,000 held in trust for the benefit of the
children of Gary V. Heesch, with Dan Roberts as the trustee. Also
included are 25,000 shares held in trust for the benefit of Carol Lee
Poulton, with Mr. Heesch as trustee. All of these shares are deemed to
be controlled by Mr. Heesch.
(4) Includes 13,600 shares held by wife and children residing in
Mr. Giles' principle residence. All of these shares are deemed to be
controlled by Mr. Giles.
(5) The shares were cancelled in 1998 when the owner was unable
to meet the terms of his contractual agreement.
Security Ownership of Management of the Company
Title
of Name and Position of Amount and Nature of Percentage
Class Officer and/or Director Beneficial Ownership of Class
Common Gary V. Heesch, CEO,
and Director 815,455(1) 7.5
Common David K. Giles, VP, Sec. 713,600(2) 6.6
Common Craig Heesch, Director 595,455 5.5
Common Robert Arbon, Director 275,000 2.5
Common Jack Brotherson, Director 250,000 2.3
Common Ronald J. Hollberg, Jr.
Director 300,617 2.8
Common Leland. Hale, Pres.(3) -0- 0
--------- ---
All Officers and Directors
as a Group (7 person) 2,950,127 27.2
========== ====
<PAGE>
(1) Includes 150,000 held in trust for the benefit of the children of Gary V.
Heesch, with Dan Roberts as the trustee. Also included are 25,000 shares
held in trust for the benefit of Carol Lee Poulton, with Mr. Heesch as
trustee. All of these shares are deemed to be controlled by Mr. Heesch.
(2) Includes 13,600 shares held by wife and children living at home. All of
these shares are deemed to be controlled by Mr. Giles.
(3) Appointed President October 1997.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Transactions with Management and Others.
On November 1, 1996 and November 15, 1996, the Company entered into two
similar agreements with Lindberg controlled by W.A. Gary, a Director of the
Company, wherein, the Company issued an aggregate of 12,000,000 shares of its
Common Stock in exchange for a note payable of $60,000,000, based on a valuation
of $5.00 per share of common stock. The Company's board of directors has
retained the voting rights to such shares until paid for by Lindbergh. Payment
on the promissory notes was to be generated 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 could be made under different
arrangements and were to some extent, dependent on the price of the Company's
Common 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
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. 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 and, consequently, a holder in due course. 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. See "Legal Proceedings."
Convertible Debentures Program - In early 1997, the Company commenced a
broker-sponsored program to sell convertible debentures. Debentures totaling
$50,000 were sold under the program. On November 24, 1997, the debentures issued
were converted to 270,758 common shares.
At December 31, 1997, the Company's CFO had loaned approximately
$12,000 and $11,200 in principal and interest remained unpaid. Two directors had
loaned the Company $15,500.
<PAGE>
ITEM 13. EXHIBITS FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K
(a)(1)FINANCIAL STATEMENTS. The following financial statements are included in
this report:
Title of Document Page
- ----------------- ----
Independent Auditor's Report of Thomas Leger & Co.,
Certified Public Accountants............................................ F-1
Consolidated Balance Sheets as of December 31, 1997...................... F-3
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996, and from inception (September 7, 1989)
through December 31, 1997............................................. F-4
Consolidated Statements of Changes in Common Stockholders' Equity
(Deficit) from inception (September 7, 1989) through December
31, 1997................................................................ F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996, and from inception (September 7, 1989)
to December 31, 1997.................................................... F-8
Notes to Consolidated Financial Statements............................... F-10
(a)(2)FINANCIAL STATEMENT SCHEDULES. The following financial statement schedules
are included as part of this report:
None.
<PAGE>
(a)(3)EXHIBITS. The following exhibits are included as part of this report:
SEC
Exhibit Reference
Number Number Title of Document Location
- ------- --------- ----------------- ------------
27 27 Financial Data Schedule This Filing
(b) Reports on Form 8-K.
On February 6, 1997, The Company filed the following report on Form 8K
identifying a change in certifying accountants.
ITEM 4. CHANGES IN REGISTRANT'S CERTIFYING ACCOUNTANT
On February 6, 1997, by mutual consent, the Registrant terminated its
relationship with its independent auditors by accepting the resignation of
Jones, Jensen & Company, Certified Public Accountants.
During the Registrants two most recent fiscal years and all interim
periods leading up to the date of Jones, Jensen & Company's resignation, they
did not issue any adverse opinions or disclaimer of opinion or qualify an
opinion as to uncertainty, audit scope, or accounting principles, except as to
the following:
1. A limitation in the scope of audit procedures performed with respect to
the Registrant's supplies inventory ($9,374) at December 31, 1995, due to the
fact that the auditors were not engaged in time to observe the opening
inventory; and
2. A modified opinion relating to the fact the Registrant is a "development
stage enterprise" and its ability to continue as a "going concern".
The mutual decision to terminate the auditor's relationship was recommended
and approved by the Registrant's board of directors.
The Registrant has requested that Jones, Jensen & Company review the 8K
disclosures and provide a letter addressed to the Securities and Exchange
Commission stating whether they agree with the above statements and, if not,
stating in what respects they do not agree. Jones, Jensen & Company's letter is
included as an exhibit to this report on form 8-K.
On February 13, 1997, the Registrant, with the concurrence of its board
of directors engaged Thomas Leger & Co., L.L.P. as its principal independent
auditors.
<PAGE>
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 12, 2000 By /S/ Gary V. Heesch
---------------------------------
Gary V. Heesch, President and CEO
Date: April 12, 2000 By /S/ David K. Giles
----------------------------------
Gary V. Heesch, 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 12, 2000 By /S/ Gary V. Heesch, Director
---------------------------
Gary V. Heesch
Date: By
---------------------------
Craig Heesch, Director
Date: By
---------------------------
Jack D. Brotherson, Director
(Resigned February 1999)
Date: By
---------------------------
Robert Arbon, MD, Director
Date: By
---------------------------
Ronald J. Hollberg, Director
(Resigned February 1999)
<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 Utah corporation
in the development stage) as of December 31, 1997, 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,
1997. 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,
1997, 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 31,1997, 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 and has net
working capital deficiencies, which together, raise 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, 1997
ASSETS
CURRENT ASSETS
<S> <C>
Cash $ 14,259
Accounts receivable - trade 7,839
Inventory 3,642
Prepaid expenses 15,663
------
Total Current Assets 41,403
------
PROPERTY AND EQUIPMENT
Oil and gas properties, successful efforts method:
Property subject to amortization -
Furniture and office equipment 41,554
------
41,554
Less accumulated depreciation (21,662)
--------
Net Property and Equipment 19,892
------
OTHER ASSETS 875
---
TOTAL ASSETS $ 62,170
========
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable - trade $ 229,234
Accrued interest 229,484
Other accrued expenses 198,293
Notes and advances currently due:
Short-term shareholder advances 31,581
Vendors 112,333
Stockholders 921,388
---------
Total Liabilities 1,722,313
---------
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,
9,225,763 shares issued and outstanding 9,226
Additional paid-in capital 1,792,421
Accumulated development stage deficit (2,765,949)
-----------
(964,253)
Less notes receivable on shares issued (695,890)
---------
Total Stockholders' Deficit (1,660,143)
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 62,170
========
</TABLE>
The accompanying notes are an intergral part of these financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
WASATCH PHARMACEUTICAL, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENT OF OPERATION
For the Year Ended
December 31, From
----------------------------- Inception To
1997 1996 Dec. 31, 1997
----------- ---------- -------------
REVENUES
<S> <C> <C> <C>
Professional fee income $ 38,982 $ 31,529 $ 184,848
Product sales 62,861 82,715 368,939
----------- ---------- -------------
Total Revenues 101,843 114,244 553,787
----------- ---------- -------------
OPERATING EXPENSES
Cost of products sold 5,783 7,072 43,077
Salaries 141,642 99,116 324,721
Employee leasing - - 218,745
Payroll taxes 13,222 11,237 33,159
Physicians fees 43,200 46,200 197,668
Rent 33,845 41,974 135,143
Advertising 6,250 21,234 212,552
Depreciation 6,799 6,811 23,999
Other 6,356 33 56,882
----------- ---------- -------------
Total Operating Expense 257,097 233,677 1,245,946
GENERAL AND ADMINISTRATIVE EXPENSE 507,178 291,965 1,367,810
INTEREST 118,236 83,894 296,262
----------- ---------- -------------
Total Expenses 882,511 609,536 2,910,018
----------- ---------- -------------
LOSS BEFORE DISCONTINUED OPERATIONS
AND THE PROVISION FOR INCOME TAXES (780,668) (495,292) (2,356,231)
----------- ---------- -------------
LOSS FROM DISCONTINUED OPERATIONS
Loss from operations (17,969) (8,816) (26,785)
Loss from asset disposition (382,933) - (382,933)
----------- ---------- -------------
Total Loss From Discontinued Operations (400,902) (8,816) (409,718)
----------- ---------- -------------
NET LOSS BEFORE INCOME TAXES (1,181,570) (504,108) (2,765,949)
PROVISION FOR INCOME TAXES - - -
----------- ---------- -------------
NET LOSS $(1,181,570) $ (504,108) $(2,765,949)
============ =========== ============
Loss per share before discontinued operations $ (0.087) $ (0.149) $ (0.366)
Loss per share from discontinued operations (0.044) - (0.064)
----------- ---------- -------------
BASIC LOSS PER COMMON SHARE $ (0.131) $ (0.149) $ (0.430)
============ =========== ============
BASIC WEIGHTED AVERAGE SHARES OUTSTANDING 8,986,460 3,380,960 6,439,487
============ =========== ============
</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 - -
------- -- -- ------ -- -
Re-stated 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 of stockholders'
equity-per committed contracts 49 9,225,763 9,226 1,792,421 (2,765,949) (964,253)
Stock subscription notes outstanding - (3,400,390) (3,400) (692,490) - (695,890)
-- ----------- ------- --------- -- ---------
Net equity December 31, 1997 $ 49 5,825,373 $ 5,825 $1,099,931 $ (2,765,949) $ (1,660,143)
===== ========== ======== =========== ============= =============
</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 CASH FLOWS
For the Year Ended From
December 31, Inception To
1997 1996 Dec. 31, 1997
----- ----- --------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C> <C>
Net Loss $(1,181,570) $ (504,108) $(2,765,949)
Adjustments to reconcile net loss to net cash used
by operating activities:
Depreciation and depletion 6,799 6,811 21,662
Depreciation and losses on fixed asset disposals
Clinic assets - 3,513 15,234
Oil and gas assets 3,383 806 4,189
Loss on disposal of oil and gas properties 382,933 - 382,933
Increase (decrease) in working capital -
(Increase) decrease in receivables (4,913) (844) (7,839)
(Increase) decrease in related party receivable 6,600 (6,100) -
(Increase) decrease in inventory 4,944 788 (3,642)
(Increase) decrease in prepaid expenses (15,663) - (15,663)
Increase (decrease) in accounts payable 61,076 12,173 229,234
Increase (decrease) in accrued interest 68,258 70,920 229,484
Increase (decrease) in other accruals 157,242 15,575 198,293
-------- ------- -------
Net cash used by operating activities (510,911) (400,466) (1,712,063)
--------- --------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets (1,804) (755) (27,764)
(Increase) decrease in other assets (475) 266 (875)
----- ---- -----
Net cash used by investing activities (2,279) (489) (28,639)
------- ----- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings 158,582 382,100 1,193,034
Expenses paid by shareholder - - 38,323
Repayment of loans (5,021) (120,000) (122,752)
Proceeds from sale of common shares 210,704 137,500 348,204
Capital contributed by shareholder - - 154,800
Collection of share subscriptions 99,560 - 99,560
Common shares exchanged for debt - 12,318 12,318
Exercised stock options 125,000 250 125,250
Redemption of common shares - - (20,409)
Cost of raising capital (73,366) - (73,366)
-------- -- --------
Net cash provided by financing activities 515,459 412,168 1,754,961
-------- -------- ---------
NET INCREASE IN CASH 2,269 11,213 14,259
Balance at beginning of period 11,990 777 -
------- ---- -
Balance at end of period $ 14,259 $ 11,990 $ 14,259
========= ========= ========
</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
1997 1996 Dec. 31, 1997
----- ----- -------------
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION
<S> <C> <C> <C>
Cash paid for interest $ 49,950 $ 11,604 $ 61,554
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 12,780 3,719,536 3,732,316
Exchanged (3,349,383) - (3,349,383)
Preferred stock of an insurance company
Acquired - 750 750
Subscription receivable for common stock
Amount on issuance of common stock 935,000 300,000 1,235,000
Adjustment to subscriptions receivable (449,950) - (449,950)
Common stock for
Goods and services 3,032 256 8,999
Interest 27 - 27
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-9
<PAGE>
WASATCH PHARMACEUTICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
-----------------------------------------------------
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
History and Nature of Business - The consolidated financial statements include
Wasatch Pharmaceutical, Inc. (a development stage company) (Wasatch or the
Company), and its wholly owned subsidiaries, Medisys Research Group, Inc. and
American Institute of Skin Care, Inc.
Medisys Research Group, Inc., a Utah corporation, (Medisys) was incorporated on
September 7, 1989 for the purpose of developing treatment programs for various
skin disorders. On January 21, 1994, American Institute of Skin Care, Inc.
(AISC) was incorporated as a wholly owned Utah subsidiary of Medisys to
administer the skin treatment programs developed by Medisys.
On December 29, 1995, Ceron Resources Corporation 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 subsequently changed to Wasatch
Pharmaceutical, Inc.
The acquisition of Medisys by Ceron was accounted for as a purchase by Medisys
because the shareholders of Medisys control the surviving company. There was no
adjustment to the carrying value of the assets or liabilities of Ceron in as
much as its market value approximated the carrying value of net assets. In
summary, Ceron is the acquiring entity for legal purposes and Medisys is the
surviving entity for accounting purposes.
On January 16, 1996, Wasatch reorganized for the purpose of changing its
domicile from Delaware to Utah and modifying its capital structure. For the
purpose of this financial presentation "Inception" shall mean September 7, 1989,
which was the commencement of Medisys operations.
Disposition of Oil and Gas Business - On November 20, 1996, Wasatch exchanged
2,000,000 of its common shares for a 25% interest in fifty oil and gas wells
located in western West Virginia. Under the terms of the agreement, Wasatch's
was entitled to 25% of the revenues and incurred 25% of the operating expenses
from the wells. The property operator holds a vendor's lien that entitles it to
offset future revenues against accumulated operating deficits not covered by
revenues.
F-10
<PAGE>
WASATCH PHARMACEUTICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
-----------------------------------------------------
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
(Continued)
At the time they were acquired, the properties were not economically productive.
The transaction was based on the property developer raising the funds to
increase productivity in each of the wells in 1997. The Company would not bear
any of the enhanced production costs. There were no costs incurred for reworking
wells in 1997 or 1996.
In accordance with generally accepted accounting principles for non-monetary
transactions, the acquired properties were recorded at a fair market value that
was derived from the cash price for comparable recoverable reserves but is not
in excess of risk discounted future net revenues.
In November 1997, Wasatch called upon the oil and gas property developer to
demonstrate its ability to meet commitments under the acquisition agreement. The
developer was unable to perform.
After determining the oil and gas developer would not be able to meet their
commitments in accordance the contractual arrangements, the Board of Directors
authorized management to exchange the Company's West Virginia oil and gas
properties for the common shares issued by Wasatch. 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 original shares issued and a release
from all obligations associated with the oil and gas operations.
The exchange transaction results in a material loss on disposal of a segment of
business at December 31, 1998. Consequently, the loss from the exchange and the
loss from operations are retroactively included in the loss from discontinued
operations at December 31, 1997.
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.
F-11
<PAGE>
WASATCH PHARMACEUTICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
-----------------------------------------------------
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
(Continued)
Loss Per Share - In 1997, the Company adopted the Financial Accounting Standards
Board Statement No. 128, "Earnings per Share". Statement 128 which 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.
The Company has issued approximately 39,030,000 shares for the period January 1,
1998 through December 31, 1999 for cash, note extension, services and other
equity transactions including the stock referred to in the potential change in
control paragraph in Note 9.
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.
F-12
<PAGE>
WASATCH PHARMACEUTICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
-----------------------------------------------------
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
(Continued)
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. Amortization of the cost of oil and gas
properties is based upon of the units of production. 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 and amortization are 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.
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, 1997 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 1996 and for the period from inception on September 7, 1989 through December
31, 1996 have been reclassified to conform to the 1997 presentation.
F-13
<PAGE>
WASATCH PHARMACEUTICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
-----------------------------------------------------
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
(Continued)
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.
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, 1997, management projects that
their businesses plan to commence the operational phase of its clinic treatment
activities will be implemented in 2000.
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 operate 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 and reach an amicable settlement with the
note-holder more fully described in Note 9.
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
with 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.
F-14
<PAGE>
WASATCH PHARMACEUTICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
-----------------------------------------------------
2. GOING CONCERN (continued)
At December 31, 1999, the Company's operating expenses have exceeded operating
revenues by $2,765,949. 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 December 1999, it is
uncertain whether these same or comparable sources will be available until the
completion of the development stage.
3. RELATED PARTY TRANSACTIONS
Discussed below are related party transactions not included in other notes to
the financial statements.
On October 11, 1994, the Company entered into an agreement with a shareholder to
redeem 150,000 shares for $25,000. The Company paid the shareholder $12,500 upon
execution of the agreement, and an additional $5,000 during 1994 and $1,000
during 1996 and 1997, respectively. The remaining balance of $5,500 is
non-interest bearing and is due on demand.
A liability totaling $118,000 was provided for two principal officers with the
understanding that the amounts are to be paid only when sufficient cash is
available. The liability represents back pay and the reimbursement of certain
expenses paid 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 on notes totaling $110,000. In 1998,
the stock was revalued and the consideration was reduced to $2,200 (par value).
During 1997, the Company issued 16,666 common shares to certain
shareholder/creditors as compensation for extending the due date on their
obligations.
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.
F-15
<PAGE>
WASATCH PHARMACEUTICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
-----------------------------------------------------
5. NOTES PAYABLE
Notes payable at December 31, 1997 are as follows:
Unsecured notes payable to shareholders dated at various dates,
accruing interest at 10% to 20%, 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. Certain notes have
additional stipulations and provisions $ 921,388
Unsecured notes payable to vendors dated various dates,
accruing interest at rates ranging from 6% to 10%. Certain
notes are guaranteed by an officer of the Company 112,333
Advances from officers and shareholders to meet cash shortfall,
payable on demand with interest ranging from 15% to 30% 31,581
Total notes payable $1,065,302
==========
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.
At December 31, 1997, there were 10,876,850 shares of common stock were issued
and outstanding according to the transfer agent's records. For financial
statement purposes 9,225,763 shares of common stock were considered to be issued
and outstanding. The difference is equal to the shares returned (1,800,000)
under the aforementioned exchange agreement, which were treated as retired, and
the shares that were sold and paid for in a private placement (148,913) that
were treated as issued and outstanding but lacked the appropriate documentation
to allow the transfer agent to physically issue
F-16
<PAGE>
WASATCH PHARMACEUTICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
-----------------------------------------------------
6. CAPITAL STRUCTURE, (Continued)
Common Stock - In August 1996, the Board of Directors authorized a four-for-one
reverse split of common stock. All references in the financial statements to the
number of shares and per share amounts of Wasatch's common stock have been
retroactively restated to reflect the decrease in the number of common shares
outstanding.
Preferred Stock - The Company's preferred stock (Series A) entities the holder
to per-share annual dividends equal to 20% of the Company's net income divided
by 300,000, times the number of shares of preferred stock outstanding (3.28% of
net income based on preferred stock outstanding at December 31, 1997 and 1996).
Dividends are required to the extent that there is net income and that there are
funds legally available. To the extent funds are not legally available in net
income years, the payment of the dividends calculated shall be deferred until
such time as there shall be funds legally available. The shares are redeemable
at the option of the Company at $2.00 per share plus accrued and unpaid
dividends. The shares have a liquidating value of $1 per share plus accrued and
unpaid dividends. There were no accrued and unpaid dividends at December 31,
1997 and 1996.
On July 26, 1994, the shareholders of the Company passed a resolution to allow
the exchange of one share of preferred stock for two shares of common stock. To
date, no shares of preferred stock have been exchanged and there were no other
preferred share transactions in 1997 and 1996.
F-17
<PAGE>
WASATCH PHARMACEUTICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
-----------------------------------------------------
6. CAPITAL STRUCTURE, (Continued)
Escrowed Share Agreement - On November 1 and 15, 1996, the Board of Directors
authorized two agreements, each of which resulted in issuing 6,000,000 shares of
the Company's stock to an insurance company for a $30,000,000 note payable to
the Company (total of 12,000,000 shares for $60,000,000). Each agreement
contains generally the same terms and conditions. The shares were to be held in
escrow pending payment of the note and the voting rights remained with the
Company's Board of Directors on a pro-rata basis until the note is paid.
The note payments were to 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 management concluded, under the circumstances, 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 results of a pending trial will demonstrate the
meritorious defenses of its claim.
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.
F-18
<PAGE>
WASATCH PHARMACEUTICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
-----------------------------------------------------
6. CAPITAL STRUCTURE, (Continued)
Preferred Stock Purchase - On November 29, 1996, the Company exchanged 750,000
shares common stock for 12,000 shares of $250 par value preferred stock of the
parent of an insurance company. Management considered this to be a speculative
investment and the exchange was recorded at the par value of the Company's
common stock ($750). There was no activity in the investment and, in an
agreement between the parties, the transaction was rescinded in February of
1998.
Capital Markets Fund Raising Efforts - During 1997, various individuals and
companies were issued 180,000 common shares as compensation for their attempts
to raise capital for the Company.
Professional Services - During 1997, various individuals and companies were
issued 30,000 common shares as compensation for service ranging from accounting
to insurance consulting.
Convertible Debentures Program - In early 1997, the Company commenced a
broker-sponsored program to sell convertible debentures. Debentures totaling
$50,000 were sold under the program. On November 24, 1997, the debentures issued
were converted to 270,758 common shares.
Short-Term Warrants - In connection with plans to raise funds through the
private placement of convertible debentures, the Company issued to the selling
investment sponsor group, 90 day warrants for the purchase of 100,000 shares of
its common stock at $2 per share. The warrants expired June 7, 1998.
Share Sale to Officers and Directors - In March 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 1998, the price per
share was reduced to $.001 per share. Notes were accepted for the subscription
price of the stock.
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 September 1996, the Company
granted options to four shareholders to purchase 750 shares of common stock for
$2.00 per share. The options expire in two years.
F-19
<PAGE>
WASATCH PHARMACEUTICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
-----------------------------------------------------
6. CAPITAL STRUCTURE, (Continued)
Stock Options - Consultant - In November 1996, Wasatch granted stock options for
1,500,000 shares under the non-qualified stock option plan to a capital markets
consulting company in connection with services rendered and to be rendered in
the future (See Note 8 regarding this consulting agreement). The stock options
expire November 5, 1998. In December 1996, options for 300,000 shares were
exercised by the consulting firm and Wasatch was given a one-year non-interest
bearing note for $300,000. The shares were issued and the outstanding balance of
the note has been recorded as a reduction to shareholders' equity. During 1997,
$99,560 was collected on the subscription note. In 1997, the Company granted an
additional 190,000 stock options for $1.00, which expire in 1999 to the same
consulting company. The holder of the options exercised options totaling 125,000
shares in 1997.
Options - Stock option activity for shares granted that were
exercisable during 1997 was as follows:
<TABLE>
<CAPTION>
Expired or Ending Expiration
Price Per Share Granted Exercised 1997 Date
-------------------- ----------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Granted 1996
Consultants
.25 100,000 - 100,000 June 1, 1998
.50 100,000 - 100,000 June 1, 1998
.625 100,000 - 100,000 June 1, 1998
.064 500,000 500,000 - Nov. 5, 1998
1.00 700,000 - 700,000 Nov. 5, 1998
Shareholder
2.00 750 - 750 Sept. 1998
Granted 1997
Consultants
1.00 125,000 125,000 - April 10, 1999
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 & directors
.001 1,350,000 - 1,350,000 Open
--------- ------- ---------
Total 3,075,750 625,000 2,450,750
========= ======= =========
Exercised 625,000
=======
</TABLE>
F-20
<PAGE>
WASATCH PHARMACEUTICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
-----------------------------------------------------
6. CAPITAL STRUCTURE (continued)
Officers' And Key Employee Options - In December 1997, the Board of Directors
approved an inceptive stock option plan for the benefit of officers and key
employees and set aside 2,000,000 share for this purpose. At the same time
options were granted to the two principal officers (1,350,000 shares) at $.05
per share, 50% are exercisable December 27, 1998 and 50% on December 27, 1999.
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 as outstanding options by the Company.
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 to be issued 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.
Contested Consulting Options - In June 1996, Wasatch executed a consulting
agreement that granted stock options expiring June 1998 for the purchase of
three 100,000 share options at a per share price of $.25, $.50 and $.625,
respectively. In October, 1996, 100,000 common shares were issued to the
consultants in accordance with the agreement. The company recorded these shares
for a nominal value equal to the par value of $100. The consultants were unable
to perform in accordance with the agreement; the Company considered the contract
voided and requested the return of the shares issued. One consultant returned
the shares and voided the transaction. The other consultant retained the shares
issued and remained silent on the performance issues raised. The Company took no
other action and the options expired unused in June 1998.
There are no other stock purchase plans or arrangements at December 31, 1997.
Incentive Based Compensation - The fair value of options granted was estimated
on the date of grant using the Black-Scholes options pricing model assuming a
risk free interests rate of 5.42% for one to three year options, respectively,
no expected dividend yield, expected life of one to three years and zero
expected volatility. The zero volatility was assumed because the shares were not
tradable in a secondary market system when the options to purchase were granted.
F-21
<PAGE>
WASATCH PHARMACEUTICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
-----------------------------------------------------
6. CAPITAL STRUCTURE (continued)
The Company applies the Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for stock option and purchase plans. Accordingly,
no compensation cost has been recognized for the stock option agreement. Had
compensation cost been determined based upon the fair value at the grant dates
for awards under those plans consistent with the method of FASB Statement 123,
the Company's net loss and loss per share for the year ended December 31, 1997
and 1996 would have been as reflected in the pro forma amounts indicated below:
1997 1996
----------- ---------
Net loss $(1,260,757) $(530,065)
============ ==========
Net loss per common share $ (.140) $ (.157)
============ ==========
7. INCOME TAXES
The following table sets forth a reconciliation of the statutory federal income
tax at December 31, 1997 and 1996:
1997 1996
------------ ----------
Loss before income taxes $ (1,181,570) $ (504,108)
============= ===========
Income tax benefit computed at statutory rates $ (171,397) $ (401,734)
Increase in valuation allowance 399,441 168,079
Permanent differences 2,293 3,318
------------ ----------
Tax benefit $ - $ -
============ ==========
No federal income taxes have been paid since the inception of the Companies.
F-22
<PAGE>
WASATCH PHARMACEUTICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
-----------------------------------------------------
7. INCOME TAXES (continued)
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:
1997 1996
-------------- --------------
Deferred tax liabilities $ - $ -
-------------- --------------
- -
-------------- --------------
Deferred tax assets:
Net operating loss carryforwards 934,812 535,371
Valuation allowance (934,812) (535,371)
-------------- --------------
Total deferred tax assets - -
-------------- --------------
Net deferred tax asset (liability) $ - $ -
============== ==============
Deferred income tax provisions for the years ended December 31, 1997 and 1996
result from the following temporary differences:
1997 1996
------------ ------------
Net operating loss carry-forward benefit $ (399,441) $ (168,079)
Valuation allowance 399,441 168,079
------------ ------------
Total deferred tax benefit $ - $ -
============ ============
Net Operating Loss Carry-forwards - As of December 31, 1997, the Company had
cumulative net operating loss carry-forwards ("NOL") for federal income tax
purposes of approximately $2,749,443, which expire in 2007 through 2017, and net
operating loss carry-forwards for alternative minimum tax purposes of
approximately the same amount which expire in 2007 through 2017. Due to
ownership changes, Internal Revenue Code Section 382 will limit future
utilization of the net operating loss carryforwards.
F-23
<PAGE>
WASATCH PHARMACEUTICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
-----------------------------------------------------
8. COMMITMENTS AND CONTINGENCIES
Lease Commitment - The Company has two leases for office space. One lease has a
rent of $725 per month through January 31,1998. The second lease has a rent of
$1,889 per month and expires in October 1999. Rent expense was approximately
$33,000 and $42,000 for 1997 and 1996, respectively.
Consulting Agreement - On November 18, 1996, the Board of Directors ratified a
consulting agreement with a company to provide services consisting of financial
and business consulting for a period of one year (contract expired November 5,
1997). In consideration for these services, the Company granted stock options
totaling 1,500,000 shares to the consulting company (See Note 6 for details of
the option granted).
Escrowed Share Agreement - The Company has been sued by an insurance company to
have reissued 12 million shares of Wasatch's common shares that were cancelled
at the Company`s request (See Note 6 for additional information).
Preferred Stock Rescission - In February 1998, the Company and the issuer of its
preferred stock holding agreed to reverse the transaction and 750,000 common
shares were returned to Wasatch for the preferred stock investment. (See Note 6
for additional information).
9. SUBSEQUENT EVENTS
Revaluation of Shares Issued Officers and Directors - In March 1997, the Company
authorized the issuance of 2,200,000 common shares to key officers and directors
as compensation for past services and assistance. The officers and directors
gave notes totaling $110,000, based on an internal evaluation of the stock. In
1998, the stock was revalued and the amount was reduced to par value.
Discontinued Business - In February 1998, the Company executed an exchange
agreement with the developer/operator for the West Virginia oil and gas
properties. (See Note 1 for an additional information) Under the exchange
agreement, title to the fifty oil and gas properties the Company acquired in
1996 were returned to the developer in exchange for 1,800,000 of Wasatch's
common shares and a release from any and all obligations associated with the oil
and gas business.
F-24
<PAGE>
WASATCH PHARMACEUTICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
-----------------------------------------------------
9. SUBSEQUENT EVENTS, (Continued)
There were 200,000 fewer shares received in exchange than were originally issued
for the wells acquired. This share difference results in a monetary loss of
$382,933 that materially impairs the oil and gas property value. Consequently,
the loss and the loss from operation was recorded and reflected in the loss from
discontinued operations at December 31, 1997 and the shares returned were
retroactively reflected as a reduction of the shares issued and outstanding at
December 31, 1997.
Concesson and Compromise With Note Holder - In a series of transactions
occurring in 1998 and 1999 in which the Company was attempting to raise
long-term capital, the Company issued a majority of its voting common stock
(25,500,000 shares) as collateral for a short-term borrowing arrangement. During
the first half of 1999, the Company defaulted on the loan. Negotiations then
commenced and the parties reached a compromise and resolution of their
differences in March 2000. Under the settlement agreement, the note holder
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.
10. GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses are as follows:
From
December 31, Inception To
1997 1996 Dec. 31, 1997
--------- --------- -------------
Officers compensation $ 225,686 $ 143,149 $ 608,271
Professional fees 40,021 49,159 214,778
Travel 29,614 20,435 63,974
Telephone 14,534 13,649 47,868
Other 197,323 65,573 432,919
--------- --------- -------------
$ 507,178 $ 291,965 $ 1,367,810
========= ========= ===========
F-25
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 14,259
<SECURITIES> 0
<RECEIVABLES> 7,839
<ALLOWANCES> 0
<INVENTORY> 3,642
<CURRENT-ASSETS> 41,403
<PP&E> 41,554
<DEPRECIATION> (21,662)
<TOTAL-ASSETS> 62,170
<CURRENT-LIABILITIES> 1,722,313
<BONDS> 0
0
0
<COMMON> 9,226
<OTHER-SE> (2,765,949)
<TOTAL-LIABILITY-AND-EQUITY> 62,170
<SALES> 62,861
<TOTAL-REVENUES> 101,843
<CGS> 5,783
<TOTAL-COSTS> 257,097
<OTHER-EXPENSES> 507,178
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 118,236
<INCOME-PRETAX> (780,668)
<INCOME-TAX> 0
<INCOME-CONTINUING> (780,668)
<DISCONTINUED> (400,902)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,181,570)
<EPS-BASIC> (0.131)
<EPS-DILUTED> 0
</TABLE>
