<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20509
FORM 8-K-A2
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act
December 15, 1998
Date of Report
(Date of Earliest Event Reported)
VITRISEAL, INC.
(Exact Name of Registrant as Specified in its Charter)
Nevada 2-99110-NY 11-2751537
(State or other juris- (Commission File No.) (IRS Employer
diction of incorporation) I.D. No.)
12226 South 1000 East, Suite 9
Draper, Utah 84020
(Address of Principal Executive Offices)
(801) 553-8785
(Registrant's Telephone Number)
A.X.R. Development Corporation, Inc.
9005 Cobble Canyon Lane
Sandy, Utah 84093
(Former Address of Principal Executive Offices)
<PAGE>
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
There have been the following changes to this Item, which was
contained in the 8-K Current Report of the Company dated December 15, 1998,
as amended in the 8-K-A1 dated April 2, 1999.
(a) Financial Statements of Business Acquired.
Audited financial statements for the years ended December 31, 1998,
December 31, 1997 and for the period from April 16, 1992 to
December 31, 1998.
(b) Exhibits. (See attached Financial Statements.)
All other portions of the previously filed 8-K-A Current Report
dated December 15, 1998 and the Amendment dated April 2, 1999 remain unchanged.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned hereunto duly authorized.
VITROSEAL, INC.
Date: June 30, 1999 By: /s/ Culley W. Davis
--------------------------------
Culley W. Davis
CEO and Chairman of the
Board of Directors
<PAGE>
DANCOR, INC.
(A DEVELOPMENT STAGE COMPANY)
FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 AND
FOR THE PERIOD APRIL 16, 1992 (INCEPTION) THROUGH DECEMBER 31, 1998
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . . . 1
Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Statements of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Statements of Stockholders' Equity . . . . . . . . . . . . . . . . . . . . . 4
Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Notes to Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . 6
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS AND STOCKHOLDERS
DANCOR, INC.
DRAPER, UTAH
We have audited the accompanying balance sheet of Dancor, Inc., A Development
Stage Company ("the Company"), as of December 31, 1998 and the related
statements of operations, stockholders' equity, and cash flows for the
years ended December 31, 1998 and 1997, and for the period April 16, 1992
(inception) through December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 the Company at December 31,
1998, and the results of its operations and its cash flows for the years
ended December 31, 1998 and 1997, and for the period April 16, 1992
(inception) through December 31, 1998, in conformity with generally accepted
accounting principles.
As described in Note 10 to the financial statements, the Company completed a
reorganization with a publicly held entity in March of 1999. Because the
transaction was a "reverse acquisition" and the Company is considered the
acquirer for accounting purposes, the Company is now required to comply with
The Securities Exchange Act of 1934. Among other things, this law requires
the timely filing of proxy statements, quarterly financial statements, and
annual audited financial statements.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has experienced a loss
of approximately $3.8 million for the period from April 16, 1992 (inception)
to December 31, 1998. As discussed in Note 7 to the financial statements, a
significant amount of additional capital will be necessary to advance the
development of the Company's sole product to the point where it may become
commercially viable. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans
regarding these matters also are described in Note 7. The accompanying
financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
June 26, 1999
Newport Beach, California
SQUAR, MILNER & REEHL LLP
<PAGE>
- --------------------------------------------------------------------------------
DANCOR, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
DECEMBER 31, 1998
<TABLE>
- ---------------------------------------------------------------------------------------------
<S> <C>
ASSETS
Current assets - cash $ 28,900
Property and equipment, net 45,598
Patents, net of accumulated amortization of $4,214 171,633
Deferred tax asset, net of valuation allowance -
Other assets 946
----------
TOTAL ASSETS $ 247,077
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities - accounts payable and accrued expenses $ 32,744
Commitments and contingent liabilities
Stockholders' Equity
Common stock, par value $.001 per share, 10,000,000 shares
authorized, 9,932,864 shares issued and 6,425,381 shares outstanding 6,425
Additional paid-in capital 4,000,284
Accumulated deficit during the development stage (3,792,376)
----------
Total stockholders' equity 214,333
----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 247,077
==========
</TABLE>
- --------------------------------------------------------------------------
PAGE 2
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
<PAGE>
DANCOR, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 AND FOR
THE PERIOD APRIL 16, 1992 (INCEPTION) THROUGH DECEMBER 31, 1998
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
APRIL 16, 1992
(INCEPTION) THROUGH
1998 1997 DECEMBER 31, 1998
--------------------- -------------------- ---------------------------
<S> <C> <C> <C>
REVENUES
Licensing fees $ - $ 25,000 $ 25,000
EXPENSES
Research and development 530,731 387,148 1,493,285
Operating expenses 648,365 619,656 2,269,017
Interest expense, net 29,402 23,610 55,074
----------- --------- ----------
Loss before income tax benefit (1,208,498) (1,005,414) (3,792,376)
Income tax benefit:
Current - - -
Deferred 460,000 375,000 1,285,000
Less valuation allowance (460,000) (375,000) (1,285,000)
--------- -------- ----------
Net (loss) $ (1,208,498) $ (1,005,414) $ (3,792,376)
============ ============ ============
Basic and diluted loss per share $ (0.20) $ (0.17) $ (0.62)
============ ============ ============
</TABLE>
- --------------------------------------------------------------------------
PAGE 3
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
<PAGE>
DANCOR, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 AND FOR THE
PERIOD APRIL 16, 1992 (INCEPTION) TO DECEMBER 31, 1998
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
ACCUMULATED
COMMON STOCK ADDITIONAL DEFICIT DURING TOTAL
---------------------- PAID-IN DEVELOPMENT STOCKHOLDERS'
SHARES AMOUNT CAPITAL STAGE EQUITY
--------- -------- --------- -------------- ------------
<S> <C> <C> <C> <C> <C>
AT INCEPTION ON APRIL 16, 1992 $ $ $ $
Common stock issued to related parties at par 5,833,985 5,834 (5,834) - -
Common stock issued for settlement of advances
from related parties at $.63 per share 1,480,035 1,480 930,942 - 932,422
Common stock issued at $.63 per share for cash 800,000 800 503,200 - 504,000
Common stock issued at $1 per share for cash 100,000 100 99,900 - 100,000
Repurchase and retirement of common stock at
$.09 per share (3,111,458) (3,111) (279,889) - (283,000)
Repurchase and retirement of common stock from
related parties at $.58 per share (386,025) (386) (224,614) - (225,000)
Common stock issued to related parties at par 1,132,963 1,133 (1,133) - -
Common stock issued at $2 per share for cash 3,500 3 6,997 - 7,000
Common stock issued at $3 per share for cash 50,000 50 149,950 - 150,000
Repurchase and retirement of common stock at
$3 per share (10,000) (10) (29,990) - (30,000)
Common stock issued at $3 per share for cash 107,000 107 320,893 - 321,000
Net loss for the period from April 16, 1992
(inception) through December 31, 1996 - - - (1,578,464) (1,578,464)
---------- -------- --------- ----------- -----------
BALANCE AT DECEMBER 31, 1996 6,000,000 6,000 1,470,422 (1,578,464) (102,042)
Common stock issued for settlement of advances
from related parties at $8.33 per share 42,150 42 351,208 - 351,250
Common stock issued at $10 per share for cash 1,000 1 9,999 - 10,000
Net loss for the year ended December 31, 1997 - - - (1,005,414) (1,005,414)
---------- -------- --------- ----------- -----------
BALANCE AT DECEMBER 31, 1997 6,043,150 6,043 1,831,629 (2,583,878) (746,206)
Common stock issued at $10 per share for cash 18,000 18 179,982 - 180,000
Common stock issued for settlement of advances
from related parties at $6.85 per share 214,231 214 1,466,823 - 1,467,037
Common stock issued on conversion of note
payable (Note 9) 150,000 150 521,850 - 522,000
Net loss for the year ended December 31, 1998 - - - (1,208,498) (1,208,498)
---------- -------- ----------- ------------ -----------
BALANCE AT DECEMBER 31, 1998 6,425,381 $ 6,425 $ 4,000,284 $ (3,792,376) $ 214,333
========== ======= =========== ============= =========
</TABLE>
- --------------------------------------------------------------------------
PAGE 4
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
<PAGE>
DANCOR, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 AND
FOR THE PERIOD APRIL 16, 1992 (INCEPTION) THROUGH DECEMBER 31, 1998
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
APRIL 16, 1992
(INCEPTION) THROUGH
1998 1997 DECEMBER 31, 1998
------------ ---------- ------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) $ (1,208,498) $(1,005,414) $ (3,792,376)
Adjustment to reconcile net (loss) to net cash
used by operating activities:
Depreciation and amortization 10,644 7,885 30,707
Changes in current assets and liabilities:
Other assets - 2,998 (946)
Accounts payable and accrued expenses 32,744 31,500 32,744
----------- --------- -----------
NET CASH (USED) BY OPERATING ACTIVITIES (1,165,110) (963,031) (3,729,871)
----------- --------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property and equipment (18,265) (7,390) (72,091)
Patent costs (43,933) (3,584) (175,847)
----------- --------- -----------
NET CASH (USED) BY INVESTING ACTIVITIES (62,198) (10,974) (247,938)
----------- --------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings on note payable - - 450,000
Advances from related party 1,022,362 627,057 2,750,709
Proceeds from issuance of common stock 180,000 10,000 1,272,000
Repurchases of common stock - - (538,000)
Capital contribution - - 72,000
---------- --------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,202,362 637,057 4,006,709
---------- --------- -----------
NET INCREASE (DECREASE) IN CASH (24,946) (336,948) 28,900
CASH AT BEGINNING OF PERIOD 53,846 390,794 -
---------- --------- -----------
CASH AT END OF PERIOD $ 28,900 $ 53,846 $ 28,900
========== ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Non-cash transactions:
Conversion of note payable to common stock $ 450,000 $ - $ 450,000
========== ======== ===========
Conversion of interest payable to paid-in capital $ 72,000 $ - $ 72,000
========== ======== ===========
Conversion of advances from related party to common stock $1,467,037 $351,250 $ 2,750,709
========== ======== ===========
</TABLE>
- --------------------------------------------------------------------------
PAGE 5
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
<PAGE>
DANCOR, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
- -------------------------------------------------------------------------------
NOTE 1: NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Dancor, Inc. ("the Company") was incorporated in Delaware on April 16, 1992
("inception"). On April 24, 1992, the Company executed a reorganization
agreement whereby 3,043,350 shares of its common stock were issued on the
effective date in exchange for 100% of the outstanding common stock of The
Dancor Corporation, a Washington corporation, in a substantially all-stock
transaction. The estimated April 1992 fair value of the only significant
asset acquired in this purchase (a patent pending, with an undeveloped
technology) is not material to the accompanying financial statements. The
Dancor Corporation was dissolved in November 1994.
The Company owns the right to a process called "VitroSeal,"
which is based on inorganic silicate chemistry that produces a waterborne
corrosion-protective coating for metal surfaces. VitroSeal is in the research
and development stage with respect to its application to particular
industries. For environmental reasons, the coatings industry is subject to a
high degree of governmental regulation. The Company is classified as a
development stage enterprise under generally accepted accounting principles
("GAAP"), and has not commenced its planned principal operations to generate
revenues.
Initially, the Company will seek to penetrate the automotive wheels
aftermarket beginning in late 1999. Management hopes to use this market
segment as a proving ground to demonstrate the technology's benefits, develop
name recognition, and establish a performance track record.
The Company has initiated the process of obtaining approval from the Food and
Drug Administration ("FDA") for the use of VitroSeal on food and beverage
containers; completing this process is expected to take about 1 1/2 to 3
years. In the opinion of management, the Company's product contains only
ingredients that are generally regarded by the FDA as safe for food contact.
Assuming FDA approval, management projects that this market segment could
generate a significant percentage of the Company's operating revenue in
future years.
During March 1999, the Company completed a reorganization with a publicly
traded company (see Note 10 concerning "Subsequent Events").
INTRODUCTION TO THE SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The summary of significant accounting policies of the Company presented below
is designed to assist in understanding the Company's financial statements.
Such financial statements and these notes are the representations of Company
management, who are responsible for their integrity and objectivity. These
accounting policies conform to GAAP in all material respects, and have been
consistently applied in preparing the accompanying financial statements.
REVENUE RECOGNITION
When revenues first become significant, management intends to adopt
appropriate revenue recognition accounting policies in material conformity
with GAAP.
- -------------------------------------------------------------------------------
PAGE 6
<PAGE>
NOTE 1: NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
RESEARCH AND DEVELOPMENT COSTS ("R & D COSTS")
R & D costs are charged to expense when incurred. Such costs include
scientific research and laboratory testing intended to advance the product's
technology to the point of commercial production.
PATENTS
The Company capitalizes the cost of domestic and foreign patents and patents
pending, and amortizes such costs over the shorter of the remaining legal
life or their estimated economic life. Amortization expense for the years
ended December 31, 1998 and 1997 was $1,831 and $770, respectively. The cost
of abandoned patent applications is written off when management makes the
decision to do so.
PROPERTY AND EQUIPMENT
Repairs, maintenance, and similar costs that do not significantly improve or
extend the useful lives of the assets are expensed as incurred. When an asset
is sold or retired, the cost and accumulated depreciation or amortization are
removed from the accounts and any gain or loss is included in current
operations.
Equipment, fixtures, and leasehold improvements are stated at cost less
accumulated depreciation or amortization. Leasehold improvements are
amortized over the shorter of the remaining lease term or their estimated
economic life. Other property and equipment are depreciated on a
straight-line basis over estimated useful lives ranging from five to seven
years.
INCOME TAXES
Using the liability method required by Statement of Financial Accounting
Standards ("SFAS") No. 109, the estimated tax effects of temporary
differences between financial and income tax reporting are recorded in the
period in which the events occur. Such differences between the financial and
tax bases of assets and liabilities result in future tax deductions or
taxable income. (see Note 5).
STATEMENT OF CASH FLOWS
For purposes of the statement of cash flows, the Company considers all
interest-bearing deposits with an original maturity of three months or less
as cash equivalents.
- -------------------------------------------------------------------------------
PAGE 7
<PAGE>
NOTE 1: NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
USE OF ESTIMATES
Management uses estimates and assumptions in preparing financial statements
in accordance with GAAP. Such estimates and assumptions affect the reported
amounts of certain assets and liabilities, disclosures relating to any
contingent assets and liabilities, and the reported amounts of revenue and
certain expenses. Actual results could vary from the estimates used to
prepare the accompanying financial statements.
LOSS PER SHARE
In accordance with SFAS No. 128, basic loss per share is computed by dividing
the loss attributable to common stockholders by the weighted average number
of common shares outstanding during the period. Diluted loss per share
reflects the amount that would have resulted if certain dilutive potential
common stock had been issued. Because the Company has experienced losses from
inception, the stock options described in Note 10 are antidilutive.
Therefore, if such options had been granted prior to January 1, 1999, they
would not have impacted the disclosures in the following paragraph.
The weighted average number of common shares outstanding for the indicated
periods is set forth below:
<TABLE>
<CAPTION>
Weighted Average
Number Of Common
Period Shares Outstanding
------ ------------------
<S> <C>
Year Ended December 31, 1998 6,083,108
Year Ended December 31, 1997 6,013,418
Inception to December 31, 1998 6,087,839
</TABLE>
ELEMENTS OF OTHER COMPREHENSIVE INCOME
For the period from inception to December 31, 1998, the Company did not have
any elements of other comprehensive income as defined by SFAS No. 130,
"Reporting Comprehensive Income." Therefore, statements of comprehensive
income have not been presented.
- -------------------------------------------------------------------------------
PAGE 8
<PAGE>
NOTE 1: NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
NON-COMPETE COVENANTS
As set forth in Note 6, the Company is the beneficiary of several covenants
not to compete. For reasons discussed in Note 7, management has determined
that it is appropriate to allocate only a nominal value (which is not
significant to the accompanying financial statements) to such intangible
assets.
NOTE 2: RELATED PARTY TRANSACTIONS AND RELATIONSHIPS
The names and relationships of related parties referred to in these notes are
set forth below (Company stock ownership percentages, which are as of
December 31, 1998, include beneficial ownership):
- - Culley W. Davis: Chairman of the Board of Directors; 12% stockholder
including ownership through Pinnacle Enterprises, Inc. ("PEI"), which is
controlled by Culley W. Davis.
- - Bruce H. Haglund, Esq.: an officer and director of the Company, the
brother-in-law of the Company's Chief Financial Officer, and a 1%
stockholder of the Company. Bruce Haglund is a partner in the law firm of
Gibson, Haglund & Paulsen ("GHP"), the Company's legal counsel. For the
period from inception to December 31, 1998, the Company paid or incurred
legal fees to GHP of approximately $76,000, including $33,500 and $29,000
for the years ended December 31, 1998 and 1997, respectively.
- - Daniel L. Corbin: President, director, 7% stockholder, and brother-in-law
of Culley W. Davis.
- - Dennis A. Repp: Director, and 2% stockholder.
- - John Nagel: Chief Financial Officer
On May 12, 1999, the Company granted stock options to several individuals,
including all of the persons listed above (see Note 10).
Because the Company, PEI and other entities have commonality of ownership and
are under common management control, reported operating results and/or
financial position of the Company could significantly differ from what would
have been obtained if such entities were autonomous (see Note 8).
Other related party transactions are discussed elsewhere in these notes to
the financial statements.
- -------------------------------------------------------------------------------
PAGE 9
<PAGE>
NOTE 3: CONCENTRATION OF CREDIT RISK
Financial instruments which may subject the Company to credit risk
principally consist of uninsured cash-in-bank balances. At various times
during the year, the Company's bank balance may exceed the FDIC-insured
amount. As of December 31, 1998, the Company bank balance reported by its
principal financial institution was less than such amount.
NOTE 4: PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31, 1998:
<TABLE>
<S> <C>
Computers and software $ 3,738
Furniture and fixtures 18,163
Testing equipment 47,713
Leasehold improvements 2,477
----------
72,091
Accumulated depreciation and amortization (26,493)
----------
$ 45,598
==========
</TABLE>
NOTE 5: INCOME TAXES
The Company files its income tax returns using the cash basis of accounting.
For the period from inception to December 31, 1998, the Company is considered
a start-up entity for federal and state income tax purposes. As a result,
research/development and start-up expenses are capitalized for tax purposes;
all such costs are expensed as incurred for financial reporting purposes.
This is the only significant temporary difference at December 31, 1998; the
estimated income tax effect of such difference approximated $1.3 million at
that date.
The reported income tax benefit differs from the amount that would result
from applying the federal statutory rate to the pretax loss because of the
state income tax effect at a rate of approximately 9%. The components of the
deferred income tax benefit are set forth below:
<TABLE>
<CAPTION>
Inception to
1998 1997 December 31, 1998
-------- -------- -----------------
<S> <C> <C> <C>
Federal $360,000 $290,000 $1,000,000
State 100,000 85,000 285,000
-------- -------- ----------
Total $460,000 $375,000 $1,285,000
======== ======== ==========
</TABLE>
- -------------------------------------------------------------------------------
PAGE 10
<PAGE>
NOTE 5: INCOME TAXES (CONTINUED)
The Company has an estimated federal tax net operating loss ("NOL")
carryforward at December 31, 1998 of approximately $375,000 expiring as
follows:
<TABLE>
<CAPTION>
Year of
Expiration Amount
---------- ---------
<S> <C>
2010 $ 54,000
2011 214,000
2012 66,000
2018 41,000
</TABLE>
The Company's accounting NOL carryforward approximates $3.8 million at
December 31, 1998. The related deferred tax asset arising in 1998 and 1997
approximated $460,000 and $375,000, respectively. Because the Company is a
development stage enterprise and there is no reasonable assurance that such
asset will be realized in future years, the Company has recorded a 100%
valuation allowance against the December 31, 1998 balance of this deferred
tax asset.
A summary of the activity in the valuation allowance for the deferred tax
asset for the years ended December 31, 1998 and 1997 is presented below:
<TABLE>
<CAPTION>
Amount
-----------
<S> <C>
Balance at January 1, 1997 $ 450,000
Adjustment for 1997 deferred tax asset 375,000
----------
Balance at December 31, 1997 825,000
Adjustment for 1998 deferred tax asset 460,000
----------
Balance at December 31, 1998 $1,285,000
==========
</TABLE>
NOTE 6: COMMITMENTS AND CONTINGENT LIABILITIES
LEASES
The Company is obligated on two operating leases at December 31, 1998. The
first lease is for an office facility in Newport Beach, California, which
calls for monthly rent of $896, increasing to $1,183 effective April 15,
1999. Daniel Corbin is a co-lessee on this lease, which expires April 15,
2000. The second lease is for research activity storage space at Northwestern
University in Evanston, Illinois, which requires monthly rent of $1,200 and
expires on March 31, 1999.
- -------------------------------------------------------------------------------
PAGE 11
<PAGE>
NOTE 6: COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
LEASES (CONTINUED)
The following is a schedule of the approximate future minimum rental payments
required by the above leases:
<TABLE>
<CAPTION>
Year Ending
December 31 Amount
----------- ------
<S> <C>
1999 $ 16,690
2000 4,140
Thereafter -
-----------
$ 20,830
===========
</TABLE>
For the years ended December 31, 1998 and 1997, total rent expense
approximated $25,000 and $18,000, respectively. The Company was not a party
to any leases prior to January 1, 1997.
RESEARCH AND CONSULTING CONTRACTS
In January 1997, the Company entered into a month-to-month consulting
contract ("the Jennings Contract") to engage Hamlin Jennings, Ph. D.
("Jennings") as an independent contractor to provide technical consulting
services on a best-efforts basis relating to (1) product
research/development, technology, and commercialization and (2) patent
completion and processing. At December 31, 1998, payments being made under
the Jennings Contract were $35,000 per month. The performance of services
under the Jennings Contract is neither transferable nor assignable without
the Company's prior written consent. The Company paid approximately $390,000
and $320,000 to Jennings during the years ended December 31, 1998 and 1997,
respectively.
The Jennings Contract also requires the Company to allocate a portion of its
revenues from all sources to a deferred compensation plan. The terms of such
deferred compensation plan are set forth below under "Royalty Agreements."
Jennings has provided a non-compete covenant prohibiting him from engaging in
any activities that are competitive with or adverse to the Company's business
during the term of the Jennings Contract.
In September 1998, the Company entered into a consulting contract ("the
Hanneman Contract") with Rodney Hanneman to provide management, marketing,
and technical services in return for a $10,000 annually renewable retainer
fee and hourly consulting fees. The Hanneman Contract also provides that
Rodney Hanneman will receive (a) incentive and performance payments of 1% of
the Company's gross revenue from 1999 through 2005 payable quarterly; or
(b) 1% of the selling price of the Company, or 1% of the value of any initial
public offering, if either transaction occurs before December 31, 2005.
- -------------------------------------------------------------------------------
PAGE 12
<PAGE>
NOTE 6: COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
ROYALTY AGREEMENTS
On February 18, 1997, the Company entered into separate royalty agreements
with Dennis Repp ("Repp") and Daniel Corbin ("Corbin") whereby Repp and
Corbin shall each receive a 2% royalty on all revenues or other proceeds
earned by the Company resulting directly or indirectly from the VitroSeal
process, including licensing fees, product and technology sales, royalty
income, and asset sales. The royalty agreements provide that such payments
will continue until the termination (for whatever reason) of Repp's and
Corbin's services to the Company in connection with the development and
commercialization of the VitroSeal process.
Upon the termination of such services, Repp and Corbin and their
heirs/successors shall receive post-termination royalties equal to 2% of
defined revenues earned by the Company from (1) existing customers at the
termination date and (2) prospects who were contacted prior to such date and
later became customers of the Company. Such payments will continue until the
customers described in the preceding sentence no longer generate any revenue.
Repp and Corbin have provided a non-compete covenant prohibiting them from
engaging in any activities that are competitive with or adverse to the
Company's business during the term of the royalty agreements. Violation of
this covenant will discharge the Company from any future obligation to make
royalty payments.
On February 18, 1997, the Company also entered into an agreement with
Jennings identical to those with Repp and Corbin as set forth above. On July
15, 1998, the Jennings royalty agreement was amended to provide for a 3%
royalty; all other provisions of the Jennings royalty agreement remain in
effect.
On November 23, 1998, the Company entered into a royalty agreement with
Culley W. Davis ("Davis") whereby Davis shall receive a 2% royalty on all
revenues or other proceeds earned by the Company resulting directly or
indirectly from the VitroSeal process, including licensing fees, product and
technology sales, royalty income, and asset sales. The royalty agreement
provides that such payments will continue until the termination (for whatever
reason) of Davis' services to the Company in connection with the development
and commercialization of the VitroSeal process. On June 24, 1999, the Davis
royalty agreement was mutually canceled as additional consideration for the
136,381 shares and the 28,167 shares of common stock issued to PEI in 1998
and 1999, respectively, as discussed in Note 8.
NOTE 7: GOING CONCERN/LIQUIDITY CONSIDERATIONS
As discussed in Note 1, the Company is a development stage enterprise
developing a metal coating process known as VitroSeal. There have been no
product sales or significant royalty revenues to date, and management
projects that the Company will require significant additional capital to
advance the development of its sole product to the point where it may become
commercially viable. Accordingly, there is substantial uncertainty about the
Company's ability to continue as a going concern. The accompanying financial
statements do not include any adjustments that might result from the outcome
of this uncertainty. If operations are discontinued, capitalized patent costs
may not be fully recoverable.
Subsequent to December 31, 1998, the Company issued additional common stock
for approximately $1.5 million cash. Management plans to finance the
remaining development of the product's application technology with equity
capital.
- -------------------------------------------------------------------------------
PAGE 13
<PAGE>
NOTE 8: ADVANCES FROM RELATED PARTIES AND COMMON STOCK TRANSACTIONS
From inception to December 31, 1998, PEI and other related parties
periodically made cash advances to the Company and/or directly funded the
Company's R & D and operating expense requirements. The Company repaid these
advances with the issuance of common stock as follows:
<TABLE>
<CAPTION>
Year Shares Amount
---- ------ ------
<S> <C> <C>
1994 252,715 $ 159,210
1995 1,227,320 773,212
1997 42,150 351,250
1998 214,231 1,467,037
</TABLE>
During 1998, the Company issued 136,381 shares to PEI which are held in
escrow pending PEI's efforts to raise approximately $500,000 of additional
equity capital for the Company by November 10, 1999. Concurrent with this
transaction, the Company recorded an $818,287 reduction of advances payable
to related parties with a corresponding increase of additional paid-in
capital, which is not contingent upon any future events. Because the parties
agreed that the original terms of such advances included a conversion
privilege, no gain or loss was recognized on the transactions described
above.
During the quarter ended March 31, 1999, an additional 28,167 shares
($169,000) were issued to PEI under the same terms and conditions.
NOTE 9: CONVERTIBLE NOTE PAYABLE TO RELATED PARTY
On September 7, 1996, the Company borrowed $450,000 from R. A. Properties,
Ltd. ("RAP"), which is owned/controlled by Dennis Repp, and executed a
$450,000 note payable with all principal and interest (at 7%) due on
September 8, 1998. Such note was convertible any time at RAP's option into
Company common stock at $3/share. On December 10, 1998, when principal plus
accrued interest approximated $522,000, the note was converted into 150,000
shares of common stock. The $522,000 (less the par value of common stock) was
credited to additional paid-in-capital upon conversion of the note payable.
- -------------------------------------------------------------------------------
PAGE 14
<PAGE>
NOTE 10: SUBSEQUENT EVENTS
REORGANIZATION
On March 18, 1999, approximately 85% of the Company's outstanding common
stock was acquired by AXR Development Corporation, Inc. ("AXR"), a Nevada
corporation. AXR was incorporated on July 9, 1985 and was a dormant entity on
March 18, 1999. AXR had no assets or significant operations during 1997 or
1998, and has not had any revenues since 1989.
On December 23, 1998, AXR and the Company entered into an Agreement and Plan
of Reorganization ("the Plan") structured to result in the acquisition by AXR
of at least 80% of the issued and outstanding shares of restricted common
stock of the Company. Such transaction is hereinafter referred to as "the
Reorganization." The Reorganization is intended to qualify as a tax-free
transaction under Section 368 (a)(1)(B) of the 1986 Internal Revenue Code, as
amended. Under the terms of the Plan, the former stockholders of the Company
(1) received three shares of AXR for each one share of the Company and (2)
will ultimately acquire approximately 95% of the issued and outstanding
common stock of AXR, if all of the Company's stockholders execute the Plan.
As of May 31, 1999, the former stockholders of the Company owned
approximately 88% of the 17.2 million post-Reorganization shares of AXR's
issued and outstanding common stock. Such shares are restricted securities
under Federal law, and will become available for sale (under certain
conditions, and subject to statutory limitations) in approximately March of
the year 2000.
Management will account for the Reorganization as a capital stock transaction
(as opposed to a "business combination," as that term is defined by GAAP).
Accordingly, the Reorganization will be reported as a recapitalization of the
Company, which is considered the acquirer for accounting purposes (a "reverse
acquisition"). Through its former stockholders, the Company is deemed the
acquirer for accounting purposes because of (a) its majority ownership of
AXR, (b) its representation on AXR's board of directors, and (c) executive
management positions held by former officers of the Company.
There are certain restrictions on the sale or other transfer of the Company's
common stock issued under the Plan. Such stock, generally referred to as
"Rule 144 stock," was not registered under the Securities Act of 1933, as
amended ("the Act"), in reliance upon an exemption from its requirements.
Each exchanging shareholder agreed to (1) acquire such stock for his/her own
account and (2) hold the stock for investment purposes only. In addition, the
stock certificates are required to contain a legend (a) documenting these
restrictions and (b) requiring a legal opinion that any proposed sale is
exempt from registration under the Act.
- -------------------------------------------------------------------------------
PAGE 15
<PAGE>
NOTE 10: SUBSEQUENT EVENTS (CONTINUED)
REORGANIZATION (CONTINUED)
If the Reorganization had occurred on December 31, 1998, the stockholders'
equity section of the Company's balance sheet at that date would have
reflected the following (assuming that 100% of the Company's stockholders
executed the Plan):
<TABLE>
<CAPTION>
Pro Forma
-----------
<S> <C>
Common shares outstanding 17,001,840
-----------
-----------
Common stock $ 17,002
Additional paid-in capital 4,093,217
Accumulated deficit during the
development stage (3,897,442)
-----------
Total stockholders' equity $ 212,777
-----------
-----------
</TABLE>
If the Reorganization had occurred on January 1, 1997, the pro forma effect
on basic and diluted loss per share for 1997 and 1998 would not have been
significant.
Since the Reorganization is not a business combination, additional pro forma
financial information otherwise required by the rules and regulations of the
Securities and Exchange Commission has not been presented.
AXR's common stock trades on the OTC Bulletin Board of the National
Association of Securities Dealers under the symbol "VTSL".
NAME CHANGE
AXR changed its name to VitriSeal, Inc. ("VSI") in February of 1999.
STOCK OPTIONS
On May 12, 1999, VSI granted non-statutory options to purchase 1,225,000
post-Reorganization shares of its common stock to certain employees,
directors and outside consultants at an exercise price of $1.75 per share.
Such options, which expire on June 30, 2009, became exercisable on the date
of grant. Management will adopt accounting policies for these stock options
during preparation of VSI's unaudited financial statements for the quarter
ending June 30, 1999.
The related parties listed below are among the recipients of the stock
options described in the preceding paragraph:
<TABLE>
<CAPTION>
Number of
Name Option Shares
---- -------------
<S> <C>
Culley W. Davis 300,000
Daniel Corbin 300,000
Dennis Repp 300,000
Hamlin Jennings (see Note 6) 100,000
Bruce Haglund 50,000
John Nagel 25,000
</TABLE>
As of June 26, 1999, VSI had not adopted a stock option plan.
- -------------------------------------------------------------------------------
PAGE 16
<PAGE>
NOTE 11: EXPENSE PAID BY A PRINCIPAL STOCKHOLDER
In March of 1995, PEI transferred as additional compensation 120,000 of its
Company shares to James A. Latty, Ph. D., owner of JAL Engineering and an
officer and stockholder of the Company in 1995 and 1996. JAL Engineering was
a former research consultant to the Company. At that time, the Board of
Directors estimated the value of the stock at $1.00 per share. In November of
1996, PEI repurchased such stock for cash. The Company has accounted for
these transactions by recording approximately $120,000 of research and
development expense.
NOTE 12: YEAR 2000 (UNAUDITED)
Many computerized systems use only two digits to record the year in date
fields; such systems may be unable to accurately process dates ending in the
year 2000 and thereafter. The effects of this problem will vary from system
to system, and may adversely affect the Company's operations and its ability
to prepare financial statements. Management has adopted a plan to review its
internal computer systems to determine the effects, if any, of the year 2000
problem. Year 2000 problems, if any, resulting in an adverse impact on the
Company from external sources, such as vendors, banks, etc. cannot be
determined.
- -------------------------------------------------------------------------------
PAGE 17
