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, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ________ to __________
Commission File Number 0-22899
WASATCH PHARMACEUTICAL, INC.
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(Exact name of registrant as specified in charter)
Utah 84-0854009
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State or other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization
714 East 7200 South, Midvale, Utah 84047
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Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code (801) 566-9688
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Securities registered pursuant to section 12(b) of the Act:
None
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(Title of class)
Securities registered pursuant to section 12(g) of the Act:
Title of each class Name of each exchange on which registered
Common Stock Par Value .001 N/A
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Check whether the Issuer (1) filed all reports required to be filed by section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
(1)Yes [X]No [ ] (2)Yes [x]No [ ]
Check if disclosure of delinquent filers in response to Item 405 of Regulation
SB is not contained in this form, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in
Part III of this Form 10KSB or any amendment to this Form 10KSB. [ ]
State issuer's revenues for its most recent fiscal year: $81,476
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State the aggregate market value of the voting stock held by
non-affiliates computed by reference to the price at which the stock was sold,
or the average bid and asked prices of such stock, as of a specified date within
the past 60 days:
At April 5, 2000 the aggregate market value of the voting stock held by
non-affiliates was $23,650,033 (based on 22,311,352 shares held by
non-affiliates multiplied by a average of the bid and ask price of $1.06 per
share).
As of April 5, 2000, the Registrant had 23,455,282 shares of common
stock issued and outstanding. (This includes 10,044 shares paid for but unissued
awaiting appropriate issue documentation; includes 576,978 shares committed to
officers under the Exchange Agreement; excludes 750,000 shares issued as
collateral to secure the Registrant's obligations.
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by reference and
the part of the form 10KSB (e.g., part I, part II, etc.) into which the document
is incorporated: (1) Any annual report to security holders; (2) Any proxy or
other information statement; and (3) Any prospectus filed pursuant to rule
424(b) or (c) under the Securities Act of 1933:
NONE
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TABLE OF CONTENTS
PART I
Page
ITEM 1. DESCRIPTION OF BUSINESS.................................... 4
ITEM 2. DESCRIPTION OF PROPERTY.................................... 8
ITEM 3. LEGAL PROCEEDINGS.......................................... 8
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........ 8
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS... 9
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.. 10
ITEM 7. FINANCIAL STATEMENTS....................................... 17
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE...................... 17
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE
ACT..................................................... 18
ITEM 10. EXECUTIVE COMPENSATION.................................... 20
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.......................................... 22
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............ 24
PART IV
ITEM 13. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K..... 26
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
This form 10KSB for fiscal year ended December 31, 1998 is being filed
on April 15, 2000, and should be read in conjunction with the Company's periodic
reports, including the Form 10KSB for December 31, 1997 and 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.
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
includes 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
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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 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 intends to open and operate
medical skin care clinics using the "Skin Fresh Methodology" including the
utilizing treatment centers to market and treat through the "Internet". The
Company intends to establish brick and mortar clinics with an electronic
interface, based upon its prototype clinic experience, in large metropolitan
areas under the supervision of a licensed physician. The Company's plan to open
additional clinics is dependent upon profitability and raising additional
capital, but there can be no assurance that such profits or capital will be
realized.
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"
methodology is effective in its present form without additional development.
Currently, other research and development has been limited due to the
Company's limited financial resources. As funds become available, Medisys 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
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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 that is part of
the treatment regimen. In the clinics, the patients learn the treatment regimen
and are monitored in frequent follow up visits to insure strict compliance. The
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.
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.
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Oil And Gas Operations
On November 26, 1996, the Company's oil and gas division commenced when
the Company exchanged 2,000,000 shares of its Common Stock for a 25% net profits
interest in 50 oil and gas wells located in West Virginia. Under the terms of
the agreement, the Company is entitled to 25% of the revenues and is obligated
for 25% of the operating expenses but only to the extent there is revenue.
Although practically non-productive, the manager/operator for the properties
planned to enhance well production by utilizing improved technology and
re-completion methods to rework wells. The well owner and operator was obligated
to raise funds for the enhanced production program. After one year of no well
improvement activity, the Company requested that the operator complete his
commitment or commence negotiations for the return of The Company shares
exchanged originally.
Negotiations culminated in consummation of an exchange agreement and,
on February 8, 1998, the Company exchanged title in the fifty West Virginia
wells acquired in 1996 for 1,800,000 shares of its Common Stock and a release
from all past and future obligations pertaining to the aforementioned
properties. The Company currently undertakes no oil and gas activity.
During the fifteen months the Company held title to the West Virginia
oil and gas wells, revenues were minimal and the recorded losses from operations
were $26,800. The Company experienced $40,000 in cash costs (principally legal
and accounting fees) and a financial loss of $382,000 (attributable to the value
of the shares retained in the exchange) associated with the venture.
Employees
The Company has seven full time employees and two part-time employees
and believes its relations with its employees to be good.
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ITEM 2. DESCRIPTION OF PROPERTY
Dermatology and Administrative Operations
The Company's administrative and clinical offices are located
at 714 East 7200 South, Midvale, Utah, and consists of 1,800 square feet. The
Company leases this space from 700 Union Partnership for $1,889 per month. The
term of the lease is 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.
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. During 1998, the
Company paid $500 on it's indebtedness and intends to pay off the balance.
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 judgment in the proceeding and
requested that the plaintiff's claim be dismissed. The presiding judge denied
the Company's request for summary judgment and scheduled the matter for trial,
which is now set for May 2000.
The Company believes that the claim by Crestport is without merit and
intends to vigorously defend the proceedings. An adverse determination in these
proceedings would have a material adverse effect on the Company.
The Company is a party to other legal proceedings that are covered by
liability insurance, the outcome of which will not have a material adverse
effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
No matters were submitted to a vote of shareholders of the Company
during the fiscal year ended December 31, 1998.
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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. The
following table sets forth, for the respective periods indicated, the prices for
the Company's common stock in the over-the-counter market as reported by the
NASD's OTC Electronic Bulletin Board. The bid prices represent interdealer
quotations, without adjustments for retail mark-ups, markdowns or commissions
and may not necessarily represent actual transactions.
At April 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
Fiscal Year Ending December 31, 1998
First Quarter $ .219 $ .13
Second Quarter $ .375 $ .17
Third Quarter $ .41 $ .13
Fourth Quarter $ .301 $ .13
Since its inception, the Company has not paid any dividends on its Common
Stock, and the Company does not anticipate that it will pay dividends in the
foreseeable future. At April 5, 2000 the Company had approximately 1,039
shareholders of record based on information provided by the Company's transfer
agent.
Changes in Securities
During the fourth quarter of 1998, the following changes were made
in securities. Changes in securities for the previous three quarters were
disclosed in the 10Qs for those periods.
1. Issued 177,834 restricted shares of Common Stock to creditors
for extension fees on notes.
2. Issued 250,000 restricted shares of Common Stock as collateral
on a loan.
3. Issued 72,600 restricted shares of Common Stock for cash
totaling $7,260.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATION
Overview
At the end of 1998, 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 operations had been discontinued.
Due to the lack of advertising and marketing, the two existing clinics
are operating at approximately 10% of capacity. In the past, the clinics have
required patients to pay for their services at the time they are provided and
the patient is given a standard claim form to submit for insurance
reimburse-ment. The Company policy of not accepting direct reimbursement from
insurance companies has had a negative impact on each clinic's ability to
attract new patients. Clinics made the decision to accept direct reimbursement
from insurance carriers. This should have a positive effect on attracting new
patients. An essential element of the clinic's marketing program is to develop
contract relationships with insurance companies that highlight the cost savings
inherent in the Company's treatment program.
Since their opening, the Company's primary revenue source has been the
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 media publicity and advertising.
The primary objective of Company management has been to raise the funds
necessary to establish medical skin care service in Utah and ultimately
throughout the United States. In the short term, the Company's Plan is to raise
sufficient capital to establish it Internet presence and begin its marketing
program to increase revenue in the existing clinics to the point where they are
profitable. Although there is no assurance of success, management believes if
there are 4-5 clinics and a network of Internet physicians operating at a
profitable level, the Company would be able to pursue a public offering to raise
sufficient capital to set up clinics all over the United States and Europe.
At December 31, 1998, the Company has a cumulative operating loss of
$4,225,000 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 experienced in attracting the
capital necessary in the promotion of its products.
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, 1998 the Company had a working capital deficit of
$2,928,000 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
$41,500 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 funding is received. Once funding is received, advertising
and marketing expenses will increase as the Company launches its e-commerce and
marketing programs. The Company has not been able to secure funding from
commercial lenders and has had to rely on cash flow from its clinic operations
and loans from individuals to meet its current obligations.
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In 1996, the Company executed a series of transactions designed to add
corporate value and operating net income in the future. These transactions were
speculative but the direct cash cost was minimal. During 1997, it was apparent
that the value added, approximately $3,800,000 in equity, was not going to be
realized through operating profits and cash flows. Consequently, in transactions
occurring late 1997 and early 1998, the Company disposed of the operating assets
associated with these businesses. The financial impact of these management
decisions was to reduce shareholders equity approximately $3,800,000 and limit
the Company's revenue producing operations to two clinic treatment centers that
are operating at 5% of capacity.
For the year ended December 31, 1998, the Company's operating expenses
have exceeded operating revenues. The cumulative deficit since inception has
been funded by open account creditor debt ($786,800), shareholder loans
($2,158,000), shareholders' cash investment ($778,000) and common shares
exchanged for property and services ($501,200). 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, 1998 the Company had direct obligations to
shareholders of $1,783,900 in principal and $320,000 in interest. In addition,
the Company is obligated repay approximately $31,000 in funds loaned by certain
officers and directors. During 1998 the Company's activities were financed with
cash from new borrowings, net of repayments of $849,000, and the sale of Common
Stock $204,000. Those monies were used to fund an unsuccess-ful attempt to raise
capital through Berkshire-Halifax, cost $700,000, the operations of the clinics,
Cost $160,000, and other administrative costs of the Company, cost $193,000.
The Company's financial information is prepared using generally
accepted accounting principles applicable to a going concern that contemplates
the realization of assets and liquidation of liabilities in the normal course of
business. However, the Company in its development stage has not established a
source of revenues sufficient to cover its operating costs and allow it to
continue as a going concern. The Company plans to seek long-term funding through
private and public stock offerings. Management believes that sufficient funding
will be raised to meet operating needs during the remainder of its development
stage.
Following is a recapitulation of some special financing vehicles used
to finance the Company's operations:
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. 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.
Profession Services - During 1998 and 1997, various individuals and
companies were issued 848,750 and 30,000 common shares, respectively, as
compensation for service ranging from accounting to insurance consulting.
Shares Issued Note Holders - In September 1998, the Company issued
500,000 Common shares to long-term note holders who had not previously been
compensated for extending credit and allowing the forbearance of interest.
During 1998 and 1997, the Company issued 852,368 and 16,666 common shares,
respectively, to certain other shareholder/creditors as compensation for
extending the due date on their obligations and in lieu of principal payments
and interest. In addition, two creditor/shareholders elected to add the interest
earned to date to their notes principal balance.
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Unsuccessful Joint Venture to Raise Long-term Capital - During 1998,
the Company entered into a joint venture arrangement with Beehive International,
Inc. in an attempt to raise long-term capital from a foreign lender. The foreign
lender committed to loaning $20 million each to the Company and Beehive. Beehive
received 750,000 shares of common stock as a fee for securing the loan source.
Under the terms of the proposed loan, the lender required a $10 million good
faith deposit. The Company obtained the funds for its share of the fee through
the sale of common stock ($100,000), a loan from Beehive ($100,000) and a loan
from a third party ($300,000) Collier Management & Development Company
Inc.(Collier).
Collier required the Company to issue to it, but held in trust, a majority
of the outstanding common stock as collateral on the loan and, on August 31,
1998; 25.5 million shares of restricted common stock were issued. In early
September 1998, the Company and Beehive forwarded $700,000, representing the
first year's fee for the accommodation deposit. The advance was made with the
understanding that Berkshire would be able to meet the requirements of the
lender and close the transaction within five days.
The Company was assured by Berkshire that the funds advanced for the loan
fee would be held in a Merrill Lynch trust account until Berkshire had met its
commitments. Company personnel got a verbal commitment of the arrangement from
Merrill Lynch. Subsequently, there were multiple monthly attempts to get
Berkshire to close the transaction. But in each case, Berkshire could not meet
the requirements of the lender. Because of the delays in closing the loan with
the foreign lender, Berkshire agreed to advance the Company $200,000 and did so
through an affiliate -Assured Capital Corporation.
In late 1998, the Company demanded the return of the escrowed fee
because Berkshire had been unable to perform. Berkshire refused to return the
funds claiming they had performed in accordance with the contract. At that point
it was discovered that the Merrill Lynch account was actually under the control
of Berkshire and the funds were no longer on deposit.
In February 1999, the Company escrowed an additional $200,000 in a
final attempt to compel Berkshire to perform. Once again, the documentation and
arrangements of Berkshire did not satisfy the foreign lender, who proceeded to
withdraw his commitment. Berkshire continued to contend it had met the
requirements of the escrow agreement and had earned the fee. The Company
contested Berkshire's position. However, in May 1999, the Company agreed to
release the funds escrowed in February in exchange for a release on the
indebtedness from the funds advanced the Company by Assured Capital Corporation.
Although management believes it has a solid case and legal counsel is
optimistic about the outcome, there is a major uncertainty due to the Company's
lack of resources to aggressively pursue timely legal remedies. In light of the
uncertainties, management concluded to charge-off the $500,000 in fees advanced
Berkshire. That amount is included in general and administra-tive expenses in
the statement of operations for the year ended December 31, 1998. The Company is
currently reviewing and evaluating its legal remedies.
Debt for Stock - On the first anniversary date of the loan, two of the
Company's note holders, with an aggregate debt of $60,000, have the option to
convert the principal and interest into Common Stock of the Company. The
conversion value equals 200% of the amount owing and is converted at the bid
price defined by the note.
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Results of Operations
Revenues
One purpose of the Company's development stage enterprise was to
establish proven medical and administrative procedures. During this period,
revenues from operations have been limited because substantial funds have not
been available to AISC to launch a major advertising and public relations
campaign to promote the Skin Fresh Methodology.
Revenues from clinic operations consist of professional fees charged
for the services of the physician and trained medical assistants and product
sales from the sale of products through the clinics. During the fiscal year
ending December 31, 1998, revenues from operations were $81,476, a 20% drop from
revenues of $101,843 for the fiscal year ending December 31, 1997. The drop in
revenues is due to the limited marketing efforts during the year.
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 1998 were marginally lower
than fiscal 1997 by $3,304 or 1%. This slight decrease 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
$525,000 or 103.5% from fiscal 1997 to fiscal 1998 due primarily to a large
charge for an unsuccessful fund raising effort,($500,000), an increases in the
accrual for officer's back-pay and expenses ($97,000) and a decrease legal
accounting and other expense associated with fund raising activities of the
Company ($47,000).
Plan of Operations
Company management believes the results of operations during the first
four years of operating the prototype clinics are not indicative of future
operating results because the primary 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" methodology.
Working capital requirements for the past five 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
needed until revenues from professional fees and the sale of product increase to
the point covering such costs.
If the Company is able to obtain additional funding, the Company
intends to open 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 plans
to implement a related advertising and marketing campaign to support the new
network of clinics and the clinics currently in operation. The Company estimates
that it will need approximately $10,000,000 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.
13
<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 currently has a significant and material working capital
shortfall that continues to adversely affect its business. Although the Company
has secured modest working capital infusions from a variety of sources that has
enabled it to continue in business, there are no assurances that it will be able
to do so in the future. In the event the Company is unable to locate and secure
additional sources of working capital in the near future it will be unable to
pursue its business. Because of the Company's limited asset base and poor
financial condition, the Company is not able to secure working capital from
traditional sources of capital and is dependent upon identifying sources of
equity capital that may necessitate significant dilution of the existing common
stockholders' equity position.
The Company's future success depends in part on the acceptance of the
Company's treatment products and methods that have not been widely promoted or
accepted by consumers. The Company's future operating results will largely
depend upon the commercial success of the "Skin Fresh" treatment process and
products. In the future the Company may not be successful in marketing existing
products or any new or enhanced products or services.
Product development delays could harm the Company's business. If the
Company fails to release new products, its business may suffer one or more of
the following consequences:
* customer dissatisfaction;
* negative publicity;
* loss of revenues; or
* slower market acceptance.
The Company's business will suffer if its products or treatment
contains imperfections or errors in 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. If new or existing customers have
difficulty adjusting to the Company's products or require significant amounts of
customer support, the Company's operating margins could be harmed. Moreover, the
Company could face possible claims and higher development costs if its treatment
products contain undetected inappropriate materials or if the Company fails to
meet customers' expectations. In addition, a product liability claim, whether or
not successful, could harm the Company's business by increasing the Company's
costs and distracting the Company's management. The Company does not carry
products liability insurance and therefore any product liability claim, if
successful, would have a material adverse effect on the Company. Significant
defense costs would also adversely affect the Company.
The Company 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
14
<PAGE>
past been, and there may in the future be, a shortage of such personnel with the
skills and expertise necessary to effectively sell the Company's products and
services. Also, it will take the Company's new personnel and personnel that are
hired in the future several months before they become productive. The Company's
business will be harmed if it fails to continue to hire or retain qualified
treatment personnel, or if newly hired staff fail to develop the necessary
technical skills or develop these skills more slowly than management
anticipates.
Difficulties the Company may encounter managing growth could adversely
affect its business. The Company expects a period of rapid growth in its
operations that could place a strain on management, administrative, operational
and financial infrastructure. The Company's ability to manage its operations and
growth requires management to continue to improve operational, financial and
management controls, and reporting systems and procedures. In addition, the
Company will be required to hire additional management, financial, and sales and
marketing personnel to manage the Company's expanding operations. If management
is unable to manage this growth effectively, the Company's business, operating
results and financial condition may be materially adversely affected.
Substantially increasing sales of products and services. Substantially
expanding the Company's penetration of the skin treatment market places is a
formidable task considering the number of competitors in that space. The Company
is competing against vendors who have significantly larger, well-developed
distribution channels and significantly greater resources for sales development.
Acquisitions of companies or technologies may result in disruptions to
the Company's business and diversion of management attention. The Company
expects to make acquisitions of complementary companies, products or
technologies although the Company currently lacks adequate working capital or
financial resources to effect acquisitions requiring cash and given the
uncertainty involving the Company's outstanding Common Stock it may encounter
difficulty in effecting transactions utilizing its equity as purchase
consideration. Currently, he company has not identified any acquisition
candidates and no acquisitions are contemplated. If the Company makes any
acquisitions, it will be required to assimilate the operations, products and
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 current or potential collaborative relationships with
medical treatment groups (HMO's or PPO's) and insurance companies may not prove
to be beneficial in the future, and they may not be sustained. The Company also
may not be able to enter into successful new strategic relationships in the
future, which could have a material adverse effect on the Company's business,
operating results and financial condition. The Company could lose sales
opportunities if it fails to work effectively with these parties. Moreover,
management expects that maintaining and enhancing these and other relationships
will become a more meaningful part of the Company's business strategy in the
future. However, many of the Company's current partners are either actual or
potential competitors. In addition, the Company may not be able to maintain
these existing relationships, due to the fact that these relationships are
informal or, if written, are terminable with little or no notice.
15
<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:
* 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;
* avoiding difficulties that could delay or prevent
the successful development, introduction or marketing of these
products; or
* 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.
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
16
<PAGE>
usage delays or require the Company to enter into royalty or licensing
agreements. Such royalty or licensing agreements, if required, may not be
available on terms acceptable to the Company, if at all. In the event of a
successful claim of product infringement against the Company and the failure or
inability to either license the infringed or similar technology or develop
alternative technology on a timely basis, the Company's business, operating
results and financial condition could be materially adversely affected.
The Company has incurred significant losses in prior period and expects
to incur significant increases in operating expenses in the foreseeable future.
The Company's independent auditors have questioned the Company's ability to
continue as a "going concern" and unless the Company is able to achieve
profitable operations, which it has not achieved to date, its business and
financial condition will be materially adversely affected. The With the funds
from an offering or placement, the Company intends to substantially increase its
operating expenses for the foreseeable future with:
o increased sales and marketing activities, including expanding
its direct and channel sales and telesales forces;
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 achieve profitability. These expenses will be incurred
before the Company generates any revenues by this increased spending. If the
Company does not significantly increase revenues from these efforts, its
business and operating results would be negatively impacted.
Significant Control of Collier Management and Development (Collier) and
Officers and Directors In connection with a loan of $300,000 in 1998 the Company
issued to Collier, as collateral for such loan 25,500,000 shares of Common Stock
and, as inducement to do the transaction 400,000 shares of Common Stock. The
loan from Collier was due March 1, 1999 and was defaulted when the principal
balance went unpaid.
In March 2000, the Company was successful in negotiating a resolution
and compromise that caused 23,200,000 of the collateral shares to be returned.
The remainder of the debt was satisfied and all other legal actions were set
aside. After settlement, the Collier management group will own and control
approximately 12.3% of the shares of Company's Common Stock and, potentially,
would be able to significantly influence the management and affairs of the
Company and have the ability to influence matters requiring stockholder
approval.
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
17
<PAGE>
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The following table sets forth as of December 31, 1998, the name, age, and
position of each executive officer and director and the term of office of each
director of the Company.
Director or Officer Age Position Since .
- ------------------- ---- ------------------- ------------------
Gary V. Heesch 62 CEO & Director December 29, 1995
Leland Hale 51 President October 31, 1997
David K. Giles 52 CFO & Secretary December 29, 1995
Craig Heesch 60 Director December 29, 1995
Jack D. Brotherson 59 Director December 29, 1995
Robert Arbon, M.D. 62 Director December 29, 1995
Ronald J. Hollberg 65 Director October 1, 1996
Biographical Information
Set forth below is certain biographical information for each of the
Company's Officers and Directors:
Gary V. Heesch. Mr. Heesch has been a director of Medisys Research
Group, Inc. since its incorporation in 1989 and its president since January,
1993. Mr. Heesch has been president and a director of 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 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 engaged in evaluating merger and
acquisition opportunities.
David K. Giles, MBA. Mr. Giles has been a consultant with Medisys since
1993 and a vice president and secretary/treasurer of Medisys since June, 1994
and vice president and secretary of Wasatch Pharmaceutical, the parent company
since December 1995. Prior to coming to Medisys, Mr. Giles worked from 1981 to
1993 for EFI Electronics Corporation, Salt Lake City, Utah, a Utah public
corporation [NASDAQ: EFIC], serving for the majority of that time as CFO and
Vice President of Finance and Administration. Mr. Giles received his BS degree
from the University of Utah (1970) and an MBA from the University of Utah
(1971).
Craig Heesch. Mr. Heesch has been a director of Medisys since 1989 and
a director of the Company since December 1995. Since 1975, Mr. Heesch has been a
senior partner at CV Associates, Vancouver, Washington, a technical consulting
firm assisting in the development of technologies for disposition into the
marketplace.
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 in the Department of Botany and
Range Sciences, having earned several degrees including a BS from B.Y.U. (1964),
a MS from Iowa State University (1967), and a Ph.D. from Iowa State University
(1969). Dr. Brotherson resigned from the board of directors 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 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).
18
<PAGE>
Ronald J. Hollberg, Jr. Mr. Hollberg was a director of Ceron Resources
Corporation, the company that merged into Medisys to form 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 fr0om 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.
Beneficial Owner Reporting Compliance with Section 16(a) of the Exchange Act
Based on a review of the forms submitted to the company, with respect
to this fiscal year, as of the date of this annual report, Gary Heesch has not
filed his Form 4, "Statement of Changes in Beneficial Ownership" for 11
transactions nor his Form 5, "Annual Statement of Change in Beneficial
Ownership" for 1998. Upon notice of this oversight, Mr. Heesch advised the
company that he has filed all of the forms required by Section 16(a).
Based on a review of the forms submitted to the company, with respect
to this fiscal year, as of the date of this annual report, David Giles has not
filed his Form 4, "Statement of Changes in Beneficial Ownership" for 1
transaction nor his Form 5, "Annual Statement of Change in Beneficial Ownership"
for 1998. Upon notice of this oversight, Mr. Giles advised the company that he
has filed all of the forms required by Section 16(a).
Based on a review of the forms submitted to the company, with respect
to this fiscal year, as of the date of this annual report, Craig Heesch has not
filed his Form 4, "Statement of Changes in Beneficial Ownership" for 1
transaction nor his Form 5, "Annual Statement of Change in Beneficial Ownership"
for 1998. Upon notice of this oversight, Mr. Heesch advised the company that he
will file all of the forms required by Section 16(a).
Based on a review of the forms submitted to the company, with respect
to this fiscal year, as of the date of this annual report, Robert Arbon has not
filed his Form 4, "Statement of Changes in Beneficial Ownership" for 1
transaction nor his Form 5, "Annual Statement of Change in Beneficial Ownership"
for 1998. Upon notice of this oversight, Mr. Arbon advised the company that he
will file all of the forms required by Section 16(a).
19
<PAGE>
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 $100,000 during such period (as determined at December 31, 1998, the
end of the Company's last completed fiscal year):
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term Compensation
Annual Compensation Awards Payouts
Other Restricted
Name and Annual Stock Options LTIP All other
Principal Position Year Salary Bonus($) Compensation Awards /SARs Payout Compensation
- ------------------ ---- ------ ------- ------------ ------ ----- ------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gary V. Heesch, 1998(3) -0- -0- $37,530 -0- -0- -0- $115,000(2)
President & CEO 1997 -0- -0- $53,668 $500(3) $42,500(4) -0- $ 73,000(2)
(Wasatch Pharm) 1996 -0- -0- $36,595 125(1) -0- -0- -0-
David Giles, 1998 -0- -0- $96,876 -0- -0- -0- $56,124(2)
V.P. Sec'y 1997 -0- -0- $119,034 $500(3) $25,000(5) -0- $45,000(2)
(Wasatch Pharm) ABLE>
</TABLE>
(1) Represent value of options to purchase 125,000 shares of common stock at
$0.001 per share exercised in December 1996.
(2)These amounts represent back pay and the reimbursement of payroll taxes and
other costs paid by the officers for the benefit of the Company. The amounts
will not be disbursed until adequate funds are available.
(3)Represents 500,000 shares issued at $.001 per share.
(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 1999.
Employment Contracts and Termination of Employment and Changes in Control
Arrangements
There are no compensatory plans or arrangements, including payments to
be received from the Company, with respect to any person named as a director,
executive officer, promoter or control person above which would in any way
result in payments to any such person because of his resignation, retirement, or
other termination of such person's employment with the Company or its
subsidiaries, or any change in control of the Company, or a change in the
person's responsibilities following a changing in control of the Company, except
as noted below:
Gary V. Heesch, Chief Executive Officer - Through actions taken during
1998 and 1997, the board agreed to reimburse Mr. Heesch $188,970 as compensation
for payroll and income taxes he incurred for the benefit of the Company. This
amount is to be paid when monies are available.
David K. Giles, Vice President and Secretary - Through actions taken
during 1998, the board agreed to reimburse Mr. Giles $101,124 as compensation
for payroll and income taxes he incurred for the benefit of the Company. This
amount is to be paid when monies are available.
Non-Qualified Stock Option Plan - On December 16, 1996, the Company adopted the
1996 Non Qualified Stock Option Plan ("Plan") with 1,700,000 shares of the
Company's common stock being issuable at the discretion of Board of Directors.
The Board of Directors will determine the terms, exercise price and vesting, as
well as other rights. The Plan is designed to allow the Company to provide stock
as an incentive to employees, officers, directors and consultants who provide
services. As of December 31, 1997, 1,500,000 options have been granted under
this plan.
20
<PAGE>
1997 Options Granted Officers - The Board of Directors approved an
incentive stock option plan for the benefit of officers and key employees and
reserved 2,000,000 shares for issuance under this purpose. In 1997, 5 year
options were granted to the two principal officers (1,350,000) at $.05 per
share, 50% are exercisable on December 31, 1998 and 50% on December 31, 1999.
The Company did not formalize the incentive stock option plan within the one
year time period required by the Internal Revenue Service.
Board Compensation
The Company may, from time to time, retain certain of its directors to
provide consulting or other professional services to the Company at standard
industry rates or enter into transactions in which non-salaried directors
receive compensation as sellers, brokers, or is some other capacity. Any
decision to retain such individuals or to enter into such transaction will be
subject to the approval of a majority of the disinterested directors.
The Company has not established a cash payment to the directors for
board of director's meetings. However, all directors are entitled to be
reimbursed for travel and other out of pocket expenses for their attendance at
board meetings.
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
Company's stock.
Termination of Employment and Change of Control Arrangement
There are no compensatory plans or arrangements, including payments to
be received from the Company, with respect to any person named in Cash
Compensation set out above which would in any way result in payments to any such
person because of his resignation, retirement, or other termination of such
person's employment with the Company or its subsidiaries, or any change in
control of the Company, or a change in the person's responsibilities following a
changing in control of the Company.
21
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of December 31, 1998, 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 14,952.821* 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.
*The number of shares considered as issued and outstanding used in this table
excludes the 25,9500,000 held as collateral by Collier and others, 500,000
shares unpaid for, but includes the shares retained by Collier in his settlement
agreement dated March 31, 2000.
Title
of Name and Address Amount and Nature of Percentage
Class Beneficial Owner Beneficial Ownership(1) of Class
- ----- ---------------- ---------------------- --------
Common Collier Management and D 2,580,000(2) 17.3%
Development Company
880 South Main Street
Bountiful, Utah 84010
Common Corazon Vedar, Trustee D 1,500,000 10.0%
for Karlo Agustin
900 Palmito Dr.
Millbro CA 94030
Common Officers and Directors
As a group D 3,180,3236 21.3%
(1) Indirect and direct ownership are referenced by an "I" or "D",
respectively. All shares owned directly are owned beneficially and of
record and such shareholder has sole voting, investment, and
dispositive power, unless otherwise noted.
(2) The result of an agreement and compromise whereby 25,500,000 shares of
restricted stock that were issued and held as collateral on a $300,000
short-term note of the Company dated August 31, 1998. The Company has
the incidents of ownership unless the borrowing becomes delinquent. The
first delinquency occurs in mid-1999. A final settlement was reached
March 31, 2000 whereby 23,200,000 was returned to Wasatch and 2,300,000
was retained by Collier plus approximately $214,000 in cash for
settlement of the note.
(See ITEM 12. Certain Relationships And Related
Transactions-Transactions with Management and Others - Loans
Collateralized with Company Stock.)
Litigation on Cancelled Common Stock - On November 1, 1996 and November
15, 1996, the Company entered into two similar agreements with Lindbergh-Hammar
Associates, Inc. ("Lindbergh"), a holding company controlled by WA Gary, a
former director of the Company, wherein, the Company issued an aggregate of
12,000,000 shares of its Common Stock in exchange for a note payable of
$60,000,000, based on a valuation of $5.00 per share of common stock. The
Company's board of directors has retained the voting rights to such shares until
paid for by Lindbergh. Payment on the promissory notes was to come from premiums
generated by Lindbergh's affiliated companies The Company is entitled to 10% of
the premiums generated on a monthly basis. Since entering into the agreement
with Lindbergh no payments have been received by the Company.
The note payments can be made several different ways and were to some
extent, dependent on the price of the Company's stock. In addition, the
agreement provides for a minimum payment commencing February 15, 1997. This
minimum payment was not paid and the insurance company requested an extension of
time for payment. The Company's management concluded, under the circum-stances,
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
22
<PAGE>
fraudulent acts of the insurance company's management. Cresport Insurance,
believed to be an affiliate of the insurance company, has filed suit asserting
it was an innocent party who had acquired ownership to the Company's stock and,
consequently, a holder in due course. On October 15, 1997, Crestport filed a
lawsuit against the Company and its stock transfer agent for canceling the 12
million shares. Crestport claimed that it was an innocent third party and a
holder in due course who had paid Lindbergh for the shares. As of December 31,
1997, the lawsuit was in the discovery stage. Crestport has asserted a claim for
$5,000,000 in damages arising out of cancellation of the share certificate. On
July 20, 1999, the Company moved for summary judgement in the proceeding and
requested that the plaintiff's claim be dismissed. The presiding judge did not
accept the summary judgement pleading and scheduled the matter for trial, which
is now set for May 2000. On October 15, 1997, Crestport filed a lawsuit against
the Company and its stock transfer agent for canceling the 12 million shares.
Crestport claimed that it was an innocent third party and a holder in due course
who had paid Lindbergh for the shares. As of December 31, 1997, the lawsuit was
in the discovery stage. Crestport has asserted a claim for $5,000,000 in damages
arising out of cancellation of the share certificate. Management and counsel
believe that the results of a pending trial will be in their favor. See "Legal
Proceedings." This was a highly speculative transaction and, consequently, no
asset value was recorded.
An adverse finding in these proceedings could result in a materially
adverse event that could jeopardize the financial stability of the Company.
Security Ownership of Management of the Company
Title
of Name and Address Amount and Nature of Percentage
Class Beneficial Owner Beneficial Ownership(1) of Class
- ----- ---------------- ----------------------- --------
Common David K. Giles, VP, Sec. D 711,600(3) 4.8
Common Gary V. Heesch, CEO,
and Director D 597,654(2) 4.0
Common Craig Heesch, Director D 545,455 3.6
Common Leland. Hale, Pres. D 500,000 3.3
Common Ronald J. Hollberg, Jr.
Director D 300,617 2.0
Common Robert Arbon, Director D 275,000 1.8
Common Jack Brotherson, Director D 250,000 1.7
--------- ----
All Officers and Directors
as a Group (7 person) D3,180,326 21.3
========= ====
(1) Indirect and direct ownership are referenced by an "I" or "D", respectively.
All shares owned directly are owned beneficially and of record and such
shareholder has sole voting, investment, and dispositive power, unless otherwise
noted.
(2) Includes 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. Mr.
Heesch is deeded to have beneficial ownership of these shares.
(3) Includes 13,600 shares held by wife and children living at home. All of
these shares are deemed to be controlled by Mr. Giles.
23
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Transactions with Management and Others.
Disposition of Discontinued Business - Oil and Gas Operations - In
November 1997, after determining the oil and gas de111veloper of the Company's
West Virginia oil and gas properties 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 originally issued by the Company to International Casualty &
Surety Company of New Zealand, a shareholder of the Company. Negotiations
commenced and an acceptable solution was reached in February 1998. Under the
agreed upon exchange arrangement, the Company would return title to the fifty
oil and gas wells acquired in exchange for 1,800,000 of the shares issued and a
release from all obligations associated with the oil and gas operations.
The transaction results in a material asset impairment and,
consequently, the loss from the exchange is included, retroactively, in the loss
from discontinued operations at December 31, 1997.
Associated with the principals of the oil and gas transaction were
certain notes receivable taken for the Company's issued common shares. It was
agreed that the amount due on shares issued at the time of the exchange,
$520,390, would be forgiven. This reduction in the obligation was reflected in
the financial statements as a charge to additional paid in capital during the
year ended December 31, 1998.
Repurchase of Common Stock - In an August 1999, the Company executed an
agreement for the sale and repurchase of 1,500,000 shares of its common stock.
Under the agreement, the shares were sold at $.10 per share and they were to be
repurchased no later than December 30, 1998 at $.125 per share. The funding on
which the share sale was based has not occurred and the Company has negotiated
several extensions of the repurchase provisions. Under the latest extension of
the repurchase agreement, dated October 20, 1999, the Company is obligated to
buy back the shares at $.1667 per share no later than December 1, 1999 and issue
50,000 shares of the Company's common stock. The deadline was not met and the
Company is negotiating an additional extension. The difference between the
original issue price and the repurchase value, $30,000 and $100,000 at December
31, 1998 and 1999, respectively, have not been recorded awaiting the
consummation of the transaction through redemption and a final determination of
the Company's obligation.
Loans Collateralized with Company Stock - Two note holders have been
issued 450,000 common shares as collateral on notes payable with an aggregate
value of $79,900. Generally, the security agreements provide that the Company
will retain the voting rights to the collateral until such time as a default of
the loan agreement occurs. At which time the rights will pass to the note
holders. At December 31, 1999, the two notes were in default under the loan
agreements but neither of the note holders had taken action to seize control of
their collateral.
Collier Loan Compromise and Settlement - In 1998, in connection with an
18%, $300,000 loan made by Collier Management & Development Company, the Company
issued 25,500,000 shares of the Company's Common Stock as collateral for the
loan, and, as additional payment in consideration of the loan, 400,000 shares of
Common Stock. The loan from Collier was due March 1, 1999 and a default resulted
when the principal balance went unpaid. As a result of subsequent compromises,
the Company made payments of $146,250 in 1999 and was able to reach a compromise
and resolution dated March 31, 2000.
Under the settlement agreement, Collier received $214,750 in cash for
principal and interest and 2,300,000 shares of common stock and the Company
received the return of 23,200,000 shares of its common stock and the
extinguishment of $165,972 of principal debt.
24
<PAGE>
Stock Options - Consultant - In November 1996, the Company granted
500,000 stock options 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 notes. The balance was forgiven in the
exchange of the oil and gas properties. In 1997, the Company granted an
additional 190,000 stock options for $1.00, which expired in April, 1999, to the
same consulting company. The holder of the options exercised options on 125,000
shares and options on 65,000 shares remained open at December 31, 1998.
25
<PAGE>
(a)(2)FINANCIAL STATEMENT SCHEDULES. The following financial statement schedules
are included as part of this report:
None.
(a)(3)EXHIBITS. The following exhibits are included as part of this report:
SEC
Exhibit Reference
Number Number Title of Document Location
- ------- --------- ----------------- ------------
27 27 Financial Data Schedule This Filing
(a)(3)EXHIBITS. The following exhibits are included as part of this report:
None
(b) Reports on Form 8-K.
On March 9, 1998, the Company filed the following report on Form 8K
describing the disposition of certain assets.
Summary
In November 1997, after determining the oil and gas developer of the
Company's West Virginia oil and gas properties would not be able to meet their
contractual commitments, the Board of Directors authorized management to
exchange the Company's oil and gas properties for the shares originally issued.
The Company would return title to the fifty oil and gas wells acquired
in exchange for 1,800,000 of the shares issued and a release from all
obligations associated with the oil and gas operations.
Associated with the principals of the oil and gas transaction were
certain notes receivable taken for the Company's common shares issued. It was
agreed that the amount due on shares issued at the time of the exchange,
$520,390, will be forgiven. This reduction in the obligation was reflected in
the financial statements as a charge to Additional Paid In Capital during the
year ended December 31, 1998.
On May 29, 1998, the Company filed the following report on Form 8K
describing a change in management.
Summary
The board of directors, pursuant to its meeting on December 31, 1997,
appointed Leland Hale as President and Chief Operating Officer of the Company.
Mr. Hale's background includes Vice President of US Operations for Tecsyn
International Inc. and other top management experience. Gary V. Heesch, former
President will continue as Chairman of the Board and Chief Executive Officer.
Announcement of the appointment was made in a press release May 19, 1998.
26
<PAGE>
On May 29, 1998, the Company filed the following report on Form 8K A
amending it's filing of March 9, 1998 describing the disposition of certain
assets.
Summary
February 23, 1998, the Company entered into an agreement (the
"Agreement") with Mountaineer Gas Transmission, Inc., a Nevada corporation,
registered to do business in West Virginia ("Mountaineer"), wherein the Company
exchanged its 25% net profits interest in 50 gas wells located in Pleasants,
Wood, and Ritchie Counties, West Virginia. In connection with the exchange of
the working interest with Mountaineer, the Company received 1,800,000 shares of
restricted common stock of the Company, which was returned to the treasury and
canceled.
The Company had entered into the purchase of these 50 gas wells
November 20, 1996 in an effort to enhance its cash flows. The cash flows did not
come as expected and the Company determined that an investment in the oil and
gas business did not fit in with its long-term strategy of setting up and
operating medical skin care clinics.
Amendment
Due to the sale of this asset, the Company no longer has sufficient net
tangible assets to preclude it from being characterized as a "penny stock".
Therefore, pursuant to SEC Rule 3a51-1, the common stock of the Company is now
defined and considered a "penny stock".
27
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated:
WASATCH PHARMACEUTICAL, INC.
Date: April 15, 2000 By /S/ Gary V. Heesch, President and CEO
Date: April 15, 2000 By /S/ David K. Giles, Secretary and CFO
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
Date: April 17, 2000 By /S/ Gary V. Heesch, Director
Date: April 17, 2000 By ___ Craig Heesch, Director
Date: April 17, 2000 By /S/ Jack D. Brotherson, Director
(Resigned February 1999)
Date: April 17, 2000 By /S/ Robert Arbon, MD, Director
Date: April 17, 2000 By ___ Ronald J. Hollberg, Director
(Resigned February 1999)
28
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Wasatch Pharmaceutical, Inc.
Salt Lake City, Utah
We have audited the accompanying consolidated balance sheet of Wasatch
Pharmaceutical, Inc. (formerly Ceron Resources Corporation)(a Utah corporation
in the development stage) as of December 31, 1998, 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,
1998. 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,
1998, 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 31,1998, 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 a net
working capital deficiency, which together, raises substantial doubt about its
ability to continue as a going concern. Management's plans regarding those
matters are described in Note 2. The financial statements do not include any
adjustments that might result from the outcome of these uncertainties.
THOMAS LEGER & CO. L.L.P.
Houston, Texas
April 5, 2000
F-2
<PAGE>
<TABLE>
<CAPTION>
WASATCH PHARMACEUTICAL, INC.
(A Development Stage Company)
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1998
ASSETS
CURRENT ASSETS
<S> <C>
Cash $ 2,589
Accounts receivable - trade 7,175
Inventory 7,158
Prepaid expenses 600
-----------
Total Current Assets 17,522
-----------
PROPERTY AND EQUIPMENT
Clinic and office equipment 41,554
Less accumulated depreciation (28,492)
-----------
Net Property and Equipment 13,062
-----------
OTHER ASSETS 200
-----------
TOTAL ASSETS $ 30,784
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable - trade $ 237,609
-----------
Accrued interest 356,260
Other accrued expenses 436,878
Notes and advances currently due:
Short-term shareholder advances 18,157
Vendors 112,333
Stockholders 1,783,946
-----------
Total Liabilities 2,945,183
-----------
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, 38,822,821 shares issued and outstanding 38,823
Additional paid-in capital 1,322,096
Accumulated development stage deficit (4,224,632)
-----------
(2,863,664)
Less shares issued for future transactions (50,735)
-----------
Total Stockholders' Deficit (2,914,399)
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 30,784
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
WASATCH PHARMACEUTICAL, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENT OF OPERATIONS
For the Year Ended
December 31, From
------------------------------- Inception To
1998 1997 Dec. 31, 1998
----------- ----------- ------------
REVENUES
<S> <C> <C> <C>
Professional fee income 29,239 38,982 214,087
Product sales 52,237 62,861 421,176
----------- ----------- ------------
Total Revenues 81,476 101,843 635,263
----------- ----------- ------------
OPERATING EXPENSES
Cost of products sold 4,931 5,783 48,008
Salaries 154,849 141,642 479,570
Employee leasing - - 218,745
Payroll taxes 13,159 13,222 46,318
Physicians fees 40,200 43,200 237,868
Rent 34,790 33,845 169,933
Advertising - 6,250 212,552
Depreciation 5,257 6,799 29,256
Other 607 6,356 57,489
----------- ----------- ------------
Total Operating expenses 253,793 257,097 1,499,739
GENERAL AND ADMINISTRATIVE EXPENSE 1,032,251 507,178 2,400,061
INTEREST 254,115 118,236 550,377
----------- ----------- ------------
Total Expenses 1,540,159 882,511 4,450,177
----------- ----------- ------------
LOSS BEFORE DISCONTINUED OPERATIONS AND
THE PROVISION FOR INCOME TAXES (1,458,683) (780,668) (3,814,914)
----------- ----------- ------------
LOSS FROM DISCONTINUED OPERATIONS
Loss from operations - (17,969) (26,785)
Loss from asset disposition - (382,933) (382,933)
-- --------- ---------
Total Loss From Discounted Operations - (400,902) (409,718)
-- --------- ---------
NET LOSS BEFORE INCOME TAXES (1,458,683) (1,181,570) (4,224,632)
PROVISION FOR INCOME TAXES - - -
-- -- -
NET LOSS $(1,458,683) $(1,181,570) $ (4,224,632)
============ ============ =============
Loss per share before discounted operations $ (0.141) $ (0.087) $ (0.456)
Loss per share from discounted operation - (0.044) (0.049)
-- ------- -------
BASIC LOSS PER COMMON SHARE $ (0.141) $ (0.131) $ (0.505)
============ ============ =============
BASIC WEIGHTED AVERAGE SHARES OUTSTANDING 10,358,889 8,986,460 8,357,505
============ ============ =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
WASATCH PHARMACEUTICAL, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
Preferred Common Stock Additional Accumulated Total
Stock ------------ Paid - In Development Stockholders'
Amount Shares Amount Capital Stage Deficit Equity
------ ------ ------ ------- ------------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance, September 7, 1989 $ - - $ - $ - $ - $ -
Stock issued at inception at
approximately $0.0005 to
the Company's founders
for services rendered - 10,000,000 5,334 - - 5,334
Contribution of capital by
a shareholder - - 23,509 - - 23,509
Net loss from inception
through December 31, 1992 - - - - (170,895) (170,895)
--------- ---------- --------- ------- ---------- ----------
Balance, December 31, 1992 - 10,000,000 28,843 - (170,895) (142,052)
Contribution of capital by
a shareholder - - 20,000 - - 20,000
Net loss for the year ended
December 31, 1993 - - - - (92,931) (92,931)
--------- ---------- --------- ------- ---------- ----------
Balance, December 31, 1993 - 10,000,000 48,843 - (263,826) (214,983)
Common stock issued in
payment of loan fees at
$0.005 per share in
December, 1994 - 75,000 375 - - 375
Contribution of capital by
a shareholder - - 170,434 - - 170,434
Redemption and cancellation
of common stock for cash
and note payable - (600,000) (25,000) - - (25,000)
Net loss for the year ended
December 31, 1994 - - - - (365,189) (365,189)
--------- ---------- --------- ------- ---------- ----------
Balance, December 31, 1994 $ - $9,475,000 $ 194,652 $ - $ (629,015) $ (434,363)
========= ========== ========= ======= ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
WASATCH PHARMACEUTICAL, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
Preferred Common Stock Additional Accumulated Total
Stock ------------ Paid - In Development Stockholders'
Amount Shares Amount Capital Stage Deficit Equity
------ ------ ------ ------- ------------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance forward January 1, 1995 $ - 9,475,000 $ 194,652 $ - $ (629,015) $ (434,363)
Stock issued at $.005 per share for
services rendered during 1995 - 837,216 4,186 - - 4,186
Contribution of capital by a shareholder - - 1,000 - - 1,000
Equivalent shares exchanged in the consolidation
of Medisys Research Group, Inc &
Wasatch Pharmaceutical, Inc 9,852 1,777,040 (187,749) 184,051 - 6,154
Net loss for the year ended
December 31, 1995 - - - - (451,255) (451,255)
--------- ---------- --------- ------- ---------- ----------
Balance, December 31, 1995 9,852 12,089,256 12,089 184,051 (1,080,270) (874,278)
To give retro-active effect to a one for
four reverse stock split (7,389) (9,066,924) (9,067) 9,067 - (7,389)
--------- ---------- --------- ------- ---------- ----------
Restated balance, December 31, 1995 2,463 3,022,332 3,022 193,118 (1,080,270) (881,667)
Proceeds from the sale of common stock - 57,500 58 137,442 - 137,500
Cash proceeds from the exercise of
employee stock options - 250,000 250 - - 250
Stock issued in connection with the following:
Borrowing funds - 148,374 148 - - 148
Consulting agreement - 100,000 100 - - 100
Services rendered - 7,500 8 - - 8
Cancellation of debt - 250 - 12,339 - 12,339
Stock exchanged for the following assets:
Preferred stock of an insurance
holding company - 750,000 750 - - 750
Oil and gas properties - 2,000,000 2,000 3,717,536 - 3,719,536
Stock issued for a short-term note under a
November, 1996 stock option plan - 300,000 300 299,700 - 300,000
Net loss for the year ended
December 31, 1996 - - - - (504,108) (504,108)
--------- ---------- --------- ------- ---------- ----------
Balance, December 31, 1996 $ 2,463 6,635,956 $ 6,636 $4,360,135 $(1,584,378) $2,784,856
========= ========= ========= ========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
<TABLE>
<CAPTION>
WASATCH PHARMACEUTICAL, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
Preferred Common Stock Additional Accumulated Total
Stock ------------ Paid - In Development Stockholders'
Amount Shares Amount Capital Stage Deficit Equity
------ ------ ------ ------- ------------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance forward December 31, 1996 $ 2,463 6,635,956 $ 6,636 $4,360,135 $(1,584,379) $ 2,784,855
Retroactive adjustment to the merged
Preferred Stock Amount (2,414) - - 2,414 - -
------- ---------- -------- ----------- ------------ ------------
Restated balance, December 31, 1996 49 6,635,956 6,636 4,362,549 (1,584,379) 2,784,855
Proceeds from the exercise of stock options:
Cash - 125,000 125 124,875 - 125,000
Notes - 500,000 500 319,500 - 320,000
Shares issued in connection with:
Past services of officers and directors - 2,200,000 2,200 107,800 - 110,000
Acquisition of West Virginia oil & gas properties - 151,000 151 - - 151
Services rendered in connection with raising
development stage funds - 180,000 180 - - 180
Note extensions - 26,666 27 - - 27
Services rendered for operations - 30,000 30 2,721 - 2,751
Conversion of debentures - 270,758 271 18,065 - 18,336
Shares returned with cancelled contract - (50,000) (50) - - (50)
Exchange of oil and gas properties for originally
issued shares - (1,800,000) (1,800) (3,347,583) - (3,349,383)
Proceeds from sale of shares - 456,383 456 139,494 - 139,950
Shares issued for notes - 500,000 500 65,000 - 65,500
Net loss for the year ended December 31, 1997 - - - - (1,181,570) (1,181,570)
------- ---------- -------- ----------- ------------ ------------
Balance, December 31, 1997 $ 49 $9,225,763 $ 9,226 $ 1,792,421 $ (2,765,949) $ (964,253)
======= ========== ======== =========== ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
<TABLE>
<CAPTION>
WASATCH PHARMACEUTICAL, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
Preferred Common Stock Additional Accumulated Total
Stock ------------ Paid - In Development Stockholders'
Amount Shares Amount Capital Stage Deficit Equity
------ ------ ------ ------- ------------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance forward December 31, 1997 $ 49 9,225,763 $ 9,226 $1,792,421 $(2,765,949) $ (964,253)
Shares issued in connection with:
Note extensions - 1,352,368 1,352 - - 1,352
Securities sold for cash - 1,695,940 1,696 135,565 - 137,261
Exercise of stock options - 500,000 500 24,500 - 25,000
Services rendered - 848,750 849 - - 849
Shares issued as interim loan collateral to
be return at debt satisfaction - 25,950,000 25,950 - - 25,950
Exchange of preferred shares held for
investment for originally issued shares - (750,000) (750) - - (750)
Charge for per share price reduction of
shares held under subscription notes - - - (630,390) - (630,390)
Net loss for the ended December 31, 1998 - - - - (1,458,683) (1,458,683)
Balance December 31, 1998 of stockholders'
equity-per committed contracts 49 38,822,821 38,823 1,322,096 (4,224,632) (2,863,664)
Stock issued for future transactions - (26,450,000) $ (26,450) (24,285) - (50,735)
---- ----------- --------- ---------- ----------- ------------
Net equity December 31, 1998 $ 49 12,372,821 $ 12,373 $1,297,811 $(4,224,632) $ (2,914,399)
===== =========== ========= ========== ============ ============
</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
December 31, From
------------------------------- Inception To
1998 1997 Dec. 31, 1998
----------- ----------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C> <C>
Net loss $(1,458,683) $(1,181,570) $(4,224,632)
Adjustments to reconcile net (Loss) to net cash
used by operating activities:
Depreciation and depletion 6,829 6,799 28,492
Loss on fixed asset disposal
Clinic assets - - 15,234
Oil and gas assets - 3,383 4,189
Loss on disposal of oil and gas properties - 382,933 382,933
Increase (decrease) in working capital
(Increase) decrease in receivables 664 (4,913) (7,175)
(Increase) decrease in related party receivable - 6,600 -
(Increase) decrease in inventory (3,516) 4,944 (7,158)
(Increase) decrease in prepaid expenses 15,063 (15,663) (600)
Increase (decrease) in accounts payable 8,375 61,076 237,609
Increase (decrease) in accrued interest 126,776 68,258 356,260
Increase (decrease) in other accruals 238,585 157,242 436,878
----------- ------------ -----------
Net cash used by operating activities (1,065,907) (510,911) (2,777,970)
----------- ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets - (1,804) (27,764)
(Increase) decrease in other assets 675 (475) (200)
----------- ------------ -----------
Net cash provided used by investing activities 675 (2,279) (27,964)
----------- ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings 1,183,173 158,582 2,376,207
Expenses paid by shareholder - - 38,323
Repayment of loans (334,038) (5,021) (456,791)
Proceeds from sale of common shares 162,261 210,704 510,465
Capital contributed by shareholder - - 154,800
Collection of share subscriptions 42,166 99,560 141,726
Common shares exchanged for debt - - 12,318
Exercised stock options - 125,000 125,250
Redemption of common shares - - (20,409)
Cost of raising capital - (73,366) (73,366)
----------- ------------ -----------
Net cash provided used by financing activities 1,053,562 515,458 2,808,523
----------- ------------ -----------
NET INCREASE (DECREASE) IN CASH (11,670) 2,269 2,589
At beginning of period 14,259 11,990 -
----------- ------------ -----------
At end of period $ 2,589 $ 14,259 $ 2,589
=========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-9
<PAGE>
<TABLE>
<CAPTION>
WASATCH PHARMACEUTICAL, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Year Ended
December 31, From
------------------------------- Inception To
1998 1997 Dec. 31, 1998
----------- ----------- ------------
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION
<S> <C> <C> <C>
Cash paid for interest $ 49,975 $ 49,950 $ 111,529
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 3,732,316
Exchanged - (3,349,383) (3,349,383)
Preferred stock of an insurance company
Acquired - 750
Exchanged (750) - (750)
Subscription receivable for common stock
Amount on issuance of common stock 25,950 935,000 1,235,000
Adjustment to subscriptions receivable (110,000) (449,950) (596,923)
Write - off of subscriptions receivable (520,391) - (520,391)
Common stock for
Goods and services 849 3,032 9,848
Interest 1,352 27 27
Accrued interest added to principal 41,156 - 41,156
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-10
<PAGE>
WASATCH PHARMACEUTICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
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-11
<PAGE>
WASATCH PHARMACEUTICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
(Continued).
At the time they were acquired, the properties were not economically productive.
The property developer committed to increasing productivity in each of the wells
in 1997 with the Company not bearing any of the enhanced production costs. There
were no costs incurred for reworking wells in 1998 or 1997.
In November 1997, after determining the oil and gas developer of Wasatch's West
Virginia oil and gas properties would not be able to meet their commitments in
accordance the contractual arrangements, the Board of Directors authorized
management to exchange the Company's West Virginia oil and gas properties for
common shares originally 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 shares issued and a release from all
obligations associated with the oil and gas operations.
The 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 included in the loss from discontinued operations at December 31,
1997.
Associated with the principals of the oil and gas transaction were certain notes
receivable taken for the Company's common shares issued. It was agreed that the
amount due on shares issued at the time of the exchange, $520,390, would be
forgiven. This reduction in the obligation was reflected in the financial
statements as a charge to Additional Paid In Capital during the year ended
December 31, 1998.
Use of Estimates - The presentation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of asset and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimated.
Statements of Cash Flows - Cash equivalents include short-term, highly liquid
investments with maturities of three months or less at the time of acquisition.
F-12
<PAGE>
WASATCH PHARMACEUTICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
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 basis 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 had 25,950,000 shares of common stock issued to various note holders
as collateral for their notes. Since the shares are contingently returnable,
they are not included in the average shares outstanding for the earnings per
share computation.
The Company has issued approximately 9,233,000 shares for the period January 1,
1999 through December 31, 1999 for cash, note extensions, services and other
equity transactions.
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-13
<PAGE>
WASATCH PHARMACEUTICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
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. Expenditures for major acquisitions and
improvements are capitalized while expenditures for maintenance and repairs are
charged to operations. The cost of assets sold or retired and any related
accumulated depreciation is eliminated from the accounts, and any resulting gain
or loss is included in operations.
Principles of Consolidation - The consolidated financial statements include the
accounts of the Company's wholly owned subsidiaries, Medisys Research Group,
Inc. and American Institute of Skin Care, Inc. All material inter-company
transactions and balances have been eliminated.
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, 1998 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 1997 and for the period from inception on September 7, 1989 through December
31, 1997 have been reclassified to conform to the 1998 presentation.
F-14
<PAGE>
WASATCH PHARMACEUTICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
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, 1998, management projects that
their businesses plan to commence the operational phase of its clinic treatment
activities will be implemented in 2000.
As more fully explained elsewhere in these footnotes, in 1996 the Company
entered into a series of transactions to add corporate value and operating net
income in the future. These transactions were speculative, but the direct cash
cost was nominal. During 1997, it was apparent that the value added,
approximately $3,800,000 in equity, was not going to be realized through
operating profits and cash flows. Consequently, in transactions occurring late
1997 and early 1998, the Company disposed of the operating assets associated
these businesses. The financial impact of these management decisions was to
reduce shareholders equity approximately $4,000,000 and limit the Company's
revenue producing operation to two prototype treatment centers that are
operating at 10% of capacity.
At December 31, 1998, the Company's operating expenses have exceeded operating
revenues. This cumulative deficit has been funded by open account creditor debt,
shareholder loans, shareholders' cash investment and common shares exchanged for
property and services. Although the Company has continued to operate with the
above sources of funds through December 1999, it is uncertain whether these same
or comparable sources will be available until the completion of the development
stage.
F-15
<PAGE>
WASATCH PHARMACEUTICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
2. GOING CONCERN, (Continued).
Wasatch's financial statements are prepared using generally accepted accounting
principles applicable to a going concern that contemplates the realization of
assets and liquidation of liabilities in the normal course of business. However,
Wasatch in its development stage has not established a source of revenues
sufficient to cover its operating costs and allow it to continue as a going
concern supported by its cash flow from operations. Wasatch plans to eventually
seek long-term funding through private and public stock offerings. Management
believes that sufficient funding will be raised to meet operating needs during
the remainder of its development stage and reach an amicable settlement with the
note-holder more fully described in Note 9.
3. RELATED PARTY TRANSACTIONS
Discussed below are related party transactions not included in other notes to
the financial statements.
In 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.
During the two years ending December 31, 1998, the board of directors approved
specific compensation totaling $290,094 for two principal officers with the
stipulation that the amounts are to be paid only when sufficient cash is
available. The liability represents back pay and the payroll costs paid by the
officers for the benefit of the Company.
In 1997, the Company issued 2,200,000 common shares to certain of its officers
and directors for consideration in the form of notes totaling $110,000. In 1998,
the stock was revalued and notes were reduced to $2,200 (par value).
During 1998, five Directors holding Wasatch notes with a face value of $47,500,
agreed to fore-go interest payments for the debt reduction described in the
previous paragraph. In addition, several creditor/shareholders elected to add
the interest earned to date to their notes principal balance.
F-16
<PAGE>
WASATCH PHARMACEUTICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
3. RELATED PARTY TRANSACTIONS, (Continued).
During 1998 and 1997, the Company issued 1,342,368 and 16,666 common shares,
respectively, to certain shareholder/creditors as compensation for extending the
due date on their obligations and in lieu of interest.
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-17
<PAGE>
WASATCH PHARMACEUTICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
4. NOTES PAYABLE
Notes payable at December 31, 1998 are as follows:
Unsecured notes payable to shareholders dated at various
dates, generally accruing interest at 10% to 60%,
annually, generally are to be repaid from the proceeds
of a proposed share offering and in some cases are
past due by terms of the note. $1,483,946
Collateralized note payable dated August 31, 1998 and
due six months after funding with interest at 18% per
annum. During the six-month period interest only is
payable monthly with the entire principal balance due
March 31, 1999. Collateral includes all the tangible
assets of the Company and its subsidiaries, 25,500,000
shares of Wasatch common stock and the joint and
severable guarantee of the two principal officers.
During 1999 the note became delinquent. See Note 6 300,000
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% 18,157
----------
TOTAL $1,914,436
==========
F-18
<PAGE>
WASATCH PHARMACEUTICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
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, 1998, there were 38,778,651 shares of common stock were issued
and outstanding according to the transfer agents records. For financial
statement purposes 38,822,821 shares of common stock were considered to be
issued and outstanding. The difference is equal to the shares that were sold and
paid for in a private placement (44,170) which were treated as issued and
outstanding but lacked the appropriate documentation to allow the transfer agent
to physically issue the shares.
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, 1998 and 1997).
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,
1998 and 1997.
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 1998 and 1997.
F-19
<PAGE>
WASATCH PHARMACEUTICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
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
Wasatch (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 can be made several different ways and were to some extent,
dependent on the price of the Company's stock. In addition, the agreement
provides for a minimum payment commencing February 15, 1997. This minimum
payment was not paid and the insurance company requested an extension of time
for payment. Wasatch 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 pending trial will reveal the meritorious nature of
their defense.
In as much as the transaction was dependent on significant contingencies, none
of which occurred, Wasatch has not recorded the transaction in its books and
records.
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 1998 and 1997, various individuals
and companies were issued 848,750 and 180,000 common shares, respectively, as
compensation for their attempts to raise capital for the Company.
Professional Services - During 1997, various individuals and companies were
issued 26,666 common shares, respectively, as compensation for service ranging
from accounting to insurance consulting.
F-20
<PAGE>
WASATCH PHARMACEUTICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
6. CAPITAL STRUCTURE, (Continued).
Shares Issued To Note Holders - In September 1998, the Company issued 500,000
Common shares to long-term holders who had not been previously compensated for
extending credit and the forbearance of interest.
Convertible Debentures Program - In early 1997, the Company commenced a
broker-sponsored program to sell convertible debentures. $50,000 in debentures
was sold under the program. On November 24, 1997, the debentures issued were
converted to 270,758 common shares.
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.
Joint Venture to Raise Long-Term Capital - During 1998, the Company entered into
a joint venture arrangement with Beehive International, of Salt Lake City, in an
attempt to raise long-term capital from a foreign lender. The foreign lender was
committed to advance $20 million each to Wasatch and Beehive. Beehive received
750,000 shares of common stock as a fee for finding the loan source. Under the
terms of the proposed loan, the lender required a $10 million good faith deposit
for a period of 24 months.
Through its sources, Wasatch made arrangements with Berkshire Halifax
Corporation of Palm Beach, Florida to provide the good faith deposit. Berkshire
was to receive a $700,000 loan fee for providing the funds and the bank interest
earned on the funds deposited. The loan fee was to be provided by Wasatch
($500,000) and Beehive ($200,000).
Wasatch obtained the funds for its share of the fee through the sale of common
stock ($100,000), a loan from Beehive ($100,000) and a loan from a third party
($300,000) Collier Management & Development Company, Inc of Bountiful Utah.
Collier required a majority of the common stock as collateral on the loan and,
on August 31, 1998; 25,500,000 shares of restricted common stock were issued.
F-21
<PAGE>
WASATCH PHARMACEUTICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
6. CAPITAL STRUCTURE, (Continued).
Wasatch and Beehive forwarded $700,000 with the understanding that Berkshire
would be able to meet the requirements of the lender and close the transaction
within five days. Wasatch was assured that the funds advanced for the loan fee
would be held in a Merrill Lynch trust account until Berkshire had met its
commitments. Subsequently there were several attempts to close the transaction
but in each case Berkshire could not meet the requirements of the lender. Unable
to close the loan, Berkshire agreed to advance Wasatch $200,000 and did so
through an affiliate - Assured Capital Corporation.
In late 1998, Wasatch demanded the return of the escrowed fee because Berkshire
had been unable to perform. Berkshire refused to return the funds claiming they
had performed in accordance with the contract. At that point it was discovered
that the Merrill Lynch account was actually under the control of Berkshire and
the funds were no longer on deposit.
In a final attempt to get Berkshire to perform, Wasatch escrowed an additional
$200,000 in February 1999. Once again, the documentation and arrangements of
Berkshire did not satisfy the foreign lender. At this point the lender withdrew
his commitment. Berkshire continued to contend they had met the requirements of
the escrow agreement and had earned the fee. Wasatch contested that and in May
1999 agreed to release the funds escrowed in February in exchange for a release
on the indebtedness under the funds advanced Wasatch by Assured Capital
Corporation.
Although management believes it has a solid case and is assured by counsel the
legal process will return the fees taken by Berkshire. However, there is a major
uncertainty due to Wasatch's lack of resources to aggresively pursue timely
legal remedies. In light of the uncertainties, management concluded it would be
prudent to charge-off the $500,000 in fees advanced Berkshire. That amount is
included in General and Administrative Expenses in the Statement of Operations
for the year ended December 31, 1998.
The Company is currently reviewing and evaluating its legal remedies.
F-22
<PAGE>
WASATCH PHARMACEUTICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
6. CAPITAL STRUCTURE, (Continued).
Repurchase of Common Stock - In an August 1999, the Company executed an
agreement for the sale and repurchase of 1,500,000 shares of its common stock.
Under the agreement, the shares were sold at $.10 per share and they were to be
repurchased no later than December 30, 1998 at $.125 per share. The funding on
which the share sale was based has not occurred and the Company has negotiated
several extensions of the repurchase provisions. Under the latest extension of
the repurchase agreement, dated October 20, 1999, Wasatch is obligated to buy
back the shares at $.1667 per share no later than December 1, 1999 and issue
50,000 shares of the Company's common stock. The deadline was not met and the
Company is negotiating an additional extension. The difference between the
original issue price and the repurchase value, approximately $30,000 and
$100,000 at December 31, 1998 and 1999, respectively, have not been recorded
awaiting the consummation of the transaction through redemption and a final
determination of the Company's obligation.
Debt for Stock - On the first anniversary date of the loan, two of the Company's
note holders, with an aggregate debt of $60,000, have the option to convert the
principal and interest into common stock of Wasatch. The conversion value equals
200% of the amount owing and is converted at a bid price defined in the note.
Loans Collateralized with Company Stock - Three separate note holders have been
issued 25,950,000 common shares as collateral on notes payable with an aggregate
value of $379,900. Generally, the security agreements provide that Wasatch will
retain the voting rights to the collateral until such time as a default of the
loan agreement occurs. Then those rights will pass to the note holders. The
Company has defaulted under two loan agreements, but the note holders have not
taken any action to enforce control over the collateral.
During 1999, the other collateralized loan fell into default. That note holder
with 25,500,000 common shares as collateral called for a shareholders meeting.
The Company is in a position whereby the Federal securities law prohibits
solicitation of proxies. The result is that the Company will not be able to have
a shareholders meeting until all of its Securities and Exchange Commission
compliance filings have been submitted on a timely basis.
F-23
<PAGE>
WASATCH PHARMACEUTICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
6. CAPITAL STRUCTURE, (Continued).
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). 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. Consequently, the
loss 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.
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.
Stock Options - Consultant - In November 1996, Wasatch granted the stock options
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 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 notes. The balance was forgiven in the exchange of the oil and gas
properties (see Note 1). In 1997, the Company granted an additional 190,000
stock options for $1.00, which expired in April, 1999, to the same consulting
company. The holder of the options exercised options totaling 125,000 shares in
1997.
Non-Qualified Stock Option Plan - On December 16, 1996, Wasatch adopted the 1996
Non Qualified Stock Option Plan ("Plan") with 1,700,000 shares of the Company's
common stock being issuable at the discretion of Board of Directors. The Board
of Directors will determine the terms, exercise price and vesting, as well as
other rights. The Plan is designed to allow the Company to provide stock as an
incentive to employees, officers, directors and consultants who provide
services. As of December 31, 1997, 1,500,000 options have been granted under
this plan.
F-24
<PAGE>
WASATCH PHARMACEUTICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
6. CAPITAL STRUCTURE, (Continued).
Contested Consulting Options - On June 7, 1996, Wasatch executed a consulting
agreement that granted the stock options expiring June 1, 1998. 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.
Contingent Options - Contingent options for 500,000 shares were issued the
Collier Group in connection with the $300,000 loan made to Wasatch. The options
are for free trading stock and they become exercisable only upon the Company
defaulting on its loan agreement. The company was in compliance at December 31,
1998 and in default at the end of 1999.
1997 Options Granted Officers - The Board of Directors approved an incentive
stock option plan for the benefit of officers and key employees and set aside
2,000,000 shares for this purpose. At the same time, options were granted to the
two principal officers (1,350,000) at $.05 per share, 50% are exercisable on
December 31, 1998 and 50% on December 31, 1999. The expiration date is open. The
Company did not formalize the incentative stock option plan within the one year
time period required by the Internal Revenue Service. The options granted are
considered outstanding by the Company.
F-25
<PAGE>
WASATCH PHARMACEUTICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
6. CAPITAL STRUCTURE, (Continued).
Options - Stock option activity for the Company during 1998 was as follows:
<TABLE>
<CAPTION>
Expired or Ending Expiration
Price Per Share Granted Exercised 1998 Date
- -------------------- ----------- --------- ---------- -----------
Granted 1996
Consultants
<S> <C> <C> <C> <C> <C>
.25 100,000 100,000 - June 1, 1998
.50 100,000 100,000 - June 1, 1998
.625 100,000 100,000 - June 1, 1998
1.00 700,000 700,000 - Nov. 5, 1998
Shareholder
2.00 750 750 - Sept. 1998
Granted 1997
Consultants
1.00 65,000 - 65,000 April 10, 1999
Others
1.00 25,000 - 25,000 June 19, 2000
1.00 10,000 - 10,000 April 10, 1999
Employees and
directors
.05 1,350,000 - 1,350,000 Open
--------- ------- ---------
Total 2,450,750 1,000,750 1,450,000
========= ========= =========
Exercised -
=========
Expired 1,000,750
=========
</TABLE>
There are no other stock purchase plans or arrangements at December 31, 1998.
Incentive Based Compensation - The fair value of options granted will be
estimated on the date of grant using the Black-Scholes options pricing model,
assuming a risk free interests rate, no expected dividend yield, the expected
life of the options and zero expected volatility. The zero volatility will be
assumed because the shares are not currently tradable in a secondary market
system.
F-26
<PAGE>
WASATCH PHARMACEUTICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
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 any stock option agreements. No
options were granted in 1998 and options totaling 1,575,000 shares were granted
in 1997. 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, 1998 and 1997 would have been as reflected in the pro forma amounts
indicated below:
1998 1997
------------ ------------
Net loss $ (1,458,683) $ (1,260,757)
============ ============
Net loss per common share $ (.077) $ (.140)
============ ============
7. INCOME TAXES
The following table sets forth a reconciliation of the statutory federal income
tax at December 31, 1998 and 1997:
1998 1997
----------- -----------
Loss before income taxes $(1,458,683) $(1,181,570)
=========== ===========
Income tax benefit computed at statutory
rates $ (495,952) $ (401,734)
Increase in valuation allowance 492,585 399,441
Permanent differences:
Nondeductible expenses 3,367 2,293
----------- -----------
Tax benefit $ - $ -
=========== ============
No federal income taxes have been paid since the inception of the Company.
F-27
<PAGE>
WASATCH PHARMACEUTICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
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:
1998 1997
----------- ---------
Deferred tax liabilities $ - $ -
----------- ---------
Deferred tax assets:
Net operating loss carryforwards 1,427,397 934,812
Valuation allowance (1,427,397) (934,812)
----------- ---------
Total deferred tax assets - -
----------- ---------
Net deferred tax asset (liability) $ - $ -
=========== =========
Deferred income tax provisions for the years ended December 31, 1998 and 1997
result from the following temporary differences:
1998 1997
--------- ---------
Net operating loss carryforward benefit $(492,585) $(399,441)
Valuation allowance 492,585 399,441
--------- ---------
Total deferred tax benefit $ - $ -
========= =========
Net Operating Loss Carryforwards - As of December 31, 1998, the Company had
cumulative net operating loss carryforwards ("NOL") for federal income tax
purposes of approximately $4,198,226, which expire in 2007 through 2018, and net
operating loss carryforwards for alternative minimum tax purposes of
approximately the same amount which expire in 2007 through 2018. Due to
ownership changes, Internal Revenue Code Section 382 will limit future
utilization of the net operating loss carryforwards.
F-28
<PAGE>
WASATCH PHARMACEUTICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
8. COMMITMENTS AND CONTINGENCIES
Lease Commitment - The Company has two leases for office space. One lease has
rent of $725 per month through January 31,1998, then converted to a month to
month lease until January, 1999 when a new lease was signed for the same monthly
amount and expires on February, 2000. The second lease has a rent of $1,889 per
month and expires in October, 1999. Rent expense was approximately $35,000 and
$33,000 for 1998 and 1997, respectively.
Escrowed Share Agreement - A former director is affiliated with a company that
is contending they are legitimate holders in due course of 12,000,000 of the
Company's common shares. Wasatch asserted that consideration was never received
and, consequently, the shares were cancelled. See Note 6 Capital Structure.
9. SUBSEQUENT EVENTS
Concession 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 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 2,300,333 shares of common stock and the Company
received the return of 23,200,000 shares of its common stock and the
extinguishment of $164,972 of debt.
F-29
<PAGE>
WASATCH PHARMACEUTICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
10. GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses are as follows:
<TABLE>
<CAPTION>
December 31, From
----------------------------- Inception To
1998 1997 Dec. 31, 1998
----------- --------- -----------
<S> <C> <C> <C>
Officers compensation $ 365,605 $ 225,686 $ 973,876
Loss on capital raising venture 500,000 - 500,000
Professional fees 70,535 40,021 285,313
Travel 9,127 29,614 73,101
Telephone 13,208 14,534 61,076
Other 73,776 197,323 506,695
----------- --------- -----------
Total $ 1,032,251 $ 507,178 $ 2,400,061
=========== ========= ===========
</TABLE>
F-30
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 2,589
<SECURITIES> 0
<RECEIVABLES> 7,175
<ALLOWANCES> 0
<INVENTORY> 7,158
<CURRENT-ASSETS> 17,522
<PP&E> 41,754
<DEPRECIATION> 28,492
<TOTAL-ASSETS> 30,784
<CURRENT-LIABILITIES> 2,945,183
<BONDS> 0
0
49
<COMMON> 38,823
<OTHER-SE> 1,322,096
<TOTAL-LIABILITY-AND-EQUITY> 30,784
<SALES> 81,476
<TOTAL-REVENUES> 81,476
<CGS> 4,931
<TOTAL-COSTS> 253,793
<OTHER-EXPENSES> 1,032,251
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 254,115
<INCOME-PRETAX> (1,458,683)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,458,683)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,458,683)
<EPS-BASIC> (0.141)
<EPS-DILUTED> (0.141)
</TABLE>
