<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FEBRUARY 6, 1998
-------------------------
(Date of earliest event reported)
EYE TECHNOLOGY, INC.
(Exact Name of Registrant as Specified in Charter)
DELAWARE 000-15324 52-1402131
-------- --------- ----------
(State or Other Jurisdiction (Commission (IRS Employer
of Incorporation) File Number) Identification No.)
16 SOUTH MARKET STREET
PETERSBURG, VIRGINIA 23803
(Address of Principal Executive Offices, Including Zip Code)
(804) 861-0681
-------------------------------
(Registrant's telephone number,
including area code)
<PAGE> 2
EYE TECHNOLOGY, INC.
FORM 8-K
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(a) Financial Statements of Businesses Acquired.
Filed herewith are the Balance Sheets of Star Tobacco &
Pharmaceuticals, Inc. as of December 31, 1996 and 1997, the related
Statements of Operations, Stockholders' Deficit and Cash Flows for the
years ended December 31, 1996 and 1997, and the related Notes to
Consolidated Financial Statements (unaudited).
(b) Pro Forma Financial Information.
Filed herewith are the Pro Forma Combined Condensed Statements of
Operations of the Registrant for the year ended December 31, 1997
(unaudited).
-2-
<PAGE> 3
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: April 20, 1998 EYE TECHNOLOGY, INC.
By: /s/ SAMUEL P. SEARS JR.
---------------------------------------
Samuel P. Sears, Jr., Chief Executive
Officer
-3-
<PAGE> 4
STAR TOBACCO & PHARMACEUTICALS, INC.
------------------------------------
Financial Statements
December 31, 1997 and 1996
<PAGE> 5
STAR TOBACCO & PHARMACEUTICALS, INC.
Table of Contents
<TABLE>
<CAPTION>
Page
<S> <C>
Independent Auditors' Report 2
Exhibit
A Balance Sheets 3-4
B Statements of Operations 5
C Statements of Stockholders' Deficit 6
D Statements of Cash Flows 7-8
Notes to Financial Statements 9-18
</TABLE>
<PAGE> 6
[KEITER, STEPHENS, HURST, GARY & SHREAVES, P.C. LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Star Tobacco & Pharmaceuticals, Inc.
Petersburg, Virginia:
We have audited the accompanying balance sheets of Star Tobacco &
Pharmaceuticals, Inc. as of December 31, 1997 and 1996, and the related
statements of operations, stockholders' deficit, and cash flows for the years
then ended. 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 Star Tobacco &
Pharmaceuticals, Inc. as of December 31, 1997 and 1996, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
/s/ KEITER, STEPHENS, HURST, GARY & SHREAVES, P.C.
Keiter, Stephens, Hurst, Gary & Shreaves, P.C.
March 24, 1998
<PAGE> 7
Exhibit A
STAR TOBACCO & PHARMACEUTICALS, INC.
Balance Sheets
December 31, 1997 and 1996
<TABLE>
<CAPTION>
Assets 1997 1996
------ ---- ----
<S> <C> <C>
Current assets:
Cash $ 10,929 $ 10,584
Accounts receivable:
Trade, net 760,941 1,047,920
Other 14,227 267,496
Inventories 605,392 1,616,831
Prepaid expenses 33,264 57,588
Notes receivable, current 56,725 60,851
------------- --------------
Total current assets 1,481,478 3,061,270
------------- --------------
Property and equipment:
Land 172,572 172,572
Buildings and improvements 269,484 269,484
Machinery and equipment 2,360,784 2,360,784
Sales equipment 441,932 441,500
Office equipment 116,074 112,975
------------- --------------
3,360,846 3,357,315
Less accumulated depreciation 945,214 589,921
------------- --------------
Property and equipment, net 2,415,632 2,767,394
------------- --------------
Other assets:
Intangibles, net of amortization of
$178,254 in 1997 and $109,869 in 1996 157,557 225,942
Notes receivable, long-term 64,969 589,377
------------- --------------
Total other assets 222,526 815,319
------------- --------------
$ 4,119,636 $ 6,643,983
============= ==============
</TABLE>
See accompanying notes to financial statements. 3
<PAGE> 8
Exhibit A
STAR TOBACCO & PHARMACEUTICALS, INC.
Balance Sheets
December 31, 1997 and 1996
<TABLE>
<CAPTION>
Liabilities and Stockholders' Deficit 1997 1996
------------------------------------- ---- ----
<S> <C> <C>
Current liabilities:
Cash overdraft $ 198,337 $ 190,553
Line of credit 1,095,801 1,369,919
Current maturities of notes payable 647,947 673,824
Accounts payable 2,375,903 1,917,603
Federal excise taxes payable 359,783 537,869
Accrued expenses:
Salaries and wages 39,038 94,916
Interest 39,263 13,632
Other 6,807 28,653
------------- --------------
Total current liabilities 4,762,879 4,826,969
Notes payable, less current maturities 1,099,242 2,655,141
------------- --------------
Total liabilities 5,862,121 7,482,110
------------- --------------
Commitments and contingencies
Stockholders' deficit:
Common stock, no par value per share:
1,000 shares authorized, 200 shares
issued and outstanding 383,557 383,557
Additional paid-in capital 1,004,607 16,320
Accumulated deficit (3,130,649) (988,004)
Notes receivable from stockholders -- (250,000)
------------- --------------
Total stockholders' deficit (1,742,485) (838,127)
------------- --------------
$ 4,119,636 $ 6,643,983
============= ==============
</TABLE>
See accompanying notes to financial statements. 4
<PAGE> 9
Exhibit B
STAR TOBACCO & PHARMACEUTICALS, INC.
Statements of Operations
For the Years ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
--------------------------------- ----------------------------------
Amount Percent Amount Percent
------------ ------------- ----------- ----------
<S> <C> <C> <C> <C>
Net sales $ 20,763,856 100.00% $ 34,260,279 100.00%
Cost of goods sold 10,033,330 48.32 16,150,442 47.14
Excise taxes on products 7,810,720 37.62 13,471,282 39.32
------------ ------------ ------------ --------
Gross profit 2,919,806 14.06 4,638,555 13.54
------------ ------------ ------------ --------
Operating expenses:
Marketing and distribution expenses 1,111,420 5.35 1,991,130 5.81
General and administrative expenses 1,425,299 6.86 1,637,417 4.78
Research and development 2,134,656 10.29 1,331,218 3.89
------------ ------------ ------------ --------
Total operating expenses 4,671,375 22.50 4,959,765 14.48
------------ ------------ ------------ --------
Operating loss (1,751,569) (8.44) (321,210) (.94)
------------ ------------ ------------ --------
Other income (expenses):
Other 21,073 .10 44,795 .13
Interest expense (256,001) (1.23) (476,542) (1.39)
------------ ------------ ------------ --------
Net other expense (234,928) (1.13) (431,747) (1.26)
------------ ------------ ------------ --------
Net loss $ (1,986,497) (9.57)% $ (752,957) (2.20)%
============ ============ ============ =========
Pro forma presentation applicable to
conversion from S corporation to C
corporation:
Net income before pro forma income
tax expense $ (1,986,497)
Pro forma income tax expense --
------------
Pro forma net loss $ (1,986,497)
============
Pro forma basic loss per common share $ (9,932)
============
</TABLE>
See accompanying notes to financial statements. 5
<PAGE> 10
Exhibit C
STAR TOBACCO & PHARMACEUTICALS, INC.
Statements of Stockholders' Deficit
For the Years ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
Common Stock Additional Notes
--------------------------- Paid-In Accumulated Receivable
Shares Amount Capital Deficit Stockholders Total
------------ ------------ ----------- ------------ ------------ -----
<S> <C> <C> <C> <C> <C> <C>
December 31, 1995 200 $ 383,557 $ 16,320 $ (93,210) $ (250,000) $ 56,667
Net loss -- -- -- (752 957 -- (752,957)
Distributions -- -- -- (141,837) -- (141,837)
----------- ----------- ----------- ----------- ----------- -----------
December 31, 1996 200 383,557 16,320 (988,004) (250,000) (838,127)
Collection of note
receivable -- -- -- -- 250,000 250,000
Conversion of note
payable to equity -- -- 923,499 -- -- 923,499
Capital contribution -- -- 64,788 -- -- 64,788
Net loss -- -- -- (1,986,497) -- (1,986,497)
Distributions -- -- -- (156,148) -- (156,148)
----------- ----------- ----------- ----------- ----------- -----------
December 31, 1997 200 $ 383,557 $ 1,004,607 $(3,130,649) $ -- $(1,742,485)
=========== =========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements. 6
<PAGE> 11
Exhibit D
STAR TOBACCO & PHARMACEUTICALS, INC.
Statements of Cash Flows
For the Years ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Operating activities:
Net loss $(1,986,497) $ (752,957)
Adjustments to reconcile net loss to
net cash provided (used) by operating activities:
Depreciation 355,292 362 555
Amortization 68,385 62 468
Gain on fixed asset disposal -- (21,376)
(Increase) decrease in:
Accounts receivables 540,248 672 427
Inventories 1,011,439 400 932
Prepaid expenses 24,324 (22,998)
(Decrease) increase in:
Accounts payable 458,300 (416,548)
Federal excise taxes payable (178,086) (66,912)
Accrued expenses (52,093) (231,119)
----------- -----------
Net cash provided (used) by operating activities 241,312 (13,528)
----------- -----------
Investing activities:
Collections of notes receivable 19,045 98,522
Purchases of property and equipment (3,530) (170,725)
Proceeds from disposal of property and equipment -- 76,443
Purchases of intangible assets -- (47,452)
----------- -----------
Net cash provided (used) by investing activities 15,515 (43,212)
----------- -----------
Financing activities:
Lease deposits collected -- 2,600
Payments on line of credit, net (274,118) (257,711)
Proceeds from notes payable 300,000 1,580,000
Payments on notes payable (198,788) (1,251,035)
Increase in cash overdraft 7,784 131,594
Proceeds from capital contribution 64,788 --
Stockholder distributions (156,148) (141,837)
----------- -----------
Net cash provided (used) by financing activities (256,482) 63,611
----------- -----------
</TABLE>
See accompanying notes to financial statements. 7
<PAGE> 12
Exhibit D
STAR TOBACCO & PHARMACEUTICALS, INC.
Statements of Cash Flows, Continued
For the Years ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Increase in cash $ 345 $ 6,871
Cash, January 1 10,584 3,713
-------- --------
Cash, December 31 $ 10,929 $ 10,584
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $230,370 $496,806
======== ========
Supplemental schedule of noncash investing and financing activities:
Issuance of note receivable for sale of building $ -- $ 68,800
Repayment of related party note payable with
related party note receivable $759,489 $ --
Conversion of related party note payable to equity $923,499 $ --
</TABLE>
See accompanying notes to financial statements. 8
<PAGE> 13
STAR TOBACCO & PHARMACEUTICALS, INC.
Notes to Financial Statements
1. Summary of significant accounting policies:
a. Nature of business:
Star Tobacco and Pharmaceuticals, Inc., formerly named Star
Tobacco Corporation, was incorporated under the laws of the
Commonwealth of Virginia on November 14, 1990.
The Company has been engaged since 1991 in the manufacture and
sale of tobacco products. Since 1994, the Company has also
engaged in extensive research and development activities
relating to the production of less harmful tobacco and to the
development of tobacco products and smoking cessation products
which contains less harmful tobacco. Through the year ended
December 31, 1997, the Company had not yet marketed or
received any revenues from products developed from its
research and development activities.
In January, 1998, the Company introduced to the consumer
market a chewing gum containing an FDA-approved tobacco
flavoring.
During both 1997 and 1996, the Company had sales to one
customer which represented approximately 19% and 22%,
respectively, of net sales. No one geographical area was
significant.
b. Use of estimates:
Management uses estimates and assumptions in preparing these
financial statements in accordance with generally accepted
accounting policies. Those estimates and assumptions affect
the reported amount of assets and liabilities, the disclosure
of contingent assets and liabilities, and the reported
revenues and expenses. Actual results could vary from the
estimates that were used.
c. Fair value of financial instruments:
The Company's financial instruments consist of cash,
short-term trade receivables and payables for which the
current carrying amounts approximate fair market value.
Additionally, the borrowing rates currently available to the
Company approximate the rates for debt agreements with similar
terms and average maturities.
d. Cash:
The Company's definition of cash includes items such as
short-term, highly liquid investments with maturities of three
months or less at date of purchase.
9
<PAGE> 14
STAR TOBACCO & PHARMACEUTICALS, INC.
Notes to Financial Statements, Continued
1. Summary of significant accounting policies, continued:
e. Accounts receivable:
The Company uses the reserve method of accounting for bad
debts for financial reporting. The Company also records an
allowance for returns and discounts. Allowances amounted to
$167,091 and $122,940 at December 31, 1997 and 1996,
respectively.
f. Inventories:
Inventories are valued at the lower of cost or market. Cost is
determined on the first-in, first-out (FIFO) method.
g. Property and equipment:
Property and equipment are recorded at cost. Depreciation is
computed by the straight-line method over the estimated useful
lives of three to seven years for sales equipment, office
equipment and machinery and equipment and thirty-nine years
for buildings and improvements. Expenditures for maintenance,
repairs and minor renewals to property and equipment are
expensed in the year in which incurred.
h. Intangibles:
Intangibles consist primarily of trademarks and packaging
design costs. Intangibles are amortized by the straight-line
method over a period of 15 years for trademarks and 5 years
for packaging design costs.
i. Income taxes:
The Company has been an S Corporation since August 1, 1991 for
federal income tax purposes. Accordingly, the taxable income
or loss of the Company has been "passed-through" to its
stockholders, and they have been subject to the tax on any
income earned by the Company.
10
<PAGE> 15
STAR TOBACCO & PHARMACEUTICALS, INC.
Notes to Financial Statements, Continued
1. Summary of significant accounting policies, continued:
i. Income taxes, continued:
As more fully described in Note 12, the Company had a change
in ownership and merged with a public company, which caused
the income tax status of the Company to change. Management
believes that the Company is no longer eligible for S
corporation status effective February 6, 1998. As a C
corporation, the Company will be responsible for income taxes
payable resulting from earnings subsequent to February 6,
1998. Additionally, under the provisions of Financial
Accounting Standards Board ("FASB") Statement No. 109,
Accounting for Income Taxes, deferred tax assets and
liabilities are computed based on the difference between the
financial statement and tax bases of assets and liabilities
using currently enacted tax rates.
j. Credit risk:
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash and
receivables.
The Company maintains its cash balances in two financial
institutions. Each of the balances are insured by the Federal
Deposit Insurance Corporation up to $100,000.
Trade accounts receivable result from sales of tobacco
products to its various customers throughout the United
States. Credit is extended to customers after an evaluation
for credit worthiness; however, the Company does not require
collateral or other security from customers.
k. Research and development costs:
Research and development costs are charged to expense when
incurred.
l. Net loss per common share:
In 1997, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 128, Earnings per Share. SFAS No. 128 replaced
the previously reported primary and fully diluted earnings per
share with basic and diluted earnings per share. Unlike
primary earnings per share, basic earnings per share excludes
any dilutive effects of options, warrants and convertible
securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. Basic
11
<PAGE> 16
STAR TOBACCO & PHARMACEUTICALS, INC.
Notes to Financial Statements, Continued
1. Summary of significant accounting policies, continued:
l. Net loss per common share, continued:
earnings per share is computed using the weighted-average
number of common shares outstanding during the period. Diluted
earnings per share is computed using the weighted-average
number of common shares and potential common shares
outstanding during the period. Potential common shares are
excluded from the computation if their effect is antidilutive.
Pro forma basic loss per common share was computed using 200
shares, the weighted-average number of common shares
outstanding. The Company had no potential common shares
outstanding.
2. Inventories:
The following summarizes inventories at December 31, 1997 and 1996:
<TABLE>
1997 1996
---- ----
<S> <C> <C>
Raw materials $ 282,594 $ 550,262
Packaging materials 203,102 664,662
Finished goods 119,696 401,907
----------- -----------
$ 605,392 $ 1,616,831
=========== ===========
</TABLE>
3. Notes receivable:
Notes receivable consists of the following at December 31, 1997 and
1996:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Related parties (note 6):
Note receivable from a related entity due in
ten annual installments of $32,790 including
principal and interest at 8.00%. Unsecured. $ - $ 220,022
Note receivable from related parties with
interest at the applicable Federal short-term
rate. Unsecured and due upon demand. - 209,102
</TABLE>
12
<PAGE> 17
STAR TOBACCO & PHARMACEUTICALS, INC.
Notes to Financial Statements, Continued
3. Notes receivable, continued:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Related parties (note 6), continued:
Note receivable from related parties with
interest at the applicable Federal short-term
rate. Unsecured and due upon demand $ -- $ 87,445
-------- --------
Total notes receivable from related parties -- 516,569
Other:
Note receivable from an unrelated entity for the sale of
the Factory Cigarette Outlets
Interest at 9.25%, due upon demand 54,807 65,000
Note receivable from an unrelated entity for
the sale of a building. Interest at 8.00%,
due in monthly installments of $600 through
November, 2001 66,887 68,659
-------- --------
Total notes receivable 121,694 650,228
Less current portion 56,725 60,851
-------- --------
$ 64,969 $589,377
======== ========
</TABLE>
4. Line of credit:
The Company has a revolving line of credit agreement with NationsBanc
Commercial Corporation that provides up to $2,000,000 for working
capital requirements with interest charged monthly on outstanding
amounts at 1.25% above the prime interest rate. Amounts borrowed are
collateralized by the inventory, receivables and equipment and are
guaranteed by the stockholders. At December 31, 1997 and 1996,
borrowings under the line of credit agreement amounted to $1,095,801
and $1,369,919, respectively.
At both December 31, 1997 and 1996, the Company was not in compliance
with various covenants required by the line of credit and the bank
considers the loan to be in default. The bank has agreed to extend the
termination date of the loan to April 30, 1998.
13
<PAGE> 18
STAR TOBACCO & PHARMACEUTICALS, INC.
Notes to Financial Statements, Continued
5. Notes payable:
Notes payable consists of the following at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Related parties (note 6):
Term note payable to a related entity in
three annual installments of $100,000
commencing in January, 1996. Interest at
9.5% is payable monthly. Subordinated to the
NationsBanc Commercial Corporation note $ 295,000 $ 300,000
Term note payable to a related entity in sixteen quarterly
installments of $50,000 commencing in August, 1996 and
one final payment of $700,000 in June, 2000. Interest at
9.5% is payable monthly. Subordinated to the NationsBanc
Commercial Corporation note 97,012 1,500,000
Note payable to a related entity maturing
in June, 2000. Interest at 8.0% payable
monthly. Subordinated to the NationsBanc
Commercial Corporation note -- 200,000
Note payable to a related entity maturing in
June, 2000. Interest at 8.0% payable monthly
Subordinated to the NationsBanc Commercial
Corporation note -- 80,000
---------- ----------
Total notes payable to related parties 392,012 2,080,000
Other:
Term note payable to Regency Bank in 59 monthly
installments of $3,111 of principal and interest
commencing January, 1997 and a final principal payment of
$244,762 due December, 2001. Interest is at prime plus 1%
and the note is secured by a first deed of trust on
certain real property and personal
guaranty of stockholders 289,995 300,000
</TABLE>
14
<PAGE> 19
STAR TOBACCO & PHARMACEUTICALS, INC.
Notes to Financial Statements, Continued
5. Notes payable, continued:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Other, continued:
Term note payable to G.E. Capital Corporation in 61
monthly installments of $21,047 of principal and interest
through September, 2001. Interest is at a rate of 10.15%
and the note is secured by
various manufacturing equipment. $ 785,149 $ 948,965
Term note payable to G.E. Capital Corporation in 50
monthly installments of $7,262 of principal and interest
through October, 2001. Interest is at a rate of 9.31% and
the note is secured by
various manufacturing equipment. 280,033 --
---------- ----------
Total notes payable 1,747,189 3,328,965
Less current portion 647,947 673,824
---------- ----------
$1,099,242 $2,655,141
========== ==========
</TABLE>
The annual maturities of notes payable are as follows:
<TABLE>
<CAPTION>
Year Ended
December 31,
<S> <C>
1998 $ 647,947
1999 282,444
2000 311,702
2001 505,096
-------------
$ 1,747,189
=============
</TABLE>
15
<PAGE> 20
STAR TOBACCO & PHARMACEUTICALS, INC.
Notes to Financial Statements, Continued
6. Related party transactions:
The Company has entered into certain transactions with companies and
trusts that are owned by members of management and stockholders. The
following is a summary of related party transactions and balances as of
December 31, 1997 and 1996 and for the years then ended:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Related party transactions:
Interest income $ -- $ 20,402
Interest expense 28,975 171,000
Management fees 565,000 387,500
Aircraft expenses 238,750 --
Related party balances:
Notes receivable (note 3) -- 516,569
Notes receivable - stockholders -- 250,000
Notes payable (note 5) 392,012 2,080,000
Accrued interest expense 21,330 --
</TABLE>
On January 1, 1997, the Company consolidated the majority of the
related party notes payable and all of the related party notes
receivable and repaid $759,489 of the related party note payable by
offsetting the related party note receivable. The remaining related
party note payable of $923,499 was then converted to equity.
The Company paid a related entity $565,000 in 1997 and $387,500 in 1996
for management fees. The Company is also leasing an aircraft from a
related entity on a short-term basis with all expenses associated with
the use of the aircraft amounting to $238,750 in 1997 and $-0- in 1996.
7. Employee benefit plan:
In 1995, the Company adopted Internal Revenue Code Section 401(k) and
became the sponsor of a defined contribution retirement plan covering
all employees who meet certain eligibility and participation
requirements. Participants may contribute up to 15% of their
compensation. The Company may make an annual discretionary
contribution. The Company made no contribution for 1997 or 1996.
16
<PAGE> 21
STAR TOBACCO & PHARMACEUTICALS, INC.
Notes to Financial Statements, Continued
8. Leases:
The following is a schedule by years of future minimum rental payments
required under operating leases (primarily for vehicles) that have
initial or remaining noncancellable lease terms in excess of one year
as of December 31, 1997:
<TABLE>
<CAPTION>
Year Amount
---- ------
<S> <C>
1998 $ 99,508
1999 56,707
2000 3,304
---------------
$ 159,519
===============
</TABLE>
Lease expense for all leases, including leases with terms of less than
one year, amounted to $169,988 and $204,845 for the years ended
December 31, 1997 and 1996, respectively.
9. Litigation:
The Company is involved in legal actions in the ordinary course of its
business. Although the outcome of any such legal actions cannot be
predicted, in the opinion of management, there are no legal proceedings
pending against or involving the Company whose outcome is likely to
have a material adverse effect upon the financial position or results
of operations of the Company.
10. Risks and uncertainties:
The Company has incurred losses from operations, has a net working
capital and equity deficit and is in default on its line of credit.
These factors are substantially due to the Company's significant
investment in research and development activities. Management is in the
process of raising additional capital which it believes will be
sufficient for the Company to continue its research and development
activities and normal operations. In addition, the shareholders of the
Company have agreed to financially support the operations of the entity
and have the ability to do so.
11. Advertising costs:
Advertising costs are expensed as incurred and are included in
marketing and distribution expenses. For the years ended December 31,
1997 and 1996, the costs were $59,930 and $254,306, respectively.
17
<PAGE> 22
STAR TOBACCO & PHARMACEUTICALS, INC.
Notes to Financial Statements, Continued
12. Subsequent events:
Merger:
On February 6, 1998, Star Tobacco & Pharmaceuticals, Inc. ("Star")
entered into a stock exchange agreement with Eye Technology, Inc., a
publicly-owned company. Under the agreement, the Company exchanged all
of its common stock for shares of series B convertible voting preferred
stock, which when converted would equal approximately 90% of the
outstanding common stock of Eye Technology, Inc. For accounting
purposes, the acquisition has been treated as a reverse acquisition
with Star as the accounting acquirer. The accounting acquirer expects
to treat the merger as a purchase acquisition.
Income taxes:
As discussed in Note 1, effective February 6, 1998, the Company will no
longer be treated as an S Corporation for tax purposes and will be
subject to corporate income taxes. If the Company had been subject to
corporate income taxes during 1997, it would not have any current
income tax liability due to its operating losses. The Company would
have a deferred income tax asset resulting from the net operating
losses and a deferred income tax liability resulting primarily from
temporary differences in depreciation. A valuation allowance would have
been established to fully reserve the excess of the deferred tax asset
over the deferred tax liability due to the uncertainty of the
utilization of the operating loss carryforward.
At the date of the change in tax status, the Company had approximately
$100,000 in deferred income tax liabilities that will be realized in
future tax periods.
18
<PAGE> 23
EYE TECHNOLOGY, INC. AND SUBSIDIARIES
AND
STAR TOBACCO & PHARMACEUTICALS, INC.
Pro Forma Condensed Consolidated Financial Statements
(Unaudited)
December 31, 1997
<PAGE> 24
EYE TECHNOLOGY, INC. AND SUBSIDIARIES
AND
STAR TOBACCO & PHARMACEUTICALS, INC.
Pro Forma Condensed Consolidated Financial Statements
(Unaudited)
December 31, 1997
These pro forma condensed consolidated financial statements reflect the February
6, 1998 merger of Eye Technology, Inc. and subsidiaries, a publicly-owned
company, and Star Tobacco & Pharmaceuticals, Inc., a privately-owned company.
The pro forma balance sheet and statement of operations present the balance
sheet as if the transaction occurred to correspond with the Companies' year end
and the statement of operations as if the transaction occurred at the beginning
of the year presented.
For accounting purposes, the transaction is recorded as a reverse acquisition
with Star Tobacco & Pharmaceuticals, Inc. as the accounting acquirer. In a
reverse acquisition, the accounting acquirer is treated as the surviving entity,
even though the registrant's legal existence does not change and the financial
statements refer to Eye Technology, Inc., not Star Tobacco & Pharmaceuticals,
Inc. The accounting acquirer treats the merger as a purchase acquisition. As a
result, the merger has been recorded using the historical cost basis for the
assets and liabilities of Star Tobacco & Pharmaceuticals, Inc., as adjusted, and
the estimated fair value of Eye Technology, Inc. and subsidiaries assets and
liabilities.
A further description of the merger and pro forma adjustments follow the
unaudited pro forma condensed consolidated financial statements.
1
<PAGE> 25
EYE TECHNOLOGY, INC. AND SUBSIDIARIES
AND
STAR TOBACCO & PHARMACEUTICALS, INC.
Pro Forma Condensed Consolidated Balance Sheet
(Unaudited)
December 31, 1997
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Assets Eye Tech Star Adjustments Consolidation
------ -------- ---- ----------- -------------
<S> <C> <C> <C> <C>
Current assets:
Cash $ 3,243 $ 10,929 $ -- $ 14,172
Accounts receivable 52,214 775,168 -- 827,382
Inventories 894,077 605,392 -- 1,499,469
Other current assets 7,177 89,989 -- 97,166
---------- ---------- ---------- ----------
Total current assets 956,711 1,481,478 -- 2,438,189
---------- ---------- ---------- ----------
Property and equipment, net 48,514 2,415,632 -- 2,464,146
---------- ---------- ---------- ----------
Other assets:
Intangibles, net of amortization 193,793 157,557 748,445(2) 1,099,795
Other assets 54,225 64,969 -- 119,194
---------- ---------- ---------- ----------
Total other assets 248,018 222,526 748,445 1,218,989
---------- ---------- ---------- ----------
$1,253,243 $4,119,636 $ 748,445 $6,121,324
========== ========== ========== ==========
</TABLE>
See notes to pro forma condensed consolidated financial statements. 2
<PAGE> 26
EYE TECHNOLOGY, INC. AND SUBSIDIARIES
AND
STAR TOBACCO & PHARMACEUTICALS, INC.
Pro Forma Condensed Consolidated Balance Sheet
(Unaudited)
December 31, 1997
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Liabilities and Stockholders' Deficit Eye Tech Star Adjustments Consolidated
- ------------------------------------- ----------- ---- ------------ ------------
<S> <C> <C> <C> <C>
Current liabilities:
Line of credit $ - $ 1,294,138 $ - $ 1,294,138
Current maturities of notes
payable 452,638 647,947 (156,000)(1) 944,585
Accounts payable 478,348 2,375,903 - 2,854,251
Federal excise taxes payable - 359,783 - 359,783
Accrued expenses 1,280,484 85,108 (310,782)(1) 1,054,810
-------------- ------------ ------------- -------------
Total current liabilities 2,211,470 4,762,879 (466,782) 6,507,567
Notes payable, less current
maturities - 1,099,242 - 1,099,242
--------------- ------------ ------------- -------------
Total liabilities 2,211,470 5,862,121 (466,782) 7,606,809
-------------- ------------ ------------- -------------
Commitments and contingencies
Redeemable preferred stock 257,000 - 138 (2) 257,138
-------------- ------------ ------------- -------------
Stockholders' deficit:
Common stock 34,352 383,557 12,388 (1) 46,740
(383,557)(2)
Additional paid-in capital 8,777,505 1,004,607 454,394 (1) 1,341,286
(8,895,220)(2)
Accumulated deficit (10,027,084) (3,130,649) 10,027 084 (2) (3,130,649)
-------------- ------------ ------------- -------------
Total stockholders' deficit (1,215,227) (1,742,485) 1,215,089 (1,742,623)
-------------- ------------ ------------- -------------
$ 1,253,243 $ 4,119,636 $ 748,445 $ 6,121,324
============== ============ ============= =============
</TABLE>
See notes to pro forma condensed consolidated financial statements. 3
<PAGE> 27
EYE TECHNOLOGY, INC. AND SUBSIDIARIES
AND
STAR TOBACCO & PHARMACEUTICALS, INC.
Pro Forma Condensed Consolidated Statement of Operations
(Unaudited)
For the Year ended December 31, 1997
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Eye Tech Star Adjustments Consolidation
-------- --------- ------------ -------------
<S> <C> <C> <C> <C>
Net sales $ 1,333,431 $ 20,763,856 $ -- $ 22,097,287
Cost of goods sold 748,018 10,033,330 -- 10,781,348
Excise taxes on products -- 7,810,720 -- 7,810,720
------------ ------------ ------------ ------------
Gross profit 585,413 2,919,806 -- 3,505,219
------------ ------------ ------------ ------------
Operating expenses:
Marketing and distribution
expenses 197,422 1,111,420 -- 1,308,842
General and administrative
expenses 888,746 1,425,299 149,689(3) 2,463,734
Research and development -- 2,134,656 -- 2,134,656
------------ ------------ ------------ ------------
Total operating expenses 1,086,168 4,671,375 149,689 5,907,232
------------ ------------ ------------ ------------
Operating loss (500,755) (1,751,569) (149,689) (2,402,013)
------------ ------------ ------------ ------------
Other income (expenses):
Other 331,140 21,073 -- 352,213
Interest expense (160,576) (256,001) -- (416,577)
------------ ------------ ------------ ------------
Net other income
(expense) 170,564 (234,928) -- (64,364)
------------ ------------ ------------ ------------
Net loss $ (330,191) $ (1,986,497) $ (149,689) $ (2,466,377)
============ ============ ============ ============
Pro forma presentation applicable
to conversion from S corporation
to C corporation:
Net loss before pro forma
income tax expense $ (330,191) $(1,986,497) $ (2,466,377)
Pro forma income tax expense -- -- --
----------- ----------- -------------
Pro forma net loss $ (330,191) $(1,986,497) $ (2,466,377)
=========== =========== =============
Pro forma basic loss per
common share $ (.10) $ (9,932) $ (.53)
=========== =========== =============
Weighted average number of
shares 3,435,190 200 4,673,990
=========== =========== =============
</TABLE>
See notes to pro forma condensed consolidated financial statements. 4
<PAGE> 28
EYE TECHNOLOGY, INC. AND SUBSIDIARIES
AND
STAR TOBACCO & PHARMACEUTICALS, INC.
Notes to Pro Forma Condensed Consolidated Financial Statements
(Unaudited)
A. Description of merger:
On February 6, 1998, Eye Technology, Inc. and subsidiaries, a
publicly-owned company, entered into a stock exchange agreement with
Star Tobacco & Pharmaceuticals, Inc., a privately-owned company. Under
the agreement, Star Tobacco & Pharmaceuticals, Inc. exchanged all of
its common stock for 13,831 shares of Series B convertible voting
preferred stock, par value $.01 per share. When converted this stock
would equal 45,367,251 shares of common stock, approximately 90% of the
outstanding common stock of Eye Technology, Inc. and subsidiaries as of
the transaction date. These potential common shares have not been
included in the pro forma basic loss per common share calculation as it
would be antidilutive.
The value assigned the net assets of Eye Technology, Inc. and
subsidiaries was based on fair value. The excess of liabilities assumed
over assets acquired amounted to $748,445 and was assigned to goodwill.
B. Pro forma adjustments:
The following is a description and summary of the pro forma adjustments
for the consolidated balance sheet:
<TABLE>
DR (CR)
-------
<S> <C>
(1) Notes payable $ 156,000
Accrued expenses 310,782
Common stock (12,388)
Additional paid-in capital (454,394)
To record issuance of 1,238,800 shares of common stock used to
reduce a related party note payable and various accrued
expenses as part of the merger agreement.
(2) Goodwill 748,445
Common stock 383,557
Additional paid-in capital 8,895,220
Redeemable preferred stock (138)
Accumulated deficit (10,027,084)
To record purchase accounting adjustments based upon terms of
the transaction in accordance with Accounting Principles Board
Statement No. 16.
The pro forma adjustment associated with the consolidated statement of
operations is as follows:
Goodwill amortization $ 149,689
</TABLE>
To record amortization of goodwill based upon a 5-year life.
5
<PAGE> 29
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 14,172
<SECURITIES> 0
<RECEIVABLES> 827,382
<ALLOWANCES> 0
<INVENTORY> 1,499,469
<CURRENT-ASSETS> 2,438,189
<PP&E> 2,464,146
<DEPRECIATION> 0
<TOTAL-ASSETS> 6,121,324
<CURRENT-LIABILITIES> 6,507,567
<BONDS> 1,099,242
257,138
0
<COMMON> 46,740
<OTHER-SE> (1,789,363)
<TOTAL-LIABILITY-AND-EQUITY> 6,121,324
<SALES> 22,097,287
<TOTAL-REVENUES> 22,097,287
<CGS> 10,781,348
<TOTAL-COSTS> 18,592,068
<OTHER-EXPENSES> 5,391,512
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (416,577)
<INCOME-PRETAX> (2,466,377)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,466,377)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,466,377)
<EPS-PRIMARY> (0.53)
<EPS-DILUTED> (0.53)
</TABLE>
