U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
X Annual Report Under Section 13 or 15(d) of the Securities
- ----- Exchange Act of 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1997
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Transition Report Under Section 13 or 15(d) of the Securities
- ------ Exchange Act of 1934 (NO FEE REQUIRED)
For the transition period from to .
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Commission file number 0-12627
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Medical Discoveries, Inc.
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(Name of small business issuer in its charter)
Utah 87-0407858
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(State or other Jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2985 North 935 East, Suite 9, Layton, UT 84041
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(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number, Including Area Code: (801) 771-0523
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Securities Registered under Section 12(b) of the Exchange Act:
Title of Each Class Name of Each Exchange on Which Registered
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None None
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Securities registered under Section 12(g) of the Exchange Act:
Common Stock
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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 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.
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The Company had no revenues from operations during the fiscal year ended
December 31, 1997.
The aggregate market value of the voting stock held by nonaffiliates of the
registrant (22,236,580 shares) is approximately $3,780,219. The aggregate market
value has been computed by reference to the average bid and asked prices of such
stock ($0.17 per share) as of February 28, 1998 (which date is within 60 days of
the filing of this Form 10-KSB/A).
The number of shares outstanding of the issuer's Common Stock as of March 17,
1998 was 23,303,630.
PART I
ITEM 1. BUSINESS OVERVIEW
THE COMPANY
Medical Discoveries, Inc. ("MDI" or the "Company")has developed a product
(hereafter "MDI-P") that appears to have the ability to destroy certain viruses
and bacteria. MDI-P may also have the ability to kill other infectious agents,
possibly including pathogenic fungi and parasites. MDI-P may possibly be used as
a sterilizing agent for medical and dental instruments. MDI-P may also
potentially be used to remove or inactivate infectious agents in human and
animal blood-derived products, such as plasma and gamma globulin. The Company
has extended its core technology to preliminary investigations of a wide variety
of "functional waters" which may have applications in the cosmetic, home water
purification and skin care markets.
The year 1997 was a year of transition for the company. It has expanded the
Board of Directors, reformed the Scientific Advisory Board, become a founding
member of the newly created Function Water Society of North America, developed
strategic alliances with key individuals in the Japanese function water
industry, become a participating member of the Japanese Functional Water
Foundation, and is preparing to enter selected target markets in the consumer
products market.
The Company remains committed to its pursuit of establishing MDI-P as an
effective liquid chemical sterilant for the sterilization of surgical
instruments, and developing MDI-P as an effective anti-bacterial, anti-viral and
anti-fungal pharmaceutical for in-vitro and in-vivo applications as its base
business.
MDI is a development stage company. The Company needs to raise additional
funding to continue development of its technology and to submit its technology
to the Food and Drug Administration(the "FDA") for approval. FDA approval is
required for commercialization of the Company's core technology.
THE PRODUCT
The Company's product is referred to as MDI-P. MDI-P stands for "Medical
Discoveries, Inc.-Pharmaceutical." In the in-vivo applications, targeted at
treating certain human diseases, the MDI-P compound would be administered either
intravenously, orally, nasally or topically as required. Electrolysis is the
method whereby a certain type of electric current is passed through a chemical
solution. The electrical current causes the chemicals in the saline solution to
alter, producing a variety of chemical compounds, such as ozone and hypochlorous
acid. Different electrical currents produce different concentrations of these
and related products. In previously published scientific literature,
electrolyzed saline solutions have been shown to have an intense microbicidal
effect.
IN VITRO applications, such as the sterilization of surgical instruments,
involve the washing and/or submersion of the instrument or material in the MDI-P
solution. In the Company's currently proposed protocol for treating human
diseases, this electrolyzed solution would be administered intravenously to a
patient in a series of injections over a two-week period. MDI-P could also
conceivably be administered orally, nasally, or topically.
Function water has received rapid and intense attention in Japan. In support of
this technology, the Japanese government has established a special organization
to study the applications for this technology. The name for this organization is
the Function Water Foundation. Japan currently has as many as 35 separate
companies developing products to make the benefits of function water available
for a wide variety of applications. The activity in Japan is an excellent
opportunity to develop key relationships that will enhance the company's
understanding and development of these technologies as MDI prepares to enter
worldwide markets in the future, either separately or in strategic alliance with
several of these companies.
PATENTS AND PATENT APPLICATIONS
MDI has been issued the following five patents:
"Electrically Hydrolyzed Salines as In Vivo Microbicides for Treatment of
Cardiomyopathy and Multiple Sclerosis", issued August 2, 1994. This is the
original patent filed by MDI.
"Apparatus for Electrolyzing Fluids", issued April 16, 1996. This allows for
patent protection for the device which manufactures MDI-P.
"Apparatus for Electrolyzing Fluids", issued October 1, 1996. This covers the
methods for using the device to generate MDI-P.
"Electrically Hydrolyzed Salines as Microbicides for In Vitro Treatment of
Contaminated Fluids Containing Blood", issued April 22, 1997. This covers the
use of MDI-P for blood and blood products sterilization.
"Electrically Hydrolyzed Saline Solution Comprising Reactive Species of Ozone
and Chlorine", issued October 7, 1997. This is a patent on the product MDI-P
produced by the Company's technology.
MDI has two other patents pending which, if allowed, will provide protection for
in vivo treatment of microbial infections and the methods used to prepare MDI-P.
In addition, the Company has made use of the Patent Treaty Cooperative to extend
its patent protection to countries in the European Union, Canada, Mexico, and
Japan.
RESEARCH AND DEVELOPMENT
MDI is a start-up company with limited resources. During the two fiscal years
ended December 31, 1996 and 1997, the Company spent $ 286,858 and $ 149,820
respectively on research and development of MDI-P. The Company intends actively
to pursue and expand its research efforts as funds will allow. The focus of the
initial research is on the use of MDI-P as a sterilizing agent for dental and
medical instruments. In the future as funds allow, the Company will also focus
its research on the use of MDI-P as a broad spectrum bactericide, anti-fungal
agent, human anti-viral agent, and a potential sterilizing agent for blood
products.
1997 RESEARCH ACTIVITIES
In spite of limited funds, the Company has conducted the following studies in
1997:
At the Company's request, The University of Nevada at Reno conducted a series of
tests comparing MDI's redesigned electrolyzer to the old electrolyzer. The test
demonstrated that the new design effectively separated the acid and alkaline
water. There was very good reproducibility from run to run. The tests also
allowed the company to develop data on the effects of time and different levels
of charge.
An independent lab conducted a large series of studies to support the
effectiveness of MDI-P on sterilizing dental equipment. Work continues on
understanding the effect of MDI-P on Candida Albacans. This work has been very
successful and has resulted in abstracts published in trande journals and a
paper published in Japan.
Work in 1998 will be dictated by the availability of funds. In vitro studies
defining the effect of MDI-P on killing various viruses are planned. If the
results are positive, the Company will commence the necessary toxicity studies
to prepare for an "investigational new drug" applications ("IND Application").
MDI will also start chemical work for MDI-P for the IND. Studies will be
continued to further define the effect of MDI-P as an antifungal and
antibaterial agent.
SCIENTIFIC ADVISORY BOARD
MDI's Scientific Advisory Board is chaired by Dr. Novick with members Bruce
DeZube, M.D. (Harvard Medical School), Dennis Winson, D.M.D. (University of
Maryland Dental School) and Thomas Asher, Ph.D. MDI's Scientific Advisory Board
in Japan, under the direction of Dr. Novick, is chaired by Shoji Kubota, Ph.D.
(The Society of Water Design), with members Asao Sumita, Ph.D. (Coherent
Technologies), Asahi Kimtamoto Ph.D. (Tokyo Institute of Technology), and Akito
Ohmura, M.D. (Teikyo University School of Medicine).
THE FUTURE
In regard to applications of MDI-P other than the direct treatment of human
diseases, MDI intends to actively pursue the potential application of MDI-P as a
sterilizing agent for medical and dental instruments in the U.S. and overseas.
MDI intends, as soon as the necessary studies are completed, to file a 510(k)
pre-market notification in this regard with the FDA. In regard to use of MDI-P
for human diseases, MDI intends to file appropriate IND Application with the FDA
for use of MDI-P. The Company has filed a pre-IND submission for the possible
use of MDI-P as an anti-HIV agent. Due to uncertainties in the development
process, a time for such filings cannot be predicted. The Company will also seek
funding to commence appropriate clinical trials on such patients upon approval
of the IND Application. Additionally, the Company intends to further investigate
the ability of MDI-P to kill certain highly resistant and pathogenic bacteria.
Also, MDI intends to continue possible cooperative research efforts with the
major pharmaceutical/biotechnology companies with respect to blood-derived
products and veterinary diseases. The results of the current preliminary
research in these areas will determine the course of future research efforts.
TECHNOLOGY PROTECTION POLICY AND DISCLAIMERS
It is the Company's policy to protect its technology by, among other means,
filing patent applications to protect technology which it considers important to
the development of its business. The Company will also rely upon trade secrets
and improvements, unpatented know-how, and continuing technological innovation
to develop and maintain its competitive position. Despite the Company's policy
to seek patent protection wherever appropriate, there can be no assurance that
the Company's patent applications will result in further patents being issued or
that, if issued, the patents will afford protection against competitors with
similar technology. There can also be no assurance that any patent issued to the
Company will not be infringed or circumvented by others or that others will not
obtain patents that the Company would need to license or circumvent. There can
be no assurance that licenses, which might be required for the Company's
processes or products, would be available on reasonable terms or that patents
issued to others would not prevent the Company from developing and marketing its
products. In addition, there can be no assurance that the patents, if issued,
would be held valid by a court of competent jurisdiction. To the extent the
Company also relies upon unpatented trade secrets, there can be no assurance
that others will not independently develop substantially equivalent proprietary
information and techniques or otherwise gain access to the Company's trade
secrets or disclose such technology.
CONFIDENTIALITY POLICY AND DISCLAIMERS
MDI, as a matter of policy, requires its employees, consultants, and advisors to
execute a confidentiality agreement upon the commencement of an employment or
consulting relationship with the Company. The Company also, as a matter of
policy, obtains such confidentiality agreements from appropriate independent
parties. The agreements provide that all confidential information developed or
made known to the individual during the course of the relationship shall be kept
confidential and not be disclosed to others except in specified circumstances.
In the case of employees and certain consultants, the agreements contain
non-competition clauses and provide that all inventions conceived by the
individual shall be the exclusive property of the Company. There can be no
assurance, however, that these agreements will provide meaningful protection for
the Company's trade secrets in the event of unauthorized use or disclosure of
such information.
COMPETITION
MDI's preliminary tests of MDI-P as a sterilizing agent have shown that
sterilization of "contaminated" dental handpieces can be accomplished in six
minutes or less. Moreover, MDI-P is a non-toxic sterilizing agent, in contrast
to some of the techniques currently in the marketplace that use toxic chemicals
or toxic gas. Based on these preliminary tests, MDI's management believes that
MDI-P has the potential to be competitive in the sterilization marketplace.
Nevertheless, future sterilization techniques may be developed that could
compete directly with MDI-P.
COMPETITION GENERALLY. The biotechnology and pharmaceutical industries are
characterized by rapidly evolving technology and intense competition. The
Company's competitors include major pharmaceutical, chemical, and specialized
biotechnology companies, many of which have financial, technical, and marketing
resources significantly greater than those of the Company . Fully integrated
pharmaceutical companies, due to their expertise in research and development,
manufacturing, testing, obtaining regulatory approvals, and marketing, as well
as their substantially greater financial and other resources, may be the
Company's most formidable competitors. In addition, acquisitions by such
pharmaceutical companies could enhance the financial and marketing resources of
smaller competitors. Furthermore, colleges, universities, governmental agencies,
and other public and private research organizations will continue to conduct
research and possibly market competitive commercial products on their own or
through joint ventures. These institutions are becoming more active in seeking
patent protection and licensing arrangements to collect royalties for use of
technology that they have developed. These institutions also will compete with
the Company in recruiting and retaining highly qualified scientific personnel.
If and when MDI obtains regulatory approval for any of the uses of MDI-P, it
must then compete for acceptance in the marketplace. Given that such regulatory
approval, especially in the United States, may take a number of years, the
timing of the introduction of MDI-P and other products to the market is
critical. Other safe and effective drugs and treatments may be introduced into
the market prior to the time that the Company is able to obtain approval for the
commercialization of MDI-P. In addition, even after such regulatory approval is
obtained, competition among products approved for sale may be affected by, among
other things, product efficacy, safety, reliability, availability, price, and
patent position. There can be no assurance that MDI-P will be competitive if and
when introduced into the marketplace for any of its possible uses.
GOVERNMENT REGULATIONS
REGULATIONS GENERALLY. The Company's use of the MDI-P solution in the treatment
of HIV and for other human or IN VITRO uses is subject to extensive regulation
by United States and foreign governmental authorities. These regulations apply
not only to the use of MDI-P itself, but also to the manufacture of the
electrolyzer used to create MDI-P. In particular, pharmaceutical treatments are
subject to rigorous preclinical and clinical testing and other approval
requirements by the FDA in the United States under the federal Food, Drug and
Cosmetic Act and by comparable agencies in most foreign countries. Various
federal, state and foreign statutes also govern or influence the manufacture,
labeling, storage, record keeping, and marketing of such products.
Pharmaceutical manufacturing facilities are also regulated by state, local, and
other authorities. Obtaining approval from the FDA and other regulatory
authorities for a new drug or treatment may take several years and involve
substantial expenditures. Moreover, on going compliance with these requirements
can require the expenditure of substantial resources. Difficulties or
unanticipated costs may been countered by the Company or marketing partners in
their respective efforts to secure necessary governmental approvals, which could
delay or preclude the Company or its marketing partners from marketing MDI-P.
GOVERNMENT APPROVALS NEEDED FOR COMMERCIALIZATION. For in vivo uses, MDI must
conduct preclinical studies to prepare its IND application. If the FDA accepts
the IND application, the Company would be allowed to commence a series of
clinical trials. Each clinical study must be evaluated by an independent
institutional review board ("IRB"). Data from preclinical testing and clinical
trials of MDI-P against HIV or as an anti-bacterial agent may eventually be
submitted to the FDA in a "New Drug Application" ("NDA") for marketing approval.
After the FDA grants approval for the NDA, initial marketing efforts may begin.
Each step of the approval process can involve considerable time, money, and
effort. At any point, approvals may be withdrawn if compliance with regulatory
standards are not maintained. For in vitro uses, the FDA process is
significantly less complicated and time consuming. Because the use of MDI-P as a
sterilizing agent does not require the injection of this "new drug" in a human
patient, MDI is required by the FDA regulations only to demonstrate in
laboratory tests that MDI-P is an effective sterilizing agent. This data is
required to be filed with the FDA by MDI in the form of a "510(k) Application."
This 510(k) Application is subject to FDA approval, but the time required for
such approval is considerably less than the time required for the approval of a
"new drug" because extensive clinical data is not required. Given appropriate
funding, MDI's management believes that MDI will be able to obtain approval from
the FDA for the use of MDI-P as a sterilizing agent possibly before June, 1999,
although there is no guarantee that such approval can be obtained within that
time. Again, the FDA's approval may be withdrawn if any regulatory standards are
not maintained.
OTHER GOVERNMENTAL REGULATIONS. In addition to regulations enforced by the FDA,
the Company is also subject in the United States to regulation under the
Occupational Safety and Health Act, the Environmental Protection Act, the Toxic
Substances Control Act, the Resource Conservation and Recovery Act, and other
present and potential federal, state and local regulations. Because the Company
does not currently produce, use, or otherwise handle hazardous chemicals or
produce pollutants in regulated amounts, it is not subject to significant costs
of compliance with these environmental laws.
CONTINUING RESEARCH
For its core technologies, MDI has not yet commenced any operations other than
research and development with respect to MDI-P. Initially, the Company intends
to focus its continuing research on commercializing the use of MDI-P as a
sterilizing agent for medical and dental instruments.
LICENSING, DISTRIBUTION, AND MANUFACTURING
Given the preliminary nature of the Company's research, and given the
uncertainty of regulatory approvals and market viability, management of the
Company has not yet determined the best course for commercialization of MDI-P in
its various potential applications. MDI may seek to commercialize the potential
applications of MDI-P either directly or indirectly in contracts with third
parties, including larger, established pharmaceutical companies.
EMPLOYEES AND OFFICERS
MDI is currently a development stage company that conducts research primarily
through third parties. It currently has one full-time paid employee who is not
an officer. The officers of the Company are Lee F. Kulas, President and Chief
Executive Officer, William J. Novick, Ph.D., Vice President and Chief Technical
Officer, and Mr. Marlin Toombs, Vice President of Investor Relations and
Secretary. Mr. Kulas and Mr. Toombs each devote their full time to MDI's
affairs. Generally, the officers of the Company have not been paid any regular
salaries or bonuses, although the Company occasionally has authorized
compensation to certain officers for services rendered and expenses personally
incurred on the Company's behalf. The Company accrues amounts due these officers
under agreements with the officers. This compensation has generally taken the
form of a waiver of the cash exercise price for outstanding stock options to
these individuals (see "Executive Compensation" below). It is anticipated that
in 1998, given an appropriate level of funding, the Company will begin to pay
appropriate current and accrued salaries to its officers.
ITEM 2. PROPERTIES
The Company's principal place of business is located in a small commercial
office space at 2985 North 935 East, Suite 9, Layton, Utah 84041. The lease on
the Company's offices expires on April 30, 2000, with a remaining lease
obligation of approximately $25,200. This space is currently used as corporate
headquarters and starting in the first quarter of 1998, will serve as the
company's base of operations as the company enters consumer markets.
ITEM 3. LEGAL PROCEEDINGS
NO LEGAL PROCEEDINGS. The Company is not currently involved in any legal
proceedings. In November 1997, MDI negotiated a general release with Spira and
Associates in exchange for 800,000 shares of common stock. The Company had
retained Spira and Associates in 1995 to assist in funding and to provide
general consulting in exchange for two issuances of stock (the first issuance
due upon execution of the agreement and the second due in the future based on
certain criteria). The Company and Spira and Associates had terminated their
relationship in 1996 and the second stock issuance of 1,240,000 shares was
voided. Spira and Associates has agreed to accept 800,000 shares of common stock
in lieu of the second issuance of stock due under the original agreement.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
Part II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the over-the-counter("OTC") system under
the symbol "MLSC". The following table sets forth, for the periods indicated,
the closing high and low bid prices for the Common Stock. The prices represent
inter-dealer prices, without adjustment for retail markups, markdowns, or
commissions and may not represent actual transactions. The information has been
provided by the National Quotation Bureau, Inc.
BID PRICE
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HIGH LOW
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Fiscal Year Ended December 31, 1997
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First quarter 0.600 0.210
Second quarter 0.470 0.200
Third quarter 0.400 0.180
Fourth quarter 0.330 0.140
Fiscal Year Ended December 31, 1996
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First quarter 1.125 0.500
Second quarter 1.750 0.625
Third quarter 0.875 0.438
Fourth quarter 0.625 0.250
On December 31, 1997, there were approximately 1,061 record owners of the
Company's Common Stock. The Company estimates that the number of beneficial
holders is in excess of 2,000.
The Company has never paid a cash dividend and does not anticipate the payment
of cash dividends in the foreseeable future. Earnings are expected to be
retained to finance the Company's growth. Declaration of dividends in the future
will remain within the discretion of the Company's Board of Directors, which
will review its dividend policy from time to time.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATION
RESULTS OF OPERATIONS: FISCAL YEAR 1997 COMPARED TO FISCAL YEAR 1996. The
Company had no revenue in either 1997 or 1996. The Company has interest revenue
of $ 5,829 in 1997 compared to $11,974 in 1996 due to capital raised by the
Company in 1996. Funds raised in equity offerings were placed in low-risk
interest-bearing accounts until needed by the Company and resulted in higher
interest income in 1996. The Company spent $149,820 on R&D in 1997 compared to
$286,858 in 1996, a decrease of 48%. Most research funds were expended in
identifying, establishing, and developing scientific and engineering expertise
in Japan, and securing distribution relationships with selected Japanese
manufacturers. G&A Costs were $619,671 in 1997 compared to $807,002 in 1996. G&A
costs in 1997 included the value of stock paid to investment advisors of
approximately $200,000. The Company interest expense of $68,100 compared to
$46,566 in 1996. The increased interest expense resulted from increased debt
incurred by the Company in 1997.
LIQUIDITY. The Company's net working capital position (current assets less
current liabilities) decreased to negative $1,283,166 in 1997 from negative
$616,129 in 1996, due primarily to increased short-term borrowings and accrued
expenses. Of the Company's $1,325,385 in current liabilities, approximately
$250,000 results from legal services, approximately $264,000 results from dated
payables from a predecessor company, $101,000 results from short-term borrowings
from shareholders, and approximately $378,000 results from accrued liabilities
to officers and employees. None of these four groups (holding a total of
approximately $993,000 in current liabilities) has made or is expected to make a
demand for cash payments until the Company's cash position improves.
PRIVATE PLACEMENTS CLOSED. The Company closed the following private placements
during 1997:
During the first quarter of 1997, the Company sold 53,846 shares of stock for
$35,000 at $0.65 per share. The investor in this offering also received a
warrant to acquire three shares in the future of every one share acquired
currently. Accordingly, the Company issued warrants to these investors allowing
them to acquire an aggregate of 161,538 shares at $3.00 per share over the next
three years. This purchase completed an equity investment approved by the Board
in the first quarter of 1996.
During the first quarter of 1997, The Company sold 50,000 shares of stock for
$10,000 at $0.20 per share. The investor in this offering received no warrants.
During the second and third quarters of 1997, the Company sold 300,000 shares of
stock for $150,000 at $0.50 per share. Each investor in this offering also
received a warrant to acquire two shares in the future of every one share
acquired currently. Accordingly, the Company issued warrants to these investors
allowing them to acquire an aggregate of 600,000 shares at a price to be
determined per share over the next three years.
During the fourth quarter of 1997, a beneficiary of the MDI Investors Trust (the
"Trust") elected to convert a note for $25,000 to the Trust to common stock at
$0.25 per share. The investor received 100,000 shares of stock for the
conversion of the note to equity.
ADDITIONAL FUNDING IS REQUIRED. The Company's planned research and testing will
require substantial additional funds. At this time, the Company does not have
sufficient cash to support all the required testing for the projects described
above. As part of its plan to meet future cash needs, the company intends in the
first and second quarters of 1998 to establish a consumer products division
called "MDI Healthcare Systems" to sell a variety of cosmetic, skin care and
water purification systems. Management intends to raise substantial additional
funds in both private and possibly public stock offerings in the future in order
to meet its future funding requirements. Additionally, MDI will seek licensing
and research funds from the companies with whom MDI may establish a
relationship. As additional funds are raised or revenues received, the Company
intends to progress FDA-required compliance testing for submission of certain
FDA applications for pharmaceutical products and initiate commercialization of
non-regulated consumer products in the cosmetics, skin care and consumer water
purification systems, and to commence paying salaries to its officers. The
Company also intends at that time to hire additional technical and
administrative personnel. The bulk of any additional funding will likely be
spent on continued research, testing, and patent protection with respect to
MDI-P.
ITEM 7. FINANCIAL STATEMENTS
The financial statements are filed at the end of this report and are
incorporated herein by reference.
ITEM 8. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Not applicable.
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 following table identifies the name, ages, and positions of all directors,
officers, and persons nominated by management to become a director.
NAME AGE POSITION
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David Walker 53 Director, Chairman of the Board
Lee F. Kulas 44 Director, President and Chief
Executive Officer
Marlin N. Toombs 66 Director, Vice President of
Investor Relations, and Secretary
Dr. William J. Novick, Jr. 66 Director, Vice President,Chief Technical
Officer
Alvin Zidell 68 Director
Paul Griesgraber 46 Director
Aaron Etra 52 Director
Agostino Vittadini 49 Director (nominated)
All current directors are serving one-year terms and are subject to re-election
at the annual meeting of shareholders. Officers are elected to serve, subject to
the discretion of the Board, until their successors are appointed.
David Walker was appointed to the Board of Directors on May 2, 1996 and was
appointed Chairman of the Board on May 10, 1997. He represents a group of
investors who recently invested in the Company in a private stock offering. He
has been general manager of Sunheaven Farms in Prosser, Washington (a twelve
thousand acre agricultural operation) for twenty years. Mr. Walker has a degree
in economics from Brigham Young University.
Lee F. Kulas has been President, Chief Executive Officer, and a Director since
April 1997. Mr. Kulas was formerly President and CEO of BioWave Research, Inc.,
a development stage biotechnology corporation involved in medical sterilization.
Previously, Mr. Kulas had been President, CEO and Director of ADACHI (USA),
Inc., a USA based trading company engaged in developing distribution
relationships, product development and acquisitions for its Japanese parent
company. Prior to joining ADACHI (USA), Mr. Kulas was the founder, President and
CEO of Applied Vascular Engineering, (NASDAQ:AVEI), a start-up medical
production venture located in Santa Rosa, California. Mr. Kulas has over twenty
years' experience in management, marketing, sales, business development, and
start-up ventures, and has broad based experience in medical technology and
business domestically and internationally.
Marlin Toombs has been a Director and the Secretary for the Company since August
6, 1992. He has served as Vice President for Investor Relations since February
21, 1994. Mr. Toombs has also served as marketing director for International
Marketing, Inc.
from 1985 to 1989.
Dr. William J. Novick, Jr. has over thirty years' experience in the
pharmaceutical industry. Dr. Novick received his doctoral degree from Duke
University in Physiology-Pharmacology with a minor in Biochemistry. For 23
years, Dr. Novick has held position of increasing responsibility with
Hoechst-Roussel Pharmaceuticals, Inc. Prior to his retirement in 1993, Dr.
Novick was Senior Director, International Products Development for ten years. He
has been cited in 64 publications, where he was named as principal author in 12
of these. Additionally, Dr. Novick is named in 11 patents. Dr. Novick has
lectured in various medical schools throughout the United States and Puerto
Rico, and internationally in the Soviet Union, India, Italy, France, Germany,
and England. Dr. Novick has also consulted on various projects and research for
Johnson & Johnson, Fuji Pharmaceuticals, Forrest Labs, Roussel-UCLAF, Paris,
Park Davis, Apex Pharmaceuticals, and Pfizer. In addition to his duties as the
Company's Chief Technical Officer, Dr. Novick chairs the Medical Scientific
Advisory Board.
Alvin Zidell has been a Director of the Company since December 1, 1993. Since
February 1, 1996, Mr. Zidell has served as Interim President of the Company.
Since April 1, 1989, Mr. Zidell has acted as President of AZ Healthcare Group, a
company which develops and sells laser machines. Since April 1, 1992, Mr. Zidell
has also acted as a vice president of Dal-Tex Recycling, a paper recycling
company which employs approximately 48 people.
Paul Griesgraber has studied at the University of Southern California and the
London School of Economics and University College. In his academic pursuits, his
area of specialization was in the field of international business relations. He
has worked as a consultant partner, and agent and as a business negotiator in
sponsorship agreement in Japan, Europe, and the United States.
Aaron Etra, Esq. has been, President of Investors & Developers Associates, Inc.,
a corporation engaged in the following activities: merchant developers of
commercial, residential and industrial property in the U.S.; brokerage and
property management; managing and financing ventures internationally; domestic
and international trading and commerce; technology transfer; business advisors
and counselors. Previously, Mr. Etra was an attorney with Fried, Harris, Shriver
& Jacobson (New York and London), and Etra & Etra (New York). Additionally, he
has served as Managing Director, International Advisory Group-New York and
London; Hollander Concern-Stockholm, Paris, London. Mr. Etra also served in the
Cabinet of Director-General, International Labor Organization, Geneva,
Switzerland. Mr. Etra has been a lecturer at Columbia University (New York),
University of Malawi (Blantrye, Malawi) and the Center for International Studies
(New York University). Mr. Etra received his Juris Doctorate in law from
Columbia University, his LL.M. from New York University, and his B.A. for Yale
University, and studied at the Hague Academy of International Law. Mr. Etra also
serves as a director and officer of several U.S., Dutch, U.K., and Australian
companies engaged in industrial, retailing, trading, licensing, property and
financial services.
Agostino Vittadini has over twenty-five years experience in all phases of
international marketing, including product research and development,
advertising, merchandising, distribution and market development. Mr. Vittadini
brings a unique combination of engineering expertise and understanding of the
Company's technologies, as well as demonstrated success in the consumer products
marketing for over-the-counter health and beauty products. Mr. Vittadini has
also been associated with Adrienne Vittadini cosmetics and fashion company.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Securities and Exchange Act of 1934 requires the Company's
executive officers and directors, and persons who beneficially own more than ten
percent of the Company's stock, to file initial reports of ownership and reports
of changes in ownership with the Securities and Exchange Commission. Officers,
directors and greater than ten-percent owners are required by applicable
regulations to furnish the Company with copies of all Section 16(a) forms that
they file.
Based solely on a review of the copies of such forms furnished to the Company or
written representations from certain persons, the Company believes that during
the 1996 fiscal year all filing requirements applicable to its current officers
and directors were complied with.
ITEM 10. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
The following table sets forth the annual compensation for services rendered by
certain officers for the fiscal years indicated.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
Other
Annual
Name and Position Year Salary Bonus Comp
- ---------------------- --------- -------- -------- -------------
Lee F. Kulas Fiscal 97 -0- -0- $90,000 (1)
President and Chief Fiscal 96 N/A N/A N/A
Executive Officer Fiscal 95 N/A N/A N/A
Marlin Toombs Fiscal 97 -0- -0- $60,000 (2)
Vice President of Fiscal 96 -0- -0- $60,000 (2)
Investor Relations Fiscal 95 -0- -0- $60,000 (2)
and Secretary
William Novick Fiscal 97 -0- -0- $40,000 (3)
Chief Technical Fiscal 96 N/A N/A N/A
Officer Fiscal 95 N/A N/A N/A
William D. Welch Fiscal 97 -0- -0- -0-
Interim President and Fiscal 96 -0- -0- -0-
Vice President of R&D Fiscal 95 -0- -0- -0-
(resigned)
John J. Carella (4) Fiscal 97 N/A N/A N/A
CFO Fiscal 96 N/A N/A N/A
(resigned) Fiscal 95 -0- -0- $ 4,687 (5)
(1) During 1997, Mr. Kulas accrued salary of $90,000 which was not paid by
the company.
(2) During each of the years of 1997, 1996, and 1995, Mr. Toombs was given the
right to exercise stock options for 60,000 shares (accruing at 5,000 shares per
month) at $1.00 per share, without the payment of the $60,000 exercise price. He
has not exercised options for any shares from the 1996 grant.
(3) During 1997, Dr. Novick accrued salary of $40,000 which was not paid by the
company.
(4) CFO from June 1995 to March 9, 1996.
(5) During 1995, Mr. Carella earned 1,500 shares per month for five months ended
December 31, 1995 for an aggregate of 7,500 shares. Assuming that these shares
are issued as of December 31, 1995 at an the fair market value at that date of
$0.625 per share, Mr. Carella's total compensation is $4,687.
The following table sets forth all long-term compensation and all other
compensation for the above-named executive officers for the fiscal years
indicated.
SUMMARY COMPENSATION TABLE CONTINUED
LONG-TERM (OPTIONS/SARS) AND ALL OTHER COMPENSATION
All other
Name and Position Year Options/SARS Compensation
- --------------------- --------- --------------- ------------------
Lee F. Kulas Fiscal 97 (1)
President and Chief Fiscal 96 N/A
Executive Officer Fiscal 95 N/A
Marlin Toombs Fiscal 96 200,000 (2) None
Vice President of 335,000 (3)
Investor Relations Fiscal 95 None None
Fiscal 94 None None
William Novick Fiscal 97 150,000 (4)
Chief Technical Fiscal 96 N/A
Officer Fiscal 95 N/A
William Welch Fiscal 97 None None
Vice President of R&D Fiscal 96 Expired (5) None
(resigned) Fiscal 95 None None
John J. Carella (6) Fiscal 97 N/A N/A
CFO (resigned) Fiscal 96 None None
Fiscal 95 None None
(1) A stock option grant is currently being negotiating which will result in
options granted for an as-yet undetermined number of shares.
(2) Options granted at $0.25 per share to expire on December 31, 2001
(3) Options previously granted at $1.00 per share which expired on
December 31, 1996. The expiration date is extended to December 31, 1999.
(4) Options granted at $0.25 per share to expire on April 30, 2002
(5) Options previously granted to Dr. Welch were not exercised upon his
resignation and have therefore expired.
(6) CFO from June 1995 to March 9, 1996.
No officers or directors of the Company exercised any options or SARS in fiscal
1997.
COMPENSATION OF DIRECTORS
The Company has no standard arrangements to compensate directors of the Company.
The compensation previously described for Marlin Toombs in the section captioned
"Executive Compensation" includes compensation for his services as a director of
the Company.
As previously described above, in footnote 2 to the Summary Compensation Table
in the section "Executive Compensation," the Company has granted to Mr. Toombs
the right to exercise Company stock options that were previously granted to him
at the rate of 5,000 shares per month without the payment of the $1.00 exercise
price in consideration for services rendered and expenses he personally incurred
as an officer on behalf of the Company. Pursuant to this arrangement, Mr. Toombs
acquired 30,000 shares in 1995 and no shares in 1996. Mr. Toombs has the right
to acquire an additional 60,000 shares for 1996.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
PRINCIPAL SHAREHOLDERS
The following table sets forth the holdings of Common Stock (the Company's sole
class of stock) as of March 31, 1998 by (i) each person who held of record, or
was known by the Company to own beneficially, more than five percent of the
outstanding Common Stock of the Company, (ii) each director, (iii) each director
nominee, and (iv) all directors and officers as a group. Unless otherwise
indicated, all shares are owned directly. Common Stock that is "beneficially
owned" includes all the Common Stock that the person has the right to acquire
within 60 days of March 31, 1998, and stock for which the person has voting
rights alone. The percentage ownership for any person assumes that all the stock
that could be acquired by that person, by option or warrant exercise or
otherwise, is in fact outstanding and that no other stockholder has exercised a
similar right to acquire additional shares. The number of shares of stock in
this table is 29,138,297 which includes 22,970,297 shares outstanding on March
31, 1998 plus all shares represented by options or warrants currently held by
the directors listed in the table.
BENEFICIAL OWNERS OF COMMON STOCK
Names and Addresses Amount of Percentage
of Certain Beneficial Owners Beneficial Ownership of Class
- ----------------------------- -------------------- ----------
David Walker
Director
c/o Medical Discoveries, Inc. 91,538 0.31%
Lee Kulas
Director/President
c/o Medical Discoveries, Inc. 0 (1) 0.00%
Marlin Toombs
Director/Vice President
c/o Medical Discoveries, Inc. 1,643,100 (2) (3) 5.64%
Alvin Zidell
Director
c/o Medical Discoveries, Inc. 1,107,000 (2) (4) 3.80%
Paul Griesgraber
Director
c/o Medical Discoveries, Inc. 5,008,412 (5) 17.19%
William Novick, Jr.
Director/Vice President
c/o Medical Discoveries, Inc. 160,000 0.55%
Agostino Vittadini
Director/Director of Marketing
c/o Medical Discoveries, Inc. 100,000 0.34%
Aaron Etra
Director
c/o Medical Discoveries, Inc. 0 0.00%
Directors and Executive Officers
as a Group (8 persons) 8,110,050 27.83%
(1) As noted in the compensation section above, a stock option grant is
currently being negotiating which will result in options granted for an as-yet
undetermined number of shares.
(2) Includes shares to which the shareholder has voting rights under a Stock
Purchase Agreement ("SPA") with a former director of the Company. The SPA is for
2,800,000 shares purchased in 40 quarterly installments by buyers (including two
individuals not on table). Each buyer receives 1/4 of shares. Shares are held by
an escrow agent. Shares are released in groups of 70,000 on payment of each
installment. Voting proxy for balance of shares held by escrow agent has been
granted to the buyers. If buyers default any shares with the escrow agent revert
to the seller and proxy for those shares is canceled.
(3) Includes 338,680 shares owned directly; 331,920 shares owned in a family
partnership in which Mr. Toombs is a general partner; 437,500 shares for which
Mr. Toombs has voting rights under the SPA referred to in footnote (2) above;
and options to purchase 535,000 shares that are currently exercisable. Excludes:
all shares owned by Mr. Toombs' children (other than through the family
partnership noted above), for which Mr. Toombs disclaims beneficial ownership.
(4) Includes: 296,500 shares owned directly; 437,500 shares for which Mr. Zidell
has voting rights under the SPA referred to in footnote (2) above; and options
to purchase 373,000 shares that are currently exercisable. Excludes: all shares
held by children and other relatives of Mr. Zidell, for which Mr. Zidell
disclaims beneficial ownership.
(5) Includes: warrants to purchase 5,000,000 at $5.00 per share. Excluding these
warrants would result in beneficial ownership to Mr. Griesgraber of 0.03% and
beneficial ownership for Directors and Executive Officers as a group of 10.67%.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits Required by Item 601 of Regulation S-B.
The following are exhibits to this Form 10-KSB:
EXHIBIT
NUMBER DESCRIPTION
- -------- ----------------------------------------------------------------
3.1 Articles of Incorporation, as amended June 14, 1994. (1)
3.2 Bylaws, as amended June 14, 1994. (1)
10.1 1993 Incentive Plan, effective April 1, 1993. (1) (2)
10.2 Form of Stock Option Grant under 1993 Incentive Plan. (1) (2)
10.3 Settlement Agreement, dated October 12, 1995, between Dr.
Robert E. Morrow and the Company re settlement of lawsuit. (3)
10.4 Agreement, dated March 26, 1996, between Dr. Robert E. Morrow
and the Company re termination of royalties. (4)
10.5 Engagement Agreement, dated June 15, 1995, between Robert A.
Spira and the Company re financial advisory
services. (4)
(1) These exhibits are incorporated by reference to the Company's Form 10-KSB
for the fiscal year ended December 31, 1994, to which these exhibits were filed
as exhibits with the same exhibit numbers as shown above.
(2) These exhibits are management or compensatory plans, contracts or
arrangements required to be filed as exhibits.
(3) This exhibit is incorporated by reference to the Company's Form 8-K, dated
October 12, 1995, to which it was originally filed as "Exhibit 10.1."
(4) These exhibits are incorporated by reference to the Company's original
filing of Form 10-KSB for the Fiscal Year ended December 31, 1995, to which
these exhibits were filed as exhibits with the same exhibit numbers as shown
above.
The Company has filed no 8-k reports during the since the
previous 10KSB/a filing.
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MEDICAL DISCOVERIES, INC.
Date: March 30, 1998 /s/ Lee F. Kulas
---------------------------
President and Chief Executive Officer
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and
Stockholders of Medical Discoveries, Inc.
We have audited the accompanying balance sheet of Medical Discoveries, Inc., (a
development stage company) as of December 31, 1997 and 1996, and the related
statements of operations, stockholders' deficit and cash flows for the two years
ended December 31, 1997 and cumulative amounts since inception. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our 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 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 financial statements referred to above present fairly, in
all material respects, the financial position of Medical Discoveries, Inc., (a
development stage company) as of December 31, 1997, and the results of its
operations and its cash flows for the two years then ended and cumulative
amounts since inception in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in note 2, the Company's
significant losses, lack of significant revenue and a stockholders' deficit
raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in note 2. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
TANNER+Co.
Salt Lake City, Utah
March 13, 1998
1
<PAGE>
<TABLE>
<S> <C> <C>
MEDICAL DISCOVERIES, INC.
(A Development Stage Company)
Balance Sheet
December 31,
- ----------------------------------------------------------------------------------------------------------
1997 1996
----------------------------------
Assets
Current assets:
Cash $ 764 $ 25,307
Current portion of note receivable - related party 30,586 46,785
Prepaid expenses 10,869 10,779
----------------------------------
Total current assets 42,219 82,871
----------------------------------
Note receivable - related party - 30,586
Furniture and equipment 72,304 74,231
Less accumulated depreciation (23,507) (16,181)
----------------------------------
Net furniture and equipment 48,797 58,050
Other assets 3,160 1,170
----------------------------------
Total assets $ 94,176 $ 172,677
==================================
- ----------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Deficit
Current liabilities:
Accounts payable $ 916,734 $ 670,166
Accrued interest 14,360 26,039
Current maturities of notes payable 102,591 2,795
Current maturities of convertible notes payable 291,700 -
----------------------------------
Total current liabilities 1,325,385 699,000
----------------------------------
Notes payable - 2,008
Convertible notes payable - 316,700
Commitments and contingencies - -
Stockholders' deficit:
Common stock - no par value, authorized 100,000,000 shares,
22,970,297 shares and 21,658,423 shares issued
and outstanding in 1997 and 1996, respectively 6,507,317 6,121,733
Accumulated deficit (7,626,026) (6,794,264)
Subscription receivables (112,500) (172,500)
----------------------------------
Total stockholders' deficit (1,231,209) (845,031)
----------------------------------
$ 94,176 $ 172,677
==================================
- ----------------------------------------------------------------------------------------------------------
1
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C>
MEDICAL DISCOVERIES, INC.
(A Development Stage Company)
Statement of Operations
- ----------------------------------------------------------------------------------------------------------
Cumulative
Amounts
Since
November 20,
Year Ended December 31, 1991 (Date of
-----------------------------------
1997 1996 Inception)
-----------------------------------------------------
Revenues
Medical care and fees $ - $ - $ 108,200
Interest 5,829 11,974 20,891
-----------------------------------------------------
Total revenue 5,829 11,974 129,091
-----------------------------------------------------
Expenses
License - 1,500 1,001,500
Research and development 149,820 286,858 1,856,876
General and administrative 619,671 807,002 4,589,457
Interest 68,100 46,566 143,243
-----------------------------------------------------
Total expenses 837,591 1,141,926 7,591,076
-----------------------------------------------------
Loss before income taxes and
extraordinary item (831,762) (1,129,952) (7,461,985)
Income taxes - - -
Forgiveness of debt net of $-0-, $-0-,
income taxes - 673,486 1,235,536
-----------------------------------------------------
Net loss $ (831,762) $ (456,466) $ (6,226,449)
=====================================================
Gain loss per share
Continuing operations $ (.04) $ (.05) $ (.42)
Extraordinary item .00 .03 .07
-----------------------------------------------------
Net loss per share $ (.04) $ (.02) $ (.35)
=====================================================
- ----------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
2
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
MEDICAL DISCOVERIES, INC.
(A Development Stage Company)
Statement of Stockholders Deficit
- ----------------------------------------------------------------------------------------------------------
Accumu- Sub-
Common Stock lated scription
-----------------------------
Shares Amount Deficit Receivables Total
--------------------------------------------------------------------------
Balance, October 31, 1991 3,500,000 $ 252,997 $ (1,482,514) $ - $ (1,229,517)
Reverse stock split (1 for 2) (1,750,000) - - - -
Restatement for reverse
acquisition of WPI
Pharmaceutical, Inc. by
Medical Discoveries, Inc. - (252,997) 252,997 - -
Shares issued in merger of
WPI Pharmaceutical and
Medical Discoveries, Inc. 10,000,000 135,000 (170,060) - (35,060)
--------------------------------------------------------------------------
Balance at November 20, 1991
(Date of Inception) 11,750,000 135,000 (1,399,577) - (1,264,577)
Common stock issued for cash 200,000 100,000 - - 100,000
Common stock issued for
services 500,000 250,000 - - 250,000
Common stock issued for cash 40,000 60,000 - - 60,000
Net loss October 31, 1992 - - (370,398) - (370,398)
--------------------------------------------------------------------------
Balance, October 31, 1992 12,490,000 545,000 (1,769,975) - (1,224,975)
Net loss two months ended
December 31, 1992 - - (65,140) - (65,140)
--------------------------------------------------------------------------
Balance, December 31, 1992 12,490,000 545,000 (1,835,115) - (1,290,115)
Common stock issued for
license 2,000,000 1,000,000 - - 1,000,000
Common stock issued for cash 542,917 528,500 - - 528,500
- --------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
3
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
MEDICAL DISCOVERIES, INC.
(A Development Stage Company)
Statement of Stockholders Deficit
Continued
- ----------------------------------------------------------------------------------------------------------
Accumu- Sub-
Common Stock lated scription
-----------------------------
Shares Amount Deficit Receivables Total
--------------------------------------------------------------------------
Common stock issued for
services 251,450 127,900 - - 127,900
Common stock issued for
$100,000 cash plus services 800,000 400,000 - - 400,000
Net loss - - (2,271,999) - (2,271,999)
--------------------------------------------------------------------------
Balance, December 31, 1993 16,084,367 2,601,400 (4,107,114) - (1,505,714)
Common stock issued for cash 617,237 739,500 - - 739,500
Common stock issued for
services 239,675 239,675 - - 239,675
Cash contributed - 102,964 - - 102,964
Net loss - - (1,223,162) - (1,223,162)
--------------------------------------------------------------------------
Balance, December 31, 1994 16,941,279 3,683,539 (5,330,276) - (1,646,737)
Common stock issued for cash 424,732 283,200 - - 283,200
Common stock issued for
services 4,333,547 1,683,846 - (584,860) 1,098,986
Common stock option issued
to satisfy debt restructuring - 20,000 - - 20,000
Net loss - - (1,007,522) - (1,007,522)
--------------------------------------------------------------------------
Balance, December 31, 1995 21,699,558 5,670,585 (6,337,798) (584,860) (1,252,073)
Common stock issued for cash 962,868 635,000 - (60,000) 575,000
- --------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
4
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
MEDICAL DISCOVERIES, INC.
(A Development Stage Company)
Statement of Stockholders Deficit
Continued
- ----------------------------------------------------------------------------------------------------------
Accumu- Sub-
Common Stock lated scription
-----------------------------
Shares Amount Deficit Receivables Total
--------------------------------------------------------------------------
Common stock issued for
services 156,539 101,550 - - 101,550
Common stock canceled (1,400,000) (472,360) - 472,360 -
Common stock issued in
settlement of obligations 239,458 186,958 - - 186,958
Net loss - - (456,466) - (456,466)
--------------------------------------------------------------------------
Balance, December 31, 1996 21,658,423 6,121,733 (6,794,264) (172,500) (845,031)
Common stock issued for
services and interest 8,028 45,584 - - 45,584
Common stock issued for cash 403,846 195,000 - 60,000 255,000
Common stock issued in
settlement of contract 800,000 120,000 - - 120,000
Common stock issued for
conversion of notes payable 100,000 25,000 - - 25,000
Net loss - - (831,762) - (831,762)
--------------------------------------------------------------------------
Balance, December 31, 1997 22,970,297 $ 6,507,317 $ (7,626,026) $ (112,500) $ (1,231,209)
--------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
5
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C>
MEDICAL DISCOVERIES, INC.
(A Development Stage Company)
Statement of Cash Flows
- ----------------------------------------------------------------------------------------------------------
Cumulative
Amounts
since
November 20,
Year Ended December 31, 1991 (Date of
-----------------------------------
1997 1996 Inception)
-----------------------------------------------------
Cash flows from operating activities:
Net loss $ (831,762) $ (456,466) $ (6,226,449)
Adjustments to reconcile net loss to
net cash used in operating activities:
Common stock issued for services,
license, and litigation 420,584 199,050 3,636,195
Reduction of legal costs - (130,000)
Depreciation 7,326 12,948 24,966
Loss on disposal of property and
equipment 24,034 - 30,364
Gain on debt restructuring - (673,486) (1,235,536)
Write-off of receivables - - 193,965
Increase in receivables - - (7,529)
Decrease (increase) in prepaid
expenses (90) 55,080 (10,869)
Increase in other assets (1,990) - (3,160)
Increase (decrease) in:
Accounts payable 246,568 223,130 760,825
Accrued expenses (11,679) 18,943 35,841
-----------------------------------------------------
Net cash used in
operating activities (147,009) (620,801) (2,931,387)
-----------------------------------------------------
Cash flows from investing activities:
Purchase of property and equipment (22,107) (21,760) (95,967)
Payments received on note receivable 46,785 42,591 99,414
-----------------------------------------------------
Net cash provided by
investing activities 24,678 20,831 3,447
-----------------------------------------------------
Cash flows from financing activities:
Increase in notes payable 101,000 - 101,000
Payment of notes payable (3,212) (2,556) (6,570)
Increase in convertible note payable - 15,000 316,700
Contributed equity - - 131,374
Common stock issued for cash - 575,000 2,386,200
-----------------------------------------------------
Net cash provided by
financing activities 97,788 587,444 2,928,704
-----------------------------------------------------
See accompanying notes to financial statements.
6
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C>
MEDICAL DISCOVERIES, INC.
Statement of Cash Flows
Continued
- ----------------------------------------------------------------------------------------------------------
Cumulative
Amounts
since
November 20,
Year Ended December 31, 1991 (Date of
-----------------------------------
1997 1996 Inception)
-----------------------------------------------------
Net (decrease) increase in cash (24,543) (12,526) 764
Cash, beginning of period 25,307 37,833 -
-----------------------------------------------------
Cash, end of period $ 764 $ 25,307 $ 764
=====================================================
</TABLE>
Supplemental disclosure of non-cash investing and financing activities:
In 1997, the Company converted a $25,000 note into 100,000 shares of common
stock.
In 1996, the Company issued common stock for settlement of accounts payable
totaling $89,458.
In 1995, the Company acquired furniture and equipment with a cost of $8,161 for
notes payable.
On August 6, 1992, the Company and WPI Pharmaceutical, Inc. (WPI) entered into
an agreement which has been accounted for as if the Company acquired WPI. At the
time of the acquisition WPI had the following balance sheet:
Receivables 186,436
Accounts payable (245,367)
Accrued interest (49,826)
Advances shareholders (284,230)
Notes payable (900,000)
-----------------
Stockholders' Deficit $ (1,292,987)
-----------------
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
7
<PAGE>
MEDICAL DISCOVERIES, INC.
(A Development Stage Company)
Statement of Cash Flows
Continued
- --------------------------------------------------------------------------------
Actual amounts paid for interest and income taxes are as follows:
Cumulative
Amounts
since
November 20,
1991 (Date of
1997 1996 Inception)
-----------------------------------------------------
Interest $ 38,606 $ - $ 37,042
=====================================================
Income taxes $ - $ - $ -
=====================================================
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
8
<PAGE>
MEDICAL DISCOVERIES, INC.
(A Development Stage Company)
Notes to Financial Statements
December 31, 1997 and 1996
- --------------------------------------------------------------------------------
1. Summary of Significant Accounting Policies
Organization
Medical Discoveries, Inc. (the Company) was organized under the laws of the
state of Utah on November 20, 1991, date of inception. On August 6, 1992, the
Company entered into an agreement whereby the shareholders of the Company
exchanged 100 percent of their common stock for 10,000,000 shares of common
stock of WPI Pharmaceutical, Inc. (WPI). The WPI shareholders had 1,750,000
shares following a reverse stock split of one share for two shares. At the time
of the transaction the name of WPI was changed to Medical Discoveries, Inc.
(MDI). Inasmuch as the 10,000,000 shares of common stock are in excess of 80
percent of the total outstanding common stock of WPI, the transaction is
accounted for as a reverse acquisition. The Company is, therefore, deemed to
have acquired WPI. At the time of the merger the entity previously known as
Medical Discoveries, Inc., ceased. The development stage commenced on November
20, 1991 which is the date of the inception of MDI.
The Company has not generated any significant revenue and is, therefore,
considered a development stage company as defined in SFAS No. 7. The Company
has, at the present time, not paid any dividends and any dividends that may be
paid in the future will depend upon the financial requirements of the Company
and other relevant factors.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all highly
liquid debt instruments with a maturity of three months or less to be cash
equivalents.
Furniture and Equipment
Furniture and equipment are carried at cost. Depreciation is computed using the
straight-line method over 3 to 7 years. When assets are retired or otherwise
disposed of, the cost and related accumulated depreciation are removed from the
accounts, and any resulting gain or loss is recognized in income for the period.
The cost of maintenance and repairs is charged to income as incurred;
significant renewals and betterments are capitalized. Deduction is made for
retirements resulting from renewals or betterments.
- --------------------------------------------------------------------------------
9
<PAGE>
MEDICAL DISCOVERIES, INC.
(A Development Stage Company)
Notes to Financial Statements
Continued
- --------------------------------------------------------------------------------
1. Summary of Significant Accounting Policies Continued
Income (Loss) Per Common Share
Income (loss) per share of common stock is calculated based on the weighted
average number of shares outstanding during the periods. Common stock
equivalents and stock options have not been included as they are antidilutive.
Business and Concentration of Credit
The primary purpose of the business is the research and development of the
sterilization of medical equipment and an anti-viral treatment for infectious
diseases. The Company has no significant revenues and, therefore, no trade
receivables or extensions of credit.
Fair Value of Financial Instruments
The fair value of financial instruments is determined by reference to various
market data and other valuation techniques as appropriate. Financial instruments
subject to possible material market variations from the recorded book value are
notes payable to related parties and advances from related parties. There are no
material differences in these financial instruments from the recorded book value
as of December 31, 1997.
Use of Estimates
The preparation of financial statements in conformity 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.
Reclassifications
Certain amounts in the 1996 financial statements have been reclassified in order
to conform to the 1997 presentation.
- --------------------------------------------------------------------------------
10
<PAGE>
MEDICAL DISCOVERIES, INC.
(A Development Stage Company)
Notes to Financial Statements
Continued
- --------------------------------------------------------------------------------
2. Going Concern
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has not had significant
revenues and is still in the process of developing anti- viral treatments for
infectious diseases and the sterilization of medical equipment. The Company is
hopeful but there is no assurance that the current product development and
research will be economically viable. The Company has incurred substantial
losses in the development of the product.
The Company is dependent upon the sale of its common stock to satisfy its
current cash operating needs. The Company is also looking into the possibility
of licensing its technology to an outside unrelated party. Although, management
has been successful thus far in raising the needed capital there can be no
assurance that the Company and its management will be able to continue to sell
sufficient amounts of common stock or enter into license agreements to bring the
current product development to a point where it is economically viable.
Management intends to meet its cash needs through the issuance of additional
shares of common stock and licensing its technology.
3. Note Receivable Related Party
In 1995, the Company entered into an agreement to recover costs which had been
expended in a dispute with a former officer. The Company received a 0% interest
rate note in the amount of $150,000. The note was discounted to $130,000 to
realize a 9.5% return for financial statements. The note requires quarterly
payments of $13,125.
The balance of the note receivable at December 31, 1997 and 1996 are as follows:
1997 1996
-----------------------------------
Current $ 30,586 $ 46,785
Noncurrent - 30,586
-----------------------------------
Total $ 30,586 $ 77,371
===================================
- --------------------------------------------------------------------------------
11
<PAGE>
MEDICAL DISCOVERIES, INC.
(A Development Stage Company)
Notes to Financial Statements
Continued
- --------------------------------------------------------------------------------
4. Notes Payable
The Company has the following notes payable at December 31, 1997:
1997 1996
-----------------------------------
Note payable to a company requiring
monthly payments of $260 including
interest at an implied rate of 9%
secured by equipment $ 1,591 $ 4,803
Notes payable to shareholders which
are currently due and in default.
Interest is at 12%. The notes are
unsecured 101,000 -
-----------------------------------
102,591 4,803
-----------------------------------
Less current maturity 102,591 2,795
-----------------------------------
Total long-term $ - $ 2,008
===================================
Current maturities are as follows:
Year Amount
-----------------
1998 $ 102,591
=================
5. Convertible Notes Payable
The Company has $291,700 at December 31, 1997 and $316,700 at December 31, 1996
of notes payable to a trust. The notes have an interest rate of 12%, have a term
of three years and are due in 1998. Each $1,000 note is convertible into 667
shares of the Company's common stock.
- --------------------------------------------------------------------------------
12
<PAGE>
MEDICAL DISCOVERIES, INC.
(A Development Stage Company)
Notes to Financial Statements
Continued
- --------------------------------------------------------------------------------
6. Related Party Transactions
During 1997, the Company settled allegations made by a former officer of the
Company where in the Company issued 800,000 shares of the Company's common stock
to settle the allegations. (see Note 12).
At December 31, 1997, the company had accounts payable to officers and directors
totaling $218,500 for services performed.
At December 31, 1996, the Company had an accounts payable to an officer
shareholder and an entity with common ownership of $58,500 and another officer
of $102,000. During 1996, the Company incurred costs relating primarily to
the development of the technology of $91,816 from the officer shareholder and
his related entity.
The Company has agreed to make the payments on a vehicle lease for an officer of
the Company. The annual payments totaled $-0- and $2,680 during 1997 and
1996, respectively.
7. Income Taxes
The provision for income taxes for the years ended December 31, 1997 and 1996,
is different than amounts which would be provided by applying the statutory
federal income tax rate to income before provision for income taxes for the
following reasons:
Cumulative
Amounts
Since
November 20,
Year Ended December 31, 1991 (Date of
--------------------------------------------------
1997 1996 Inception)
--------------------------------------------------
Federal income tax
benefit at statutory
rate $ 274,000 $ 155,000 $ 2,074,000
Change in valuation
allowance (274,000) (155,000) (2,074,000)
--------------------------------------------------
$ - $ - $ -
==================================================
- --------------------------------------------------------------------------------
13
<PAGE>
MEDICAL DISCOVERIES, INC.
(A Development Stage Company)
Notes to Financial Statements
Continued
- --------------------------------------------------------------------------------
7. Income Taxes Continued
The net timing differences for deferred income tax assets are as follows:
1996 1997
------------------ -----------------
Net operating loss carryforward $ 1,800,000 $ 2,074,000
Valuation allowance (1,800,000) (2,074,000)
------------------ -----------------
Net deferred tax asset $ - $ -
================== =================
Inasmuch as it is not possible to determine when or if the net operating losses
will be utilized, a valuation allowance has been established to offset the
benefit of the utilization of the net operating losses.
The Company has available net operating losses of approximately $6,202,000 which
can be utilized to offset future earnings of the Company. The Company also has
available approximately $43,000 in research and development credits which expire
in 2008. The utilization of the net operating losses and research and
development credits are dependent upon the tax laws in effect at the time such
losses can be utilized. The losses expire between the years 2007 and 2011.
Should the Company experience a change of ownership the utilization of net
operating losses could be reduced.
8. Gain on Debt Forgiveness
At December 31, 1994, the Company was involved in litigation regarding notes
payable of $900,000 and corresponding related accrued interest. In 1995, the
litigation was partially resolved and the Company was relieved of $250,000
principal portion of its obligation on the notes payable and accrued interest.
In March 1996, the Company was notified that it had been released from all
obligations relating to the debt and related accrued interest. To resolve the
litigation including repayment of the advances payable of $284,230, the Company
agreed to issue options to a former officer to purchase 100,000 shares of
Company stock at $.25 per share. The Company did not accrue interest for the
notes payable in 1995 as its contention that it was not liable was up held and
the $900,000 of notes payable and accrued interest of $71,306 were written off
as an extraordinary gain on debt forgiveness in 1995 and 1996. The gain on the
debt forgiveness in 1996 was $673,486 with the aggregate gain totaling
$1,235,536.
- --------------------------------------------------------------------------------
14
<PAGE>
MEDICAL DISCOVERIES, INC.
(A Development Stage Company)
Notes to Financial Statements
Continued
- --------------------------------------------------------------------------------
9. Stock Options
The Company has an incentive stock option plan wherein 4,000,000 shares of the
Company's common stock can be issued. The Company has granted stock options and
warrants to certain officers and shareholders of the Company to purchase shares
of the Company's common stock. A schedule of the options and warrants is as
follows:
Number of Warrant and
Warrants and Option Price
Options Per Share
-----------------------------------
Outstanding at December 31, 1995 1,209,778 $ .25 to 1.00
Granted 3,602,604 .25 to 3.00
Exercised (25,000) 1.00
Expired (425,000) 1.00
-----------------------------------
Outstanding at December 31, 1996 4,362,382 .25 to 3.00
Granted 6,075,000 .25 to 5.00
Exercised - -
Expired (657,164) .25 to 1.00
-----------------------------------
Outstanding at December 31, 1997 9,780,218 $ .25 to 3.00
===================================
- --------------------------------------------------------------------------------
15
<PAGE>
MEDICAL DISCOVERIES, INC.
(A Development Stage Company)
Notes to Financial Statements
Continued
- --------------------------------------------------------------------------------
9. Stock Options Continued
In October 1995, the Financial Accounting Standards Board issued Statement of
financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (FAS 123) which established financial accounting and reporting
standards for stock-based compensation. The new standard defines a fair value
method of accounting for an employee stock option or similar equity instrument.
This statement gives entities the choice between adopting the fair value method
or continuing to use the intrinsic value method under Accounting Principles
Board (APB) Opinion No. 25 with footnote disclosures of the pro forma effects if
the fair value method had been adopted. The Corporation has opted for the latter
approach. Had compensation expense for the Corporation's stock option plan been
determined based on the fair value at the grant date for awards in 1997 and 1996
consistent with the provisions of FAS No. 123, the Corporation's results of
operations would have been reduced to the pro forma amounts indicated below:
December 31,
-----------------------------------
1997 1996
-----------------------------------
Net loss - as reported $ (831,762) $ (456,466)
Net loss - pro forma $ (2,600,339) $ (1,622,499)
Loss per share - as reported $ (.04) $ (.02)
Loss per share - pro forma $ (.02) $ (.07)
The fair value of each option grant is estimated at the date of grant using the
Black-Scholes option pricing model with the following assumptions:
December 31,
-----------------------------------
1997 1996
-----------------------------------
Expected dividend yield $ - $ -
Expected stock price volatility 142.5% 97.5%
Risk-free interest rate 5.5% 5.5%
Expected life of options 3-10 years 1-5 years
===================================
The weighted average fair value of options granted during 1997 and 1996 are $.30
and $.32, respectively.
- --------------------------------------------------------------------------------
16
<PAGE>
MEDICAL DISCOVERIES, INC.
(A Development Stage Company)
Notes to Financial Statements
Continued
- --------------------------------------------------------------------------------
9. Stock Options Continued
The following table summarized information about fixed stock options outstanding
at December 31, 1997:
Options Outstanding Options Exercisable
------------------------------------------------------------------
Weighted
Average
Number Remaining Weighted Number Weighted
Range of Outstanding Contractual Average Exercisable Average
Exercise at Life Exercise at Exercise
Prices 12/31/97 (Years) Price 12/31/97 Price
- --------------------------------------------------------------------------------
$ .25 to .50 859,000 3.7 $ .29 776,500 $ .29
.65 to 1.00 1,328,000 2.0 .97 1,253,000 .97
3.00 to 5.00 7,593,218 1.3 4.32 7,593,218 4.32
- --------------------------------------------------------------------------------
$ .25 to 5.00 9,780,218 1.9 $ 3.51 9,622,718 $ 3.56
- --------------------------------------------------------------------------------
10. Loss Per Share
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 (SFAS 128) "Earnings Per Share," which
requires companies to present basic earnings per share (EPS) and diluted
earnings per share, instead of the primary and fully diluted EPS that was
previously required. The new standard also requires additional informational
disclosures, and makes certain modifications to the previously applicable EPS
calculations defined in Accounting Principles Board No. 15. The new standard is
required to be adopted by all public companies for reporting periods ending
after December 15, 1997, and requires restatement of EPS for all prior periods
reported. During the year ended December 31, 1997, the Company adopted this
standard.
- --------------------------------------------------------------------------------
17
<PAGE>
MEDICAL DISCOVERIES, INC.
(A Development Stage Company)
Notes to Financial Statements
Continued
- --------------------------------------------------------------------------------
10. Loss Per Share Continued
Loss per share information in accordance with SFAS 128 is as follows:
Year Ended December 31, 1997
-----------------------------------------------
Loss Shares Per-Share
(Numerator) (Denominator) Amount
-----------------------------------------------
Net loss $ (831,762)
Less preferred stock
dividends -
----------------
Basic EPS
Loss available to
common stockholders (831,762) 22,206,000 $ (.04)
==============
Effect of Dilutive Securities
Stock options - -
---------------------------------
Diluted EPS
Loss available to common
stockholders plus assumed
conversions $ (831,762) 22,206,000 $ (.04)
===============================================
Year Ended December 31, 1996
-----------------------------------------------
Loss Shares Per-Share
(Numerator) (Denominator) Amount
-----------------------------------------------
Net loss $ (456,466)
Less preferred stock
dividends
----------------
Basic EPS
Loss available to
common stockholders (456,466) 22,549,000 $ (.02)
==============
Effect of Dilutive Securities
Stock options - -
---------------------------------
Diluted EPS
Loss available to common
stockholders plus assumed
conversions $ (456,466) 22,549,000 $ (.02)
===============================================
- --------------------------------------------------------------------------------
18
<PAGE>
MEDICAL DISCOVERIES, INC.
(A Development Stage Company)
Notes to Financial Statements
Continued
- --------------------------------------------------------------------------------
10. Loss Per Share Continued
Cumulative Amounts Since
November 20, 1991
-----------------------------------------------
Loss Shares Per-Share
(Numerator) (Denominator) Amount
-----------------------------------------------
Net loss $ (6,226,449)
Less preferred stock
dividends
----------------
Basic EPS
Loss available to
common stockholders (6,226,449) 17,931,000 $ (.35)
==============
Effect of Dilutive Securities
Stock options - -
---------------------------------
Diluted EPS
Loss available to common
stockholders plus assumed
conversions $ (6,229,449) 17,931,000 $ (.35)
===============================================
11. Commitments
The Company leases its office facility and previous office facility under
operating leases The leases require monthly payments of $900 and $895 through
April 2000 and the year 1998, respectively. The Company as entered into an
agreement to sublease its previous office to another unrelated entity for a
monthly rent of $940 for the duration of the lease.
Approximate future commitments under these leases are as follows:
Year Amount
-----------------
1998 $ 10,260
1999 10,800
2000 3,600
-----------------
$ 24,660
=================
Annual rent expense totaled approximately $10,000 for the years ended December
31, 1997 and 1996.
- --------------------------------------------------------------------------------
19
<PAGE>
MEDICAL DISCOVERIES, INC.
(A Development Stage Company)
Notes to Financial Statements
Continued
- --------------------------------------------------------------------------------
12. Contingency
The Company in 1995, engaged an entity to raise capital. As part of the
agreement the Company issued shares of its stock to the entity, placed an
officer of the other entity on the Company's Board of Directors and appointed
another individual related to the entity to be the Company's Chief Financial
Officer. In 1996, both individuals resigned from their positions with the
Company and have made numerous allegations. The Company is in discussion with
the entity and these individuals to determine the extent and validity of these
allegations. The Company has canceled 1,400,000 shares of the common stock
issued as a fee to raise the capital. The corresponding subscription
receivable was also canceled. The Company, in 1997, resolved the dispute with
the former officer and issued 800,000 shares of the Company's common stock in
full satisfaction.
13. Recently Issued Accounting Statements
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130 (SFAS 130), "Reporting Comprehensive Income." SFAS 130 requires entities
presenting a complete set of financial statements to include details of
comprehensive income consists of net income or loss for the current period and
other comprehensive income, which consists of revenue, expenses, gains, and
losses that bypass the income statement and are reported directly in a separate
component of equity. This statement is effective for fiscal years beginning
after December 15, 1997, and requires restatement of prior period financial
statements presented for comparative purposes.
- --------------------------------------------------------------------------------
20
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MEDICAL
DISCOVERIES, INC. DECEMBER 31, 1997 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 764
<SECURITIES> 0
<RECEIVABLES> 30,586
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 42,219
<PP&E> 72,304
<DEPRECIATION> 23,507
<TOTAL-ASSETS> 94,176
<CURRENT-LIABILITIES> 1,325,385
<BONDS> 0
0
0
<COMMON> 6,507,317
<OTHER-SE> (7,738,526)
<TOTAL-LIABILITY-AND-EQUITY> 94,176
<SALES> 0
<TOTAL-REVENUES> 5,829
<CGS> 0
<TOTAL-COSTS> 769,491
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 68,100
<INCOME-PRETAX> (831,762)
<INCOME-TAX> 0
<INCOME-CONTINUING> (831,762)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (831,762)
<EPS-PRIMARY> (.04)
<EPS-DILUTED> (.04)
</TABLE>