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US Securities and Exchange Commission
Washington, DC 20549
FORM 10-KSB/A
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, 1995
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period from __________________ to ____________________
Commission File Number 0-12365
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MEDICAL DEVICE TECHNOLOGIES, INC.
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(Name of small business issuer in its charter)
Utah 58-1475517
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
9171 Towne Centre Drive, Suite 355, San Diego, California 92122
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(Address of principal executive offices)
Issuer's telephone number: (619) 455-7127
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Securities registered under Section 12(b) of the Exchange Act:
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Title of each class Name of each exchange on which registered
Common Stock, $0.15 Par Value NASDAQ Small-Cap/SM/ Market
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Securities registered under Section 12 (g) of the Exchange Act:
Common Stock, $0.15 Par Value
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(Title of Class)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports); and (2) has been
subject to such filing requirements for the past 90 days. Yes X No ______
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Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B not contained in this form, and no disclosure will be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year 0
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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 April 1, 1996, was $7,893,936.
As of April 1, 1996, Registrant had outstanding 8,774,339 shares of common
stock, and 247,500 shares of Series I convertible preferred stock.
Transitional Small Business Disclosure Format (check one): Yes _____ No. X
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TABLE OF CONTENTS
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PART I
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Item 1. Description of Business........................................ 3
Item 2. Description of Property........................................ 13
Item 3. Legal Proceedings.............................................. 13
Item 4. Submission of Matters to a Vote of Security Holders............ 14
PART II
Item 5. Market for Common Equity and Related Stockholder Matters....... 15
Item 6. Management's Discussion and Analysis and Plan of Operation..... 16
Item 7. Financial Statements........................................... 20
Item 8. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure........................................... 20
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons,
Compliance with Section 16(a) of the Exchange Act.............. 21
Item 10. Executive Compensation......................................... 27
Item 11. Security Ownership of Certain Beneficial Owners and Management 31
Item 12. Certain Relationships and Related Transactions................. 33
PART IV
Item 13. Exhibits and Reports on Form 8-K 33
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
Corporate History
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Medical Device Technologies, Inc. (the "Company") was incorporated on
February 6, 1980, under the laws of the State of Utah, initially under the name
of Gold Probe, Inc. In September of 1981, the Company and the Hailey Oil
Company, Inc., a Mississippi corporation, entered into an Agreement and Plan of
Reorganization whereby the Company acquired Hailey Oil Company, Inc. and
exchanged 9,000,000 shares of its common stock for all the issued and
outstanding shares of Hailey Oil Company, Inc. In the transaction, Scott F.
Hailey and Loyce Hailey received 7,000,000 shares, and 2,000,000 shares were
issued to certain members of the Company's Board of Directors in exchange for
their respective working interests in certain oil and gas properties, then owned
by the Company. Also, pursuant to the reorganization, the Company changed its
name to Hailey Energy Corporation, effected a one (1) for five (5) reverse split
of its common stock, and increased its authorized number of shares to 25,000,00.
In 1986, the number of authorized shares of the Company was increased to
100,000,000. In November 1990, the Company effected a one (1) for thirty (30)
reverse split of its common stock and increased the par value of its common
stock to $0.15 per share. In 1992, the Company changed its name from Hailey
Energy Corporation to CytoProbe Corporation. The number of authorized shares
(100,000,000) remained unchanged. In January 1994, the Company effected a one
(1) for six (6) reverse split of its common stock. The par value of the
Company's common stock remained at $0.15 per share and the number of authorized
shares remained unchanged. In April of 1995 the Company changed its name to
Medical Device Technologies, Inc. to reflect the Company's broadening base of
medical products.
The Company
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Effective as of January 1, 1994, the Company has been engaged full-time in
identifying, developing and bringing to market medical devices which the Company
believes are innovative, represent improvements over existing products, or are
responsive to a presently unfulfilled need in the marketplace. The Company's
strategy consists of: (i) identifying patented technologies in the medical
device field that it believes have potential commercial viability but still
require refinement and regulatory clearance, (ii) providing the necessary funds
to develop and obtain the requisite regulatory clearance of such products in
exchange for the acquisition, license or some other right to commercialize such
technologies, and (iii) attempting to commercialize or sublicense such
technologies by entering into agreements with one or more entities for clinical
development, manufacturing and marketing of such products. Through this
strategy, the Company believes that it can play a role in bridging the gap
between viable patented technologies and their commercialization. Pursuant to
this strategy, the Company has identified and acquired three licenses to develop
products: the Personal Alarm System (the "PAS"); the Cell Recovery System (the
"CRS"); and the Intracranial Pressure Monitoring System (the "ICP"), all of
which the Company believes have commercial viability. The primary focus of the
Company's activities for the foreseeable future will be the marketing of the PAS
and the CRS and completing the regulatory and development process relative to
the ICP so that the Company can also bring this product to market.
Nevertheless, the Company also receives opportunities from time-to-time to
license other patented technologies in the medical device field. The Company is
generally afforded these various opportunities on an unsolicited basis primarily
as a result of the Company's CEO, Mr. M. Lee Hulsebus' experience and contacts
in the medical device industry. Depending on the specific device and other
circumstances,
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such as the Company's then-current financial and operating situation, the
Company may pro-actively attempt, on a limited basis, to identify and license
additional patented technologies in the medical device field.
The Company's Products
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THE PERSONAL ALARM SYSTEM
The PAS is a device that monitors the integrity of infection control
barriers, such as surgical gloves and gowns, worn during medical procedures.
The PAS is designed to provide notification of fluid contact between the health
care professional and patient, and thus decrease the probability of transmission
of fluid-borne infectious agents, such as Human Immunodeficiency Virus ("HIV")
(the virus that causes Acquired Immune Deficiency Syndrome ("AIDS")), Hepatitis
B and C viruses, and Staphylococcus ("Staph"). The Company received the Food
and Drug Administration's ("FDA") clearance to market its Personal Alarm System
in August of 1995, and commenced production and marketing of the product in
January 1996. The Company believes that fluid contact between health care
professionals and patients occurs not only when barriers, such as latex surgical
gloves and gowns are breached by tearing or puncture, but also when such
barriers are fluid-saturated. Further, the Company believes that all latex
surgical gloves, at some point in time, become fluid-saturated, potentially
permitting micro-organisms contained in bodily fluids to pass between the health
care professionals and the patients. The Company intends to engage two
independent organizations, one of which is a medical school and the other a
professional laboratory, to conduct studies and supply empirical data with
respect to the fluid-saturation of latex surgical gloves and the subsequent
infection that may occur from the resulting exchange of bodily fluids.
Hospital regulations, as well as good medical practice, require that
defective or compromised barriers be replaced as quickly as feasible. The
immediate awareness of fluid contact between the health care professional and
patient is designed to decrease the probability of transmission of fluid-borne
infectious agents. Defective or fluid-saturated gloves represent a potential
danger for both the worker and the patient. Regulations promulgated by the US
Government's Occupational Safety and Health Agency ("OSHA") require a user of
sterile barriers to be aware of the status of his or her protective barriers at
all times during a surgical procedure. The user of sterile barriers is required
to change any portion of those barriers when they have been compromised. The
Company believes that the PAS provides users with a high degree of accuracy and
reliability in becoming aware of compromised infection barriers, such as latex
surgical gloves.
Presently, health care professionals rely on visual observations or "feel"
to determine whether their protective barriers have been compromised. While
this approach may be effective for punctures or tears, it is not reliable when
the integrity of protective barriers are breached due to unnoticed defects or
fluid-saturation. In the case of surgeons' latex gloves, which are frequently
covered with blood and are sweaty inside, visual observation and inspection is
difficult and unreliable. Thus, the Company believes that its PAS device will
enable health care professionals to immediately recognize with a high degree of
accuracy when a protective barrier has been compromised.
The PAS is designed to be worn similar to a pager, and provides two types
of immediate warnings in order to indicate either fluid-saturation or a small
hole or tear in a health care worker's glove. The PAS consists of a battery-
powered, electronic, pager-like device that is simultaneously tethered to the
patient and the health care professional that can sense the flow of extremely
small
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electrical currents when a fluid contact is made between such patient and health
care professional. When the PAS senses a current flow characteristic of a tear,
major puncture or fluid saturation, the PAS device generates a continuous 5-
second vibration. Alternatively, when a current flow characteristic of a small
puncture or partial fluid saturation is detected, the PAS device will vibrate in
brief intermittent bursts.
The Company presently intends that the PAS will be sold for $500.00 each to
distributors, who in turn may resell or lease the PAS device to end-users.
Potential Market for PAS Device
The Company believes that the potential market for the PAS includes all
hospitals, physicians' offices, dental offices, emergency rooms, and other
medical facilities. Given the limited resources of the Company, its initial
strategy will be to focus on those markets where the need for the PAS is
greatest. Consequently, the Company will initially introduce the PAS to
hospital operating rooms and out-patient surgical centers. Further, the Company
believes that it needs to convince the medical community of the unreliability of
infection control barriers, such as latex surgical gloves, particularly in the
absence of obvious breaches of the gloves' integrity, before it can effect
substantial sales of the PAS device. The Company has commissioned two
independent organizations, a medical school and a professional laboratory, to
conduct studies and supply empirical data with respect to the saturation of
latex surgical gloves and the concomitant health risk to patients and health
care professionals as a result thereof. In addition, the Company is also
seeking the endorsement of, or a mandate from, either the Center for Disease
Control in Atlanta, Georgia (the "CDC"), or OSHA, that a device similar to the
PAS should be used in connection with all surgical and other medical procedures
where the possibility exists for fluid contact between health care professionals
and patients. There is no assurance that the Company will be able to convince
the medical community of the need for a device like the PAS whether or not the
CDC or OSHA endorses or mandates such a device, of which there can be no
assurance, and thus, there can be no assurance that a market will develop for
the PAS device.
License Agreement
The Company obtained the rights to the PAS effective June 1, 1994, pursuant
to a license agreement (the "PAS License Agreement") with Robert Lee Thompson,
d/b/a Thompson Medical, whereby Mr. Thompson granted to the Company the
exclusive worldwide license to manufacture, use, sell, or otherwise dispose of
the PAS. To date, the Company has paid Mr. Thompson $75,000 and issued 200,000
shares of the Company's common stock pursuant to the PAS License Agreement.
Under the PAS License Agreement, Mr. Thompson is also entitled to receive
royalty payments equal to 5% of the net sales proceeds from the PAS, with
quarterly minimum royalty payments of $7,813.00 which began on August 1, 1995,
and 25% of any payments received by the Company from sublicensing the PAS. The
PAS License Agreement is for a term of 10 years and may be extended for an
additional 10 years. Other than by breach, the PAS License Agreement cannot be
terminated by the Company prior to the expiration of the 10 year term. In May
1995, the Company also entered into an exclusive license agreement with Dietmar
P. Rabussay, PhD, a consultant to the Company, for the Signal Modulation Barrier
Monitor (the "SMBM"), which is a component part of the PAS device. Pursuant to
this license agreement, the Company is obligated to pay royalties equal to 1% of
net sales of all PAS devices. The invention disclosure for the SMBM has been
filed with the Patent and Trademark Office and the Company presently intends to
file a patent application for the SMBM by April 30, 1996. See "Item 9.
Directors, Executive Officers, Promoters and Control Persons, Compliance with
Section 16(a) of the Exchange Act - Consultants."
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THE CELL RECOVERY SYSTEM
The Company's Cell Recovery System is a cell "brushing" and retrieval
system using an automated brush for the collection of specimen cells from an
organ's internal surface for diagnostic purposes, primarily (but not limited to)
cancer detection. Presently, in order to obtain diagnostically significant
tissue cells from an organ's internal surface, an excisional biopsy is
necessary, i.e., the patient must check into a hospital for a $5,000-$7,000
procedure that requires general anesthesia and the endoscopic surgical removal
of tissue from the patient's internal organ. In contrast, the CRS device is a
non-surgical procedure that can be performed on an outpatient basis, without
general anesthesia.
The first application for the CRS device is intended to be to the urology
market. Currently, the preliminary test for bladder cancer is to test a
patient's urine sample, which has a very high incidence of producing "false
negatives." As a consequence, in most instances where there are persistent
symptoms, physicians who receive a negative result from a urine sample when
testing for bladder cancer will then conduct a visual, in-office examination
using a cystoscope, which is a catheter-type instrument. If a visual
examination with the cystoscope does not reveal cancer polyps on the bladder
wall, as is often the case even when cancer cells have been detected in the
urine sample, the physician will then require an excisional biopsy to verify the
presence of cancer in the organ tissue. The Company believes that its CRS
device provides a reliable alternative to, and complements today's standard
biopsy procedure. Although products that utilize a manual, but not automated,
brushing technique for obtaining organ cells are currently available, the
Company believes that there is no automated device that accomplishes the same
tasks the CRS is designed to perform. Manual brushing is awkward and, unlike
the CRS, does not include a system by which the cells that are "brushed" off the
wall of the internal organ are simultaneously and selectively retrieved. As an
alternative to biopsy, the CRS system, which can be used in an outpatient
(office) setting, is intended to save time, and gives the physician an option
that does not include the increased expense of general anesthesia and an
overnight stay in the hospital, thus, representing a reduced cost and risk to
the patient. Accordingly, as the CRS automated brushing and retrieval system is
significantly less expensive than excisional biopsy, it meets the cost
containment requirements of private, managed care and government payers. The
Company believes that the CRS procedure is reimbursable, although there can be
no such assurance. In addition, the CRS can be used for the follow-up care that
bladder cancer patients require. The Company also believes that the CRS will be
the first automated brush system able to successfully retrieve cell samples.
The Company received marketing clearance from the FDA for the CRS device
for the urology market on March 20, 1996. The Company presently anticipates
marketing the CRS in the fourth quarter of 1996 subsequent to completing
clinical trials for the CRS.
The Company has not presently determined who will manufacture the CRS
device or the price of or manner in which the CRS device will be marketed or
sold.
Potential Market for CRS Device
The Company believes that in order to successfully market the initial CRS
device, it will have to establish the device's efficiency in accurately
detecting bladder cancer. In order to do so, the Company has contacted four
leading urologists, one who has committed to begin clinical studies and three
others who have expressed interest and are being considered for expanded
clinical trials to establish the improved efficacy of the CRS in detecting
bladder cancer in comparison to pathology analysis of voided or manually brushed
samples. The Company also presently intends to then begin the testing and FDA
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clearance process for other applications of the technologies underlying the CRS
device. The Company believes that the technologies underlying the CRS device
can readily be applied to, and adapted for, other diagnostic procedures with
relatively minor modifications. Specifically, the Company believes that the
technologies underlying the CRS will be applicable to a large number of
diagnostic procedures amenable to endoscopy, such as bronchoscopy (lung
examination), laparoscopy (abdominal and pelvic organ examination), and gastro-
intestinal endoscopy.
License Agreement
The Company entered into an exclusive license agreement, as amended (the
"CRS License Agreement"), with Robert Langdon, Nancy Bush and Dr. Max Willscher
in August 1992 for the exclusive worldwide rights to develop, manufacture and
market the CRS and any other device based upon the underlying patent. The CRS
License Agreement is for a term equal to the currently remaining life of the
patent relating to the CRS, which is approximately 14 years. Under the CRS
License Agreement, the Company is obligated to pay Mr. Langdon, under an
agreement to purchase Mr. Langdon's share of the license and royalties thereto,
a total of $300,000 in three payments beginning in January 1996 and to be
completed in the third quarter of 1996. Furthermore, the Company is obligated
to pay to Ms. Bush and the estate of Dr. Willscher a royalty equal to 5% of the
average retail sales price on all net sales, plus $100,000 in 20 equal quarterly
installments of $5,000 beginning January 1, 1997. The Company can terminate the
CRS License Agreement with 90 days written notice, at which time all of the
Company's patent rights in the CRS device will cease. Through December 31,
1995, the Company has paid $300,000 and 455,932 shares of common stock pursuant
to the original CRS License Agreement.
THE INTRACRANIAL PRESSURE MONITORING SYSTEM
The Intracranial Pressure Monitoring System is a device that non-invasively
monitors pressure inside the human skull. Increased intracranial pressure
generally results from either fluid build-up, or swelling or abnormal tissue
growth of the brain, thereby reducing blood flow to the brain and resulting in
increased risk of cell death. This cell death results in brain damage, and in
severe cases, can cause patient death. Presently, intracranial pressure can
only be determined by surgically drilling a hole into the skull and inserting a
catheter pressure transducer to measure the pressure. Thereafter, if a high
level of intracranial pressure is found to be present, then a similar surgical
drilling procedure is often used in an attempt to relieve the pressure. Due to
the invasive nature of such a procedure, the current practice of drilling a hole
in or removing a section of the skull is considered risky and expensive, and
cannot be used for routine monitoring and examinations. The Company believes
that the ICP, when developed, can be a valuable diagnostic tool and will greatly
assist health care professionals in assessing when surgical drilling is
necessary to relieve intracranial pressure.
The ICP's non-invasive system utilizes a process of imparting a small known
force on the surface of the skull and sensing resulting low frequency (0 to
approximately 100 Hz) wave signals at different points on the skull surface.
The characteristics of the resulting wave signals are a function of the pressure
within the skull and change when the intracranial pressure increases or
decreases. The Company presently anticipates that it will commercialize two
distinct versions of the ICP device. The first generation ICP device will
measure changes in the direction and rate of change in intracranial pressure.
The second generation ICP device, which will effectively be an upgrade of the
software used in the first generation, will be able to assess ranges of
intracranial pressure levels as well. The Company believes significant non-
overlapping markets exist for each generation of the device. The ICP system
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makes use of proprietary wave form analysis software developed by Scientific-
Atlanta, Inc., with whom the Company has entered into a teaming agreement as
more fully described below.
Potential Market for the ICP Device
The Company believes that the potential market for both the first and
second generation ICP device is primarily hospitals that perform intracranial
procedures. Management believes that the initial users of the first generation
ICP will be neurosurgeons in connection with diagnostic procedures. Management
believes that the second generation ICP will be used not only by neurosurgeons
but also by emergency room personnel for patients who have suffered traumas to
the head, as well as by physicians to monitor and record the intracranial
pressure of individuals as a standard diagnostic procedure, similar to measuring
an individual's blood pressure. Clinical testing with respect to the first
generation ICP is currently ongoing and is expected to be finished in the third
quarter of 1996. The Company presently intends to submit a 510(k) application
to the FDA prior to the end of 1996. Contemporaneously, at the end of 1996, the
Company intends to commence clinical trials for the second generation ICP which
the Company presently anticipates will be concluded in the third quarter of
1997. The Company believes that there is no product or system presently on the
market that is similar to the ICP, and the Company is not presently aware of any
ongoing development of a competitive product.
License Arrangement
The Company's majority-owned subsidiary, ICP Corporation, has the right to
the ICP. The ICP Corporation entered into an agreement in January 1993 with
Medys, Inc., a New Hampshire corporation (the "Medys Agreement"), whereby the
ICP Corporation obtained the right to acquire the worldwide, exclusive, non-
transferable license to develop, manufacture and market the ICP until the year
2009, which is when the patent relating to the ICP expires. Under the terms of
the agreement, the ICP Corporation is obligated to pay Medys, Inc. royalties
equal to 10% of the net sales proceeds from the ICP with a minimum payment of
$90,000 due for the year ended December 31, 1996, and $200,000 for all
subsequent years through the life of the patent. With respect to the royalties
due for the year ended December 31, 1996, $15,000 was prepaid on December 31,
1995. Further, under the Medys Agreement the Company is responsible for
clinical testing of the ICP and obtaining all required FDA and other required
regulatory clearances. The Company can terminate the Medys Agreement with 90
days written notice at which time all of the Company's patent rights in the ICP
device will cease.
In addition to the license agreement that the Company entered into with
respect to the ICP, the Company also entered into an agreement with respect to
the ICP device on November 23, 1992 with Hampton Morgan Holdings, S.A., a
Panamanian company ("Hampton Morgan"), which was controlled by a shareholder of
the Company (the "Hampton Morgan Agreement"). The Company had previously
retained the consulting services of Hampton Morgan in June of 1992 in connection
with the CRS device. The Hampton Morgan Agreement provided, among other things,
for (i) a payment of 166,667 shares of common stock to Hampton Morgan as a
finder of the ICP device; (ii) royalties to Hampton Morgan equal to 8% of gross
sales of the ICP; and (iii) the issuance of 2,000,000 shares of common stock to
Hampton Morgan upon the Company achieving gross sales of $10,000,000 with
respect to the ICP. The Company issued the 166,667 shares in 1992 to Hampton
Morgan as finder, but the Company, on the advice of counsel, believes that the
balance of the Hampton Morgan Agreement is not enforceable because Hampton
Morgan has failed to make certain required payments to the Company under the
Hampton Morgan Agreement. Consequently, the Company does not intend to pay the
8% royalty or 2,000,000 shares of common stock to Hampton Morgan.
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Scientific-Atlanta Agreement
In February 1993, the Company entered into a teaming agreement (the
"Teaming Agreement") with Scientific-Atlanta, Inc. ("S-A") to provide equipment,
technical expertise and experience directly related to the computer software
which provides the signal/data processing and modal analysis techniques, in
developing the ICP. Under the Teaming Agreement, the Company has agreed to use
S-A exclusively as its supplier for signal/data processing and model analysis
techniques, equipment and software, provided S-A prices are as low as those
offered by any other third party. The Teaming Agreement is for a term of the
earlier of five years or a date of two years following initial product sale,
unless sooner terminated.
In April 1996, The Company was advised by S-A that the joint application
submitted in January 1993 for a grant from the National Medical Technology Test
Bed ("NMTTB") program was not accepted. The Company does not consider this
outcome to materially affect its planned development of the ICP.
Manufacturing
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The Company has no manufacturing capabilities and does not intend to
establish any such capabilities in the foreseeable future. The Company intends
to rely on third party original equipment manufacturers ("OEMs") to produce the
Company's medical devices. Any such OEMs will have to comply with FDA and other
regulatory requirements for such facilities, including FDA Good Manufacturing
Practice ("GMP") regulations. The Company entered into an agreement with a
third party manufacturer, effective as of December 15, 1995, for the manufacture
of the PAS. Although this manufacturer satisfies the FDA's GMP regulations, in
the event that the Company experiences substantial sales of its PAS device, of
which there can be no assurance, the Company may have to identify other third
party manufacturers in connection with additional manufacturing of the PAS.
Further, the Company presently anticipates it will engage other third party
manufacturers in connection with the manufacture of the CRS and ICP devices.
There can be no assurance that such other manufacturers can be identified on
commercially acceptable terms, or at all, or that such other manufacturers, if
identified, will be adequate for the Company's long-term needs, or that they can
meet all relevant regulatory requirements. Moreover, there can be no assurance
that the Company's manufacture of products on a limited scale basis means that
the Company can effect the successful transition to commercial, large-scale
production.
Sales, Distribution, and Marketing Strategy
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The Company is exploring a variety of sales and distribution strategies in
connection with the anticipated commercialization of its medical devices. The
precise strategy that the Company eventually adopts may be a combination of some
or all of these strategies. In addition, the Company may also adopt different
strategies for different products. The two fundamental strategies currently
being explored are:
. Assembling a network of regional independent distributors who have proven
to be successful in effecting the sale of new medical products in the
market for the particular medical device.
. Forming a strategic alliance with a corporate partner with a strong
presence in the potential market for the applicable medical device.
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The Company's form of marketing will be influenced by the sales and
distribution strategies it eventually pursues. Nevertheless, the Company
anticipates that during 1996, its marketing efforts will most likely concentrate
on attending trade shows and advertising in trade publications. The Company's
marketing strategy may also include, to a lesser extent, direct mailings,
textual and audio video sales literature, and general advertising and publicity.
With respect to the PAS system, which the Company began marketing in
January 1996, the Company intends to initially sell this product through
independent regional distributors. At some later date, the Company may form a
strategic alliance with a corporate partner, who would most likely be a
manufacturer or marketer of latex surgical gloves, although the Company does not
presently have any current prospects. The Company presently intends to market
the PAS during 1996, primarily through trade show appearances and advertisements
in trade publications. The Company will coordinate its sales and marketing
efforts with respect to the PAS through its vice president of sales and
marketing and its two regional sales managers.
The Company has not yet developed a marketing or sales strategy with respect
to the CRS device which received pre-market clearance from the FDA on March 20,
1996.
Competition
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The medical device industry is intensely competitive, particularly in terms
of price, quality and marketing. Most of the Company's competitors are better
established and have substantially greater financial, marketing and other
resources than the Company. Further, most of the Company's competitors have
been in existence for a substantially longer period of time and may be better
established in those markets where the Company intends to sell its devices.
Although the Company is not presently aware of any competitor that commercially
manufactures and sells any medical devices similar to those the Company
presently intends to sell, the Company is aware that several technologies
similar to the PAS are being developed and tested by other small companies. Due
to the Company's relative lack of experience, financial, marketing and other
resources, even though it has received FDA clearances for the PAS and CRS there
can be no assurance that the Company will be able to market these devices
successfully, nor develop, receive FDA clearance and market the ICP, or compete
in the medical device industry in general.
Patents and Intellectual Property Rights
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The Company has entered into exclusive license agreements with respect to
each of the patents underlying the Company's first three products: the Personal
Alarm System; the Cell Recovery System; and the Intracranial Pressure Monitoring
System. There can be no assurance, however, that such patents will provide the
Company with significant protection from competitors. Patent protection
relative to medical devices is generally uncertain, and involves complex legal
and factual questions. To date, there has emerged no consistent policy
regarding the breadth of claims allowed in connection with the patent protection
of medical devices. Accordingly, there can be no assurance that any patents
licensed by the Company will afford protection against competitors with similar
technologies. Finally, there can be no assurance that the Company will have the
financial resources necessary to enforce its patent rights.
Even though the Company has been licensed patents, under the terms of the
Company's license agreements, the Company is responsible for protecting such
patents. Challenges may be instituted by third parties as to the validity,
enforceability and infringement of the patents. Further, the cost of the
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litigation to defend any challenge to the Company's licensed patents or to
uphold the validity and enforceability and prevent infringement of the Company's
licensed patents can be substantial. In the event that others are able to
design around the Company's licensed patents, the Company's business could be
materially and adversely affected.
The Company may be required to obtain additional licenses from others to
continue to refine, develop, manufacture, and market new products. There can be
no assurance that the Company will be able to obtain any such licenses on
commercially reasonable terms or at all or that the rights granted pursuant to
any licenses will be valid and enforceable.
Notwithstanding the Company's exclusive license with respect to the patents
underlying the PAS, CRS and ICP, there can be no assurance that others will not
independently develop similar technologies, or design around the patents. If
others are able to design around the patents, the Company's business will be
materially adversely affected. Further, the Company will have very limited, if
any, protection of its proprietary rights in those jurisdictions where it has
not effected any patent filings or where it fails to obtain patent protection
despite filing therefor.
Even though the patents underlying the Company's three medical devices have
been issued by the United States Patent and Trademark Office, challenges may be
instituted by third parties as to the validity and enforceability of the
patents. The Company is not presently aware of any challenges to the patents.
Similarly, the Company may also have to institute legal actions in order to
protect infringement of the patents by third parties. The Company is not
presently aware of any such infringements. The costs of litigation or
settlement in connection with the defense of any third party challenges relative
to the validity and enforceability of its patents and/or to prevent any
infringement of the patents by third parties, which pursuant to the license
agreements with respect to the patents are the Company's responsibility, could
be substantial. Moreover, in the event that the Company was unsuccessful in any
such litigation, the Company could be materially adversely affected.
In addition to relying on patent protection for its products, of which
there is no assurance, the Company will also attempt to protect its products,
processes and proprietary rights by relying on trade secret laws and non-
disclosure and confidentiality agreements, as well as exclusive licensing
arrangements with persons who have access to its proprietary materials or
processes, or who have licensing or research arrangements exclusive to the
Company. Despite these protections, no assurance can be given that others will
not independently develop or obtain access to such materials or processes, or
that the Company's competitive position will not be adversely affected thereby.
To the extent members of the Company's Scientific Advisory Board have consulting
arrangements with, or are employed by, a competitor of the Company, such members
might encounter certain conflicts of interest, and the Company could be
materially adversely affected by the disclosure of the Company's confidential
information by such scientific advisors.
Government Regulations
- ----------------------
The Company's medical device products are subject to extensive government
regulations in the United States and in other countries. In order to clinically
test, produce, and market its devices, the Company must satisfy numerous
mandatory procedures, regulations, and safety standards established by the FDA,
and comparable state and foreign regulatory agencies. Typically, such standards
require that the products be cleared by the government agency as safe and
effective for their intended use prior to being marketed for human applications.
The clearance process is expensive and time-consuming. Other
-11-
<PAGE>
than with respect to the Company's PAS and CRS, no assurance can be given that
clearances will be granted for the sale of the Company's ICP or that the length
of time for clearance will not be extensive, or that the cost of attempting to
obtain any such clearances will not be prohibitive.
The FDA employs a rigorous system of regulations and requirements governing
the clearance processes for medical devices, requiring, among other things, the
presentation of substantial evidence, based upon clinical studies, establishing
the safety and efficacy of new medical devices. The principal methods by which
FDA clearance is obtained are Pre-Market Approval ("PMA"), which is for products
that are not comparable to any other product in the market, or filing a pre-
market notification under Section 510(k) of the Food, Drug and Cosmetics Act (a
"510(k)") which is for products that are similar to products that have already
received FDA clearance. Although both methods require clinical testing of the
products in question under an approved protocol, because PMA clearance relates
to more unique products, the PMA procedure is more complex and time-consuming.
Applicants under the 510(k) procedure must prove that the products for which
clearance is sought are substantially equivalent to products on the market prior
to the Medical Device Amendments of 1976, or products approved thereafter
pursuant to the 510(k) or PMA procedure. The review period for a 510(k)
application is typically ninety (90) days from the date of filing the
application, although there can be no assurance that the review period will not
extend beyond such ninety (90) day period.
Under the PMA procedure, the applicant is required to conduct substantial
clinical testing to determine the safety, efficacy and potential hazards of the
product. The review period under a PMA application is one hundred eighty (180)
days from the date of filing, and the application is not automatically deemed
cleared if not rejected during that period. The preparation of the PMA
application is significantly more complex, expensive and time-consuming than the
510(k) procedure. Further, the FDA can request additional information, which
can prolong the clearance process.
In order to conduct human clinical studies for any medical procedure
proposed for the Company's products, the Company could also be required to
obtain an Investigational Device Exemption ("IDE") from the FDA, which would
further increase the time before potential FDA clearance. In order to obtain an
IDE, the Company would be required to submit an application for the FDA,
including a complete description of the product, and detailed medical protocols
that would be used to evaluate the product. In the event an application were
found to be in order, an IDE would ordinarily be granted promptly thereafter.
The Company may be required to use the PMA process for the ICP, in order
to be granted final FDA clearance. The clearance process can take from a
minimum of six (6) months to several or more years, and there can be no
assurance that FDA clearance will be granted for the commercial sale or for
routine clinical use of the ICP.
The FDA also imposes various requirements on manufacturers and sellers of
medical devices under its jurisdiction, such as labeling, manufacturing
practices, record keeping, and reporting requirements. The FDA may also require
post-market testing and surveillance programs to monitor a product's effect.
There can be no assurance that the appropriate clearance from the FDA will be
obtained, that the process to obtain such clearance will not be excessively
expensive or lengthy, or that the Company will have sufficient funds to pursue
such clearances. Moreover, failure to receive requisite clearance for the
Company's products or processes would prevent the Company from commercializing
its products as intended, and would have a materially adverse effect on the
business of the Company.
-12-
<PAGE>
Even after regulatory clearance is obtained, any such clearance may include
significant limitations on indicated uses. Further, regulatory clearances are
subject to continued review, and later discovery of previously unknown problems
may result in restrictions with respect to a particular product or manufacturer,
including withdrawal of the product from the market, or sanctions or fines being
imposed on the Company.
Distribution of the Company's products in countries other than the United
States may be subject to regulation in those countries. There can be no
assurance that the Company will be able to obtain the approvals necessary to
market its medical devices outside of the United States.
Research and Development
The Company's expenditures for research and development were $943,510 in
1995 and $778,468 in 1994. See "Item 6. Management's Discussion and Analysis
and Plan of Operation."
Number of Employees
As of March 22, 1996, the Company had 10 full-time employees, five of whom
were employed in executive and management capacities, three in sales and
marketing, and two in general and administrative.
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases its executive offices, which occupy approximately 3,256
square feet, at 9171 Towne Centre Drive, Suite 355, San Diego, CA 92122. The
Company's rent is approximately $5,210 per month through April 20, 1998. The
Company is also responsible for its pro-rata share of increased operating
expenses starting in 1997 predicated upon a 1996 base year.
ITEM 3. LEGAL PROCEEDINGS
Subsequent to the Company terminating its investment banking relationships
with Chandler Church & Company ("Chandler Church") and the Noir Intertrade
Corporation ("Noir") in early 1994, these entities demanded payment from the
Company of approximately $330,000 for services and/or funds they alleged to have
advanced. Over the previous two years, the Company had issued a substantial
amount of its stock, approximately 2,070,000 shares, to Chandler Church and its
affiliates for services claimed to have been rendered to the Company. The
Company's management is now informed, and now believes, that these entities are
under common control or otherwise affiliated with an individual who, in 1994,
was a substantial shareholder of the Company. The Company refused to pay the
dollar amounts demanded by these entities. These entities subsequently assigned
their claims to Uptown Trust, which in July 1994, filed a Complaint regarding
such claims in the Superior Court of San Diego County, California, seeking
recovery of these amounts plus interest from the Company. Upon the Company's
motion, this Complaint was dismissed. Subsequently, Chandler Church filed a
Complaint in the Superior Court of San Diego County, California, seeking
approximately $290,000 from the Company based on the claims previously asserted
by Uptown Trust. The Company has filed an Answer to this Complaint in which it
denies these claims, and has filed a Cross-Complaint against Chandler Church
seeking damages in excess of the amounts claimed by Chandler Church. The
Company believes that it has meritorious defenses to such claims.
-13-
<PAGE>
There are no other legal proceedings to which the Company is a party
which could have a material adverse effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
-14-
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The common stock is quoted on the NASDAQ Small-Cap Market under the
symbol "MEDD". There currently is no public market for the Company's Series I
Preferred Stock. (See "Item 6. Management's Discussion and Analysis and Plan
of Operation - Liquidity and Capital Resources.") The following table sets
forth, for the periods indicated, the high and low bid prices for the common
stock, as reported by the NASDAQ Small-Cap Market.
<TABLE>
<CAPTION>
Bid Price
---------
High Low
-------------------------
<S> <C> <C>
1994
- ----
First Quarter $3.00 $1.00
Second Quarter $2.19 $0.88
Third Quarter $2.22 $1.06
Fourth Quarter $1.25 $0.88
1995
- ----
First Quarter $1.00 $0.56
Second Quarter $1.44 $0.38
Third Quarter $1.63 $0.75
Fourth Quarter $1.06 $0.63
1996
- ----
First Quarter $ .88 $ .50
Second Quarter (through April 1, 1996) $1.00 $ .75
</TABLE>
On April 1, 1996, the closing bid and asked prices of the Company's common
stock, as reported by the NASDAQ Small-Cap Market, were $.88 and $1.00 per
share, respectively.
On April 1, 1996, there were 1,090 holders of record of common stock and 45
holders of record of Series I Preferred Stock.
The Company has not paid any dividends since its inception and does not
intend to pay dividends in the foreseeable future with respect to the common
stock. The Company is not required to pay any dividends on the Series I
Preferred Stock and does not intend to pay dividends in the foreseeable future
with respect to the Series I Preferred Stock. It is presently anticipated that
any earnings which the Company may realize in the foreseeable future will be
retained to finance the growth of the Company.
-15-
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS AND PLAN OF OPERATION
The following discussion of the Company's financial condition and results
of operations should be read in conjunction with the Financial Statements and
the Notes thereto appearing in Item 7 in this Form 10-KSB.
General
- -------
From its incorporation in 1980 until June of 1992, the Company was engaged
exclusively in oil and gas activities. In June 1992 the Company commenced
certain initial activities with respect to the medical device business.
Thereafter, the Company continued to increase its activities in the medical
device field while simultaneously decreasing its oil and gas activities.
Effective as of January 1, 1994, the Company having disposed of all its oil and
gas interests and ceased all activities related thereto, commenced on a full-
time basis its current medical device operations. Accordingly, the results of
the Company's operations prior to 1994 are not necessarily comparable. On June
1, 1992, the Company was considered, for accounting purposes, to have re-emerged
as a development stage company. In the fourth quarter of 1995, the Company
changed its method of amortizing its license agreements from commencement of
product shipments to the estimated useful life of the license agreement. The
effects of the changes on the consolidated statements of operations are to
increase the losses as shown in Note 14 to the financial statements in
Item 7.
The Company believes that its research and development costs will continue
to be its largest single operating expense in 1996 as the Company completes the
development of the CRS and ICP. As development of these devices concludes,
increased marketing and sales costs will be incurred and the Company's working
capital requirements can also be expected to grow accordingly.
The Company, which is still in the development stage with respect to its
current medical device operations, has not been profitable for the last 10 years
and expects to incur additional operating losses for the foreseeable future.
The following discussion and analysis should be read in conjunction with the
financial statements and notes thereto referred to in Item 7.
Results of Operations
- ---------------------
Year ended December 31, 1995 compared to year ended December 31, 1994.
Revenues
- --------
There were no operating revenues in 1995 or 1994.
Operating Expenses
- ------------------
Research and Development
Research and development costs in 1995 were $943,510 as compared to
$778,468 in 1994, representing an increase of 21.2%. This increase was due to a
full year of research and development activities in 1995 as opposed to
approximately nine months of such activities in 1994. Increased research and
development costs were primarily related to engineering costs associated with
further development of the PAS, design and development and FDA submission costs
related to the CRS, and further design changes to the ICP.
-16-
<PAGE>
General and Administrative
General and administrative costs were $2,102,612 in 1995 as compared to a
restated $1,834,402 in 1994, representing an increase of 14.6% This increase was
the result of the hiring in 1995 of a vice president of marketing and two
regional sales managers, increased advertising and promotional expenses to
introduce the PAS device, and higher office expenses and rental costs. The
Company's office expenses and rental costs were $116,700 in 1995 as compared to
$78,200 in 1994.
Losses
The Company's net loss for 1995 was $3,049,047 as compared to $3,005,803 in
1994 representing an increased loss of 1.4%. This increased loss was primarily
attributable to an increase in research and development and general and
administrative costs which exceeded the loss incurred by the Company in
discontinuing its oil and gas operations in 1994. Loss per share was $.45 in
1995 as compared to a restated $.95 in 1994, representing a decrease of 54.5%.
This decrease was primarily attributable to the increase in the average number
of shares outstanding in 1995 as compared to 1994.
Liquidity and Capital Resources
- -------------------------------
To date, the Company has funded its capital requirements for its current
medical device operations from the sale of debt and equity securities and the
issuance of common stock in exchange for services. The Company's cash position
at December 31, 1995 was $306,851 as compared to $483,611 at December 31, 1994,
representing a decrease of 36.5%. In 1995, $1,435,445 of net cash was used for
operating activities plus $104,270 was invested in patents, and property and
equipment. These amounts were not fully offset by the $1,362,955 received by
the Company in 1995 from financing activities. Net cash used in operating
activities in 1995 consisted principally of a net loss of $3,049,047, plus an
increase in other net assets (excluding cash) of $273,984, the reversal of a
reserve for litigation in the amount of $286,996 which were offset by $1,563,130
in common stock paid for services in lieu of cash, plus depreciation,
amortization and non-cash compensation accrual and recognition of $611,452.
Financing activities in 1995 resulted in $1,182,500 of net proceeds, from notes
payable plus the receipt of $231,959 in net proceeds from the issuance of common
stock. The Company also repaid $51,504 in principal with respect to outstanding
notes and leases in 1995. The Company's increase in current assets in 1995 of
$58,915 or 12.2% was offset by an increase in current liabilities of $366,461 or
61.8% from December 31, 1994 to December 31, 1995. These changes in current
assets and current liabilities resulted in an increase in the Company's negative
working capital position to $417,120 at December 31, 1995 from $109,574 at
December 31, 1994. Management expects to increase working capital to meet the
growing requirements of the Company as it brings its products to market. The
Company plans to fund its working capital needs from the proceeds of the
anticipated public offering of convertible preferred stock in the second quarter
of 1996 and certain minimum sales of the PAS during the year.
As discussed in Note 1 to the Financial Statements, the Company's recurring
losses from operations, negative working capital and limited capital resources
raise substantial doubt about the Company's ability to continue as a going
concern.
While the Company had no inventory at December 31, 1994, inventory
consisting of parts and materials was $147,593 at December 31, 1995, in
anticipation of the first quarter market launch of the PAS.
-17-
<PAGE>
In the second quarter of 1995, the Company completed a private placement
(the "1995 Private Placement") of its securities and received net proceeds of
$974,769 in connection with the sale of 20.75 units at a purchase price of
$50,000 per unit. Each unit consisted of 71,429 shares of common stock and
25,000 3-year warrants to purchase 25,000 shares of common stock. The warrants
are exercisable for $1.00 per share of common stock. The Company also issued to
the broker-dealer which assisted the Company in effecting the 1995 Private
Placement 56,250 two-year warrants to purchase 56,250 shares of common stock at
an exercise price of $1.00 per share.
In June and July 1995, the Company issued an aggregate of $275,000 of
short-term convertible debt which, if not converted into common stock, was to
mature in six months and bore interest at the rate of 48% per annum (the
"Convertible Debt") payable on maturity. As of December 27, 1995, all of the
Convertible Debt had converted into common stock at the rate of 2.5 shares of
common stock for each $1.00 of indebtedness, or an aggregate of 687,500 shares
of common stock (the "Debt Shares"). In connection with the issuance of the
Convertible Debt, the Company also issued an aggregate of 137,500 warrants
exercisable for 137,500 shares of common stock at $.60 per share. The warrants
expire 10 days after the effective date of an S-3 Registration Statement to be
filed shortly.
On January 24, 1996, the Company completed a private placement (the
"Private Placement") pursuant to which it sold 33 units (the "Units") to non-
affiliated, accredited investors, each Unit consisting of (i) a secured, one
year, 10%, $50,000 promissory note (the "Note"), and (ii) 7,500 shares of the
Company's Series I convertible preferred stock, par value $.01 per share (the
"Series I Preferred Stock") and received net proceeds of $1,470,000. The Series
I Preferred Stock does not pay any dividends and is anticipated to be
automatically convertible into the convertible preferred stock which is
anticipated to be offered to the public in the second quarter of 1996. The
original issue discount incurred by the Company is a one-time change related to
the Private Placement.
The Company is currently filing an S-3 Registration Statement which relates
to, among other securities, all of the shares of common stock, and the shares of
common stock underlying the warrants issued in the 1995 Private Placement and
the Convertible Debt.
The Company anticipates that its current resources, together with the net
proceeds of its anticipated public offering will be sufficient in addition to
certain minimum PAS sales, to finance the Company's currently anticipated needs
for operating and capital expenditures during 1996.
Net Operating Loss Carryforwards
- --------------------------------
At December 31, 1995, the Company had approximately $12,907,808 of federal
operating loss carryovers and $4,231,087 of state operating loss carryovers to
offset future taxable income; these carryovers will expire in various years
through 2010. As a result of a change in ownership, federal tax rules impose
limitations on the use of net operating losses. The limitations will reduce the
amount of these benefits that will be available to offset future taxable income
each year, starting with the year of ownership change. The dollar amount of
these limitations is indeterminable at this time.
New Accounting Pronouncements
- -----------------------------
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of"
(SFAS No. 121) issued by the Financial Accounting Standards Board (FASB) is
effective for financial statements for fiscal years beginning after
-18-
<PAGE>
December 15, 1995. The new standard establishes new guidelines regarding when
impairment losses on long-lived assets, which include plant and equipment, and
certain identifiable intangible assets, should be recognized and how impairment
losses should be measured. The Company does not expect adoption to have a
material effect on its financial position or results of operations.
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS No. 123) recently issued by the Financial Accounting
Standards Board (FASB) is effective for specific transactions entered into after
December 15, 1995, while the disclosure requirements of SFAS No. 123 are
effective for financial statements for fiscal years beginning no later than
December 15, 1995. The new standard establishes a fair value method accounting
for stock-based compensation plans and for transactions in which an entity
acquires goods or services from non-employees in exchange for equity
instruments. At the present time, the Company has not determined if it will
change its accounting policy for stock based compensation or only provide the
required financial statement disclosures. As such, the impact on the Company's
financial position and result of operations is currently unknown. The Company
does not expect adoption of the SFAS No. 123 to have a material effect on its
financial position or results of operations.
PLAN OF OPERATION
Emergence from a Development Stage Company
- ------------------------------------------
The Company anticipates emerging in 1996 from a development stage to
an operating company upon achieving revenues from its first medical device
product, the PAS, which the Company began marketing in January 1996.
The Company's Capital Requirements
- ----------------------------------
The Company's greatest cash requirements during 1996 will be for
funding the introduction and working capital associated with the market
introduction of the PAS and CRS, continued development, FDA filings and clinical
testing of the ICP, and general and administrative expenses. The funding for
costs and build-up of working capital associated with the market introduction of
the PAS are expected to be partially supplemented by certain minimum anticipated
sales in 1996.
In order to satisfy the Company's capital needs for the next 12
months, the successful completion in the second quarter of the anticipated
public offering of approximately $6.5 million convertible preferred stockand the
Company achieving certain minimum sales in 1996 of the recently-introduced PAS,
are essential. The public offering is subject to timely approvals required from
the SEC and favorable market conditions, none of which can be assured.
If the anticipated public offering of convertible preferred stock is
not completed, the Company will be required to seek alternative financing
sources which cannot be assured. Consequently, the Company might have to
substantially curtail product development and market introduction plans due to
lack of funds.
Subsequent to the next 12 months, the Company currently plans to
finance its long-term operations and capital requirements with the profits and
funds generated from the sales of its products as well as through new private
financings and public offerings of debt and equity securities.
-19-
<PAGE>
The long-term viability of the Company is dependent on its ability to
profitably develop and market its current products and to identify, develop and
profitably market additional products as well as to obtain the financing
necessary to fund this anticipated growth.
ITEM 7. FINANCIAL STATEMENTS
The following financial statements are attached hereto, commencing on page
F-1.
INDEX
-----
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Report of Independent Certified Public Accountants F-1
Consolidated Balance Sheets as of December 31, 1995 and 1994 F-4
Consolidated Statements of Operations for the
Years Ended December 31, 1995 and 1994 F-6
Consolidated Statements of Changes in Stockholders' Equity for the
Years Ended December 31, 1995 and 1994 F-7
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1995 and 1994 F-9
Summary of Accounting Policies F-11
Notes to Consolidated Financial Statements F-14
</TABLE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On January 29, 1996, Medical Device Technologies, Inc. and Robert Early &
Company, P.C., the Company's certified public accountant ("Robert Early"), by
mutual agreement discontinued the services of Robert Early as independent public
accountant for the Company. The Company has replaced its former accountant with
BDO Seidman, LLP, effective as of that date. Robert Early's report on the
financial statements of the Company for the year ended December 31, 1994
contained no adverse opinion nor disclaimers of opinion, but was qualified as to
going concern. The decision to change accountants was approved by the Company's
Board of Directors. Further, during the Company's most recent fiscal year, and
any subsequent period preceding such disengagement, there were no disagreements
with Robert Early on any matter of accounting principles or practices, financial
statement disclosure or auditing scope of procedure, which disagreement, if not
resolved to the satisfaction of Robert Early, would have caused Robert Early to
make reference to the subject matter of such disagreements in connection with
its report.
-20-
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS,
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
Directors and Executive Officers
- --------------------------------
The names and ages of the directors and executive officers of the Company
are set forth below.
<TABLE>
<CAPTION>
Name Age Position Held
---- --- -------------
<S> <C> <C>
M. Lee Hulsebus 57 Chairman of the Board, Chief Executive
Officer and President
Don Arnwine 63 Director
Dr. Arthur Bradley 62 Director
Thomas E. Glasgow 42 Director
Stephen W. Kenney 45 Vice President of Sales and Marketing
Edward C. Hall 55 Chief Financial Officer and Secretary
Richard E. Sloan 47 Vice President of New Business
Development
</TABLE>
There are presently six (6) seats available on the Board, although to date,
management has not yet identified the individuals to fill the current vacancies.
The Company has a staggered Board of Directors which is divided into three
classes. Mr. Arnwine (and any individuals appointed to the currently vacant
Board seat) has been elected to hold office until the annual meeting of
stockholders to be held in 1996. Dr. Bradley and Mr. Glasgow have been elected
to hold office until the annual meeting of stockholders to be held in 1996. Mr.
Hulsebus has been elected to hold office until the annual meeting of
stockholders to be held in 1996. The successors of each of the current
Directors are duly elected and qualified until the earlier resignation, removal
from office or death. As a consequence, only one class of Directors will be
elected at each annual meeting of stockholders.
Background of Executive Officers and Directors
- ----------------------------------------------
M. LEE HULSEBUS has been chairman of the Board, chief executive officer and
president of the Company since August 1994 and has been in the health care field
for 30 years. From January 1992 until he joined the Company in August 1994, he
was the president and owner of his own health care consulting firm, Hulsebus &
Associates, Inc. In July 1993, Mr. Hulsebus filed a voluntary petition for
-21-
<PAGE>
relief under Chapter 7 of the United States Bankruptcy Code. The filing was
made principally as a result of obligations arising out of personal guarantees
made by Mr. Hulsebus on behalf of a business operated by a member of his
immediate family. Mr. Hulsebus was granted a discharge by order of the United
States Bankruptcy Court for the District of Georgia in December 1993. From
August 1993 to November 1993 Mr. Hulsebus also served as chief executive officer
of InCoMed Corporation, then a small California based medical products company.
From January 1990 to January 1992, Mr. Hulsebus also served as president and
chief operating officer of Sports Support, Inc., a sports medicine company.
From 1988 until 1990, he served as medical group president for Teleflex, Inc.
For 22 years prior to that, Mr. Hulsebus was employed by Becton-Dickinson & Co.
and C.R. Bard, Inc., both of which are leading companies in the health care
industry.
DON ARNWINE has served as a director of the Company since March 1995.
Since 1988, Mr. Arnwine has been president of Arnwine Associates of Irving,
Texas, a company that provides advisory services to the health care industry.
Mr. Arnwine served as chairman and chief executive officer from 1985 until 1988
of Voluntary Hospitals of America (VHA), a company he joined in 1982. Prior to
joining VHA, Mr. Arnwine served as president and chief executive officer of
Charleston Area Medical Center, a 1,000-bed regional facility care center in the
State of West Virginia. Mr. Arnwine holds a BA degree in business
administration from Oklahoma Central State University and a Masters degree in
hospital management from Northwestern University.
DR. ARTHUR BRADLEY has been a director of the Company since 1986. Dr.
Bradley has been a practicing dentist in Hattiesburg, Mississippi since 1961.
He has been involved for his own account in real estate investments for twenty
years and has been active in oil and gas investments for fifteen years. Dr.
Bradley graduated from the University of Mississippi at Hattiesburg and obtained
his degree in dentistry from Loyola University Dental School.
THOMAS E. GLASGOW has been a director of the Company since November 1994.
From April 1992 to the present, Mr. Glasgow has been president and co-owner of
Integrated Trade System ("ITS"), a Chicago, Illinois company. ITS is a
logistics management company specializing in the development and marketing of
import and export document generation systems. He and another individual
purchased ITS from its parent company in 1992. From March 1994 to the present,
Mr. Glasgow has been the president and owner of Automation Information
Management, a software applications company. From 1989 through 1991, he was a
partner with Wharton Resource Group and a consultant with ITS. Wharton Resource
Group is a strategic management company specializing in the development of early
stage companies. Prior to these activities, he was a director with Federal
Express Corporation for 11 years in various senior management capacities.
STEPHEN W. KENNEY has been the Company's vice president of sales and
marketing since January 1995, and has 21 years of health care industry
experience. Prior to joining the Company, Mr. Kenney served as chief operating
officer of Cardio Vista, a private medical products company headquartered in
Southern California. Prior to joining Cardio Vista in 1993, he served as
chairman and chief executive officer of AMBIS, Inc., a private research
instrumentation company based in San Diego, California (a company he originally
joined in 1989). From 1987 to 1989, Mr. Kenney served as vice president, sales
and marketing, of Digivision, Inc., also headquartered in San Diego. Prior to
that, Mr. Kenney held various management positions with IVAC Corporation in San
Diego) (five years) and American Hospital Supply (six years).
-22-
<PAGE>
EDWARD C. HALL has been chief financial officer of the Company since March
15, 1996. Mr. Hall has also been a financial consultant to the Company since
March 1995. From 1994 through the present, Mr. Hall was a consultant to high
technology companies in the San Diego area where he provided strategic,
financing, planning, analytical, administrative and system design support.
Since 1991, he has acted as an interim CFO and has provided financial and
turnaround consulting services to a wide variety of high technology and other
companies in California and the Southwest. His experience includes positions
and assignments for medical, pharmaceutical, broadband and wireless
communications, specialty and mail order retailing, and aerospace manufacturing
firms.
RICHARD E. SLOAN has been vice president of new business development since
March 15, 1996. Mr. Sloan was a consultant to the Company from August 16, 1995
to March 14, 1996. From March 1995 to July 1995, Mr. Sloan served as chief
executive officer of WorldWide Products, Inc., a private Los Angeles based
development and marketing firm that distributes pharmaceutical products to
plastic surgeons and dermatologists. Prior thereto, from 1992 to March 1995, he
served as corporate marketing director and general manager for Industrial
Products of UniFET, Incorporated, a private company based in San Diego,
California, involved in the development of sensor-based medical products. From
December 1989 through March 1992, Mr. Sloan managed his own mergers and
acquisition business with First Pacific Group, located in Carlsbad, California,
which provided investment and financial services to privately-held companies
primarily in Southern California.
Directors' Committees
- ---------------------
The Company's Board of Directors has appointed a nominating committee
comprised of Messrs. Hulsebus and Glasgow. The committee selects the persons
standing for election to the Company's Board of Directors at the annual meeting.
Messrs. Arnwine, Glasgow and Hulsebus serve as the members of the Company's
Compensation Committees. Additionally, Messrs. Arnwine, Glasgow and Hall serve
as members of the Audit Committee. The Board of Directors has no current plans
to appoint additional committees.
Directors' Compensation
- -----------------------
The Company compensates each of its outside directors with shares of common
stock at the rate of 15,000 shares per annum, payable quarterly, all of which
shares are registered from time-to-time by the Company under its stock
compensation plans. See "Item 10. Executive Compensation - Management
Employment Agreements - Option Plans." The Company also reimburses all
directors for their travel expenses to attend directors' meetings.
Scientific Advisory Board and Consultants
- -----------------------------------------
Scientific Advisory Board
The Company, in addition to its Board of Directors, has a Scientific
Advisory Board ("Advisory Board") which provides technical oversight, expertise
and guidance to the Company. The Advisory Board does not meet as a group but
rather, its members are consulted from time-to-time by the Company as and when
the Company requires the particular expertise or guidance of an individual
Advisory Board member in connection with a particular issue. Each member of the
Advisory Board receives 12,000 shares of common stock per annum, payable semi-
annually. The members of the Advisory Board are:
-23-
<PAGE>
HOWARD G. GRATZNER, PHD, currently serves as president and scientific
director for Oncyte, Inc. in Houston, Texas. Dr. Gratzner holds an
undergraduate degree in microbiology and a PhD in genetics from Florida State
University, and was a research fellow in genetics at the California Institute of
Technology. Dr. Gratzner has held several professorships and received grants
from various organizations, including the National Institutes of Health,
National Aeronautics and Space Administration, and the National Foundation -
March of Dimes. Dr. Gratzner has written numerous articles in various medical
publications in cytopathology and genetics.
BRYANT H. HUDSON, III, MD, is a urologist in private practice in
Montgomery, Alabama, and also serves as the state surgeon for the Alabama Army
National Guard. Dr. Hudson holds degrees from the University of Alabama and the
Medical College of Alabama, and has extensive military and civilian experience
in both adult and pediatric urology at several hospitals, including Baptist
Medical Center of Montgomery.
RUTH L. KATZ, MD, is Board certified in anatomic pathology, clinical
pathology, and cytopathology, and currently serves as professor of pathology,
co-chief of cytopathology, and director, Image Cytometric Diagnostic Laboratory
at the University of Texas MD Anderson Hospital. Dr. Katz holds undergraduate
and medical degrees from the University of Witwatesrand in Johannesburg, South
Africa, and is licensed in Texas and in California. Dr. Katz has published over
ninety articles in medical journals, and written chapters in several pathology
textbooks. Dr. Katz is acknowledged as an expert in cytopathology.
LESTER A. KLEIN, MD, is a Board certified urologist, and currently serves
as urologist at Green Hospital, Scripps Clinic and Research Institute, La Jolla,
CA. Dr. Klein holds medical degrees from the University of California in San
Francisco, Berkeley and Los Angeles. From 1971 to 1977 he was appointed to the
Harvard Medical School as assistant professor of surgery, and from 1977 to 1988
as associate professor of surgery. During this same period, he served as
surgeon and head, Division of Urology, Beth Israel Hospital, Boston. He serves
on numerous committees and has held a variety of teaching positions. Dr. Klein
has published fifty-seven articles in medical publications, and has presented
over thirty abstracts before various scientific meetings around the world.
WILLIAM E. MAYER, MD, retired as director of the Department of Mental
Health for the State of California in July 1992. From January 1990 to 1991 he
was director of the International Forum for AIDS Research at the National
Academy of Sciences. Dr. Mayer served from 1983 to 1990 as Assistant US
Secretary of Defense for Health Affairs, directing a $13 billion annual military
health care system. He also served as chairman of the Board of Governors of the
Armed Forces Institute of Pathology, and as a trustee on the Board of the
Uniformed Services University of Health Sciences. In 1981 President Reagan
appointed Dr. Mayer assistant surgeon general, and administrator of the Federal
Alcohol, Drug Abuse and Mental Health Administration. Dr. Mayer initiated the
world's largest program of hospital data automation, and established the
military's model program of drug abuse testing. He holds undergraduate degrees,
as well as his medical degree from Northwestern University, and has specialty
training in neurology, psychiatry and neuropathology.
LAWRANCE C. POLLAK, MD, is a Board certified orthopedic surgeon
specializing in total joint replacement. He graduated from The Johns Hopkins
University with a BA and Indiana University School of Medicine with an MD.
After a general surgery internship and residency at Dartmouth-Hitchcock Medical
Center in Hanover, New Hampshire, he completed an orthopedic residency in
Albany, New York. He received fellowship training in arthritis surgery at the
Robert Breck Brigham
-24-
<PAGE>
Hospital in Boston, Massachusetts, and at the National Institutes of Health in
Bethesda, Maryland. Dr. Pollak joined Sharp Rees-Stealy Medical Group in 1981
and has held numerous leadership positions with this 270 physician group,
including medical director, and with Sharp Healthcare as community care liaison,
working on a variety of projects related to managed care and physician/medical
group integration. In addition, Dr. Pollak frequently works with APM, a national
health care consulting firm.
RICHARD S. SAUNDERS, MD, has been professor and chairman of neurological
surgery at the Dartmouth-Hitchcock Medical Center in Lebanon, New Hampshire,
since 1981. Board certified in 1972, he received his BS and MD from Tufts
University and is the director of the Dartmouth neurosurgical residency program.
He has authored one book, several book chapters and many journal articles. For
the past seven years, Dr. Saunders has received the "Physician's Recognition
Award" from the American Medical Association. Dr. Saunders has been overseeing
all aspects of the ICP's pre-clinical and clinical trials.
Consultants
In an effort to control costs, in lieu of employing full-time engineers,
the Company uses consultants on a regular basis to fulfill its engineering needs
in connection with the development of its products. During 1995, the Company
paid all of its consultants, in the aggregate, an average of approximately
$35,000, per month. Subsequent to the completion of the proposed secondary
offering, the Company intends to retain full-time engineers and substantially
reduce its reliance on consultants. The consultants currently used by the
Company are as follows:
DEITMAR P. RABUSSAY, PHD, serves in the capacity of technical consultant to
the Company. He has extensive experience with the development of products in
the biomedical field and has assisted emerging growth companies in the design
and development of their technologies. He has many publications and patents to
his credit and continues with research in the development of new products. Dr.
Rabussay received his doctorate from the University of Munich; his thesis was
completed at Max Planck Institute of Biochemistry. He has served as president
and CEO of InCoMed Corporation in 1992 and 1993, and prior to that, for 10 years
as a vice president of Bethesda Research Laboratories, Inc., and Life
Technologies, Inc., respectively. Dr. Rabussay has taught at Florida State
University and the University of Maryland, and has served as a member of a study
section for the National Institute of Health. Dr. Rabussay is the owner of the
patent under the license agreement with respect to the signal modulation barrier
monitor, a component of the PAS, for which the Company pays a 1% royalty. See
"Item 1. Description of Business - The Company's Products - Personal Alarm
System - License Agreement."
CHRIS CATSIMANES is currently involved in developing the CRS for the
Company. His past experience includes design, development, and management in a
variety of engineering fields, including design of control systems, energy
management systems, automated monitoring and diagnostic systems, bindery
automation systems, and electronic warfare systems. Mr. Catsimanes received his
BSEE degree from the University of Wyoming and his ME degree from the University
of Florida.
ICRC, INC. (formerly known as CRCI, Inc.) is a team of professionals with
management and technical experience which provides consulting services to the
health care industry. ICRC provides an array of services to the Company, the
most critical being the validation of technology and preparation and
documentation of the material required to gain necessary regulatory clearances.
ICRC's professionals have substantial industry experience and work frequently
with the FDA. They are familiar
-25-
<PAGE>
with all the requirements ranging from document preparation for the submission
of PMA's to the development of application manuals required for product
applications/submissions.
Based solely on its review of copies of Forms 3, 4, and 5 received by the
Company, or written representations from certain reporting persons that no Forms
5 were required for such persons, the Company believes that, during the fiscal
year ended December 31, 1995, all Section 16(a) filing requirements applicable
to officers, directors, and 10% shareholders were complied with.
-26-
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
Executive Compensation
- ----------------------
The following table sets forth the cash compensation paid by the Company
to executive officers of the Company whose total annual salary and bonus
exceeded $100,000 for the years ended December 31, 1993, 1994 and 1995.
SUMMARY COMPENSATION TABLE
--------------------------
<TABLE>
<CAPTION>
Annual Compensation
------------------------------------------------------------------------------
Name and Year Salary Bonus Other Annual
-------- ---- ------ ----- ------------
Principal Position Compensation
------------------ ------------
<S> <C> <C> <C> <C>
M. Lee Hulsebus, Chairman of 1995 $162,000 $- 0 - $- 0 -
the Board, Chief Executive 1994 $ 54,000 $- 0 - $- 0 -
Officer and President 1993 $ - 0 - $- 0 - $- 0 -
B. Roland Freasier, Jr./ (2)/ 1995 $120,000 $- 0 - $- 0 -
1994 $120,000 $- 0 - $- 0 -
1993 $ 75,000 $- 0 - $- 0 -
Stephen W. Kenney, Vice 1995 $110,000 $- 0 - $- 0 -
President of Sales and 1994 $ - 0 - $- 0 - $- 0 -
Marketing
<CAPTION>
Long-Term Compensation
----------------------
Awards Payouts
------------------------------------ ----------------
Name and Year Restricted Options/ LTIP Payouts All Other
-------- ---- ---------- -------- ------------ ---------
Principal Position Stock Awards SARs /(1)/ Compensation
------------------ ------------ ---------- ------------
<S> <C> <C> <C> <C> <C>
M. Lee Hulsebus, Chairman of 1995 $71,094 300,000 $- 0 - $- 0 -
the Board, Chief Executive 1994 $43,489 200,000 $- 0 - $- 0 -
Officer and President 1993 $- 0 - - 0 - $- 0 - $- 0 -
B. Roland Freasier, Jr./ (2)/ 1995 $68,750 - 0 - $- 0 - $- 0 -
1994 $22,917 150,000 $- 0 - $- 0 -
1993 $- 0 - - 0 - $- 0 - $- 0 -
Stephen W. Kenney, Vice 1995 $41,250 100,000 $- 0 - $- 0 -
President of Sales and 1994 $- 0 - - 0 - $- 0 - $- 0 -
Marketing
</TABLE>
/(1)/ Includes warrants.
/(2)/ Resigned as a director in January 1996, and resigned as executive vice
president and an employee in March 1996.
-27-
<PAGE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR /(1)/
--------------------------------------
<TABLE>
<CAPTION>
Name Warrants Granted Percent of Total Exercise of Base Price Expiration Date
---- ---------------- ---------------- ---------------------- ---------------
Option/SARs Granted to ($/Share)
---------------------- ---------
Employees in
------------
Fiscal Year /(1)/
-----------
<S> <C> <C> <C> <C>
M. Lee Hulsebus 300,000 70.6% $.40/share 7/19/00
Stephen W. Kenney 75,000 17.6% $1.00/share 1/03/03
</TABLE>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Name Shares Acquired Value Realized ($) Number of Unexercised
---- --------------- ------------------ ---------------------
on Exercise Options/SARs at FY-End
----------- ----------------------
Exercisable / Unexercisable/(1)/
---------------------------
<S> <C> <C> <C>
M. Lee Hulsebus - 0 - $- 0 - 300,000 / 200,000
B. Roland Freasier, Jr. /(2)/ - 0 - $- 0 - 0 / 150,000
Stephen W. Kenney - 0 - $- 0 - 0 / 75,000
<CAPTION>
Name Value of Unexercised In-the-Money
---- ---------------------------------
Options/SARs at FY-End
----------------------
Exercisable / Unexercisable /(1)/
---------------------------
<S> <C>
M. Lee Hulsebus $153,000 / $0
B. Roland Freasier, Jr. /(2)/ $0 / $0
Stephen W. Kenney $0 / $0
</TABLE>
/(1)/ Includes warrants.
/(2)/ Resigned as a director in January 1996, and resigned as executive vice
president and an employee in March 1996.
-28-
<PAGE>
MANAGEMENT EMPLOYMENT AGREEMENTS; CONSULTING AGREEMENTS
- -------------------------------------------------------
Employment Agreements
- ---------------------
Effective the 31st day of August, 1994, the Company entered into an
exclusive four year term employment agreement with Mr. M. Lee Hulsebus. Under
his employment agreement, Mr. Hulsebus is to serve as the Company's chief
executive officer and receive a base salary of $162,000 per annum. He is also
entitled to receive two hundred fifty thousand (250,000) shares of the Company's
common stock at the end of two years of continuous satisfactory employment with
the Company. In addition, Mr. Hulsebus received 200,000 common stock purchase
warrants which are exercisable over a five-year period, ending August 31, 1999,
at $1.00 per share.
In addition, on August 31, 1994, the Company entered into a severance
agreement with Mr. Hulsebus. Such severance agreement generally provides that
in the event a change in control of the Company occurs or Mr. Hulsebus is
involuntarily terminated, suffers a disability while employed by the Company or
dies while employed by the Company, then he is entitled to receive certain
benefits from the Company. Such benefits may include some or all of the
following: an amount based on his base salary as provided for in his employment
agreement, an amount based on the bonus paid or payable to the him as provided
for in his employment agreement, the right to receive common stock that shall
vest immediately, the right to exercise any warrants or stock options held by or
granted to him under the employment agreement or any stock option plan of the
Company or both, health insurance and disability insurance. Mr. Hulsebus will
not receive any benefits if he voluntarily terminates his employment with the
Company or the Company terminates him "for cause", which is defined as the
conviction after appeal of a felony.
Effective August 31, 1994, the Company entered into an employment agreement
with the former executive vice president for a four-year term providing for a
base salary of $120,000 per year, in addition to 200,000 shares of common stock
to be granted at the end of two years of employment. The agreement also
provided for 150,000 warrants, exercisable after the earlier of August 31, 1996
or a public offering of stock, through August 31, 1999 at an exercise price of
$1.00 per share. Compensation expense for the years ended December 31, 1995 and
1994 is recorded for the 200,000 shares based on the pro-rata shares earned and
the market value of the stock at the end of the period. No compensation expense
was recorded for the issuance of the warrants since they were not issued below
fair market value.
On March 29, 1996, the Company and the former executive vice president
entered into a termination agreement which terminated his existing employment
and severance agreements and settled any and all claims between the two parties.
Under the termination agreement, the former executive vice president will
receive 29 monthly payments of $10,000, commencing on April 1, 1996 and ending
August 31, 1998. Further, the 200,000 shares of common stock discussed above
will be fully vested and available to the former executive vice president as of
August 31, 1996. The provisions relating to the 150,000 warrants discussed
above remain the same. In addition, the Company issued an additional 75,000
warrants at an exercise price of $.40 per share which are exercisable from
August 31, 1998 through August 31, 2001.
Effective January 4, 1995, the Company entered into a three-year employment
agreement with Mr. Stephen W. Kenney under which he is to serve as the Company's
vice president of marketing and sales. Mr. Kenney receives a base salary of
$110,000 per annum. He is also entitled to receive one hundred thousand
(100,000) shares of the Company's common stock on August 31, 1996 and is
entitled to receive warrants to purchase seventy-five thousand (75,000) shares
of the Company's common stock
-29-
<PAGE>
at $1.00 per share. One-third (1/3) of the warrants are to be issued on each of
January 4, 1996, 1997 and 1998. The warrants are exercisable for a period of
five years from the date of issuance. The agreement also provides for severance
benefits upon termination without cause in the amount of six months' base
salary.
Effective March 15, 1996, the Company entered into a non-exclusive
employment agreement with Mr. Edward C. Hall under which he is to serve as the
Company's chief financial officer. Mr. Hall receives a base salary of $60,000
per annum based upon a three day work week. In the event that Mr. Hall's
services are required by the Company in excess of three days per week, Mr. Hall
is to be compensated at the same rate as when he was a consultant to the
Company, $600 per day. Mr. Hall is also entitled to receive twenty-five
thousand (25,000) shares of the Company's common stock; 12,500 of common stock
will vest on March 15, 1997 and the remaining 12,500 shares will vest on March
15, 1998. In addition, Mr. Hall is entitled to receive warrants to purchase
fifty thousand (50,000) shares of the Company's common stock at $.40 per share.
One-quarter ( 1/4) of the warrants are to be issued on each of March 15, 1997,
1998, 1999, and 2000. The warrants are exercisable for a period of five years
from the date of issuance. The agreement also provides for severance benefits
upon termination without cause in the amount of six months' base salary.
Effective March 15, 1996, the Company entered into an exclusive employment
agreement with Mr. Richard E. Sloan under which he is to serve as the Company's
vice president of new business development. Mr. Sloan receives a base salary of
$108,000 per annum. He is also entitled to receive fifty thousand (50,000)
shares of the Company's common stock; 25,000 shares of common stock will vest
each on March 15, 1997 and the remaining 25,000 shares will vest on March 15,
1998. In addition, Mr. Sloan is entitled to receive warrants to purchase
seventy-five thousand (75,000) shares of the Company's common stock at $.40 per
share. One-quarter ( 1/4) of the warrants are to be issued on each of March
15, 1997, 1998, 1999, and 2000. The warrants are exercisable for a period of
five years from the date of issuance. The agreement also provides for severance
benefits upon termination without cause in the amount of six months' base
salary.
Under each of their contracts, Messrs. Hulsebus, Kenney, Hall, and Sloan,
may receive bonuses or other additional compensation consisting of cash, stock
or stock purchase rights as may be determined from time-to-time by the Board of
Directors. The Board of Directors has no current intention or plan to award
such additional compensation.
There are no family relationships among any directors or executive
officers.
Option Plans
- ------------
Stock Options
The Company does not presently have a stock option plan, although it
intends to institute a stock option plan for officers, directors, employees and
consultants to the Company. The purpose of such a stock option plan would be to
encourage stock ownership by current and future officers, directors, employees
and consultants to the Company, and certain other persons, judged by the
committee who would administer the plan, to be instrumental to the success of
the Company, and to give such persons a greater personal interest in the Company
achieving continued growth and success. To date the Company's Board of
Directors has not yet proposed or adopted a stock option plan.
-30-
<PAGE>
Stock Compensation Plan
Effective January 10, 1996 the Company established the 1996 Stock
Compensation Plan (the "1996 Plan") which provides for the issuance of up to
950,000 registered shares of common stock to employees, directors, consultants
and other third parties in exchange for services. To date, 381,140 shares of
common stock have been issued pursuant to the 1996 Plan. The remaining 568,860
shares under the 1996 Plan can be issued any time prior to January 10, 1998.
The Company adopted similar stock compensation plans in 1994 and 1995 covering
500,000 and 1,750,000 shares of common stock, respectively. All of these shares
of common stock with respect to each of these other stock compensation plans
were issued in their respective calendar years.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Principal Shareholders
- ----------------------
The following table sets forth information as of March 15, 1996 with
respect to the beneficial ownership of the outstanding shares of the Company's
common stock by: (i) any holder of more than five percent (5%) of the
outstanding shares; (ii) the named executive officers; (iii) the Company's
directors; and (iv) the Company's directors and executive officers as a group.
None of the Company's officers, directors or holders of five percent (5%) or
more of the outstanding common stock own any shares of preferred stock.
-31-
<PAGE>
Management and Directors
- ------------------------
<TABLE>
<CAPTION>
Name and Address of Beneficial Owner Amount and Nature of Percent of Class
- ------------------------------------ -------------------- ----------------
Beneficial Ownership /(1)/
--------------------
<S> <C> <C>
M. Lee Hulsebus 375,475 /(2)/ 4.1%
c/o Medical Device Technologies, Inc.
9191 Towne Centre Drive, Suite 430
San Diego, CA 92122
Edward C. Hall 3,825 /(3)/ *
c/o Medical Device Technologies, Inc.
9191 Towne Centre Drive, Suite 430
San Diego, CA 92122
Stephen W. Kenney 36,000 /(3) (4)/ *
c/o Medical Device Technologies, Inc.
9191 Towne Centre Drive, Suite 430
San Diego, CA 92122
Richard E. Sloan 4,730 /(3)/ *
c/o Medical Device Technologies, Inc.
9191 Towne Centre Drive, Suite 430
San Diego, CA 92122
Dr. Arthur Bradley 102,200 1.1
207 South 28th Street
Hattiesburg, MS 39401
Thomas E. Glasgow 166,805 /(5)/ 1.9
350 W. 22nd Street, Suite 103
Lombard, IL 60148
Don Arnwine 50,000 /(3) (6)/ *
The Towers at Williams Square
5215 No. O'Connor, Suite 970
Irving, TX 75039
Virgil McDonald /(7)/ 771,440 8.6
12310 Pomona Drive
Whittier, CA 90602
All officers and directors 739,035 8.1
as a group
(7) persons
</TABLE>
* Less than 1%
-32-
<PAGE>
/(1)/ The shares of common stock owned by each person or by the group, and the
shares included in the total number of shares of common stock
outstanding, have been adjusted in accordance with Rule 13d-3 under the
Securities Exchange Act of 1934, as amended, to reflect the ownership of
shares issuable upon exercise of outstanding options, warrants or other
common stock equivalents which are exercisable within 60 days. As
provided in such Rule, such shares issuable to any holder are deemed
outstanding for the purpose of calculating such holder's beneficial
ownership but not any other holder's beneficial ownership.
/(2)/ Includes 300,000 warrants exercisable at $.40 per share to acquire
300,000 shares of common stock.
/(3)/ Holdings represent less than 1% of the Company's issued and outstanding
common stock.
/(4)/ Includes 25,000 warrants exercisable at $1.00 per share to acquire 25,000
shares of common stock.
/(5)/ Includes 31,250 warrants exercisable , 25,000 at $1.00, 6,250 at $.60 per
share to acquire 31,250 shares of common stock.
/(6)/ Includes 6,250 warrants exercisable at $.60 per share to acquire 6,250
shares of common stock.
/(7)/ Not an officer or director.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Mr. Hulsebus is entitled to designate one nominee, including himself, for
election to the Company's Board of Directors, pursuant to the terms of his
employment agreement with the Company.
In June 1994, the Company issued 700,000 shares of its common stock to
SurgiSafe, Inc. ("SurgiSafe") in exchange for SurgiSafe's assignment to the
Company (the "SurgiSafe Assignment") of SurgiSafe's rights under an exclusive
sales agreement entered into with the Company on September 11, 1992 (the
"SurgiSafe Agreement"). Under SurgiSafe Agreement, SurgiSafe had the exclusive
right to sell the Company's Cell Retrieval System ("CRS") and Intracranial
Pressure Monitoring Device("ICP") and other present and future products in a
sales territory which included The Department of Defense, The Veterans
Administration, The World Health Organization and the State of California.
Under the SurgiSafe Agreement, the Company was obligated to pay SurgiSafe
commissions equal to 20% of the net sales price of sales in the sales territory
and to issue to SurgiSafe 16,667 shares of the Company's common stock. The
700,000 shares of the Company's common stock issued to SurgiSafe in June 1994
pursuant to the SurgiSafe Assignment was distributed in February 1995 to Mr.
William E. Mayer, III, the son of William E. Mayer, Jr., a member of the
Company's Scientific Advisory Board and shareholder of SurgiSafe, and Mr. B.
Roland Frasier, III, the son of B. Roland Freasier, Jr., a former director and
executive vice president of the Company. Also subsequent to the SurgiSafe
Assignment, Mr. Mayer, III, was appointed to the Company's Board of Directors.
Mr. Mayer, III, subsequently resigned as a director in 1995.
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
- --------
None
Reports on Form 8-K
- -------------------
See Form 8-K dated January 15, 1996 and January 31, 1996 and Item 8 herein.
-33-
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
MEDICAL DEVICE TECHNOLOGIES, INC.
Dated: May, 1, 1996 By:/s/ Edward C. Hall
--------------------
Chief Financial Officer, Principal
Accounting Officer
-34-
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Medical Device Technologies, Inc.
and Subsidiary (formerly
Cytoprobe Corporation)
San Diego, California
We have audited the accompanying consolidated balance sheet of Medical Device
Technologies, Inc. and subsidiary (formerly Cytoprobe Corporation) (a
development stage company) (the "Company") as of December 31, 1995 and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows for the year then ended. We have also audited the statements of
operations and cash flows for the period from June 1, 1992 through December 31,
1995, except that we did not audit these financial statements for the period
from June 1, 1992 to December 31, 1994; those statements were audited by other
auditors whose report dated February 17, 1994 expressed a qualified opinion on
those statements. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audit. Our opinion, insofar
as it relates to the amounts for the period from June 1, 1992 to December 31,
1994, is based solely on the report of other 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 consolidated financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, based on our audit and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Medical Device Technologies, Inc.
and subsidiary (a development stage company) at December 31, 1995 and the
results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles.
F-1
<PAGE>
As discussed in Note 14 to the financial statements, the Company changed
its method of computing amortization in the fourth quarter of 1995.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company's recurring losses from operations, negative
working capital and limited capital resources raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to this matter are also described in Note 1. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
/s/BDO Seidman, LLP
Los Angeles, California
January 29, 1996, except for
Notes 4 and 15 which are
as of April 1, 1996
F-2
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
CytoProbe Corporation
La Jolla, California
We have audited the accompanying consolidated balance sheets of CytoProbe
Corporation (a development stage company) and subsidiary as of December 31, 1994
and the related consolidated statements of income, changes in stockholders'
equity and cash flows for the year then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits 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 consolidated 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 audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
CytoProbe Corporation (a development stage company) and subsidiary at December
31, 1994, and the consolidated results of its operations and its consolidated
cash flows for the year then ended in conformity with generally accepted
accounting principles.
As discussed in Note 14 to the financial statements, the Company changed its
method of computing amortization in the fourth quarter of 1995.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 12 to the
financial statements, the Company is in the development stage and has no
operating revenues. This situation raises substantial doubt as to the Company's
ability to continue as a going concern. Management's plans in regard to this
situation are also described in Note 12. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
/s/ Robert Early & Company
________________________________
Robert Early & Company, P.C.
Abilene, Texas
February 17, 1995, except for Note 14 which is as of December 31, 1995
F-3
<PAGE>
MEDICAL DEVICE TECHINOLOGIES, INC. AND SUBSIDIARY
(FORMERLY CYTOPROBE CORPORATION)
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
================================================================================
<TABLE>
<CAPTION>
December 31, 1995 1994
(restated)
- -------------------------------------------------------------------
<S> <C> <C>
ASSETS (Note 2)
CURRENT ASSETS
Cash $ 306,851 $ 483,611
Inventory 147,593 -
Prepaid royalties (Note 4) 60,000 -
Prepaid expenses and other assets 28,082 -
- -------------------------------------------------------------------
Total current assets 542,526 483,611
- -------------------------------------------------------------------
PROPERTY AND EQUIPMENT:
Furniture and fixtures 112,149 75,015
Machinery and equipment 17,136 -
Equipment under capital lease 5,349 5,349
- -------------------------------------------------------------------
134,634 80,364
Less accumulated depreciation 37,309 16,563
- -------------------------------------------------------------------
NET PROPERTY AND EQUIPMENT 97,325 63,801
- -------------------------------------------------------------------
LICENSE AGREEMENTS(net of accumulated 1,858,468 1,939,299
amortization of $367,661 and $236,830)
PREPAID ROYALTIES (Note 4) 115,000 -
LOAN ORIGINATION FEES (Note 2) 117,500 -
PREPAID MARKETING COSTS (net of amortization of
$493,075 at December 31, 1994) - 125,781
OTHER ASSETS 44,341 8,341
- -------------------------------------------------------------------
$2,775,160 $2,620,833
===================================================================
</TABLE>
F-4
<PAGE>
MEDICAL DEVICE TECHINOLOGIES, INC. AND SUBSIDIARY
(FORMERLY CYTOPROBE CORPORATION)
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
================================================================================
<TABLE>
<CAPTION>
December 31, 1995 1994
(restated)
- -------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 276,366 $ 164,958
Accrued expenses 40,927 326,640
Accrued patent license cost - 50,000
Short-term notes payable, net of unamortized
discount of $384,375 (face value of $1,025,000 in 1995)
(Note 2) 640,625 50,000
Current obligation under capital lease (Note 3) 1,728 1,587
- ------------------------------------------------------------------------------------------
Total current liabilities 959,646 593,185
OTHER LIABILITIES
Capital lease obligation (Note 3) 1,755 3,400
- ------------------------------------------------------------------------------------------
COMMITMENTS (Note 4)
STOCKHOLDERS' EQUITY (Note 5)
Series I convertible preferred stock, 187,500
shares authorized, 153,750 issued and outstanding 384,375 -
Preferred stock, 10,000,000 shares authorized,
$.01 par value, 0 shares issued and outstanding - -
Common stock, $.15 par value (100,000,000 shares
authorized, 8,393,199 and 4,289,963 outstanding) 1,258,980 643,495
Stock to be issued (50,000 and 1,096,875 shares) 23,440 796,250
Additional paid-in capital 12,146,899 9,716,485
Deferred compensation (Note 4) 247,500 66,406
Accumulated deficit ($8,540,733 and $5,491,686
accumulated during the development stage through
December 31, 1995 and 1994) (12,247,435) (9,198,388)
-----------------------------------------------------------------------------------------
Total stockholders' equity 1,813,759 2,024,248
- ------------------------------------------------------------------------------------------
$2,775,160 $2,620,833
==========================================================================================
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-5
<PAGE>
MEDICAL DEVICE TECHNOLOGIES, INC. AND SUBSIDIARY
(FORMERLY CYTOPROBE CORPORATION)
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
================================================================================
<TABLE>
<CAPTION>
June 1, 1992 to
December 31,
Year ended December 31, 1995
--------------------------------
1995 1994 (Cumulative)
(restated) (restated)
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING EXPENSES:
Research and development $ 943,510 $ 778,468 $ 2,056,504
General and administrative 2,102,612 1,834,407 5,506,382
- --------------------------------------------------------------------------------------------
LOSS FROM CONTINUING OPERATIONS (3,046,122) (2,612,870) (7,562,886)
OTHER INCOME (EXPENSE):
Interest income - - 6,096
Interest expense (2,925) (2,904) (6,883)
Loss on sale marketable
securities (Note 6) - (18,655) (20,790)
Net unrealized loss on
marketable securities - - (64,500)
LOSS BEFORE DISCONTINUED OPERATIONS
AND DISPOSAL OF OIL AND GAS
OPERATIONS (3,049,047) (2,634,429) (7,648,963)
DISCONTINUED OPERATIONS - - (520,396)
LOSS FROM DISPOSAL OF OIL AND
GAS OPERATIONS (Note 7) - (371,374) (371,374)
- --------------------------------------------------------------------------------------------
NET LOSS $ (3,049,847) $ (3,005,803) $ (8,540,733)
============================================================================================
PRIMARY LOSS PER SHARE:
Loss from continuing operations $ (.45) $ (.87)
Loss from disposal of oil and
gas operations - (.12)
- ------------------------------------------------------------------------
Net loss $ (.45) $ (.99)
=========================================================================
Weighted average shares outstanding 6,714,168 3,032,813
=========================================================================
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-6
<PAGE>
MEDICAL DEVICE TECHNOLOGIES, INC. AND SUBSIDIARY
(FORMERLY CYTOPROBE CORPORATION)
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
================================================================================
<TABLE>
<CAPTION>
Additional
Preferred Stock Common Stock Paid-In
------------------------ ---------------------------
Shares Amount Shares Amount Capital
=================================================================================================================
<S> <C> <C> <C> <C> <C>
Balance, May 31, 1992 - $ - 2,859,017 $ 440,008 $ 4,252,058
Common stock issued for:
Cash - - 717,667 96,494 462,450
Research and development
and services - - 455,932 68,390 359,046
Patent and licensing costs - - 350,000 52,500 78,750
Prepaid market research - - 1,150,000 172,500 258,750
Stock to be issued - - - - 163,958
Net loss from June 1
through December 31, 1992 - - - - -
- ----------------------------------------------------------------------------------------------------------------
Balances, December 31, 1992 - - 5,532,616 829,892 5,575,012
================================================================================================================
Common stock issued for:
Cash - - 625,500 93,825 237,400
Patent and licensing costs - - 1,000,000 150,000 639,000
Research and development,
compensation, and services - - 725,000 108,750 705,294
Stock to be issued - - - - -
Net loss for 1993 - - - - -
- ----------------------------------------------------------------------------------------------------------------
Balances, December 31, 1993 - $ - 7,883,116 $ 1,182,467 $ 7,156,706
================================================================================================================
<CAPTION>
=========================================================================================================
Deferred Retained
Stock Compen- Deficit
To Be Issued sation (restated) Total
========================================================================================================
<S> <C> <C> <C> <C>
Balance, May 31, 1992 - - $ (3,706,702) $985,364
Common stock issued for:
Cash - - - 558,944
Research and development
and services - - - 427,436
Patent and licensing costs - - - 131,250
Prepaid market research - - - 431,250
Stock to be issued 75,000 - - 238,958
Net loss from June 1
through December 31, 1992 - - (778,576) (778,576)
- --------------------------------------------------------------------------------------------------------
Balances, December 31, 1992 75,000 - (4,485,278) 1,994,626
========================================================================================================
Common stock issued for:
Cash (75,000) - - 256,225
Patent and licensing costs - - - 789,000
Research and development,
compensation, and services - - - 814,044
Stock to be issued 42,000 - - 42,000
Net loss for 1993 - - (1,707,307) (1,707,307)
- --------------------------------------------------------------------------------------------------------
Balances, December 31, 1993 42,000 - $ (6,192,585) $ 2,188,588
========================================================================================================
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-7
<PAGE>
MEDICAL DEVICE TECHNOLOGIES, INC. AND SUBSIDIARY
(FORMERLY CYTOPROBE CORPORATION)
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
================================================================================
<TABLE>
<CAPTION>
Additional
Preferred Stock Common Stock Paid-In
------------------------ ----------------------------
Shares Amount Shares Amount Capital
=================================================================================================================
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1994 - $ - 7,883,116 $ 1,182,467 $ 7,156,706
Reverse stock split - - (6,569,121) (985,368) 985,368
Common stock issued for: (Note 5)
Cash - - 769,640 115,446 368,816
Research and development,
compensation and services - - 1,211,828 181,774 949,074
Patent and licensing costs - - 900,000 135,000 218,333
Conversion of debt - - 94,500 14,175 38,189
Stock to be issued - - - - -
Accrued stock issuance (Note 4) - - - - -
Net loss for 1994 - - - - -
- -------------------------------------------------------------------------------------------------------------------
Balances, December 31, 1994 - - 4,289,963 643,494 9,716,486
===================================================================================================================
Stock to be issued (Note 5) - -
Common stock issued for: (Note 5)
Cash - - 86,000 12,900 17,100
Patent and licensing costs - - 40,000 6,000 44,000
Purchases, research and development,
compensation, and services - - 1,807,561 271,135 1,291,995
Conversion of debt - - 687,500 103,125 171,875
Private placement - - 1,482,175 222,326 752,443
Accrued stock issuance (Note 4) - - - - -
Issuance of warrants (Note 5) - - - - 153,000
Issuance of preferred stock (Note 5) 153,750 384,375 - - -
Net loss for 1995 - - - - -
- ------------------------------------------------------------------------------------------------------------------
Balances, December 31, 1995 153,750 $384,375 8,393,199 $ 1,258,980 $ 12,146,899
==================================================================================================================
<CAPTION>
Deferred Retained
Stock Compen- Deficit
To Be Issued sation (restated) Total
=================================================================================================
Balance, January 1, 1994 42,000 $ - $(6,192,585) $ 2,188,588
Reverse stock split - - - -
Common stock issued for: (Note 5)
Cash (42,000) - - 442,262
Research and development,
compensation and services - - - 1,130,848
Patent and licensing costs - - - 353,333
Conversion of debt - - - 52,364
Stock to be issued 796,250 - - 796,250
Accrued stock issuance (Note 4) - 66,406 - 66,406
Net loss for 1994 - - (3,005,803) (3,005,803)
- -------------------------------------------------------------------------------------------------
Balances, December 31, 1994 796,250 66,406 (9,198,388) (2,024,248)
=================================================================================================
Stock to be issued (Note 5) 201,959 - - 201,959
Common stock issued for: (Note 5)
Cash - - - 30,000
Patent and licensing costs - - - 50,000
Purchases, research and development,
compensation, and services - - - 1,563,130
Conversion of debt - - - 275,000
Private placement (974,769) - - -
Accrued stock issuance (Note 4) - 181,094 - 181,094
Issuance of warrants (Note 5) - - - 153,000
Issuance of preferred stock (Note 5) - - - 384,375
Net loss for 1995 - - (3,049,047) (3,049,047)
- -------------------------------------------------------------------------------------------------
Balances, December 31, 1995 23,440 $247,500 (12,247,435) $1,813,759
=================================================================================================
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-8
<PAGE>
MEDICAL DEVICE TECHNOLOGIES, INC. AND SUBSIDIARY
(FORMERLY CYTOPROBE CORPORATION)
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
================================================================================
<TABLE>
<CAPTION>
INCREASE (DECREASE) IN CASH June 1, 1992 to
December 31,
Year ended December 31, 1995
------------------------------- (Cumulative)
1995 1994
(restated) (restated)
==================================================================================================
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (3,049,047) $ (3,005,803) $(8,540,733)
Adjustments to reconcile net loss
to net cash provided by operations:
Loss from discontinued operations
from January 1 through May 31, 1992 - - (101,599)
Stock paid for services 1,563,130 1,130,848 3,522,741
Compensation recognized relating to
accrued employee stock grants 181,094 66,406 247,500
Compensation recognized relating to
the issuance of warrants 153,000 - 153,000
Bad debt expense - - 394,720
Depreciation and amortization 277,358 521,486 1,022,482
Loss on disposal of fixed assets - 5,804 102,595
Reversal of litigation outstanding at
end of prior year (286,996) - (286,996)
Loss on sale of marketable securities - 18,655 48,290
Net unrealized loss on marketable
securities - - 37,000
Loss on disposal of oil and gas operations - 368,894 368,894
Increase (decrease) from changes in:
Accounts receivable - 16,906 2,515
Interest receivable - - 8,053
Amounts due from related party - - 1,682
Inventory (147,593) - (147,593)
Prepaid royalties (175,000) - (175,000)
Prepaid expenses and other assets (28,082) (8,341) (204,424)
Other assets (36,000) - (44,341)
Accounts payable 111,408 31,519 189,284
Accrued expenses and taxes 1,283 60,750 43,827
- --------------------------------------------------------------------------------------------------
Net cash used in operating activities (1,435,445) (792,876) (3,357,103)
- --------------------------------------------------------------------------------------------------
</TABLE>
F-9
<PAGE>
MEDICAL DEVICE TECHNOLOGIES, INC. AND SUBSIDIARY
(FORMERLY CYTOPROBE CORPORATION
A DEVELOPMENT STAGE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
================================================================================
<TABLE>
<CAPTION>
Increase (Decrease) in Cash June 1, 1992 to
December 31,
Year ended December 31, 1995
------------------------------ (Cumulative)
1995 1994
(restated) (restated)
=====================================================================================================
<S> <C> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES
Patent and marketing licensing costs (50,000) (89,260) (525,110)
Purchase of property and equipment (54,270) (39,689) (142,374)
Proceeds from sale of marketable securities - 55,345 110,671
Loan payments received - - 44,560
Proceeds from sale of fixed assets - - 11,634
Investment by discontinued operations - - 8,323
- -----------------------------------------------------------------------------------------------------
Net cash used in investing activities (104,270) (73,604) (492,296)
- -----------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings from related party - - 22,608
Proceeds from notes payable 1,182,500 50,000 1,282,500
Principal payments on notes payable (50,000) - (50,000)
Proceeds from common stock to be issued 201,959 754,250 1,237,167
Proceeds from issuing common stock 30,000 486,627 1,364,052
Capital lease financing (1,504) 4,987 3,483
Advances on private common
stock placement - 44,217 296,440
- -----------------------------------------------------------------------------------------------------
Net cash provided by financing activities 1,362,955 1,340,081 4,156,250
- -----------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH (176,760) 473,601 306,851
CASH, beginning of year 483,611 10,010 -
- -----------------------------------------------------------------------------------------------------
CASH, end of year $306,851 $483,611 $306,851
=====================================================================================================
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-10
<PAGE>
MEDICAL DEVICE TECHNOLOGIES, INC. AND SUBSIDIARY
(FORMERLY CYTOPROBE CORPORATION)
(A DEVELOPMENT STAGE COMPANY)
SUMMARY OF ACCOUNTING POLICIES
================================================================================
DESCRIPTION OF Medical Device Technologies, Inc. (the "Company"), is a
BUSINESS public company incorporated in Utah on February 6,
1980 and headquartered in San Diego, California. The
Company currently trades on the Nasdaq SmallCap Market
(MEDD). Prior to 1992, the Company's core business was
the exploration and production of hydrocarbons. As of
June 1, 1992, the Company re-entered the development
stage. Effective January 1, 1994, the Company completed
the divestiture of all oil and gas properties, and was
no longer in the hydrocarbon business. Since that time,
the Company has been exclusively a medical device
company. The Company changed its name in April 1995,
from Cytoprobe Corporation, to reflect the change of
focus.
The Company has developed three innovative medical
device products. The first product, the Personal Alarm
System (PAS) is a device which monitors the integrity
of infection control barriers, such as surgical gloves
and gowns worn during medical procedures. The second
product, the Cell Recovery System (CRS) is a cell
"brushing" and retrieval system using an automated
biopsy brush for the collection of specimen cells for
diagnostic purposes, primarily (but not limited to)
cancer detection. The third product, the Intracranial
Pressure Measuring System (ICP) is a diagnostic device
that measures pressure within the skull non-invasively.
The Company received FDA clearance of the PAS during
the year ended December 31, 1995 and received FDA
clearance of the CRS in March, 1996.
INVENTORY During the year ended December 31, 1995, the Company
began preliminary production of PAS device components.
The inventory balance shown is the accumulated costs of
materials at December 31, 1995.
PROPERTY AND Property and equipment are stated at cost.
EQUIPMENT Depreciation is being provided on a straight line basis
over the estimated useful lives of the related assets
which range from three to seven years.
LOAN ORIGINATION In conjunction with the Company's private placement
FEES notes payable (Note 2), the Company incurred $117,500
in loan origination fees during the year ended December
31, 1995. These fees will be amortized over
approximately five months, which is the expected term
of the notes payable as they are to be repaid upon
consummation of the proposed public offering of
convertible preferred stock.
F-11
<PAGE>
MEDICAL DEVICE TECHNOLOGIES, INC. AND SUBSIDIARY
(FORMERLY CYTOPROBE CORPORATION)
(A DEVELOPMENT STAGE COMPANY)
SUMMARY OF ACCOUNTING POLICIES
================================================================================
LICENSE The Company has entered into various license agreements
AGREEMENTS whereby the Company has acquired the exclusive
worldwide rights to commercialize, manufacture, and
sell its three products. In addition, the Company paid
finder's fees relating to two of the three products.
These costs, along with legal costs to register the
related patents, have been capitalized and are being
amortized over the estimated useful life of the license
agreement
INCOME TAXES Effective January 1, 1994, the Company adopted FAS
109 "Accounting for Income Taxes." It requires an asset
and liability approach for financial accounting and
reporting of deferred income taxes. Generally, FAS 109
allows for recognition of deferred tax assets in the
current period for the future benefit of net operating
loss carryforwards and items for which expenses have
been recognized for financial statement purposes but
will be deductible in future periods. A valuation
allowance is recognized, if on the weight of available
evidence it is more likely than not that some portion
or all of the deferred tax asset will not be realized.
The adoption of FAS 109 did not have any effect on the
financial statements of the Company.
CASH FLOWS For purposes of the statement of cash flows, the
Company considers all highly liquid debt instruments
with an original maturity of three months or less to be
cash equivalents.
ACCOUNTING The preparation of financial statements in conformity
ESTIMATES with generally accepted accounting principles requires
management to make estimates and assumptions that
affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported
amounts of revenues and expenses during the reporting
period. Actual results could differ from those
estimates.
F-12
<PAGE>
MEDICAL DEVICE TECHNOLOGIES, INC. AND SUBSIDIARY
(FORMERLY CYTOPROBE CORPORATION)
(A DEVELOPMENT STAGE COMPANY)
SUMMARY OF ACCOUNTING POLICIES
================================================================================
EARNINGS PER Earnings per share data has been computed on the
SHARE weighted average number of shares of common stock
outstanding each period. Warrants outstanding have not
been considered in the average number of shares since
the effect would be anti-dilutive. Weighted average
shares outstanding at December 31, 1995 and 1994
includes the stock to be issued.
NEW ACCOUNTING Statement of Financial Accounting Standards No. 121,
PRONOUNCEMENTS "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Dis posed of" (SFAS No.
121) issued by the Financial Accounting Standards Board
(FASB) is effective for financial statements for fiscal
years beginning after December 15, 1995. SFAS No. 121
establishes new guidelines regarding when impairment
losses on long-lived assets, which include plant and
equipment, and certain identifiable intangible assets,
should be recognized and how impairment losses should
be measured. The Company does not expect adoption of
SFAS No. 121 to have a material affect on its financial
position or results of operations.
Statements of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (SFAS No.
123) issued by the Financial Accounting Standards Board
(FASB) is effective for specific transactions entered
into after December 15, 1995, while the disclosure
requirements of SFAS No. 123 are effective for
financial statements for fiscal years beginning no
later than December 15, 1995. The new standard
establishes a fair value method of accounting for
stock-based compensation plans and for transactions in
which an entity acquires goods or services from
nonemployees in exchange for equity instruments. At the
present time, the Company has not determined if it will
change its accounting policy for stock based
compensation or only provide the required financial
statement disclosures. As such, the impact on the
Company's financial position and results of operations
is currently unknown. The Company does not expect
adoption of SFAS No. 121 to have a material effect on
its financial position or results of operations.
RECLASSIFICATIONS Certain reclassifications have been made to conform
the prior year's amounts to the current year's
presentation.
F-13
<PAGE>
MEDICAL DEVICE TECHNOLOGIES, INC. AND SUBSIDIARY
(FORMERLY CYTOPROBE CORPORATION)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
1. GOING CONCERN These financial statements have been prepared assuming
that the Company will continue as a going concern. The
Company has recurring losses from operations, negative
working capital and limited capital resources. These
conditions raise substantial doubt about the Company's
ability to continue as a going concern. Further, the
Company does not have sufficient cash flow to fund
completion of its development programs or current level
of expenses or pay $1,025,000 in notes due in December
1996.
Management plans to raise gross proceeds of
approximately $6,500,000 in capital through a public
offering of convertible preferred stock during the
second quarter of 1996. There is no assurance that the
public offering will be successful.
If the anticipated public offering of convertible
preferred stock is not completed and the Company does
not achieve certain minimum sales of the PAS device
during the next twelve months, the Company will be
required to seek alternative sources of financing,
which cannot be assured. In such event, the Company
would have to curtail product as well as research and
development plans substantially due to lack of funds.
The long-term viability of the Company is dependent on
its ability to profitably develop and market its
current products and to obtain the financing necessary
to fund its anticipated growth.
The financial statements do not include any adjustments
relating to the recoverability and classification of
recorded asset amounts or the amount of liabilities
that might be necessary should the Company be unable to
continue in existence.
F-14
<PAGE>
MEDICAL DEVICE TECHNOLOGIES, INC. AND SUBSIDIARY
(FORMERLY CYTOPROBE CORPORATION)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
2. SHORT-TERM Pursuant to a Confidential Private Placement Memorandum
NOTES PAYABLE dated October 27, 1995, between December 14, 1995 and
December 27, 1995, the Company effected a private
placement of notes and 153,750 shares of Series I
convertible preferred stock. Of the $1,025,000 of gross
proceeds, $384,375 was allocated to the preferred stock
and represents the original issue discount on the
notes. The proceeds of the private placement are being
used to provide working capital to the Company.
Notes sold in the private placement bear interest at
10% per annum and mature at the earlier of (i) the
expiration of twelve months after their issuance, (ii)
receipt by the Company of at least $3,000,000 in gross
proceeds from (a) a public or private sale of its
securities, (b) a joint venture, or (c) a licensing
agreement. The unamortized original issue discount was
$384,375 as of December 31, 1995.
On January 24, 1996, the Company completed the private
placement and issued an additional $625,000 of notes
and 93,750 shares of Series I convertible preferred
stock.
The notes issued are secured by a first priority lien
on all assets of the Company. This security interest
will terminate upon repayment of the notes.
The loan origination fees associated with the above
private placement totaled $117,500 through December 31,
1995. Subsequent to year end, an additional $62,500 in
loan fees were incurred.
During the year ended December 31, 1995, the Company
repaid a note payable in the principal amount of
$50,000 which existed at December 31, 1994.
F-15
<PAGE>
MEDICAL DEVICE TECHNOLOGIES, INC. AND SUBSIDIARY
(FORMERLY CYTOPROBE CORPORATION)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
3. CAPITAL LEASE Minimum future lease payments under a capital lease for
OBLIGATION each of the next two years and in aggregate are as follows:
<TABLE>
<CAPTION>
December 31, Amount
----------------------------------------------------
<S> <C>
1996 $ 2,214
1997 1,660
----------------------------------------------------
3,874
Less: amount representing interest 391
-----------------------------------------------------
Present value of minimum lease payments $ 3,483
====================================================
</TABLE>
4. COMMITMENTS The Company is currently leasing its offices under a three
year operating lease which ends July, 1997. Future minimum
lease payments under this and other operating leases are as
follows:
<TABLE>
<CAPTION>
December 31, Amount
----------------------------------------------------
<S> <C>
1996 $ 40,248
1997 29,364
1998 2,748
1999 2,748
2000 2,748
----------------------------------------------------
$ 77,856
====================================================
</TABLE>
Rent expense was $54,642 and $78,220 for the years ended
December 31, 1995 and 1994, respectively.
F-16
<PAGE>
MEDICAL DEVICE TECHNOLOGIES, INC. AND SUBSIDIARY
(FORMERLY CYTOPROBE CORPORATION)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
4. COMMITMENTS ROYALTY AGREEMENTS
(CONTINUED)
The Company entered into a royalty agreement when it
purchased the exclusive license and technological
rights relating to the CRS device. Under the terms of
the agreement, the Company will pay one party an amount
of $300,000 under defined payment terms beginning in
January 1996. Also, the Company will pay royalties to a
second party amounting to 5% of the average retail
sales price on all net sales, plus $100,000 in twenty
equal quarterly installments of $5,000 beginning
January 1, 1997. The Company can terminate this
agreement with 90 days written notice at which time all
patent rights will cease.
The Company entered into a royalty agreement when it
purchased the exclusive license and received the
technology and developments relating to the PAS device.
Under the terms of the agreement, the Company will pay
royalties in the amount of 5% of the net sales price of
each product for the life of the patent. Previous
consulting payments made by the Company in the amount
of $160,000 at December 31, 1995 will be deducted from
royalties at the rate of $15,000 per quarter, provided
that the minimum royalty payable in each quarter will
be $7,813. In addition, the Company entered into a
royalty agreement when it obtained the exclusive
license to the Signal Modulation Barrier Monitor, which
is a component part of the PAS. Pursuant to this
license agreement, the Company will pay royalties of 1%
of the average retail sales price on all net sales,
through the life of the future patent, when registered.
The Company has obtained FDA clearance for the PAS and
began marketing the device in the first quarter of
1996.
The Company entered into a royalty agreement when it
exercised its option to enter into an exclusive license
agreement for the ICP device. Under the terms of the
agreement, the Company will pay royalties equal to 10%
of the net sales proceeds from the ICP, with a minimum
payment of $90,000 for the year ended December 31, 1996
and $200,000 for all subsequent years through the life
of the patent. With respect to the royalties due in
1996, $15,000 is prepaid at December 31, 1995. The
Company can terminate this agreement with 90 days
written notice, at which time all patent rights will
cease.
F-17
<PAGE>
MEDICAL DEVICE TECHNOLOGIES, INC. AND SUBSIDIARY
(FORMERLY CYTOPROBE CORPORATION)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
4. COMMITMENTS Further, in accordance with a finder's agreement, the
(CONTINUED) Company is obligated to pay royalties equal to 8% of
the gross sales of the ICP, as well as to issue an
additional 2,000,000 restricted shares of common stock
to the finder when gross sales of the ICP reach
$10,000,000. The Company believes, on the advice of
counsel, that it is not obligated to pay the 8% royalty
or the 2,000,000 shares of restricted stock based on a
breach of contract by the finder, as the finder failed
to reimburse the Company for consulting fees in
accordance with the agreement.
MEDICAL ADVISORY AGREEMENTS
On January 1, 1996, the Company entered into agreements
with seven medical advisors for a two year term. The
agreements provide for 12,000 shares to be issued to
each advisor per year, issued semi-annually.
EMPLOYMENT CONTRACTS
Effective August 31, 1994, the Company entered into an
employment agreement with the Chief Executive Officer
for a four year term providing for a base salary of
$162,000 per year, in addition to 250,000 shares of
common stock to be granted at the end of two years of
employment. The agreement also provides for 200,000
warrants, exercisable after the earlier of August 31,
1996 or a public offering of stock, through August 31,
1999 at an exercise price of $1.00 per share.
Compensation expense for the years ended December 31,
1995 and 1994 is recorded for the 250,000 shares based
on the pro-rata shares earned and the market value of
the stock at the end of the period. No compensation
expense was recorded for the issuance of the warrants
since they were not issued below fair market value. A
separate severance agreement provides for severance
benefits upon involuntary termination in the amount of
three years' base salary.
F-18
<PAGE>
MEDICAL DEVICE TECHNOLOGIES, INC. AND SUBSIDIARY
(FORMERLY CYTOPROBE CORPORATION)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
4. COMMITMENTS EMPLOYMENT CONTRACTS (Continued)
(CONTINUED)
Effective August 31, 1994, the Company entered into an
employment agreement with the former Executive Vice
President for a four year term providing for a base
salary of $120,000 per year, in addition to 200,000
shares of common stock to be granted at the end of two
years of employment. The agreement also provided for
150,000 warrants, exercisable after the earlier of
August 31, 1996 or a public offering stock, through
August 31, 1999 at an exercise price of $1.00 per
share. Compensation expense for the years ended
December 31, 1995 and 1994 is recorded for the 200,000
shares based on the pro-rata shares earned and the
market value of the stock at the end of the period. No
compensation expense was recorded for the issuance of
the warrants since they were not issued below fair
market value. A separate severance agreement provided
for severance benefits upon involuntary termination in
the amount of three years' base salary.
On March 29, 1996, the Company and the former Executive
Vice President entered into a termination agreement
which terminated the existing employment and severance
agreement and settled any and all claims between the
two parties. Under the termination agreement, the
former Executive Vice President will receive twenty-
nine monthly payments of $10,000, commencing on April
1, 1996 and ending August 31, 1998. Further, the
200,000 shares of common stock discussed above will be
fully vested and available to the former Executive Vice
President as of August 31, 1996. Finally, the
provisions relating to the 150,000 warrants discussed
above remain the same.
F-19
<PAGE>
MEDICAL DEVICE TECHNOLOGIES, INC. AND SUBSIDIARY
(FORMERLY CYTOPROBE CORPORATION)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
4. COMMITMENTS EMPLOYMENT CONTRACTS (Continued)
(CONTINUED)
Effective January 4, 1995, the Company entered into an
employment agreement with the Vice President of
Marketing and Sales for a three year term providing for
a base salary of $110,000 per year, in addition to
100,000 shares of common stock to be issued on August
31, 1996. The agreement also provides for 25,000
warrants at an exercise price of $1.00 per share to be
issued on each of January 4, 1996, 1997 and 1998.
Compensation expense for the year ended December 31,
1995 is recorded for the 100,000 shares based on the
pro-rata shares earned and the market value of the
stock at the end of the period. No compensation expense
was recorded for the issuance of the warrants since
they were not issued below fair market value. The
agreement also provides for severance benefits upon
involuntary termination in the amount of six month's
base salary.
Effective March 15, 1996, the Company entered into an
exclusive employment agreement with the Vice President
of New Business Development for a three year term
providing for a base salary of $108,000 per year, in
addition to 25,000 shares of common stock which vest on
March 15, 1997 and 25,000 shares of common stock which
vest on March 15, 1998. The agreement also provides for
18,750 warrants at an exercise price of $.40 per share
to be issued on each of March 15, 1997, 1998, 1999 and
2000. The warrants are exercisable for a period of five
years from the date of issuance. The agreement also
provides for severance benefits upon involuntary
termination in the amount of six month's base salary.
Effective March 15, 1996, the Company entered into a
non-exclusive employment agreement with the Chief
Financial Officer for a three year term providing for a
base salary of $60,000 per year, in addition to 12,500
shares of common stock which vest on March 15, 1997 and
12,500 shares of common stock which vest on March 15,
1998. The agreement also provides for 12,500 warrants
at an exercise price of $.40 per share to be issued on
each of March 15, 1997, 1998, 1999 and 2000. The
warrants are exercisable for a period of five years
from the date of issuance. The agreement also provides
for severance benefits upon involuntary termination in
the amount of six month's base salary.
F-20
<PAGE>
MEDICAL DEVICE TECHNOLOGIES, INC. AND SUBSIDIARY
(FORMERLY CYTOPROBE CORPORATION)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
4. COMMITMENTS OTHER COMMITMENTS
(CONTINUED)
The Company is a defendant in a lawsuit filed by
Chandler Church & Company ("Chandler Church"). The
lawsuit demands payment of approximately $330,000 for
services rendered and/or funds that Chandler Church
alleged to have advanced. Prior to the lawsuit, the
Company had issued a substantial amount of its stock,
approximately 2,070,000 shares, to Chandler Church &
Company and its affiliates for services claimed to have
been rendered to the Company, which the Company is now
disputing. These entities assigned their claims to
Uptown Trust, and the case was subsequently dismissed
by the Superior Court of San Diego County. However,
after the dismissal, Chandler Church refiled the same
complaint. The Company has filed an answer denying the
claims in the complaint and filed a cross-complaint.
The Company believes it has meritorious defenses to
such claims.
5. STOCKHOLDERS' COMMON STOCK
EQUITY
During the year ended December 31, 1994, the Company
issued 1,096,875 shares in a private placement
offering. This stock was classified as stock to be
issued at December 31, 1994 because the Company did not
issue the shares until the offering was closed. During
the first quarter of 1995, an additional 200,000 shares
were sold. During the second quarter of 1995, the
shares were issued. As the Company decided to reduce
the purchase price from $.80 per share to $.70 per
share, an additional 185,300 shares were issued, for a
total of 1,482,175 shares. Net proceeds from the
private placement, after deducting associated costs,
amounted to $974,769.
During June and July 1995, the Company raised $275,000
from the issuance of convertible debentures. These
notes were converted into 687,500 shares of common
stock during December 1995.
During the years ended December 31, 1995 and 1994, the
Company received cash of $30,000 and $484,262 for the
issuance of 86,000 and 769,640 shares of common stock,
respectively.
F-21
<PAGE>
MEDICAL DEVICE TECHNOLOGIES, INC. AND SUBSIDIARY
(FORMERLY CYTOPROBE CORPORATION)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
5. STOCKHOLDERS' COMMON STOCK (Continued)
EQUITY
(CONTINUED) During the years ended December 31, 1995 and 1994,
other unregistered stock and stock under Form S-8
registrations were issued for services provided to the
Company. An S-8 registration allows the Company to
issue free-trading stock to employees, directors and
consultants and advisors for services rendered to the
Company.
PREFERRED STOCK
In April of 1995, the Company amended its Articles of
Incorporation to authorize 10,000,000 share of $.01 par
value preferred stock. In December of 1995, the Company
further amended its Articles of Incorporation to
authorize 187,500 of Series I Convertible Preferred
Stock. In the event that the Company fails to effect an
offering of common stock within six months after
December 14, 1995, each share of the Series I
Convertible Preferred Stock will convert into common
stock based upon the price of the Company's common
stock on June 14, 1996 (less a discount of 20%) in an
amount equal to the number of shares of common stock
equal to $5, plus any declared but unpaid dividends.
During December 1995, in conjunction with the private
placement of notes payable (Note 2), the Company issued
153,750 shares of Series I convertible preferred stock.
The shares were assigned a value of $384,375. As no
consideration was paid for the preferred stock, this
amount is considered an original issue discount and
will be amortized to interest expense over
approximately five months, which is the expected term
of the notes payable which are to be repaid upon
consummation of Company's contemplated offering of
preferred stock.
F-22
<PAGE>
MEDICAL DEVICE TECHNOLOGIES, INC. AND SUBSIDIARY
(FORMERLY CYTOPROBE CORPORATION)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
5. STOCKHOLDERS' PREFERRED STOCK (Continued)
EQUITY In connection with the private placement which
(CONTINUED) commenced during the year ended December 31, 1994 and
was completed in the second quarter of 1995, and
certain other agreements, the Company agreed to issue
warrants, each of which allowed the holder to purchase
one share of the Company's common stock at a specified
price. Details of the warrants are as follows:
<TABLE>
<CAPTION>
Number Per Share
of Exercise
Issued to Warrants Price Expires
====================================================================================
<S> <C> <C> <C> <C>
January 1, 1994 - -
Granted Private Placement 460,000 $1.00 8/98
Granted Officers 350,000 $1.00 8/99
Granted Noteholder 10,000 $1.00 9/99
------------------------------------------------------------------------------------
December 31, 1994 820,000
Granted Public relations firm 300,000 $1.00 - $2.00 6/96
Granted Officer 300,000 .40 7/00
Granted Officer 75,000 $1.00 1/03
Granted Convertible debentures 137,500 .60 2/96
Granted Private placement 58,750 $1.00 8/98
Granted Consultant 56,250 $1.00 2/00
Granted Employee 25,000 $1.00 8/00
Granted Employee 25,000 $1.00 12/00
------------------------------------------------------------------------------------
December 31, 1995 1,797,500
====================================================================================
</TABLE>
In regards to the issuance of 300,000 warrants to an
officer at $.40 per warrant during the year ended
December 31, 1995, compensation expense of $153,000 was
recorded as the fair market value of the warrants at
the measurement date. Compensation expense was not
recorded for any other issuances of warrants to
officers or employees as the fair market value of the
warrants was below the exercise price.
F-23
<PAGE>
MEDICAL DEVICE TECHNOLOGIES, INC. AND SUBSIDIARY
(FORMERLY CYTOPROBE CORPORATION)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
6. COMPENSATORY During the year ended December 31, 1995, the Company
STOCK BENEFIT adopted the Compensatory Stock Benefit Plan (the "1995
PLANS Plan") for certain technical and professional
employees and independent third parties who provide
services in connection with the development of the
Company's products or otherwise in connection with its
business. The 1995 Plan authorizes the Company to issue
up to 1,750,000 shares under the 1995 Plan. Shares may
be awarded under the 1995 Plan until December 31, 1996.
At December 31, 1995, all 1,750,000 shares were issued
under the 1995 Plan.
During the year ended December 31, 1994, the Company
adopted the Compensatory Stock Benefit Plan (the "1994
Plan") for certain technical and professional employees
and independent third parties who provide services in
connection with the development of the Company's
products or otherwise in connection with its business.
The 1994 Plan authorizes the Company to issue up to
500,000 shares under the 1994 Plan. At December 31,
1994, all 500,000 shares were issued under the 1994
Plan.
7. LOSS ON At January 1, 1994, the Company held 59,200 shares of
SALE OF Golden Triangle Royalty and Oil stock. This investment
MARKETABLE had a cost basis of $111,000 and a fair market value of
SECURITIES $74,000. This investment was being carried on the books
at the lower of cost or market which reflected an
unrealized loss of $37,000. During the year ended
December 31, 1994, this investment was liquidated at an
additional loss of $18,655.
8. LOSS FROM Effective January 1, 1994, the Company completed the
DISPOSAL OF liquidation of its oil and gas operations and their
OIL AND GAS related assets and liabilities. These consisted
OPERATIONS primarily of a small amount of cash, a note receivable
(offset by a deferred gain allowance), oil and gas
leases, and royalty payables. Consideration for this
transaction consisted of the transferee's assumption of
the potential plugging and environmental liabilities
associated with these assets and a note receivable from
a third party which proved to be worthless. The Company
recognized a loss of $371,374 as the result of this
disposition during the year ended December 31, 1994.
F-24
<PAGE>
MEDICAL DEVICE TECHNOLOGIES, INC. AND SUBSIDIARY
(FORMERLY CYTOPROBE CORPORATION)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
9. RELATED PARTY During the year ended December 31, 1995, Mr. Thomas
TRANSACTIONS Glasgow, a director of the Company, received
compensation of $25,297 for computer and other general
corporate consulting services.
In June 1994, the Company issued 700,000 shares of its
common stock to Surgisafe, Inc. ("Surgisafe") in
exchange for Surgisafe's assignment to the Company (the
"Surgisafe Assignment") of Surgisafe's rights under an
exclusive sales agreement entered into with the Company
on September 11, 1992 (the "Surgisafe Agreement").
Under the Surgisafe Agreement, Surgisafe had the
exclusive right to sell the CRS and ICP, as well as
other future products in a defined sales territory.
Under the Surgisafe Agreement, the Company was
obligated to pay Surgisafe commissions equal to 20% of
the net sales price of sales in the sales territory and
to issue to Surgisafe 16,667 shares of the Company's
common stock. The 700,000 shares of the common stock
issued to Surgisafe in June 1994 pursuant to the
Surgisafe Assignment were distributed in February 1995
to Mr. William E. Mayer, III, the son of William E.
Mayer, II, a member of the Company's Scientific
Advisory Board, and Mr. Roland Frasier, III, the son of
B. Roland Freasier, II, the Executive Vice President of
the Company. Mr. Mayer III was appointed to the
Company's Board of Directors and subsequently resigned
in 1995.
F-25
<PAGE>
MEDICAL DEVICE TECHNOLOGIES, INC. AND SUBSIDIARY
(FORMERLY CYTOPROBE CORPORATION)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
10. INCOME TAXES The types of temporary differences between the tax
bases of assets and liabilities and their financial
reporting amounts that give rise to the net deferred
tax asset and liability, and their approximate tax
effects, are as follows:
<TABLE>
<CAPTION>
December 31, 1995 1994
===========================================================================
<S> <C> <C>
Capital lease liability $ - $ 1,696
Excess tax depreciation over book (9,715) (3,871)
Investment tax credit carryforward 6,941 6,941
Net operating loss carryforwards 4,640,045 3,508,583
Valuation allowance (4,637,271) (3,513,349)
---------------------------------------------------------------------------
$ - $ -
===========================================================================
</TABLE>
Due to management not being able to conclude that it is
more likely than not that the deferred tax asset will
be realized, a valuation allowance has been recorded
for the full amount.
At December 31, 1995, the Company had approximately
$12,540,147 of federal operating loss carryovers and
$4,047,257 of state operating loss carryovers to offset
future taxable income; these carryovers will expire in
various years through 2010. As a result of a change in
ownership, federal tax rules impose limitations on the
use of net operating losses. The limitation will reduce
the amount of these benefits that will be available to
offset future taxable income each year, starting with
the year of ownership change. The dollar amount of
these limitations is indeterminable at this time.
11. FOURTH QUARTER During the fourth quarter of the year ended December
ADJUSTMENTS 31, 1995, the Company recorded net adjustments in the
AND amount of $656,796 relating to the reversal of an
TRANSACTIONS estimated loss accrual for litigation of $286,996, an
adjustment to deferred compensation of 118,969, the
recording of prepaid royalties of $120,000 the
recording of amortization expense of $130,831. The
adjustments decreased net loss by $.10 per share for
the year ended December 31, 1995.
F-26
<PAGE>
MEDICAL DEVICE TECHNOLOGIES, INC. AND SUBSIDIARY
(FORMERLY CYTOPROBE CORPORATION)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
12. SUPPLEMENTAL On December 18, 1995, $275,000 of convertible
EARNINGS PER promissory notes were converted into common stock. Had
SHARE DATA this conversion occurred on June 23, 1995, the date of
issuance, the reported net loss per common share for
the year ended December 31, 1995 would have decreased
$.02 to ($.39).
13. SUPPLEMENTAL During the year ended December 31, 1995, the Company
DISCLOSURES OF issued Series I convertible preferred stock valued at
NON-CASH $384,375 in conjunction with notes payable issued in a
OPERATING, private placement (Note 5). This amount is recorded as
INVESTING AND an original issue discount.
FINANCING
TRANSACTIONS During the years ended December 31, 1995 and 1994,
$275,000 and $52,364 of debt was converted into common
stock (Note 5).
During the years ended December 31, 1995 and 1994,
deferred compensation expense of $181,094 and $66,406
was recorded relating to accrued employee stock grants
(Note 4).
During the year ended December 31, 1995, $153,000 of
compensation expense was recorded relating to the
issuance of warrants with an exercise price below fair
market value at the date of issuance.
During the years ended December 31, 1995 and 1994,
$1,563,130 and $1,130,848 of obligations relating to
purchases and services rendered were satisfied through
the issuance of common stock.
During the years ended December 31, 1995 and 1994,
$50,000 and $353,333 of obligations relating to the
purchase of patents and marketing licenses were paid
for through the issuance of common stock.
F-27
<PAGE>
MEDICAL DEVICE TECHNOLOGIES, INC. AND SUBSIDIARY
(FORMERLY CYTOPROBE CORPORATION)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
14. Change In the fourth quarter of 1995, the Company changed its
in Accounting method of amortizing its license agreements from
Principle commencement of product shipment to the estimated useful
life of the license agreement. This method was adopted
because the Company believes it results in a better
matching of expenses with revenues. This change in
accounting method has been applied by retroactively
restating the financial statements of the Company for the
years ended December 31, 1995 and 1994 and from June 1,
1992 to December 31, 1995 (cumulative). The effects of the
changes on the consolidated statements of operations is to
increase the losses as follows:
<TABLE>
<CAPTION>
June 1, 1992
to December
31, 1995
Years ended December 31, 1995 1994 (Cumulative)
================================================================================
<S> <C> <C> <C>
Net loss:
Effect on continuing
operations $(130,831) $(117,270) $(367,661)
Effect on discontinued
operations and disposal
of oil and gas operations -- -- --
Effect on net loss (130,831) (117,270) (367,661)
Primary loss per share:
Effect on continuing
operations (.02) (.04) --
Effect on discontinued
operations and disposal
of oil and gas operations -- -- --
Effect on net loss (.02) (.04) --
</TABLE>
F-28
<PAGE>
MEDICAL DEVICE TECHNOLOGIES, INC. AND SUBSIDIARY
(FORMERLY CYTOPROBE CORPORATION)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
15. SUBSEQUENT On January 19, 1996, the Company amended its Articles
EVENTS of Incorporation to increase the authorized shares of
Series I Convertible Preferred Stock from 187,500 to
247,500. These additional 93,750 shares were issued as
a part of the completion of the Company's private
placement (see Note 2).
The 1996 Stock Compensation Plan (the "1996 Plan") was
established by the Company effective January 10, 1996.
The 1996 Plan allows for issuance of common stock to
certain technical and professional employees and
independent third parties who provide services in
connection with the development of the Company's
products or otherwise in connection with its business.
The 1996 Plan authorizes the Company to issue up to
950,000 shares under the 1996 Plan. Shares may be
awarded under the Plan until January 10, 1998. As of
April 1, 1996, 381,140 shares were issued under the
1996 Plan.
F-29
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DEC-31-1995
10-KSB AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 306,851
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 147,593
<CURRENT-ASSETS> 542,526
<PP&E> 134,634
<DEPRECIATION> 37,309
<TOTAL-ASSETS> 2,775,160
<CURRENT-LIABILITIES> 959,646
<BONDS> 1,755
0
384,375
<COMMON> 1,258,980
<OTHER-SE> 170,404
<TOTAL-LIABILITY-AND-EQUITY> 2,775,160
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,046,122
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,925
<INCOME-PRETAX> (3,049,047)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,049,047)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,049,047)
<EPS-PRIMARY> (0.45)
<EPS-DILUTED> 0
</TABLE>
