<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(Mark One)
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the quarterly period ended September 30, 1998
-------------------------------------------------
[ ] Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from to
------------------------ ---------------------
Commission file number 0-15324
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Eye Technology, Inc.
- - --------------------------------------------------------------------------------
(Exact Name of Small Business Issuer as Specified in Its Charter)
Delaware 52-1402131
- - --------------------------------------------------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
16 South Market Street, Petersburg, Virginia 23803
- - --------------------------------------------------------------------------------
(Address of Principal Executive Offices)
(804) 861-0681
- - --------------------------------------------------------------------------------
(Issuer's Telephone Number, Including Area Code)
- - --------------------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Check whether the issuer: (1) filed all reports 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 [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Check whether the registrant filed all documents and reports required
to be filed by Section 12, 13 or 15(d) of the Exchange Act after the
distribution of securities under a plan confirmed by a court.
Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: 9,669,740 shares of Common
Stock, $.01 par value, 250 shares of Class A Convertible Preferred Stock
(convertible into 20,000 shares of Common Stock), 14,086 shares of Series B
Convertible Preferred Stock (convertible into 45,118,720 shares of Common
Stock), outstanding as of November 12, 1998
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [ ]
<PAGE> 2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
An index to the financial statements of the Company filed as a part of
this report appears at Page F-1. The financial statements of the Company appear
at Pages F-2 through F-10 of this report.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO
NINE MONTHS ENDED SEPTEMBER 30, 1997
The results of operations for the first nine months of 1998 include the
results of operations of Star Tobacco and Pharmaceuticals, Inc. ("Star") for the
entire period, consolidated with those of Eye Technology, Inc. ("ETI") and its
subsidiaries since the beginning of February, 1998, while the results of
operations for the first nine months of 1997 include only those of Star.
Net sales declined by 34.2%, or $5.86 million dollars, from the first
nine months of 1997 to the first nine months of 1998, which include sales of
$537,425 of ETI. The decline in sales is attributable to: (i) the loss of
contract manufacturing business, primarily sales to Swisher International, Inc.
for the manufacture of small cigars, which declined from 3.56 million dollars in
the 1997 period to less than $30,000 in the 1998 period; (ii) declining sales of
Star brand cigarettes due to management's decision to de-emphasize single order,
high volume, low margin sales; and (iii) an emphasis within Star of management
attention to development of its proprietary tobacco processing technology. The
1998 results also reflect net sales of $255,436 of GUMSMOKE(R), a
tobacco-flavored, non-nicotine chewing gum first sold by the Company in the
first quarter of 1998 but subsequently discontinued by the Company.
Costs of goods sold ("COGS"), as a percentage of sales, decreased from
48.0% in the first nine months of 1997 to 45.5% in the comparable period of
1998. The percentage of COGS on ETI's sales was 79% in the first nine months of
1998, whereas the percentage of COGS on Star's sales was 43.9%, an improvement
of 4.10% over the comparable 1997 period. The Company's improved gross profit
margin is due primarily to increases in product pricing as well as improvements
in manufacturing efficiencies and product configurations. The Company's ability
to raise its prices has benefitted, particularly in recent months, from general
industry conditions whereby the prices of the leading cigarette manufacturers
have risen substantially due to litigation settlements.
Excise taxes, as a percentage of sales, increased from 36.7% in the
1997 nine-month period to 44.6% in the 1998 nine-month period. The increase is
mostly attributable to the fact that no federal tobacco excise taxes were
payable by Star on its sales of little cigars to Swisher International, Inc.
As a result of the above-described factors, gross profit margins of the
Company declined from 15.4% of sales in the 1997 period to 9.8% in the 1998
period.
Marketing and distribution expenses increased only slightly in dollar
amount from the first nine months of 1997 compared to the first nine months of
1998, but as a percentage of sales the increase was from 4.7% to 7.9%. The
percentage increase is attributable to three factors: (1) the effect of
relatively fixed overhead costs which become a larger percentage of sales as
sales volume declines; (2) expenses incurred in the introduction in the first
quarter of 1998 of GUMSMOKE(R) chewing gum; and (3) to a revised method of
compensating sales persons which resulted in higher selling expense.
General and administrative expenses increased significantly from the
first nine months of 1997 to the first nine months of 1998 - from $1,120,647, or
6.5% of sales in 1997, to $1,887,447, or 16.7% of sales in 1998. The 1998 amount
includes $354,601 incurred at ETI. The increase is also due to the following:
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(1) substantially higher legal and accounting expenses due primarily to the
Company's need to bring itself into compliance with Securities and Exchange
Commission reporting requirements following the "reverse acquisition" of ETI by
Star in February, 1998; (2) increased management compensation expense relating
primarily to the hiring of a new Chief Executive Officer; (3) goodwill expense
in 1998 of $96,000 resulting from the "reverse acquisition" transaction; and (4)
a write-off of $180,000 of the carrying value of technology acquired by ETI in
1994. Moreover, the percentage increase may be attributed in part to the fact
that relatively fixed expenses constitute a higher proportion of a lesser sales
figure.
Research and development expenses declined slightly in the first nine
months of 1998 compared to the same period in 1997, or by 7.5% and $97,000. All
of these expenses in both periods were incurred by Star and not ETI, are related
to the development of the Company's proprietary technology for the elimination
of nitrosamines from tobacco, and were not related to the Company's
revenue-producing operations.
The net expense of $305,462 under "Other" in the 1998 nine-month period
reflects a non-recurring loss on the sale of surplus cigarette manufacturing
equipment.
Interest expense increased by $124,000 from the 1997 nine-month period
to the comparable period in 1998. The increase is attributable primarily to fees
incurred to maintain a revolving line of credit with one bank and to cause a
second bank to take over the credit line.
The extraordinary gain of $293,606 in 1998 reflects settlements with
various creditors of ETI entered into at the time of the "reverse acquisition"
transaction between Star and ETI in February, 1998.
As a result of all of the above factors, the Company's net loss
increased from $765,000 for the first nine months of 1997 to $3,196,000 for the
same period of 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company's balance sheet at September 30, 1998, reflects an illiquid
position with a current asset to current liability ratio of 1 to 1.6, which is
nevertheless improved from a 1 to 2.45 ratio at June 30, 1998.
In years prior to 1998, operations at Star were financed primarily
through increases in accounts payable, accrued expenses and borrowed funds from
institutional and private lenders. In the first nine months of 1998, the Company
relied upon equity financings rather than increases in debt to fund operations.
It has received, mostly in the third quarter ended September 30, in excess of
four million dollars through sales of capital stock, allowing the Company to
reduce its levels of borrowed funds and, to a lesser extent, its levels of
accounts payable and accrued expenses.
In July 1998, through arrangements initiated by the Company, the
Company's bank line of credit, by which advances to the Company were limited by
formula to specified levels of Star's accounts receivable and inventory, was
assigned to a different bank with then existing defaults being waived. The
Company has maintained its loan balance at approximately $630,000, and has not
relied upon this credit facility for additional advances. By its terms, the loan
agreement expires on December 31, 1998. The Company expects to extend the loan
term, to replace it with a new credit facility, or to retire the indebtedness.
Equity financings in 1998 have included the following: in the first
quarter, the Company sold 2.9 million shares of Common Stock to private
investors for 1.45 million dollars; in the third quarter, the Company sold to a
single institutional investor 2.5 million shares of Common Stock and 763 shares
of Series B Preferred Stock, convertible into 2,502,640 shares of Common Stock,
for 2.5 million dollars; and in the third quarter, the Company sold to private
investors 305 shares of Series B Preferred Stock, convertible into 1,000,000
shares of Common Stock, for one million dollars.
The Company's financial position was further enhanced in 1998 by the
issuance of 1,238,800 shares of Common Stock in cancellation of a total of
$466,782 of indebtedness of the Company. In addition, 2,320
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shares of Class A Preferred Stock, which were redeemable, were converted into
232,000 shares of common stock.
In July 1998, principal stockholders of the Company contributed to the
Company 305 shares of Series B Preferred Stock, convertible into 1,000,000
shares of Common Stock, for the purpose of reducing the dilutive effect upon
existing stockholders of the sale of capital stock at that time.
All of the Company's revenues to date have been generated from the sale
by Star of conventional cigarette and other tobacco products and ophthalmic
products produced by ETI. The Company has determined, however, that available
capital resources should be allocated primarily to the continued development of
the Company's technology for the curing of tobacco so as to reduce the health
risks to smokers and consumers of smokeless tobacco products. The Company will
require in 1999 additional capital funds of an undetermined amount in order to
finance its development and commercialization plans. The Company intends to
raise additional equity and/or debt funds. The Company may also enter into
collaborative arrangements with one or more parties in the tobacco industry by
which funding might be provided to the Company. The Company has no commitments
to obtain any additional capital funds and there are no assurances that the
Company will be able to secure sufficient funds to finance fully its development
and commercialization activities.
As a consequence of the Company's decision to focus upon, and allocate
resources to, the Company's tobacco-processing technology, the Company has
adopted a policy of evaluating assets and product lines with a view to their
potential to contribute to the Company's primary objectives. Accordingly, the
Company has solicited inquiries into the side of various assets of ETI,
including assets devoted to the manufacture and sale of intraocular lens. The
Company intends to continue to explore possibilities for the sale of those
assets.
YEAR 2000 ISSUES
The Company has made an assessment of its information technology
systems relating to year 2000 issues at Star's Virginia facilities. The
assessment resulted in the development of a preliminary plan to prepare Star for
year 2000 readiness. The plan includes replacement of certain hardware systems
and the upgrading or replacement of software applications. The Company estimates
that the costs for implementation of Star's plan will be in the $40,000-$60,000
range; all such costs will be expensed as incurred. The Company expects that
implementation will be completed prior to the year 2000 and that the domestic
operations of Star will not be materially disrupted by the implementation
process.
Star has begun the process of contacting key vendors to obtain
assurances that the operations of a key vendor, as they affect Star, will not be
interrupted because of year 2000 issues. Star has received assurances from some
but not all of the vendors and therefore has not completed this process. Star
does not rely upon vendors for products or services that are data-dependent and
believes that its customers are not data-dependent with respect to the
purchasing and reselling of products such as those sold by Star. Therefore, Star
believes that the failure of its vendors to be compliant with Year 2000 issues
will not cause a material interruption in Star's business operations. Any such
interruption, however, would likely have a material adverse effect upon the
operations of Star. ETI does not rely upon vendors for products or services that
are data-dependent and believes that its customers are not data-dependent with
respect to the purchasing and reselling of products such as those sold by ETI.
Therefore, ETI believes that the failure of its vendors to be compliant with
Year 2000 issues will not cause a material interruption in ETI's business
operations. Any such interruption, however, would likely have a material adverse
effect upon the operations of ETI.
The Company has made only a preliminary assessment of its information
technology systems relating to year 2000 issues with respect to the ETI
operations in Minnesota and Mexico, and is unable at this time to assess either
the cost of year 2000 readiness or the extent to which operations would be
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interrupted by the failure to adequately and timely address these issues. In
addition, the Company has not yet begun the process of determining whether key
vendors expect to be in compliance with year 2000 issues.
The Company does not have a contingency plan in the event that its
systems or those of any third parties are not year 2000 compliant by the end of
the century. The failure of the Company to address adequately all year 2000
issues may have a material adverse impact upon its financial condition and/or
business operations.
PART II
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the three months ended September 30, 1998, the Company issued
and sold securities not registered under the Securities Act of 1933, as amended
(the "Act"), as follows:
(1) On July 10, 1998, the Company issued and sold to an investment fund
2,500,000 shares of Common Stock, 763 shares of Series B Preferred Stock
convertible into 2,502,640 shares of Common Stock and a warrant to purchase up
to 500,000 shares of Common Stock at an exercise price of $2.00 per share, for a
total of $2,500,000 in cash.
(2) On July 10, 1998, the Company issued to an accredited investor
304.878 shares of Series B Preferred Stock convertible into 1,000,000 shares of
Common Stock in exchange for 1,000,000 shares of Common Stock of the Company.
(3) On August 6, 1998, the Company issued to Malcolm Bailey, a Director
and the President of the Company, 25 shares of Series B Preferred Stock
convertible into 82,000 shares of Common Stock in consideration for consulting
services rendered to the Company.
(4) In September 1998, the Company issued and sold to nine individuals
for a total of $1,000,000 a total of 305 Units of the Company, each Unit
consisting of one share of Series B Preferred Stock convertible into 3,280
shares of Common Stock and a Warrant to purchase 3,280 shares of Common Stock at
an exercise price of $2.00 per share.
With respect to all of the sales described above, the Company claims
exemption from the registration provisions of the Act pursuant to Section 4(2)
thereof as transactions not involving a public offering.
ITEM 5. OTHER INFORMATION
On July 6, 1998, the Receivable and Inventory Financing Agreement dated
July 17, 1996 between the Company and NationsBanc Commercial Corporation was
assigned to MFC Merchant Bank S.A. and amended pursuant to a letter agreement
dated July 6, 1998 between the Company and MFC Merchant Bank S.A.
On August 18, 1998, Star Tobacco and Pharmaceuticals, Inc. entered into
an exclusive supply agreement with Amana Company, L.P. ("Amana") expiring on
August 18, 2013 pursuant to which Amana agreed to manufacture and supply the
Company with all its requirements for certain microwave equipment during the
term of the Agreement.
5
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Letter Agreement dated July 6, 1998, between the Company and MFC
Merchant Bank S.A.
Exclusive Supply Agreement dated August 18, 1998 between Star
Tobacco and Pharmaceuticals, Inc. and Amana Company, L.P.
(b) Reports on Form 8-K.
During the three months ended September 30, 1998, the Company filed the
following Reports on Form 8-K:
Report on Form 8-K dated July 15, 1998.
Report on Form 8-K dated September 11, 1998.
Report on Form 8-K/A dated September 16, 1998.
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SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
EYE TECHNOLOGY, INC.
Date: November 16, 1998 /s/ James A. McNulty
----------------------------------
Authorized Signatory and
Chief Financial Officer
7
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INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Description Page
- - ----------- ----
Condensed Consolidated Balance Sheets dated September 30, 1998 F-2
and December 31, 1997
Condensed Consolidated Statements of Operations F-3
for the Three and Nine Month Periods Ended September 30,
1998 and 1997
Condensed Consolidated Statements of Cash Flows F-4
for the Nine Months Ended September 30, 1998 and 1997
Notes to Condensed Consolidated Financial Statements F-6
F-1
<PAGE> 9
EYE TECHNOLOGY, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
---- ----
Assets (Unaudited)
<S> <C> <C>
Current assets:
Cash $ 981,510 $ 10,929
Accounts receivable 582,146 775,168
Inventories 1,525,290 605,392
Other current assets 76,889 89,989
----------- -----------
Total current assets 3,165,835 1,481,478
----------- -----------
Property and equipment, net 2,011,065 2,415,632
----------- -----------
Other assets:
Intangibles, net of amortization 785,466 157,557
Other assets 117,651 64,969
----------- -----------
Total other assets 903,117 222,526
----------- -----------
$ 6,080,017 $ 4,119,636
=========== ===========
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Notes payable - current $ 1,142,532 $ 1,942,085
Accounts payable 2,911,137 2,735,686
Accrued expenses 1,031,680 85,108
----------- -----------
Total current liabilities 5,085,349 4,762,879
Notes payable, less current maturities 688,489 1,099,242
----------- -----------
Total liabilities 5,773,838 5,862,121
----------- -----------
Redeemable preferred stock 44,000 --
----------- -----------
Commitments and contingencies
Stockholders' equity (deficit):
Preferred stock 141 --
Common stock 96,698 383,557
Additional paid-in capital 6,491,928 1,004,607
Accumulated deficit (6,326,588) (3,130,649)
----------- -----------
Total stockholders' equity (deficit) 262,179 (1,742,485)
----------- -----------
$ 6,080,017 $ 4,119,636
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
F-2
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EYE TECHNOLOGY, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 4,448,853 $ 5,241,043 $ 11,286,618 $ 17,150,303
Cost of goods sold 2,086,643 2,516,354 5,140,608 8,226,493
Excise taxes on products 2,082,802 1,954,400 5,037,752 6,288,109
----------- ----------- ------------ ------------
Gross profit 279,408 770,289 1,108,258 2,635,701
----------- ----------- ------------ ------------
Operating expenses:
Marketing and distribution expenses 323,966 248,282 893,024 812,709
General and administrative expenses 522,494 340,248 1,887,447 1,120,647
Research and development 506,298 784,272 1,208,356 1,305,670
----------- ----------- ------------ ------------
Total operating expenses 1,352,758 1,372,802 3,988,827 3,239,026
----------- ----------- ------------ ------------
Operating loss (1,073,350) (602,513) (2,880,569) (603,325)
Other income (expenses):
Other (6,946) 2,218 (305,482) 18,048
Interest expense (146,383) (60,365) (303,494) (179,493)
----------- ----------- ------------ ------------
Loss before extraordinary item (1,226,679) (660,660) (3,489,545) (764,770)
Extraordinary gain from extinguishment of debt
(no applicable income taxes) -- -- 293,606 --
----------- ----------- ------------ ------------
Net loss $(1,226,679) $ (660,660) $ (3,195,939) $ (764,770)
=========== =========== ============ ============
Basic and diluted earnings (loss) per common share:
Loss before extraordinary item $ (.13) $ (3,303) $ (.49) $ (3,824)
Extraordinary item $ -- $ -- $ .04 $ --
Net loss $ (.13) $ (3,303) $ (.45) $ (3,824)
Weighted average number of shares 9,398,001 200 7,045,663 200
=========== =========== ============ ============
</TABLE>
See notes to condensed consolidated financial statements.
F-3
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EYE TECHNOLOGY, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
For the Nine Months ended September 30, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Operating activities:
Net loss $(3,195,939) $ (764,770)
Adjustments to reconcile net loss to net cash
provided (used) by operating activities:
Depreciation and other non-cash charges 1,000,829 317,653
Extraordinary gain from extinguishment of debt (293,606) --
(Increase) decrease in current assets 234,182 1,384,037
(Decrease) increase in current liabilities (18,964) (792,749)
----------- -----------
Net cash provided (used) by operating activities (2,273,498) 144,171
----------- -----------
Investing activities:
Purchases of property and equipment (529,069) (3,532)
Purchases of intangible assets (460) --
Proceeds from sale of property and equipment 175,000 --
----------- -----------
Net cash used by investing activities (354,529) (3,532)
----------- -----------
Financing activities:
Proceeds from notes payable 845,060 687,552
Proceeds from issuance of stock, net 4,888,679 --
Payments on notes payable (2,135,131) (697,498)
Stockholder distributions -- (130,348)
----------- -----------
Net cash provided (used) by financing activities 3,598,608 (140,294)
----------- -----------
Increase in cash 970,581 345
Cash, beginning of period 10,929 10,584
----------- -----------
Cash, end of period $ 981,510 $ 10,929
=========== ===========
Cash paid for:
Interest $ 307,035 $ 192,534
</TABLE>
See notes to condensed consolidated financial statements.
F-4
<PAGE> 12
EYE TECHNOLOGY, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows, Continued
For the Nine Months ended September 30, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
---------- --------
<S> <C> <C>
Non-cash investing and financing activities:
Repayment of related party note payable with
related party note receivable $ -- $759,439
Conversion of related party note payable to equity $ -- $923,499
Conversion of redeemable preferred stock to equity $ 232,000 $ --
Notes payable reduced by proceeds from equipment sale $ 255,000 $ --
Issuance of common stock as compensation $ 123,700 $ --
Acquisition:
Fair value of assets acquired $1,237,238 $ --
Liabilities assumed 2,001,688 --
---------- --------
Excess assigned to goodwill $ 764,450 $ --
========== ========
</TABLE>
See notes to condensed consolidated financial statements.
F-5
<PAGE> 13
EYE TECHNOLOGY, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
A. Basis of presentation:
The financial information included herein is unaudited; however, such
information reflects all adjustments (consisting solely of normal
recurring adjustments) which are, in the opinion of management,
necessary for a fair statement of results for the interim periods.
The results of operations for the three months and nine months ended
September 30, 1998 are not necessarily indicative of the results to be
expected for the full year.
B. Description of acquisition:
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 45,365,680 shares of common stock, approximately 90% of the
outstanding common stock of Eye Technology, Inc. and Subsidiaries as of
the transaction date.
APB No. 16, paragraph 70 states that presumptive evidence of the
acquiring corporation in combinations effected by an exchange of stock
is obtained by identifying the former common stockholder interest of a
combining company which either retain or receive the larger portion of
the voting rights in the combined corporation. That corporation should
be treated as the acquirer unless other evidence clearly indicates that
another corporation is the acquirer. As the former stockholders of Star
Tobacco & Pharmaceuticals, Inc. hold the larger portion of the voting
rights of the combined corporation, the transaction has been 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. 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. The excess of Eye Technology Inc. and
Subsidiaries' liabilities assumed over assets acquired amounted to
$764,450 and was assigned to goodwill which is being amortized over
five years on a straight-line basis.
F-6
<PAGE> 14
EYE TECHNOLOGY, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements, Continued
(Unaudited)
B. Description of acquisition, continued:
The results of operations of Eye Technology, Inc. and Subsidiaries are
included in the accompanying condensed consolidated financial
statements from the date of acquisition.
The following summarized pro forma information assumes the acquisition
had occurred as of January 1, 1997.
<TABLE>
<CAPTION>
Nine months ended
September 30,
-------------
1998 1997
---- ----
<S> <C> <C>
Net sales $ 11,345,511 $ 18,209,640
Operating loss $ (2,910,638) $ (801,814)
Net loss $ (3,231,055) $ (759,781)
Earnings (loss) per share:
Basic and diluted $ (.42) $ (.15)
</TABLE>
C. Income taxes:
Effective February 6, 1998, Star Tobacco & Pharmaceuticals, Inc. 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 and through February 6, 1998, it
would not have any current income tax liability due to its operating
losses. Star Tobacco & Pharmaceuticals, Inc. 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 carry forward.
D. Extraordinary item:
During the first quarter of 1998, the Company recognized an
extraordinary gain of $293,606 as the result of its negotiated
settlements with vendors for trade accounts payable. There was no
income tax effect on the transactions.
E. Earnings (loss) per common share:
Earnings (loss) per common share is computed under the provisions of
Statement of Financial Accounting Standards No. 128, "Earnings per
Share". Basic earnings (loss) per common share is computed by dividing
net earnings (loss) by the weighted average number of common shares
outstanding during the period. Diluted earnings (loss) per common share
includes the dilutive effect of potential common shares outstanding.
The Company's potential common shares outstanding are from preferred
stock and warrants. Basic and diluted earnings (loss) per share were
the same in 1998 because all potential common shares were antidilutive.
F-7
<PAGE> 15
EYE TECHNOLOGY, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements, Continued
(Unaudited)
F. Purchased technology:
The Company maintained certain purchased technologies in connection
with its Microlamellar Keratomileusis (MKM) product line. Additional
development was needed to sustain marketability of the technology and
during the second quarter of 1998 management elected not to make such
improvements. Under guidance of Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of", management has determined
that the value of such technology has been impaired and should be
written-off. The carrying value of the technology amounted to $180,000
and was written-off as a charge to general and administrative expenses.
G. Financing:
The Company maintained a $1.5 million revolving line of credit pursuant
to which borrowings were available to the Company with advances limited
by formula to specified levels of accounts receivable and inventory.
This credit facility was to expire on March 31, 1998, but was extended
to June 30, 1998. The Company was in default of certain covenants, a
situation which has existed for over two years. In July, 1998, the
Company's bank loan arrangements were assigned to a different bank and
the loan terms were modified. As a result, the term of the loan was
extended to January 1, 1999, and existing defaults were waived.
In July 1998, the Company sold to a single institutional investor
2,500,000 shares of Common Stock, 763 shares of Series B Preferred
Stock convertible into 2,502,640 shares of Common Stock, and a one-year
warrant to purchase 500,000 shares of Common Stock of the Company at a
price of $2.00 per share for a total price of $2,500,000.
Simultaneously with that transaction, certain controlling stockholders
of the Company contributed to the Company 1,144 shares of Series B
Preferred Stock convertible into 3,752,320 shares of common stock.
Additional warrants to purchase 350,000 shares of common stock at a
price of $2.00 per share were issued to other parties in connection
with this transaction.
F-8
<PAGE> 16
EXHIBIT INDEX
Exhibit 10(a) Letter Agreement dated July 6, 1998, between the Company
and MFC Merchant Bank S.A.
Exhibit 10(b) Exclusive Supply Agreement dated August 18, 1998 between
Star Tobacco and Pharmaceuticals, Inc. and Amana Company, L.P.
Exhibit 27 Financial Data Schedule
<PAGE> 1
EXHIBIT 10(a)
[MFC MERCHANT BANK S.A. LETTERHEAD]
July 6, 1998
Mr. Johnnie Williams
Director of Research
Eye Technology, Inc.
16 South Market Street
Petersburg, VA
23803
Dear Mr. Williams,
This letter will serve to outline the amendments to the Receivable and Inventory
Financing Agreement that will be assigned from NationsBanc Commercial
Corporation dated July 17, 1996.
Eye Technology, Inc. agrees that no more credit will be granted under the
Financing Agreement.
We will not call the loan prior to January 1, 1999, unless Eye Technology, Inc.
is in further default of interest payment, Bankruptcy, insolvency or
significant deterioration of assets greater than 50% as of March 31.
Eye Technology, Inc. retains the right to prepay the loan prior to maturity
without penalty.
MFC Merchant Bank S.A. reserves the right of offset in the case of further
default.
Yours truly, Accepted:
/s/ MICHAEL J. SMITH /s/ JONNIE WILLIAMS
Michael J. Smith Jonnie Williams
<PAGE> 1
EXHIBIT 10(b)
EXCLUSIVE SUPPLY AGREEMENT
AMANA COMPANY, L.P., a limited partnership, whose general partner is
Goodman Holding Company, a Texas corporation ("Amana") and Eye Technologies,
Inc. And Star Tobacco & Pharmaceuticals, Inc., including their successors,
assigns, affiliates, and licensees (collectively referred to as "Star"), in
consideration of the mutual covenants and promises hereinafter made, and for
other good and valuable consideration acknowledged by each party to be
satisfactory and adequate, hereby consent and agree as follows:
1. TERM OF AGREEMENT. The term of this Agreement shall be fifteen (15)
years from the date last executed by the parties hereto.
2. PRODUCT. In accordance with specification provided by Star to Amana,
Amana will manufacture and sell to Star, and Star will purchase or
lease from Amana for resale and cause its licensees and affiliates to
purchase or lease, microwave equipment described below to be used for
the processing of tobacco. (The Product"). The Product will include
only the equipment specified below, and subsequent equipment as agreed
upon in writing by the parties:
- Microwave Applicators
- Microwave generating transmitters (915 MH(2) and 2450 MH(2))
- Microwave System Controllers
Unless otherwise agreed to in writing, all equipment will be new and
unused.
3. EXCLUSIVITY. For the term of this Agreement Star agrees to purchase or
lease, and shall cause its licensees and affiliates to purchase or
lease, exclusivity from Amana, all of Star's requirements and needs for
Product, microwave equipment and parts. This Agreement shall apply to
the sale or use of Product, microwave equipment and parts anywhere in
the World.
4. PRICE AND TERMS OF SALE.
a) Star shall pay the prices shown on Exhibit "A" for all
Products purchased under this Agreement. Prices will remain
firm for six (6) months from first date of volume production.
Prices for subsequent Product will be based on Amana's then
existing commercial terms and conditions and shall be
comparable to sales of products to unrelated third parties.
b) Prices do not include sales, use, property, excise or any
other tax which may be or become applicable to the manufacture
or sale of Product to Star prior to delivery of Product to
Star.
<PAGE> 2
5. ORDERS/FORECASTS. Star shall provide a rolling twelve (12) month
forecast by the 15th day of each month. Forecasts for the first ninety
(90) days shall be treated as firm orders and will be shipped by Amana
and accepted and paid for by Star per the forecast.
6. INSTALLATION/DESIGN CHANGES. The final system layout, including
specifications and drawings, relating to installation or design of the
equipment shall be provided by Star and agreed upon in writing by Amana
no later than forty-five (45) days before shipment. Subsequent
modifications to the system layout or equipment shall be determined by
Star, subject to additional charges, and paid by Star. Any such
modification and charge therefor shall be specified in a change order
provided to Amana and acknowledged in writing by Star.
7. SUPERVISION OF INSTALLATION. Star is responsible for connection of
electrical and plumbing services to the equipment at the time of
installation and the quality of that service.
Amana service personnel will provide technical support at the time of
installation completion and system start up at the installation site
for up to seven (7) consecutive calendar days.
a) Star shall complete all plumbing and wiring before an Amana
technician arrives at the system site.
b) Star is responsible for assuring that all electrical wiring
and plumbing to and between system components conforms to
local codes.
c) Star will insure main electrical service of:
United States: 480 volts 650 hz with a standard +/-5%
constant supply
Select International Markets: 380 volts 05 hz with a
standard +/-5% constant supply Any power conditioning
necessary to achieve system power requirements is the
responsibility of Star or the end user.
d) If Amana service personnel are required to be present beyond
seven (7) consecutive calendar days or leave the installation
and return later because of any delay caused by Star, Star
will be billed at the rate of $70 per hour for up to eight (8)
consecutive hours (four (4) hour minimum billing) and $105 per
hour for additional consecutive hours and for weekends and
Amana holidays, plus travel and subsistence expenses for the
extended or return period.
8. FORCE MAJEURE. Delivery dates quoted are approximate and are based on
current schedules. Amana shall incur no liability for failure to
deliver for any cause beyond its control, including by way of
illustration and not limitation, fire, flood, strike, unusually severe
weather, windstorm, severe accidence at plant, unavailability of
adequate material or labor, acts of God or governmental action of any
kind.
9. PATENTS. All inventions, devices and processes developed by Amana which
relate to microwave devices shall be owned by Amana. All inventions,
devices and process which relate exclusively to the processing of
tobacco shall be owned by Star. No license under any patent rights held
by Amana or Star shall be deemed to be granted by virtue of this
agreement.
2
<PAGE> 3
10. TRADEMARKS.
a) With respect to Star's trademarks or trade names, Star
warrants and represents to Amana that Star has the full right
to use the same as applied to all or any of the Products, and
that the use of any such trademarks and/or trade names shall
not constitute an infringement of the rights of any third
party.
b) Star shall indemnify and hold Amana harmless against any
claim, demand, suit, expense or proceeding brought against
Amana based on the use of any of such trademarks or trade
names upon any of the Product hereunder, and shall pay all
damages and costs awarded therein against Amana. Star shall
pay for all costs of counsel, court costs, attorneys fees, and
other expenses arising from any such claim.
c) Star will not use any Amana trademarks or make reference to
Amana as the manufacturer of the Product, except as may be
required by law. Star shall prevent any use of Amana
trademarks or trade names by any dealer, distributor, agent,
licensee, assignee or user in connection with the Product.
11. STAR INDEMNIFICATION. Star agrees to indemnify and hold Amana harmless,
from and against any and all liabilities, costs, expenses, demands,
claims, lawsuits, causes of action, and damages (i) arising out of or
occasioned by negligent, faulty or improper installation and/or
servicing or alteration of Product by Star or its employees or agents,
or (ii) arising out of or occasioned by the use of parts or
specifications supplied by Star or Star's vendors for the production of
the Product. Amana will timely notify Star of any claim, demand,
lawsuit or proceedings.
12. WARRANTY. THE LIMITED WARRANTIES SET FORTH HEREIN ARE EXPRESSLY IN LIEU
OF OTHER WARRANTIES, EXPRESS OR IMPLIED, STATUTORY OR OTHERWISE, AND
ANY IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR
PURPOSE IS HEREBY EXPRESSLY EXCLUDED.
a) Amana warrants all new industrial microwave equipment and
accessories to be free from defects for a period of one (1)
year from date of original installation.
b) Amana warrants that all refurbished Amana industrial microwave
equipment and accessory parts to be free from defects for a
period of ninety (90) days from date of original installation.
c) New equipment magnetron tube and circulator parts are
warranted for 4000 run-time hours of life on a prorata basis,
or two (2) years from date of shipment, whichever occurs
first.
d) Amana's liability under this warranty is limited to:
1) The repair or replacement, at its sole discretion, of
any part found to be defective under normal use and
service within the warranty period specified
3
<PAGE> 4
for the particular part and labor for ninety (90)
days from date of original system installation,
exclusive of parts exchange freight and technician
travel and subsistence charges, provided:
a) Amana is promptly notified in writing upon
discovery of such defects.
b) The defective parts are returned to Amana,
transportation charges prepaid, in
accordance with Amana's instructions and
authorization.
c) Misuse, abuse, neglect, accident, or
adjustments not specified in the Amana
Operating and Maintenance Manual do not
cause such defects.
d) Equipment has been installed in accordance
with Amana's installation instructions and
operated in accordance with good engineering
practice.
e) Star pays part exchange freight cost and, technician travel
and subsistence charges if an Amana service technician is
required at the system site to replace the defective part.
f) This warranty applies only to equipment and accessories
manufactured by Amana. Any products, parts, and accessories
not manufactured by Amana carry only the warranty provided by
the manufacturer thereof, which upon request shall be assigned
by Amana to Star.
g) All warranty replacement parts assume the unexpired portion of
the original parts warranty. After expiration of the original
warranty period, replacement parts manufactured by Amana are
warranted for ninety (90) days from shipment.
h) THE WARRANTY IS INVALID IF SYSTEM EQUIPMENT IS MODIFIED
WITHOUT ADVANCE CONSENT AND WRITTEN APPROVAL FROM
AMANA.
13. CONSEQUENTIAL DAMAGES. Except as otherwise expressly set forth in this
Agreement, in no event shall Amana be liable on a claim of any kind
(whether in contract, tort or warranty) for any special, incidental or
consequential damages under any provision of this Agreement.
14. STAR WARRANTY. Star will assume full responsibility for the promotion,
sale and delivery of all Product sold by Star to its customers and will
indemnify and hold Amana harmless from any and all claims arising out
of or occasioned by (a) Star's improper promotion, sales or delivery,
(b) the use of Star's trademarks or production descriptions, (c)
4
<PAGE> 5
any misrepresentations by Star, its agents, employees regarding Product
or the qualities or attributes of Product.
15. NOTICES. Notices required or permitted hereunder will be deemed to have been
properly given if sent by United States mail, first class, postage prepaid,
return receipt requested or by telecopy, telex or telegram, confirmed by letter,
addressed to:
Amana Appliances Star Tobacco & Pharmaceuticals, Inc.
ATTENTION: Legal ATTENTION: CEO
2800 220th Trail 16 South Market Street
Amana, Iowa 52204 Petersburg, Virginia 23803
Notices shall be deemed to have been given upon receipt by the party to
which they are addressed.
16. RELATIONSHIP OF THE PARTIES. Neither party is an agent for the other.
Each party acknowledges that the relationship between Amana and Star is
that of a vendor-vendee. This Agreement and any subsequent actions
between Star and Amana shall not be construed to create a partnership,
joint venture, or agency relationship. All improvements, inventions,
discoveries, and work product resulting from the work performed by
Amana or discussions between the parties, relating to microwave
equipment or devices shall be owned by Amana.
17. ASSIGNMENT. Neither this Agreement, nor any of the rights or interests
of Star or Amana hereunder may be assigned, transferred or conveyed by
operation of law or otherwise without the prior written consent of the
other except that either party may assign this Agreement to one or more
affiliated entities.
18. APPLICABLE LAW. This Agreement will be binding upon the parties hereto,
their successors and assigns and will be construed, enforced and
performed in accordance with the laws of the State of Texas.
19. ARBITRATION. All disputes arising under this agreement shall be subject
to mandatory binding arbitration under the rules of the American
Arbitration Association (AAA). The arbitration shall take place in
Houston, Harris County, Texas. The parties shall chose an arbitrator to
settle the dispute. If the parties cannot agree upon an arbitrator
within ten (10) days from the date upon which notice is given, the AAA
shall appoint an arbitrator. Each party waives any objection to
personal jurisdiction in Houston, Harris County, Texas, and submit to
jurisdiction over the person and entity in Houston, Harris County,
Texas.
20. ENTIRE AGREEMENT. This Agreement and all Exhibits, attachments and
appendices together constitute the entire agreement on the subject
matter hereof between the parties hereto and supersedes all prior
agreements and understandings between the Parties. This Agreement may
not be amended or modified unless set forth in writing and signed by
both Amana and Star. In case of any conflict between this Agreement and
any purchase order,
5
<PAGE> 6
acceptance, correspondence, memorandum, or document exchanged between
Star and Amana during the term of this Agreement, this Agreement
shall govern and prevail.
IN WITNESS WHEREOF, the parties have agreed, accepted, and executed this
Agreement in duplicate this _____ day of ______________________, 1998.
STAR TOBACCO & AMANA COMPANY L.P.
PHARMACEUTICALS, INC. Goodman Holding Company,
General Partner
BY: BY:
----------------------------- -----------------------------
NAME: NAME:
----------------------------- ---------------------------
TITLE: TITLE:
----------------------------- --------------------------
DATE: DATE:
----------------------------- ---------------------------
6
<PAGE> 7
EXHIBIT "A"
I. Microwave Applicators
II. Microwave Generating Transmitters (915 and 2450 MH(2))
Mega Hertz Price
---------- -----
a) 915 MH(2) $62,000.00
b) 2450 MH(2) TBD
III. Microwave System Controllers for Above
- - -----------------------
TBD - To be determined
7
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 981,510
<SECURITIES> 0
<RECEIVABLES> 582,146
<ALLOWANCES> 0
<INVENTORY> 1,525,290
<CURRENT-ASSETS> 3,165,835
<PP&E> 3,876,213
<DEPRECIATION> 1,865,148
<TOTAL-ASSETS> 6,080,017
<CURRENT-LIABILITIES> 5,085,349
<BONDS> 0
44,000
141
<COMMON> 96,698
<OTHER-SE> 165,340
<TOTAL-LIABILITY-AND-EQUITY> 6,080,017
<SALES> 11,286,618
<TOTAL-REVENUES> 11,286,618
<CGS> 10,178,360
<TOTAL-COSTS> 10,178,360
<OTHER-EXPENSES> (305,482)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (303,494)
<INCOME-PRETAX> (3,489,545)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,489,545)
<DISCONTINUED> 0
<EXTRAORDINARY> 293,606
<CHANGES> 0
<NET-INCOME> (3,195,939)
<EPS-PRIMARY> (.45)
<EPS-DILUTED> (.45)
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