REGISTRATION NO. 333-1462
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 4 TO
FORM SB-2
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
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NEUROCORP, LTD.
(Name of small business issuer in its charter)
Nevada 8099 87-0446395
(State or other Jurisdiction (Primary Standard (I.R.S. Employer
of Incorporation or Industrial Classification Identification No.)
Organization Code Number)
150 White Plains Road, Tarrytown, New York 10591 (914) 631-3316
(Address and telephone number of Principal Executive Offices)
Dr. Turan M. Itil, Chairman
(Name of agent for service)
Copy to:
Peter Landau, Esq.
Opton Handler Feiler & Landau
52 Vanderbilt Avenue, New York, NY 10017
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: FROM TIME TO
TIME AFTER THE EFFECTIVE DATE OF THE REGISTRATION STATEMENT, AS DETERMINED
BY MARKET CONDITIONS.
If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box: [X]
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CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED
MAXIMUM PROPOSED
TITLE OF EACH AGGREGATE MAXIMUM
CLASS OF AMOUNT OFFERING AGGREGATE AMOUNT OF
SECURITIES TO BE PRICE PER OFFERING REGISTRATION
REGISTERED REGISTERED SHARE PRICE FEE
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<S> <C> <C> <C> <C>
991,667 $2.5625
Common Stock Shares (1) $2,541,147 $770
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Class B Warrants 600,000 Nil Nil Nil
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Common Stock
Issuable Upon
Exercise of 600,000
Class B Warrants Shares (3) $1.00 (2) $600,000 $182
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Class C Warrants 400,000 Nil Nil Nil
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Common Stock
Issuable Upon
Exercise of 400,000
Class C Warrants Shares (3) $2.00 (2) $800,000 $267
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TOTAL $1,219 (4)
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</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) on the basis of the average of the high and low
closing sale price on February 5, 1996, as reported on the National
Association of Securities Dealers' Over-The-Counter Bulletin Board, a
date within five business days of the date of filing of the Registration
Statement.
(2) Based on the exercise price of the Warrants.
(3) Pursuant to Rule 416, Registrant is also registering an indeterminate
number of shares of Common Stock which may become issuable pursuant to
the antidilution provisions of the Warrants.
(4) $2,677 previously paid.
The registrant hereby amends the Registration Statement on such date or dates
as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
CROSS REFERENCE SHEET
Pursuant to Item 501 of Regulation S-B
<TABLE>
<CAPTION>
<S> <C> <C>
Item No. and Heading in Form Caption or Location in Prospectus
SB-2 Registration Statement
1. Front part of Registration Front part of Registration
Statement and Outside Front Statement and Outside Front Cover
Cover Page of Prospectus Page of Prospectus
2. Inside Front and Outside Back Inside Front and Outside Back Cover
Cover Pages of Prospectus Pages of Prospectus
3. Summary Information and Risk Prospectus Summary; Risk Factors
Factors
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Price Outside Front Cover Page of
Prospectus;
Plan of Distribution
6. Dilution *
7. Selling Security Holders Outside Front Cover Page of
Prospectus; Selling Security Holders
8. Plan of Distribution Outside Front Cover Page of
Prospectus;
Plan of Distribution
9. Interests of Named Experts and *
Counsel
10. Information with Respect to the Cover Page of Prospectus,
Registrant Prospectus to the Registrant
Summary; The Company;
Risk Factors; Certain
Market Information and
Dividends; Summary
Financial Information;
Management's Discussion
and Analysis of
Financial Condition and
Results of Operations;
Business; Management;
Principal Shareholders;
Certain Transactions;
Description of
Securities; Legal
Proceedings; Legal
Matters; Financial
Statement
11. Disclosure of Commission Part II, Item 24
Position on Indemnification for
Securities Acts Liabilities
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* Omitted because answer is negative or item is otherwise not
applicable.
TABLE OF CONTENTS
Page
AVAILABLE INFORMATION.................................................. 3
ADDITIONAL INFORMATION................................................. 3
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS...................... 3
PROSPECTUS SUMMARY..................................................... 4
RISK FACTORS........................................................... 9
CERTAIN MARKET INFORMATION AND DIVIDENDS............................... 21
USE OF PROCEEDS........................................................ 23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS...............................................24
BUSINESS............................................................... 36
MANAGEMENT............................................................. 51
EXECUTIVE COMPENSATION................................................. 56
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT......... 57
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS......................... 59
SELLING SECURITY HOLDERS............................................... 63
PLAN OF DISTRIBUTION................................................... 66
DESCRIPTION OF SECURITIES.............................................. 67
SHARES ELIGIBLE FOR FUTURE SALE........................................ 70
LEGAL PROCEEDINGS...................................................... 70
LEGAL MATTERS.......................................................... 70
EXPERTS................................................................ 70
SIGNATURES............................................................II-6
Subject to Completion Dated September 22, 1997
PROSPECTUS
NEUROCORP, LTD.
1,991,667 SHARES OF COMMON STOCK
600,000 CLASS B WARRANTS
600,000 CLASS C WARRANTS
All of the shares (the "Shares") and all of the Class B and Class C
Warrants (the "Warrants") of Neurocorp, Ltd. (the "Company") offered hereby
are to be sold for the accounts of the selling stockholders and selling
warrantholders set forth herein (the "Selling Security Holders"). The Company
is registering the Shares and the Warrants pursuant to certain registration
rights, and other contractual obligations incurred by the Company in
connection with the original issuance of such Shares and Warrants. The Company
will not receive any of the proceeds from the sale of the Shares or Warrants
by the Selling Security Holders. The Company will receive the exercise prices
with respect to the exercise of any of the Warrants described herein. The
Company estimates that total expenses it will incur in connection with the
offering of the Shares and Warrants (the "Offering") will be approximately
$400,000. Certain of the Selling Security Holders are obligated to pay certain
costs and expenses incurred in connection with the registration of the Shares
and Warrants. See "Selling Security Holders" and "Plan of Distribution".
Of the 1,991,667 Shares of the Common Stock, par value $.001 per share
(the "Common Stock"), being offered hereby, (i) 1,000,000 Shares are to be
issued from time to time upon the exercise of certain Warrants described
herein, (ii) 566,667 of the Shares being offered hereby were issued under
exemptions from registration under the Securities Act of 1933, as amended (the
"Securities Act"), (iii) 25,000 Shares are being offered by a charitable
foundation and (iv) 400,000 Shares were issued upon the exercise of 200,000
Class B and 200,000 Class C Warrants. The Warrants were issued to stockholders
of record of the Company as of November 1, 1994 in connection with the reverse
acquisition of HZI Research Center, Inc. See "Selling Security Holders".
The Selling Security Holders may sell the Shares and Warrants to or
through underwriters, and also may sell the Shares directly to other
purchasers or through agents from time to time in the over-the-counter market
at prevailing prices in such market. See "Plan of Distribution".
The Common Stock of the Company is quoted on the National Association of
Securities Dealers' ("NASD") Over-the-Counter ("OTC") Bulletin Board under the
symbol "NURC". The Common Stock has not been actively traded. At present,
there is no market for the Warrants and there is no assurance that any market
will develop.
On September 19, 1997, the average of the last bid and asked prices of
the Company's Common Stock in the over-the-counter market as reported by the
NASD was $83/8. See "Certain Market Information and Dividends".
THE PURCHASE OF THE COMMON STOCK AND WARRANTS OFFERED HEREBY ENTAILS A HIGH
DEGREE OF RISK. SEE "RISK FACTORS", BEGINNING ON PAGE 11 FOR CERTAIN
CONSIDERATIONS RELEVANT TO AN INVESTMENT IN THE SHARES AND THE WARRANTS.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is , 1997
AVAILABLE INFORMATION
The Company has filed a Registration Statement on Form SB-2 (together
with all amendments, exhibits and schedules, herein referred to as the
"Registration Statement") with the Securities and Exchange Commission (the
"Commission") under the Securities Act. This Prospectus does not contain all
of the information set forth in the Registration Statement, certain parts of
which are omitted in accordance with the rules and regulations of the
Commission. For further information, reference is hereby made to the
Registration Statement.
The Company is subject to the informational reporting requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith, the Company files certain periodic reports and other
information with the Commission. The Registration Statement and the exhibits
thereto filed by the Company with the Commission as well as the periodic
reports and other information filed with the Commission are available for
inspection and copying at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the Commission's regional offices located at Citicorp
Center, 500 W. Madison Street, Suite 1400, Chicago Illinois 60661 and at 7
World Trade Center, Suite 1300, New York, New York 10048. Copies of such
material may also be obtained by mail from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Washington D.C. 20549 and they are also
available on the Commission's web site at http://www.sec.gov.
ADDITIONAL INFORMATION
The Company intends to distribute annual reports containing audited
financial statements to its shareholders.
No dealer, salesman or any other person has been authorized to give any
information or to make any representation not contained or incorporated by
reference in this Prospectus in connection with the Offering and, if given or
made, such information or representation must not be relied upon as having
been authorized by the Company. This Prospectus does not constitute an offer
to sell or a solicitation of an offer to buy by any person in any jurisdiction
in which it is unlawful for such person to make such an offer or solicitation.
Neither the delivery of this Prospectus nor any sale made hereunder shall,
under any circumstances, imply that the information contained herein is
correct as of any date subsequent to the date hereof.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus contains certain forward-looking statements and
information relating to the Company that are based on the beliefs of the
Company's management as well as assumptions made by and information currently
available to the Company's management. When used in this document, the words
"anticipate," "believe," "estimate," "expect," "going forward," and similar
expressions, as they relate to the Company or Company management, are intended
to identify forward-looking statements. Such statements reflect the current
views of the Company with respect to future events and are subject to certain
risks, uncertainties and assumptions, including the risk factors described in
this Prospectus. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual results
may vary materially from those described herein as anticipated, believed,
estimated or expected. The Company does not intend to update these
forward-looking statements.
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED
OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS. INVESTORS SHOULD CAREFULLY
CONSIDER INFORMATION SET FORTH UNDER THE HEADING "RISK FACTORS".
THE COMPANY
THE COMPANY IS PRIMARILY INVOLVED IN TWO BUSINESSES: IT PERFORMS
CONTRACT MEDICAL RESEARCH SERVICES FOR HEALTH AGENCIES, RESEARCH ORGANIZATIONS
AND PHARMACEUTICAL COMPANIES, AND IT OWNS, OPERATES OR MANAGES A GROUP OF
FACILITIES THAT DIAGNOSE AND TREAT MEMORY DISORDERS. IN ADDITION, AS AN
OUTGROWTH OF ITS RESEARCH ACTIVITIES, THE COMPANY ALSO DESIGNS DIAGNOSTIC
TESTING SOFTWARE AND EQUIPMENT FOR NEUROPSYCHIATRIC APPLICATIONS AND THE
COMPANY PERFORMS NEUROLOGICAL TESTING SERVICES FOR HOSPITALS AND PHYSICIANS.
THE COMPANY CONDUCTS THESE ACTIVITIES THROUGH TWO WHOLLY-OWNED SUBSIDIARIES,
HZI RESEARCH CENTER, INC., A NEW YORK CORPORATION ("HZI"), AND MEMORY
CENTERS(TM) OF AMERICA, INC., A DELAWARE CORPORATION ("MCAI"). IN NOVEMBER
1994, THE COMPANY ACQUIRED ALL OF THE ISSUED AND OUTSTANDING SHARES OF HZI.
HZI CONDUCTS CONTRACT RESEARCH, DESIGNS DIAGNOSTIC SOFTWARE AND EQUIPMENT AND
PERFORMS NEUROLOGICAL TESTING SERVICES. IN MARCH 1996, THE COMPANY ESTABLISHED
MCAI, WHICH OWNS AND OPERATES A NETWORK OF PILOT FACILITIES, MEMORY
CENTERS(TM), THAT TREAT MEMORY DISORDERS.
CONTRACT RESEARCH
THE COMPANY'S CONTRACT RESEARCH BUSINESS SPECIALIZES IN CLINICAL STUDIES
OF COMPOUNDS THAT AFFECT THE CENTRAL NERVOUS SYSTEM FOR DRUG COMPANIES AND
RESEARCH ORGANIZATIONS IN BOTH THE UNITED STATES AND EUROPE. THESE CONTRACTS
INCLUDE STUDIES CONDUCTED AT BOTH SINGLE AND MULTIPLE LOCATIONS; THEY INCLUDE
BOTH ASYMPTOMATIC VOLUNTEER STUDIES AND SYMPTOMATIC VOLUNTEER STUDIES. IN
THESE STUDIES, THE COMPANY DEVELOPS INFORMATION ON THE CLINICAL USEFULNESS AND
THERAPEUTIC DOSES OF NEW PSYCHOTROPIC DRUGS, PARTICULARLY DRUGS DEVELOPED TO
TREAT DEMENTIA, ALZHEIMER'S DISEASE, DEPRESSION, SCHIZOPHRENIA AND ANXIETY
DISORDERS. THE COMPANY'S PROPRIETARY BRAIN FUNCTION MONITORING SYSTEM ("BFM
SYSTEM(R)"), ITS METHOD OF QUANTITATIVE PHARMACO-EEG ("QPEEG(R)") AND ITS
COMPUTER DRUG AND DIAGNOSTIC DATA BASES PROVIDE THE COMPANY WITH A UNIQUE
ADVANTAGE IN DEVELOPING SUCH INFORMATION. THE COMPANY DOES NOT CONDUCT ITS OWN
HUMAN RESEARCH, AND AS A RESULT, DOES NOT TAKE ANY RESPONSIBILITY FOR MEDICAL
TREATMENT OR LIABILITY. HOWEVER, THE COMPANY MONITORS THE STUDIES CONDUCTED IN
OTHER ORGANIZATIONS, IT SUPERVISES DATA COLLEC- TION AND IT ANALYZES BOTH DATA
AND PROGRESS STUDY REPORTS. THE COMPANY'S RESEARCH STUDIES ADHERE TO STRICT
FEDERAL AND LOCAL RULES AND REGULATIONS AND THEY ARE SUPERVISED BY LOCAL
INSTITUTIONAL REVIEW BOARDS, DRUG COMPANIES, AND THE LOCAL AND FEDERAL OFFICES
OF THE FOOD AND DRUG ADMINISTRATION ("FDA").
THE COMPANY HAS NOT MADE ANY EFFORTS TO MARKET OR PROMOTE ITS CONTRACT
RESEARCH BUSINESS AND AS A RESULT, THE COMPANY ESTIMATES THAT IT HAS LESS THAN
A 1% MARKET SHARE. HOWEVER, THE COMPANY BELIEVES THAT CONTRACT RESEARCH IS A
GROWING INDUSTRY IN THE UNITED STATES. MAJOR DRUG COMPANIES IN THE UNITED
STATES, EUROPE AND JAPAN ALL CONDUCT THEIR CLINICAL RESEARCH PRIMARILY IN THE
UNITED STATES SINCE, GIVEN THE HIGH LEVEL OF REGULATORY OVERSIGHT IN THIS
COUNTRY, THE RESULTS OF CLINICAL TESTS PERFORMED HERE ARE HELD IN PARTICULARLY
HIGH REGARD . MOREOVER, THE COMPANY BELIEVES THAT AS DRUG COMPANIES CONTINUE
TO TRY TO CONTROL COSTS, THEY WILL INCREASINGLY SUBCONTRACT THEIR CLINICAL
RESEARCH PROJECTS. THE COMPANY BELIEVES THE CONTRACT RESEARCH INDUSTRY WILL
GROW OVER THE NEXT 5-10 YEARS. THE COMPANY FURTHER BELIEVES THAT A SIGNIFICANT
PORTION OF THIS MARKET WILL BE FOCUSED ON CLINICAL RESEARCH RELATED TO CENTRAL
NERVOUS SYSTEM DRUGS. IN THE UNITED STATES ALONE, THERE ARE OVER 100 NEW
CENTRAL NERVOUS SYSTEM-RELATED DRUGS DEVELOPED EACH YEAR; IN EUROPE AND JAPAN,
THE COMPANY ESTIMATES THAT THERE ARE MORE THAN 200 CENTRAL NERVOUS
SYSTEM-RELATED DRUGS BEING DEVELOPED EACH YEAR.
MEMORY CENTERS(TM)
IN 1996, THE COMPANY ESTABLISHED ITS SECOND WHOLLY OWNED SUBSIDIARY,
MCAI. MCAI PROVIDES PROFESSIONAL DIAGNOSTIC, PREVENTIVE AND TREATMENT
SERVICES, THROUGH A NETWORK OF PILOT FACILITIES, MEMORY CENTERS(TM), TO
PERSONS WHO SUFFER FROM MEMORY DISTURBANCES. THERE ARE CURRENTLY THREE PILOT
MEMORY CENTERS(TM), ONE IN MANHATTAN, ONE IN BROOKLYN AND THE OTHER IN
TARRYTOWN, NEW YORK. THE COMPANY INTENDS TO ADD THREE MORE LOCATIONS IN THE
METROPOLITAN NEW YORK AREA AND IT PLANS TO EXPAND NATIONALLY WITH ADDITIONAL
PILOT CENTERS. IN ALL, THE COMPANY INTENDS TO OPEN BETWEEN 5 AND 10 MEMORY
CENTERS(TM) BY THE END OF CALENDAR YEAR 1997. MEMORY CENTERS(TM) ARE OPERATED
UNDER EXPERT MEDICAL SUPERVISION WITH UP TO DATE DIAGNOSTIC TOOLS THAT PROVIDE
THE BEST AVAILABLE TREATMENT.
MCAI'S MANAGEMENT BELIEVES THAT THE EARLIER PHYSICIANS CAN EVALUATE,
DIAGNOSE AND TREAT MEMORY PROBLEMS, THE MORE LIKELY IT WILL BE THAT THEY CAN
PREVENT SEVERE MEMORY PROBLEMS FROM DEVELOPING LATER ON. AT PRESENT, THERE IS
NO SIGNIFICANT TREATMENT FOR SERIOUS MEMORY DEFICITS SUCH AS ALZHEIMER'S
DISEASE. IN RECENT DECADES, HOWEVER, SCIENTISTS HAVE DISCOVERED CHEMICALS THAT
TREAT BRAIN DISORDERS, SUCH AS SCHIZOPHRENIA AND DEPRESSION, THEY HAVE
DISCOVERED CHEMICALS THAT REVERSE EXPERIMENTALLY INDUCED MEMORY DISTURBANCES
IN HUMAN AND ANIMAL STUDIES AND THEY HAVE DEMONSTRATED THAT, ALTHOUGH OLDER
SUBJECTS MORE FREQUENTLY SUFFER FROM MEMORY IMPAIRMENT, MEMORY IMPAIRMENT IS
NOT THE INEVITABLE RESULT OF AGING. IN THE UNITED STATES, OVER 50 MILLION
PEOPLE WILL BE 65 OR OLDER BY THE YEAR 2030. TO THE EXTENT MEMORY CENTERS(TM)
CAN PREVENT THE ONSET OF SOME MEMORY DISORDERS THAT MIGHT OTHERWISE OCCUR,
THEY WILL OFFER A PARTICULARLY TIMELY AND IMPORTANT SERVICE.
MEMORY CENTERS(TM) OFFER EARLY DIAGNOSIS OF MEMORY DISTURBANCES,
FOLLOWED BY PROPRIETARY TREATMENTS. THE ASSESSMENT PHASE OF THE MEMORY
CENTERS(TM) PROGRAM GENERALLY INCLUDES A COMPREHENSIVE HISTORY, AN EXAMINATION
BY A PHYSICIAN, A BLOOD CHEMISTRY ANALYSIS, NEUROPSYCHOLOGICAL AND
NEUROPHYSIOLOGICAL TESTS, AND OTHER STEPS THAT ARE DESIGNED TO IDENTIFY THE
CAUSE OF THE PATIENT'S PROBLEMS. WHEN AN ASSESSMENT IS COMPLETE, THE PHYSICIAN
WILL DIAGNOSE THE PATIENT AND CREATE AN INDIVIDUAL TREAT- MENT PLAN TO ADDRESS
THEIR PARTICULAR NEEDS. THERAPIES WILL INCLUDE PRESCRIPTION MEDICATIONS,
HERBAL COM- POUNDS, COGNITIVE EXERCISES DESIGNED TO IMPROVE MENTAL
PERFORMANCE, AND NUTRITIONAL ACTION, AMONG OTHER THINGS. THE TREATMENT PROGRAM
INCLUDES FOLLOW-UP ASSESSMENTS TO CONFIRM THE PATIENT'S RESPONSE TO THE
PRESCRIBED THERAPY.
THE ACTIVITIES OF THE MEMORY CENTERS(TM) WILL BE REGULATED BY A VARIETY
OF AGENCIES ON FEDERAL, STATE AND POSSIBLY LOCAL LEVELS. THE COMPANY
RECOGNIZES THAT THE OPERATION OF THE MEMORY CENTERS(TM) MAY BE DEEMED BY
CERTAIN REGULATORS TO CONSTITUTE THE PRACTICE OF MEDICINE. MANY STATES
PROHIBIT BUSINESS CORPORATIONS FROM ENGAGING IN THE PRACTICE OF MEDICINE,
EMPLOYING PHYSICIANS, OR ENTERING INTO CERTAIN FINANCIAL ARRANGEMENTS WITH
PHYSICIANS, INCLUDING FEE SPLITTING. HOWEVER, MCAI BELIEVES THAT IT WILL BE
ABLE TO STRUCTURE RELATIONSHIPS WITH PHYSICIANS AND OTHER ENTITIES THAT WILL
COMPLY WITH ALL APPLICABLE REGULATIONS.
NEUROPSYCHIATRIC TESTING EQUIPMENT AND SOFTWARE
THE COMPANY DESIGNS PROPRIETARY DIAGNOSTIC TESTING SOFTWARE AND
EQUIPMENT THAT IS USED IN NEUROPSYCHIATRIC APPLICATIONS, AND IT SELLS THESE
SYSTEMS TO PHYSICIANS, RESEARCHERS AND HOSPITALS. THE SYSTEM, KNOWN AS THE
CEEG-SCAN SYSTEM(R) OR BFM SYSTEM(R), ENHANCES WIDELY ACCEPTED DIAGNOSTIC
TESTS, SUCH AS THE ELECTROENCEPHALOGRAM ("EEG") BY QUANTIFYING THEIR RESULTS
AND PERMITS THESE TESTS TO BE PER- FORMED IN A MORE PRACTICAL AND ECONOMICAL
FASHION. THE CEEG-SCAN SYSTEM ALSO INCLUDES PROPRIETARY SOFTWARE KNOWN AS
DYNAMIC BRAIN MAPPING(R) THAT IS SOMETIMES SOLD SEPARATELY. AS OF JUNE 30,
1997, THE COMPANY HAS SOLD 119 OF THESE SYSTEMS SINCE INCEPTION CONSISTING OF
EITHER HARDWARE, SOFTWARE OR BOTH AT PRICES RANGING FROM $15,000 TO $130,000.
THIS SYSTEM, UNLIKE THOSE OF ITS COMPETITORS, IS PRIMARI- LY BASED ON THE
COMPANY'S PROPRIETARY SOFTWARE AND OFF-THE-SHELF HARDWARE. THE COMPANY INTENDS
TO SOLICIT ORDERS FOR THIS SYSTEM FROM GOVERNMENT AGENCIES AND INTERNATIONAL
HEALTH ORGANIZATIONS.
DIAGNOSTIC TESTING SERVICES
THE COMPANY, THROUGH HZI, OFFERS INTERACTIVE NEUROLOGICAL DIAGNOSTIC
TESTING SERVICES TO PHYSICIANS AND HOSPITALS TO ASSIST IN THE DIAGNOSIS OF
BRAIN DISORDERS. THESE SERVICES INCLUDE DIAGNOSTIC TESTS SUCH AS EEG WITH OR
WITHOUT DYNAMIC BRAIN MAPPING(R), AND ARE KNOWN COLLECTIVELY AS "TELE-MAP".
HZI PROVIDES PHYSICIANS OR HOSPITALS WITH A CONVENTIONAL OR SPECIALLY-DESIGNED
MODEM, OR TRANSMITTER, BY WHICH PHYSICIANS CONDUCTING NEUROLOGICAL TESTS CAN
TRANSMIT THE DATA THEY COLLECT VIA TELEPHONE TO HZI. THE DATA IS RECORDED AND
THEN ANALYZED BY HZI EMPLOYEES AND INTERPRETED BY CONSULTANTS AND EXPERTS, AND
THE REPORTS ARE THEN PROVIDED TO THE TESTING PHYSICIANS. HZI'S TECHNICAL STAFF
COMMUNICATES WITH THE PHYSICIANS THROUGHOUT THE TEST PROCEDURE TO ENSURE THE
QUALITY OF THE DATA THE PHYSICIANS COLLECT. HZI BELIEVES, ALTHOUGH THERE CAN
BE NO ASSURANCE, THAT THIS INTERACTIVE SERVICE WILL CONTINUE TO BE ATTRACTIVE
TO HOSPITALS AND PHYSICIANS ALIKE, AS IT PERMITS PHYSICIANS TO CONDUCT EEG
TESTS IN THEIR INDIVIDUAL OFFICES, OR HOSPITALS WITHOUT A SUBSTANTIAL CAPITAL
INVESTMENT. REVENUES OF THE TELE-MAP(R) DIVISION FOR THE YEARS ENDED 1996 AND
1995 WERE $129,622 AND $146,119, RESPECTIVELY.
DEVELOPMENTAL ACTIVITIES
THE COMPANY IS CURRENTLY DEVELOPING OTHER PRODUCTS AND SERVICES SOME OF
WHICH IT BELIEVES MAY OFFER COMMERCIAL POTENTIAL IN THE FUTURE, BUT WHICH ARE
NOT YET MARKETABLE:
HARDWARE AND SOFTWARE: THE COMPANY HAS SEVEN HARDWARE AND SOFTWARE
PRODUCTS IN VARIOUS STAGES OF DEVELOPMENT. BY EARLY 1998, THE COMPANY
EXPECTS TO BEGIN THE PROCESS OF OBTAINING FDA APPROVAL FOR THREE
PRODUCTS: THE EEG/EP AMPLIFIER, THE DIGITAL EEG SYSTEM SOFTWARE AND THE
HZI ELECTRODE HEADSET. BY EARLY 1999, THE COMPANY HOPES TO BEGIN THE FDA
APPROVAL PROCESS FOR TWO ADDITIONAL PRODUCTS: ENHANCED EVOKED POTENTIAL
SOFTWARE AND PHARMACOLOGICALLY ACTIVATED EEG (TEST-DOSE(R)) SOFTWARE.
DRUG DEVELOPMENT: THE COMPANY PLANS TO USE ITS PROPRIETARY HARDWARE,
SOFTWARE, QPEEG(R) METHODOLOGY AND DATABASES IN ORDER TO DEVELOP, EITHER
ALONE OR WITH OTHERS, PROPRIETARY DRUGS FOR CONDITIONS THAT AFFECT THE
CENTRAL NERVOUS SYSTEM. THE COMPANY HAS COMPILED WHAT IT BELIEVES TO BE
A UNIQUE DATABASE ON THE EFFECTS OF COMPOUNDS USED TO TREAT ALZHEIMER'S
DISEASE AND MEMORY IMPAIRMENT. HZI BELIEVES THAT IT CAN NOW STUDY A
VARIETY OF NEW CHEMICAL ENTITIES OR NATURALLY OCCURRING SUBSTANCES (SUCH
AS PLANT EXTRACTS OR VITAMINS) USING ITS PROPRIETARY SOFTWARE AND
DATABASE TO IDENTIFY POTENTIAL TREATMENTS FOR MEMORY DISORDERS.
FOR THE FISCAL YEARS ENDED DECEMBER 31, 1994, DECEMBER 31, 1995 AND
DECEMBER 31, 1996, THE COMPANY HAS SPENT $224,010, $181,512, AND $98,018,
RESPECTIVELY, ON RESEARCH AND DEVELOPMENT ACTIVITIES TO ESTABLISH THE
TECHNOLOGICAL FEASIBILITY OF PROPRIETARY ITEMS. THE COMPANY IS NOT REIMBURSED
FOR ANY RESEARCH OR DEVELOPMENT EXPENSES FROM ITS CUSTOMERS. SEE "RISK FACTORS
- -- GOVERNMENT REGULA- TION."
THE COMPANY'S EXECUTIVE OFFICES ARE LOCATED AT 150 WHITE PLAINS ROAD,
TARRYTOWN, NEW YORK 10591 AND ITS TELEPHONE NUMBER IS (914) 631-3316.
THE OFFERING
SECURITIES OFFERED............ 1,991,667 SHARES OF COMMON STOCK, 600,000
CLASS B WARRANTS AND 400,000 CLASS C
WARRANTS. SEE "DESCRIPTION OF
SECURITIES".
.............................. OF THE 1,991,667 SHARES OF COMMON STOCK,
PAR VALUE $.001 PER SHARE BEING OFFERED
HEREBY, 1,000,000 SHARES ARE TO BE ISSUED
FROM TIME TO TIME UPON THE EXERCISE OF
CERTAIN WARRANTS AND 400,000 SHARES WERE
ISSUED UPON EXERCISE OF 400,000 WARRANTS.
566,667 SHARES BEING OFFERED WERE ISSUED
IN CONNECTION WITH PRIVATE PLACEMENTS
UNDER SECTION 4(2) OF THE SECURITIES ACT,
AS AMENDED, AND 25,000 SHARES ARE BEING
OFFERED BY A CHARITABLE FOUNDATION. SEE
"SELLING SECURITY HOLDERS".
COMMON STOCK OUTSTANDING
PRIOR TO THE OFFERING......... 8,173,806 SHARES.
COMMON STOCK TO BE OUTSTANDING
AFTER THIS OFFERING .......... 9,173,806 SHARES ASSUMING EXERCISE OF
1,000,000 WARRANTS OFFERED.
OUTSTANDING CLASS A AND CLASS B
WARRANTS...................... THE 1,000,000 WARRANTS BEING OFFERED
HEREBY ARE THE UNEXERCISED WARRANTS
REMAINING FROM AN AGGREGATE OF 1,600,000
WARRANTS ISSUED TO STOCKHOLDERS OF RECORD
OF THE COMPANY AS OF NOVEMBER 1, 1994 IN
CONNECTION WITH THE REVERSE ACQUISITION
OF HZI. 600,000 OF THE WARRANTS ARE CLASS
B WARRANTS AND 400,000 ARE CLASS C
WARRANTS EXERCISABLE AT $1.00 PER SHARE
AND $2.00 PER SHARE, RESPECTIVELY, AT ANY
TIME ON OR BEFORE DECEMBER 31, 1997. IN
MARCH, 1997, 200,000 CLASS A AND 200,000
CLASS B WARRANTS WERE EXERCISED. THE
WARRANTS ARE REDEEMABLE BY THE COMPANY AT
ANY TIME UPON THIRTY (30) DAYS WRITTEN
NOTICE AT $.001 PER WARRANT. SEE
"DESCRIPTION OF SECURITIES-- WARRANTS".
USE OF PROCEEDS............... THIS OFFERING IS BEING MADE BY SELLING
SECURITY HOLDERS AND THE COMPANY WILL NOT
RECEIVE ANY OF THE PROCEEDS OF SUCH
SALES. THE COMPANY MAY RECEIVE CASH
PROCEEDS TO THE EXTENT ANY OF THE CLASS B
AND CLASS C WARRANTS ARE EXERCISED. SEE
"USE OF PROCEEDS" AND "SELLING SECURITY
HOLDERS."
RISK FACTORS.................. THIS OFFERING INVOLVES A HIGH DEGREE OF
RISK.
SEE "RISK FACTORS."
NASD OTC
BULLETIN BOARD SYMBOL......... NURC.
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
THE FOLLOWING SUMMARY CONSOLIDATED FINANCIAL INFORMATION CONCERNING THE
COMPANY HAS BEEN DERIVED FROM THE FINANCIAL STATEMENTS INCLUDED ELSEWHERE IN
THIS PROSPECTUS AND SHOULD BE READ IN CONJUNCTION WITH SUCH CONSOLIDATED
FINANCIAL STATEMENTS AND THE NOTES THERETO AND MANAGEMENT DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS OF THE COMPANY.
SEE "FINANCIAL STATEMENTS."
STATEMENT OF OPERATIONS DATA:
</TABLE>
<TABLE>
<CAPTION>
Six Months
Ended
Year Ended December 31, June 30,
1992 1993 1994 1995 1996 1997
<S> <C> <C> <C> <C> <C> <C>
Sales $1,453,766 $2,185,380 $2,350,989 $1,543,363 $ 1,068,891 587,000
Gross profit 906,504 1,359,966 1,421,979 905,617 362,312 293,937
Total expenses 1,110,629 1,228,001 1,218,944 1,168,111 1,996,987 953,160
Net income (loss) $(204,125) $131,965 $203,035 $(262,494) $(1,634,675)$(659,223)
========== ========= ========= ========== =========== =========
Net income (loss)
per share $(.30) $ .19 $.04 $(.05) $(.23) $(.08)
===== ===== ==== ====== ====== ======
Weighted average
number of shares 680,000 680,000 4,676,666 5,484,585 7,002,279 8,015,486
BALANCE SHEET DATA:
Working capital
(deficiency) $ (6,765) $1,082,613 $1,464,877
Total Assets $3,329,412 $4,580,364 $4,072,896
Long term liabilities $ 346,734 $279,502 $914,000
Stockholders' equity $1,917,669 $2,777,899 $2,711,896
</TABLE>
RISK FACTORS
The securities offered hereby are speculative and involve a high degree
of risk. In analyzing this offering, prospective purchasers should carefully
consider the following factors, among others:
RECENT LOSSES AND POSSIBLE FUTURE LOSSES
The Company has operated at a net loss for the years ended December 31,
1995 and December 31, 1996 and the six months ended June 30, 1997. Its net
income for the fiscal year ended December 31, 1994 was $203,035. For the years
ended December 31, 1995, and December 31, 1996 and the six months ended June
30, 1997 the Company had a net loss of $262,494, $1,634,675, and $659,223,
respectively. Operating losses have resulted primarily from the lack of major
new contracts during the last three years and from general and administrative
expenses. The Company's ability to achieve profitability depends upon its
ability to enter into new contract research agreements, develop pharmaceutical
products, services and medical devices, obtain regulatory approval for its
proposed products and enter into agreements for product development,
manufacturing and commercialization. There can be no assurance that the
operations of the Company will be profitable in future periods. See "Financial
Statements" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
POTENTIAL FLUCTUATION IN QUARTERLY RESULTS
The Company's quarterly operating results have varied significantly as a
result of a number of factors, including the timing of contracts for clinical
research studies and testing and changes in health care regulations. The
Company expects that its operating results will fluctuate in the future as a
result of the difficulties and delays encountered in any effort to conduct
contract research and develop and commercialize new pharmaceutical products,
services and medical devices, the competitive factors in the market place and
the regulatory environment in which the Company operates. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
NEED FOR WORKING CAPITAL - DEPENDENCE ON PRIVATE SALES OF SECURITIES
The Company and its subsidiaries may require substantial additional
financing to continue their research, complete their product development,
obtain regulatory approvals and to manufacture and market any products and
services that they may develop. The Company may also need to expend
substantial amounts of money on research relating to the application of
products or systems that may never develop into marketable products.
The Company has incurred a deficiency in net cash flow from operating
activities for each of the three years ended December 31, 1994, 1995 and 1996.
The Company had a net working capital deficiency of $275,034 as of December
31, 1994, $6,765 as of December 31, 1995 and had positive working capital of
$1,082,613 as of December 31, 1996 and $1,464,877 as of June 30, 1997. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and "Financial Statements".
The Company has financed its working capital requirements through
private sales of its securities to individual investors and groups of
investors and loans from officers and shareholders of the Company. In
particular, the Company has been dependent on Trinity American Corporation
("Trinity"), one of its principal stockholders, and Trinity's President for
loans. Such shareholders are under no obligation to continue financing the
operations of the Company. The Company intends to continue its practice of
funding its working capital requirements through private sales of securities
and loans to the extent that it is unable to meet its working capital
requirements by generating sufficient income from operations. See "Certain
Relationships and Related Transactions".
While there can be no assurance with respect to the Company's continuing
ability to sell its securities privately or that outstanding warrants or
options will be exercised, management believes that its available cash
together with expected proceeds from the various sources noted above (i.e.
warrants) and expected cash flows from operations will be sufficient to
finance its working capital and capital requirements for at least a twelve
month period.
In view of the foregoing, in all likelihood, in order to fund any future
capital which may be required, the Company may have to undertake additional
financings by means of public or, as noted above, private offerings, or obtain
funds through arrangements with corporate partners that may require the
Company to relinquish some rights to any technologies, products or systems it
develops. If additional financing is required, no assurance can be given that
this financing will be available on acceptable terms, if at all. If adequate
funds are not available, the Company may have to substantially reduce or
eliminate expenditures to develop, produce and market its proposed products,
systems and programs, all of which would have a material adverse effect on the
Company. See "Business -- Developmental Activities".
In the event the Company obtains any additional funding through the sale
of Common Stock, securities convertible into or exchangeable for Common Stock
or warrants and options exercisable for Common Stock, and the exercise of the
rights of holders of such convertible securities, warrants and options may
result in dilution of the investments of present holders of Common Stock. See
"Financial Statements", "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Certain Relationships and Related
Transactions".
DIVIDENDS
The Company has not paid any cash dividends on its Common Stock and
does not anticipate paying any cash dividends in the foreseeable future. See
"Certain Market Information and Dividends".
DEPENDENCE UPON KEY PERSONNEL
Given the specialized scientific nature of the Company's business, the
Company's current and future success is highly dependent on its ability to
attract and retain qualified scientific and technical personnel. There is
intense competition for qualified personnel in the areas of the Company's
activities, and there can be no assurance that the Company will be able to
attract or retain the qualified personnel necessary to develop its business.
In particular, the Company is dependent upon the following management
and technical personnel: Dr. Turan M. Itil, Chairman and President, Dr.
Pierre Le Bars, Executive Vice President, Kurt Itil, President and CEO of
HZI, and Jonathan Raven, Executive Vice President of the Company and
President and CEO of the Company's subsidiary, MCAI. Moreover, Dr. T. Itil
is substantially responsible for generating new business for the Company's
contract research studies. Each of Dr. T. Itil, Dr. Le Bars and Mr. Raven
have Employment Agreements with the Company. None of such personnel, with the
exception of Dr. T. Itil, is covered by key person life insurance. Some
management personnel are relatively new to the Company, and the Company's
success in the future will depend in part on successful assimilation of new
management personnel.
The loss of key personnel or inability to hire and retain qualified
personnel could have a material adverse effect on the Company's business and
results of operations. See "Business" and "Management -- Directors and
Executive Officers".
CONTROL BY DIRECTORS AND OFFICERS
The Company's current directors and officers and their affiliates
beneficially own approximately 54.4% of its outstanding Common Stock. As a
result of their Common Stock ownership, the Company's current directors and
officers and their affiliates will have significant influence over all matters
requiring approval by the Company's stockholders, including the election of
directors. Through any directors that they nominate and elect, they may have
the ability to direct policy and influence the Company's day-to-day
operations. See "Management" and "Selling Security Holders".
DILUTION
As of June 1997, there were outstanding (a) employee stock options to
purchase 250,000 shares of Common Stock and (b) Warrants to purchase 1,200,000
shares of Common Stock. In December 1996 the Company issued additional
warrants to purchase 1,100,000 shares of Common Stock, and in January 1997 the
Company granted additional employee stock options to purchase 500,000 shares
of Common Stock. See "Management". In addition, the Company has outstanding
Preferred Stock convertible into Common Stock and loans convertible into
Common Stock and Warrants. See "- Possible Issuance of Preferred Stock."
Any exercise of options or warrants will usually take place at a time
when the Company would be able, in all likelihood, to obtain funds from the
sale of the Company's Common Stock at prices higher than the exercise prices
thereof. As a result, investors in the securities offered hereby may incur
substantial dilution of their investments as the issuance of such a
significant number of additional securities, or even the possibility thereof,
may depress the price of such securities. See "Shares Eligible for Future
Sale."
GOVERNMENT REGULATION: PRODUCT DEVELOPMENT
The Company's proposed products, technologies and services are subject
to regulation and supervision by federal, state and local governmental
authorities. Such regulations apply not only to research, development and
manufacturing activities (whether by the Company, subcontractors, or by
licensees) but also to the marketing of proposed systems products and
services, particularly those involving medical applications. The Food and Drug
Administration ("FDA") must approve the Company's products before the Company
can market its products in the United States. The process of obtaining
approvals from the FDA is costly, time consuming and often subject to
unanticipated delays. There can be no assurance that approvals of the
Company's proposed products, processes, facilities or services will be granted
on a timely basis, if at all. In addition, new government regulations may be
established that could delay or prevent regulatory approval of the Company's
products under development. The Company's failure to comply with FDA
regulatory requirements can result in the delay of premarket product reviews,
fines, civil penalties, recalls, seizures, and injunctions. The failure to
obtain or delay in obtaining FDA approval will have a material adverse effect
on the Company's business, financial condition and operations.
Even if regulatory approval of the Company's proposed products is
granted, such approval may include significant limitations on indicated uses
for which any such products could be marketed. Further, even if such
regulatory approvals are obtained, a marketed drug or device and its
manufacturer are subject to continued review, and later discovery of
previously unknown problems may result in restrictions on such product or
manufacturer, including withdrawal of the product from the market. Failure of
the Company to obtain and maintain regulatory approval of its proposed
products, processes or facilities would have a material adverse effect on the
business, financial condition and results of operations of the Company.
The Company's proposed products and technologies may also be subject to
certain other federal state and local government regulations, including, but
not limited to, the Federal Food, Drug and Cosmetic Act, the Environmental
Protection Act, the Occupational Safety and Health Act, and state, local and
foreign counterparts to certain of such acts. The Company intends to develop
its business to strategically address regulatory needs. However, the Company
cannot predict the extent of the adverse effect on its business or the
financial and other cost that might result from any government regulations
arising out of future legislative, administrative or judicial action.
If the Company manufactures its own products, the Company's
manufacturing facilities and operations must comply with the FDA's Good
Manufacturing Practices ("GMP") regulations. The failure to receive GMP
approval, the delays associated with seeking approval as well as the costs
associated with the foregoing and compliance with the FDA's regulations and
related enforcement activities may have a material adverse effect on the
Company's business, financial conditions. In addition, some of the Company's
activities may become subject to future additional government regulation. See
"Business -- Government Regulations -- HZI" and "Business -- Government
Regulations -- Memory Centers(TM)".
Although the Company cannot estimate the cost of compliance with various
regulations, it expects such costs to be significant. The process of obtaining
these approvals can involve lengthy and detailed laboratory and clinical
testing, sampling activities, and other costly and time consuming procedures.
Obtaining regulatory approval may delay marketing of products for lengthy
periods, require significant expenditures and furnish an advantage to large
competitors. There can be no assurance that any of the foregoing approvals
will be granted to the Company or its licenses on a timely basis, if at all.
See "Business -- Government Regulations."
GOVERNMENT REGULATION: CONTRACT RESEARCH
The Company's contract research business benefits from the extensive
government regulation of the drug development process in the United States.
From time to time, legislation is introduced in the United States to
substantially modify regulations administered by the FDA governing the drug
approval process. Changes in regulation, including a relaxation in the scope
of regulatory requirements or the introduction of simplified drug approval
procedures, could have a material adverse effect on the Company and its
contract research operations.
TECHNOLOGICAL UNCERTAINTY/NEW PRODUCT DEVELOPMENT
The Company's products and ventures are in an early stage of
development. Only one of the Company's seven products, its CEEG Scan System
software, has received FDA marketing approval. This product was approved in
March, 1987. The Company's product candidates will require significant
additional development, pre-clinical and clinical trials, regulatory approval
and additional investment prior to commercialization. In addition, the
Company's product candidates are subject to the risks of failure inherent in
the development of products based on innovative technologies. Accordingly,
there can be no assurance that the Company's research and development efforts
will be successful, that the Company's product candidates will prove safe and
effective, that any commercially successful products will be developed or that
the proprietary or patent rights of others will not develop competitive or
superior products. As a result of the early stage product development and the
regulatory review process that these products must undergo, the Company cannot
predict with certainty when it will be able to market any of its products, if
at all.
TECHNOLOGICAL CHANGE
The manufacture of diagnostic equipment and products, and development of
software systems and the delivery of healthcare has undergone and is expected
to continue to undergo, significant and rapid change and there can be no
assurance that technological or other advances will not render any system,
product, service or program developed by the Company uneconomical or obsolete.
COMPETITION
The market for the Company's contract research services is highly
competitive. The Company competes against traditional contract research
organizations, the in-house research and development departments of
pharmaceutical companies as well as universities and teaching hospitals.
Competition for contract research services has increased as a result of
consolidation within the pharmaceutical industry.
In addition, the medical and drug technology industry, including the
manufacture of diagnostic equipment and products in the United States and
abroad, is also extremely competitive. Major pharmaceutical, food and chemical
companies, specialized biotechnology firms, universities and research
institutions develop products, technologies and services that compete with the
Company's business. Many of these competitors have greater financial and other
resources than the Company and, therefore, are able to expend more than the
Company in areas such as research, marketing and product development.
Competitors may develop products or technologies that are more effective than
any that are being developed by the Company or they may obtain FDA approval
for products more rapidly than the company. There can be no assurance that
developments by others will not render the Company's products or technologies
or other therapeutic techniques noncompetitive or obsolete.
The Company expects that competition will increase with the perceived
potential for commercial applications of medical and drug related
technologies. The greater availability of capital for investment in medical
and drug technology, and the potentially greater funding of industrial
research in this field by foreign governments will also likely result in
increased competition. See "Business."
DEPENDENCE ON OTHERS FOR MANUFACTURING AND MARKETING
Currently, the Company has not invested in the development of commercial
manufacturing facilities, and the Company has only limited marketing
capabilities. If the Company does not develop its own manufacturing and
marketing capabilities, it will continue to be dependent upon other companies
for the manufacturing and marketing of its products through licensing or other
arrangements.
If the Company cannot enter into contracts to manufacture its products
on acceptable terms, the Company's ability to conduct pre-clinical and human
clinical testing and its ability to market its products will be adversely
affected. This may cause delays in the Company's plans to submit products for
regulatory approval or initiate new product development programs, which in
turn could materially impair the Company's competitive position and its
efforts to achieve profitability. If the Company does manufacture its own
products, its manufacturing facilities and operations must comply with the
FDA's GMP regulations prior to obtaining pre-marketing approval from the FDA.
If the Company were to attempt to develop its own manufacturing capabilities,
there could be no assurance that the Company would succeed or, if so, that it
would receive GMP approval.
Similarly, the inability of the Company to enter into marketing or
selling agreements for its products will have a material adverse effect on the
Company's business. There can be no assurance that the Company will be able to
enter into such agreements, or that if they do, such future partners will be
successful in commercializing the Company's products or that the products will
be accepted by patients, health care providers and insurance companies or that
they can be manufactured and marketed at prices that would permit the Company
to operate profitably. See "Business".
PATENT PROTECTION
The Company's ability to compete effectively will depend in part on its
success in protecting its proprietary technology in the United States and
abroad. To date, the Company has seven patents. The patent positions of
pharmaceutical, biotechnology and drug delivery companies, including the
patent rights licensed by the Company, are uncertain and involve complex legal
and factual issues. No consistent policy has emerged regarding the breadth of
claims covered in biopharmaceutical patents. No assurance can be given that
the Company will develop additional proprietary products that are patentable,
that any patents issued to, or licensed by, the Company will be valid or
enforceable, or that patents issued to or licensed by the Company will afford
protection against competitors with similar technology.
As the Company's research develops, it plans to protect its intellectual
property rights, products, designs and processes through the filing of
additional patents with the United States Patent and Trademark Office ("PTO")
and with corresponding foreign authorities. The Company also registers
trademarks and trade names. There can be no assurance that the PTO or any
foreign jurisdiction will grant the Company's patent applications, if made, or
that the Company will obtain any patents or other protection for which
application for patent protection has been made. No assurance can be given
that patents issued to or licensed by the Company will not be challenged,
invalidated, or circumvented or that the rights granted thereunder will
provide any competitive advantage. The Company will also rely on trade
secrets, know-how and continuing technological advancement in seeking to
achieve a competitive position. No assurance can be given that the Company
will be able to protect its rights to its unpatented trade secrets or that
others will not independently develop substantially equivalent proprietary
information and techniques or not otherwise gain access to the Company's trade
secrets.
In addition to protecting its proprietary technology and trade secrets,
the Company may be required to obtain additional licenses to use patents or
other proprietary rights from third parties. No assurance can be given that
any additional licenses required under any patents or proprietary rights would
be made available on acceptable terms, if at all. If the Company does not
obtain required licenses, it could encounter delays in product development
while it attempts to design around blocking patents, or it could find that
development, manufacture or sale of products requiring such licenses could be
foreclosed.
The Company could also incur substantial costs in defending any patent
infringement suits or in asserting any patent rights, including those granted
by third parties, and there can be no assurance that an action of this sort
would be resolved in the Company's favor. If such a dispute were resolved
against the Company, in addition to incurring potential damages, the Company's
continued testing, manufacture or sale of one ore more of its technologies,
products or services could be enjoined. Defense of any lawsuit or failure to
obtain any required license could have a material adverse effect on the
Company. See "Business".
POTENTIAL PRODUCT LIABILITY
In connection with providing contract research services, the Company
contracts with physicians to serve as investigators in conducting clinical
trials to test new drugs on human volunteers. Such testing creates risks of
liability for personal injury to or death of volunteers, particularly to
volunteers with life- threatening illnesses, resulting from adverse reactions
to the drugs administered. Although the Company does not believe it is legally
accountable for the medical care rendered by third-party investigators, it is
possible that the Company could be held liable for the claims and expenses
arising from any professional malpractice of the investigators with whom it
contracts or in the event of personal injury to or death of persons
participating in clinical trials. The Company also could be held liable for
errors or omissions in connection with the services it performs. In addition,
as a result of its Phase I clinical trials (which are out-patient only), the
Company could be liable for the general risks associated with a Phase I trial,
including, but not limited to, adverse events resulting from the
administration of drugs to clinical trial participants or the professional
malpractice of Phase I medical care providers. The Company believes that its
risks are reduced by contractual indemnification provisions with clients and
investigators, insurance maintained by clients and investigators, various
regulatory requirements, including the use of institutional review boards and
the procurement of each volunteer's informed consent to participate in the
study. The contractual indemnifications generally do not protect the Company
against certain of its own actions such as negligence. The contractual
arrangements are subject to negotiation with clients and the terms and scope
of such indemnification vary from client to client and from trial to trial.
The financial performance of these indemnities is not secured. Therefore, the
Company bears the risk that the indemnifying party may not have the financial
ability to fulfill its indemnification obligations. Moreover, the Company does
not maintain professional liability insurance or product liability insurance
that covers the foregoing risks and its products. The Company could be
materially and adversely affected if it were required to pay damages or bear
the costs of defending any claim outside the scope of or in excess of a
contractual indemnification provision or in the event that an indemnifying
party does not fulfill its indemnification obligations.
POTENTIAL FUTURE SALES PURSUANT TO RULE 144 OR REGISTRATION RIGHTS
Future sales of Shares by existing stockholders under Rule 144 of the
Securities Act, or through the exercise of outstanding registration rights, or
the issuance of Shares of Common Stock upon exercise \of options, warrants or
otherwise could have a negative impact on the market price of the Common
Stock. The Company is unable to estimate the number of Shares that may be sold
under Rule 144 or pursuant to registration rights since this will depend on
the market price for the Common Stock of the Company, the personal
circumstances of the sellers and other factors. Any sale of substantial
amounts of Common Stock in the open market may adversely affect the market
price of the Securities offered hereby. See "Shares Eligible For Future Sale".
REGISTRATION RIGHTS
The Company expects that purchasers of securities in future private
sales may receive registration rights at the Company's cost and expense. Such
registration rights require the Company to register such securities with the
Commission and state securities commissions for resale by the selling security
holders, and enable such security holders to sell the securities to or through
underwriters or to other purchasers in market transactions at prevailing
market prices. In the absence of such registration, the securities acquired in
private placements are restricted securities and can be sold only under Rule
144 under the Securities Act after a holding period of one year from the date
of purchase or pursuant to another available exemption from the registration
requirements under the Securities Act. Currently, there are no additional
shares subject to future registration rights.
The approximate cost of registering the securities offered hereby is
$350,000. Certain of the Selling Security Holders are obligated to pay certain
costs and expenses incurred in connection with the registration of the Shares
and Warrants.
POSSIBLE ISSUANCE OF PREFERRED STOCK
The Company's Certificate of Incorporation authorizes 5,000,000 shares
of Preferred Stock ("Preferred Stock"), of which 400,000 Shares are issued and
outstanding. Of these 400,000 Shares, 150,000 Shares are designated Class B,
Series 1 and 250,000 Shares are designated Class B, Series 2.
The 150,000 Shares of Class B, Series 1, have a liquidation preference
of $1 per Share and are not convertible into any other class of stock.
Cumulative dividends accrue on such stock at a rate of 10% of the liquidation
value and are payable semi-annually in cash or Common Stock of the Company
based on the average closing bid price of the Common Stock for 30 consecutive
days prior to the date the dividend becomes payable. The Company may redeem
such Shares at any time for $3 per Share.
The 250,000 Shares of Class B Series 2 are presently convertible into
50,000 Shares of Common Stock. 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 25/8 for thirty (30) consecutive trading days. The
convertibility of the Class B, Series 2 Preferred Stock into Shares of Common
Stock provides an opportunity for the holder to profit from a rise in the
market price of the Common Stock, with resulting dilution in the ownership
interest in the Company held by the then present shareholders.
The remaining 4,600,000 authorized but unissued Shares of the Company's
Preferred Stock may be issued in the future without further stockholder
approval and upon such terms and conditions and having such rights, privileges
and preferences, as the Board of Directors may determine. The rights of the
holders of Common Stock will be subject to and may be adversely affected by,
the rights of the holders of any Preferred Stock that may be issued in the
future. The issuance of Preferred Stock, while providing desirable flexibility
in connection with possible acquisitions and other corporate purposes, could
have the effect of making it more difficult for a third party to acquire or
discouraging a third party from acquiring a majority of the outstanding voting
stock of the Company. The existence of the Preferred Stock may have a
depressive effect on the market value of the Company's Common Stock. The
Company has no present plans to issue any additional shares of Preferred
Stock. See "Description of Securities -- Preferred Stock".
In addition to the foregoing, the following risk factors relate
specifically to the Company's subsidiary, MCAI, and the network of Memory
Centers(TM) that it owns, operates or manages:
NEED FOR ADDITIONAL WORKING CAPITAL
The Company plans to develop 5-10 Memory Centers(TM) by the end of 1997.
This will require substantial amounts of capital without any assurance that
the new Memory Centers(TM) will be successful. Depending on size and location,
the Company estimates that each facility would require between $150,000 and
$200,000 for equipment, leasehold improvements, and working capital, including
corporate overhead.
GOVERNMENT REGULATION
In addition, in connection with the Company's proposed management of
Memory Centers(TM), the Company and its operations are and will continue to be
subject to extensive federal, state and local laws, rules and regulations
affecting the health care industry and the delivery of health care, including,
but not limited to, laws and regulations prohibiting the corporate practice of
medicine, fee-splitting, anti-kickback laws and physician referral laws. In
addition, contractual arrangements with hospitals, medical centers and managed
care organizations, among others, are extensively regulated by state and
federal law.
The regulatory requirements that the Company must satisfy to conduct its
existing and planned business vary from state to state and, accordingly, the
manner of operation by the Company, the degree of control over the delivery of
care and the level of revenues potentially to be generated by the Company may
differ among the states. In particular, some states have enacted laws
governing the ability of physicians to enter into contracts to provide
professional services with business corporations or lay persons and some
states (such as New York, the planned initial principal market for the
Company's Memory Centers(TM)) prohibit the Company from computing its fee for
its management services based upon a percentage of the gross revenues of the
medical practice being managed. It is possible that in certain other states
the proposed activities of the Company would not be permissible on terms
acceptable to the Company, in which case the Company would not do business in
such states. The Company's business strategy calls for the Company to
establish its Memory Centers(TM) in affiliation with health care providers.
Various federal and state regulations limit the financial and non-financial
terms of agreement with these health care providers, and the revenues
potentially generated by the Company may therefore differ depending upon the
nature of the Company's various health care provider affiliations.
COMPETITION
Although to the best of the Company's knowledge there are no other
commercial concerns in the United States that provide the services offered by
Memory Centers(TM), Memory Centers(TM) compete with Alzheimer centers,
dementia clinics, neurology groups and other medical centers that conduct
memory assessments, offer prevention measures and treatment for memory
disturbed patients.
UNCERTAINTY OF MEMORY CENTERS(TM) MARKET ACCEPTANCE
Memory Centers(TM) is a new business with only a one year operating
history and limited business experience and it is subject to all the risks in
the establishment of any new business venture. The likelihood of Memory
Centers(TM) success must be considered in light of the problems, expenses,
difficulties, complications and delays frequently encountered in the
development of a new business.
The Memory Centers(TM) concept is untested from a commercial perspective
in the United States, as, to the best of the Company's knowledge, no
commercial concern has attempted to create or operate a similar business. The
Company believes that the medical diagnostic and therapeutic procedures the
Company expects to be utilized within the Memory Centers(TM) will be
consistent with the applicable standards of the care within the communities
served. As such, although patients may not be familiar with the packaging of
these services in the manner anticipated by the Company's business plan, the
care they will receive is accepted. Notwithstanding this, there can be no
assurance that the Company will be able to achieve market acceptances of its
Memory Centers(TM) by the general population or the medical community, and the
failure to achieve such acceptance would, in all likelihood, have a material
adverse effect on the Company. Since the Company will be dependent on its
ability to establish relationships with physicians who will provide the
medical services, it will be necessary to gain their acceptance of the
Company's business format. There can be no assurance that such acceptance will
be forthcoming, however the Company believes that similarities between the
Company's business format and that of established practice management
companies will be recognized by physicians and will assist in achieving the
necessary acceptance. Managed care organizations ("MCO's"), including HMO's
and PPO's are often involved in contracting for services such as those to be
offered by individual Memory Centers(TM). Accordingly, the Company will be
required to market directly to such MCO's and gain their acceptance. The
Company cannot ensure when or if any MCO's will contract with the company or
its affiliated physicians for services.
CONCERNS WITH RESPECT TO SAFETY AND EFFICACY OF MEMORY CENTERS(TM)
The Company expects that the procedures employed by it and its
affiliated physicians are accepted within the medical community as safe and
effective, and used individually by physicians in treating patients with
similar concerns. Medical research is continuous with respect to treating
patients with memory disturbances, including Alzheimer's Disease, and new
diagnostic and treatment techniques, including drugs, are being developed
regularly. It is expected that as these new techniques become available and
approved, they will be offered through medical practitioners associated with
Memory Centers(TM). Since some of the patients who are expected to be seen at
Memory Centers(TM) will have advanced forms of dementia, including but not
necessarily limited to Alzheimer's Disease, and since the current state of
medical knowledge does not include a cure for Alzheimer's Disease, certain
patients who come to Memory Centers(TM) will not experience improvement in
their memory, although they may benefit from treatment in other ways, such as
possible relief from anxiety, agitation and depression.
LIABILITY AND POSSIBLE INSUFFICIENCY OF INSURANCE
Although management intends to require the health care providers with
which the Company enters into management or other fee arrangements to name the
Company as an additional insured under such providers' medical malpractice or
liability insurance, there can be no assurance that the company will be fully
protected under such providers' insurance policies. The Company currently has
umbrella liability insurance with a limit of one million per occurrence (two
million in aggregate) to cover general liability claims. Since the Company
does not provide medical services, it will not obtain medical malpractice
insurance to cover the physicians performing services at its Memory
Centers(TM), and may not be able to purchase other insurance at reasonable
rates, which would protect it against claims arising from the medical practice
conducted by health care providers, including physicians, at its Memory
Centers(TM). In addition, there can be no assurance that the Company or such
health care providers will be able to retain adequate liability insurance at
reasonable rates, or that the insurance indemnification provided by such
health care providers will be adequate to cover claims asserted against the
Company, in which event the Company's business may be adversely affected.
NO EXPERIENCE IN DEVELOPING OR
MANAGING MEMORY CENTERS(TM)/NEED FOR KEY PERSONNEL
The Company believes that a portion of its future growth is dependent
upon the successful development of its Memory Centers(TM). Although the
Company has opened and operated pilot Memory Centers(TM), neither the Company
nor any of the health care providers with whom the Company is currently
holding discussion as to possible affiliations, has any experience in
developing, opening or managing facilities such as Memory Centers(TM). In
addition, the Company has had no experience in operating and managing its
other business while simultaneously devoting management time and attention to
the development and management of Memory Centers(TM). As the Company's
development and management of Memory Centers(TM) will entail different skills
than those currently being utilized by the Company and its management, with
the exception of Mr. Jonathan Raven, no assurance can be given that the
Company will succeed in meeting its objectives with respect to its opening or
continued management of Memory Centers(TM). Failure of Memory Centers(TM) may
adversely affect the Company and other divisions since the Company has
allocated a substantial part of its resources to this venture.
The success of Memory Centers(TM) is highly dependent on the Company's
ability to attract and retain qualified technical and marketing personnel.
There is intense competition for qualified personnel and there can be no
assurance that Memory Centers(TM) will be able to attract and retain the
qualified personnel necessary to develop its business. In particular, Memory
Centers(TM) are dependent upon the support of the following management and
technical personnel: Jonathan Raven, Executive Vice President of the Company
and President and CEO of MCAI, Dr. Turan M. Itil, Chairman and President of
the Company and Dr. Pierre LeBars, Executive Vice President of the Company. As
noted earlier, Mr. Raven, Dr. Itil and Dr. LeBars have employment agreements
with the Company. With the exception of Dr. T. Itil, none of such personnel is
covered by key person life insurance. The loss of key personnel or inability
to hire and retain qualified personnel could have a material adverse effect on
Memory Centers'(TM) business and results of operations.
EFFECT OF THIRD PARTY REIMBURSEMENT
The Company anticipates that certain of the services offered by Memory
Centers(TM) will be subject to reimbursement by third party payors, such as
health and medical insurance programs and health maintenance organizations,
but that some services will not be reimbursed. The Company intends to educate
third-party payors as to the services offered by Memory Centers(TM). However,
there can be no assurance that third parties who may now reimburse some of the
costs incurred by patients will continue to do so, or that rates of
reimbursement currently in effect may not change. Depending upon such
potential changes, and the willingness of patients to absorb certain costs
from their own funds, the revenues of the Company and its affiliated
caregivers might be adversely affected.
DEPENDENCE ON HEALTH CARE PROVIDERS
Certain states prohibit the Company from practicing medicine or
employing licensed physicians to practice medicine on the Company's behalf.
Accordingly, the Company's activities generally will be limited to owning and
managing Memory Centers(TM) at which health care providers (primarily
physicians and psychologists) will render services. Moreover, the success of
the Company's expansion will depend upon its ability to enter into agreements
with health care providers to render medical and other professional services
at the facilities to be managed by the Company. To date, the Company is
engaged in negotiations with physicians and other organizations, some of which
discussions are only preliminary in nature, and there can be no assurance that
such negotiations will result in a formal agreement with any of such
caregivers, that the Company will be able to enter into agreements with other
health care providers on satisfactory terms, or that any such agreements will
be profitable to the Company.
CERTAIN MARKET INFORMATION AND DIVIDENDS
MARKET INFORMATION
In connection with the Company's acquisition of HZI, the Company issued
to each of its public stockholders of record on November 1, 1994 one Class B
and one Class C Warrant for each Share of the Company's Common Stock held by
such stockholders, for an aggregate of 800,000 Class B and 800,000 Class C
Warrants (after giving effect to a 50 to 1 reverse stock split); of these
Warrants, 400,000 have been exercised to date. Each Class B and Class C
Warrant entitles the holder to purchase one share of the Company's Common
Stock. The Warrants will not be tradeable or exercisable until the
Registration Statement of which this Prospectus is a part has been declared
effective by the Commission. 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. The Warrants are redeemable by the
Company at any time upon thirty days written notice, at a price of $.001 per
Warrant. In December 1996, the Company issued 1,100,000 Warrants exercisable
for 1,100,000 Shares. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
The Company's Common Stock has traded publicly on the NASD OTC Bulletin
Board under the symbol "NURC" since March 2, 1995. Prior to that time, there
had been no public trading in the Company's Common Stock.
The table below sets forth the high and low range of quotations for the
Company's Common Stock for the quarters indicated as reported by the NASD:
High Low
1995
First Quarter (commencing 3/2/95) 33/4 3
Second Quarter 33/4 21/8
Third Quarter 2 1/8 1/2
Fourth Quarter 1 7/8 11/2
1996
First Quarter 4 1 7/8
Second Quarter 13 3
Third Quarter 20 131/2
Fourth Quarter 173/4 6
1997
First Quarter 12 81/2
Second Quarter 11 7/8 7 3/8
Third Quarter (through September 19 ) 9 7/8 7
Such over-the-counter market quotations reflect interdealer prices
without retail mark-up, mark-down or commission, and may not necessarily
represent actual transactions. The Company's Common Stock has not been
actively traded.
On September 19, 1997, the last bid price reported on the NASD Over-the
Counter Bulletin Board for the Common Stock was $83/8 per share. On June 30,
1997, the Company had 8,173,806 shares of Common Stock outstanding. The
Company has 151 stockholders of record.
DIVIDENDS
The Company has never declared or paid cash dividends on its Common
Stock. The current policy of the Board of Directors is to retain any earnings
to provide for the development and growth of the Company. Consequently, no
cash dividends are expected to be paid in the foreseeable future on Shares of
Common Stock. The Company is obligated to pay dividends at the rate of $15,000
per year in cash or Shares of Common Stock on its outstanding shares of Class
B Series 1 Preferred Stock. There are no dividend payment requirements with
respect to the Class B Series 2 Preferred Stock. See "Description of
Securities".
USE OF PROCEEDS
The Company will not receive any cash proceeds from securities to be
sold for the account of Selling Security Holders pursuant to this Offering.
The Company may, however, receive cash proceeds to the extent 1,200,000
outstanding Warrants are exercised by Selling Security Holders. If the
Warrants are exercised in full, as to which there can be no assurance, the net
proceeds would be approximately $1,800,000. The Company would use these
proceeds, if any, for general corporate purposes including working capital,
repayment of loans (the proceeds of which were used for working capital) and
payment of salaries outstanding as of June 30, 1997 in the amount of $756,680
and $32,852, respectively. See "Selling Security Holders" and "Certain
Relationships and Related Transactions."
Certain of the Selling Security Holders are obligated to pay all costs
and expenses incurred in connection with the registration of the Shares and
Warrants.
Pending the ultimate application of the proceeds of any financing, the
Company may make temporary investments, including but not limited to, interest
bearing savings accounts, certificates of deposit, United States government
obligations or money market certificates.
United States government obligations are not necessarily those backed by
the full faith and credit of the United States government. Company policy does
not require temporary investments to be investment grade as determined by a
nationally recognized statistical rating organization nor does it require that
such investments have any additional safety feature such as insurance.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company was incorporated in the State of Nevada on March 18, 1987
with the name Tamarac Ventures, Ltd. On November 23, 1994, in connection with
the reverse acquisition of HZI Research Center, Inc. ("HZI"), the Company
amended its Certificate of Incorporation to change its name to NeuroCorp, Ltd.
and to reduce its authorized common stock from 200,000,000 shares to
100,000,000 shares and to authorize 5,000,000 shares of preferred stock.
The Company is primarily involved in two businesses: it performs
contract medical research services for health agencies, research organizations
and pharmaceutical companies, and it owns, operates or manages a group of
facilities that diagnose and treat memory disorders. In addition, as an
outgrowth of its research activities, the Company also designs diagnostic
testing software and equipment for neuropsychiatric applications and the
Company performs neurological testing services for hospitals and physicians.
The Company conducts these activities through two wholly-owned subsidiaries.
In November 1994, the Company acquired all of the issued and outstanding
shares of HZI Research Center, Inc., a New York corporation ("HZI"). HZI
conducts contract research, designs diagnostic software and equipment and
performs neurological testing services. In March 1996, the Company established
Memory Centers(TM) of America, Inc., a Delaware corporation ("MCAI"). MCAI
owns and operates a network of pilot facilities, Memory Centers(TM), that
treat memory disorders. MCAI began full operations of the pilot program at the
end of the second quarter of 1996. Each facility is estimated to cost between
$150,000 to $200,000 for equipment, leasehold improvements and working capital
which includes administration costs. Revenues from this wholly owned
subsidiary are considered insignificant for the three and six months ended
June 30, 1997.
During the second quarter, the Company created a new division within
NeuroCorp Ltd., called Tele-Neuro Psychiatry ("TNP"). The TNP division will be
responsible for marketing Tele-Neuro Psychiatric systems which are based on
the Company's proprietary software and hardware equipment. The TNP system will
provide data communication with off-site experts. Furthermore, the Company
believes the new TNP system will be useful for enhancing quality controls in
research programs. The Company is currently utilizing TNP systems at two MCAI
pilot centers. In September 1997, Drs. Itil and Le Bars and Mr. Eralp received
a patent for certain data collection, analysis and transmission procedures
that the TNP system relies upon. This patent will be assigned to the Company.
The Company recognizes revenue and costs from its contracts under the
percentage of completion method. Cost of revenues include all direct material
and labor costs and those indirect costs related to contract performance.
General and administrative expenses are accounted for as period costs and are,
therefore, not included in the calculation of the estimates to complete
contracts in progress. Changes in each contracts's 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. The
liability, "Billings in excess of contract revenues on uncompleted contracts",
represent billings in excess of revenues recognized.
Revenue from computer system sales, which includes the BFM System(R),
are recognized upon the shipment of turnkey systems. Service revenues such as
TeleMap(R) are recognized as they are rendered.
SIX MONTHS ENDED JUNE 30, 1997 AS COMPARED TO THE SIX MONTHS ENDED JUNE 30,
1996
The Company reported a net loss of $659,223 for the six months ended
June 30, 1997 as compared to a net loss of $313,067 for the six months ended
June 30, 1996.
Revenues for the six months ended June 30, 1997 and 1996 amounted to
$587,000 and $791,122, respectively. Revenues decreased by $204,122 or 26% for
the six months ended June 30, 1997 as compared to the six months ended June
30, 1996. Gross profit for the six months ended June 30, 1997 and 1996
amounted to $293,937 and $408,228, respectively or a net decrease of $114,291.
Gross profit percentage for six months ended June 30, 1997 and 1996 amounted
to 50% and 52%, respectively, or a net decrease of 2%. The Company includes in
the cost of sale amortization of its database and computer system product
development costs. Commencing January 1, 1996, the Company revised its
estimate of the useful life of the software development cost from 17 years to
7 years. This change was made to better reflect the estimated period during
which the assets will remain in service. For the six months ended June 30,
1997 and 1996, amortization charges amounted to $135,805 and $128,800,
respectively, resulting in a reduction of the Company's overall gross profit
percentage by 23% and 16%, respectively.
Furthermore, the net reduction of sales and gross profit during the six
months ended June 30, 1997 as compared to the six months ended June 30, 1996
is attributable to the following:
1. The Company has not entered into any new major multi-million
dollar long-term contract since December 31, 1993 and major
contracts recorded prior to this period have been substantially
completed during the December 31, 1995 and 1994 years. For the
years ended December 31, 1996 and 1995 the Company received
$759,000 and $516,000, respectively, or $1,275,000 of new
contracts. Revenues from contracts for the six months ended June
30, 1997 as compared to the six months ended June 30, 1996
amounted to $393,100 and $476,964, respectively, or a net
decrease of $83,864. The contract division's low revenues for
the June 30, 1997 and 1996 period is attributable to the
Company's lack of major new contracts. Management believes that
the contract research industry has temporarily been negatively
affected due to consolidation in the pharmaceutical industry,
which has resulted in the reduction of the available pool of new
research contracts. The Company believes that demand for more
effective drugs with fewer negative side effects, in the area of
the Company's expertise will continue to stimulate research
activity in the long term.
The gross profit percentage from contracts for the six months
ended June 30, 1997 is 64% as compared to June 30, 1996 which was
47%. The increase in gross profit for the six months ended June
30, 1997 as compared to the six months ended June 30, 1996, is a
result of efficiencies introduced within the contract division.
2. Net sales of BFM Systems(R)for the six months ended June 30, 1997
and 1996 amounted to $53,278 and $232,685, respectively or a net
decrease of $179,407. Gross profit amounts for the six months
ended June 30, 1997 amounted to a negative $50,194 whereby for
the six months ended June 30, 1996, the gross profit amounted to
$140,967 or a net decrease of $191,161. As noted previously, the
Company changed its amortization of software development costs,
resulting in an increased charge to the BFM Systems(R)division.
Amortization expense for six months ended June 30, 1997 and 1996
amounted to $70,617 and $89,200, respectively. During the last
twelve months for the period ended June 30, 1997, the Company has
not sold any major BFM Systems(R).
3. Revenues of the Tele-Map(R) division for the six months ended June
30, 1997 and 1996 amounted to $50,520 and $56,446, respectively.
Gross profit percentage for the six months ended June 30, 1997 and
1996 amounted to 48% and 54%, respectively due to a slight
increase in labor costs.
4. Pilot Memory Centers(TM)revenue for the six months ended June 30,
1997 amounted to $15,000. This revenue was derived entirely from
Manhattan Westchester through a pilot program conducted under the
management of MCAI. Manhattan Westchester is a medical practice
that is controlled by the Company's Chairman. While MCAI does
not receive any direct insurance reimbursements, it does receive
a management fee from Manhattan Westchester. Insurance
reimbursements are received by the medical practice conducting
the program based on rates established by third-party payors
which are in turn based on the number of visits and type of
service performed.
The TNP division completed its first sale amounting to $75,102 during the
second quarter ended June 30, 1997. Costs in connection with this sale,
principally amortization of software development costs allocated to the TNP
division from the BFM Systems(R) division, amounted to $21,093. Gross profit
on this sale amounted to $54,009 or 72%. Two TNP Systems were ordered in
September 1997 by CoreCare, Inc. for the Kirkbride joint venture.
See"--Management's Plan."
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 products 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 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 six months ended June 30,
1997 were $844,765 as compared to the six months ended June 30, 1996 of
$521,650 or an increase of $323,115 or 62%. The increase in general and
administrative expenses for the six months ended June 30, 1997 is due to the
Company increasing its development costs for MCAI by $294,033 as compared to
the six months ended June 30, 1996. The intended business of MCAI is to manage
and distribute through professional medical practitioners a program that will
evaluate and treat memory disturbances.
Research and development costs for the six months ended June 30, 1997
were $52,128 as compared to the six months ended June 30, 1996 of $45,184 or
an increase of $6,944.
Commencing July 19, 1995 through September 13, 1996, the Company
borrowed approximately $700,000 net of repayments from its shareholders and
their affiliates. These loans were used principally to finance losses from
operations. As a result of these additional borrowings, interest expense for
the six months ended June 30, 1997 as compared to the six months ended June
30, 1996 increased by $43,319.
YEAR ENDED DECEMBER 31, 1996 AS COMPARED TO THE YEAR ENDED DECEMBER 31, 1995
The Company reported a net loss of $1,634,675 for the year ended
December 31, 1996 as compared to a net loss of $262,494 for the year ended
December 31, 1995.
Revenues for the years ended December 31, 1996 and 1995 amounted to
$1,068,891 and $1,543,364, respectively. Revenues decreased by $474,473 or 31%
for the year ended December 31, 1996 as compared to the year ended December
31, 1995. Gross profit for the years ended December 31, 1996 and 1995 amounted
to $362,312 and $905,617, respectively or a net decrease of $543,305. Gross
profit percentage for years ended December 31, 1996 and 1995 amounted to 34%
and 59%, respectively, or a net decrease of 25%. The Company includes in the
cost of sale amortization of its database and computer system product
development costs. For the year ended December 31, 1996 and 1995 amortization
charges amounted to $264,790 and $179,308, respectively, or a net increase of
$85,482, resulting in a reduction of the Company's overall gross profit
percentage by 13%. Commencing January 1, 1996, the Company revised its
estimate of the useful life of the software development cost from 17 years to
7 years. This change was made to better reflect the estimated period during
which the assets will remain in service. The resulting effect of this change
in estimate for the year ended December 31, 1996 as compared to the year
ending December 31, 1995 was an additional charge to the cost of sales
amounting to $77,227.
Furthermore, the net reduction of sales and gross profit during the year
ended December 31, 1996 as compared to the year ended December 31 of 1995 is
attributable to the following:
1. The Company has not entered into any new major multi-million
dollar long-term contract since December 31, 1993 and major
contracts recorded prior to this period have been substantially
completed during the December 31, 1995 and 1994 year end. For
the years ended December 31, 1996 and 1995 the Company received
$759,000 and $516,000, respectively, or $1,275,000 of new
contracts. Revenues from contracts for the year ended December
31, 1996 as compared to the year ended December 31, 1995 amounted
to $696,359, and $841,057, respectively, or a net decrease of
$144,698. The decrease in revenues from contracts for the year
ended December 31, 1996 is attributable to the Company completing
a major portion of multi-million dollar contracts during the year
ended December 31, 1995. Furthermore, a majority of the new 1996
contracts amounting to $759,000 were received during the third
and fourth quarter of 1996, and the contract division did not
commence work on these new contracts until the end of the fourth
quarter, resulting in lost revenue for the year ended December
31, 1996.
The gross profit percentage from contracts for the year ended
December 31, 1996 is 35% as compared to December 31, 1995 which
was 52%. As noted previously, the Company changed its amortization
of software development costs, resulting in an increased charge to
the contract division. This increased amortization charge reduced
the contract division gross profit by 10%. The remaining reduction
of gross profit for the year ended December 31, 1996 as compared
to the year ended December 31, 1995, is due to less profitable
contracts and fixed overhead direct cost being absorbed by less
sales.
As of December 31, 1996 the Company's contract division had a
backlog of approximately $748,000 from uncompleted contracts. The
Company expects to realize a minimum of $640,000 during 1997 from
said contracts.
The contract research division during the 1996 fiscal year has
performed significant work for a major foreign customer, resulting
in a large increase in accounts receivable. In accordance with the
contract, a significant portion of the
receivable will be paid by this customer upon completion of the
statistical report. During the fourth quarter of the 1996 calendar
year, the Company completed the statistical report for the foreign
customer and collected the remaining portion of the outstanding
receivable from September 30, 1996 which amounted to $50,000. As
of June 30, 1997 and December 31, 1996, the receivable amounts
from this foreign customer amounted to $220,000 and $320,000
respectively, of which $150,000 is expected to be collected during
the fourth quarter of 1997. In connection with this second
contract, the foreign customer has amended the original contract
to include additional patients, which has resulted in a change of
the estimated completion date from December 1996 to August 1997.
2. Net sales of BFM Systems(R)for the years ended 1996 and 1995
amounted to $212,685 and $556,187, respectively or a net decrease
of $343,502. Gross profit percentage for the years ended 1996
and 1995 amount to 28% and 72%, respectively, or a net decrease
of 44%. As noted previously, the Company changed its
amortization of software development costs, resulting in an
increased charge to the BFM System(R)division. Amortization
expense as a percent of sales for year ended December 31, 1996
and 1995 amounted to 50% and 13%, respectively, or net reduction
of gross profit of 37%. During the last six months of the year
ended December 31, 1996, the Company did not sell any BFM
Systems(R).
3. Revenues of the Tele-Map(R) division for the years ended December
31, 1996 and 1995 amounted to $129,622 and $146,119, respectively,
or net decrease of $16,487. Gross profit percentage for the years
ended 1996 and 1995 amounted to 48% and 37%, respectively. The
increase in gross profit is attributable to the Company
reassigning part of the internal staff of the Tele-Map(R) division
to MCAI.
4. Pilot Memory CentersTM revenue from date of commencement, March
1996 to December 31, 1996 amounted to approximately $30,000.
This revenue was derived entirely from Manhattan Westchester
through a pilot program conducted under the management of MCAI.
Manhattan Westchester is a medical practice that is controlled by
the Company's Chairman. While MCAI does not receive any direct
insurance reimbursements, it does receive a management fee from
Manhattan Westchester. Insurance reimbursements are received by
the medical practice conducting the program based on rates
established by third party payors which are in turn based on the
number of visits and type of service performed.
General and administrative expenses for the year ended December 31, 1996
were $1,249,022 as compared to the year ended December 31, 1995 of $1,013,233
or an increase of $235,789 or 19%. The increase in general and administrative
expenses for the year ended December 31, 1996 is due to the Company incurring
in excess of approximately $205,000 of initial development costs for MCAI. The
intended business of MCAI is to manage and distribute to professional medical
practitioners a program that will evaluate and treat mild memory disturbances.
Furthermore, it should be noted the Company for the year ended December 31,
1996 has charged general and administration expense for $330,000 of costs in
connection with two of the following projects: (i) design of a proposed
protocol for a multi-center Alzheimer study conducted through a leading
international health organization (ii) development of oxiracetam drug that
would be used as part of the overall treatment for Alzheimer disease. These
costs that are included in the December 31, 1996 general and administrative
expenses were derived from company personnel who were employed by the Company
during the year ended December 31, 1995, and were reassigned from other
general and administrative duties to the above projects. For the year ended
December 31, 1995 the Company's Chairman waived $146,347 of his base salary of
$250,000. Said salary amount has been recorded as an administrative expense
and as a capital contribution.
Research and development costs for the year ended December 31, 1996 were
$98,018 as compared to the year ended December 31, 1995 of $181,512 or a
decrease of $83,494. The decrease in research and development costs is due to
reductions in fixed cost for the research and development department. At the
end of 1995, management relocated its research facility to its main operating
division at HZI, in order to enhance communications between operational and
research personnel and to lower fixed costs, such as rent, depreciation and
other associated fixed costs. The Company plans on maintaining the same level
of research and development, with lower fixed costs associated therewith.
During 1996, the Company recorded an allowance amounting to $440,000 for
uncollectible receivables related to sales made during 1995 from a total sales
of $1,543,000 in 1995. Accordingly, for the year ended December 31, 1996
management has increased its allowance for doubtful accounts by $440,000,
resulting in a charge to bad debt expense by said amount. The increase of the
accounts receivable provision was based on managements review of the Company's
outstanding foreign receivables at December 31, 1996.
Management has concluded that the costs of legally pursuing the
customers associated with these receivables, which consisted principally of
foreign research centers, would outweigh the benefits.
Effective January 1, 1996, the Company revised its estimate of the
useful life of software development costs from 17 years to 7 years. This
change was made to better reflect the estimated period during which such
assets will remain in service. The resulting cumulative effect at January 1,
1996 was a one time, non-cash charge to operations amounting to $125,745.
Commencing July 19, 1995 through December 31, 1996, the Company borrowed
an aggregate of approximately $700,000, net of repayments, from its
shareholders and their affiliates (see "- Liquidity and Capital Resources" for
sources and terms of such loans). These loans were used principally to finance
losses from operations. As a result of these additional borrowings, interest
expense for the year ended December 31, 1996 as compared to the year ended
December 31, 1995 increased by $80,807.
On July 19, 1995, the Company entered into a letter agreement with
Trinity to borrow $100,000. As additional consideration for the $100,000 loan,
the Company agreed to issue 49,998 shares of restricted common stock to
Trinity. 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 market value of the common stock issued on July 19, 1995, the date of
the agreement. The implicit rate of interest for this loan is 37% per year.
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, whichever comes
first. As consideration for such loan the Company issued 66,665 shares of
restricted common stock. The Company has valued the common stock at $133,333
or fifty percent (50%) of the fair value on May 24, 1996, the date of the
transaction. The Company recorded deferred financing costs and increased
stockholders' equity by $133,333 for this transaction. The deferred financing
costs 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. The
implicit rate of interest for this loan is 67% per year. At the time of the
loan from such stockholder, the Company was unable to borrow at lower interest
rates due to its financial condition and the size of the loan. Accordingly,
management considered the importance to the Company of obtaining such funding
which in its opinion outweighed the cost, particularly since the costs of
issuing its securities did not impair the Company's cash flows since such
costs did not involve the outlay of Company funds.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1997 and December 31, 1996, the Company had working capital
of $1,464,877 and $1,082,613, respectively. The $382,264 net increase in
working capital for the six months ended June 30, 1997 as compared to the year
ending December 31, 1996 is the result of the Company raising $600,000 from
the exercise of warrants during March 1997. These funds were used to
supplement the Company's working capital. Furthermore, the Company during the
quarter ended June 30, 1997 obtained agreements to extend $650,000 of
stockholder loans to December 15, 1998, thereby increasing the Company's
working capital by said amount.
For the six months ended June 30, 1997 and 1996, the Company used cash
for operations of $790,120 and $445,317, respectively, resulting in increased
use of cash for operations by $344,803. The net increase in the use of cash
for the six months ended June 30, 1997 is mainly due to an increase in the
loss from operations for the same period (i.e., a loss of $659,223 for the six
months ended June 30, 1996 as compared to the loss from operations of
$313,067). As noted previously, the Company's sales for the six months ended
June 30, 1997 were $204,122 less than the June 30, 1996 period, principally
due to a decrease in sales in the BFM Systems(R) division. Additionally, the
Company changed its amortization policy for computer system product
development costs effective January 1, 1996 resulting in an additional
non-cash charge to operation of $125,745 for the six months ended June 30,
1996.
For the years ended December 31, 1996 and 1995, the Company used cash
for operations of $897,382 and $660,652, respectively, resulting in increased
use of cash for operations by $236,730. The net increase for the year ended
December 31, 1996 is the result of loss from operations amounting to
$1,634,675 as compared to the loss from operations for the year ended December
31, 1995 of $262,494. As noted previously, the Company's BFM System(R) and
contract division sales for the year ended December 31, 1996 were $488,200
less than the prior year. Additionally, the Company changed its amortization
policy for computer system product development costs effective January 1, 1996
resulting in additional charges to operation of approximately $195,000. As
discussed previously, management determined that certain foreign receivables
were deemed uncollectible and provided for additional reserves of $440,000.
Lastly, the company incurred approximately $205,000 of initial development
costs for its new subsidiary, MCAI. The effect of these four items increased
the loss from operations by $1,328,000.
The Company increased its development costs expenditures by $294,033 for
its new subsidiary, MCAI, for the six months ended June 30, 1997 as compared
to the six months ended June 30, 1996. The effect of these items, excluding
the non-cash charge to the June 30, 1996 operations for additional
amortization resulting from the change in the Company's amortization policy,
increased the loss from operations by $498,155.
For the six months ended June 30, 1997 and 1996 cash used by investing
activities amounted to $240,701 and $75,588, respectively, or a net increase
in use of cash of $165,138. The increased use in cash for investing activities
for the six months ended June 30, 1997 as compared to the six months ended
June 30, 1996 was attributable to the following: (i) purchase of equipment and
fixtures amounting to $52,517, (ii) $17,656 increase in database development
costs and (iii) costs incurred in organizing Memory Centers(TM) amounting to
approximately $100,000. The increase in the database development costs was the
result of a large amount of EEG studies inputted into the database. The
Company during the six months ended June 30, 1997 purchased equipment and
incurred organization costs amounting to approximately $165,975 principally
for its new subsidiary, MCAI. The organization costs expenditures were in
connection with future operating sites, legal documentation and other such
items.
For the years ended December 31, 1996 and 1995, cash used by investing
activities, mainly in connection with costs incurred for development of
databases and computer system development costs, amounted to $132,395 and
$218,127, respectively, or a net decrease in use of cash of $85,782. During
1996, the Company reduced its payments by $105,050 for database and computer
system product development costs as compared to the year ended December 31,
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(R) would 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(R). The Company during the six
months ended June 30, 1995 received a $34,271 payment from its insurance
carrier on an automobile that was destroyed in an accident.
A majority of loan proceeds from stockholders was received by the
Company from July 1995 to present. The amounts and related terms of such loans
are outlined below:
1. On July 19, September 14 and October 12, 1995 and February 26,
1996, the Company and the Chairman of the Board entered into
letter agreements with Trinity 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, and were due six
months from the date of issuance with accrued interest. 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 with accrued interest. Trinity 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 if 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 Trinity. 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 market value of the common stock issued on July 19,
1995, the date of the agreement. Further, the letter agreements
give Trinity the option to convert said loans into 550,000 shares
of common stock.
On September 13, 1996 the Company borrowed from Trinity $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 Trinity the option to convert each $4.00 of debt into one
(1) unit. Trinity and the Company have agreed to extend the due
dates of the above loans to December 31, 1998 or the date a
substantial percentage (90% or more) of the Class B and C
Warrants are exercised. Each unit will consist of one (1) share of
Common Stock of the Company and two (2) warrants. Each warrant is
exercisable into one (1) share of Common Stock of the Company at
$8.00 per share until August 31, 1997, and thereafter at $10.00
per share. The warrants expire on August 31, 1998.
Subsequent to year end, the maturity dates on the above notes were
extended to December 31, 1998 with a revised interest rate of 5%
per annum. Accordingly, as of June 30, 1997, such amounts have
been classified as long term.
2. On July 16, 1996, the Company entered into two loan agreements
amounting to $200,000 with two unrelated shareholders. Each loan
was for $100,000 and bears interest at 9% per annum and is due
within one (1) year, or from the proceeds of the Company's
securities including the exercise of Class B and C Warrants. On
April 30, 1997 the Company liquidated one loan obligation
amounting to $100,000 and extended the second loan maturity date
to December 15, 1998, or the date a substantial percentage (90%
or more) of the Class B and Class C Warrants are exercised.
For the six months ended June 30, 1997 and 1996, cash provided by
financing activities amounted to $329,741 and $516,532, respectively. For the
six months ended June 30, 1997, the Company received $600,000 in connection
with the exercise of 200,000 Class B and 200,000 Class C Warrants, which
resulted in the Company issuing 400,000 shares of Common Stock. During March
1996, the Company sold 1,000,000 shares of Common Stock for $400,000 to
foreign investors. Furthermore, during the six months ended June 30, 1996 the
Company repaid a line of credit which amounted to $50,000 and borrowed from
shareholder $227,630 net of repayments. On April 30, 1997 the Company repaid a
shareholder loan amounting to $100,000. The Company incurred registration
costs for the six months ended June 30, 1997 and 1996 amounting to $114,035
and $25,046, respectively, in connection with registering shares of Common
Stock and Warrants pursuant to contractual obligations with certain
stockholders. At June 30, 1997 and 1996, the Company accrued $7,500 of
dividends for Series 1 Preferred Stock as required under terms of the
Preferred Stock.
For the years ended December 31, 1996 and 1995, cash provided by
financing activities amounted to $2,740,372 and $682,843, respectively. For
the year ended December 31, 1996 the Company received $400,000 in connection
with the sale of 1,000,000 shares of Common Stock to investors and borrowed
from shareholders approximately $478,000 net of repayments. During December
1996 the Company sold 550,020 units for $2,001,068. Each unit is comprised of
one (1) share of Common Stock and two (2) Warrants. Each Warrant entitles the
holder to purchase one (1) share of Common Stock at $8.00 per share until
August 31, 1997 and thereafter at $10 per share. The Warrants expire August
31, 1998. Furthermore, during the year ended December 31, 1996 the Company
repaid a line of credit which amounted to $50,000. The Company incurred costs
in this period amounting to $25,046 in connection with registering shares of
Common Stock and Warrants pursuant to contractual obligations with certain
stockholders. At December 31, 1996, the Company accrued $15,000 of dividends
for Series 1 Preferred Stock as required under terms of the Preferred Stock.
At June 30, 1997, the Company's outstanding debt with respect to
borrowings amounted to $756,680. The Company expects to repay, and in some
cases is obligated to repay, such debt from the first proceeds received upon
the exercise of the Class B and C Warrants. If such proceeds are insufficient,
the Company expects to be able to make repayments from internally generated
funds or additional public or private sales of its securities.
MANAGEMENT'S PLAN
The intended development of Memory Centers(TM) requires substantial
amounts of capital without any assurance that they will be successful.
Depending on size and location, the Company estimates that each facility would
require between $150,000 and $200,000 for equipment, leasehold improvements,
and working capital, including corporate overhead attributable to operating
the Memory Centers(TM). Therefore, the Company estimates that its short term
capital requirements for 10 fully functioning Memory Centers(TM) will be in
the range of $1,500,000 to $2,000,000.
During December 1996, the Company completed a private placement of its
securities which provided $2,001,618. Approximately 60% of the proceeds of
this private placement are intended to be used for the initial development and
expansion of Memory Centers(TM) , including advertising, working capital and
new management. The Company intends to set up 100 centers within the next 5
years if additional capital can be raised. Long term capital requirements for
these centers based on the same assumptions as set forth above, could range
from $15,000,000 to $20,000,000. The Company intends to raise such capital
through public and private sale of its securities as well as by debt
financing. Additionally the Company is exploring joint ventures and strategic
alliances with other companies. No assurance can be given that such capital
will be raised or that strategic alliances or joint ventures will be formed.
The Company demonstrated and reported in a scientific periodical that a
double dose of a plant extract product sold by the Company's largest customer
has more central nervous system effects and thus, should be more
therapeutically effective than that of the current marketed dose. This
customer has made new commitments to the Company. In this connection the
Company received from this customer, as of December 31, 1996, $100,000 to
support the efforts of an Advisory Committee of a prominent international
health organization to develop an Alzheimer's Study protocol, as well as
commitments for $285,000 to continue its work on the plant extract product.
Management believes that this recent significant support by the Company's
largest customer will have a positive effect on future business. The Company,
during the fourth quarter of 1996, also obtained a new contract ($140,000)
from a U.S. pharmaceutical company to conduct a QPEEG(R) study. In September
1997, the Company obtained another contract in the amount of $230,708 pursuant
to which a U.S. pharmaceutical company will use QPEEG(R) in their multi-center
drug trial. QPEEG(R) is a methodology developed by HZI that evaluates a drug's
effect on the central nervous system using computer analyzed EEG. HZI
statistically analyzes the before and after effects of a drug and correlates
the changes with information in HZI's psychotropic drug data base to determine
the optimal time or dosage window to yield particular central nervous system
effects.
In January, 1995, the Company entered into a joint venture arrangement
with Tena, Ltd. in Istanbul, Turkey, for the purpose of further research and
development of the Company's products and the marketing and sales of its
products in the Mid-East, former U.S.S.R. countries and in other geographical
areas in which the Company has no distribution. Each project assigned to the
joint venture requires a statement of work to be completed, and a budget with
funding responsibility to be decided by the respective parties. The Company
entered into this joint venture anticipating that certain of its products
could be developed by the joint venture at a cost below that attainable in the
United States. While no development work has been assigned to Tena to date,
Tena is involved in marketing the Company's products. Accordingly, there are
at present no capital or other funding requirements anticipated with respect
to this venture. However, during the second quarter of 1997, Tena ordered a
TNP system, including a full BFM system, in order to set up a Memory Center in
Istanbul, Turkey. A letter of intent in connection with this joint venture was
signed in September 1997.
On September 4, 1997, the Company signed an agreement with the CoreCare
Corporation, a regional provider of mental healthcare services, to form a
joint venture. The joint venture, which will be 50% owned by the Company, will
be located at Kirkbride Center, a large medical complex being developed in
Philadelphia. Within the Kirkbride Hospital complex, the agreement
contemplates that the joint venture will establish a Memory CenterTM and
tele-neuropsychiatric diagnostic laboratory. The joint venture will also
include a 30 bed VIP-Neuropsychiatry clinic, a Phase I in-patient drug
research unit and a contract research site management venture.
The joint venture has not yet begun operations. However, as the first
step of the joint venture, in September 1997, CoreCare ordered two TNP systems
in order to set up a Memory Center (each at $95,800), and a TNP diagnostic
laboratory. The various aspects of the joint venture will require additional
development and capital. Accordingly, there can be no assurance that any
aspect of the joint venture can be developed within a reasonable amount of
time or that any of these will be successful, or that capital will be found to
develop any of these ventures.
The Company intends to submit 510(k) applications to the FDA between the
latter part of 1997 and mid 1998 with respect its EEG/EP Amplifier, HZI
Electrode Headset and Digital EEG System Software. Two of the products require
improved prototypes and the software product is in the final testing stage.
The aggregate cost for finishing the products and completing the 510(k)
applications is estimated at $90,000, which funds will be derived from
currently available working capital raised in a recent private offering.
The Company will meet its future cash requirements for its general
corporate overhead for at least the next twelve months through cash flow from
operations based on its current contract backlog amounting to $355,000 at June
30, 1997, future contracts currently under negotiation and the balance of the
$2,601,618 received during December 1996 and March 1997 as a result of selling
units in a private placement and the exercise of warrants as previously
discussed.
The Company does not presently have any long term capital commitments
for its HZI and general corporate operations and does not expect to have major
capital expenditures for these activities.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
The Private Securities Litigation Reform Act of 1995 provides a safe
harbor for forward-looking information made on behalf of the Company. All
statements, other than statements of historical facts, which address the
Company's expectations of sources of capital or which express the Company's
expectation for the future with respect to financial performance or operating
strategies can be identified as forward-looking statements. Forward-looking
Statements made by the Company are based on knowledge of the environment in
which it operates, but because of the factors previously listed, as well as
the factors beyond the control of the Company, actual results may differ
materially from the expectations expressed in the forward-looking statements.
BUSINESS
The Company is primarily involved in two businesses: it performs
contract medical research services for health agencies, research organizations
and pharmaceutical companies, and it owns, operates or manages a network of
facilities that diagnose and treat memory disorders. In addition, as an
outgrowth of its research activities, the Company also designs diagnostic
testing software and equipment for neuropsychiatric applications and the
Company performs neurological testing services for hospitals and physicians.
The Company conducts these activities through two wholly-owned subsidiaries,
HZI and MCAI. In November 1994, the Company acquired all of the issued and
outstanding shares of HZI. HZI conducts contract research, designs diagnostic
software and equipment and performs neurological testing services. In March
1996, the Company established MCAI. MCAI owns and operates a network of pilot
Memory Centers(TM) that treat memory disorders.
CONTRACT RESEARCH SERVICES
HZI performs contract research for health agencies, research
organizations and pharmaceutical companies. The research generally involves
conducting clinical studies with psychotropic drugs intended to treat
conditions that affect the central nervous system. Since its inception in
1974, HZI has received aggregate revenues in excess of $15,000,000 from its
contract research services. For the fiscal years ended December 31, 1995 and
1996, revenues from contract research services accounted for 55% and 65%,
respectively, of total revenues.
CONTRACT RESEARCH INDUSTRY
Contract research organizations provide clinical research to support the
development of new drugs. In order to develop and market a new drug, a company
must obtain approval from the FDA, which involves, in part, successfully
testing that drug in animal or human studies. Traditionally, very few animal
research studies have been contracted out to independent organizations, and
then only to academic centers or contract research companies with
sophisticated animal facilities. By contrast, research studies that involve
human subjects are increasingly conducted by independent investigators. In the
past, when human studies were contracted out to clinicians in private or
academic centers, the drug companies or health organizations initiating the
research continued to manage these studies. Today, though, these organizations
hire contract research organizations to organize, manage and monitor clinical
research.
Contract research organizations are highly dependent on medical,
pharmaceutical and biotechnology companies. Contract research organizations
derive substantially all of their revenue from the research and development
expenditures of these companies. The contract research industry itself is
extremely fragmented, ranging from several hundred small organizations that
provide very limited clinical services to international organizations that
provide pre-clinical evaluations, design studies, manage clinical trials,
collect data, and provide biostatistical analysis and product registration
support.
As the medical, pharmaceutical and biotechnology companies seeking to
employ contract research organizations have become more international in
scope, the contract research industry has begun to consolidate. It is often
difficult for small contract research organizations to compete with larger
organizations that have the expertise and resources to respond to the demands
of international clients. For example, international clients often require
contract research organizations to have broad therapeutic expertise, the
ability to coordinate and manage complex clinical trials that simultaneously
take place within and across several countries, the expertise to respond to
the regulatory requirements in different countries, and the ability to develop
and maintain the complex information technology systems required to integrate
these capabilities. As a result, larger research organizations that are able
to offer a broader range of services have acquired smaller contract research
firms.
The Company believes that the following trends will create increased
opportunities for contract research organizations in the future, although
there can be no assurance that these opportunities will materialize:
Drug Companies Will Increasingly Use Contract Research Services. As drug
companies face pressure to improve their operating margins, they will
increasingly focus on identifying cheaper, more efficient ways to
develop new products. The growing use of generic drugs, the expiration
of patents and increased regulatory pressures have all contributed to
the demands on drug company executives to control costs. In response,
the pharmaceutical industry has begun to consolidate, centralize its
research and development process and outsource to contract research
organizations. In so doing, drug companies have been able to reduce the
fixed costs associated with internal drug development. Since contract
research organizations specialize in conducting and managing clinical
trials, when compared with drug companies, they can generally perform
clinical studies with a greater degree of expertise, more quickly and at
a lower cost. The Company believes that it will be able to take
advantage of this trend in the future, particularly as drug companies
begin to focus on developing compounds to treat conditions that affect
the central nervous system.
Increasingly Complex and Stringent Regulation; Need for Technological
Capabilities. As regulatory requirements throughout the world have
become increasingly complex, there is greater demand for organizations
that can collect, analyze and manage the increasingly large volumes of
data required for regulatory filings. In fact, the FDA and corresponding
regulatory agencies in Canada, Japan and Western Europe have all begun
to discuss the need to harmonize the standards for preclinical and
clinical studies as well as the format and content of applications for
new drug approvals. The Company believes that in response to these
regulatory demands, medical, pharmaceutical and biotechnology companies
will increasingly rely on the ability of contract research organizations
to collect, analyze and manage data.
Drug Development Pressures. The Company believes that research and
development expenditures for medical, pharmaceutical and biotechnology
companies will increase as a result of the constant pressure to develop
a pipeline of new products. In particular, the Company believes these
expenditures will increase as companies try to respond to the demand for
products to meet the needs of an aging population, to treat chronic
disorders, such as Alzheimer's disease, and life- threatening conditions
such as infectious diseases, including AIDS. Any effort to develop
therapies for these disorders will require complex clinical trials and
sophisticated databases in order to demonstrate whether a particular
therapy is effective and whether there are any long-term side effects.
Growth in the Biotechnology Industry Growth. The biotechnology industry
in the United States has grown dramatically over the last ten years and,
as a result, there will be significant numbers of new drug candidates
that will require regulatory approval. Since many biotechnology
companies do not have the necessary experience or resources to conduct
clinical trials, many of these companies will outsource to contract
resource organizations rather than expend significant time and resources
to develop internal clinical development capabilities. In addition, the
biotechnology industry is rapidly developing in western Europe, which
will provide significant opportunities for contract research
organizations to grow and expand in these areas.
HZI'S CONTRACT RESEARCH SERVICES
The Company's contract research business specializes in clinical studies
(Phase I-IV) of com- pounds that affect the central nervous system for drug
companies and research organizations in the U.S. and abroad. These contracts
include studies conducted at both a single location and across multiple loca-
tions; they include both asymptomatic volunteer studies (Phase I and Phase Ib
special studies with healthy subjects) and symptomatic volunteer studies
(Phase II-IV studies on patients). The Company does not conduct its own human
research, and as a result, does not take any responsibility for medical
treatment or liability. However, the Company monitors the studies conducted in
other organizations, it supervises data collection and it analyzes both data
and progress study reports. The Company's research studies adhere to strict
federal and local rules and regulations and they are supervised by local
institutional review boards, drug companies, and the local and federal offices
of the FDA.
In a "typical" single center contract research project, the Company will
prepare the protocol and negotiate the financing for the study. The Company
will then subcontract the study to another organization or to individual
investigators, such as the New York Institute for Medical Research, Inc.
("NYI"), a private, not-for-profit organization, that will perform the
research under the Company's supervision. The Company closely adheres to
local, state and federal rules and regulations in conducting its studies, and
it has not been involved any legal conflict with any regulatory authorities in
regard to its contract research since its inception.
The Company's single center studies fall into two categories:
asymptomatic volunteer studies (Phase I and Phase Ib special studies with
healthy subjects) and symptomatic volunteer studies (Phase II- IV studies on
patients). Phase I and Ib studies aim to establish the safety of a drug in
healthy subjects. Phase II trials are conducted to find a safe and effective
dose. Phase III studies aim to establish efficacy of a new compound. After the
drug is approved by the FDA and marketed, Phase IV trials are conducted for
safety and/or with different types of efficacy questions. In general, these
studies focus on the effects of drugs developed to treat conditions that
include dementia/Alzheimer's, depression, schizophrenia and anxiety disorders
among others. The asymptomatic volunteer studies use the Company's QPEEG(R)
meth- od. As noted earlier, QPEEG(R) is a methodology developed by HZI that
evaluates a drug's effect on the central nervous system using computer
analyzed EEG. HZI statistically analyzes the before and after effects of a
drug and correlates the changes with information in HZI's psychotropic drug
data base to determine the optimal time or dosage window to yield particular
central nervous system effects. Thus, in these so-called Phase I and Phase Ib
special studies, the Company develops information on the clinical usefulness
and therapeutic doses of new psychotropic drugs. In 1987, with the development
of its BFM System(R), the Company was able to dramatically increase its
capacity for conducting QPEEG(R) studies. Prior to that time, the Company
could only conduct 6 QPEEG(R) studies a year; however, with the BFM System(R),
the Company has the potential to conduct up to 24 studies a year. The Company
has conducted a total of 145 QPEEG(R) studies with 125 new drugs. These
studies generate between $30,000 - $450,000 in revenues per study.
The Company believes that there will be a growing interest in QPEEG(R)
trials in the United States. The FDA is increasingly interested in the
pharmaco-dynamics of new and existing drugs, and the Task Force Committee of
the American College of Neoropsychopharmacology has cited the QPEEG(R) method
as one of the methods to establish pharmaco-dynamics of a psychotropic drug at
the central nervous system level. In addition, many of the drugs
newly-developed by bio-technology companies, which are based on receptor and
specific biochemical models, do not have readily identifiable toxic effects.
Therefore, in both animal and human studies on these drugs, it is very
difficult to determine maximum tolerable doses, and thus, very difficult to
estimate therapeutic dosage levels. However, the Company believes that its
QPEEG(R) method and its extensive database on psychotropic drugs can help
biotechnology companies to determine the effective dosage levels for their new
central nervous system compounds.
In symptomatic volunteer (patient) studies (Phase II-IV), while the use
of the QPEEG(R) method is less frequent (although, in September 1997, the
Company obtained such a contract from a U.S. pharmaceutical company), the
Company still relies on its BFM System(R) to identify whether a drug has any
therapeutic effects and in what doses. Again, these studies are conducted
either in facilities the Company subcontracts from NYI, or facilities that the
Company has subcontracted from hospitals or medical centers, where the studies
themselves will be conducted under the supervision and monitoring of both the
Company's and NYI's staff.
In addition to its single-center studies, the Company has also begun to
conduct multi-center research studies. The Company was involved in its first
multicenter study in 1989, when it conducted a study on dementia in five
centers. Since then, the Company has been involved in a number of other
multicenter clinical studies, including a study of depression that involved
450 patients in 19 centers that were spread over 16 countries.
In general, with each new study, asymptomatic or symptomatic, the
Company is able to increase its database of information on central nervous
system drugs, which the Company believes is already the largest database of
its kind. In addition, the Company's researchers, with the permission and
cooperation of the drug companies or research organizations that hire the
Company, will generally seek to publish the results of the studies they
conduct. For example, the Company has published 41 studies based on the
results of its QPEEG(R) methodology.
COMPETITION
Three major companies dominate the market in the $500 million contract
research industry. The Company has not made any efforts to advertise or
promote its contract research business and as a result, the Company estimates
that it has it has less than 1% market share. However, the Company believes
that contract research is a growing industry in the United States. Major drug
companies in the United States, Europe and Japan all conduct their clinical
research primarily in the United States since, given the high level of
regulatory oversight in the United States, the results of clinical tests
performed in this country, are generally held in high regard . Moreover, the
Company believes that drug companies will increasingly subcontract clinical
research projects, and that many of these projects will increasingly focus on
central nervous system drugs. In the United States alone, there are over 100
new central nervous system-related drugs developed each year; in Europe and
Japan, the Company estimates that there are more than 200 central nervous
system-related drugs being developed every year.
As far as the Company's proprietary technology is concerned, such as its
QPEEG(R) method or its BFM System(R), the Company has very little competition
in the United States. Since the FDA guidelines do not require such studies,
drug companies in the United States do not routinely conduct QPEEG(R) studies.
However, as noted above, given the increasing cost pressure on drug company
executives, the Company believes that there will be growing interest in
clinical studies that rely on the QPEEG(R) method to determine therapeutic
opportunities for psychotropic drugs in a cost effective manner.
MARKETING STRATEGY
The Company's contract research has traditionally been dependent on the
publications and personal contacts of Dr. Turan Itil. The Company also plans
to rely on the personal contacts and professional reputation of its staff to
develop contacts and generate contracts for clinical research studies,
including Dr. Kurt Itil, Dr. Pierre Le Bars and Dr. I. Ahmed.
In addition to the contacts developed by its professional staff, the
Company plans to work with NYI on a coordinated marketing effort in which the
Company and NYI will make joint presentations to medical, pharmaceutical and
biotechnology companies. The Company also plans to more aggressively
advertise its research capabilities in professional journals, in particular,
highlighting its expertise in research on psychotropic drugs. In the next
several months, the Company expects to publish several new drug studies,
including papers produced by Dr. T. Itil, Dr. P. Le Bars, Dr. K. Itil and Dr.
I. Ahmed. The Company will also continue to participate in meetings of the
professional scientific community, and present the results of its clinical
research studies.
In the past, the Company has heavily relied on its ability to produce
scientific publications to promote and market its research capabilities.
However, the Company plans to focus on alternative marketing strategies, such
as media stories, advertising and a broader range of publications to promote
its activities.
MEMORY CENTERS OF AMERICA, INC.
MCAI provides professional diagnostic, preventive and treatment
services, to persons who suffer from memory disturbances. MCAI owns and
operates a network of facilities, Memory Centers(TM), that treat patients
whose memory problems range from "benign" age-related forgetfulness to
different brain disorders and Alzheimer's disease. MCAI management believes
that as the population of elderly people in the United States continues to
grow, as scientists continue to perfect drugs and procedures that improve
memory and cognitive performance, and as the early diagnosis of memory-related
diseases continues to improve, there will be increasingly strong demand for
the services Memory Centers(TM) provide.
BACKGROUND
MCAI is committed to providing professional help for a condition that is
largely ignored by medical practitioners. While the actual number of people
suffering from memory problems in the United States is difficult to determine,
MCAI's management conservatively estimates that there are over 10 million
people in the United States suffering from memory problems. Patients with
memory problems often do not show any significant physical or mental symptoms.
Medical professionals may not treat patients with memory problems until they
have significantly deteriorated, perhaps even to the point where they are
diagnosed as suffering from dementia, such as Alzheimer's disease. Since
memory disturbance on its own is not considered a "disease", it does not have
a diagnostic label or CPT code. Third party payors, such as insurance
companies or Medicare, generally do not accept charges to treat memory
disorders unless they are tied to other symptoms that they do cover.
The memory process, which includes the ability to receive information
through the senses, to store this information and to retrieve it when it is
needed, is one of the most sensitive, cognitive functions of the brain. Most
brain disorders are also associated with memory disturbances. For example,
memory disturbances are frequently seen in depression, anxiety, late symptoms
of drug abuse, attention-deficit disorders, head trauma, cerebrovascular
disorders and other cerebral diseases (such as syphilis, AIDS and brain
tumors). Memory disturbances may also be caused by deficiencies in vitamins
and minerals or the toxic effects of some drugs (such as anticholinergic
antidepressants, Parkinson drugs and drugs that control blood pressure). Until
a few decades ago, memory decline was considered the inevitable result of the
aging process. In mild cases it was called "senility"; in more severe forms,
senile dementia. Even today, the majority of physicians who are unaware of the
significant developments in this area do not take memory decline seriously,
particularly in aged persons.
At present, there is no significant treatment for serious memory
deficits such as Alzheimer's disease. In recent decades, however, scientists
have made a series of important discoveries. First, they discovered chemicals
that affect the brain, and reverse brain disorders, such as schizophrenia, and
reverse mood, such as depression. Scientists also discovered chemicals called
cognitive activators (or "smart" pills) which reverse experimentally induced
disturbances of memory both in man and animals. Scientists have thus begun to
quantify the degree and the type of memory impairment, and they believe they
may be able to reverse its effects through chemical means. Large scientific
studies have demonstrated that, although older subjects more frequently suffer
from memory impairment, memory impairment is not the inevitable result of
aging.
Even for Alzheimer's, scientists have begun to develop treatments for
the earlier stages of the disease. This includes the use of (i) ethical drugs,
such as cerebro-vascular drugs, hormones (male and female) and cholesterol
lowering agents, and (ii) "natural" substances and plant extracts, the most
important of which are Ginkgo Biloba, an extract of Ginkgo tree leaves, and
Glutathione. The only drugs that have been approved to treat Alzheimer's in
the United States are Tacrine and Aricept.
Since memory impairment is not the inevitable result of aging, MCAI's
management believes that the earlier physicians can evaluate, diagnose and
treat memory problems, the more likely they can prevent severe memory problems
from developing later on. The services Memory Centers(TM) provide will be
particularly important as the demographics of the population in the United
States shifts towards the older groups that have typically suffered from
memory problems in the past. In the United States, over 50 million will be 65
or older by the year 2030. To the extent Memory Centers(TM) can prevent the
onset of memory disorders that might otherwise occur, they will offer a
particularly timely and important service.
MEMORY CENTERS(TM)
MCAI has currently established three pilot Memory Centers(TM), one in
Manhattan, one in Brooklyn, New York and the other in Tarrytown, New York. The
Company intends to add two more locations in the metropolitan New York area
and it plans to expand nationally with additional pilot centers. In all, the
Company intends to open between 5 and 10 Memory Centers(TM) by the end of
1997. Memory Centers(TM) are operated under expert medical supervision with up
to date diagnostic tools that provide the best available treatment for memory
disorders. As of December 31, 1996, Memory Centers(TM) had generated
management fees of $30,000 since they began operations in March 1996.
In general, MCAI plans to establish Memory Centers(TM) either on a
stand-alone basis, or where practical, in connection with the offices of
physicians. MCAI expects to operate Memory Centers(TM) in a structural
environment that will resemble medical practice management companies, where
local physi- cians or professional corporations conduct all aspects of the
medical services practice, and MCAI will provide certain management,
administrative, marketing and professional support services. For example, MCAI
will provide sophisticated, proprietary, high technology diagnostic and
treatment systems to each Memory Center. All Memory Centers(TM) will have the
ability to communicate via a tele-neuropsychiatry system with a central
facility that will evaluate tests, provide reports and recommend treatment.
MCAI will also be responsible for national advertising campaigns and will
supply individual Memory Centers(TM) with medicinal products such as minerals,
vitamins and alternative herbal medicines.
MCAI offers early diagnosis of memory disturbances, followed by
medically accepted treatments. Since the diagnostic battery requires knowledge
in neuropsychology, electrophysiology, neurology, and psychiatry, accompanied
by treatment which will include both conventional and "unconventional" strate-
gies, the majority of doctors are neither prepared nor equipped to provide a
complete "memory" evaluation and treatment. However, by working in concert
with the facilities provided at Memory Centers(TM), physicians can offer a
full memory evaluation.
Memory Centers(TM) currently offer five programs tailored to specific
groups who have concerns with their memory:
1. Memory Fitness For Life(TM): a program for younger people who want
to learn how they can best contribute to their own long-term
functioning and cognitive abilities.
2. Early Detection Program(TM): a program for people who believe they
are experiencing mild forms of memory impairment.
3. Senior Memory(TM): a program for seniors and younger patients with
early onset of memory problems.
4. Family Memories(TM) Supportive Counseling Program: a program to
address the special needs of caregivers.
5. Executive Memory Fitness(TM): a program through which corporations
may offer their key executives a confidential baseline assessment
of their own mental performance and try to enhance their
cognitive abilities.
The assessment phase of the Memory Centers(TM) program generally
includes a comprehensive history, an examination by a physician, a blood
chemistry analysis, neuropsychological and neuro- physiological tests, and
other steps that are designed to identify the cause of the patient's problems.
When an assessment is complete, the physician will diagnose the patient and
create an individual treat- ment plan to address their particular needs.
Therapies will include prescription medications, herbal com- pounds, cognitive
exercises designed to improve mental performance, and nutritional action,
among other things. The treatment program includes follow-up assessments to
confirm the patient's response to the prescribed therapy.
Since the services offered to the patients encompass comprehensive
diagnostic evaluations and a variety of treatment strategies, professional,
medical supervision is a necessity. As such, MCAI, where practical, will
establish Memory Centers(TM) in sites (i.e., medical practices) that already
have the necessary administrative, diagnostic hardware-software systems in
place. The electrophysiological, neuropsycho- logical and medical test data
will be transmitted telephonically to the main center located in Tarrytown,
New York. The data will be evaluated there and a complete profile of the
patient will be returned to the center with treatment recommendations. The
individual Memory Centers(TM) will be charged for each such evaluation.
Each Memory Center(TM) will be responsible for its own professional
liability. The medical professionals that participate in Memory Center(TM)
programs will have to adhere to MCAI's strict require- ments with respect to
ethical research, standard diagnostic systems, state-of-the-art memory
enhancement and/ or treatment programs and apply MCAI's standard operating
procedures. MCAI may recommend research projects, such as drug studies, that
particular Memory Centers(TM) may conduct, and MCAI may recommend that Memory
Centers(TM) employ certain procedures to treat or prevent memory disorders
that the individual medical professionals will apply.
MCAI's plans to develop Memory Centers(TM) will require substantial
amounts of capital without any assurance that they will be successful.
Depending on their size and location, MCAI estimates that each facility would
require between $150,000 and $200,000 for equipment, leasehold improvements,
and working capital, including corporate overhead, to operate the Memory
Centers(TM). Therefore, MCAI estimates that its capital requirements will
range from $1,500,000 to $2,000,000, depending on the number of Memory
Centers(TM) it actually opens. MCAI intends to set up 100 Memory Centers(TM)
within the next five years if the pilot program is successful and if
additional capital can be raised.
COMPETITION
At the present time, MCAI is not aware of any facilities that focus on
providing point of contact services for memory disorders. Historically, a
number of neurologists, psychiatrists and psychologist have developed memory
oriented clinics, but these have all focused on conducting research. While
MCAI is not aware of any existing or proposed programs that offer the services
provided by Memory Centers(TM), the neurological departments of any hospital,
Alzheimer's clinics and even well-equipped neurologists in private practice
will potentially compete with the services Memory Centers(TM) offer. However,
as noted above, since memory impairment is generally not considered an
illness, or a diagnostic category, doctors and hospitals have a tendency to
belittle or ignore the problem, and patients themselves generally hesitate to
address the problem until it becomes more severe. Patients with severe memory
problems, such as Alzheimer's disease, will generally go to specialized
Alzheimer's centers, neurology clinics or hospitals. However, for patients
with light to moderate memory problems, there are currently no professional
organizations available to help them. Memory Centers(TM) offer a unique set of
services for this group of people, and MCAI intends to capitalize on the
potential for Memory Centers(TM) to prevent memory problems that might
otherwise occur, particularly given the increasing size of the population aged
65 or older.
MARKETING
MCAI management plans to market Memory Centers(TM) to patients,
third-party payors, corporations and community service and government
organizations. MCAI plans to initiate an aggressive, concentrated advertising
effort to inform potential patients that memory impairment can be objectively
diagnosed and that early treatment can stop further memory deterioration. This
media campaign will include print, radio and direct mail sources as well as
the internet. MCAI will also make presentations at local organizations and
community groups that include whose members largely consist of potential
patients.
MCAI will also market Memory Centers(TM) to physicians, both to inform
them about Memory Centers(TM) and the services they offer and to help build a
network of potential affiliates. By developing relationships with physicians,
Memory Centers(TM) will also build credibility and develop an important source
of referral business.
MCAI recognizes that it must develop a relationship with third party
payors to penetrate the managed care market and develop an affiliation with
HMO's and similar entities. In addition, to the extent the availability of
coverage from third party payors will significantly affect its patient base,
it will be important for MCAI to help third party payors become comfortable
with the nature of the services Memory Centers(TM) provide, and the billing
patterns they employ. MCAI also plans to market Memory Centers(TM) to
corporations who can sponsor wellness programs for their executives that
include the services Memory Centers(TM) offer.
Finally, MCAI intends to build relationships with community service
groups and government organizations. For example, local groups such as
assisted living centers, rehabilitation providers, senior centers and
Alzheimer Associations, all deal with populations that will be particularly
interested in the services Memory Centers(TM) provide. MCAI will also try to
build relationships with government organizations to create interest and
support among government leaders to fund programs that utilize Memory
Centers(TM). MCAI expects to be involved in the public debate on issues such
as third party payment, professional practice standards and the regulation of
telemedicine.
NEUROPSYCHIATRIC DIAGNOSTIC EQUIPMENT
HZI offers a line of proprietary neuropsychiatric diagnostic testing
equipment to physicians, researchers and hospitals. This equipment, known as
the CEEG-Scan System(R) enhances widely accepted diagnostic tests (such as
EEG) by quantifying their results, and it permits them to be performed in a
more practical and economical fashion than through other means. The CEEG-Scan
System(R) also includes proprietary software used to perform Dynamic Brain
Mapping(R). Dynamic Brain Mapping(R) is HZI's proprietary brain mapping
technique that summarizes a patients electrical brain activity on an
anatomically correct, color-coded image of the patient's brain. This software
is sometimes sold separately.
As of December 31, 1996, the Company has sold 115 CEEG-Scan Systems(R),
consisting of hardware and software or software only, at prices ranging from
$15,000 to $130,000. For the fiscal years ended December 31, 1994, 1995 and
1996, revenues from sales of neuropsychiatric diagnostic testing equipment
accounted for 39%, 36% and 20%, respectively, of the Company's total revenues.
With respect to $556,187 of sales of this equipment in 1995, $440,000 of
receivables associated with these sales were written off in 1996.
The CEEG Scan System(R), which the FDA approved in March 1987, is
currently being utilized by many of the world's largest psychiatric research
centers, such as the United States National Institute on Drug Abuse, the
National Institute of Mental Health in China, and the National Academia of
Medicine in Russia. This system, unlike those of its competitors, is primarily
based on proprietary software and off-the-shelf hardware. In addition, the
CEEG-Scan System(R) is based on the use of digital, rather than analog, EEG.
It was not until 1991 that the American Electroencephalography Society began
to accept the use of digital EEGs, instead of the more traditional analog EEG
presentation.
The Company has many competitors in this field, including leading
international academic centers and larger companies with greater financial
resources. The Company believes that some form of computer analysis of EEGs
and digital EEGs, with and without brain mapping, has been developed by
approximately a dozen companies in the United States, and perhaps another 35
companies outside the United States. These competitors are generally larger
organizations with far more resources than the Company. There is no assurance
that the Company's CEEG Scan System(R) software and systems will continue to
provide revenues. Nevertheless, the Company believes that its CEEG-Scan
System(R) offers physicians and other medical professionals one of the most
advanced, non-invasive, objective and economical brain function monitoring
tests.
TELE-MAP(R)
HZI offers interactive neurological testing services to assist hospitals
and physicians in the diagnosis of brain disorders. These services include
providing diagnostic tests based on the Company's CEEG-Scan System(R) with or
without Dynamic Brain Mapping(R), and these services are known collectively as
"Tele-Map(R)". Revenues of the Tele-Map(R) division for the years ended 1996
and 1995 were $129,622 and $146,119, respectively.
In the Tele-Map(R) program, HZI provides hospitals or physicians with a
conventional or specially-designed modem that the physician uses to transmit
the data they collect during a diagnostic test, via telephone, to HZI. HZI
employees will then record the data, and HZI's consultants and experts will
then analyze and interpret the data, and prepare reports that are sent back to
the physician within 2 business days of the test. HZI believes that this
interactive service will continue to be attractive to hospitals and physicians
alike, since it permits physicians to conduct EEG tests in their individual
offices, or hospitals, without having to invest in the equipment needed to
analyze and interpret results. HZI's technical experts will communicate with
the testing physicians as they record data during the procedure to ensure the
quality of the results.
There can be no assurance that HZI will be able to increase or even
sustain this business in the future. The Company has at least two competitors,
one of which, Telemedix Corporation, claims to have more than 500 subscribers.
The Company expects competition in this area will increase. There is no
assurance that the Company can expand or sustain its services and revenues at
their present level. Furthermore, since this service is regulated by the FDA,
any changes in FDA regulations or any changes in professional standards could
significantly affect the Company's Tele-Map(R) services.
DEVELOPMENTAL ACTIVITIES
The Company is currently engaged in developing other products and
services which it believes may offer commercial potential in the future, but
which are not yet marketable.
Hardware and Software
The Company is in the process of developing six new products. At this
time, the Company does not have any 510(k) Applications pending with the FDA,
but the Company intends to submit a 510(k) Application for three of the six
products in late 1997 or early 1998: the EEG/EP Amplifier; the Digital EEG
System software and the HZI Electrode Headset. The Company also intends to
submit a 510(k) Application for two additional products, enhanced Evoked
Potential Software and Pharmacologically Activated EEG (Test-Dose(R))
Software, in the latter part of 1998 or early 1999. The Company has not yet
decided when it will resubmit the application for its sixth new product. For
the fiscal years ended December 31, 1994, 1995 and 1996, the Company has spent
$224,010, $181,512, and $98,018, respectively, on research and development
activities for these proprietary items. The Company is not reimbursed for any
research or development expenses from its customers.
Drug Development
HZI plans to use its proprietary hardware, software, and databases in
order to try to develop, either alone or with others, proprietary drugs. HZI
believes that the combination of its expertise and its proprietary databases
will enable HZI to define neuropharmacological activity of central nervous
system drugs. HZI's physicians and research professionals have extensive
experience in the screening and testing of psychotropic drugs, as well as the
measurement of brain functions indicated by brain electrical activities.
HZI has compiled what it believes to be a unique database on the effects
of compounds on Alzheimer's disease and memory impairment. During the last ten
years, HZI has been involved, as a subcontractor for drug companies, in the
development of six new drugs for the treatment of Alzheimer's disease, such as
oxiracetam, suloctidil, nimodipine, pramiracetam, BMY-21502 and Ginkgo biloba.
HZI also studied choline/lecithin, deprenyl, synthetic male hormone
("mesterolone"), thyroid releasing hormone ("TRH"), physostigmine, tacrine
("THA"), neostigmine, hydergine, velnacrine and propentofylline, all of which
are claimed to be effective in memory problems and Alzheimer's disease. HZI
believes that it can now study a variety of new chemical entities or naturally
occurring substances (such as plant extracts or vitamins) using its
proprietary software and database to search for potential treatments of memory
dysfunctions.
HZI believes that its database can be used to expedite the overall drug
development process (i) by finding new uses for compounds already on the
market, and (ii) by refining and improving experimental drugs that
manufacturers now consider marginal. The Company believes that, through the
use of HZI's proprietary systems, it can discover previously unexplored
effects and potentially new applications at a relatively low cost since the
bulk of the basic research has already been completed.
If the Company determines that a particular drug under study has
marketplace potential, the Company would try to license the drug to major drug
companies, or possibly enter into a joint venture partnership. For example, in
September 1995, the Company entered into an agreement with Mediator S.r.l., an
Italian company ("Mediator"), which has exclusive rights from SmithKline
Beecham Farmaceutici Italia S.p.A to develop oxiracetam, an anti-dementia
drug. The Company has the exclusive right to develop, use, sell and market
oxiracetam in the United States, and the right to market this product in other
countries. To date, the Company estimates it has incurred expenses related to
this project of approximately $170,000. Oxiracetam is presently marketed by
other companies in Italy and Korea. The Company is also involved in a second
joint venture. In January 1995, the Company entered into an agreement with
Tena, Ltd. ("Tena"), a company located in Istanbul, Turkey, to jointly
research and develop the Company's products, and to market and sell the
Company's products in the Mid-East, the former republics of the Soviet Union
and other areas in which the Company currently has no distribution network.
While to date, the Company has not entered into any research and development
projects with Tena, Tena has been involved in marketing the Company's existing
products. In June 1997, Tena ordered a TNP system, which includes a full BFM
System, in order to set up a Memory Center in Istanbul as a joint venture.
Any effort by the Company to develop new drugs will require large
amounts of capital and be subject to substantial competition from established
pharmaceutical companies, among others. In addition, if the Company decides to
investigate a pharmaceutical product it will also incur the costs of the
burdensome government regulatory process. There is no assurance than any of
the projected drug developments of the Company will be successful even if the
required funds are available.
Tele-Medicine (Tele-Neuro-Psychiatry)
Tele-Medicine started about 30 years ago with the goal of improving
patient care in rural areas without significantly increasing the cost. While
technology was expensive, until five years ago, a variety of companies have
now developed hardware/software systems which improved the quality of pictures
and sound, while reducing the cost.
TNP is the application of tele-medicine in neurological and psychiatric
patients. The Company's system includes clinical data collection and
reporting; psychological-psychiatric evaluations and reporting; interactive
neuro-psychological evaluations and reporting; neuro-physiological evaluations
and reporting; cognitive rehabilitation and reporting; and neuro-biofeedback
and reporting. all the data collections are done in a remote location by
mental healthcare workers under the medical-psychological-psychiatric
supervision of experts in the receiver center via a tele-video system. The
experts provide confirmation of the report and second opinions on the
diagnosis and treatment. The Company has developed its TNP system to use in
its Memory Centers as well as in multi-center contract research. Thus, Memory
Centers can be located in remote places but patients will be diagnosed and
treated by experts in receiver stations. Using TNP, even the most remote
Memory Centers will be supervised by memory experts, improving quality without
a significant increase in the cost. In contract research, the data collection,
quality control and study monitoring will be done on-line from a central
location. Management believes the Company should have a competitive edge by
providing high quality data at a reduced cost. There are, however, a series of
governmental and local restrictions in the use of tele-medicine. There is no
assurance whether TNP will successfully be developed and/or applied. There is
also no assurance that the patients will accept video interviews in Memory
Centers or that drug companies or the FDA will approve such data collection
procedures in multi-center trials. In September 1997, Drs. Itil and Le Bars
and Mr. Eralp received a patent for certain data collection, analysis and
transmission procedures that the TNP system relies upon. This patent will be
assigned to the Company.
Kirkbride/Core Care Joint Venture
On September 4, 1997, the Company signed an agreement with the CoreCare
Corporation, a regional provider of mental healthcare services, to form a
joint venture. The joint venture, which will be 50% owned by the Company, will
be located at Kirkbride Center, a large medical complex being developed in
Philadelphia. Within the Kirkbride Hospital complex, the agreement
contemplates that the joint venture will establish a Memory CenterTM and
tele-neuropsychiatric diagnostic laboratory. The joint venture will also
include a 30 bed VIP-Neuropsychiatry clinic, a Phase I in-patient drug
research unit and a contract research site management venture.
The joint venture has not yet begun operations. However, as the first
step to the joint venture, in September, 1997 CoreCare ordered two TNP systems
in order to set up a Memory Center (each at $95,800), and a TNP diagnostic
laboratory. The various aspects of the joint venture will require additional
development and capital. Accordingly, there can be no assurance that any
aspect of the joint venture can be developed within a reasonable amount of
time or that any of these will be successful, or that capital will be found to
develop any of these ventures.
GOVERNMENT REGULATIONS - HZI
Substantial segments of the Company's proposed operations are expected
to be subject to regulation and supervision by federal, state and local
governmental authorities. Such regulations apply not only to research,
development and manufacturing activities (whether by the Company or by
licensees) but also to the marketing of proposed systems and products,
particularly those involving medical applications. Although the Company cannot
estimate the cost of compliance with various regulations, it expects such
costs to be significant.
With respect to the manufacturing and marketing of its present and
future systems and products, the Company or its licensees must first obtain
the approval of the FDA, particularly if the products are to be marketed in
the United States. The Company conducts contract research. For every research
project to be conducted, the Company has to have an approval of an independent
Institutional Review Board ("IRB"). If the drug is being studied and is not a
marketed compound, FDA approval is required after filing an Investigational
New Drug Application ("IND"). Commonly, IND's are applied for by drug
manufacturers who subcontract to others. On many occasions, the Company may
further subcontract the research projects to other companies, not-for-profit
organizations and/or medical centers. The procedure of seeking and obtaining
FDA approval for medical products (e.g., hardware and software systems) and/or
pharmaceutical products involving humans involves many steps, including
testing, to determine safety and efficacy of the products. Seeking and
obtaining FDA approval of a medical product may take a number of years and
expenditure of substantial funds. FDA regulations also will govern the
manufacturing process and marketing activities, and may require that
post-marketing surveillance programs be undertaken to continuously monitor the
safety of some products. If it develops its own manufacturing and marketing
capabilities, the Company will be subject to substantial record keeping and
manufacturing procedure requirements.
In general all new products are subject to a ninety (90) day pre-market
notification requirement. During that period, the FDA determines whether new
products are "substantially equivalent" to products already on the market.
Products found to be "substantially equivalent" to products already on the
market may be sold immediately. Products that are not found to be
"substantially equivalent" to products already on the market require filing of
an application for pre-market approval, which subjects to FDA scrutiny and
gives the FDA one hundred and eighty (180) days to approve or reject the
product for immediate sales. Therefore, any new products developed by the
Company may be subject to pre-market approval by the FDA or investigation
under regulations administered by the FDA. As a result, the Company may
experience delays in new product introduction.
The Company's present and proposed future activities, including Memory
Centers(TM), telephonic EEG or telemedicine neuro-psychiatric services, are
also likely to be subject to varying degrees of additional regulation under
other local, state or federal regulations. The extent of governmental
regulation which might result from future legislation or administrative action
cannot now be accurately predicted.
Regulations concerning importing and marketing of medical devices and/or
human pharmaceutical products are generally imposed by foreign governments and
may have an impact upon the Company's anticipated operations, although the
scope and impact of any such regulations cannot now be accurately predicted.
The Company's business would be adversely affected if it were unable to
obtain the approvals or to comply with continuing regulations of the FDA and
other governmental agencies. In addition, the Company cannot predict whether
or to what extent future changes in government regulations might increase the
cost of conducting its business or affect the time required to develop and
introduce new products. Obtaining regulatory approval may delay marketing of
products for lengthy periods, require significant expenditures and furnish an
advantage to larger and better financed competitors. See "Risk Factors --
Government--Regulation."
GOVERNMENT REGULATION -- MEMORY CENTERS(TM)
The activities of the Memory Centers(TM) will be regulated by a variety
of agencies on federal, state and possibly local levels. The Company believes
that it will be able to structure relationships with physicians and other
entities that will comply with all applicable regulations. However, there can
be no assurance that any given regulatory issue might not have a material
impact on the ability of the Company to do business in a particular
jurisdiction.
The Company recognizes, for the purpose of commercializing its centers,
that the operation of the Memory Centers(TM) may be deemed by certain
regulators to constitute the practice of medicine. If operation of the Memory
Centers(TM) is determined to involve the practice of medicine, the degree of
physician involvement required under applicable laws and regulations in
operating the Memory Centers(TM) is unclear. In addition, many states prohibit
business corporations from engaging in the practice of medicine, employing
physicians, or entering into certain financial arrangements with physicians,
including fee splitting.
The Company believes there are several possible structures it can employ
to provide for physician involvement, including, where possible, direct
employment and independent contractor status. In some states, the Company will
be required to license the right to use the Memory Center format to an
independent medical corporation. Although the precise legal structure of the
centers may vary as the result of differing state law requirements, the
Company believes that the operating structures adopted with respect to its
Centers will not materially affect the revenue or profit received by the
Company from the operation of its centers, taken as a whole.
The Company believes that its existing and proposed administrative
structures, including its relationship with physicians, comply with relevant
regulations. However, no formal ruling regarding the Company's various
structures and relationships has been obtained from any government agency and
there can be no assurance that any such ruling would deem such structures or
relationships in compliance with applicable laws and regulations. There can be
no assurance that review of the Company's business by courts or healthcare,
tax, labor, and other regulatory authorities that have jurisdictions over
matters including, without limitation, the corporate practice of medicine,
licensing of facilities and equipment, and franchising will not result in
determinations that could adversely affect the operations of the Company or
that the healthcare regulatory environment will not change in a manner that
would restrict the Company's proposed operations or limit the expansion of the
Company's business or otherwise adversely affect the Company.
COMPANY HISTORY
The Company, formerly known as Tamarac Ventures, Ltd., was incorporated
in the State of Nevada on March 18, 1987 and completed an initial public
offering in September, 1987. At the time of its initial public offering, the
Company was a "blind pool" wherein the Company's securities were sold to the
public to provide the Company with net proceeds of approximately $178,000
capital to purchase unknown existing businesses or to acquire unknown existing
assets to establish a subsidiary business or businesses.
PERSONNEL
The Company has 17 full-time employees, including five executives. In
addition the Company has six consultants and two part-time employees.
PROPERTY
The Company owns a parcel of vacant land in Florida held for investment.
The Company's offices and other facilities are located at 150 White Plains
Road, Tarrytown, New York 10591, under a lease expiring in 1998. Office rent
and payments for non-cancelable equipment leases have been estimated to be
$122,000 for the year ending December 31, 1997. In addition, MCAI has recently
entered into a contract to lease its Manhattan Memory Center. The five year
lease requires annual lease payments of $110,000. Management believes its
present facilities may not be adequate for its expanding needs but that new
space is readily available.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and the executive officers of the Company are as follows:
NAME AGE POSITION WITH THE COMPANY
Turan M. Itil 73 Chairman of the Board,
Chief Executive Officer,
President and Director
I. Ronald Horowitz 75 Director
Kurt Z. Itil 38 Director
Pierre LeBars1 45 Director and Executive
Vice President
Jonathan E. Raven 46 Director and Executive
Vice President
Aileen A. Kunitz1 54 Vice President
Evelyn Sommer, Esq.2 71 Director
Richard Katz, Esq.1, 2 54 Director
Joseph DioGuardi, CPA1, 2 57 Director, Chief Financial
Officer
1 Member of Audit Committee
2 Member of Compensation Committee
Each director is elected for a period of one year, expiring on the date
of the next annual meeting and thereafter until his or her successor shall
have been elected and qualified or until his or her death, resignation or
removal. Officers are appointed and serve at the will of the Board of
Directors subject to the terms of any employment agreements. Except for Mrs.
Sommer who is to receive $1000 for each Board meeting attended, the Company
does not currently pay any cash or other compensation to directors for serving
in that capacity.
TURAN M. ITIL, M.D. has been Chairman of the Board and Director of the
Company since November 23, 1994 and Chairman of the Board and a Director of
HZI, the Company's medical research subsidiary since he founded HZI in 1974.
In January 1997, upon the resignation of Ronald Horowitz as President, Dr.
Itil resumed the Presidency of the Company. Dr. Itil is a
neurologist/psychiatrist with special interests in electrophysiology (brain
electrical activity studies) and psychopharmacology (psychotropic drug
treatment and research). Dr. Itil is Honorary Chairman of the Board of the
New York Institute for Medical Research, a not-for-profit organization.
Dr. Itil was Dozent (Associate Professor) of the University of
Erlangen-Nurenberg, Germany for two years; Associate Professor and Full
Professor of the University of Missouri for ten years; and Full Professor at
New York Medical College for sixteen years. At present, he is Clinical
Professor at New York University Medical Center.
Dr. Itil was appointed a member of the World Health Organization Expert
Advisory Panel in October 1995; he is also Past-President of the American
Psychiatric Electrophysiology Association; Past Vice President, International
Pharmaco-EEG Society; Secretary General, Academia, Medicinal & Psychiatric
Foundation; Co-Editor, Journal of Integrative Psychiatry; on the Board of
Examiners of the American Medical EEG Association. He is a Life Fellow of the
American Psychiatric Association, American Psychosomatic Association, and
American College of Neuro-psychopharmacology. Dr. Itil is on the Editorial
Board of more than 15 scientific journals; Board Member of Mental Hygiene of
the State of New York. Dr. Itil has written/edited seven books and is the
author of more than 522 scientific articles. Dr. Itil is the inventor of 13
patents issued and has four patent applications pending. Seven of the patents
owned by Dr. Itil have been assigned to the Company and six others have been
assigned to major drug companies.
I. RONALD HOROWITZ, Esq., became Vice Chairman, President and Director
of the Company in 1995. He resigned in 1997 as President and subsequently as
Vice Chairman. Mr. Horowitz has been a practicing lawyer and member of the New
York Bar for over 40 years. From 1974 to 1977 he was President and Vice
Chairman of the Board of Vagabond Hotels Inc., a publicly held West Coast
chain of 56 hotels and motels. From 1969 to 1972 he was President of Paramount
Studios Inc. a motion picture company. From 1970 to 1972 he was President of
Paramount Immobiliare, a joint venture between Paramount Studios and Societa
Immobiliare, Italy's largest real estate Company and from 1967 to 1969 he was
Executive Vice President and Chief Operating Officer of Gulf & Western Realty
Corp.
Mr. Horowitz is a Fellow of Academia, Medicinae and Psychiatriae
Foundation and has also served as Justice of the Peace for the City of
Stamford, Connecticut, special counsel for the New Haven Railroad and was a
Trustee of Grand Central Hospital in New York City. He has also been active as
a private investor.
KURT Z. ITIL, Ph.D. (Honorary) has been a Director of the Company since
November 23, 1994 and has been President of HZI since 1983 and a Director of
HZI since 1982. In 1981, Dr. Itil graduated from Boston University (B.A. -
Psychology). He obtained an honorary Doctorate of Philosophy from Medicina
Alternativa based on his publications and his contribution to science. Dr.
Itil has participated in business and management seminars at the
Massachusetts Institute of Technology. He was Vice President of HZI from
1977-1980. Dr. Itil was Vice President (Sales & Marketing) of International
Drug Experts Associates from 1981-1982.
Since 1983, he has served as President of HZI and he is responsible for
sales, promotion and marketing of services and products and administration.
Dr. K. Itil is a Fellow of Academia, Medicinae and Psychiatriae
Foundation and a Member of the American Psychiatric Electrophysiology
Association. Dr. Itil has more than 45 scientific publications to his credit.
Dr. Kurt Itil is the son of Dr. Turan Itil.
PIERRE LE BARS, M.D., Ph.D. has been a Director and Executive Vice
President and Chief of Research and Development of the Company since November
23, 1994 and has been Executive Vice President and Chief of Research and
Development of HZI since 1992.
Dr. Le Bars obtained his M.D. in 1978 in France. Subsequently, he
obtained his Ph.D. in Neurophysiology from the University of Picardie and
Pierre et Marie Curie in France. He became a Research Fellow in 1988 at New
York Medical College. Since 1991, Dr. Le Bars has been employed by HZI as
Vice President for Research and Development and since 1993, as Executive Vice
President. Dr. Le Bars also had an appointment as a Research Fellow at
Massachusetts Mental Health Center of the Harvard Medical School since 1992.
Dr. Le Bars is Assistant Editor of the journal of Integrative Psychiatry. He
is a member of numerous French and U.S. professional societies and
author/co-author of a series of scientific publications. Dr. Le Bars is the
son-in-law of Dr. Turan Itil.
JONATHAN E. RAVEN became a Director and Executive Vice President of the
Company and President and CEO of MCAI on January 6, 1997. From 1981 to 1996,
Mr. Raven was employed by NuVision, Inc. of Flint, Michigan, starting as
General Counsel in 1981 and becoming President and Chief Operating Officer in
1990. NuVision, at the time of its acquisition by American Vision Centers,
Inc. in June 1996, was a multi-state optometric and optical provider of
mall-based and group vision care delivery systems including manufacturing and
distribution of custom eyewear with annual revenues of $90 million. Mr. Raven
received a Bachelor of Arts, cum laude from Western Michigan University in
Kalamazoo, Michigan in 1972 and Juris Doctor from the University of Michigan
Law School in Ann Arbor, Michigan in 1975. Mr. Raven has been a licensed
attorney since 1975. From 1975 to 1981, he was engaged in the private practice
of law with the Lansing, Michigan law firm of Foster, Swift, Collins & Smith,
P.C., of which he became a partner in 1981.
AILEEN A. KUNITZ has served as Vice President of the Company since
November 23, 1994. She also served as a Director until July 1997 and as Chief
Financial Officer ("CFO") until June 1997. After she resigned as Director and
CFO, she continued her employment with the Company as Vice-President. Ms.
Kunitz joined HZI in 1974 as a Research Coordinator. In 1976, she became Chief
Research Coordinator. In 1980 she was appointed Administrator; in 1984 she
became Executive Administrator and in 1990, Vice President of Finance. She
studied mathematics at the University of Detroit and received training in EEG
technology through Wayne University in Detroit, Michigan and was employed by
the University of Missouri as a Technologist from 1968 - 1974.
EVELYN SOMMER, Esq. has been a Director of the Company since March,
1996. Ms. Sommer graduated from Hunter College (A.B. 1945) and from Brooklyn
Law School (LLB 1955). She concentrates in patent and intellectual property
law and has been Adjunct Professor, Intellectual Property Law, Quinnipiac
College School of Law since 1983. She joined Skadden, Arps, Slate, Meagher and
Flom LLP's Intellectual Property Department in 1993 after 20 years as Chief
Patent and Trademark Counsel to Champion International Corporation, a Fortune
100 company based in Stamford, Connecticut. Skadden, Arps, Slate, Meagher &
Flom LLP performs legal services for the Company.
RICHARD A. KATZ, Esq. has been a Director of the Company since November
23, 1994 and has been a Director of HZI since 1984. Mr. Katz graduated from
Hunter College in June, 1964 (B.A.) and Brooklyn Law School, June 1967
(L.L.B.). He was admitted to the New York State Bar on December 18, 1967 and
admitted to both the Southern and Eastern Federal District Courts and has been
a practicing attorney since that time. Mr. Katz has been a member of the law
firm of Fohret Last & Katz, P.C. since March 1, 1997 which firm performs legal
services for the Company and was a partner in the law firm of Opton Handler
Feiler and Katz, LLP from January 1, 1995 through February 28, 1997 which firm
serves as special counsel to the Company. From January 1, 1994 to December 31,
1994 he was counsel to said firm. Prior to January 1994 thereto and for a
period of 23 years he was a partner in the New York law firm of Garrell Siegal
& Katz. Mr. Katz is President of the New York Institute for Medical Research.
JOSEPH DIOGUARDI, CPA. Mr. DioGuardi became a Director of the Company in
March 1996. He became "Special Assistant" to the Chairman in November 1996,
Acting CFO in June 1997 and CFO on July 1, 1997. Since leaving Congress in
1989, Mr. DioGuardi established Truth In Government, a non-partisan
foundation, through which he continues his activities for federal fiscal
reforms. From 1985 to 1989, Mr. DioGuardi was a member of the U.S. Congress
for New York's Twentieth Congressional District. While in Congress, he was
Member, Committee on Government Operations; Ranking Minority Member,
Subcommittee on Employment and Housing; Member, Committee on Banking, Finance
and Urban Affairs; Chairman, House Republican Research Committee Task Force on
Federal Budgeting and Financial management. From 1962 to 1984 he was with
Arthur Andersen & Co., the international accounting, auditing and consulting
firm, where he was a tax partner from 1972. He received a Bachelor of Science
Degree with honors from the College of Business Administration of Fordham
University in 1962.
EMPLOYMENT ARRANGEMENTS
Dr. Turan M. Itil entered into an employment agreement with the Company,
effective September 20, 1995, providing for a base salary of $250,000 per year
plus annual increases and bonuses. The agreement is for an initial term of 10
years and is renewable on a month to month basis thereafter unless either
party notifies the other in writing at least 30 days before the end of the
initial term or any month thereafter, of its intention to cancel. Dr. Itil
waived $146,347 of his base salary for the year ended December 31, 1995. Dr.
Itil has waived negotiations for salary increases for 1996 and 1997.
The Company is required to maintain a life insurance policy on the life
of Dr. Itil, in the amount of $1,000,000 payable to his designated beneficiary
and to provide Dr. Itil with a car and driver. Dr. Itil waived the life
insurance requirement for the year ended December 31, 1995 and 1996. The life
insurance policy was effective as of May 26, 1997; the Company is a 50%
beneficiary of the policy.
Dr. Pierre Le Bars entered into an employment agreement with the
Company, effective December 7, 1994, providing for a base salary of $100,000
per year plus annual increases and bonuses. The agreement is for an initial
term ending January 1, 2000 and is renewable on a year to year basis
thereafter.
IRH Corporation, a personal service company owned by I. Ronald Horowitz,
entered into an employment agreement with the Company effective July 1, 1995
pursuant to which it will supply the services of Mr. Horowitz to act as a
business consultant to the Company for a five year period at an annual
retainer of $75,000 per year, which amount was reduced, by mutual agreement,
to $30,000 effective June 1, 1996. Mr. Horowitz subsequently agreed to serve
as Vice Chairman and President of the Company with no additional compensation.
On September 19, 1995 Mr. Horowitz was granted a seven year Incentive Stock
Option to purchase 250,000 shares of the Company's Common Stock at $.10 per
share. In January, 1997 Mr. Horowitz resigned from the position of President
of the Company and subsequently as Vice Chairman.
Jonathan E. Raven entered into an employment agreement with the Company,
effective January 6, 1997, providing for $150,000 in salary in the first year
of the contract, $225,000 in the second and third years, subject to an
increase in year three by an amount consistent with the CPI as compared to the
prior year. The agreement is for an initial term ending January 1, 2000 and is
renewable on a year to year basis thereafter. Mr. Raven was granted Incentive
Stock Options to purchase up to 500,000 shares of the Company's Common Stock
at the lower of $7.00 per share or fair market value, 200,000 of which vest as
of January 6, 1997 and 150,000 vest on each of the first and second
anniversary of such date. The Company has agreed that at Mr. Raven's
discretion, the national administrative office of MCAI. may be located within
the general metropolitan area of Lansing, Michigan.
Aileen A. Kunitz entered into an employment agreement with the Company
effective January 1, 1997 providing for annual base salary of $85,000 plus
bonus. The agreement is for initial term ending January 1, 2000 and is
renewable on a year to year basis thereafter.
Joseph DioGuardi, a Director of the Company, has, since November 16,
1996, acted as a Special Assistant to the Chairman of the Company working on
various financial projects and business plans in connection with private
placements, and the Registration Statement of which this Prospectus is a part,
as well as the development of budgeting, accounting, reporting and management
information. In addition, Mr. DioGuardi became Acting CFO and CFO in June and
July 1997, respectively. Mr. DioGuardi works a minimum of 3 days per week, and
receives compensation of $7,500 per month.
EXECUTIVE COMPENSATION
The following table sets forth the aggregate cash and cash equivalent
forms of compensation paid by the Company during the last three fiscal years
for services in all capacities to those persons who were as of December 31,
1996, the Chief Executive Officer and each of the most highly compensated
officers, to the extent each earned more than $100,000 in salary and bonus.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
LONG TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Name & Other # Share
Principal Annual Underlying All Other
Position Year Salary Bonus Compensation1 Options Compensation
- ------------- ---- ----------- ---------- ---------- --------- ----------
Turan Itil -
Chief Executive
Officer 1996 $250,000 - - - -
1995 $106,653(2) - - $11,000 -
Pierre LeBars -
Chief Executive
Vice President 1996 $112,000 $50,000 - -
1995 $100,000(3) - - - -
</TABLE>
- -------------------
1 Does not include an annual car allowance of $9,000 for Dr. Itil and
$6,000 for Dr. LeBars.
2 For the year ended December 31, 1995 Dr. Itil waived $146,347 of his
$250,000 base salary and for the year ended December 31, 1996, Dr. Itil
deferred $21,000 of his $250,000 base salary.
3 For the year ended December 31, 1995 Dr. Le Bars waived $5,857 of his
$100,000 base salary.
STOCK OPTION PLAN
On November 23, 1994 the Company adopted a stock option plan (the
"Plan") providing for the granting of options to purchase up to 1,500,000
shares of the Company's Common Stock. Options granted pursuant to the Plan may
be either incentive options or non qualified stock options. Incentive stock
options may be granted to persons who are employees or officers of the
Company. Non-statutory stock options may be granted to employees, officers,
non-employee directors and consultants to the Company.
The Plan provides for its administration by a committee chosen by the
Board of Directors which committee shall have full discretionary authority to
determine the number of shares to be granted and the individuals to whom, the
times at which, and the exercise price for which options will be granted. In
the case of statutory stock options 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. Options for 250,000 and 500,000 shares have been
granted under the Plan respectively to Mr. Horowitz in September, 1995 and Mr.
Raven in 1997. No options were granted for the year ended December 31, 1996.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of June 30, 1997
regarding shares of Common Stock of the Company beneficially owned by each
director of the Company, each executive officer of the Company and by all
officers and directors as a group, and by persons known to the Company to be
beneficial owners of more than 5% of the Company's Common Stock.
AMOUNT AND NATURE
NAME AND ADDRESS OF BENEFICIAL PERCENTAGE OF
OF BENEFICIAL OWNER 1, 2 OWNERSHIP2 CLASS14
Turan M. Itil,
Chairman, CEO, President and 4,175,000 3,
Director 4, 8 50.83%
I. Ronald Horowitz,
Director 250,000 6, 8 2.97%
Kurt Z. Itil, 1,259,300 4,8 15.41%
Director
Eleonore Itil 566,000 4,5, 8 6.92%
Pierre Le Bars,
Executive Vice President and
Director 210,000 4, 8 2.57%
Aileen A. Kunitz, 86,400 4, 7,8
Vice President 1.06%
Richard Katz, 214,500 4,
Director 8, 9 2.62%
Evelyn Sommer,
Director 1,000 4 *
Joseph DioGuardi,
Chief Financial Officer and
Director 1,000 4 *
Yasmin Itil Le Bars 798,000 4, 8 9.76%
Jonathan E. Raven
Executive Vice President and
Director 400,000 10 4.67%
Trinity American Corporation
800 Kings Highway North
Cherry Hill, New Jersey 08034 2,506,098 11 26.45%
Lancer Partners, LP
Lancer Offshore, Inc.
Michael Lauer, General Partner
200 Park Avenue
New York, NY 2,550,060 12 27.50%
All directors and officers of the
Company as a group
(9 individuals) 4,825,000 13 54.43%
- ----------------------
* Less than 1%
1 Unless otherwise noted, the addresses of all persons listed above are in
care of the Company.
2 Each of the persons named in the table disclaims beneficial ownership of
the shares of the Company's Common Stock owned by such person's spouse or
by his or her children.
3 Includes 40,000 shares of Common Stock currently issuable upon conversion
of a promissory note. See "Certain Relationships and Related Transactions".
4 Each of these persons are party to a Voting Trust Agreement expiring in
January 2012, pursuant to which the Trustee, Turan M. Itil has the
exclusive right to vote such shares or give written consents in lieu of
voting at all meetings of the Company's shareholders, and in all
proceedings where the vote or written consent of shareholders may be
required or authorized by law. Turan M. Itil is the Trustee and Kurt Z.
Itil is the Successor Trustee.
5 Mrs. Le Bars is the wife of Pierre Le Bars and the daughter of Turan
Itil. Mrs. Itil is the wife of Turan Itil and the mother of Mrs. Le Bars.
6 Includes 250,000 options currently exercisable at $.10 per share, expiring
June 30, 2002.
7 Includes 1,400 shares owned by Mrs. Kunitz' son.
8 In connection with a recent private placement of the Company's securities
in the aggregate amount of $2 million each of these persons entered into
"lock-up" agreements prohibiting the sale of their shares for a one (1)
year period commencing November 22, 1996.
9 Includes 67,500 shares owned by Mr. Katz' son.
10 Includes 200,000 options currently exercisable at the lower of $7.00 per
share or fair market value on January 6, 1997, expiring January 5, 2007,
and 200,000 Class C Warrants currently exercisable at $2.00 per share
acquired from Trinity. See "Certain Relationships and Related
Transactions".
11 Includes 451,000 Class B Warrants currently exercisable at $1.00 per share
and 251,000 Class C Warrants currently exercisable at $2.00 per share, both
of which expire December 31, 1997; 250,000 shares of Class B Series 2
Preferred Stock currently convertible into 50,000 shares of Common Stock;
$275,000 of loans currently convertible into 550,000 shares of common
stock; and 16,666 shares of Common Stock owned by each of three adult sons
of Abraham Salaman, the President and sole shareholder of Trinity. See
"Certain Relationships and Related Transactions".
12 Includes 1,100,000 currently exercisable Warrants, each of which entitles
the holder to purchase one additional share of Common Stock at $4.00 per
share until December 31, 1997 and at $6.00 per share thereafter and until
December 31,1998, the expiration date of the Warrants. See "Certain
Relationships and Related Transactions".
13 Includes the shares issuable upon conversion of a promissory note and
exercise of certain options and Warrants, as set forth in footnotes 3, 6
and 10 above.
14 The percentage calculation for each of the named persons or entities is
based upon 8,173,806 common shares outstanding as of June 30, 1997 plus the
number of shares underlying currently exercisable options, warrants or
conversion privileges held by the identified person or entity.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TRANSACTIONS WITH MANAGEMENT AND OTHERS
The Company, from December, 1989 until November 25, 1994 utilized an
office provided on a rent free basis by Monroe Arndt, its former president, at
45 North Main Street, Marlboro, New Jersey.
On October 25, 1994, the Company issued to Trinity 120,000 post-split
shares of the Company's Common Stock in consideration of Trinity's identifying
HZI as a potential acquisition candidate for the Company. Previously, on March
24, 1994, HZI received a bridge loan of $75,000 from Trinity. It was
subsequently agreed that HZI shall have no responsibility for the repayment of
such bridge loan. On November 23, 1994, Trinity contributed $400,000 to the
Company's capital account with no further issuance of stock. In December 1994,
the Company and Trinity reached an agreement whereby in consideration for the
$400,000 paid on November 23, 1994 two classes of preferred stock were issued
to Trinity. See "Risk Factors -- Possible Issuance of Preferred Stock" and
Note 11 of "Notes to the Consolidated Financial Statements". Abraham Salaman
is the President and sole shareholder of Trinity.
By a Stock Purchase Agreement dated as of October 25, 1994, Mr. Arndt
agreed to sell 556,000 of his post-split shares of the Company's Common Stock
to Trinity, for a purchase price of $40,000, which shares were transferred to
Trinity immediately upon the completion of the Company's acquisition of HZI.
Trinity has the right to transfer a portion of the shares purchased to other
nonaffiliated persons.
In December 1996 the Company sold an aggregate of 550,020 Units for an
aggregate of $2,00`1,068 ($3.64 per Unit) to three investors (the "Lancer
Group") in a private placement. Each Unit consists of one share of Common
Stock and two Warrants, each of which entitles the holder to purchase one
additional share of Common Stock. The 1,100,060 Warrants included in the Units
are exercisable at $4.00 per share until December 31, 1997 and at $6.00 per
share thereafter and until December 31, 1998, the expiration date of the
Warrants. The purchasers of the Units have not been granted registration
rights and none of the Shares of Common Stock or Warrants comprising the Units
or Shares of Common Stock issuable upon exercise of the Warrants have been
included in the Registration Statement of which this Prospectus is a part.
In two separate private transactions, Lancer Partners L.P. and Lancer
Offshore, Inc., two of the three investors who purchased the above referenced
550,020 Units in December, 1996, purchased an aggregate of 500,000 shares of
the Company's Common Stock from J.L.B. Equities, Inc. ("JLB Equities"), a
shareholder of the Company, and they purchased 200,000 Class B Warrants and
200,000 Class C Warrants from Trinity. In March, 1997, these two investors
exercised the 200,000 Class B and 200,000 Class C Warrants which they had
acquired from Trinity, for a total aggregate exercise price of $600,000.00.
The Company agreed to register the 500,000 shares purchased from JLB Equities
and they are included in the Registration Statement; and the 400,000 shares of
Common Stock issued upon the exercise of the Class B and Class C Warrants were
already included in the Registration Statement and accordingly, both may be
sold pursuant to the Prospectus. See "Selling Security Holders."
On July 19, September 14, October 12, 1995 and February 26, 1996, the
Company and the Chairman of the Board entered into agreements with Trinity 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, and were due in nine
months from the date of issuance, including accrued interest. The $40,000 and
$75,000 loans have an interest rate of 10% and are due within 90 days and nine
months, respectively, from the date of issuance including accrued interest.
Trinity and the Company 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, if prior to September 30, 1997. As additional consideration
for the $100,000 loan, the Company agreed to issue an aggregate of 49,998
shares of restricted Common Stock to the President of Trinity's three sons.
Further, the agreements give Trinity the option to convert said loans into
550,000 shares of Common Stock.
On February 5, 1996, the Company borrowed from Trinity an additional
$50,000 from Trinity which was due on demand. This loan has an interest rate
of 10% and was repaid during April, 1996.
On November 16, 1995, the Company entered into a letter agreement with
SRS Partners, a partnership affiliated with Trinity to borrow $25,000. The
loan had an interest rate of 9%, and was due within nine months.
On September 13, 1996, the Company borrowed $50,000 from Trinity, which
is payable from any future private placement proceeds. Said loan bears
interest at 9.5% per annum. Further, the loan agreement gives Trinity 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) 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
Warrants expire on August 31, 1998.
Subsequent to year end, the above loans between TAC, SRS Partners and
the Company were extended to December 31, 1998 with a revised interest rate of
5% per annum. Accordingly, as of June 30, 1997, such loans have been
reclassified as long term.
As of December 31, 1996 Dr. Itil was the personal guarantor of bank
loans to the Company in the amount of approximately $18,500. The Company has
agreed to indemnify Dr. Itil should he be called upon for payment pursuant to
such guarantee. As of June 30, 1997 said loan has been paid in full.
In October and November 1995, Dr. Itil loaned the Company an aggregate
of $65,000 with interest payable at 10%. $25,000 was repaid in January 1996,
$20,000 was repaid in February 1996, and interest was waived. The $20,000
balance of the loan is convertible into 40,000 shares of the Company's Common
Stock.
In December 1995 the Company sold an aggregate of 1,000,000 shares of
Common Stock to four investors for $250,000 (the "December 1995 Private
Placement"). As a condition of this private placement Dr. Itil and his wife
each contributed 200,000 shares of the Company's Common Stock owned by them to
the treasury of the Company for cancellation.
In March 1996, the Company sold 333,333 shares of Common Stock to Anker
Bank, Zurich, Switzerland, for $133,333 and in April the Company sold 333,333
shares of Common Stock to Avi Herson, for $133,333 and 333,334 shares of
Common Stock to Georges Hauchecorne for $133,334. All of these sales were made
to foreign investors. Subsequently, these shareholders each sold 300,000 of
their shares respectively to Four Acres Limited, Jersey, Channel Islands;
Meadowbrook Investments, Ltd., Nevis, West Indies; and JLB Equities, Elmsford,
New York. Subsequently, JLB Equities, which had purchased 250,000 shares of
the Company's Common Stock in a December 1995 Private Placement and purchased
300,000 additional shares from the above referenced foreign investors sold an
aggregate of 500,000 of its 550,000 of the 550,000 shares which it owned to
Lancer Partners, L.P. and Lancer Offshore, Inc. The Company agreed to include
all of the 900,000 shares sold by, as well as the aggregate of 100,000 shares
retained by, Anker Bank, Risco Investment Trust and Mr. Hauchecorne, in the
Registration Statement of which this Prospectus is a part. Accordingly, all of
the foregoing shares, to wit, 900,000 shares sold by the foreign investors,
100,000 shares retained by the foreign investors, 500,000 shares sold to
Lancer Partners L.P. and Lancer Offshore, Inc., by JLB Equities and the 50,000
shares still owned by JLB Equities (an aggregate of 1,550,000 shares) may be
sold at such time as the Registration Statement becomes effective.
In June 1996, the Company borrowed $200,000 from Elvena, Inc., a
shareholder of the Company. 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, whichever comes first.
As additional consideration the Company issued 66,666 shares of restricted
common stock to Elvena, Inc. In July 1996, Elvena loaned the Company an
additional $100,000 in a non-interest-bearing loan. Both of the foregoing
loans from Elvena, originally for periods of twelve months, have been extended
to the earlier of the date the Class B and C Warrants are exercised in their
entirety, or December 15, 1998.
In July 1996, JLB Equities, a shareholder, loaned the Company $100,000.
This loan bore interest at 9% per year, was payable monthly, and was repaid in
full in April 1997.
On August 14, 1996, Dr. Itil and his wife Eleanore Itil, each
contributed 12,500 shares of the Company's Common Stock owned by them to the
National Ethnic Albanian-American Foundation, Inc. ("Foundation"), a nonprofit
corporation organized exclusively to receive and administer funds for
religious, charitable, scientific, literacy and educational purposes. Joseph
J. DioGuardi, a director of the Company is a director and President of the
foundation.
In December 1996 the Company sold an aggregate of 550,020 Units for an
aggregate of $2,000,000 ($3.63 per Unit) to three investors in a private
placement as follows: Lancer Partners, L.P. 269,775 shares; Lancer Offshore,
Inc. 275,749 shares; and Michael Lauer, general partner of Lancer Partners,
L.P. 4,496 shares. Each Unit consists of one share of Common Stock and two
Warrants, each of which entitles the holder to purchase one additional share
of Common Stock. The 1,100,000 Warrants included in the Units are exercisable
at $4.00 per share until December 31, 1997 and at $6.00 per share thereafter
and until December 31, 1998, the expiration date of the Warrants. The
purchasers of the Units have not been granted registration rights with respect
to the Units and none of the Shares of Common Stock or Warrants comprising the
Units or Shares of Common Stock issuable upon exercise of the Warrants have
been included in the Registration Statement.
In December, 1996, Lancer Partners, L.P. and Lancer Offshore, Inc.
acquired an aggregate of 200,000 Class B and 200,000 Class C Warrants from
Trinity. In March, 1997, these Warrants were exercised and Lancer Partners,
L.P. and Lancer Offshore, Inc. were issued 400,000 shares of the Company's
Common Stock for which they paid an aggregate of $600,000. These shares, as
well as the remaining 1,200,000 shares underlying the Class B and Class C
Warrants are included in the Registration Statement.
SERVICES PROVIDED BY AFFILIATES
HZI subcontracts material amounts of its patient testing performed in
connection with servicing contracts to NYI, a not for profit medical research
entity. Richard Katz, a director of the Company is President and Dr. Itil, the
Company's Chairman is honorary Chairman of NYI. Expenses incurred with such
contractor for the years ending December 31, 1996 and 1995, respectively, were
$-0- and $40,715, respectively. Net payables to this contractor amounted to
$-0- and $37,583 at December 31, 1996 and 1995, respectively.
During 1994, HZI and Manhattan Westchester Medical Services, P.C.
("Manhattan Westchester") entered into an arrangement whereby Manhattan
Westchester would provide medical consulting services to HZI's Tele-Map(R)
business. This arrangement was suspended during 1995 and reactivated during
1996. Services provided by Manhattan Westchester to HZI for the years ended
December 31, 1996 and 1995 amounted to approximately $14,000 and $15,400
respectively. No services were provided during the three months ended June 30,
1997. Manhattan Westchester is a professional corporation of which Dr. Turan
M. Itil, Chairman of the Company owns the majority of shares outstanding.
REVENUES FROM AFFILIATES
The Company charges NYI, as well as Manhattan Westchester for the use of
certain employees and office and laboratory (administration services) of the
Company. Net revenues from these affiliates for the years ended December 31,
1996 and 1995 and the six months ended June 30, 1997 and 1996, amounted to
$65,782, $186,123, $23,708 and $24,361 respectively.
Stockholders Notes and Loans:
DECEMBER 31, 1996 JUNE 30, 1997
Notes Payable bearing an interest
of 5% to 9% * $550,000 $450,000
Non interest bearing loans and
payables(i) 108,687 106,680
Non interest bearing loan payable 200,000 200,000
-------- --------
$858,687 $756,680
======== ========
* Stockholder notes and loans payable relates to advances made to HZI by its
Chairman of the Board which are due on demand. Furthermore, pursuant to
the terms of the note dated January 30, 1996 which amounted to $20,000,
said note can be converted into 40,000 shares of Common Stock.
SELLING SECURITY HOLDERS
An aggregate of up to 2,191,667 shares of Common Stock and 1,200,000
Warrants may be offered by the Selling Security Holders consisting of (i)
566,667 shares issued in Private Placements and other exempt transactions;
(ii) 1,200,000 shares issuable upon the exercise of 600,000 Class B Warrants
and 600,000 Class C Warrants, both currently outstanding, (iii) 25,000 shares
being offered by a charitable foundation, and (iv) 400,000 shares issued upon
the exercise of 200,000 Class B and 200,000 Class C Warrants in an exempt
transaction. The following table sets forth certain information with respect
to persons or entities for whom the Company is registering for resale to the
public, shares of the Company's Common Stock and Class B and Class C Warrants
issued in November 1994. The table reflects such persons ownership as of
September 30, 1996. The exercise price of the Class B Warrants is $1.00 per
share and the exercise price of the Class B Warrants is $2.00 per share. The
Warrants expire on December 31, 1997. The Company would receive $1.00 and
$2.00 per share, respectively if and when the Class B and Class C Warrants are
exercised, but the Company will not receive any additional funds from the sale
of any Class B or Class C Warrants or the sale of any shares issuable upon the
exercise of such Warrants. See "Use of Proceeds". None of the Selling Security
Holders has, or has had within the past three years any position, office or
other material relationship with the Company or any of its predecessors or
affiliates, except as noted.
Amounts and
Nature of Number to Percent
Name of Selling Beneficial Number to be Owned of Class
Stockholder Ownership2 Be Offered After Sale After Sale
National Ethnic Albanian
American Foundation 25,0001 25,000 -0- -0-
Lancer Partners, L.P. 2,550,0601,4,14 700,000 1,650,00014 18.2%14
Lancer Offshore, Inc. 2,550,0601,5,`14 200,000 1,650,00014 18.2%14
Georges Hauchecorne 33,3339 33,333 -0- -0-
Anker Bank 33,3331,6 33,333 -0- -0-
Risco Investment Trust 33,3336 33,333 -0- -0-
Bear Stearns10 6,0007 6,000 -0- -0-
6,0008 6,000 -0- -0-
Herzog Heine Geduld Inc.10 4,0007 4,000 -0- -0-
4,0008 4,000 -0- -0-
Prudential Securities10 1,2007 1,200 -0- -0-
1,2008 1,200 -0- -0-
J. Streicher & Co.10 19,6007 19,600 -0- -0-
19,6008 19,600 -0- -0-
Karen Adeleman 8007 800 -0- -0-
8008 800 -0- -0-
Robert S. Adelman 1,2007 1,200 -0- -0-
1,2008 1,200 -0- -0-
Monroe Arndt 14,0687 14,068 -0- -0-
14,0688 14,068 -0- -0-
Morris Ashhkenazy 2,0007 2,000 -0- -0-
2,0008 2,000 -0- -0-
Joel Batchker 14,0667 14,066 -0- -0-
14,0668 14,066 -0- -0-
Kenneth Berwitz 1,6007 1,600 -0- -0-
1,6008 1,600 -0- -0-
Amounts and
Nature of Number to Percent
Name of Selling Beneficial Number to be Owned of Class
Stockholder Ownership2 Be Offered After Sale After Sale
Richard Breyley 8,0007 8,000 -0- -0-
8,0008 8,000 -0- -0-
Duncan H. Cameron II 1,2007 1,200 -0- -0-
1,2008 1,200 -0- -0-
Elaine Charney 1,2007 1,200 -0- -0-
1,2008 1,200 -0- -0-
Sharon Fingerhut 1,2007 1,200 -0- -0-
1,2008 1,200 -0- -0-
Ira Pinkler 2,0007 2,000 -0- -0-
2,0008 2,000 -0- -0-
Jersey Transfer &
Trust Co. 1114,0667 14,066 -0- -0-
14,0668 14,066 -0- -0-
Stanley Gross 2,0007 2,000 -0- -0-
2,0008 2,000 -0- -0-
Kahila Kedeshia
Parkofski 6,8007 6,800 -0- -0-
6,8008 6,800 -0- -0-
Salene Myeroff 2,4007 2,400 -0- -0-
2,4008 2,400 -0- -0-
Rod Nenner 1,8007 1,800 -0- -0-
1,8008 1,800 -0- -0-
Jack Ornstein 1,2007 1,200 -0- -0-
1,2008 1,200 -0- -0-
Frank E. Perkiel 4,0007 4,000 -0- -0-
4,0008 4,000 -0- -0-
Morris Pinkowitz 8007 800 -0- -0-
8008 800 -0- -0-
Carolyn Protz 4007 400 -0- -0-
4008 400 -0- -0-
Michael Rakusin 2,2007 2,200 -0- -0-
2,2008 2,200 -0- -0-
Arthur Rogow 2,0007 2,000 -0- -0-
2,0008 2,000 -0- -0-
Howard Rosen 8007 800 -0- -0-
8008 800 -0- -0-
Hilda Rosenfeld 6,0007 6,000 -0- -0-
6,0008 6,000 -0- -0-
Jessie Sklarin 1,6007 1,600 -0- -0-
1,6008 1,600 -0- -0-
Robin Sklarin 4007 400 -0- -0-
4008 400 -0- -0-
Donna Sobel 2,0007 2,000 -0- -0-
2,0008 2,000 -0- -0-
Benjamin Sprecher, Esq. 19,2007 19,200 -0- -0-
19,2008 19,200 -0- -0-
Robert Thierer 3,2007 3,200 -0- -0-
3,2008 3,200 -0- -0-
Trinity American
Corporation12 2,550,0601 -0- 1,848,060 20.8%
15
451,0007 451,0007 1,848,060
- -0-9 251,0008 25`1,0008
-0-9
- -----------------
* Represents less than one percent.
1 Represents number of shares of the Company's Common Stock beneficially
owned by such persons.
2 All Warrants are currently exercisable and "Percent of Class" treats as
outstanding the shares issuable upon the exercise of the Warrants.
4 400,000 of these shares were purchased from JLB Equities and 300,000
shares were acquired from the Company upon the exercise of 150,000 Class
B Warrants at $1.00 per share and 150,000 Class C Warrants at $2.00 per
share. The Class B and Class C Warrants were acquired from Trinity in
December, 1996.
5 100,000 of these shares were purchased from JLB Equities and 100,000
shares were acquired from the Company upon the exercise of 50,000 Class
B Warrants at $1.00 per share and 50,000 Class C Warrants at $2.00 per
share. The Class B and Class C Warrants were acquired from Trinity in
December, 1996. Lancer Partners, L.P. and Lancer Offshore, Inc. are
respectively a domestic hedge fund and an offshore fund. Both are
managed by Lancer Management Group LLC, of which Michael Lauer is the
Managerial Director.
6 In March 1996 the Company sold 333,333 shares of Common Stock to Anker
Bank, for $133,333 and in April the Company sold 333,333 shares to Risco
Investment Trust, for $133,333 and 333,334 shares to Georges Hauchecorne
for $133,334. All of the sales were made to foreign investors.
Subsequently, these shareholders each sold 300,000 of their shares in
private transactions. Subsequently, JLB Equities, which had purchased
250,000 shares of the Company's Common Stock in a December 1995 private
placement, purchased 300,000 additional shares from the above referenced
foreign investors. Thereafter, JLB Equities sold an aggregate of 500,000
of its 550,000 shares to Lancer Partners, L.P. and Lancer Offshore, Inc.
100,000 shares retained by Anker Bank, Risco Investment Trust and Mr.
Hauchecorne are included in this Registration Statement. Anker Bank is a
Swiss Banking Corporation, located in Zurich, Switzerland. Avi Herson is
the beneficial owner of Risco Investment Trust.
7 Represents both the number of Class B Warrants owned and number of
shares to be issued upon exercise of Warrants
8 Represents both the number of Class C Warrants owned and the number of
shares to be issued upon exercise of Warrants.
9 Represents percentage of Class B and Class C Warrants owned.
10 These entities are brokerage firms and the beneficial owners of the
Class B and Class C Warrants are customers of such firms.
11 J. Manger and H. Manger, the principals of Jersey Transfer and Trust
Co. are jointly the beneficial owners of 5,733 Class B and Class C
Warrants and Trinity American Corporation is the owner of the balance
of 8,333 Class B and Class C Warrants.
12 Abraham Salaman is the beneficial owner of Trinity.
13 Mr. Raven is Executive Vice President and a Director of the Company.
14 For purposes of this figure, Lancer Partners and Lancer Offshore have
been aggregated.
15 Represents percentage of shares of the Company's Common Stock
beneficially owned by such person.
PLAN OF DISTRIBUTION
The Selling Security Holders may sell the Shares and Warrants being
offered hereby: (i) through dealers or in ordinary broker transactions, in the
over-the-counter market or otherwise, (ii) "at the market" to or through
marketmakers or into an existing market for the Securities, (iii) in other
ways not involving marketmakers or established trading markets, including
direct sales to purchasers or effected through agents, or (iv) in combinations
of any such methods of sale. Sales may be made at fixed prices which may be
changed, at market prices prevailing at the time of sale or at negotiated
prices.
If a dealer is utilized in the sale of the Securities in respect of
which the Prospectus is delivered, the Selling Security Holders will sell such
Securities to the dealer, as principal. The dealer may then resell such
Securities to the public at varying prices to be determined by such dealer at
the time of resale.
Sales of Securities "at the market" and not at a fixed price, which are
made into an existing market for the Securities, will be made by the Selling
Security Holders to or through a marketmaker, acting as principal or as agent.
Other sales may be made, directly or through an agent, to purchasers outside
existing trading markets.
A selling broker may act as agent or may acquire the Securities or
interests therein as principal or pledgee and may, from time to time, effect
distributions of such Securities or interests.
The Selling Security Holders and broker-dealers, if any, acting in
connection with the sale of the Securities might be deemed to be
"underwriters" within the meaning of Section 2(11) of the Securities Act and
any commission received by them and any profit on the resale of the Securities
might be deemed to be underwriting discounts and commissions under the
Securities Act.
The Securities offered hereby are eligible for sale only in certain
states, and in some of those states may be offered or sold only to
"institutional investors" as defined under applicable state securities law.
No sales or distributions other than as described herein may be effected
until after this prospectus shall have been appropriately amended or
supplemented.
DESCRIPTION OF SECURITIES
The Company's Certificate of Incorporation and By-Laws authorizes
100,000,000 shares of Common Stock, par value $.001 per share of which
8,173,806 shares were issued and outstanding as at June 30, 1997.
COMMON STOCK
The holders of shares of Common Stock of the Company are entitled to one
vote per share for each share held by them and do not have cumulative voting
rights. Holders of record of shares of Common Stock are entitled to receive
dividends when and if declared by the board of directors out of legally
available funds. Upon any liquidation, dissolution or winding up of the
Company, holders of shares of Common Stock are entitled to share pro rata in
any distribution to the shareholders. There are no pre-emptive or conversion
rights and no provisions for redemption, purchase for cancellation, surrender
or sinking or purchase funds. All of the outstanding shares of Common Stock of
the Company are fully paid and non-assessable and duly authorized.
PREFERRED STOCK
Of the 400,000 shares of issued and outstanding Preferred Stock, 150,000
shares are designated Class B Series 1 and 250,000 shares are designated Class
B Series 2. All of the Preferred Stock is owned by Trinity.
The 150,000 shares of Class B Series 1, no par value, have a liquidation
preference of $1 per share and are not convertible into any other class of
stock. Cumulative 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 Common Stock of the Company based on the average closing bid price of the
Common Stock for 30 consecutive days prior to the date the dividend becomes
payable. Further, the Company may redeem such shares at any time for $3 per
share.
The 250,000 shares of Class B Series 2, no par value, are convertible
into shares of Common Stock. Between January 1, through June 30, 1996 one (1)
share of Class B, Series 2 can be converted into two (2) shares of Common
Stock. After June 30, 1996 the conversion rate is reduced to five (5) shares
of Class B, Series 2 Preferred Stock into (1) one share of Common Stock. 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. The Company acts as its own transfer agent with
respect to Class B Series 1 and Class B, Series 2 Preferred Stock.
The remaining 4,600,000 shares of authorized but unissued shares of
Preferred Stock are available for issuance for financing or other corporate
purposes in the future. The Preferred Stock may be issued in series from time
to time with such designation, rights, preferences and limitations as the
Board of Directors of the Company may determine. The rights, preferences and
limitations of separate series of Preferred Stock may differ with respect to
such matters as may be determined by the Board of Directors, including,
without limitation, the rate of dividends, method and nature of payment of
dividends, terms of redemption, amounts payable on liquidation, sinking fund
provisions (if any), conversion rights (if any) and voting rights. The
potential exists, therefore, that preferred stock might be issued which would
grant dividend preferences and liquidation preferences to persons who become
preferred shareholders. See "Risk Factors" and "Certain Relationships and
Related Transactions".
WARRANTS
In connection with the acquisition of HZI the Company's 800,000 Class C
Warrants to all public stockholders of the Company of record as of November 1,
1994. The Warrants were distributed on the basis of 1 Warrant for 1 share of
Common Stock owned, each of which is exercisable for one share of Common Stock
of the Company. The Class B Warrants were originally exercisable at $2.25 per
share and the Class C Warrants were originally exercisable at $2.75 per share
until June 30, 1996. In January 1996 the Company reduced the exercise price of
the Class B Warrant to $1.00 per share and the exercise price of the Class C
Warrant to $2.00 per share and extended the exercise date until June 30, 1997.
In March, 1997 200,000 Class B and 200,000 Class C Warrants were exercised in
an exempt transaction. Accordingly, 600,000 Class B and 600,000 Class C
Warrants are presently outstanding. The shares of Common Stock underlying the
Warrants must be registered with the Commission prior to the Warrants becoming
exercisable. The number of shares underlying the Warrants, and the exercise
price of the Warrants, may be adjusted upward or downward at any time in the
sole discretion of the Company's Board of Directors. The Warrants are
redeemable by the Company at any time upon thirty (30) days written notice, at
a price of $.001 per Warrant. On April 28, 1997 the exercise date of the Class
B and Class C Warrants was extended until December 31, 1997.
REPORTS TO SECURITY HOLDERS
The Company intends to furnish annual reports to its security holders
containing audited financial statements but does not intend to furnish interim
quarterly reports to its security holders. Upon request, the Company will
furnish copies of its Quarterly Reports filed on Form 10-Q-SB filed with the
Commission.
ELIMINATION OF MONETARY LIABILITY FOR OFFICERS AND DIRECTORS
The Company's Amended Certificate of Incorporation also incorporates
certain provisions permitted under the General Corporation law of Nevada
relating to the liability of Directors. The provisions eliminate a Director's
liability for monetary damages for a breach of fiduciary duty including gross
negligence, except in circumstances involving certain wrongful acts, such as
breach of a Director's duty of loyalty or acts or omissions which involve
intentional misconduct or a knowing violation of law. These provisions do not
eliminate a Director's duty of care nor do they prevent recourse against
Directors through equitable remedies such as injunctive relief. Moreover, the
provisions do not apply to claims against a Director for violations of certain
laws including federal securities laws.
INDEMNIFICATION OF OFFICERS AND DIRECTORS
As permitted by Section 78.751 of the Nevada General Corporation Law,
the Company shall, to the fullest extent permitted by the Nevada General
Corporation Law, as the same shall be added and supplemented, indemnify any
and all persons whom it shall have power to indemnify under said Section from
and against any and all of the expenses, liabilities or other matters referred
to in or covered by said Section, and the indemnification provided for therein
shall not be deemed exclusive of any other right to which any persons may be
entitled under any By-Law, resolution of shareholders, resolution of
directors, agreement or otherwise, as permitted by said articles, as to action
in any capacity in which he or she served at the request of the Company. These
provisions may have the practical effect in certain cases of eliminating the
ability of shareholders to collect monetary damages from Directors. The
Company believes that these provisions will assist the Company in attracting
or retaining qualified individuals to serve as Directors. Insofar as
indemnification for liabilities under the Securities Act may be permitted
pursuant to the above-described provisions or otherwise to directors, officers
and controlling persons of the Company, the Company has been advised that, in
the opinion of the Commission, such indemnification is against public policy
expressed in the Securities Act and is therefore unenforceable.
TRANSFER AGENT
The transfer agent for the Common Stock is Jersey Stock Transfer and
Trust Company, Vernon, New Jersey.
SHARES ELIGIBLE FOR FUTURE SALE
In addition to the 1,991,667 shares covered by this Prospectus, an
aggregate of 750,000 shares issuable upon the exercise of certain employees
and directors stock options at prices ranging from $0.10 to $7.00 per share
and an aggregate of approximately 4,707,987 shares of Common Stock issued in
private placements, an aggregate of 627,500 shares issuable upon conversion of
loans, an aggregate of 50,000 shares issuable upon conversion of Preferred
Stock, an aggregate of 1,100,060 shares issuable upon exercise of Warrants
issued in December 1996 and an aggregate of 200,000 shares issuable upon
exercise of Class C Warrants not included in this Registration Statement are
"restricted securities", as that term is defined under Rule 144 promulgated
under the Securities Act. In addition, 4,825,000 shares held by management and
the directors may be "control securities", as that term is defined under Rule
144. In general, under Rule 144 as currently in effect, subject to the
satisfaction of certain other conditions of Rule 144, a person, including an
affiliate of the Company (or persons whose share are aggregated), who has
owned restricted securities of the Company beneficially for at least one year
is entitled to sell, within any three-month period, a number of shares that
does not exceed the greater of 1% of the total number of outstanding shares of
the same class or, if the Common Stock is quoted on NASDAQ, the average weekly
trading volume during the four calendar weeks preceding the sale. A person who
has not been an affiliate of the Company for at least the three months
immediately preceding the sale and who has beneficially owned restricted
shares of Common Stock for at least two years is entitled to sell such shares
under Rule 144 without regard to any of the limitations described above. As
noted above 1,991,667 shares are included in this Prospectus on behalf of
certain stockholders having certain registration rights pursuant to which
their securities may be publicly sold without regard to the limitations set
forth in Rule 144. See "Selling Security Holders".
LEGAL PROCEEDINGS
There are no pending legal proceedings other than ordinary routine
litigation incidental to the Company's business.
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon by
James Morris Vernon, Esq., 760 Mays Boulevard, Incline Village, Nevada.
Certain legal matters with respect to the offering will be passed upon for the
Company by Opton Handler Feiler and Landau, LLP, 52 Vanderbilt Avenue, New
York, NY 10017.
EXPERTS
The consolidated financial statements for the years ended as of December
31, 1996 and 1995 included in the Registration Statement, of which this
Prospectus is a part, have been so included in reliance on the report of
Scarano & Lipton, P.C., independent accountants, given on the authority of
said firm as experts in auditing and accounting.
In July 1997, Scarano & Tamaro, P.C. was formed and considered a
successor firm for auditing purposes, which firm has executed the report
referenced above and the consent annexed hereto.
NEUROCORP, LTD. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
AND
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED)
(AMENDMENT #4)
NEUROCORP, LTD. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
number
------
Independent auditors' report F-1
Consolidated balance sheets at June 30, 1997
(unaudited) and December 31, 1996 F-2
Consolidated statements of operations for the
six months ended June 30, 1997 and 1996 (unaudited) and
for the years ended December 31, 1996 and 1995 F-3
Consolidated statements of stockholders' equity for the
six months ended June 30, 1997 (unaudited) and for the
years ended December 31, 1996 and 1995 F-4 - F-5
Consolidated statements of cash flows for the six months
ended June 30, 1997 and 1996 (unaudited) and for the
years ended December 31, 1996 and 1995 F-6 - F-7
Notes to consolidated financial statements F-8 - F-28
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
NeuroCorp, Ltd. and Subsidiaries
We have audited the accompanying consolidated balance sheet of NeuroCorp,
Ltd. and Subsidiaries (the "Company") as of December 31, 1996 and the
related consolidated statements of operations, stockholders' equity, and
cash flows for the years ended December 31, 1996 and 1995. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, based on our audits, the consolidated financial
statements referred to above present fairly, in all material respects,
the consolidated financial position of the Company as of December 31,
1996, and the results of its operations and cash flows for the years
ended December 31, 1996 and 1995 in conformity with generally accepted
accounting principles.
Scarano & Tomaro, P.C.
Syosset, New York
March 8, 1997, except for Note 10f as to
which the date is March 12, 1997 and
Note 10h as to which the date is March 26, 1997
NEUROCORP, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
(Unaudited)
June 30, 1997 December 31, 1996
------------- -----------------
<S> <C> <C>
Current assets:
Cash $ 1,150,034 $ 1,851,114
Accounts receivable, net of allowance for
doubtful accounts of $468,000 at December 31, 1996 519,993 550,163
Inventory 22,594 29,356
Prepaid expenses and taxes 87,215 36,982
Deferred financing costs -- 53,516
Other current assets 132,261 84,445
---------- ----------
Total current assets 1,912,097 2,605,576
---------- ----------
Equipment and fixtures, net 126,125 83,549
---------- ----------
Other assets:
Database development costs, net 1,265,886 1,264,018
Computer system product development costs, net 434,204 496,518
Deferred registration costs 114,035 --
Other 220,549 130,703
---------- ----------
Total other assets 2,034,674 1,891,239
---------- ----------
Total assets $ 4,072,896 $ 4,580,364
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 72,055 $ 166,232
Accrued expenses 182,015 176,503
Stockholder notes and loans payable 106,680 858,687
Income taxes payable 2,016 6,400
Current portion of long-term debt -- 38,715
Billings in excess of costs and estimated earnings
on uncompleted contracts 84,454 276,426
----------- -----------
Total current liabilities 447,220 1,522,963
----------- -----------
Long-term liabilities:
Stockholder notes and loans payable 650,000 --
Long-term debt -- 15,502
Deferred income taxes 264,000 264,000
----------- -----------
Total liabilities 1,361,220 1,802,465
----------- -----------
Commitments and contingencies (Note 11) -- --
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 $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 8,173,806 and 7,723,806 issued and
outstanding, respectively 47,374 46,924
Less: discount on common stock (28,500) (28,500)
Additional paid-in capital 3,847,037 3,246,987
Contributed capital 100,000 100,000
Accumulated deficit (1,654,235) (987,512)
----------- -----------
Total stockholders' equity 2,711,896 2,777,899
----------- -----------
Total liabilities and stockholders' equity $ 4,072,896 $ 4,580,364
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements .
NEUROCORP, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(Unaudited)
For the Six Months For the Years Ended
ended June 30, December 31,
1997 1996 1996 1995
----------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
Net sales $ 587,000 $ 791,122 $ 1,068,891 $ 1,543,363
Cost of sales, including amortization expense
of $135,805 and $128,800 for the six months ended
June 30, 1997 and 1996, respectively and
$264,790 and $179,308 for the years ended December
31, 1996 and 1995, respectively 293,063 382,894 706,579 637,746
----------- ----------- ----------- -----------
Gross profit 293,937 408,228 362,312 905,617
Expenses:
General and administrative expenses 844,765 521,650 1,249,022 1,013,233
Research and development 52,128 45,184 98,018 181,512
Bad debt expense -- -- 440,000 --
----------- ----------- ----------- -----------
Total expenses 896,893 566,834 1,787,040 1,194,745
----------- ----------- ----------- -----------
Loss from operations before other income (expense)
and income tax benefit (602,956) (158,606) (1,424,728) (289,128)
Other income (expense):
Cumulative effect of change of accounting estimate -- (125,745) (125,745) --
Interest income 21,708 5,940 10,302 11,760
Interest expense (77,975) (34,656) (126,793) (45,986)
Gain on sale of asset -- -- -- 31,280
----------- ----------- ----------- -----------
Loss before income tax benefit (659,223) (313,067) (1,666,964) (292,074)
Income tax (expense) benefit -- -- 32,289 29,580
----------- ----------- ----------- -----------
Net loss $ (659,223) $ (313,067) $(1,634,675) $ (262,494)
=========== =========== =========== ===========
Net loss applicable to common shares $ (666,723) $ (320,567) $(1,649,675) $ (262,494)
=========== =========== =========== ===========
Loss per common equivalent share:
Primary:
Loss before income tax benefit $ (.08) $ (.05) $ (.24) $ (.06)
Income tax (expense) benefit -- -- .01 .01
----------- ----------- ----------- -----------
Net loss $ (.08) $ (.05) $ (.23) $ (.05)
=========== =========== =========== ===========
Net loss applicable to common shares $ (.08) $ (.05) $ (.24) $ (.05)
=========== =========== =========== ===========
Weighted average number of shares outstanding 8,015,486 6,784,920 7,002,279 5,484,586
=========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
NEUROCORP, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
Retained
Addi- Earnings Total
Preferred Stock Class B tional Contri- (Accumu- Stock-
Series 1 Series 2 Common Stock Paid-in buted lated holders'
Shares Amount Shares Amount Shares Amount Capital Capital Deficit) Equity
------ ------ ------ ------ ------ ------ ------- ------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at
December 31, 1994 150,000 $150,000 250,000 $250,000 5,400,000 $16,100 262,123 -- $924,657 $1,602,880
Sale of common stock -- -- -- -- 57,143 57 99,943 -- -- 100,000
Issuance of common
stock in connection
with loan -- -- -- -- 49,998 50 14,011 -- -- 14,061
Cancellation of common
stock contributed by
shareholder -- -- -- -- (400,000) (400) (99,600) 100,000 -- --
Sale of common stock -- -- -- -- 1,000,000 1,000 249,000 -- -- 250,000
Issuance of stock option
in consideration for
compensation and
consulting fees -- -- -- -- -- -- 66,875 -- -- 66,875
Capital contribution in
connection with waived
Chairman's compensation -- -- -- -- -- -- 146,347 -- -- 146,347
Net loss for the year
ended December 31, 1995 -- -- -- -- -- -- -- -- (262,494) (262,494)
------- -------- ------- -------- --------- -------- ------- ------- ---------- --------
Balances 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
</TABLE>
See accompanying notes to consolidated financial statements
NEUROCORP, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 AND FOR
THE SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
Retained
Addi- Earnings Total
Preferred Stock Class B tional Contri- (Accumu- Stock-
Series 1 Series 2 Common Stock Paid-in buted lated holders'
Shares Amount Shares Amount Shares Amount Capital Capital Deficit) Equity
------ ------ ------ ------ ------ ------ ------- ------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances 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
Costs associated with
SB2 registration
statement - -- -- -- -- -- -- (25,046) -- (25,046)
Issuance of 66,666
shares of common
stock in lieu of
financing cost -- -- -- -- 66,665 67 133,266 -- -- 133,333
Accrued preferred
stock dividend -- -- -- -- -- -- -- -- (15,000) (15,000)
Sale of common stock 550,000 550 2,001,068 2,001,618
Net loss for the
year ended
December 31, 1996 -- -- -- -- -- -- -- -- (1,634,675) (1,634,675)
-------- -------- -------- -------- -------- ------- --------- ------- --------- ---------
Balances at
December 31, 1996 150,000 $150,000 250,000 $250,000 7,723,806 $18,424 $3,246,987 $100,000 $(987,512) $2,777,899
Accrued preferred
stock dividend -- -- -- -- -- -- -- -- (7,500) (7,500)
Issuance of common
stock in connection
with exercise
of warrants 400,000 400 599,600 -- -- 600,000
Issuance of common
stock in connection
with exercise
of stock option -- -- -- -- 50,000 50 450 -- -- 500
Net loss for the
six months ended
30, 1997 -- -- -- -- -- -- -- -- --
------- -------- ------- -------- --------- -------- ------- ------- ---------- --------
Balances at
June 30 1997 150,000 150,000 250,000 250,000 6,107,141 16,807 738,699 100,000 662,163 1,917,669
See accompanying notes to consolidated financial statements
</TABLE>
NEUROCORP, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(Unaudited)
For the Years Ended For the Six Months Ended
June 30, December 31,
1997 1996 1996 1995
--------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Cash flows for operating activities:
Net loss from operations $ (659,223) $ (313,067 $(1,634,675) $ (262,494)
Adjustments to reconcile net loss to net cash
provided by (used for) operating activities:
Depreciation and amortization 169,225 143,582 300,630 230,546
Change in allowance for doubtful accounts 53,516 13,152 428,080 7,245
Amortization of deferred financing costs -- 125,745 79,818 --
Cumulative effect of change in accounting estimate -- -- 125,745 --
Compensation in lieu of capital contribution -- -- -- 146,347
Stock options issued in lieu of expenses -- -- -- 80,936
Deferred income taxes -- -- (45,000) 12,000
Interest expense -- -- -- 9,278
Gain on disposal of vehicle -- -- -- (31,280)
Reclassification of net equipment to operations -- -- -- 9,175
Decrease (increase) in:
Accounts receivable 30,170 (447,399) (258,323) (568,798)
Due from affiliates -- -- 85,673 62,527
Inventory 6,762 (4,898) 629 (11,592)
Prepaid expenses and taxes (50,233) 18,204 (66,234) 23,768
Other current assets (47,816) 17,057 -- --
Cost and estimated earnings in excess of billings
on uncompleted contracts -- -- 26,954 121,341
Increase (decrease) in:
Accounts payable (94,177) 69,547 13,767 (55,429)
Accrued expenses (1,988) (28,586) (30,046) 60,087
Income taxes payable (4,384) (6,997) (1,893) (83,573)
Customer deposits -- -- 2,400 1,930
Billings in excess of costs and estimated earnings
on uncompleted contracts (191,972) (31,657) 75,093 (412,666)
----------- ----------- ----------- -----------
Net cash flows used for operating activities (790,120) (445,317) (897,382) (660,652)
----------- ----------- ----------- -----------
Cash flows for investing activities:
Purchase of equipment and fixtures (65,975) (13,458) (36,056) (47,955)
Database development costs capitalized (75,359) (57,703) (91,913) (60,478)
Patent cost capitalized -- (2,150) (2,150) (5,380)
Computer system development costs capitalized -- (2,277) (2,276) (138,635)
Other assets (101,027) -- -- --
Proceeds from sale of automobile 1,660 -- -- --
Proceeds from insurance on vehicle -- -- -- 34,271
----------- ----------- ----------- -----------
Net cash flows used for investing activities (240,701) (75,588) (132,395) (218,177)
----------- ----------- ----------- -----------
Cash flows from financing activities:
Proceeds from long-term debt -- -- -- 30,778
Proceeds from loans -- -- -- 90,334
(Repayments to) proceeds from demand note - line
of credit -- (50,000) (50,000) 50,000
Repayment of stockholders loans (102,007) (137,370) (46,694) (79,000)
Proceeds from stockholders loans -- 365,000 525,000 312,674
Principal payments on long-term debt (54,217) (36,052) (64,506) (71,943)
Offering/registration costs incurred (114,035) (25,046) (25,046) --
Proceeds from exercise of warrants and sale of
common stock 600,000 400,000 2,401,618 350,000
----------- ----------- ----------- -----------
Net cash flows provided by financing activities 329,741 516,532 2,740,372 682,843
----------- ----------- ----------- -----------
Net (decrease) increase in cash (701,080) (4,373) 1,710,595 (195,986)
Cash at beginning of period 1,851,114 140,519 140,519 336,505
----------- ----------- ----------- -----------
Cash at end of period $ 1,150,034 $ 136,146 $ 1,851,114 $ 140,519
=========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
NEUROCORP, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(Unaudited)
For the Six Months For the Years Ended
June 30, December 31,
1997 1996 1996 1995
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Supplemental disclosures of cash
flow information:
Cash paid during the year for:
Interest $ 3,770 $ 8,880 $ 17,197 $ 16,322
========= ======= ======== ========
Income taxes $ -- $ -- $ 12,508 $ 3,508
========= ======= ======== ========
Schedule of non-cash investing and
financing activities:
Issuance of 49,988 shares of common
stock in consideration for loan $ -- $ -- $ -- $ 14,061
========= ======= ======== ========
Issuance of stock options for 250,000
shares of common stock as compensation $ -- $ -- $ -- $ 50,000
========= ======= ======== ========
Issuance of stock options for 50,000
shares of common stock in lieu of
consulting fees $ -- $ -- $ -- $ 16,875
========= ======= ======== ========
Contribution of 400,000 shares of
common stock by shareholder $ -- $ -- $ -- $100,000
========= ======= ======== ========
Capital contribution in connection
with waived Chairman's compensation $ -- $ -- $ -- $146,347
========= ======= ======== ========
Issuance of 66,666 shares of
restricted common stock in
connection with financing costs
associated with a loan $ -- $ -- $133,333 $ --
========= ======= ======== ========
Accrued dividends on Series 1
preferred stock $ 7,500 $ 7,500 $ 15,000 $ --
========= ======= ======== ========
Liquidation of loan in exchange
for automobile $ 22,703 $ -- $ -- $ --
========= ======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
NEUROCORP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Information with respect to the six months ended
June 30, 1997 and 1996 is unaudited
NOTE 1 - ORGANIZATION
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 represent the assets and liabilities of HZI and
it's affiliates and the results of their operations and
cash flows. 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 is primarily involved in two businesses: it
performs contract medical research services for health
agencies, research organizations and pharmaceutical
companies, and it owns, operates or manages a group of
facilities that diagnose and treat memory disorders. In
addition, as an outgrowth of its research activities, the
Company also designs diagnostic testing software and
equipment for neuropsychiatric applications and the
Company performs neurological testing services for
hospitals and physicians. The Company conducts these
activities through two wholly-owned subsidiaries. In
November 1994, the Company acquired all of the issued and
outstanding shares of HZI Research Center, Inc., a New
York corporation ("HZI"). HZI conducts contract research,
designs diagnostic software and equipment and performs
neurological testing services. In March 1996, the Company
established Memory Centers(TM) of America, Inc., a
Delaware corporation ("MCAI"). MCAI owns and operates a
network of pilot facilities, Memory Centers(TM), that
treat memory disorders. MCAI began full operations of the
pilot program at the end of the second quarter of 1996.
Each facility is estimated to cost between $150,000 to
$200,000 for equipment, leasehold improvements and working
capital which includes administration costs. Revenues from
this wholly owned subsidiary are considered insignificant
for the three and six months ended June 30, 1997.
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. See Note 11(b) for additional information.
During the second quarter of 1997, the Company created a
new division within Neuro Corp. Ltd., called Tele-Neuro
Pyschiatry ("TNP"). The TNP division will be responsible
for marketing Tele-Neuro Psychiatric systems which are
based on the Company's proprietary software and hardware
equipment. The TNP system will provide data communication
with off-site experts. Furthermore, the Company believes
the new TNP system will be useful for enhancing quality
controls in research programs. The Company is currently
utilizing TNP systems at two MCAI pilot centers.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) Basis of presentation
The consolidated financial statements include the accounts
of the Company and its wholly-owned subsidiaries, HZI,
MCAI and TeleMap. The consolidated financial statements
also include the accounts of New York Institute for
Medical Research, Inc. ("NYI"). NYI is a not-for profit
entity, and as such, no direct ownership interest exists
by the Company. The Company has elected to consolidate NYI
in its financial statements since shareholders and
officers of the Company also are the controlling members
of the board of NYI. All significant intercompany
transactions have been eliminated in consolidation.
b) Basis of presentation - Six months ended June 30, 1997 and
1996
The unaudited interim financial statements for the six
months ended June 30, 1997 and 1996 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 six
months ended are not necessarily indicative of the results
for the full year.
c) Inventory
Inventory, which consists solely of finished goods, is
stated at the lower of cost (first-in, first-out method)
or market.
d) Equipment and fixtures
Equipment and fixtures are recorded at cost. Depreciation
is provided using the double- declining balance method
over the estimated useful lives (5-7 years) of the related
assets.
e) Database development costs
Database development costs consist of direct labor costs
associated with the accumulation of results of previously
tested drugs and converting such results into a readable
format. These costs are being amortized on a straight-line
method over the estimated useful life of seventeen (17)
years.
f) Computer system product development costs
Computer system product development costs consist
primarily of direct labor costs associated in developing
the Company's product. Such costs are capitalized from the
time the product is determined to be technologically
feasible to the time the product is available for general
release to customers. All costs prior to the establishment
of technological feasibility, such as the costs of
planning, designing and testing the computer system
product, are charged to research and development expense.
The Company's policy was to amortize such costs over an
estimated useful life of seventeen years. Effective
January 1, 1996, the Company revised its estimated useful
life for computer system product development costs from
seventeen (17) years to seven (7) years. This change was
made to better reflect the estimated period during which
such assets will remain in service. The cumulative effect
of this change in estimate amounting to $125,745 is
included in the statement of operations for the year ended
December 31, 1996.
g) Patents
Patents, which consist of legal costs and mandatory filing
fees specifically identified with the Company's patents,
are being amortized on a straight line basis over
seventeen (17) years.
h) Income taxes
Effective for the year ended December 31, 1992, the
Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" which requires the use of
the "liability method" of accounting for income taxes.
Accordingly, deferred tax liabilities and assets are
determined based on the difference between the financial
statement and tax bases of assets and liabilities, using
enacted tax rates in effect for the year in which the
differences are expected to reverse.
Current income taxes are based on the respective periods'
taxable income for Federal, State and City income tax
reporting purposes.
i) Revenue recognition
The Company recognizes revenue and costs from its
contracts under the percentage of completion method. Cost
of revenues include all direct material and labor costs
and those indirect costs related to contract performance.
General and administrative expenses are accounted for as
period costs and are, therefore, not included in the
calculation of the estimates to complete contracts in
progress. 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. The liability,
"Billings in excess of contract revenues on uncompleted
contracts", represent billings in excess of revenues
recognized.
Revenue from computer system sales, which include BFM, are
recognized upon the delivery of the turnkey systems.
Service revenues such as TeleMap, are recognized as they
are rendered.
j) Net loss per common share
Net loss per common share is computed based on the
weighted average number of shares of common stock
outstanding during each period. Common stock equivalents
are excluded from the computation of net loss per share of
common stock since the results are anti-dilutive.
k) Change of fiscal year end
The parent company NeuroCorp, Ltd. changed its fiscal year
end from September 30, to December 31, effective November
23, 1994, the date the Company acquired HZI. The resulting
effect of this change is not deemed material to previously
issued financial statements since the Company had no
operations prior to such date.
l) Research and development costs
Research and development costs are charged to operations
when incurred.
m) Use of estimates
The preparation of the financial statements in conformity
with generally accepted accounting principles requires
management to make estimates and assumptions that affect
the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those
estimates.
n) Impact of recently issued accounting standards
In March 1995, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of", which
requires impairment losses to be recorded on long-lived
assets used in operations when indicators of impairment
are present and the undiscounted cash flows estimated to
be generated by those assets are less than the assets'
carrying amount. Statement 121 also addresses the
accounting for long- lived assets that are expected to be
disposed of. The Company adopted Statement 121 in the
first quarter of 1996 and there was no effect to the
Company.
o) Accounting for stock-based compensation
The Company has elected earlier adoption of Statement of
Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation", which requires the recognition
of compensation expense for stock-based awards based upon
the fair value of the award at the grant date. The Company
elected adoption of Statement 123 effective January 1,
1995.
p) Fair value disclosure as of December 31, 1996
The carrying value of cash, accounts receivable, accounts
payable, accrued expenses and short-term debt are a
reasonable estimate of their fair value. The carrying
value of the long-term debt including the current portion
approximate fair value based upon the interest factors for
the debt being based upon the prime rate which reflects
market value.
NOTE 3 - EQUIPMENT AND FIXTURES, NET
Equipment and fixtures, net consists of the following at:
(Unaudited)
June 30, December 31,
1997 1996
----------- -----------
Furniture and fixtures $ 14,963 $ 9,009
Equipment 651,987 570,016
Vehicles 15,840 50,117
----------- -----------
682,790 629,142
Less: accumulated depreciation (556,665) (545,593)
----------- -----------
$ 126,125 $ 83,549
=========== ===========
Depreciation expense amounted to $27,086 and $49,224 for
the years ended December 31, 1996 and 1995, respectively.
For the six months ended June 30, 1997 and 1996,
depreciation expense amounted to $20,988 and $13,483,
respectively. Equipment and fixtures are pledged pursuant
to a note payable. (See Note 7).
NOTE 4 - DATABASE DEVELOPMENT COSTS, NET
(Unaudited)
June 30, December 31,
1997 1996
----------- ------------
Balance, beginning of period $ 1,264,018 $ 1,312,346
Capitalized costs during the
period 75,359 91,913
Amortization charged to cost
of revenues (73,491) (140,241)
----------- -----------
Balance, end of period $ 1,265,886 $ 1,264,018
=========== ===========
The recoverability of the carrying value of the database
is evaluated by management on a recurring basis. No
adjustment to the carrying value was determined to be
necessary at December 31, 1996 and June 30, 1997.
NOTE 5 - COMPUTER SYSTEM PRODUCT DEVELOPMENT COSTS, NET
(Unaudited)
June 30, December 31,
1997 1996
----------- -----------
Balance, beginning of period $ 496,518 $ 744,551
Capitalized costs during the
period -- 2,261
Amortization charged to cost
of revenues (62,314) (124,549)
Cumulative effect of change in
accounting estimate -- (125,745)
----------- -----------
Balance, end of period $ 434,204 $ 496,518
=========== ===========
In management's opinion, the net realizable value of the
unamortized computer system product development costs
after giving effect to the cumulative effect of change in
estimate as discussed in Note 2(f) exceeds the carrying
value, net, therefore, no additional adjustment to
carrying value is required. Net realizable value is
measured by estimating future sales of these products and
reducing them by the estimated costs of completing and
disposing of the products, including the costs of
performing maintenance and support required under the
sales. Effective January 1, 1996, management revised its
estimate of the recoverability of its development costs
from seventeen (17) years to seven (7) years, resulting in
the cumulative effect of change in accounting estimate.
NOTE 6 - ACCRUED EXPENSES
Accrued expenses consists of the following at:
(Unaudited)
June 30, December 31,
1997 1996
----------- -----------
Salary and related taxes $ 32,852 $ 71,334
Legal and accounting fees 32,500 44,272
Registration costs - -
Dividends 22,500 15,000
Interest 54,985 36,659
Insurance 39,178 9,238
----------- -----------
$ 182,015 $ 176,503
=========== ===========
NOTE 7 - LONG-TERM DEBT
Long-term debt consists of the following at:
(Unaudited)
June 30, December 31
1997 1996
---------- -----------
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. $ - $ 31,289
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. - 22,928
Less: current portion - (38,715)
---------- -----------
Long-term portion $ - $ 15,502
========== ==========
Long-term debt matures as
follows:
Year ended
December 31,
1996
-------------
1997 $ 38,715
1998 8,134
1999 7,368
------------
$ 54,217
===========
NOTE 8 - BILLINGS IN EXCESS OF COSTS AND ESTIMATED EARNINGS ON
UNCOMPLETED CONTRACTS
(Unaudited)
June 30, December 31,
1997 1996
----------- -----------
Costs incurred on uncompleted
contracts $ 464,432 $ 2,080,641
Estimated earnings 506,735 1,654,834
----------- -----------
971,167 3,735,475
Less: Billings to date 1,055,621 4,011,901
----------- -----------
Billing in excess of costs and
estimated earnings on
uncompleted contracts $ (84,454) $ (276,426)
=========== ===========
NOTE 9 - INCOME TAX BENEFIT
Income tax benefits are comprised of the following at:
December 31, December 31,
1996 1995
------------ -------------
Current:
Federal $ - $ (30,703)
State 12,711 (10,877)
---------- -----------
$ 12,711 (41,580)
---------- -----------
Deferred:
Federal $ (45,000) $ 12,000
State - -
---------- ------------
(45,000) 12,000
Total income tax benefits $ (32,289) $ (29,580)
=========== ===========
A reconciliation of the income tax benefit on income per
the U.S. Federal statutory rate to the reported income tax
expense is as follows:
December 31, December 31,
1996 1995
------------ ------------
U.S. Federal statutory rate
applied to pretax loss $ (566,800) $ (99,300)
State and local income taxes,
net of federal income tax
benefit (97,400) (17,100)
Increase in valuation allowance 664,200 116,400
Current provision (benefit) for
Federal and State taxes 6,400 (41,580)
Prior year under accrual
recorded in current year 6,311 -
(Decrease) increase in deferred
tax liability (45,000) 12,000
----------- --------
Total income tax (benefit) $ (32,289) $ (29,580)
=========== =========
The Company has adopted SFAS No. 109, "Accounting for
Income Taxes", effective for the year ended December 31,
1992. Management has evaluated the effect of
implementation and has determined that there is no
material impact on the Company's financial position except
for the effect of HZI's capitalized database development
and computer system product development costs.
Income taxes are provided for the tax effects of
transactions reported in the financial statements and
consist of taxes currently due plus deferred taxes related
to differences between the financial and tax basis of
assets and liabilities for financial and income tax
reporting purposes. Deferred tax assets and liabilities
represent the future tax return consequences of these
temporary differences, which will either be taxable or
deductible in the year when the assets or liabilities are
recovered or settled.
The Company has a policy of capitalizing database
development costs and computer system product development
costs attributable to the current year for financial
statement purposes and expensing such amounts currently
for tax reporting purposes.
The Company expects to continue this policy for an
indeterminable time period. Accordingly, measurement of
the deferred tax liability attributable to the book-tax
basis differentials related to the database and computer
system product development costs is computed at a rate of
15% pursuant to SFAS No. 109.
The tax effect of significant items comprising the
Company's deferred tax assets are as follows:
December 31,
1996
------------
Net operating loss carryforwards $ 212,250
Valuation allowance (212,250)
-----------
Long-term portion of deferred tax assets $ 0
===========
The tax effect of significant items comprising the
Company's deferred tax liability are as follows:
December 31,
1996
------------
Database development costs $ 189,546
Computer system product development costs 74,454
-----------
Long-term portion of deferred tax liability $ 264,000
===========
The Company and HZI file a consolidated tax return. MCAI
and TeleMap do not file a consolidated tax return. As
such, each company or group of companies computes its tax
based on its own taxable income or loss. Further, NYI has
a tax year ending on June 30. For income tax purposes, NYI
is considered a for-profit corporation and accordingly
files its own income tax return.
At December 31, 1996, the Company has a net operating loss
carryforwards (NOL's) of approximately $1,090,000. The
Company has recorded a full valuation allowance against
the deferred tax asset at December 31, 1996 pursuant to
SFAS 109, since management could not determine that it was
"more likely than not" that the deferred asset would be
realized in the future.
A portion of the Company's NOL's are subject to the
provisions of the Tax Reform Act of 1986 which limits use
of net operating loss carryforwards when changes of
ownership of more than 50% occur during a six year testing
period. On November 23, 1994, the Company's ownership
changed by more than 50% as a result of the transaction as
described in Note 10(g).
HZI has a tax credit carryforward attributable to an
increase in research and development expenditures
approximating $72,000. Any portion of the research tax
credit that remains unused at the end of the carryforward
period is allowed as a deduction in the year following the
expiration of the carryforward period.
With respect to the total carryforwards of NOL's and tax
credits said amounts expire between the years 2003 and
2011.
NOTE 10 - STOCKHOLDERS' EQUITY
a) Amendment to Certificate of Incorporation
In connection with the reverse acquisition of HZI (See
Note 10(g)), 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 retroactive effect to these
items.
b) Discount on common stock
On April 30, 1987, 600,000 shares (30,000,000 shares
pre-split) 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 (4,000,000 units pre-split) 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-nine 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 10(e) below.
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 10(g), 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 were to
expire June 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 SEC 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 December 31, 1997. As described in Note 10(m), in
February 1996, the Company filed a registration statement
in order to register such warrants. On March 12, 1997, two
(2) shareholders exercised in the aggregate 200,000 Class
B Warrants and 200,000 Class C Warrants, which resulted in
the Company receiving proceeds of $600,000 and issuing
400,000 shares of common stock.
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 June 30, 1997
and December 31, 1996, the Company had accrued cumulative
dividends of $22,500 and $15,000, respectively related to
this preferred stock based upon an anticipated cash
payment in the future. 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 June 30, 1997 and
December 31, 1996, neither TAC nor the Company have
exercised these conversion features.
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 stock option to purchase
250,000 shares of common stock at an exercise 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.
On December 15, 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. On March 26, 1997, the consultant exercised the
stock option and, the Company issued 50,000 shares of
restricted common stock pursuant to the terms of the oral
stock option agreement.
On December 18, 1996, the Company granted qualified stock
options to MCAI's CEO and President, and an Executive
Vice-President of the Company for the purchase of 500,000
shares of common stock exercisable at the lower of $7.00
per share or fair market value. The options are
exercisable upon vesting and expire January 6, 2007.
200,000 of such options vest on January 6, 1997, and the
remaining 300,000 options vest 50% on January 6, 1998 and
50% on January 6, 1999.
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.
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. 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.
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.
Subsequent to year end, the above loans were extended
to December 31, 1998 with a revised interest rate of
5% per annum. Accordingly, as of June 30, 1997, such
loans have been reclassified as long term.
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 10(f)), whichever comes first. As
additional consideration the Company issued 66,666
shares of restrictive common stock. The Company has
valued the common stock at $133,333 or fifty percent
(50%) of the fair market value on May 24, 1996, the
date of the transaction. The Company recorded deferred
financing cost and increased stockholders' equity by
$133,333, 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 12(c). Further, the Company has agreed
to register said shares. (See Note 10(m)). During June
1997, the original maturity date of May 24, 1997 was
extended to December 15, 1998. Accordingly as of June
30, 1997, such loans have been classified as long
term.
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 investors
unrelated to the Company 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 market 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 the costs related to the registration. These
costs have been deferred and will be charged to additional
paid in capital upon the successful completion of the
registration.
n) Chairman's capital contribution
As discussed in Note 11(c)(i) the Company's Chairman
waived $146,347 of his base annual salary for the year
ended December 31, 1995. Said amount was recorded as an
administrative expense and as an increase to additional
paid-in-capital for the year ended December 31, 1995.
o) Sale of common stock
During December 1996, the Company sold 550,000 units for
$2,001,068 pursuant to a private placement memorandum to
six unrelated parties. Each unit is comprised of one (1)
share of common stock and two (2) stock purchase warrants.
Each warrant entitles the holder to purchase one (1) share
of common stock at $8.00 per share until August 31, 1997,
thereafter $10 per share. The warrants expire August 31,
1998.
NOTE 11 - 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, 1996 is as follows:
Year ended December 31,
-----------------------
1997 $ 92,557
1998 77,868
-----------
$ 170,425
Rent expense under all operating leases for the years
ended December 31, 1996 and 1995 was $145,369 and
$202,755, respectively. For the six months ended June 30,
1997 and 1996, rent expense amounted to $62,111 and
$56,657, respectively.
b) Concentration of credit risk
For the years ended December 31, 1996 and 1995,
approximately 63% and 42%, respectively, of net sales were
derived from two unrelated customers, who are in the
pharmaceutical industry. For the six months ended June 30,
1997 and 1996, approximately 80% and 60%, respectively, of
net sales were derived from four and two unrelated
customers, respectively, who are in the pharmaceutical
industry. As of June 30, 1997 and December 31, 1996,
approximately 75% and 61%, respectively, of accounts
receivable is due from three and two unrelated customers,
respectively.
c) Employment Agreements
i) 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 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 years ended December 31, 1996 and 1995, and the
six months ended June 30, 1997 and 1996, the Company's
Chairman waived his right to receive the term life
insurance as provided for in the employment agreement.
During the six months ended June 30, 1997, the Company
purchased life insurance in accordance with the
September 20, 1995 employment agreement. The Company
has estimated the annual cost for the initial policy
year to be $20,000.
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. (See Note 10(n)).
ii) On December 7, 1994, the Company entered into an
employment agreement with an 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 six 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.
iii) On December 31, 1996, the Company entered into an
employment agreement with its Chief Financial Officer
providing for a base salary of $85,000 per year. The
agreement expires on January 1, 2000 and is renewable
on a year to year basis thereafter.
iv) On December 18, 1996, the Company and MCAI entered
into an employment agreement with the CEO and
President of MCAI and an Executive Vice President of
the Company providing for a base salary of $150,000 in
year one, $225,000 in year two and increasing by the
Consumer Price Index ("CPI") change each year
thereafter. The agreement expires on January 1, 2000
and is renewable on a year to year basis thereafter.
The agreement provides for 500,000 qualified stock
options for purchase of common stock exercisable at
the lower of $7.00 per share or fair market value. The
options are exercisable upon vesting and expire
January 6, 2007. On January 6, 1997, 200,000 of such
options vest and 150,000 options each vest on January
6, 1998 and 1999.
d) Consulting agreement
On July 1, 1995, the Company entered into a five (5) year
consulting agreement with an entity controlled by the
Company's former President and Vice Chairman. Said
agreement provided for a fee of $75,000 per annum. The
agreement was amended on July 12, 1996 to provide for a
reduced fee of $30,000 per annum
NOTE 12 - RELATED PARTY TRANSACTIONS
a) Revenues from affiliates
The Company charges NYI, as well as Manhattan Westchester
Medical Services, P.C. ("Manhattan Westchester") for the
use of certain employees and office and laboratory space
(administration services) of the Company. Manhattan
Westchester is also under the common control of the
Company's Chairman. Net revenues from these affiliates for
the year ended December 31, 1996 and 1995 amounted to
$65,782 and $186,123, respectively. For the six months
ended June 30, 1997 and 1996, net revenues from these
affiliates amounted to $23,708 and $24,361, respectively.
The above transactions between HZI and NYI have been
eliminated in the consolidated financial statements.
b) Services provided by affiliates
HZI subcontracts to NYI, a not-for-profit entity under the
control of the Company's shareholders', a material amount
of its patient testing performed in connection with its
long term contracts. NYI is treated as a subsidiary of the
Company and is included in the consolidation.
During 1994 HZI and Manhattan Westchester entered into an
arrangement whereby Manhattan Westchester would provide
medical consulting services to HZI's TeleMap business.
This arrangement was suspended during 1995 and reactivated
during 1996. Services provided by Manhattan Westchester to
HZI for the year ended December 31, 1996 and 1995 amounted
to approximately $14,000 and $15,400, respectively. No
such services were provided to HZI during the six months
ended June 30, 1997.
c) Stockholder notes and loans payable
Stockholder notes and loans payable consisted of the
following at:
June 30, December 31,
1997 1996
Non-interest bearing loans and
payables, except for $20,000
which bears interest at 10%
per annum (See (i) below) $ 106,680 $ 108,687
Notes payable bearing an interest
of 5% to 9% (See (ii) and (iii)
below) 450,000 550,000
Non-interest bearing loan payable
(See (iv) below) 200,000 200,000
--------- ---------
$ 756,680 $ 858,687
========= =========
i) Stockholder loans payable relates to advances made to
HZI and NYI by its Chairman of the Board which are due
on demand. Furthermore, pursuant to the terms of the
note dated January 30, 1996 amounting to $20,000, said
note can be converted into 40,000 shares of common
stock.
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 10(f)), whichever comes first. As
additional consideration the Company issued 66,666
shares of restrictive common stock. The Company has
valued the common stock at $133,333 or fifty percent
(50%) of the fair market value on May 24, 1996, the
date of the transaction. The Company recorded deferred
financing cost and increased stockholders' equity by
$133,333, 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 12(c). Further, the Company has agreed
to register said shares. (See Note 10(m)). During June
1997, the original maturity date of May 24, 1997 was
extended to December 15, 1998. Accordingly as of June
30, 1997, such loans have been classified as long
term.
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. (See below for
amended maturity date).
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. 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.
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.
Subsequent to year end, the maturity dates on the
above notes were extended to December 31, 1998 with a
revised interest rate of 5% per annum. Accordingly, as
of June 30, 1997, such amounts have been classified as
long term.
iii) On July 16, 1996 the Company entered into two loan
agreements amounting to $200,000 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 proceeds of the Company's securities
including the exercise of Class B and C Warrants. On
April 30, 1997 the Company liquidated one loan
obligation amounting to $100,000 and extended the
second loan maturity date to December 15, 1998.
iv) 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 on the earlier of
one (1) year from May 24, 1996 or out of the first
proceeds resulting from any exercise of outstanding
Class B and Class C warrants, (See Note 10(f))
whichever comes first. As additional consideration the
Company issued 66,666 shares of restricted common
stock. The Company issued and has valued the common
stock at $133,333 or fifty percent (50%) of the fair
value on May 24, 1996, the date of the transaction.
The Company recorded deferred financing cost and
increased stockholders equity by $133,333,
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
subsequent to year end, the original maturity date of
the May 24, 1997 was extended to December 15, 1998.
Accordingly, as of June 30, 1997, such loans have been
classified as long term. For the year ended December
31, 1996, amortization expense amounted to $79,417.
For the six months ended June 30, 1997 and 1996,
amortization expense amounted to $53,515 and $13,152,
respectively. Further, the Company agreed to register
said shares. (See Note 10(m)).
v) At June 30, 1997 and December 31, 1996, accrued
interest related to such notes and loans amounted to
$54,985 and $36,376, respectively, and is included in
accrued expenses.
d) 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. As of June
30, 1997 and December 31, 1996 such options have not been
exercised.
e) Consulting agreement
On July 1, 1995, the Company entered into a five (5) year
consulting agreement with an entity controlled by the
Company's former President and Vice Chairman. Said
agreement provided for a fee of $75,000 per annum. The
agreement was amended on July 12, 1996 to provide for a
reduced fee of $30,000 per annum.
f) 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. (See
Note 10(m)).
g) Due from affiliates
The Company charges Manhattan Westchester for the use of
certain employees, laboratory space and management fees
related to MCAI's services. Manhattan Westchester is under
the common control of the Company's Chairman. For the
years ended December 31, 1996 and 1995 such charges
amounted to $55,292 and $66,213, respectively. For the six
months ended June 30, 1997 and 1996, such charges amounted
to $38,803 and 11,144, respectively. At June 30, 1997 and
December 31, 1996, amounts due from Manhattan West for
these services amounted to $73,238 and $33,495,
respectively which has been included in other current
assets.
h) Chairman's capital contribution
As discussed in Note 10(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.
PART II
INFORMATION NOT REQUIRED
IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
As permitted by Section 78.751 of the Nevada General Corporation Law, as
the same shall be amended and supplemented, the Company shall, indemnify any
and all persons whom it shall have power to indemnify under said Section from
and against any and all of the expenses, liabilities or other matters referred
to in, or covered by, said Section. The indemnification provided for therein
shall not be deemed exclusive of any other right to which any persons may be
entitled under any By-Law, resolution of shareholders, resolution of
directors, agreement or otherwise, as permitted by said articles, as to
actions taken in any capacity in which he or she served at the request of the
Company.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The Company estimates that it will incur the following expenses:
SEC Registration Fees $ 1,219*
Accounting fees 125,561
Legal Fees 200,000
Printing, Engraving & Mailing 15,000
Transfer agent & Registrar's 2,500
fees
Blue Sky fees and expenses 2,500
Miscellaneous expenses 3,220
TOTAL $ 350,000
* Actual
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
During the past three years, the following securities were sold or issued by
the Company without registration under the Securities Act.
On October 25, 1994, the Company issued to Trinity 120,000 shares of the
Company's Common Stock in consideration of Trinity's identifying HZI as a
potential acquisition candidate for the Company.*
On November 23, 1994, the Company issued 4,600,000 shares of its Common Stock
to the nine shareholders of HZI in exchange for all of HZI's issued and
outstanding shares of capital stock. Such persons were Dr. Turan M. Itil,
Eleanor Itil, Kurt Itil, Pierre Le Bars, Yasmin Itil Le Bars, Richard Katz,
Howard Katz, Aileen Kunitz and Emin Eralp.*
In December 1994, the Company issued 400,000 shares of Preferred Stock to
Trinity in consideration of $400,000 contributed by Trinity on November 23,
1994 to the capital of the Company. Of the 400,000 shares of Preferred Stock,
250,000 shares are designated Class B, Series 2. Five (5) shares of Class B,
Series 2 Preferred Stock are convertible into one (1) share of Common Stock.*
On April 14, 1995, the Company sold 57,143 shares of Common Stock for $100,000
to Asim Kocabiyik, a foreign investor.
In July 1995, Trinity loaned $100,000 to the Company. As additional
consideration for such loan 16,666 shares of the Company's Common Stock was
issued to each of the three sons of the President and sole stockholder of
Trinity.*
In December 1995, the Company sold an aggregate of 1,000,000 shares of Common
Stock for an aggregate consideration of $250,000 to four investors.
In March 1996, the Company sold 333,333 shares of Common Stock to Anker Bank,
Zurich, Switzerland for $133,333 and in April the Company sold 333,333 shares
of Common Stock to Avi Herson for $133,333 and 333,334 shares of Common Stock
to Georges Hauchecorne for $133,334.
In June 1996, the Company borrowed $200,000 from Elvena, Inc., a shareholder
of the Company. 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, whichever comes first. As additional
consideration the Company issued 66,666 shares of restricted Common Stock to
Elvena, Inc.
In November 1996, the Company issued 50,000 shares of its Common Stock to
Jonathan Rahn for services rendered as a consultant to the Company and
cancelled his outstanding stock options.
On August 14, 1996, Dr. Itil and his wife Elanore Itil, each contributed
12,500 shares of the Company's Common Stock owned by them to the National
Ethnic Albanian-American Foundation, Inc. ("Foundation"), a nonprofit
corporation organized exclusively to receive and administer funds for
religions, charitable, scientific, literacy and educational purposes.
In December 1996, the Company sold an aggregate of 550,020 Units for an
aggregate of $2,000,000 ($3.63 per Unit) to three investors in a private
placement. Each Unit consists of one share of Common Stock and two Warrants,
each of which entitles the holder to purchase one additional share of Common
Stock. The 1,100,060 Warrants included in the Units are exercisable at $4.00
per share until December 31, 1997 and at $6.00 per share thereafter and until
December 31, 1998, the expiration date of the Warrants.*
In March 1997, Lancer Partners, L.P. and Lancer Offshore, Inc. exercised an
aggregate of 200,000 Class B and 200,000 Class C Warrants for a total of
$600,000 and for which the Company issued 400,000 shares of Common Stock.*
* The above securities were issued in reliance on the exemption from
registration under Section 4(2) as not involving any public offering.
Claims of such exemptions are based upon the following: (i) all of the
purchasers in such transactions were sophisticated investors with the
requisite knowledge and experience in financial and business matters to
evaluate the merits and risk of an investment in the Company, were able
to bear the economic risk of an investment in the Company, had access
to or were furnished with the kinds of information that registration
under the Securities Act would have provided and acquired securities
for their own accounts in transactions not involving any general
solicitations or advertising, and not with a view to the distribution
thereof, and (ii) a restrictive legend was placed on each certificate
evidencing the securities; (iii) each purchaser acknowledged in writing
that he knew the securities were not registered under the Securities
Act or any State securities laws, and are Restricted Securities as that
term is defined in Rule 144 under the Securities Act, that the
securities may not be offered for sale, sold or otherwise transferred
within the United States and except pursuant to an effective
Registration Statement under the Securities Act and any applicable
State securities laws, or pursuant to any exemption from registration
under the Securities Act, the availability of which is to be
established to the satisfaction of the Company.
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
27(a) Exhibits
(2)(a) Agreement and Plan of Reorganization between Company and HZI
(3)(a) Certificate of Incorporation as amended*
(b) Certificate of Amendment to Certificate of Incorporation **
(c) By-Laws*
(4)(a) Form of Common Stock Certificate
(b) Form of Class B Common Stock Purchase Warrant
(c) Form of Class B Common Stock Purchase Warrant
(d) Form of December 1996 Warrant***
(5)(a) Opinion of James Morris Vernon, Esq., with respect to the validity
of the securities offered
(10)(a) Stock Option Plan
(b) Form of Employee's Stock Option Agreement***
(c) Employment Agreement between the Company and Dr. Turan M. Itil
(c)(i) Employment Agreement between the Company and IRH Corporation
(c)(ii) Employment Agreement between the Company and Dr. Pierre LeBars
(c)(iii) Employment Agreement between the Company and Jonathan E. Raven
(c)(iv) Employment Agreement between the Company and Aileen Kunitz
(d) Lease Agreement for premises situated at 150 White Plains Road,
Tarrytown, New York
(e) Voting Trust Agreement
(f) Agreement between the Company and Mediator S.r.l.
(g) Agreement between the Company and Tena, Ltd.
(h) Lease Agreement for premises situated at 225 E. 64th Street, New
York, New York***
(i) Financing Documents between the Company, Trinity American
Corporation and Elvena, Inc.***
(24)(a) Consent of Scarano & Tamaro P.C.****
(b) Consent of Counsel (to be included in Exhibit 5(a)).
(27)(b) Financial Statement Schedules
Schedules are omitted because of the absence of conditions under which
they are required or because the required information is given in the
financial statements or notes thereto.
Unless otherwise noted all of the foregoing exhibits have been
previously filed with the Registration Statement.
* incorporated by reference to Registration Statement on Form S-18 No.
33-2205-D declared effective on July 28, 1987.
** incorporated by reference to the Company's Annual Report on Form 10-K
forth the period ending September 30, 1994.
*** to be filed by amendment.
**** filed herewith.
ITEM 28. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any Prospectus required by Section 10(a)(3) of the
Securities Act of 1933.
(ii) Reflect in the Prospectus any facts or events which individually
or together, represent a fundamental change in the information in
this registration statement; and notwithstanding the forgoing,
any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end
of the estimated maximum offering range may be reflected in the
form of prospectus filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the changes in the volume and price
represent no more than a 20% change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee"
table in the effective registration statement.
(iii) To include any additional or changed material with respect to the
plan of distribution.
(2) That, for the purpose of determining any liability under the Securities
Act, each such post- effective amendment shall be deemed to be a new
Registration Statement relating to the securities being offered therein,
and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the
termination of the offering.
(4) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of
the small business issuer pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the
Commission such indemnification is against pubic policy as expressed in
the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
SIGNATURES
In accordance with the requirements of the Securities Act, the
Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form SB-2 and authorized this amendment
to the registration statement to be signed on its behalf by the undersigned,
thereunto duly authorized in the Village of Tarrytown, State of New York on ,
1997.
NEUROCORP, LTD.
s/TURAN M. ITIL
Turan M. Itil,
Chairman, Chief Executive Officer
President, and Director
Date: , 1997
In accordance with the requirements of the Securities Act of 1933, this
Amendment to the Registration Statement has been signed by the following
persons in the capacities and on the dates indicated:
/s/TURAN M. ITIL /s/I. RONALD HOROWITZ
Turan M. Itil I. Ronald Horowitz
Chairman, Chief Executive Officer, Director
President and Director (principal Date: , 1997
executive officer)
Date: , 1997
/s/KURT Z. ITIL /s/RICHARD KATZ
Kurt Z. Itil, Director Richard Katz, Director
Date: , 1997 Date: , 1997
/s/EVELYN SOMMER /s/PIERRE LE BARS
Evelyn Sommer, Director Pierre LeBars,
Date: , 1997 Executive Vice President and
Director
Date: , 1997
/s/JOSEPH DIOGUARDI /s/JONATHAN E. RAVEN
Joseph DioGuardi, Chief Financial Jonathan E. Raven, Director
Officer and Director (principal and Executive Vice President
financial officer) Date: , 1997
Date: , 1997
September 29, 1997
NeuroCorp, Ltd.
150 White Plains Road
Tarrytown, NY 10591
We hereby consent to the use of our name "as experts", in
the "Summary Consolidated Financial Information" section
and the use of our opinion dated March 8, 1997, except
for Note 10f as to which the date is March 12, 1997 and
Note 10h as to which the date is March 26, 1997 for
NeuroCorp, Ltd. to be included in the Amendment No. 4 to
Form SB-2 Registration Statement being filed for
NeuroCorp, Ltd.
Very truly yours,
Scarano & Tomaro, P.C.
Syosset, New York
