<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[xx] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1996
------------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
--------------- --------------
Commission File Number: 33-14042-NY
-----------------------------------
NeuroCorp. (formerly Tamarac Ventures, Ltd.)
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Nevada 87-0446395
- -------------------------------- -----------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
150 White Plains Road, Tarrytown, New York 10591
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(914) 631-3315
- -------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- -------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) has filed all reports required to be filed by
section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [xx] No [ ]
APPLICABLE ONLY TO CORPORATE 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: 7,173,807 Shares as of September 30,
1996.
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
(Formerly Tamarac Ventures, Ltd.)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PART 1 - FINANCIAL INFORMATION:
ITEM 1 - FINANCIAL STATEMENTS
Page
number
------
Consolidated balance sheets (Unaudited) at
September 30, 1996 and December 31, 1995 F-1
Consolidated statements of operations (Unaudited)
for the three months ended September 30, 1996 and 1995 F-2
Consolidated statements of operations (Unaudited)
for the nine months ended September 30, 1996 and 1995 F-3
Consolidated statements of stockholders' equity
(Unaudited) for the nine months ended September 30,
1996 F-4
Consolidated statements of cash flows (Unaudited)
for the nine months ended September 30, 1996 and 1995 F-5
Notes to consolidated financial statements F-6 - F-18
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS F-19 - F-26
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
(Formerly Tamarac Ventures, Ltd.)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited)
September 30, December 31,
1996 1995
------------- ------------
ASSETS
<S> <C> <C>
Current assets:
Cash $ 118,490 $ 140,519
Accounts receivable, net of allowance for
doubtful accounts of $57,556 and $39,920, respectively 1,187,659 716,650
Inventory 34,883 29,985
Due from affiliates 99,650 88,943
Prepaid expenses and taxes 34,028 53,314
Deferred financing cost 86,848 -
Costs in excess of billings on uncompleted contracts 1,757 28,833
----------- ----------
Total current assets 1,563,315 1,058,244
----------- ----------
Equipment and fixtures, net 86,970 81,066
----------- ----------
Other assets:
Database development costs, net 1,285,028 1,312,346
Computer system product development costs, net 709,913 744,536
Other 136,220 133,220
----------- ----------
Total other assets 2,131,161 2,190,102
----------- ----------
Total assets $ 3,781,446 $3,329,412
----------- ----------
----------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Demand note - line of credit $ - $ 50,000
Accounts payable 207,315 152,465
Accrued expenses 198,969 182,310
Stockholder notes and loans payable 858,861 380,381
Income taxes payable 1,296 8,293
Current portion of long-term debt 55,840 90,227
Billings in excess of contract revenues
on uncompleted contracts 174,373 201,333
----------- ----------
Total current liabilities 1,496,654 1,065,009
----------- ----------
Long-term liabilities:
Long-term debt 18,053 37,734
Deferred income taxes 309,000 309,000
----------- ----------
Total liabilities 1,823,707 1,411,743
----------- ----------
Commitments and contingencies (Note 5) - -
Stockholders' equity:
Preferred stock authorized 5,000,000 shares issued, as follows:
Cumulative Preferred stock, class B, series 1, no par value, issued and
outstanding 150,000 shares, full liquidation value of $150,000 150,000 150,000
Convertible Preferred stock, class B, series 2, no par value, issued and
outstanding 250,000 shares, full liquidation value $250,000 250,000 250,000
Common stock, $.001 par value, 100,000,000 shares authorized
7,173,807 and 6,107,141 issued and outstanding, respectively 46,374 45,307
Less: discount on common stock (28,500) (28,500)
Additional paid-in capital 1,245,919 738,699
Contributed capital 100,000 100,000
Retained earnings 193,946 662,163
----------- ----------
Total stockholders' equity 1,957,739 1,917,669
----------- ----------
Total liabilities and stockholders' equity $ 3,781,446 $3,329,412
----------- ----------
----------- ----------
</TABLE>
See accompanying notes to consolidated financial statements (Unaudited).
F-1
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
(Formerly Tamarac Ventures, Ltd.)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
1996 1995
---------- ----------
Net sales $ 194,593 $ 396,759
Cost of sales, including amortization expense
of $45,300 and $46,110, respectively 143,939 185,187
---------- ----------
Gross profit 50,654 211,572
Expenses:
General and administrative expenses 289,753 245,632
Research and development 26,051 61,872
---------- ----------
Loss from operations (265,150) (95,932)
Other income (expense):
Interest income 2,587 3,224
Interest expense (45,282) (4,083)
---------- ----------
Loss before provision (credit) for income taxes (307,845) (96,791)
Provision (credit) for income taxes - (16,684)
---------- ----------
Net loss $ (307,845) $ (80,107)
---------- ----------
---------- ----------
Net loss applicable to common shares $ (311,595) $ 80,107)
---------- ----------
---------- ----------
Loss per common equivalent share:
Primary:
Loss before provision for taxes $ (.04) $ (.01)
Provision (credit) for income taxes - (Nil)
---------- ----------
Net income (loss) $ (.04) $ (.01)
---------- ----------
---------- ----------
Net loss applicable to common shares $ (.04) $ (.01)
---------- ----------
---------- ----------
Weighted average number of shares outstanding 7,173,807 5,457,143
---------- ----------
---------- ----------
See accompanying notes to consolidated financial statements (Unaudited).
F-2
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
(Formerly Tamarac Ventures, Ltd.)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
1996 1995
---------- ------------
Net sales $ 985,715 $ 1,185,637
Cost of sales, including amortization expense
of $135,900 and $136,131, respectively 488,633 393,178
---------- ------------
Gross profit 497,082 792,459
Expenses:
General and administrative expenses 811,403 728,649
Research and development 71,235 136,134
---------- ------------
Loss from operations (385,556) (72,324)
Other income (expense):
Gain on disposal of vehicle - 31,280
Interest income 8,527 11,037
Interest expense (79,938) (12,257)
---------- ------------
Loss before provision for income taxes (456,967) (42,264)
Provision for income taxes - 25,720
---------- ------------
Net loss $ (456,967) $ (67,984)
---------- ------------
---------- ------------
Net loss applicable to common shares $ (468,217) $ (67,984)
---------- ------------
---------- ------------
Loss per common equivalent share:
Primary:
Loss before provision for taxes $ (.07) $ (.01)
Provision for income taxes - Nil
---------- ------------
Net loss $ (.07) $ (.01)
---------- ------------
---------- ------------
Net loss applicable to common shares $ (.07) $ (.01)
---------- ------------
---------- ------------
Weighted average number of shares outstanding 6,924,548 5,434,920
---------- ------------
---------- ------------
See accompanying notes to consolidated financial statements (Unaudited).
F-3
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
(Formerly Tamarac Ventures, Ltd.)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
Total
Preferred Stock Class B Additional Contri- Stock-
Series 1 Series 2 Common Stock Paid-in buted Retained holders'
Shares Amount Shares Amount Shares Amount Capital Capital Earnings Equity
------- -------- ------- -------- --------- ------- ----------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1995 150,000 $150,000 250,000 $250,000 6,107,141 $16,807 $ 738,699 $100,000 $662,163 $1,917,669
Sale of common stock - - - - 1,000,000 1,000 399,000 - 400,000
Cost associated with the
registration for selling
shareholders and
warrantholders - - - - - - (25,046) - (25,046)
Issuance of 66,666 shares
of common stock in lieu
of deferred financing
cost for a loan - - - - 66,666 67 133,266 - 133,333
Accrued preferred stock
dividend - - - - - - - - (11,250) (11,250)
Net loss for the nine
months ended
September 30, 1996 - - - - - - - - (456,967) (456,967)
------- -------- ------- -------- --------- ------- ---------- -------- -------- ----------
Balance at
September 30, 1996 150,000 $150,000 250,000 $250,000 7,173,807 $17,874 $1,245,919 $100,000 $193,946 $1,957,739
------- -------- ------- -------- --------- ------- ---------- -------- -------- ----------
------- -------- ------- -------- --------- ------- ---------- -------- -------- ----------
</TABLE>
See accompanying notes to consolidated financial statements (Unaudited).
F-4
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
(Formerly Tamarac Ventures, Ltd.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Cash flows for operating activities:
Loss from operations $ (456,967) $ (67,984)
Adjustments to reconcile net (loss) to net cash
provided by (used for) operating activities:
Depreciation and amortization 160,311 171,327
Amortization of deferred financing costs 46,485 -
Deferred income taxes - 40,000
Gain on disposal of vehicle - (31,280)
Reclassification of net equipment to operations - 9,193
Changes in operating assets and liabilities:
Accounts receivable (471,009) (180,158)
Due from affiliates (10,707) (35,907)
Inventory (4,898) (8,613)
Prepaid expenses and taxes 19,286 1,725
Cost in excess of billings on uncompleted contracts 27,076 103,278
Accounts payable 54,850 66,689
Accrued expenses 5,409 169,178
Income taxes payable (6,997) (34,383)
Billings in excess of contract revenues on uncompleted contracts (26,960) (443,013)
---------- ----------
Net cash flows used for operating activities (664,121) (239,948)
---------- ----------
Cash flows from investing activities:
Purchase of equipment and fixtures (28,365) (13,695)
Database development costs capitalized (71,682) (198,157)
Patent cost capitalized (2,150) -
Computer system development costs capitalized (2,277) (146,235)
Proceeds from insurance on vehicle - 34,271
---------- ----------
Net cash flows used for investing activities (104,474) (323,816)
---------- ----------
Cash flows from financing activities:
Employee loans and advances (2,800) -
(Repayments to) proceeds from demand note - line of credit (50,000) 50,000
Repayment of stockholders loans (96,520) -
Proceed from stockholders loans 575,000 140,225
Principal payments on long-term debt (54,068) (54,618)
Offering costs incurred (25,046) -
Proceeds from sale of common stock 400,000 100,000
---------- ----------
Net cash flows provided by financing activities 746,566 235,607
---------- ----------
Net decrease in cash (22,029) (328,157)
Cash at beginning of period 140,519 336,505
---------- ----------
Cash at end of period $ 118,490 $ 8,348
---------- ----------
---------- ----------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 11,691 $ 9,336
---------- ----------
---------- ----------
Income taxes $ 8,526 $ 4,353
---------- ----------
---------- ----------
Schedule of non-cash investing and financing activities:
Issuance of restricted 66,666 shares of common stock
for deferred financing cost associated with a loan $ 133,333 $ -
---------- ----------
---------- ----------
Accrued dividends on Series 1 Preferred Stock $ 11,250 $ -
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements (Unaudited).
F-5
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
(Formerly Tamarac Ventures, Ltd.)
NOTES TO CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
NOTE 1 - GENERAL
NeuroCorp, Ltd. (the "Company") was incorporated in the State of
Nevada on March 18, 1987. On November 23, 1994 the Company entered
into an agreement and a plan of reorganization with HZI Research
Center, Inc. ("HZI") to exchange 100% of HZI's outstanding common
stock for 4,600,000 post-split $.001 par value common shares of the
Company. Simultaneously, the Company effectuated a 1 for 50 reverse
stock split thereby reducing its outstanding common shares from
40,000,000 to 800,000. The financial statements give effect to the
reverse stock split. This transaction has been accounted for as a
reverse acquisition of HZI, whereby its assets and liabilities have
been recorded at their historical costs. Prior to this transaction
the Company had no significant assets, liabilities or operations.
Accordingly, the financial statements at September 30, 1996 and
December 31, 1995 represent the assets and liabilities of HZI and it's
affiliates and the results of their operations and cash flows for the
nine months ended September 30, 1996 and 1995. All costs incurred in
connection with the reverse acquisition have been charged to
additional paid-in capital at the completion of the transaction. On
the closing date, the Company's Board of Directors were replaced by
directors designated by HZI and the Company changed its name from
Tamarac Ventures, Ltd. to NeuroCorp, Ltd.
The Company, through its wholly-owned subsidiary, HZI, is primarily
involved in three inter-related businesses all of which involve the
interaction or utilization of the Company's proprietary software,
databases and medical devices for the diagnosis and treatment of
brain-related disorders. The three businesses are as follows: (i)
performing long-term contract services for medical research for major
domestic and international pharmaceutical firms (ii) designing and
producing proprietary neuropsychiatric diagnostic testing equipment,
which currently is their Brain Function Monitoring (BFM) system (iii)
providing interactive diagnostic testing services and analysis to
physicians and hospitals via the telephone, this service is known as
TeleMap.
In January 1996, the Company created a new wholly-owned subsidiary
Memory Centers of America, Inc. ("MCA"). MCA will provide therapeutic
services to people who suffer from memory impairment. MCA began
operation's at the end of the second quarter of 1996.
The Company conducts its operations in Tarrytown, New York. The
Company's revenues consist of a concentration of significant long-term
contracts, thus leading to a limited number of customers comprising a
significant percentage of revenues.
The unaudited interim financial statements for the nine months ended
September 30, 1996 and 1995 included herein have been prepared by the
Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission and, in the opinion of the Company,
reflect all adjustments (consisting only of normal recurring
adjustments) and disclosures which are necessary for a fair
presentation. The results of operations for the three and nine months
ended are not necessarily indicative of the results for the full year.
For further information, refer to the Company's audited financial
statements and footnotes thereto at December 31, 1995, included in
Form 10-KSB filed with the Securities and Exchange Commission.
F-6
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
(Formerly Tamarac Ventures, Ltd.)
NOTES TO CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
NOTE 2 - DEMAND NOTE - LINE OF CREDIT
The $50,000 balance outstanding at December 31, 1995 represents
borrowings by HZI under a $100,000 secured line of credit agreement
with a bank. The agreement entered into on April 26, 1995 requires
HZI to pay interest monthly at one percent (1%) above the prime rate
and said principal balance is due on demand. The demand note is
secured by equipment, receivables and general intangibles. The
outstanding balance was repaid in full during March 1996.
NOTE 3 - LONG-TERM DEBT
Long-term debt consists of the following at:
September 30, December 31,
1996 1995
------------- ------------
Note payable due in thirty-six (36)
monthly installments of $6,175 including
interest at prime plus 1% per annum due
April 1997. The note is collateralized
by equipment, receivables and general
intangible assets and has been personally
guaranteed by certain officers. $ 48,636 $ 97,715
Note payable due in forty-eight (48)
monthly installments of $768 including
interest at 9.5% per annum due
November 1999. The note is collateralized
by a Company vehicle. 25,257 30,246
------------- ------------
73,893 127,961
Less: current portion 55,840 90,227
------------- ------------
Long-term portion $ 18,053 $ 37,734
------------- ------------
------------- ------------
Long-term debt matures as follows:
Year ended
December 31,
1995
------------
1996 $ 90,227
1997 21,587
1998 8,073
1999 8,074
------------
$ 127,961
------------
------------
F-7
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
(Formerly Tamarac Ventures, Ltd.)
NOTES TO CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
NOTE 4 - STOCKHOLDERS' EQUITY
a) AMENDMENT TO CERTIFICATE OF INCORPORATION
In connection with the reverse acquisition of HZI (See Note 4g), on
November 23, 1994, the Company amended its Certificate of
Incorporation to change its name from Tamarac Ventures, Ltd. to
NeuroCorp, Ltd. Further, the Company reduced its authorized common
stock from 200,000,000 shares to 100,000,000 shares and authorized
5,000,000 shares of preferred stock of which 400,000 of the 5,000,000
shares of the preferred stock has been deemed to be Class B, Series 1
and Series 2. Accordingly, the financial statements give effect to
these items.
b) DISCOUNT ON COMMON STOCK
On April 30, 1987, 600,000 shares of common stock, par value $.001,
were issued at $.00005 per share for total consideration of $1,500, or
a discount of $28,500. According to Nevada counsel, the laws of the
State of Nevada provide for a discount on original issue capital stock
whether or not that stock carries a par value so long as the action is
ratified by the Board of Directors and is otherwise in compliance with
applicable laws. These shares are deemed to be fully paid and non-
assessable, even though issued below par.
c) INITIAL PUBLIC OFFERING
On September 28, 1987, the Company completed its public offering of
80,000 units at $.05 per unit resulting in net proceeds of $178,509.
Each unit consisted of one (1) share of common stock, $.001 par, and
one (1) common stock purchase warrant. The warrants expired
unexercised thirty-six months after the effective date of the
offering.
d) OPTIONS TO OFFICERS
In 1985 and 1991, four (4) employees of HZI were granted an option to
buy a total of twenty (20) shares or then ten (10)% of the stock of
HZI at a price of $10 per share. Such options were available to the
respective individuals as long as they remained employees of HZI.
In November 1992, all four (4) employees exercised their option to buy
HZI's common stock. These new shareholders simultaneously transferred
their shares to the voting trust, per Note 4e below.
F-8
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
(Formerly Tamarac Ventures, Ltd.)
NOTES TO CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
NOTE 4 - STOCKHOLDERS' EQUITY (Cont'd)
e) VOTING TRUST AGREEMENT
In January 1992, the shareholders of HZI entered into an agreement
whereby all shares of HZI were transferred into a voting trust. The
trust was created for the purpose of granting the trustee the
exclusive right to vote upon the shares contained in the trust. The
trust has a life of twenty (20) years and for the first ten (10) years
the Company's current chairman is the trustee. Thereafter, HZI's
president who is the son of the Company's chairman becomes the
trustee. The trustee has the exclusive right to vote all such shares
subject to any limitations in the HZI Certificate of Incorporation.
Commencing with the reverse acquisition as discussed in Note 4g, the
original members of the voting trust transferred their newly issued
shares in the Company to the voting trust.
f) ISSUANCE OF WARRANTS
As part of the acquisition, the Board of Directors of the Company have
authorized the issuance of Class B and Class C Warrants to all
stockholders of the Company who were stockholders of record as of
November 1, 1994. The Warrants were distributed on a 1 Warrant for 1
share of common stock basis (post reverse stock split) and comprised
in the aggregate 800,000 Class B and 800,000 Class C Warrants, each of
which is exercisable into one share of Common Stock of the Company.
The Class B Warrants are exercisable at $2.25 per share and the Class
C Warrants are exercisable at $2.75 per share, and expire on
September 30, 1996. The shares of Common Stock underlying the
Warrants must be registered with the Securities and Exchange
Commission (SEC) prior to the Warrants becoming exercisable. The
Company may, at its sole discretion, undertake to file a registration
statement with the Securities and Exchange Commission wherein the
Company will register the Warrants and the shares of Common Stock
underlying the Warrants. However, until such time as said registration
statement is filed and becomes effective, the Warrants will not be
exercisable. The number of shares underlying the Warrants, and the
exercise price of the Warrants, may be adjusted downward or upward at
any time by the Company's Board of Directors. Further, the Warrants
are redeemable by the Company at any time upon thirty days written
notice, at a price of $.001 per Warrant.
In January 1996, the Company's Board of Directors reduced the exercise
price of the Class B and Class C warrants from $2.25 to $1.00 per
share and from $2.75 to $2.00 per share, respectively and the
expiration dates were extended to June 30, 1997. In February 1996,
the Company filed with SEC to register these warrants.
F-9
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
(Formerly Tamarac Ventures, Ltd.)
NOTES TO CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
NOTE 4 - STOCKHOLDERS' EQUITY (Cont'd)
g) REVERSE ACQUISITION OF SUBSIDIARY
On November 23, 1994, the Company entered into an agreement and a plan
of reorganization with HZI to exchange 100% of HZI's outstanding
common stock for 4,600,000 post-split $.001 par value common shares of
the Company. Such transaction superseded the Letter of Intent entered
into between the parties on March 18, 1994. Simultaneously, the
Company effectuated a 1 for 50 reverse stock split thereby reducing
its outstanding common shares from 40,000,000 to 800,000. The
financial statements have been restated to give effect to the reverse
stock split.
All costs incurred in connection with the acquisition have been
charged to additional paid-in capital at the completion of the
transaction. On the closing date, the Company's Board of Directors
were replaced by directors designated by HZI.
Pursuant to the March 18, 1994 Letter of Intent, between the Company
and HZI, the Company agreed, with the assistance of others, to arrange
for certain financing for HZI within a specified time period. On
March 24, 1994, a bridge loan was made for $75,000 by Trinity American
Corporation ("TAC") a stockholder of the Company, to HZI, pursuant to
the agreement. The financing that was to be arranged for HZI was not
timely arranged, based upon the terms of the agreement HZI was not
responsible for the repayment of the bridge loan. This transaction
has been recorded as a forgiveness of debt in the year ended
December 31, 1994.
On November 23, 1994 TAC contributed $400,000 to the Company's capital
account with no further issuance of common stock. In December 1994,
the Company and TAC reached an agreement whereby in consideration for
the $400,000 paid on November 23, 1994 two classes of preferred stock
were issued to TAC. The first class of 150,000 shares of cumulative
non-convertible preferred stock class B, series 1, no par value has a
liquidation preference of $1 per share. Dividends accrue on such
stock commencing January 1, 1996 at a rate of 10% of the liquidation
value and are payable semi-annually in cash or stock. The number of
shares of stock to be issued when dividends are paid in stock is based
on the average closing bid price of the stock 30 consecutive days
prior to the date the dividend becomes payable. At September 30,
1996, the Company has accrued a dividend of $11,250 related to this
preferred stock based on a cash payment. Further, the Company may
redeem such shares at any time for $3 per share.
The second class of 250,000 shares of convertible no par value
preferred stock, class B series 2, can be converted into common stock
and does not provide for dividend payments. The conversion feature
provides that between January 1, through June 30, 1996 that one (1)
share of preferred stock can be converted into two (2) shares of
common stock. After June 30, 1996 the conversion feature is reduced
to five (5) shares of preferred stock to one (1) share of common
stock. Further, the Company can at its option force a conversion of
such stock if the closing bid price for the Company's common stock is
at least 2 5/8 for thirty (30) consecutive trading days. At
September 30, 1996, neither TAC nor the Company have exercised these
conversion features.
F-10
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
(Formerly Tamarac Ventures, Ltd.)
NOTES TO CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
NOTE 4 - STOCKHOLDERS' EQUITY (Cont'd)
h) STOCK OPTION PLAN TRANSACTIONS
On November 23, 1994, the Company adopted an incentive stock option
plan that will provide for the granting of options to purchase up to
1,500,000 shares of the Company's common stock that are intended to
qualify either as incentive stock options within the meaning of
Section 422 of the Internal Revenue Code or a non-statutory stock
option plan. Options to purchase shares may be granted under the
statutory stock option plan to persons who are employees or officers
of the Company. If the Company adopts a non-statutory stock option
plan, options shall be granted to, employees, officers, non-employee
directors, and consultants to the Company.
The stock option plan provides for its administration by a committee
chosen by the Board of Directors. The committee shall have full
discretionary authority to determine the number of shares to be
granted, the grantees receiving the options, the exercise period, and
the exercise price for which options will be granted. In the case of
statutory stock option plans, the committee's authority to establish
the terms and conditions of such options, including, but not limited
to their exercise price, shall be subject to restrictions imposed by
Section 422 of the Internal Revenue Code.
On September 19, 1995, the Company granted to its President and Vice
Chairman a non-qualified stock option to purchase 250,000 shares of
common stock at an exercised price of $.10 per share. This option
expires seven (7) years from the date of grant and the underlying
common shares related to the stock option are restricted. At the date
of grant the Company recorded compensation expense of $50,000 based
upon the fair value of the stock option at that date.
In December 1995, the Company granted a consultant a non-qualified
stock option to purchase 50,000 shares of common stock at $.01 per
share. The underlying common shares related to the stock option are
restricted. At the date of grant the Company recorded a consulting
fee of $16,875 based upon the fair value of the stock option on that
date.
i) SALE OF SHARES BY FORMER PRINCIPAL SHAREHOLDER
Pursuant to a Stock Purchase Agreement dated October 25, 1994, the
then principal shareholder and President of the Company agreed to sell
556,000 of his post-split shares of the Company's common stock to TAC,
for a purchase price of $40,000. Such shares were transferred to TAC
immediately upon the completion of the Company's acquisition of HZI.
Further, TAC has the right to transfer a portion of the shares
purchased to other nonaffiliated persons through a sale of all or a
part of the shares to offshore investors pursuant to Regulation S of
the Securities Act of 1933, as amended.
TAC has the right, on one occasion, to demand that the Company file a
registration statement, at TAC's expense, as to all of the shares of
the Company's common stock held by TAC.
F-11
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
(Formerly Tamarac Ventures, Ltd.)
NOTES TO CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
NOTE 4 - STOCKHOLDERS' EQUITY (Cont'd)
j) SALE OF COMMON STOCK
On April 14, 1995, March 2, 1996 and March 25, 1996, the Company sold
57,143, 333,333 and 666,667 shares of common stock for $100,000,
$133,333 and $266,667, respectively, to foreign investors utilizing
Regulation "S" guidelines. Said shares have not been registered under
the Securities Act of 1933 (the "Act"), hence the shares cannot be
sold, transferred, assigned or hypothecated unless they are either
registered under the Act or sold pursuant to an applicable exemption
from registration.
k) ISSUANCE OF COMMON STOCK AS CONSIDERATION FOR LOANS
(i) On July 19, September 14, October 12, 1995 and February 26, 1996,
the Company and the Chairman of the Board entered into a letter
agreement with TAC to borrow $100,000, $40,000, $60,000 and
$75,000, respectively. The $100,000 and $60,000 loans have an
interest rate of 9% per annum, respectively, and were due in six
months from the date of issuance including accrued interest,
respectively. The $40,000 and $75,000 loans have an interest
rate of 10% and are due within 90 days and six months,
respectively, from the date of issuance including accrued
interest. TAC and the Company have agreed to extend the due dates
of the above loans to June 30, 1997 or the date the Class B and C
warrants are exercised in their entirety prior to June 30, 1997.
As additional consideration for the $100,000 loan, the Company
agreed to issue 49,998 shares of restricted common stock to TAC.
The Company has recorded the additional consideration as interest
expense, with a cost of $14,061, which is based upon fifty
percent (50%) of the fair value of the common stock issued on
July 19, 1995, the date of the agreement. Further, the letter
agreements give TAC the option to convert said loans into 550,000
shares of common stock. The Company's Chairman has agreed to
satisfy this conversion feature by contributing shares from his
personal common stock holdings to the Company so other
stockholders holdings will not dilute from this conversion.
On February 5, 1996, the Company borrowed from TAC an additional
$50,000 which is due on demand. Said loan has an interest of 10%
and was repaid during April, 1996.
On September 13, 1996 the Company borrowed from TAC $50,000,
which is payable from any future private placement proceeds.
Said loan bears interest at 9.5% per annum. Further the loan
agreement gives TAC the option to convert each $4.00 of debt into
one (1) unit.
Each unit will consist of one (1) share of Common Stock of the
Company and two (2) Stock Purchase Warrants. Each Warrant is
exercisable into one (1) share of Common Stock of the Company at
$8.00 per share until August 31, 1997, thereafter $10.00 per
share. The Stock Purchase Warrants expire on August 31, 1998.
F-12
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
(Formerly Tamarac Ventures, Ltd.)
NOTES TO CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
NOTE 4 - STOCKHOLDERS' EQUITY (Cont'd)
k) ISSUANCE OF COMMON STOCK AS CONSIDERATION FOR LOANS (Cont'd)
ii) On May 24, 1996, the Company entered into an agreement with
a shareholder to borrow $200,000. The loan is non-interest
bearing and is payable within one (1) year or is payable out
of the first proceeds resulting from any exercise of
outstanding Class B and Class C warrants (See Note 4f),
whichever comes first. As additional consideration the
Company issued 66,666 shares of restrictive common stock.
The Company has valued the common stock at $133,332 or fifty
percent (50%) of the fair market value at the time of
transaction. The Company recorded deferred financing cost
and increased stockholders' equity by $133,332, respectively
for this transaction. The deferred financing cost is being
amortized over one year, which is the maximum term of the
loan, or will be charged to operations if paid prior to May 24,
1997. See Note 6c. Further, the Company has agreed to register
said shares. See Note 4m.
l) SALE OF COMMON STOCK AND CAPITAL CONTRIBUTION
In December 1995, the Company sold 1,000,000 post-split shares of .001
par value common stock to four unrelated investors for $250,000. As a
condition of the sale the Company's Chairman agreed to contribute
400,000 shares of the Company's common stock owned by him to the
Company and to then have them cancelled by the Company. The Company
has accounted for this as a $100,000 contribution of capital based
upon the fair value of the stock at the date of contribution. The
Company agreed to file a registration statement in February 1996 as
one of the conditions of the sale, as described below.
m) REGISTRATION OF COMMON STOCK
During February, 1996, the Company commenced registering common shares
and warrants pursuant to certain registration rights, and other
contractual obligations incurred by the Company in connection with the
issuance of such common shares and warrants pursuant to the HZI
acquisition agreement signed in November 1994 and the sale of common
shares in December 1995. The Company will not receive any of the
proceeds from the sale of the common shares or warrants since all
respective shares are being offered by the selling stockholders. The
Company has also agreed to pay $25,046 of cost related to the
registration.
n) CHAIRMAN'S CAPITAL CONTRIBUTION
As discussed in Note 5(c)(1) the Company's Chairman waived $146,347 of
his base annual salary for the year ended December 31, 1995. Said
amount has been recorded as an administrative expense and as an
increase to additional paid-in-capital for the year ended December 31,
1995.
F-13
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
(Formerly Tamarac Ventures, Ltd.)
NOTES TO CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
NOTE 5 - COMMITMENTS AND CONTINGENCIES
a) OPERATING LEASES
The Company leases its office facilities under a noncancellable
operating lease expiring in 1998. The lease contains a provision for
additional rent which is equal to the Company's pro rated share of
future real estate taxes. In addition, the Company has a
noncancellable operating lease for office equipment expiring in 1997.
A schedule of future minimum rental payments at December 31, 1995 is
as follows:
Year ended December 31,
-----------------------
1996 $ 110,490
1997 92,557
1998 77,868
----------
$ 280,915
----------
----------
Rent expense under all operating leases for the nine months ended
September 30, 1996 and 1995 was $91,811 and $117,537, respectively.
b) CONCENTRATION OF CREDIT RISK
For the nine months ended September 30, 1996 and 1995, approximately
62% and 44%, respectively, of net sales were derived from two and one
unrelated customer, who are in the pharmaceutical industry. As of
September 30, 1996 and December 31, 1995, approximately 60% and 54% of
accounts receivable is due from two unrelated customers.
c) EMPLOYMENT AGREEMENTS
1) On September 20, 1995, the Company's Chairman of the Board
entered into an employment agreement providing for a base salary
of $250,000 per year. The agreement is for an initial term of 10
years and is renewable on a month to month basis thereafter. The
agreement provides that on each anniversary date the Chairman's
salary shall be increased in good faith subject to negotiations
between the Chairman and the Company. The Company has agreed to
review the services rendered by the Chairman at least annually
and, at the discretion of the Board of Directors award a cash
bonus or make a contribution to a deferred compensation plan.
Further, the agreement provides for a term life insurance policy
amounting to $1,000,000 payable to the Chairman's designated
beneficiary and also provides for a vehicle and driver funded by
the Company. For the nine months ended September 30, 1996, the
Company's Chairman waived his right to receive the term life
insurance as provided for in the employment agreement.
F-14
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
(Formerly Tamarac Ventures, Ltd.)
NOTES TO CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
NOTE 5 - COMMITMENTS AND CONTINGENCIES (cont')
c) EMPLOYMENT AGREEMENTS (Cont'd)
1) (Cont'd)
For the year ended December 31, 1995 the Company's Chairman
waived $146,347, of his base annual salary. Said salary amount
was recorded as an administrative expense and as an increase to
additional paid-in-capital. Additionally, the Company's Chairman
waived his right to receive the term life insurance as provided
for in the employment agreement for said year.
2) On December 7, 1994, the Company entered into an employment
agreement with its Executive Vice President providing for a base
salary of $100,000 per year. The agreement expires on January 1,
2000 and is renewable on a year to year basis thereafter. The
agreement provides that on January 1 of each year the Executive
Vice President shall be entitled to a 10% salary increase and an
annual bonus equal to at least fifty percent (50%) of his base
salary subject to the Board of Directors approval. If the
employee is terminated within the contract period due to the
change in control of the Company as defined in the Securities
Exchange Act of 1934, under Sections 13(d) and 14(d), said
Executive Vice President shall be entitled to a lump sum payment
equal to five (5) time his gross annual compensation, in effect
at date of termination. Additionally, for the three year period
after the date of termination, the Company is obligated to
provide the employee with life and health insurance benefits
substantially similar to those which the Executive Vice President
was receiving prior to the date of termination.
d) CONSULTING AGREEMENT
On July 1, 1995, the Company entered into a five (5) year consulting
agreement with a Corporation controlled by the Company's President and
Vice Chairman. Said agreement provides for a fee of $75,000 per
annum.
NOTE 6 - RELATED PARTY TRANSACTIONS
a) REVENUES FROM AFFILIATES
The Company charges NYI, as well as Manhattan Westchester Medical
Services, P.C. ("Manhattan West") for the use of certain employees and
office and laboratory space of the Company. Manhattan West is also
under the common control of the Company's Chairman. Net revenues from
these affiliates for the nine months ended September 30, 1996 and 1995
amounted to $24,361 and $156,002, respectively.
The above transactions between HZI and NYI have been eliminated in the
consolidated financial statements.
F-15
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
(Formerly Tamarac Ventures, Ltd.)
NOTES TO CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
NOTE 6 - RELATED PARTY TRANSACTIONS (Cont'd)
b) SERVICES PROVIDED BY AFFILIATES
During 1994 HZI and Manhattan West entered into an arrangement whereby
Manhattan West would provide medical consulting services to HZI's
TeleMap business. This arrangement was discontinued during 1995 and
is now being performed by the Company's personnel. Services provided
by Manhattan West to HZI for the nine months ended September 30, 1995
amounted to approximately $5,000.
c) STOCKHOLDER NOTES AND LOANS
September 30, December 31,
1996 1995
------------- ------------
Non-interest bearing loans and payables
(See i below) $ 108,861 $ 155,381
Notes payable bearing an interest of
7.5% to 10% (See ii below) 550,000 225,000
Non-interest bearing loan payable
(See iii below) 200,000 -
------------- ------------
$ 858,861 $ 380,381
------------- ------------
------------- ------------
i) Stockholder notes and loans payable relates to advances made to
HZI and NYI by its Chairman of the Board which are due on demand.
ii) On July 19, September 14, October 12, 1995 and February 26, 1996,
the Company and the Chairman of the Board entered into a letter
agreement with TAC to borrow $100,000, $40,000, $60,000 and
$75,000, respectively. The $100,000 and $60,000 loans have an
interest rate of 9% per annum, respectively, and were due in six
months from the date of issuance including accrued interest,
respectively. The $40,000 and $75,000 loans have an interest
rate of 10% and are due within 90 days and six months,
respectively, from the date of issuance including accrued
interest. TAC and the Company have agreed to extend the due dates
of the above loans to September 30, 1997 or the date the Class B
and C warrants are exercised in their entirety prior to
September 30, 1997. As additional consideration for the $100,000
loan, the Company agreed to issue 49,998 shares of restricted
common stock to TAC. The Company has recorded the additional
consideration as interest expense, with a cost of $14,061, which
is based upon fifty percent (50%) of the fair value of the common
stock issued on July 19, 1995, the date of the agreement.
Further, the letter agreements give TAC the option to convert
said loans into 550,000 shares of common stock. The Company's
Chairman has agreed to satisfy this conversion feature by
contributing shares from his personal common stock holdings to
the Company so other stockholders holdings will not dilute from
this conversion.
F-16
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
(Formerly Tamarac Ventures, Ltd.)
NOTES TO CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
NOTE 6 - RELATED PARTY TRANSACTIONS (Cont'd)
c) STOCKHOLDER NOTES AND LOANS (Cont'd)
ii) (Cont'd)
On February 5, 1996, the Company borrowed from TAC an additional
$50,000 which is due on demand. Said loan has an interest of 10%
and was repaid during April, 1996.
On November 16, 1995, the Company entered into a letter agreement
with SRS Partners, a partnership that is affiliated with TAC to
borrow $25,000. The loan bears interest at a rate of 9% and is
due within six months or out of the proceeds of the first funding
of a Reg. "S" transaction.
On September 13, 1996 the Company borrowed from TAC $50,000,
which is payable from any future private placement proceeds.
Said loan bears interest at 9.5% per annum. Further the loan
agreement gives TAC the option to convert each $4.00 of debt into
one (1) unit.
Each unit will consist of one (1) share of Common Stock of the
Company and two (2) Stock Purchase Warrants. Each Warrant is
exercisable into one (1) share of Common Stock of the Company at
$8.00 per share until August 31, 1997, thereafter $10.00 per
share. The Stock Purchase Warrants expire on August 31, 1998.
On July 16, 1996 the Company entered into two loan agreements
with two unrelated shareholders. Each loan was for $100,000 and
bear interest at 9% per annum and is due within one (1) year, or
from the sale proceeds of the Company's securities including the
exercise of Class B and C Warrants.
At September 30, 1996 and December 31, 1995, accrued interest
related to such notes and loans amounted to $26,360 and $6,598,
respectively, and is included in accrued expenses.
iii) On May 24, 1996, the Company entered into an agreement with a
shareholder to borrow $200,000. The loan is non-interest bearing
and is payable within one (1) year or is payable out of the first
proceeds resulting from any exercise of outstanding Class B and
Class C warrants, (Note 4f) whichever comes first. As additional
consideration the Company issued 66,666 shares of restrictive
common stock. The Company has valued the common stock at
$133,332 or fifty percent (50%) of the fair market value at the
time of the transaction. The Company recorded deferred financing
cost and increased stockholders equity by $133,332, respectively
for this transaction. The deferred financing cost are being
amortized over one year, which is the maximum term of the loan,
or will be charged to operations if paid prior to May 24, 1997.
Further, the Company has agreed to register said shares. See
Note 4m.
F-17
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
(Formerly Tamarac Ventures, Ltd.)
NOTES TO CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
NOTE 6 - RELATED PARTY TRANSACTIONS (Cont'd)
d) DUE FROM AFFILIATES
Due from affiliates represent amounts due to HZI which are unsecured
demand obligations amounting to the following:
September 30, December 31,
1996 1995
------------- ------------
Due from Manhattan West $ 78,356 $ 68,855
Academia 21,294 20,088
------------- ------------
$ 99,650 $ 88,943
------------- ------------
------------- ------------
Academia Medicine Psychiatric Foundation, Inc. ("Academia") is a not-
for-profit entity. One of the Company's majority stockholders is one
of nine Directors of the Board.
e) SHAREHOLDER TRANSACTIONS
On September 19, 1995 the Company granted to its Vice Chairman a non-
qualified stock option to purchase 250,000 shares of common stock at
an exercised price of $.10 per share. This option expires seven (7)
years from the date of grant and the underlying common shares related
to the option are restricted. At the date of grant the Company
recorded compensation expense of $50,000 based upon the fair value of
the stock option at that date.
f) CONSULTING AGREEMENT
On July 1, 1995, the Company entered into a five (5) year consulting
agreement with a Corporation controlled by the Company's President and
Vice Chairman. Said agreement provides for a fee of $75,000 per
annum.
g) CAPITAL CONTRIBUTION
In December 1995, the Company sold 1,000,000 shares of common stock to
four unrelated investors for $250,000. As a condition of the sale the
Company's Chairman agreed to contribute 400,000 shares of the
Company's common stock owned by him to the Company and to then have
them cancelled by the Company. The Company has accounted for this as
a $100,000 contribution of capital based upon the fair value of the
stock at the date of contribution. The Company agreed to file a
registration statement in February, 1996 as one of the conditions of
the sale.
h) DUE FROM AFFILIATES
The Company charges NYI and Manhattan West for the use of certain
employees and laboratory space. NYI and Manhattan West are under the
common control of the Company's Chairman. At September 30, 1996 and
December 31, 1995, amounts due from Manhattan West for these services
amounted to $73,238 and $68,855, respectively.
F-18
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
(Formerly Tamarac Ventures, Ltd.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
NOTE 6 - RELATED PARTY TRANSACTIONS (Cont'd)
i) CHAIRMAN'S CAPITAL CONTRIBUTION
As discussed in Note 4(n) the Company's Chairman waived $146,347 of
his base annual salary for the year ended December 31, 1995. Said
amount has been recorded as an administrative expense and as a capital
contribution for the year ended December 31, 1995 with an increase to
additional paid-in-capital.
F-19
<PAGE>
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
NeuroCorp., Ltd. ("the Company") was incorporated in the State of
Nevada on March 18, 1987. On November 23, 1994, in connection with
the reverse acquisition of HZI Research Center, Inc. and Subsidiary
("HZI") the Company amended its Certificate of Incorporation to change
its name from Tamarac Ventures, Ltd. to NeuroCorp., Ltd. Further, the
Company reduced its authorized common stock from 200,000,000 shares to
100,000,000 shares and authorized 5,000,000 shares of preferred stock.
The Company, through its wholly-owned subsidiary, HZI, is primarily
involved in three inter-related businesses all of which involve the
interaction or utilization of the Company's proprietary software,
databases and medical devices for the diagnosis and treatment of
brain-related disorders. The three businesses are as follows: (i)
performing long-term contract services for medical research for major
domestic and international pharmaceutical firms (ii) designing and
producing proprietary neuropsychiatric diagnostic testing equipment,
which currently is their Brain Function Monitoring System (BFM) (iii)
providing interactive diagnostic testing services and analysis to
physicians and hospitals via the telephone, this service is known as
TeleMap.
In January 1996, the Company created a new wholly-owned subsidiary
Memory Centers of America, Inc. ("MCA"). MCA will provide therapeutic
services to people who suffer from memory impairment. MCA began full
operation's of the pilot program at the end of the second quarter of
1996, and is currently not a significant business segment of the
Company.
On November 23, 1994, in connection with its acquisition of HZI, the
Company changed its fiscal year end from September 30 to December 31
so as to conform with HZI's fiscal year end of December 31.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1996 AS COMPARED TO THE THREE MONTHS
ENDED SEPTEMBER 30, 1995
Long-term contract revenues are recognized on the percentage of
completion method by multiplying total estimated contract revenue by
the percentage of completion. Changes in each contracts performance,
conditions and estimated profitability including those arising from
contract penalty provisions, and final contract settlements may result
in revisions to costs and income and are recognized in the period in
which the revisions are determined. In addition, losses are
recognized in full when determinable.
Revenue from computer system sales, which include BFM, are recognized
upon the delivery of the software or turnkey systems. Service
revenues such as TeleMap and MCA, are recognized as they are rendered.
Revenues for the three months ended September 30, 1996 and 1995
amounted to $194,593 and $396,759, respectively. The gross profits
for the three months ended September 30, 1996 and 1995 amounted to
$50,654 and $211,572, respectively or a net decrease of $160,918. The
gross profit percentages for the three months ended September 30, 1996
and 1995 amounted to 26% and 53%, respectively, or a net decrease of
27%.
20
<PAGE>
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Cont'd)
THREE MONTHS ENDED SEPTEMBER 30, 1996 AS COMPARED TO THE THREE MONTHS
ENDED SEPTEMBER 30, 1995 (Cont'd)
The net reduction of gross profit during the three months ended
September 30, 1996 as compared to the three months ended September 30,
1995 is attributable to the following:
1. The Company has not entered into any major multi million dollar
new long-term contracts since December 31, 1993 and major
contracts recorded prior to this period have been substantially
completed during the year ended December 31, 1994. At the end of
1995 and during the nine months ended September 30, 1996 the
Company received $941,000 of new contracts which should be
completed during 1996. Revenues from contracts for the three
months ended September 30, 1996 as compared to the three months
ended September 30, 1995 amounted to $133,984 and $193,337,
respectively, or a net decrease of $59,353. The decrease in
revenues from contracts for the three months ended September 30,
1996 is attributable to the Company commencing work on new
contracts entered into during 1996. During the three months
ended September 30, 1996 the Company just started work on two new
contracts and the majority of the third quarter revenues was from
a major contract started in 1994 that is still ongoing. Gross
profit from contracts for the three months ended September 30,
1996 as compared to the three months ended September 30, 1995
amounted to $66,213 and $40,272, respectively or a net increase
of $25,941. The gross profit percentage from contracts for the
three months ended September 30, 1996 is 49% as compared to
September 30, 1995 which was 32%. The decrease in the gross
profit is attributable to a low gross profit contract that
dominated the third quarter 1995 contract research division
revenues. Of the $193,337 revenues earned during the third
quarter 1995, $132,098 is attributable to this low gross profit
contract.
As of September 30, 1996 the Company had a backlog to perform
approximately $730,000 of contracts. The Company expects to
recognize a minimum of $350,000 of revenues from the backlog
during the remaining portion of 1996.
2. Net sales of BFM Systems for the third quarter of 1996 and 1995
amounted to none and $147,934, respectively, or a net decrease in
sales of $147,934. The third quarter of 1995 was the initial
start of a new generation of BFM Systems of which the Company
believes was well received. Gross profit amounts for the three
months ended September 30, 1996 and 1995 were negative $35,856
and $103,554, respectively, or net decrease of $139,410. The
negative gross profit for the three months ended September 30,
1996 represents an allocation of overhead to the BFM division.
The Company's management believes the lack of sales for the third
quarter of 1996 is temporary.
3. Revenues of the TeleMap division for the three months ended
September 30, 1996 and 1995 amounted to $34,933 and $55,488,
respectively, or net decrease of $20,555. The gross profit
percentages for the three months ended September 30, 1996 and
1995 amounted to 34% and 58%, respectively. The decrease in
gross profit for the three months ended September 30, 1996 as
compared to the three months ended September 30, 1995 is
attributable to the Company assigning more internal staff to
promote sales.
21
<PAGE>
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Cont'd)
THREE MONTHS ENDED SEPTEMBER 30, 1996 AS COMPARED TO THE THREE MONTHS
ENDED SEPTEMBER 30, 1995 (Cont'd)
General and administration expenses include overhead, administration
salaries, selling and consulting costs. Further, the Company
classifies the costs of planning, designing and establishing the
technological feasibility of its computer system product as research
and development costs and charges those costs to expense when
incurred. After technological feasibility has been established, costs
of producing a marketable product and its prototype are capitalized.
Capitalized database and computer system development costs are
composed of mainly of payroll and other direct employee costs. Costs
associated with above, which are not capitalized during the period are
charged to either general and administrative or research and
development expense.
General and administrative expenses for the three months ended
September 30, 1996 were $289,753 as compared to the three months ended
September 30, 1995 of $245,632 or an increase of $44,121 or 18%. The
increase in general and administrative expenses for the three months
ended September 30, 1996 is due to the Company incurring in excess of
approximately $38,000 of initial costs for its new subsidiary, Memory
Centers of America, Inc. ("MCA"). Further, during the three months
ended September 30, 1996 as compared to the three months ended
September 30, 1995, the Company reduced its administration billings to
Manhattan Westchester Medical Services, P.C., a medical practice that
is controlled by the Company's Chairman. ("Manhattan Westchester") by
$8,503 resulting in the Company absorbing more payroll costs during
the September 30, 1996 quarter.
Research and development costs ("R&D") for the three months ended
September 30, 1996 were $26,051 as compared to the three months ended
September 30, 1995 of $61,872 or an decrease of $35,872. The decrease
in R&D costs is due to the Company assigning more personnel during the
third quarter of 1995 to its Oxiracetam feasibility study and BFM
Systems projects.
Interest and deferred financing expenses for the three months ended
September 30, 1996 were $45,282 as compared to the three months ended
September 30, 1995 of $4,083 or an increase of $41,199. The increase
is attributable to the Company charging operations during the second
quarter of 1996 for $33,333 for amortization of deferred financing
cost resulting from a $200,000 shareholder loan discussed in the
liquidity and capital resources section. Additionally, the Company
has increased its debt from shareholders which has resulted in
increased interest expense of approximately $6,900 during the second
and third quarter 1996 as compared to the 1995 period.
NINE MONTHS ENDED SEPTEMBER 30, 1996 AS COMPARED TO THE NINE MONTHS
ENDED SEPTEMBER 30, 1995
Revenues for the nine months ended September 30, 1996 and 1995
amounted to $985,715 and $1,185,637, respectively. The gross profits
for the nine months ended September 30, 1996 and 1995 amounted to
$497,082 and $792,459, respectively or a net decrease of $295,377.
The gross profit percentages for the nine months ended September 30,
1996 and 1995 amounted to 50% and 67%, respectively, or a net decrease
of 17%.
22
<PAGE>
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Cont'd)
NINE MONTHS ENDED SEPTEMBER 30, 1996 AS COMPARED TO THE NINE MONTHS
ENDED SEPTEMBER 30, 1995 (Cont'd)
The net reduction of gross profit during the nine months ended
September 30, 1996 as compared to the nine months ended September 30,
1995 is attributable to the following:
1. Revenues from contracts for the nine months ended September 30,
1996 as compared to the nine months ended September 30, 1995
amounted to $611,698 and $622,018, respectively, or a net
decrease of $10,320. The decrease in revenues from contracts for
the nine months ended September 30, 1996 is attributable to the
Company commencing work on new contracts entered into during 1995
and of which work started in the latter part of 1996. Gross
profit from contracts for the nine months ended September 30,
1996 as compared to the nine months ended September 30, 1995
amounted to $292,419 and $309,729, respectively or a net decrease
of $17,310. The gross profit percentage from contracts for the
nine months ended September 30, 1996 is 48% as compared to
September 30, 1995 which was 50%. The decrease in the gross
profit is attributable to a lower gross profit on contracts in
progress during nine months ended September 30, 1996 as compared
to the nine months ended September 30, 1995. During the first
quarter of 1995 the contract research division was working on a
major high gross profit contract, which impacted positively on
the nine months ended September 30, 1995.
2. Net sales of BFM Systems for the nine months ended 1996 and 1995
amounted to $232,685 and $388,489, respectively, or a net
decrease of $155,804. The gross profit percentage on these sales
for the nine months ended September 30, 1996 and 1995 amounted to
61% and 82%, respectively or net decrease of 21%. The second
quarter of 1995 started the initial sales of the Company's new
generation of BFM Systems. The majority of these 1995 sales were
to Beta sites who are utilizing the new systems in worldwide
studies being supervised by the contract research division. The
Beta site equipment had a cost basis which had been reduced by
depreciation in connection with contract revenues of the previous
years. This resulted in higher than normal gross profits for the
sales of BFM Systems in 1995 due to the cost basis being less
than the standard cost basis.
3. Revenues of the TeleMap division for the nine months ended
September 30, 1996 and 1995 amounted to $91,379 and $119,578,
respectively, or net decrease of $28,199. The gross profit
percentages for the nine months ended September 30, 1996 and 1995
amounted to 47% and 78%, respectively. The decrease in sales for
the nine months ended September 30, 1996 as compared to the nine
months ended September 30, 1995 is attributable to the Company
discontinuing business with customers who were previously
delinquent in their payments. The Company anticipates a reversal
of the decrease in comparative sales of the TeleMap division by
year end or the first quarter of 1997. The gross profit decrease
for the nine months ended September 30, 1996 as compared to the
nine months ended September 30, 1995, is partially the result of
the Company absorbing more overhead on less sales and increase in
labor costs resulting from the Company's allocation of personnel
in connection with further improvement of its high quality
controls.
23
<PAGE>
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Cont'd)
NINE MONTHS ENDED SEPTEMBER 30, 1996 AS COMPARED TO THE NINE MONTHS
ENDED SEPTEMBER 30, 1995 (Cont'd)
General and administrative expenses for the nine months ended
September 30, 1996 were $811,403 as compared to the nine months ended
September 30, 1995 of $726,649 or an increase of $84,754 or 12%. The
increase in general and administrative expenses for the nine months
ended September 30, 1996 is due to the Company incurring in excess of
approximately $150,000 of initial costs for its new subsidiary, Memory
Centers of America, Inc. ("MCA"). Further during the nine months
ended September 30, 1996 as compared to the nine months ended
September 30, 1995, the Company reduced its administration billings to
Manhattan Westchester Medical Services, P.C., a medical practice that
is controlled by the Company's Chairman. ("Manhattan Westchester") by
$44,408 resulting in the Company absorbing more payroll costs during
the September 30, 1996 period.
Additionally, during the nine months ended September 30, 1996 as
compared to the nine months ended September 30, 1995 the Company
reduced the capitalized cost of developing the database and computer
system product by $270,433 resulting in additional payroll cost being
incurred in general and administrative. Offsetting the above cost
increases in general and administrative costs, the Company has reduced
its payroll, professional and consulting fees, and has curtailed
overseas travel principally in connection with the Company's
involvement in a worldwide contract, and marketing of its BFM System,
for the nine months ended September 30, 1996 as compared to the nine
months ended September 30, 1995.
Research and development costs ("R&D") for the nine months ended
September 30, 1996 were $71,235 as compared to the nine months ended
September 30, 1995 of $136,134 or a decrease of $64,899. The decrease
in R&D costs is due to reductions in fixed cost for the R&D
department.
LIQUIDITY AND CAPITAL RESOURCES
NINE MONTHS ENDED SEPTEMBER 30, 1996 AS COMPARED TO THE NINE MONTHS
ENDED SEPTEMBER 30, 1995
At September 30, 1996 and December 31, 1995, the Company had working
capital of $66,661 and a working capital deficiency of $6,765,
respectively. The $73,426 net increase in working capital for the
nine months ended September 30, 1996 is attributable to accounts
receivable and deferred financing cost increasing by $557,857.
Offsetting this increase in working capital for the nine months ended
September 30, 1996 as compared to the year ending December 31, 1995
are increases in stockholders loans of $478,480. The increase in
accounts receivable is the result of increased sales by the BFM
Division and the contract research division earned revenues exceeding
amounts billed. Deferred financing cost of $86,848 is the result of
the Company borrowing from a shareholder, a $200,000 interest free
loan and as additional consideration, issuing 66,666 shares of
restricted common stock, which was valued at 50% of the fair market
value on the date of the loan. During February and July 1996 the
Company borrowed from Trinity American Corporation ("TAC") $175,000 to
supplement its working capital position. During early April 1996 the
Company repaid TAC $50,000. Further, the Company borrowed from
stockholders during July 1996 an additional $200,000.
24
<PAGE>
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Cont'd)
LIQUIDITY AND CAPITAL RESOURCES (Cont'd)
NINE MONTHS ENDED SEPTEMBER 30, 1996 AS COMPARED TO THE NINE MONTHS
ENDED SEPTEMBER 30, 1995 (Cont'd)
For the nine months ended September 30, 1996 net cash decreased by
$22,029. For the nine months ended September 30, 1996 and 1995, the
Company used cash for operations of $664,121 and $239,948,
respectively, resulting in increased cash used in operations of
$424,173. The net increase for the nine months ended September 30,
1996 is the result of accounts receivables increasing by $290,851 from
slow collections of the contract research division receivable and loss
from operations increased by $388,983 at September 30, 1996 as
compared to the nine months ended September 30, 1995. The net
decrease in long-term contract accounts of $339,619 is the result of
the Company reducing its backlog of large contracts during the
March 31, 1995 quarter. The Company has not replaced these
significant high gross profit contracts which has resulted in the
Company showing a net loss of $456,967 for the nine months ended
September 30, 1996 as compared to net loss of $67,984 for the nine
months ended September 30, 1995.
For the nine months ended September 30, 1996 and 1995 cash used by
investing activities mainly in connection with cost incurred for the
development of databases and computer system products, amounted to
$104,474 and $323,816, respectively, or a net decrease in the use of
cash of $219,342. The Company during the three months ended March 31,
1995 received a $34,271 payment from its insurance carrier on an
automobile that was destroyed in an accident. During 1996 the Company
reduced its payments by $270,433 for database and computer system
product development costs as compared to 1995. As noted in the
December 31, 1995 Management Discussions and Analysis, future
capitalization of computer system product development costs primarily
in connection with the BFM system will be substantially reduced during
the 1996 period, as compared to 1995 due to the Company completing at
the end of 1995 the final programming of its BFM Systems.
For the nine months ended September 30, 1996 and 1995 cash provided by
financing activities amounted to $746,566 and $235,607, respectively.
For the nine months ended September 30, 1996 the Company received
$400,000 in connection with the sale of 333,333 shares of common stock
to investors and borrowed from shareholders approximately $478,000 net
of repayments. Furthermore, during the nine months ended
September 30, 1996 the Company repaid a line of credit which amounted
to $50,000. As discussed in Note 4(m) of the September 30, 1996
financial statements, the Company expended $25,046 to register shares
of common stock and warrants pursuant to previous contractual
obligations with certain stockholders. At September 30, 1996, the
Company accrued $11,250 of dividends for Series 1 preferred stock as
required under the agreement.
The Company intends to meet its future cash requirements through
earnings from operations, short term borrowings and the sale of stock.
25
<PAGE>
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Cont'd)
MANAGEMENT'S PLANS
Since 1991, the Company has conducted a series of research programs
and was planning to develop Memory Centers with the Company's largest
customer. The data of these studies have now been analyzed and
publications were started. These new publications demonstrated the
usefulness and the power of the Company's proprietary method
(Quantitative Pharmaco-EEG = QPEEG) for this customer. This method,
which was developed by the Chairman of the Company, helps to assess
the pharmacological effects of drugs on the human central nervous
system (CNS), thus helping to establish the bioavailability of a CNS
drug and its CNS-effective dose. It predicts the clinical-therapeutic
dose of a compound and its possible therapeutic use in different
clinical diagnostic conditions. The Company showed that the herbal
product of this customer is
Thus, the Company's largest customer renewed their interest to
continue to work with the Company. The Company received a $780,000
new contract from this customer to further analyze the previous data
as well as the data of the ongoing depression research. Negotiations
suggest that large collaborative studies may be initiated in the near
future. Because of this and because of the new private investors'
interest, the Company decided to develop Memory Centers by itself.
The Company has started a new wholly-owned subsidiary, Memory Centers
of America, Inc. A pilot project was initiated in the first quarter
of 1996 in collaboration with Manhattan Westchester Medical Services,
P.C., the Chairman's professional corporation which already has the
required equipment and know-how. MCA commenced full operations of the
pilot program during the latter part of the second quarter of 1996,
and the results of those operations are not meaningful or a
significant part of the Company's operations at September 30, 1996.
The Company is also developing an Alzheimer's research program and a
Teleneuropsychiatry developmental program. The Company also invested
in a feasibility study to develop two Alzheimer's drugs (oxiracetam
and L-a-GFC). As a result, the Company is negotiating for a license
to develop and market one of these compounds.
The Company has developed its own Web Site page on the World Wide Web
and intends to offer to provide data base services to interested
parties for psychotropic drug research and development.
The Company believes that the new and successful developments in
conjunction with the Company's largest customer will not only bring
new contracts providing additional cash and revenues, but will also
open new doors for substantial revenue-bringing long-term contracts.
The Memory Centers should also have a positive impact on the Company's
cash flow in the future.
The funds obtained from the sale of stock in the first nine months of
1996 are now being invested in programs which are expected to generate
immediate revenues, such as the Memory Center project and a program
for advertising the telephonic services.
The Company projects another five (5) BFM system sales through its
Turkish distributor. An additional 3-6 systems (estimated at
approximately $180,000) may be sold to centers who may develop the
Alzheimer's program sponsored by an international healthcare
organization.
26
<PAGE>
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Cont'd)
MANAGEMENT'S PLANS (Cont'd)
The Company is trying to obtain a contract pursuant to the Company
preparing data and analysis of previous studies which will be the
basis for a worldwide Alzheimer's research program, anticipated to be
monitored by the Company. The approximate size for the Alzheimer's
program is $4 million. If the contract is obtained, it is projected
that $500,000 of revenue will be realized in during the first half of
1997.
27
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