UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A
[xx] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to _______________________
Commission File Number: 33-14042-NY
NeuroCorp, Ltd. (formerly Tamarac Ventures, Ltd.)
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Nevada 87-0446395
- ------------------------------- -----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
150 White Plains Road, Tarrytown, New York 10591
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(914) 631-3315
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
________________________________________________________________________________
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) has filed all reports required to be filed by
section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [xx] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court.
Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity as of the latest practicable date: 7,173,807 Shares as of September 30,
1996.
<PAGE>
This filing on Form 10-QSB/A No. 1 amends the Quarterly Report on Form 10-QSB
for the 3 months ended September 30, 1996, of NeuroCorp, Ltd. (the "Company").
The undersigned Registrant hereby amends the following items, financial
statements, exhibits or other portions of its report on Form 10-QSB for the
three months ended September 30, 1996, (the "Form 10-QSB"), as set forth below:
The following items are hereby amended and restated to read in their entirety as
they appear in this amendment.
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this amendment to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: February 10, 1997 By: /s/ Aileen A. Kunitz
----------------------------------
Vice President and
Chief Financial Officer
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
(Formerly Tamarac Ventures, Ltd.)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PART 1 - FINANCIAL INFORMATION:
ITEM 1 - FINANCIAL STATEMENTS
Page
number
------
Consolidated balance sheets (Unaudited) at September 30,
1996 and December 31, 1995 F-1
Consolidated statements of operations (Unaudited) for the
three months ended September 30, 1996 and 1995 F-2
Consolidated statements of operations (Unaudited) for the
nine months ended September 30, 1996 and 1995 F-3
Consolidated statements of stockholders' equity (Unaudited)
for the nine months ended September 30, 1996 F-4
Consolidated statements of cash flows (Unaudited) for the
nine months ended September 30, 1996 and 1995 F-5
Notes to consolidated financial statements F-6 - F-19
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS F-20 - F-28
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
(Formerly Tamarac Ventures, Ltd.)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited)
September 30, December 31,
1996 1995
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 118,490 $ 140,519
Accounts receivable, net of allowance for
doubtful accounts of $57,556 and $39,920, respectively 1,187,659 716,650
Inventory 34,883 29,985
Due from affiliates 99,650 88,943
Prepaid expenses and taxes 34,028 53,314
Deferred financing cost 86,848 --
Costs in excess of billings on uncompleted contracts 1,757 28,833
----------- -----------
Total current assets 1,563,315 1,058,244
----------- -----------
Equipment and fixtures, net 86,970 81,066
----------- -----------
Other assets:
Database development costs, net 1,285,028 1,312,346
Computer system product development costs, net 527,678 744,536
----------- -----------
Other 136,220 133,220
----------- -----------
Total other assets 1,948,926 2,190,102
----------- -----------
Total assets $ 3,599,211 $ 3,329,412
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Demand note - line of credit $ -- $ 50,000
Accounts payable 207,315 152,465
Accrued expenses 198,969 182,310
Stockholder notes and loans payable 858,861 380,381
Income taxes payable 1,296 8,293
Current portion of long-term debt 55,840 90,227
Billings in excess of contract revenues
on uncompleted contracts 174,373 201,333
----------- -----------
Total current liabilities 1,496,654 1,065,009
----------- -----------
Long-term liabilities:
Long-term debt 18,053 37,734
Deferred income taxes 309,000 309,000
----------- -----------
Total liabilities 1,823,707 1,411,743
----------- -----------
Commitments and contingencies (Note 5) -- --
Stockholders' equity:
Preferred stock authorized 5,000,000 shares issued, as follows:
Cumulative Preferred stock, class B, series 1, no par value, issued and
outstanding 150,000 shares, full liquidation value of $150,000 150,000 150,000
Convertible Preferred stock, class B, series 2, no par value, issued and
outstanding 250,000 shares, full liquidation value $250,000 250,000 250,000
Common stock, $.001 par value, 100,000,000 shares authorized
7,173,807 and 6,107,141 issued and outstanding, respectively 46,374 45,307
Less: discount on common stock (28,500) (28,500)
Additional paid-in capital 1,245,919 738,699
Contributed capital 100,000 100,000
Retained earnings 11,711 662,163
----------- -----------
Total stockholders' equity 1,775,504 1,917,669
----------- -----------
Total liabilities and stockholders' equity $ 3,599,211 $ 3,329,412
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements (Unaudited).
F-1
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
(Formerly Tamarac Ventures, Ltd.)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
(UNAUDITED)
1996 1995
------------ --------
Net sales $ 194,593 $ 396,759
Cost of sales, including amortization expense
of $45,300 and $46,110, respectively 143,939 185,187
----------- -----------
Gross profit 50,654 211,572
Expenses:
General and administrative expenses 289,753 245,632
Research and development 26,051 61,872
Cumulative effect of change in estimate (Note 1) 182,235 --
----------- -----------
Total expenses 498,039 307,504
----------- -----------
Loss from operations (447,385) (95,932)
Other income (expense):
Interest income 2,587 3,224
Interest expense (45,282) (4,083)
----------- -----------
Loss before provision (credit) for income taxes (490,080) (96,791)
Provision (credit) for income taxes -- (16,684)
----------- -----------
Net loss $ (490,080) $ (80,107)
=========== ===========
Net loss applicable to common shares $ (493,830) $ (80,107)
=========== ===========
Loss per common equivalent share:
Primary:
Loss before provision for taxes $ (.07) $ (.01)
Provision (credit) for income taxes -- (Nil)
----------- -----------
Net income (loss) $ (.07) $ (.01)
=========== ===========
Net loss applicable to common shares $ (.07) $ (.01)
=========== ===========
Weighted average number of shares outstanding 7,173,807 5,457,143
=========== ===========
See accompanying notes to consolidated financial statements (Unaudited).
F-2
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
(Formerly Tamarac Ventures, Ltd.)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
(UNAUDITED)
1996 1995
----------- -----------
Net sales $ 985,715 $ 1,130,085
-----------
Cost of sales, including amortization expense
of $135,900 and $136,131, respectively 488,633 393,178
----------- -----------
Gross profit 497,082 736,907
-----------
Expenses:
General and administrative expenses 811,403 673,097
-----------
Research and development 71,235 136,134
Cumulative effect of change in estimate (Note 1) 182,235 --
----------- -----------
Total expenses 1,064,873 809,231
----------- -----------
Loss from operations (567,791) (72,324)
Other income (expense):
Gain on disposal of vehicle -- 31,280
Interest income 8,527 11,037
Interest expense (79,938) (12,257)
----------- -----------
Loss before provision for income taxes (639,202) (42,264)
Provision for income taxes -- 25,720
----------- -----------
Net loss $ (639,202) $ (67,984)
=========== ===========
Net loss applicable to common shares $ (650,452) $ (67,984)
=========== ===========
Loss per common equivalent share:
Primary:
Loss before provision for taxes $ (.09) $ (.01)
Provision for income taxes -- Nil
----------- -----------
Net loss $ (.09) $ (.01
=========== ===========
Net loss applicable to common shares $ (.10) $ (.01)
=========== ===========
Weighted average number of shares outstanding 6,924,548 5,434,920
=========== ===========
See accompanying notes to consolidated financial statements (Unaudited).
F-3
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
(Formerly Tamarac Ventures, Ltd.)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
Preferred Stock Class B Additional
Series 1 Series 2 Common Stock Paid-in Contributed Retained
Shares Amount Shares Amount Shares Amount Capital Capital Earnings
------- -------- ------- -------- ---------- -------- ---------- --------- ---------
Balance at
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
December 31, 1995 150,000 $150,000 250,000 $250,000 6,107,141 $ 16,807 $ 738,699 $ 100,000 $ 662,163
Sale of common stock -- -- -- -- 1,000,000 1,000 399,000 -- --
Cost associated with the
registration for selling
shareholders and warrantholders -- -- -- -- -- (25,046) -- -- (25,046)
Issuance of 66,666 shares
of common stock in lieu of
deferred financing cost
for a loan -- -- -- -- 66,666 67 133,266 -- --
Accrued preferred stock
dividend -- -- -- -- -- -- -- -- (11,250)
Net loss for the nine months
ended September 30, 1996 -- -- -- -- -- -- -- (639,202) (639,202)
------- -------- ------- -------- ---------- -------- ---------- --------- ---------
Balance at September 30, 1996 150,000 $150,000 250,000 $250,000 $7,173,807 $ 17,847 $1,245,919 $ 100,000 $ 11,711
======= ======== ======== ======== ========= ======== ========== ========= ==========
</TABLE>
Total
Stockholders'
Equity
-------------
Balance at
December 31, 1995 $ 1,917,669
Sale of common stock 400,000
Cost associated with the
registration for selling
shareholders and warrantholders)
Issuance of 66,666 shares
of common stock in lieu of
deferred financing cost
for a loan 133,333
Accrued preferred stock
dividend (11,250)
Net loss for the nine months
ended September 30, 1996 -
-----------
Balance at September 30, 1996 $ 1,775,504
===========
See accompanying notes to consolidated financial statements (Unaudited).
F-4
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
(Formerly Tamarac Ventures, Ltd.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
(UNAUDITED)
1996 1995
--------- ---------
Cash flows for operating activities:
Loss from operations $(639,202) $ (67,984)
Adjustments to reconcile net (loss) to net cash
provided by (used for) operating activities:
Depreciation and amortization 160,311 171,327
Cumulative effect of change in estimate 182,235 --
Amortization of deferred financing costs 46,485 --
Deferred income taxes -- 40,000
Gain on disposal of vehicle -- (31,280)
Reclassification of net equipment to operations -- 9,193
Changes in operating assets and liabilities:
Accounts receivable (471,009) (180,158)
Inventory (4,898) (8,613)
Due from affiliates (10,707) (35,907)
Prepaid expenses and taxes 19,286 1,725
Cost in excess of billings on uncompleted contracts 27,076 103,278
Accounts payable 54,850 66,689
Accrued expenses 5,409 169,178
Income taxes payable (6,997) (34,383)
Customer deposits --
Billings in excess of contract revenues
on uncompleted contracts (26,960) (443,013)
--------- ---------
Net cash flows used for operating activities (664,121) (239,948)
--------- ---------
Cash flows from investing activities:
Purchase of equipment and fixtures (28,365) (13,695)
Database development costs capitalized (71,682) (198,157)
Patent cost capitalized (2,150) --
Computer system development costs capitalized (2,277) (146,235)
Proceeds from insurance on vehicle -- 34,271
--------- ---------
Net cash flows used for investing activities (104,474) (323,816)
--------- ---------
Cash flows from financing activities:
Employee loans and advances (2,800) --
(Repayments to) proceeds from demand note
- line of credit (50,000) 50,000
Repayment of stockholders loans (96,520) --
Proceed from stockholders loans 575,000 140,225
Principal payments on long-term debt (54,068) (54,618)
Offering costs incurred (25,046) --
Proceeds from sale of common stock 400,000 100,000
--------- ---------
Net cash flows provided by financing activities 746,566 235,607
--------- ---------
Net decrease in cash (22,029) (328,157)
Cash at beginning of period 140,519 336,505
--------- ---------
Cash at end of period $ 118,490 $ 8,348
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 11,691 $ 9,336
========= =========
Income taxes $ 8,526 $ 4,353
========= =========
Schedule of non-cash investing and financing activities:
Issuance of restricted 66,666 shares of common stock
for deferred financing cost associated with a loan $ 133,333 $ --
========= =========
Accrued dividends on Series 1 Preferred Stock $ 11,250 $ --
========= =========
See accompanying notes to consolidated financial statements (Unaudited).
F-5
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
(Formerly Tamarac Ventures, Ltd.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
NOTE 1 - GENERAL
NeuroCorp, Ltd. (the "Company") was incorporated in the State of
Nevada on March 18, 1987. On November 23, 1994 the Company entered
into an agreement and a plan of reorganization with HZI Research
Center, Inc. ("HZI") to exchange 100% of HZI's outstanding common
stock for 4,600,000 post-split $.001 par value common shares of the
Company. Simultaneously, the Company effectuated a 1 for 50 reverse
stock split thereby reducing its outstanding common shares from
40,000,000 to 800,000. The financial statements give effect to the
reverse stock split. This transaction has been accounted for as a
reverse acquisition of HZI, whereby its assets and liabilities have
been recorded at their historical costs. Prior to this transaction
the Company had no significant assets, liabilities or operations.
Accordingly, the financial statements at September 30, 1996 and
December 31, 1995 represent the assets and liabilities of HZI and
it's affiliates and the results of their operations and cash flows
for the nine months ended September 30, 1996 and 1995. All costs
incurred in connection with the reverse acquisition have been
charged to additional paid-in capital at the completion of the
transaction. On the closing date, the Company's Board of Directors
were replaced by directors designated by HZI and the Company changed
its name from Tamarac Ventures, Ltd. to NeuroCorp, Ltd.
The Company, through its wholly-owned subsidiary, HZI, is primarily
involved in three inter-related businesses all of which involve the
interaction or utilization of the Company's proprietary software,
databases and medical devices for the diagnosis and treatment of
brain-related disorders. The three businesses are as follows: (i)
performing long-term contract services for medical research for
major domestic and international pharmaceutical firms (ii) designing
and producing proprietary neuropsychiatric diagnostic testing
equipment, currently known as Brain Function Monitoring (BFM) system
(iii) providing interactive diagnostic testing services and analysis
to physicians and hospitals via the telephone, through HZI's
subsidiary, TeleMap, Inc. ("TeleMap").
In January 1996, the Company created a new wholly-owned subsidiary
Memory Centers of America, Inc. ("MC Inc."). MC Inc. will provide
therapeutic services to people who suffer from memory impairment. MC
Inc. began its pilot operation's at the end of the second quarter of
1996.
The Company conducts its operations in Tarrytown, New York. The
Company's revenues consist of a concentration of significant
long-term contracts, thus leading to a limited number of customers
comprising a significant percentage of revenues. See Note 5(b) for
additional information.
The unaudited interim financial statements for the nine months ended
September 30, 1996 and 1995 included herein have been prepared by
the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission and, in the opinion of the
Company, reflect all adjustments (consisting only of normal
recurring adjustments) and disclosures which are necessary for a
fair presentation. The results of operations for the three and nine
months ended are not necessarily indicative of the results for the
full year. For further information, refer to the Company's audited
financial statements and footnotes thereto at December 31, 1995,
included in Form 10- KSB filed with the Securities and Exchange
Commission.
F-6
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
(Formerly Tamarac Ventures, Ltd.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
NOTE 1 - GENERAL (Cont'd)
On September 30, 1996, the Company revised its estimated useful life
for computer system product 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 cumulative
effect of this change in estimate amounting to $182,235 or $.03 per
share, was a charge to operations during the third quarter 1996.
NOTE 2 - DEMAND NOTE - LINE OF CREDIT
The $50,000 balance outstanding at December 31, 1995 represents
borrowings by HZI under a $100,000 secured line of credit agreement
with a bank. The agreement entered into on April 26, 1995 requires
HZI to pay interest monthly at one percent (1%) above the prime rate
and said principal balance is due on demand. The demand note is
secured by equipment, receivables and general intangibles. The
outstanding balance was repaid in full during March 1996.
NOTE 3 - LONG-TERM DEBT
Long-term debt consists of the following at:
September 30, December 31,
1996 1995
------------ ------------
Note payable due in thirty-six (36)
monthly installments of $6,175
including interest at prime plus 1%
per annum due April 1997. The note is
collateralized by equipment,
receivables and general intangible
assets and has been personally
guaranteed by certain officers. $48,636 $ 97,715
Note payable due in forty-eight (48)
monthly installments of $768
including interest at 9.5% per annum
due November 1999. The note is
collateralized by a Company vehicle. 25,257 30,246
--------- ---------
73,893 127,961
Less: current portion 55,840 90,227
--------- ---------
Long-term portion $ 18,053 $ 37,734
========= =========
Long-term debt matures as follows:
Year ended
December 31,
1995
------------
1996 $ 90,227
1997 21,587
1998 8,073
1999 8,074
---------
$ 127,961
F-7
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
(Formerly Tamarac Ventures, Ltd.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
NOTE 4 - STOCKHOLDERS' EQUITY
a) Amendment to Certificate of Incorporation
In connection with the reverse acquisition of HZI (See Note 4g), on
November 23, 1994, the Company amended its Certificate of
Incorporation to change its name from Tamarac Ventures, Ltd. to
NeuroCorp, Ltd. Further, the Company reduced its authorized common
stock from 200,000,000 shares to 100,000,000 shares and authorized
5,000,000 shares of preferred stock of which 400,000 of the
5,000,000 shares of the preferred stock has been deemed to be Class
B, Series 1 and Series 2. Accordingly, the financial statements give
effect to these items.
b) Discount on common stock
On April 30, 1987, 600,000 shares (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 4e below.
F-8
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
(Formerly Tamarac Ventures, Ltd.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
NOTE 4 - STOCKHOLDERS' EQUITY (Cont'd)
e) Voting trust agreement
In January 1992, the shareholders of HZI entered into an agreement
whereby all shares of HZI were transferred into a voting trust. The
trust was created for the purpose of granting the trustee the
exclusive right to vote upon the shares contained in the trust. The
trust has a life of twenty (20) years and for the first ten (10)
years the Company's current chairman is the trustee. Thereafter,
HZI's president who is the son of the Company's chairman becomes the
trustee. The trustee has the exclusive right to vote all such shares
subject to any limitations in the HZI Certificate of Incorporation.
Commencing with the reverse acquisition as discussed in Note 4g, the
original members of the voting trust transferred their newly issued
shares in the Company to the voting trust.
f) Issuance of warrants
As part of the acquisition, the Board of Directors of the Company
have authorized the issuance of Class B and Class C Warrants to all
stockholders of the Company who were stockholders of record as of
November 1, 1994. The Warrants were distributed on a 1 Warrant for 1
share of common stock basis (post reverse stock split) and comprised
in the aggregate 800,000 Class B and 800,000 Class C Warrants, each
of which is exercisable into one share of Common Stock of the
Company. The Class B Warrants are exercisable at $2.25 per share and
the Class C Warrants are exercisable at $2.75 per share, and expire
on September 30, 1996. The shares of Common Stock underlying the
Warrants must be registered with the Securities and Exchange
Commission (SEC) prior to the Warrants becoming exercisable. The
Company may, at its sole discretion, undertake to file a
registration statement with the Securities and Exchange Commission
wherein the Company will register the Warrants and the shares of
Common Stock underlying the Warrants. However, until such time as
said registration statement is filed and becomes effective, the
Warrants will not be exercisable. The number of shares underlying
the Warrants, and the exercise price of the Warrants, may be
adjusted downward or upward at any time by the Company's Board of
Directors. Further, the Warrants are redeemable by the Company at
any time upon thirty days written notice, at a price of $.001 per
Warrant.
In January 1996, the Company's Board of Directors reduced the
exercise price of the Class B and Class C warrants from $2.25 to
$1.00 per share and from $2.75 to $2.00 per share, respectively and
the expiration dates were extended to June 30, 1997. As described in
Note 4(m), in February 1996 the Company filed with the SEC to
register these warrants.
F-9
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
(Formerly Tamarac Ventures, Ltd.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
NOTE 4 - STOCKHOLDERS' EQUITY (Cont'd)
g) Reverse acquisition of subsidiary
On November 23, 1994, the Company entered into an agreement and a
plan of reorganization with HZI to exchange 100% of HZI's
outstanding common stock for 4,600,000 post-split $.001 par value
common shares of the Company. Such transaction superseded the Letter
of Intent entered into between the parties on March 18, 1994.
Simultaneously, the Company effectuated a 1 for 50 reverse stock
split thereby reducing its outstanding common shares from 40,000,000
to 800,000. The financial statements have been restated to give
effect to the reverse stock split.
All costs incurred in connection with the acquisition have been
charged to additional paid-in capital at the completion of the
transaction. On the closing date, the Company's Board of Directors
were replaced by directors designated by HZI.
Pursuant to the March 18, 1994 Letter of Intent, between the Company
and HZI, the Company agreed, with the assistance of others, to
arrange for certain financing for HZI within a specified time
period. On March 24, 1994, a bridge loan was made for $75,000 by
Trinity American Corporation ("TAC") a stockholder of the Company,
to HZI, pursuant to the agreement. The financing that was to be
arranged for HZI was not timely arranged, based upon the terms of
the agreement HZI was not responsible for the repayment of the
bridge loan. This transaction has been recorded as a forgiveness of
debt in the year ended December 31, 1994.
On November 23, 1994 TAC contributed $400,000 to the Company's
capital account with no further issuance of common stock. In
December 1994, the Company and TAC reached an agreement whereby in
consideration for the $400,000 paid on November 23, 1994 two classes
of preferred stock were issued to TAC. The first class of 150,000
shares of cumulative non-convertible preferred stock class B, series
1, no par value has a liquidation preference of $1 per share.
Dividends accrue on such stock commencing January 1, 1996 at a rate
of 10% of the liquidation value and are payable semi-annually in
cash or stock. The number of shares of stock to be issued when
dividends are paid in stock is based on the average closing bid
price of the stock 30 consecutive days prior to the date the
dividend becomes payable. At September 30, 1996, the Company has
accrued a dividend of $11,250 related to this preferred stock based
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 September 30, 1996, neither TAC nor the Company have
exercised these conversion features.
F-10
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
(Formerly Tamarac Ventures, Ltd.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
NOTE 4 - STOCKHOLDERS' EQUITY (Cont'd)
h) Stock Option Plan Transactions
On November 23, 1994, the Company adopted an incentive stock option
plan that will provide for the granting of options to purchase up to
1,500,000 shares of the Company's common stock that are intended to
qualify either as incentive stock options within the meaning of
Section 422 of the Internal Revenue Code or a non-statutory stock
option plan. Options to purchase shares may be granted under the
statutory stock option plan to persons who are employees or officers
of the Company. If the Company adopts a non-statutory stock option
plan, options shall be granted to, employees, officers, non-employee
directors, and consultants to the Company.
The stock option plan provides for its administration by a committee
chosen by the Board of Directors. The committee shall have full
discretionary authority to determine the number of shares to be
granted, the grantees receiving the options, the exercise period,
and the exercise price for which options will be granted. In the
case of statutory stock option plans, the committee's authority to
establish the terms and conditions of such options, including, but
not limited to their exercise price, shall be subject to
restrictions imposed by Section 422 of the Internal Revenue Code.
On September 19, 1995, the Company granted to its President and Vice
Chairman a non-qualified stock option to purchase 250,000 shares of
common stock at an exercised price of $.10 per share. This option
expires seven (7) years from the date of grant and the underlying
common shares related to the stock option are restricted. At the
date of grant the Company recorded compensation expense of $50,000
based upon the fair value of the stock option at that date.
In December 1995, the Company granted a consultant a non-qualified
stock option to purchase 50,000 shares of common stock at $.01 per
share. The underlying common shares related to the stock option are
restricted. At the date of grant the Company recorded a consulting
fee of $16,875 based upon the fair value of the stock option on that
date. On November 6, 1996 the Company cancelled the option agreement
granted to the consultant, and issued 50,000 shares of the Company's
common stock.
i) Sale of shares by former principal shareholder
Pursuant to a Stock Purchase Agreement dated October 25, 1994, the
then principal shareholder and President of the Company agreed to
sell 556,000 of his post-split shares of the Company's common stock
to TAC, for a purchase price of $40,000. Such shares were
transferred to TAC immediately upon the completion of the Company's
acquisition of HZI. Further, TAC has the right to transfer a portion
of the shares purchased to other nonaffiliated persons through a
sale of all or a part of the shares to offshore investors pursuant
to Regulation S of the Securities Act of 1933, as amended.
TAC has the right, on one occasion, to demand that the Company file
a registration statement, at TAC's expense, as to all of the shares
of the Company's common stock held by TAC.
F-11
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
(Formerly Tamarac Ventures, Ltd.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
NOTE 4 - STOCKHOLDERS' EQUITY (Cont'd)
j) Sale of common stock
On April 14, 1995, March 2, 1996 and March 25, 1996, the Company
sold 57,143, 333,333 and 666,667 shares of common stock for
$100,000, $133,333 and $266,667, respectively, to foreign investors
utilizing Regulation "S" guidelines. Said shares have not been
registered under the Securities Act of 1933 (the "Act"), hence the
shares cannot be sold, transferred, assigned or hypothecated unless
they are either registered under the Act or sold pursuant to an
applicable exemption from registration.
k) Issuance of common stock as consideration for loans
(i) On July 19, September 14, October 12, 1995 and February 26,
1996, the Company and the Chairman of the Board entered into a
letter agreement with TAC to borrow $100,000, $40,000, $60,000
and $75,000, respectively. The $100,000 and $60,000 loans have
an interest rate of 9% per annum, respectively, and were due in
six months from the date of issuance including accrued interest,
respectively. The $40,000 and $75,000 loans have an interest
rate of 10% and are due within 90 days and six months,
respectively, from the date of issuance including accrued
interest. TAC and the Company have agreed to extend the due
dates of the above loans to June 30, 1997 or the date the Class
B and C warrants are exercised in their entirety prior to June
30, 1997. As additional consideration for the $100,000 loan, the
Company agreed to issue 49,998 shares of restricted common stock
to TAC. The Company has recorded the additional consideration as
interest expense, with a cost of $14,061, which is based upon
fifty percent (50%) of the fair value of the common stock issued
on July 19, 1995, the date of the agreement. Further, the letter
agreements give TAC the option to convert said loans into
550,000 shares of common stock.
On September 13, 1996 the Company borrowed from TAC $50,000,
which is payable from any future private placement proceeds.
Said loan bears interest at 9.5% per annum. Further the loan
agreement gives TAC the option to convert each $4.00 of debt
into one (1) unit. Each unit will consist of one (1) share of
Common Stock of the Company and two (2) Stock Purchase Warrants.
Each Warrant is exercisable into one (1) share of Common Stock
of the Company at $8.00 per share until August 31, 1997,
thereafter $10.00 per share. The Stock Purchase Warrants expire
on August 31, 1998.
F-12
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
(Formerly Tamarac Ventures, Ltd.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
NOTE 4 - STOCKHOLDERS' EQUITY (Cont'd)
k) Issuance of common stock as consideration for loans (Cont'd)
ii) On May 24, 1996, the Company entered into an agreement with a
shareholder to borrow $200,000. The loan is non-interest bearing
and is payable within one (1) year or is payable out of the
first proceeds resulting from any exercise of outstanding Class
B and Class C warrants (See Note 4f), whichever comes first. As
additional consideration the Company issued 66,666 shares of
restrictive common stock. The Company has valued the common
stock at $133,333 or fifty percent (50%) of the fair market
value on May 24, 1996 the date of 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 6c. Further,
the Company has agreed to register said shares. See Note 4m.
l) Sale of common stock and capital contribution
In December 1995, the Company sold 1,000,000 post-split shares of
.001 par value common stock to four unrelated investors for
$250,000. As a condition of the sale the Company's Chairman agreed
to contribute 400,000 shares of the Company's common stock owned by
him to the Company and to then have them cancelled by the Company.
The Company has accounted for this as a $100,000 contribution of
capital based upon the fair value of the stock at the date of
contribution. The Company agreed to file a registration statement in
February 1996 as one of the conditions of the sale, as described
below.
m) Registration of common stock
During February, 1996, the Company commenced registering common
shares and warrants pursuant to certain registration rights, and
other contractual obligations incurred by the Company in connection
with the issuance of such common shares and warrants pursuant to the
HZI acquisition agreement signed in November 1994 and the sale of
common shares in December 1995. The Company will not receive any of
the proceeds from the sale of the common shares or warrants since
all respective shares are being offered by the selling stockholders.
The Company has also agreed to pay $25,046 of cost related to the
registration.
n) Chairman's capital contribution
As discussed in Note 5(c)(1) the Company's Chairman waived $146,347
of his base annual salary for the year ended December 31, 1995. Said
amount has been recorded as an administrative expense and as an
increase to additional paid-in-capital for the year ended December
31, 1995.
F-13
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
(Formerly Tamarac Ventures, Ltd.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
NOTE 5 - COMMITMENTS AND CONTINGENCIES
a) Operating leases
The Company leases its office facilities under a noncancellable
operating lease expiring in 1998. The lease contains a provision for
additional rent which is equal to the Company's pro rated share of
future real estate taxes. In addition, the Company has a
noncancellable operating lease for office equipment expiring in
1997.
A schedule of future minimum rental payments at December 31, 1995 is
as follows:
Year ended December 31,
1996 $ 110,490
1997 92,557
1998 77,868
---------
$ 280,915
Rent expense under all operating leases for the nine months ended
September 30, 1996 and 1995 was $91,811 and $117,537, respectively.
b) Concentration of credit risk
For the nine months ended September 30, 1996 and 1995,
approximately 62% and 44%, respectively, of net sales were derived
from two and one unrelated customer, who are in the pharmaceutical
industry. As of September 30, 1996 and December 31, 1995,
approximately 60% and 54% of accounts receivable is due from two
unrelated customers.
c) Employment Agreements
1) On September 20, 1995, the Company's Chairman of the Board
entered into an employment agreement providing for a base salary
of $250,000 per year. The agreement is for an initial term of 10
years and is renewable on a month to month basis thereafter. The
agreement provides that on each anniversary date the Chairman's
salary shall be increased in good faith subject to negotiations
between the Chairman and the Company. The Company has agreed to
review the services rendered by the Chairman at least annually
and, at the discretion of the Board of Directors award a cash
bonus or make a contribution to a deferred compensation plan.
Further, the agreement provides for a term life insurance policy
amounting to $1,000,000 payable to the Chairman's designated
beneficiary and also provides for a vehicle and driver funded by
the Company. For the nine months ended September 30, 1996, the
Company's Chairman waived his right to receive the term life
insurance as provided for in the employment agreement.
F-14
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
(Formerly Tamarac Ventures, Ltd.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
NOTE 5 - COMMITMENTS AND CONTINGENCIES (cont')
c) Employment Agreements (Cont'd)
1) (Cont'd)
For the year ended December 31, 1995 the Company's Chairman
waived $146,347, of his base annual salary. Said salary amount
was recorded as an administrative expense and as an increase to
additional paid-in-capital. Additionally, the Company's Chairman
waived his right to receive the term life insurance as provided
for in the employment agreement for said year. See Note 4(n)
2) On December 7, 1994, the Company entered into an employment
agreement with its Executive Vice President providing for a base
salary of $100,000 per year. The agreement expires on January 1,
2000 and is renewable on a year to year basis thereafter. The
agreement provides that on January 1 of each year the Executive
Vice President shall be entitled to a 10% salary increase and an
annual bonus equal to at least fifty percent (50%) of his base
salary subject to the Board of Directors approval. If the
employee is terminated within the contract period due to the
change in control of the Company as defined in the Securities
Exchange Act of 1934, under Sections 13(d) and 14(d), said
Executive Vice President shall be entitled to a lump sum payment
equal to five (5) time his gross annual compensation, in effect
at date of termination. Additionally, for the three year period
after the date of termination, the Company is obligated to
provide the employee with life and health insurance benefits
substantially similar to those which the Executive Vice
President was receiving prior to the date of termination.
d) Consulting agreement
On July 1, 1995, the Company entered into a five (5) year consulting
agreement with a Corporation controlled by the Company's President
and Vice Chairman. Said agreement provides for a fee of $75,000 per
annum.
NOTE 6 - RELATED PARTY TRANSACTIONS
a) Revenues from affiliates
The Company charges NYI, as well as Manhattan Westchester Medical
Services, P.C. ("Manhattan West") for the use of certain employees
and office and laboratory space of the Company. Manhattan West is
also under the common control of the Company's Chairman. Net
revenues from these affiliates for the nine months ended September
30, 1996 and 1995 amounted to $24,361 and $156,002, respectively.
The above transactions between HZI and NYI have been eliminated in
the consolidated financial statements.
F-15
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
(Formerly Tamarac Ventures, Ltd.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
NOTE 6 - RELATED PARTY TRANSACTIONS (Cont'd)
b) Services provided by affiliates
HZI subcontracts to NYI, a not-for-profit entity under the control
of the Company's shareholder's, 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. Expenses incurred with NYI for the nine months ended
September 30, 1996 and 1995 were $0 and $40,715, respectively. The
net payable due NYI at September 30, 1996 and at December 31, 1995
amounted to $0 and $37,583, respectively. The above transactions
between HZI and NYI have been eliminated in the consolidated
financial statements.
During 1994 HZI and Manhattan West entered into an arrangement
whereby Manhattan West would provide medical consulting services to
HZI's TeleMap business. This arrangement was discontinued during
1995 and is now being performed by the Company's personnel. Services
provided by Manhattan West to HZI for the nine months ended
September 30, 1995 amounted to approximately $5,000.
c) Stockholder notes and loans
September 30, December 31,
1996 1995
--------- ---------
Non-interest bearing loans and payables
(See i below) $108,861 $ 155,381
Notes payable bearing an interest of
7.5% to 10% (See ii below) 550,000 225,000
Non-interest bearing loan payable
(See iii below) 200,000 --
--------- ---------
$ 858,861 $ 380,381
========= =========
i) Stockholder notes and loans payable relates to advances made to
HZI and NYI by its Chairman of the Board which are due on
demand.
F-16
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
(Formerly Tamarac Ventures, Ltd.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
NOTE 6 - RELATED PARTY TRANSACTIONS (Cont'd)
c) Stockholder notes and loans (Cont'd)
ii) On July 19, September 14, October 12, 1995 and February 26,
1996, the Company and the Chairman of the Board entered into a
letter agreement with TAC to borrow $100,000, $40,000, $60,000
and $75,000, respectively. The $100,000 and $60,000 loans have
an interest rate of 9% per annum, respectively, and were due in
six months from the date of issuance including accrued interest,
respectively. The $40,000 and $75,000 loans have an interest
rate of 10% and are due within 90 days and six months,
respectively, from the date of issuance including accrued
interest. TAC and the Company have agreed to extend the due
dates of the above loans to September 30, 1997 or the date the
Class B and C warrants are exercised in their entirety prior to
September 30, 1997. As additional consideration for the $100,000
loan, the Company agreed to issue 49,998 shares of restricted
common stock to TAC. The Company has recorded the additional
consideration as interest expense, with a cost of $14,061, which
is based upon fifty percent (50%) of the fair value of the
common stock issued on July 19, 1995, the date of the agreement.
Further, the letter agreements give TAC the option to convert
said loans into 550,000 shares of common stock.
On February 5, 1996, the Company borrowed from TAC an additional
$50,000 which is due on demand. Said loan has an interest of 10%
and was repaid during April, 1996.
On November 16, 1995, the Company entered into a letter
agreement with SRS Partners, a partnership that is affiliated
with TAC to borrow $25,000. The loan bears interest at a rate of
9% and is due within six months or out of the proceeds of the
first funding of a Reg. "S" transaction.
On September 13, 1996 the Company borrowed from TAC $50,000,
which is payable from any future private placement proceeds.
Said loan bears interest at 9.5% per annum. Further the loan
agreement gives TAC the option to convert each $4.00 of debt
into one (1) unit. Each unit will consist of one (1) share of
Common Stock of the Company and two (2) Stock Purchase Warrants.
Each Warrant is exercisable into one (1) share of Common Stock
of the Company at $8.00 per share until August 31, 1997,
thereafter $10.00 per share. The Stock Purchase Warrants expire
on August 31, 1998.
On July 16, 1996 the Company entered into two loan agreements
with two unrelated shareholders. Each loan was for $100,000 and
bear interest at 9% per annum and is due within one (1) year, or
from the proceeds of the Company's securities including the
exercise of Class B and C Warrants.
At September 30, 1996 and December 31, 1995, accrued interest
related to such notes and loans amounted to $26,643 and $6,598,
respectively, and is included in accrued expenses.
F-17
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
(Formerly Tamarac Ventures, Ltd.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
NOTE 6 - RELATED PARTY TRANSACTIONS (Cont'd)
c) Stockholder notes and loans (Cont'd)
iii) On May 24, 1996, the Company entered into an agreement with a
shareholder to borrow $200,000. The loan is non-interest bearing
and is payable within one (1) year or is payable out of the
first proceeds resulting from any exercise of outstanding Class
B and Class C warrants, (Note 4f) whichever comes first. As
additional consideration the Company issued 66,666 shares of
restrictive common stock. The Company issued and 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 for this transaction. The
deferred financing cost are being amortized over one year, which
is the maximum term of the loan, or will be charged to
operations if paid prior to May 24, 1997. Further, the Company
has agreed to register said shares. See Note 4(m).
d) Due from affiliates
Due from affiliates represent amounts due to HZI which are unsecured
demand obligations amounting to the following:
September 30, December 31,
1996 1995
--------- ---------
Due from Manhattan West $ 78,356 $ 68,855
Academia 21,294 20,088
--------- ---------
$ 99,650 $ 88,943
========= =========
Academia Medicine Psychiatric Foundation, Inc. ("Academia") is a
not-for-profit entity. One of the Company's majority stockholders is
one of nine Directors of the Board.
e) Shareholder transactions
On September 19, 1995 the Company granted to its Vice Chairman a
non-qualified stock option to purchase 250,000 shares of common
stock at an exercised price of $.10 per share. This option expires
seven (7) years from the date of grant and the underlying common
shares related to the option are restricted. At the date of grant
the Company recorded compensation expense of $50,000 based upon the
fair value of the stock option at that date.
f) Consulting agreement
On July 1, 1995, the Company entered into a five (5) year consulting
agreement with a Corporation controlled by the Company's President
and Vice Chairman. Said agreement provides for a fee of $75,000 per
annum.
F-18
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
(Formerly Tamarac Ventures, Ltd.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
NOTE 6 - RELATED PARTY TRANSACTIONS (Cont'd)
g) Capital contribution
In December 1995, the Company sold 1,000,000 shares of common stock
to four unrelated investors for $250,000. As a condition of the sale
the Company's Chairman agreed to contribute 400,000 shares of the
Company's common stock owned by him to the Company and to then have
them cancelled by the Company. The Company has accounted for this as
a $100,000 contribution of capital based upon the fair value of the
stock at the date of contribution. The Company agreed to file a
registration statement in February 1996 as one of the conditions of
the sale, see Note 4(m).
h) Due from affiliates
The Company charges NYI and Manhattan West for the use of certain
employees and laboratory space. NYI and Manhattan West are under the
common control of the Company's Chairman. At September 30, 1996 and
December 31, 1995, amounts due from Manhattan West for these
services amounted to $73,238 and $68,855, respectively.
i) Chairman's capital contribution
As discussed in Note 5(c)(1) the Company's Chairman waived $146,347
of his base annual salary for the year ended December 31, 1995. Said
amount has been recorded as an administrative expense and as a
capital contribution for the year ended December 31, 1995 with an
increase to additional paid-in-capital.
F-19
<PAGE>
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
NeuroCorp., Ltd. ("the Company") was incorporated in the State of
Nevada on March 18, 1987. On November 23, 1994, in connection with
the reverse acquisition of HZI Research Center, Inc. and Subsidiary
("HZI") the Company amended its Certificate of Incorporation to
change its name from Tamarac Ventures, Ltd. to NeuroCorp., Ltd.
Further, the Company reduced its authorized common stock from
200,000,000 shares to 100,000,000 shares and authorized 5,000,000
shares of preferred stock.
The Company, through its wholly-owed subsidiary, HZI, is primarily
involved in three inter-related businesses all of which involve the
interaction or utilization of the Company's proprietary software,
databases and medical devices for the diagnosis and treatment of
brain-related disorders. The three businesses are as follows: (i)
the contract division performs contract medical research services
(principally conducting clinical trials which included Phase I
proprietary quantitative electroencephalogram ("EEG") studies) for
health agencies, contract research organizations and pharmaceutical
companies (ii) designing and subcontracting the manufacturing of
proprietary neuropsychiatric diagnostic testing software and
equipment, which currently is their Brain Function Monitoring
Systems(R) and (BFM) and (iii) providing interactive diagnostic
testing services and analysis to physicians and hospitals via the
telephone, the service is known as TeleMap (R).
In January 1996, the Company created a new wholly-owned
subsidiary Memory Centers of America, Inc. ("MC Inc."). MC Inc.
will provide therapeutic services to people who suffer from
memory impairment. MC Inc. began full operation's of the pilot
program at the end of the second quarter of 1996, and is
currently not a significant business segment of the Company.
On November 23, 1994, in connection with its acquisition of HZI,
the Company changed its fiscal year end from September 30 to
December 31 so as to conform with HZI's fiscal year end of December
31.
RESULTS OF OPERATIONS
Three months ended September 30, 1996 as compared to the three
months ended September 30, 1995
Long-term contract revenues are recognized on the percentage of
completion method by multiplying total estimated contract revenue
by the percentage of completion. Changes in each contracts
performance, conditions and estimated profitability including those
arising from contract penalty provisions, and final contract
settlements may result in revisions to costs and income and are
recognized in the period in which the revisions are determined. In
addition, losses are recognized in full when determinable.
Revenue from computer system sales, which include BFM, are
recognized upon the delivery of the software or turnkey systems.
Service revenues such as TeleMap and MCA, are recognized as they
are rendered.
Revenues for the three months ended September 30, 1996 and 1995
amounted to $194,593 and $396,759, respectively. The gross profits
for the three months ended September 30, 1996 and 1995 amounted to
$50,654 and $211,572, respectively or a net decrease of $160,918.
The gross profit percentages for the three months ended September
30, 1996 and 1995 amounted to 26% and 53%, respectively, or a net
decrease of 27%.
F-20
<PAGE>
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Cont'd)
Three months ended September 30, 1996 as compared to the three
months ended September 30, 1995 (Cont'd)
The net reduction of gross profit during the three months ended
September 30, 1996 as compared to the three months ended September
30, 1995 is attributable to the following:
1. The Company has not entered into any major multi million dollar
new long-term contracts since December 31, 1993 and major
contracts recorded prior to this period have been substantially
completed during the year ended December 31, 1994. At the end of
1995 and during the nine months ended September 30, 1996 the
Company received $941,000 of new contracts which should be
completed during 1996. Revenues from contracts for the three
months ended September 30, 1996 as compared to the three months
ended September 30, 1995 amounted to $133,984 and $193,337,
respectively, or a net decrease of $59,353. The decrease in
revenues from contracts for the three months ended September 30,
1996 is attributable to the Company commencing work on new
contracts entered into during 1996. During the three months
ended September 30, 1996 the Company just started work on two
new contracts and the majority of the third quarter revenues was
from a major contract started in 1994 that is still ongoing.
Gross profit from contracts for the three months ended September
30, 1996 as compared to the three months ended September 30,
1995 amounted to $66,213 and $40,272, respectively or a net
increase of $25,941. The gross profit percentage from contracts
for the three months ended September 30, 1996 is 49% as compared
to September 30, 1995 which was 32%. The decrease in the gross
profit is attributable to a low gross profit contract that
dominated the third quarter 1995 contract research division
revenues. Of the $193,337 revenues earned during the third
quarter 1995, $132,098 is attributable to this low gross profit
contract.
As of September 30, 1996 the Company had a backlog to perform
approximately $730,000 of contracts. The Company expects to
recognize a minimum of $350,000 of revenues from the backlog
during the remaining portion of 1996.
2. Net sales of BFM Systems for the third quarter of 1996 and 1995
amounted to none and $147,934, respectively, or a net decrease
in sales of $147,934. The third quarter of 1995 was the initial
start of a new generation of BFM Systems of which the Company
believes was well received. Gross profit amounts for the three
months ended September 30, 1996 and 1995 were negative $35,856
and $103,554, respectively, or net decrease of $139,410. The
negative gross profit for the three months ended September 30,
1996 represents fixed overhead costs of the BFM division. The
Company's management believes the lack of sales for the third
quarter of 1996 is temporary.
3. Revenues of the TeleMap division for the three months ended
September 30, 1996 and 1995 amounted to $34,933 and $55,488,
respectively, or net decrease of $20,555. The gross profit
percentages for the three months ended September 30, 1996 and
1995 amounted to 34% and 58%, respectively. The decrease in
gross profit for the three months ended September 30, 1996 as
compared to the three months ended September 30, 1995 is
attributable to the Company absorbing more fixed overhead costs
on less sales and increase in labor costs resulting from the
Company assigning additional internal staff to further improve
the quality control division.
F-21
<PAGE>
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Cont'd)
Three months ended September 30, 1996 as compared to the three
months ended September 30, 1995 (Cont'd)
4. Pilot memory centers revenues for the three months ended
September 30, 1996 amounted to $25,676. These revenues were
derived from patients participating in the Company's pilot
program.
General and administration expenses include overhead,
administration salaries, selling and consulting costs. Further, the
Company classifies the costs of planning, designing and
establishing the technological feasibility of its computer system
product as research and development costs and charges those costs
to expense when incurred. After technological feasibility has been
established, costs of producing a marketable product and its
prototype are capitalized. Capitalized database and computer system
development costs are composed of mainly of payroll and other
direct employee costs. Costs associated with above, which are not
capitalized during the period are charged to either general and
administrative or research and development expense.
General and administrative expenses for the three months ended
September 30, 1996 were $289,753 as compared to the three months
ended September 30, 1995 of $245,632 or an increase of $44,121 or
18%. The increase in general and administrative expenses for the
three months ended September 30, 1996 is due to the Company
incurring in excess of approximately $38,000 of initial costs for
its new subsidiary, Memory Centers of America, Inc. ("MC Inc.").
Further, during the three months ended September 30, 1996 as
compared to the three months ended September 30, 1995, the Company
reduced its administration billings to Manhattan Westchester
Medical Services, P.C., a medical practice that is controlled by
the Company's Chairman. ("Manhattan Westchester") by $8,503
resulting in the Company absorbing more payroll costs during the
September 30, 1996 quarter. The reduction in administration
billings to Manhattan Westchester is the result of Manhattan
Westchester decline in operations, therefore, service provided by
HZI personnel were not required. The Company elected to maintain
some personnel that were formally billed to Manhattan Westchester
to be utilized in other parts of the Company's operations.
Research and development costs ("R&D") for the three months ended
September 30, 1996 were $26,051 as compared to the three months
ended September 30, 1995 of $61,872 or a decrease of $35,872. The
decrease in R&D costs is due to reductions in fixed cost for the
R&D department. At the end of 1995, Management relocated its
research facility to its main operating division at HZI. The
Company relocated its research facility in order to enhance
communications between operational and research personnel and to
lower fixed costs, such as rent, depreciation and other associated
fixed costs. Management believes this will have a positive impact
in the future. The Company plans on maintaining the same level of
Research and Development, however, with a lower fixed costs
associated therewith.
Interest and deferred financing expenses for the three months ended
September 30, 1996 were $45,282 as compared to the three months
ended September 30, 1995 of $4,083 or an increase of $41,199. The
increase is attributable to the Company charging operations during
the second quarter of 1996 for $33,333 for amortization of deferred
financing cost resulting from a $200,000 shareholder loan discussed
in the liquidity and capital resources section. Additionally, the
Company has increased its debt from shareholders which has resulted
in increased interest expense of approximately $6,900 during the
second and third quarter 1996 as compared to the 1995 period.
F-22
<PAGE>
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Cont'd)
Three months ended September 30, 1996 as compared to the three
months ended September 30, 1995 (Cont'd)
At September 30, 1996 the Company revised its estimate of the useful
life of the software development cots 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 effect was a one
time, non-cash charge to operations amounting to $182,235.
The Company's loss for the three months ended September 30, 1996,
amounting to $490,080, is not representative of what is expected in
the future. See table on page F- 25.
Nine months ended September 30, 1996 as compared to the nine months
ended September 30, 1995
Revenues for the nine months ended September 30, 1996 and 1995
amounted to $985,715 and $1,130,085, respectively. The gross profits
for the nine months ended September 30, 1996 and 1995 amounted to
$497,082 and $736,907, respectively or a net decrease of $239,825.
The gross profit percentages for the nine months ended September 30,
1996 and 1995 amounted to 50% and 65%, respectively, or a net
decrease of 15%.
The net reduction of gross profit during the nine months ended
September 30, 1996 as compared to the nine months ended September
30, 1995 is attributable to the following:
1. Revenues from contracts for the nine months ended September 30,
1996 as compared to the nine months ended September 30, 1995
amounted to $611,698 and $622,018, respectively, or a net
decrease of $10,320. The decrease in revenues from contracts for
the nine months ended September 30, 1996 is attributable to the
Company commencing work on new contracts entered into during 1995
and of which work started in the latter part of 1996. Gross
profit from contracts for the nine months ended September 30,
1996 as compared to the nine months ended September 30, 1995
amounted to $292,419 and $309,729, respectively or a net decrease
of $17,310. The gross profit percentage from contracts for the
nine months ended September 30, 1996 is 48% as compared to
September 30, 1995 which was 50%. The decrease in the gross
profit is attributable to a lower gross profit on contracts in
progress during nine months ended September 30, 1996 as compared
to the nine months ended September 30, 1995. During the first
quarter of 1995 the contract research division was working on a
major high gross profit contract, which impacted positively on
the nine months ended September 30, 1995.
2. Net sales of BFM Systems for the nine months ended 1996 and 1995
amounted to $232,685 and $388,489, respectively, or a net
decrease of $155,804. The gross profit percentage on these sales
for the nine months ended September 30, 1996 and 1995 amounted to
61% and 82%, respectively or net decrease of 21%. The second
quarter of 1995 started the initial sales of the Company's new
generation of BFM Systems. The majority of these 1995 sales were
to Beta sites who are utilizing the new systems in worldwide
studies being supervised by the contract research division. The
Beta site equipment had a cost basis which had been reduced by
depreciation in connection with contract revenues of the previous
years. This resulted in higher than normal gross profits for the
sales of BFM Systems in 1995 due to the cost basis being less
than the standard cost basis.
F-23
<PAGE>
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Cont'd)
Nine months ended September 30, 1996 as compared to the nine months
ended September 30, 1995 (Cont'd)
3. Revenues of the TeleMap division for the nine months ended
September 30, 1996 and 1995 amounted to $91,379 and $119,578,
respectively, or net decrease of $28,199. The gross profit
percentages for the nine months ended September 30, 1996 and 1995
amounted to 47% and 78%, respectively. The decrease in sales for
the nine months ended September 30, 1996 as compared to the nine
months ended September 30, 1995 is attributable to the Company
discontinuing business with customers who were previously
delinquent in their payments. The gross profit decrease for the
nine months ended September 30, 1996 as compared to the nine
months ended September 30, 1995, is partially the result of the
Company absorbing more fixed overhead costs allocated to cost of
revenues on less sales and increase in labor costs resulting from
the Company's assigning additional personnel in further
improvement of its quality controls.
4. Pilot Memory Centers revenues for the nine months ended September
30, 1996 amounted to $49,952. These revenues were derived from
patients participating in the Company's pilot program.
General and administrative expenses for the nine months ended
September 30, 1996 were $811,403 as compared to the nine months
ended September 30, 1995 of $673,097 or an increase of $138,306 or
21%. The increase in general and administrative expenses for the
nine months ended September 30, 1996 is due to the Company incurring
in excess of approximately $150,000 of initial costs for its new
subsidiary, Memory Centers of America, Inc. ("MC Inc."). Further
during the nine months ended September 30, 1996 as compared to the
nine months ended September 30, 1995, the Company reduced its
administration billings to Manhattan Westchester Medical Services,
P.C., a medical practice that is controlled by the Company's
Chairman. ("Manhattan Westchester") by $44,408 resulting in the
Company absorbing more payroll costs during the September 30, 1996
period.The reduction in administration billings to Manhattan
Westchester is the result of Manhattan Westchester decline in
operations, therefore, service provided by HZI personnel were not
required. The Company elected to maintain some personnel that were
formally billed to Manhattan Westchester to be utilized in other
parts of the company's operations.
Research and development costs ("R&D") for the nine months ended
September 30, 1996 were $71,235 as compared to the nine months ended
September 30, 1995 of $136,134 or a decrease of $64,899. The
decrease in R&D costs is due to reductions in fixed cost for the R&D
department. At the end of 1995, Management relocated its research
facility to its main operating division at HZI. The Company
relocated its research facility in order to enhance communications
between operational and research personnel and to lower fixed costs,
such as rent, depreciation and other associated fixed costs.
Management believes this will have a positive impact in the future.
The Company plans on maintaining the same level of Research and
Development, however, with a lower fixed costs associated therewith.
Commencing July 19, 1995 and through September 30, 1996, the Company
borrowed approximately $700,000 net of repayments from their
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 nine months ended September 30,
1996 as compared to the nine months ended September 30, 1995
increased by $67,681.
F-24
<PAGE>
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Cont'd)
Nine months ended September 30, 1996 as compared to the nine months
ended September 30, 1995 (Cont'd)
At September 30, 1996 the company revised its estimate of the useful
life of the 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 effect was a
one time, non-cash charge to operations amounting to $182,235.
The Company's loss at September 30, 1996, amounting to $639,202, is
not representative of what is expected i the future. The following
factors should be taken into account in computing the company's net
loss at such date:
Net loss at as of September 30, 1996 $(639,202)
Add back: Cumulative effect in change in estimate 182,235
Add back: Research and development costs
(discretionary costs) 71,235
Add back: Development stage cost for Memory Centers
of America 150,000
---------
Adjusted loss without future increase in sales $(155,794)
=========
LIQUIDITY AND CAPITAL RESOURCES
Nine months ended September 30, 1996 as compared to the nine
months ended September 30, 1995
At September 30, 1996 and December 31, 1995, the Company had
working capital of $66,661 and a working capital deficiency of
$6,765, respectively. The $73,426 net increase in working capital
for the nine months ended September 30, 1996 is attributable to
accounts receivable and deferred financing cost increasing by
$557,857. Offsetting this increase in working capital for the nine
months ended September 30, 1996 as compared to the year ending
December 31, 1995 are increases in stockholders loans of $478,480.
The increase in accounts receivable is the result of the contract
research division earned revenues exceeding amounts billed.
Deferred financing cost of $86,848 is the result of the Company
borrowing from a shareholder, a $200,000 interest free loan and as
additional consideration, issuing 66,666 shares of restricted
common stock, which was valued at 50% of the fair market value on
the date of the loan. During February and July 1996 the Company
borrowed from Trinity American Corporation ("TAC") $175,000 to
supplement its working capital position. During early April 1996
the Company repaid TAC $50,000. Further, the Company borrowed from
stockholders during July 1996 an additional $200,000.
F-25
<PAGE>
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Cont'd)
LIQUIDITY AND CAPITAL RESOURCES (Cont'd)
Nine months ended September 30, 1996 as compared to the nine
months ended September 30, 1995 (Cont'd)
For the nine months ended September 30, 1996 net cash decreased by
$22,029. For the nine months ended September 30, 1996 and 1995,
the Company used cash for operations of $664,121 and $239,948,
respectively, resulting in increased cash used in operations of
$424,173. The net increase for the nine months ended September 30,
1996 is the result of accounts receivables increasing by $290,851
from slow collections of the contract research division receivable
and loss from operations increased by $388,983 net of the
cumulative effect of the change in estimate of the useful lives of
the software development costs amounting to $182,235, previously
discussed, at September 30, 1996 as compared to the nine months
ended September 30, 1995. The net decrease in long-term contract
accounts (cost in excess of billings on uncompleted contracts and
billings in excess of contract revenues on uncompleted contracts)
of $339,619 is the result of the Company reducing its backlog of
large contracts during the March 31, 1995 quarter. As of September
30, 1996 the Company had a backlog to perform approximately
$730,000 of contracts. The contract research division during the
current year has performed significant work for a major foreign
customer, resulting in a large increase in their 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. The Company intends to complete this
report prior to year end which will result in collections of the
September 1996 receivables of approximately $300,000. The Company
has not replaced these significant high gross profit contracts
which has resulted in the Company showing a net loss of $639,202
inclusive of a cumulative effect of change in estimate amounting
to $182,235 for the nine months ended September 30, 1996 as
compared to net loss of $67,984 for the nine months ended
September 30, 1995.
For the nine months ended September 30, 1996 and 1995 cash used by
investing activities mainly in connection with cost incurred for
the development of databases and computer system products,
amounted to $104,474 and $323,816, respectively, or a net decrease
in the use of cash of $219,342. The Company during the three
months ended March 31, 1995 received a $34,271 payment from its
insurance carrier on an automobile that was destroyed in an
accident. During 1996 the Company reduced its payments by $270,433
for database and computer system product development costs as
compared to 1995. As noted in the December 31, 1995 Management
Discussions and Analysis, future capitalization of computer system
product development costs primarily in connection with the BFM
system will be substantially reduced during the 1996 period, as
compared to 1995 due to the Company completing at the end of 1995
the final programming of its BFM Systems.
F-26
<PAGE>
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Cont'd)
LIQUIDITY AND CAPITAL RESOURCES (Cont'd)
Nine months ended September 30, 1996 as compared to the nine
months ended September 30, 1995 (Cont'd)
For the nine months ended September 30, 1996 and 1995 cash
provided by financing activities amounted to $746,566 and
$235,607, respectively. For the nine months ended September 30,
1996 the Company received $400,000 in connection with the sale of
1,000,000 shares of common stock to investors and borrowed from
shareholders approximately $478,000 net of repayments.
Furthermore, during the nine months ended September 30, 1996 the
Company repaid a line of credit which amounted to $50,000. As
discussed in Note 4(m) of the September 30, 1996 financial
statements, the Company expended $25,046 to register shares of
common stock and warrants pursuant to previous contractual
obligations with certain stockholders. At September 30, 1996, the
Company accrued $11,250 of dividends for Series 1 preferred stock
as required under the agreement.
MANAGEMENT'S PLANS
Since 1974, the Company has conducted a series of research
programs on memory-enhancing drugs. Since 1991 Company was
planning to develop Memory Centers with the Company's customer
whose "anti-dementia" product was tested by the Company in recent
years. The data of these studies have now been analyzed and
publications are in process. The data from these studies
demonstrated the usefulness and the power of the Company's
proprietary method (Quantitative Pharmaco-EEG) for dementia drugs.
This method, which was developed by the Chairman of the company,
helps to assess the pharmacological effects of drugs on the human
central nervous system (CNS), thus helping to establish the
bioavailability of a CNS drug and its CNS-effective dose. It
predicts the clinical-therapeutic dose of a compound and its
possible therapeutic use in different clinical diagnostic
conditions. The Company showed and reported in a scientific
periodical that a double doe of the herbal product of this
customer has more CNS effects, thus, shall be more therapeutically
effective than that of the marketed dose. This has resulted in the
company's largest customer renewing interest in this study and
continuing to work with the Company. The Company received a new
contract valued at $780,000 from this customer to further analyze
the previous data as well as the data of the ongoing depression
research. The Company believes that the new and successful
developments in conjuction with the company's largest customer
will not only bring new contracts providing additional cash and
revenues, but will also open new doors for substantial
revenue-bring long-term contracts. This customer has also promised
to offer 1-2 CNS-effective drugs for further development and
license for marketing. The Memory Centers (TM) should also have a
positive impact on the company's cash flow in the future. 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 study to establish a side-effect-free dose. Negotiations
suggest that large collaborative studies may be initiated in the
near future. Because of this and because of the new private
investors' interest, the Company decided to develop Memory Centers
(TM) by itself. The company has started a new wholly-owed
subsidiary, Memory Centers of America, Inc. (TM). A pilot project
was initiated during the first quarter of 1996 in collaboration
with Manhattan-Westchester Medical Services, P.C., a corporation
which is controlled by the Company's Chairman and also has the
required equipment, space, staff, and professional expertise.
F-27
<PAGE>
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Cont'd)
MANAGEMENT'S PLANS (Cont'd)
MC, Inc. commenced full operations of the pilot program during the
latter part of the second quarter of 1996. The revenue of those
operations are not yet a significant part of the company's
operations at September 30, 1996; however, the pilot centers have
demonstrated the need for such services. Payments from third
parties for such services have confirmed the acceptance of the
Company's Memory Center services. The majority of the
Tele-Neuro-Psychiatry (TM) System required for each of the Memory
Centers, which includes: (i) Clinical tele-neuro-psychiatry
software programs; (ii) neuropsychological and cognitive
rehabilitation testing and reporting software packages; (iii)
digital EEG and Evoked Potential transmission software and
hardware systems. The development of prototype systems has been
completed during 1996. These software and hardware systems are an
integral part of the Memory Centers (TM) and because of these
proprietary systems, Memory Centers are expected to generate
significant revenues.
The company has developed protocols for an Alzheimer's research
program and a Teleneuropsychiatry developmental program to be
conducted worldwide under the sponsorship of an international
health agency. The Company has been negotiating with several major
pharmaceutical manufacturers to support this program. The budget
for this program will be $4 to $8 million, and the Company expects
to monitor this program. The Company also invested in a
feasibility study to develop an Alzheimer's drug (oxiracetam). As
a result, the Company is negotiating for a license to develop and
market oxiracetam.
The Company is trying to obtain a contract pursuant to the Company
preparing data and analysis of previous studies which will be the
basis for a U.S. Alzheimer's research program. If the contract is
obtained, it is projected that $500,000 of revenue will be
realized during the first half of 1997.
The Company obtained a $140,000 QPEEG contract from a U.S.
pharmaceutical company. If this project can provide a dose range
which has clinically expected effects, without side effects, the
Company anticipated further contracts from this organization.
The Company has developed its own Web Site page on the World Wide
Web and intends to offer and provide data base services to
interested parties for psychotropic drug research and development.
The funds obtained from the sale of stock in the first nine months
of 1996 were invested in development of programs which are
expected to generate immediate revenues, such as the Memory Center
project and a program for advertising the telephonic services.
The Company projects another five (5) BFM system software sales
through its Turkish distributor valued at $75,000 within the next
six months. An additional 3-6 systems (estimated at approximately
$180,000) may be sold to centers who may develop the Alzheimer's
program sponsored by an international health care organization
during 1997.
F-28
<PAGE>
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Cont'd)
MANAGEMENT'S PLANS (Cont'd)
The Company intends to meet its future cash requirements through
earnings from operations based on its current backlog amounting to
$730,000 at September 30, 1996, potential future contracts,
currently under negotiations and the $2,000,000 received during
December 1996 as a result of selling 550,020 units in a private
placement. Each unit consisted of one share of Common Stock, and
two warrants, each entitling the holder to purchase one additional
share of Common Stock.
F-29
