SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 33-2205-D
NEUROCORP, LTD.
(Name of small business issuer in its charter)
Nevada 87-0446395
- ------------------------------- ------------------------------------
(State or other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
150 White Plains Road, Tarrytown, New York 10591
- ------------------------------------------ -----
(Address of Principal Executive Offices) (Zip Code)
Registrants Telephone Number, including area code: (914) 631-3316
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes |X| No |_|
Indicate by check mark if disclosure of delinquent files pursuant to Item 405 of
Regulation S-B is not contained herein, and will not be contained, to the best
of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ X ]
Registrants revenues for its most recent fiscal year: $ 1,068,891
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant, as of March 27, 1997 was $ 36,723,894 based on the average bid and
asked price on that date.
<PAGE>
ITEM 1. BUSINESS
History
NeuroCorp., Ltd., formerly known as Tamarac Ventures, Ltd. (the
"Company"), 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 had no specific business plan, but was
instead 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
be used to purchase the unknown existing businesses or to acquire the unknown
existing assets to establish a subsidiary business or businesses.
Management had, since the completion of its initial public offering,
endeavored to locate an appropriate acquisition or merger candidate. In this
regard, management had, on two occasions prior to its acquisition of HZI,
entered into negotiations for an acquisition by the Company of, or merger of the
Company into, a business identified by management as suitable for the Company's
objectives. In 1988, control of the Company was transferred to new management in
connection with the attempted sale by the Company's principal shareholder of his
shares of the Company's common stock to a group of individuals who represented
to the Company that they would subsequently merge the Company into and with a
number of active foreign corporations. However, shortly thereafter the Company's
founders ascertained that these individuals had converted substantially all of
the Company's liquid assets to their own use and had otherwise committed various
frauds against the Company and its shareholders. Thereafter, the shares sold by
the Company's principal shareholder were returned to him, management sought and
regained control of the Company, and the Company commenced litigation to recover
the Company's lost assets. The litigation commenced by Summons and Complaint
dated March 29, 1989 and filed in the U.S. District Court for the Southern
District of New York was dismissed by Order of the Court dated May 1, 1990.
A second attempted transaction took place in 1989. The terms of this
transaction included the placement into escrow of all of the shares of the
Company's common stock owned by its principal shareholder (representing a
controlling portion of the Company's issued and Outstanding common stock) and an
undertaking on the part of the new "control group" to pursue the litigation
referred to herein. This transaction was never consummated due to the failure of
the new "control group" to fully pay for the escrowed shares or to pursue the
litigation. Consequently, the escrowed shares were returned to the original
shareholder, and control of the Company was returned, and remained in the hands
of the original management.
2
<PAGE>
As a result of the loss of substantially all of the Company's liquid
assets, and the expenditure of the remainder of its assets in pursuit of the
litigation referred to above, the Company was not able to pursue other
acquisition or merger candidates during the pendency of the litigation, and
consequently was not able to engage in any business whatsoever. As noted above
the litigation was dismissed by an Order of the court dated May 1, 1990.
Recent Developments
On October 25, 1994, the Company issued to Trinity American Corporation, a
Nevada Corporation ("Trinity"), 120,000 post-split shares of the Company's
Common Stock in consideration of Trinity's identifying HZI Research Center, Inc.
("HZI") as a potential acquisition candidate for the Company. Previously, on
March 24, 1994, HZI received a bridge loan from Trinity in the principal amount
of $ 75,000. It was subsequently agreed pursuant to the March 24, 1994 agreement
that HZI shall have no responsibility for the repayment of such bridge loan,
because certain financing was not timely arranged by Trinity. On November 23,
1994, Trinity contributed $ 400,000 to the Company's capital account and in
December 1994, two classes of preferred stock were issued to Trinity. See
"Certain Transactions" and Note 10 of "Notes to the Company's Consolidated
Financial Statements".
On November 23, 1994, the Company acquired all of the issued and
outstanding shares of HZI Research Center Inc. ("HZI") for 4,600,000 shares of
the Company's common stock (after giving effect to a one for fifty share
combination, or "reverse split"), whereby the Company's name was changed to
"NeuroCorp, Ltd." and the sole officer and director of the Company resigned and
was replaced by the management of HZI. HZI is a New York corporation, founded in
1974 by Turan M. Itil, M.D., its Chairman and a principal shareholder. The
Company changed its fiscal year from September 30 to December 31 so as to
conform to HZI's fiscal year.
In December 1996 the Company sold an aggregate of 550,000 Units for an
aggregate of $ 2,000,000 ($3.63 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 1,100,000 Warrants included in the Units are
exercisable at $ 8.00 per share until August 31, 1997 and at $ 10.00 per share
thereafter and until August 31, 1998, the expiration date of the Warrants. The
purchasers of the Units have not been granted registration rights.
3
<PAGE>
In two separate private transactions, Lancer Partners L.P. and Lancer
Offshore, Inc., two of the three investors who purchased the above referenced
550,000 Units in December, 1996, purchased an aggregate of 500,000 shares of the
Company's Common Stock from J.L.B. Equities, Inc., a shareholder of the Company
and 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 J.L.B. Equities.
The Company hired Mr. Jonathan Raven, effective January 6, 1997, as President,
CEO and Director of the Company's wholly-owned subsidiary, Memory Centers of
America, Inc.(TM) In addition, Mr. Raven is an Executive Vice President and a
Director of the Company. Mr. Raven entered into a three (3) year employment
contract. See "Business - Memory Centers(TM)" and "Management."
Business of the Company
The Company itself is not only a holding company for its wholly owned
subsidiaries, HZI Research Center, Inc. and Memory Centers of America, Inc., it
is involved in research and development for its subsidiaries and prepares new
programs related to new drug development, multi-national/multi-center Alzheimer
research, and Tele-neuro-psychiatry business.
The Company, through HZI, is primarily involved in three inter-related
businesses: (i) performing contract medical research services (principally
conducting clinical trials, which includes "special" proprietary pharmaco-EEG
studies) for health agencies, contract research organizations and pharmaceutical
companies; (ii) designing and subcontracting manufacturing proprietary
neuropsychiatric diagnostic testing software and equipment and selling these
systems to physicians, researchers and hospitals; and (iii) performing
telephonic neurological diagnostic testing services, including
electroencephalogram ("EEG") and Dynamic Brain Mapping testing for physicians
and hospitals. These tests are used to assist in the diagnosis of brain
disorders. The Company's CEEG Scan System, a technique that analyzes
conventional EEG with digital computers, has received FDA marketing approval.
This product was approved in March 1987. No applications are pending with the
FDA, but the Company intends to submit 510(k) applications for three of its six
other products during 1997 or early 1998: the EEG/Evoked Potential (EP)
Amplifier; the Digital EEG System software; and the HZI Electrode Headset. The
Company intends to submit 510(k) applications for two additional products
enhanced Evoked Potential Software and pharmacologically activated EEG (Test
Dose) software in the latter part of 1998 or early 1999. The Company has not yet
decided whether or not it will resubmit the application for its seventh product,
the [alpha]- 2000 System. There can be no assurance that any of these proposed
products will be approved by the FDA for sale in the United States or that they
will be scientifically or commercially accepted.
4
<PAGE>
For the fiscal years ended December 31, 1995 and 1996, the Company has expended
$ 181,512 and $ 98,018 respectively, on research and development activities for
proprietary items, some of which are used in its contract research activities.
The Company is not reimbursed for any research or development expenses from its
customers.
Drug Development
The Company plans in the future to use its proprietary hardware, software, [
including Quantitative Pharmaco-EEG ("QPEEG")], and databases to develop, either
alone or with others, proprietary drugs. The Company believes that the
combination of its expertise and its proprietary databases will enable the
Company to define neuropharmacological activity of central nervous system (CNS)
drugs. The Company's physicians and research professionals have extensive
experience in the screening and testing of psychotropic drugs, as well as the
measurement of brain function as detected by the brain electrical activity.
During the last ten years, the Company through HZI has been involved in the
development process of five new drugs and one plant extract for the treatment of
Alzheimer's disease. These are oxiracetam, suloctidil, nimodipine, pramiracetam,
BMY-21502 and Ginkgo biloba. This involvement has been as a subcontractor for
drug companies and it has no proprietary interest in these drugs. HZI's role
involves the use of its proprietary QPEEG methodology and its proprietary data
bases to determine the effects of these drugs on the central nervous system and
to provide effective dose ranges. HZI has also studied choline/lecithin,
deprenyl, synthetic male hormone (mesterolone), thyroid releasing hormone (TRH),
physostigmine, THA (tacrine), neostigmine, hydergine, and velnacrine and
propentofylline, all of which are claimed to be effective in memory problems and
Alzheimer's disease. As a result, HZI has compiled what it believes to be a
unique database on the effects of compounds on Alzheimer's disease and memory
impairment. HZI believes that it can now study a variety of new chemical
entities or naturally occurring substances (e.g. plant extracts, vitamins) using
its proprietary software and databases in connection with memory impairment.
The Company believes that it maintains a competitive advantage in this area,
which may enable it to screen new products with high central nervous system
potency for further development. The Company further believes, although there
can be no assurance, that this type of "targeted" approach can bring new drugs
to market at a relatively lower cost than would otherwise be the case.
Consequently, the Company believes it should be an attractive joint venture
partner with larger, and smaller, pharmaceutical firms, although there are
currently no such relationships contemplated and there can be no assurance that
any such opportunity may arise in the future or if such opportunity arises that
the Company would benefit financially. There is no assurance that the Company's
QPEEG method and/or data bases will be accepted by the scientific community
and/or drug
5
<PAGE>
companies and/or drug regulators as useful vehicles to speed up and economize
psychotropic drug development.
The Company believes that HZI's database can be used to expedite the overall
drug development process in the following ways:
1. By finding new uses for compounds already on the market. Many drugs
used to treat a variety of illnesses also affect the brain. The CNS action of
drugs developed for peripheral illnesses (i.e. sedation of an antihypertension
drug) are often considered "side effects" and their potential therapeutic values
have been overlooked. For example, the Chairman of the Company, using the QPEEG
method, discovered the psychotropic properties of mianserin, an anti-allergic
drug. Mianserin was subsequently successfully marketed in Europe. HZI has also
discovered, through use of the QPEEG method, anti-depressant properties of male
and female hormone products from Schering AG which were patented and assigned to
Schering AG.
2. By refining and improving experimental drugs that manufacturers now
consider marginal. Pharmacological research programs often result in drugs, some
of which large manufacturers consider marginal, either in effectiveness or
because their potential use is limited or the patent life is too short. The
Company, through the use of HZI's proprietary systems, may be able to improve on
these drugs, for which the bulk of the basic research is already complete. The
Company believes the efficacy of these drugs can be established on a relatively
economic basis by using HZI's proprietary software.
3. By screening natural products. Many natural substances have
neuropharmacological activity, such as choline and lecithin. For example, the
Company is currently seeking a license for a herbal extract. Using very large
studies the Company has demonstrated that a similar extract manufactured by a
European company has significant effects in the brains of healthy subjects. The
Company therefore, has brain effects measurements of this extract. The other
herbal extracts will be compared with this extract.
After determining that a drug under study has marketplace potential, the Company
intends to offer it to major drug companies on a licensed basis. These large
firms, it is anticipated, will bear the majority of the cost of meeting final
FDA requirements (i.e. large clinical trials and toxicology testing) and will
bring the drug to market.
In September 1995, the Company entered into an agreement with Mediator S.r.l.,
an Italian company, which has exclusive rights for oxiracetam, an anti-dementia
drug, which Mediator obtained from SmithKline Beecham Farmaceutici Italia S.p.A.
The Company has entered into an agreement with Mediator under which the Company
obtained a right
6
<PAGE>
of first refusal for the exclusive right to develop, use, sell and market
oxiracetam in the United States, its territories and possessions. Based upon the
favorable outcome of the feasibility study it conducted pursuant to the
agreement, the Company notified Mediator that it desired to exercise its right
to negotiate an exclusive license for United States development and marketing,
and marketing rights for other countries. The Company is currently negotiating
with Mediator for such licenses. There is no assurance that such negotiations
will be successful. Should no agreement be reached and should Mediator proceed
to develop oxiracetam independently of the Company, alone or with a third party,
the Company will be reimbursed for its expenses, not exceeding $ 400,000.
To date, the Company estimates it has incurred expenses related to this project
of approximately $ 170,000. Oxiracetam is presently marketed successfully in
Italy and Korea.
A major German pharmaceutical concern has identified certain compounds which the
Company has agreed to screen. These compounds affect the central nervous system.
The Company will evaluate these compounds for further development using the
Company's proprietary method and databases.
There can be no assurance that the Company will be successful in obtaining
licenses or in developing and bringing any new pharmacological products to
market or, if so, that any such product will generate significant income for the
Company.
Multi-national, Multi-center Research
The Company, through its HZI subsidiary, has completed a multi-national drug
research program supported by a drug company and an international health agency.
The same agency has indicated their intention to conduct another multi-national
research program on Alzheimer's. The Company has supported the preparation of
the protocol for the proposed research.
Tele-Medicine (Tele-Neuro-Psychiatry)
The Company believes that Tele-medicine is one of the most rapidly expanding
medical businesses. Recognizing the fact that, in multi-center research, in
Memory Centers, and in its Tele-Map operation, Tele-medicine can significantly
enhance the quality of work while decreasing the cost, the Company has prepared
a proprietary system, called Tele-Neuro-Psychiatry, based on the
already-available hardware and software programs.
There is no assurance that the Company will be able to develop a multi-national
research or tele-medicine, or that any of these will be profitable to the
Company in the near future.
7
<PAGE>
Contract Research Services
HZI, a wholly-owned subsidiary of the Company, assists health organizations and
pharmaceutical companies in testing neuropsychiatric drugs. Since its inception
in 1974 HZI received aggregate revenues in excess of $ 15,000,000 as a result of
these services, and has performed such services for several of the world's
leading drug manufacturers. For the fiscal years ended December 31, 1995 and
1996 revenues from contract research services accounted for 55% and 65%,
respectively, of total revenues.
The services performed by HZI generally fall into one of three study categories:
1. Single dose trials in healthy subjects and patients to determine
safety, bioavailability and effective dosage of new drugs using quantitative
pharmaco-EEG (QPEEG(R)) and other methods.
2. Multiple dose drug trials in patients. (Patients are treated for weeks
or months with experimental drugs versus placebo to establish safety and
efficacy of the drug.)
3. Multicenter studies with different drugs. (Multiple dose drug trials
are conducted in patients from many centers or hospitals.)
In conducting these studies, HZI may employ its proprietary QPEEG method, and/or
may utilize several statistical software packages and computer/telephone
interactive monitoring systems (only in multicenter trials). HZI has completed
studies in the areas of Alzheimer's disease, anxiety disorders and depression
and is currently conducting studies in clinical depression and Alzheimer's
disease.
HZI has, in the past, entered into clinical research retainer agreements with
terms of up to three years with leading pharmaceutical companies in addition to
numerous shorter term contracts with many other major pharmaceutical companies
worldwide. HZI believes that its QPEEG method and ongoing research provides a
competitive advantage over its competitors in the field of single dose QPEEG
trials as a result of HZI's continued development of new software programs and
new databases on psychotropic drugs. However, some of HZI's competitors also
claim to have data bases and EEG/EP software programs for psychotropic drug
development. There can be no assurance that HZI will be able in the future to
maintain or increase the level of revenues it has received from its clinical
research activities, or that HZI's competitors will not be able to develop and
compile similar, or superior, non-infringing software applications and/or
databases in the future.
8
<PAGE>
Neuropsychiatric Diagnostic Equipment
HZI offers a line of proprietary neuropsychiatric diagnostic testing equipment
to physicians, researchers and hospitals. The system, known as the CEEG-Scan(R)
or BFM System(R) (Brain Function Monitoring via brain bioelectrical activity
monitoring) enhances, by quantifying, widely accepted diagnostic tests (i.e.,
EEG) and permits them to be performed in a more practical and economical fashion
than through other available means. The CEEG-Scan System also includes
proprietary Dynamic Brain Mapping(R) software. As of December 31, 1996
accumulated sales since the product's inception amounted to 115 sales of these
systems consisting of hardware and software (or software only), at prices
ranging from $ 15,000 to $ 130,000. For the fiscal years ended December 31, 1995
and 1996 revenues from sales of neuropsychiatric diagnostic testing equipment
accounted for 36% and 20%, respectively, of the Company's total revenues. This
system, unlike those of its competitors, is characterized by being primarily
based on software with maximum off-the-shelf hardware, along with what the
Company believes to be the largest available databases on psychotropic drugs and
on patients. Also, all of the tests performed by HZI's System, such as EEG and
Evoked Potential, have already been assigned CPT ("Current Procedural
Terminology") codes, and therefore are eligible for third party reimbursement
(except for brain mapping). Since many of these programs are regulated by the
FDA, changes in policy and/or other unforeseen events can significantly and
negatively influence the Company's business and revenues. Furthermore, the
Company has many competitors. Some of them are associated with the leading
academic centers of the world and others are much larger companies than the
Company and have greater financial resources.
The CEEG Scan System, which has received the necessary permission for marketing
from the FDA in March 1987, is currently being utilized by many of the world's
largest psychiatric research centers, such as the laboratories of the National
Institute on Drug Abuse in the United States, the National Institute of Mental
Health in China, and the National Academia of Medicine in Russia. HZI has
developed the [alpha]-2000 digital EEG/brain mapping system (the "[alpha]-2000
System"). This system, which is already in use (as Beta Sites) at 16 leading
research centers throughout the world (other than the United States), will be
upgraded by modifying HZI's proprietary hardware and/or software. Eight of the
research centers enhanced the original system to be used clinically as well as
by purchasing or enhancing the system with additional hardware/software. The
Company has sole ownership of the systems until the research centers pay
additional funds to the Company to purchase the product. The price of the
generic [alpha]-2000TM system was established at $ 55,000, with a selling price
to the centers of $ 20,000 (for research as a Beta Site). With enhancements and
upgrades, the price usually ranges from $ 60,000 to $ 108,027. For the years
ended December 31, 1995 and 1996, the Company has recognized $ 413,521 and $
212,685, respectively, of sales principally from the product. As noted below,
Company did not, however, obtain permission from the FDA to market the
[alpha]-2000 system. Additionally, some of the Company's products
9
<PAGE>
or software packages (i.e the Company's [alpha]-2000(TM) and EP are being tested
with a Beta Site program (in accordance with the Investigative Device Exemption
Registration) and offered at reduced prices since they do not yet have FDA
approval to market the products.
In 1991, the American Electroencephalography Society accepted the use of digital
electroencephalograms, which was already an integral component of HZI's
CEEG-Scan System as opposed to the traditional analog EEG presentation. HZI
subsequently developed a new generation of CEEG-Scan Systems which has been
delivered to 16 Centers in 14 countries around the world within a Beta Site
program. This is a multicenter psychiatric research program sponsored by the
Mental Health Division of one of the world's largest health organizations. The
Company believes that the newly developed EEG System offers physicians and other
medical professionals one of the most advanced, non-invasive, objective and
economical brain function monitoring tests. The original 510(k) application
submitted in August 1995 for the [alpha]-2000 System software contained a series
of detailed new uses of the software for the clinical practices and was deemed
"not substantially equivalent" by the FDA and, therefore, not cleared for
marketing under section 510(k). In their response of November 24, 1995, the FDA
determined that "the device is not substantially equivalent to devices marketed
in interstate commerce prior to May 28, 1976." The decision was based on the
fact that the Company's device "has new indications for assessing
bioavailability and bioequivalence of psychotropic drugs." Additionally, they
noted that computer-analyzed EEG data bases "have new indications for evaluating
psychiatric and neurological conditions." The FDA advised that the FDC Act
requires "a Class III device to have an approved premarket approval application
(PMA) before it can be marketed, unless the device is reclassified.
The FDA recommended that the [alpha]-2000 System should be classified as a Class
III device requiring a PMA application and recommended that clinical
investigation of this device be conducted in accordance with the Investigational
Device Exemption (IDE) regulations. The Company intends to submit new
applications for these programs and data bases in the latter part of 1998 or
early 1999, after completion of testing for validity and reliability. However,
there can be no assurance that the FDA will permit the marketing of the
[alpha]-2000 System and/or data bases, or that sales of the new and old systems
will increase, and there can be no assurance that HZI's competitors are not
currently developing, or will not develop in the future, a comparable or
superior system and data base.
The Company intends to solicit government contracts or contracts from
international health organizations on telephonic EEG, drug research and
CEEG-Scan systems. Governmental and international health organization contracts
are usually terminable at the convenience of such entities. The Company's most
recent sale of a product or service was a CEEG Scan System sold to the World
Health Organization ("WHO") for use in Minsk, Russia. The sale occurred in June
1996 at a sale price of $ 66,667.
10
<PAGE>
Tele-Map(R)
HZI offers interactive neurological diagnostic testing services to physicians
and hospitals. These services include diagnostic tests such as
electroencephalogram ("EEG") with or without Dynamic Brain Mapping, and are
known collectively as "Tele-Map". HZI provides physicians, or hospitals, as the
case may be, with a conventional or specially-designed modem, or transmitter, by
which the testing physician may transmit collected data via telephone to HZI.
The data is recorded and then analyzed by HZI employees and interpreted by
consultants and experts, and reports are then provided to the testing physician.
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, as
the case may be, without a substantial capital investment and without having to
hire and train technicians to perform the tests on site. HZI's technologists
communicate with the testing physicians throughout the recording of the data to
ensure the quality of the procedure. Interpretations and reports are provided to
the physician within two business days of the test. There can be no assurance
that these services will increase or will even continue at the present level.
These services are already being provided by different "telephone service
groups" who are in this business longer than HZI. Furthermore, they are
regulated by the FDA and therefore any changes in FDA regulations and/or in
professional society (American EEG) requirements can significantly and
negatively affect the Company's Tele-Map services. Revenues of the Tele-Map
Division for the years ended 1996 and 1995 were $ 129,622 and $ 146,119,
respectively.
Products Under Development
Products Requiring 510(k) Application.
In addition to the product and services described above, HZI has five other
proprietary products in various stages of development. After development and
validity testing, the products require FDA approval. These products include:
O An EEG/EP amplifier
The electroencephalogram measures brain electrical activity in low voltage
(microvolts). An EEG signal has to be amplified, then displayed in analog or
digital output before an expert can interpret it. For this purpose, amplifiers
are required. Although amplifiers are not highly sophisticated electronic
devices, they require exacting specifications. The prototype pre- and
post-amplifiers, originally completed by a subcontractor, in July, 1995 required
further improvement and was returned to the subcontractor to make the
appropriate changes. They are expected to be delivered during June 1997, with a
510(k) application to be filed within three months thereafter. This application
is substantially complete and no additional funding is required
11
<PAGE>
for the improvements or the application.
O HZI Electrode Headset (helmet)
Dr. T. Itil and associates have obtained 13 patents, seven of which have
been assigned to HZI, 5 of which are in connection with the development of an
electrode headset. The electrode headset is an important part of the EEG
recording. To analog or digitally record an EEG, electrodes have to be placed on
the patient's head. This is very time consuming (for a 10-20 minute recording,
30-60 minutes is required for electrode placement). This hampers more frequent
use of the EEG by the doctors. The headset reduces the time for correct
application of electrodes from 30-60 minutes to 3-5 minutes. HZI believes that
there is currently no satisfactory headset available on the market. Accordingly,
all of HZI's current BFM customers, as well as HZI's competitors, are considered
by HZI to be potential customers for this product. However, there is an
electrode cap presently available on the market which is a competitor to HZI's
helmet. Other companies may also be able to develop systems to place electrodes
more efficiently than the conventional method. The Company is currently
soliciting bids from subcontractors for development of an improved prototype for
the HZI Electrode Headset which is estimated to cost not more than $ 35,000 with
completion expected in approximately 6 months after a subcontractor is selected.
Upon satisfactory completion of the prototype, the Company estimates that it
will complete and file a 510(k) application within three months. While the
application will be principally prepared by the Company, it intends to use an
outside consultant, at an estimated cost of $ 5,000.
O Digital EEG System Software
In 1991, the American EEG Society published guidelines to record EEG by
digital means. Thus, most analog EEG machines are expected to be replaced by
digital EEG systems. HZI's CEEG Scan System is based on digital EEG. While the
CEEG Scan System has many features superior to standard digital EEG systems, it
needs additional functions for standard clinical use. The Digital EEG System
software is expected to be completed in the fourth quarter of 1997 at a maximum
cost of $ 20,000. The Company expects to file a 510(k) application in the Second
quarter of 1998 and will use an outside consultant at an expected cost of $
10,000.
Funding for the completion of the Digital EEG System Software, the HZI
Electrode Headset and the 510(k) applications for both these products will come
from currently available working capital raised in recent private offerings.
12
<PAGE>
O Enhanced Evoked Potential software
HZI has been developing EP software for many years. Using the newest
software programs, an enhanced EP software package was developed for both
clinical and research use. It is projected that a 510K application will be
submitted to the FDA in 1998 or early 1999.
O Pharmacologically-activated EEG (Test Dose(R)and Drug Monitoring System)
HZI has developed software and extensive databases to assist physicians in
determining whether a prescribed psychotropic drug enters the brain and has any
pharmacological effect on the brain, which is called the Test-Dose procedure.
The Test-Dose software and databases will be offered as an adjunct to the latest
generation of CEEG-Scan System, and also as telephonic service. HZI's objective
is to develop and market a turnkey, miniaturized hardware/software device to be
used by any physician who prescribes drugs which effect brain function. The
Test-Dose equipment enables the physician to select and monitor the dose and
effect of the particular drug treatment on brain function in an objective
fashion. The Company intends to submit a 510(k) application for approval of the
Test Dose software in the latter part of 1998 or the early part of 1999.
Product Requiring a Pre-Market Approval ("PMA")
The [alpha]-2000 system may require longer reliability and validity
testing in order to file a PMA application. HZI has developed the [alpha]-2000
system as an upgrade of the CEEG-Scan System. This system, which is already in
use at 16 leading research centers throughout the world within a Beta Site
Program, will be further upgraded to a 32-64 channel system by modifying HZI's
proprietary hardware (Console I and II). Furthermore, a new electronic system to
record and analyze brain waves will be integrated into the existing Company's
headset (electrode helmet).
Additional products being designed include (a) a stimulus generator for
evoked potential, (b) completion of the already designed receiver and
transmitter for the telephonic systems, (c) finalization of the anesthesiology
monitoring systems for which the software has already been developed, and (d)
further enhancement of the Company's drug databases.
13
<PAGE>
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 areas in which
the Company has no distribution. The Agreement contemplates that the Company's
contribution to the joint venture would consist of:prototypes and/or blueprints
of patented and/or proprietary, high technology hardware products; proprietary
and copyrighted software programs and databases; know-how and "intellectual"
assistance. Tena's contribution to the joint venture would consist of:means for
the further research and development and/or production of the products;
assurance that the US patents and copyrights in Turkey and relevant countries
would be honored; quality assurance of the products by reputable, international
organizations; market research, a sales and marketing organization, and
advertising and promotion.
Each project assigned to the joint venture would require a statement of work to
be completed, and a budget with funding responsibility to be decided by the
parties.
The Company will license those products which it has developed to the joint
venture and the joint venture will in turn grant licenses to the Company with
respect to products developed by the joint venture, in each case on a
non-exclusive basis.
The Company entered into the 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 to date, no development work has been assigned to
Tena, they are involved in marketing the company's products. There can be no
assurance that any of these proposed products, or services currently under
development by HZI, will ever be brought to market, or, if so, will generate
significant income for HZI and the Company. Tena's principal owners are nieces
of Dr. Turan M. Itil.
Memory Centers(TM)
The Company, through its wholly-owned subsidiary, Memory Centers of America,
Inc.(TM) ("MC Inc.") has established two "Memory Centers(TM)" in collaboration
with Manhattan Westchester Medical Services, P.C. in New York City, New York and
Tarrytown, New York as pilot centers to provide multidisciplinary diagnostic and
therapeutic help for people who suffer from memory impairment. The Company
intends to open 10 Memory Centers in calendar year 1997. These centers are to be
operated under expert medical supervision with up to date diagnostic tools so as
to provide the best available treatment.
14
<PAGE>
The Company's 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 capital
requirements to open 10 Memory Centers will range from $ 1,500,000 to $
2,000,000, depending on the number of centers actually opened.
The Company recently completed a $ 2,000,000 private placement of its securities
and has hired an experienced executive to become President and CEO of Memory
Centers(TM) (see "Management"). Approximately 75% of the proceeds of this
private placement are intended to be used for the initial development and
expansion of the number of Memory Centers(TM), including advertising, working
capital and new management. In addition, the Company has earmarked $ 600,000
raised from the exercise of Warrants in March, 1997 for this purpose. See
"Business - Recent Developments" and "Management." The balance of the funds from
the private placement are intended to be used to enhance management of the
Company and to promote the products and services of HZI. The Company intends to
set up 100 centers within the next 5 years if the pilot program is successful
and if additional capital can be raised, as to which there is no assurance.
Government Regulations
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 Food and Drug Administration ("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 (i.e. hardware, software
systems) and/or pharmaceutical products involving humans involves many steps,
including testing, to determine safety and
15
<PAGE>
efficacy. 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. At such time as 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 thereafter be sold. 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 the product 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 prior to market introduction.
The Company's present and proposed future activities, including Memory
Centers(TM), telephonic EEG or telemedicine neuro-psychiatric services, drug
development, multi-center trials and hardware-software systems will likely also
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 exporting 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.
16
<PAGE>
Memory Centers
The activities of the Memory Centers will be regulated by a variety of agencies
on federal, state and possibly local levels. Among the regulatory issues that
may impact Memory Centers are Medicare, Medicaid, Insurance, Medical Practice,
Corporate, Franchise, FTC, SEC and FDA. 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 may be deemed by certain regulators to
constitute the practice of medicine. If operation of the Memory Centers is
determined to involve the practice of medicine, the degree of physician
involvement required under applicable laws and regulations in operating the
Memory Centers 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 where required, 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 structures and relationships with physicians and others
comply with applicable laws and 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, licensure 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.
17
<PAGE>
Technological Changes
The manufacture of diagnostic equipment and products and software system
development has undergone and is expected to continue to undergo, significant
and rapid technological change and there can be no assurance that other
technological advances will not render any system or product developed by the
Company uneconomical or obsolete.
The Company has a series of software products which require continuous update
principally because of improvements of hardware. Some of the software programs
(i.e. CEEG Scan, Evoked Potential), require improvements to include Windows '95
programs. Updates required take time and are costly. The Company's databases are
being updated as new drugs are marketed. The Company developed a "Beta Site"
network which collects data for databases of the Company. Charges for Beta Site
data collection may, in the future, be significantly increased. While the
Company has no control over this cost, it continuously seeks economic Beta
Sites.
Hardware, which the Company subcontracts others to manufacture, is changing from
year to year. The Company has to invest a significant amount of funds to update
hardware technology, i.e. amplifiers, headset, telemedicine and Tele-Map
services. There can be no assurance that the Company's products and/or
development efforts will not be rendered obsolete by technological advances of
others or that other medical software/devices will not prove more advantageous
for the commercialization of medical software and/or devices and/or databases of
the Company.
Software and hardware for digital electroencephalogram (EEG) quantitative EEG
and brain mapping systems are being developed by many U.S. and European
companies, which are far bigger than the Company with much more financial
resources. European companies have significant advantages since they can
establish easier and inexpensive marketing programs for software and even
medical devices. There are no governmental controls for databases or medical
software programs in many countries where the companies can develop very fast
and economic databases. In the U.S. several competitors have announced that they
have databases similar to the Company's. There can be no assurance that some
competition will not develop databases and obtain approval from the FDA before
the Company obtains permission to market its newer software and/or databases.
Pharmaceutical products, which the Company may develop require large amounts of
capital and are subject to substantial competition. If the Company decides to
investigate a pharmaceutical product (i.e. an Alzheimer's drug), it will
encounter competition from the major pharmaceutical corporations. There is no
assurance that any of the projected drug developments of the Company will be
successful even if the required funds are available.
18
<PAGE>
Telephonic EEG services, which the Company provides, presently has at least one
major competitor, Telemedix Corporation. They claim they have more than 1,000
subscribers. The Telephonic EEG service is not only subject to major competitors
but is also subject to regulation by government agencies such as the FDA and
professional organizations, such as the American EEG Society. Thus, there is no
assurance that the Company's presently operating telephonic services will be
successful or that they can be continued.
Patents and Proprietary Technology
The Company's policy is to protect its intellectual property rights,
products, designs and processes through the filing of patents in the United
States, in Canada, and where appropriate. The Company also registers trademarks
and trade names. The Company presently has seven patents, two of which were
assigned to the Company by Dr. Turan M. Itil and five of which were assigned to
the Company jointly by Dr. Itil and others.
The Company believes that its patents may offer a competitive advantage,
but there can be no assurance that any patents, issued or in process, will not
be circumvented or invalidated. The Company also intends to rely on trade
secrets and proprietary know-how to maintain and develop its commercial
position. Although the Company seeks to protect its proprietary information,
there can be no assurance that others will not either develop independently the
same or similar information or obtain access to information that the Company
believes is proprietary.
Competition
Competitors engaged in all areas of medical and drug technology and
manufacture of diagnostic equipment and products in the United States and abroad
are numerous and include, among others, major pharmaceutical, food and chemical
companies, specialized biotechnology firms, universities, and research
institutions. 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 likely result in increased competition.
In all four areas of business, the Company has very significant
competitors many of which are larger and have been in existence longer than the
Company:
(1) Contract Research (CR), to assist the major drug companies with their drug
development, is presently the main source of income of the Company. There are,
among others, at least 3 major competitors (Parexel, Besselaer Associates and
Quintiles) who are much larger than the Company. They also conduct multicountry
drug trials where the Company intends to enter. The Company has developed new
software procedures which provide some advantages. However, competitors are also
developing a variety of high
19
<PAGE>
technology data collection and data processing systems. There can be no
assurance that the Company can compete with the existing CR organizations. There
is also no assurance that the Company can keep the CR income at the present
level.
(2) CEEG-Scan Systems Sales. The computer analysis of electroencephalogram and
digital EEG with and without brain mapping have been developed by approximately
a dozen companies in the US and the Company believes that approximately three
times that amount have been developed outside the U.S. While the Company is
probably one of the oldest organizations who developed databases, competitors
are much larger organizations with far more resources than the Company. There is
no assurance that the Company's CEEG Scan software and systems will continue to
provide revenues. There is also no assurance that the databases and/or new,
enhanced software packages and/or hardware developments of the Company will get
permission from the FDA to be marketed and will be sold if such permission is
obtained.
(3) Telephonic EEG services of the Company has at least two competitors. Since
Telephonic EEG saves money for hospitals and health maintenance organizations,
it is expected that other telephonic service companies will be developed. There
is no assurance that the Company can expand or that such services and revenues
will be maintained at the present level.
(4) Memory Centers(TM) have numerous competitors, such as hospitals,
neurologists, medical groups who have dementia centers, and Alzheimer clinics.
Although the main goal of Memory Centers(TM) is to evaluate and treat patients
with a lesser degree of illness than Alzheimer's, a variety of medical
establishments represent major competition.
Quality Assurance
Quality assurance of contract research and drug development has been and will be
strictly controlled by the drug companies who subcontract to the Company and by
the Institutional Review Board (IRB) which has the responsibility for the safety
of the volunteers who participate in these programs. Both drug companies and IRB
are responsible to the FDA for quality assurance.
The software products the Company is developing for EEG analysis, require
permission from the FDA before marketing. Thus, the FDA supervises the safety
and effectiveness of these programs.
Telephonic EEG recordings have been regulated by the American EEG Societies, the
FDA and third parties. The readings (description) of telephonic EEG are being
done by qualified physicians. The Company believes it has staff and consultants
with the required credentials to fulfill requirements of the governmental
agencies, IRB and professional societies.
20
<PAGE>
Sales and Marketing
The Company sells most of its present products directly, as well as through
representatives in Greece and Brazil and a joint venture in Istanbul, Turkey
with Tena, Ltd.
The Company also markets its products and services through scientific
publications, journal advertisements, scientific society exhibits and shows and
through direct mail to individual physicians, drug companies, hospitals and
HMO's. The Company prepares and mails a large amount of scientific and
commercial material to those organizations. The Company also provides warranties
on its software to customers who request warranty agreements.
Personnel
The Company has 17 full time employees, including five executives. In addition,
the Company has six consultants and two part-time employees. The Company
believes its relations with its employees to be satisfactory.
ITEM 2. DESCRIPTION OF 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. Management believes its present
facilities may not be adequate for its expanding needs but that new space is
readily available.
ITEM 3. LEGAL PROCEEDINGS
There are no pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
NONE.
21
<PAGE>
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
On July 20, 1987, the Securities and Exchange Commission declared
effective the Company's Registration Statement with respect to an initial public
offering of 4,000,000 Units, each Unit consisting of one share of the Company's
Common Stock and one redeemable warrant to purchase one additional share of
Common Stock. The redeemable warrants were exercisable during the thirty six
month period commencing with the effective date of the Registration Statement.
All of the warrants expired unexercised. 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). 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 a registration statement has been filed by the
Company with the Securities and Exchange Commission, and has been declared
effective. 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.
On March 2, 1995, the Company's Common Stock was accepted for listing on
the NASDAQ Electronic Bulletin Board under the symbol NURC. Prior thereto there
had been no public trading in the Company's Common Stock.
The high and low range of bid prices for the common shares of the Company
for the quarters indicated as reported by the NASD were as follows:
High Low
------ ------
1995
First Quarter (commencing 3/2/95) 3 3/4 3
Second Quarter 3 3/4 2 1/8
Third Quarter 2 1/8 1/2
Fourth Quarter 1 7/8 1 1/2
1996
First Quarter 4 1 7/8
Second Quarter 13 3
Third Quarter 20 13 1/2
Fourth Quarter 17 3/4 6
22
<PAGE>
1997
First Quarter (through March 27) 12 8 1/2
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.
The Company had 151 stockholders of record and 231 beneficial holders as
of December 31, 1996, for a total of 382 stockholders.
Dividends
The Company has never 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".
23
<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) (BFM) and (iii) providing interactive diagnostic
testing services and analysis to physicians and hospitals via the telephone,
which is known as TeleMap (R).
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.
In January 1996, the Company created a new wholly-owned subsidiary Memory
Centers of America, Inc. ("MC Inc.") to provide therapeutic services to people
who suffer from memory impairment. MC Inc. began full operations of the pilot
program at the end of the second quarter of 1996, and is currently not a
significant revenue producing segment of the Company.
Year ended December 31, 1996 as compared to the year ended December 31, 1995
The Company recognized 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 include BFM, are recognized upon the
delivery of the turnkey systems. Service revenues such as TeleMap, are
recognized as they are rendered.
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.
24
<PAGE>
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Cont'd)
Year ended December 31, 1996 as compared to the year ended December 31, 1995
(Cont'd)
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 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 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 increase 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 and December 31, 1995, is less
profitable contracts and fixed overhead direct cost being absorbed on less
sales.
As of December 31, 1996 the Company 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.
25
<PAGE>
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Cont'd)
Year ended December 31, 1996 as compared to the year ended December 31, 1995
(Cont'd)
1. (Cont'd)
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. During the fourth quarter of the
calendar year, the Company competed 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 December 31,
1996, the receivable amounts from this foreign customer amounted to
$320,000 which is expected to be collected during the second 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 June 1997.
2. Net sales of BFM Systems 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 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 has not sold any
BFM systems. The Company management is revising its marketing strategy and
believes the lack of sales is temporary.
3. Revenues of the TeleMap 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
TeleMap division to MC Inc.
4. Pilot memory centers revenue from date of commencement, March 1996 to
December 31, 1996 amounted to approximately $30,000. This revenue was
derived entirely from Manhattan Westchester Medical Services, P.C.
("Manhattan Westchester") through a pilot program conducted under the
management of MC Inc.. Manhattan Westchester is a medical practice that is
controlled by the Company Chairman. While MC Inc. 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 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.
26
<PAGE>
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Cont'd)
Year ended December 31, 1996 as compared to the year ended December 31, 1995
(Cont'd)
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 its new subsidiary,
Memory Centers of America, Inc. ("MC Inc."). The intended business of MC Inc. is
to manage and distribute to professional medical practioners 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 administration 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 administration duties to the above projects.
For the year ended December 31, 1995 the Company 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 ("R&D") 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 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, in order to enhance
communications between operational and research personnel and to lower fixes
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.
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, which consisted principally of foreign research centers, would
outweigh the benefits. Management is revising its foreign sales policy, and has
not yet determined the impact, if any, this will have on future sales.
Effective January 1, 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 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
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 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 TAC to borrow
$100,000. As additional consideration for the $100,000 loan, the Company agreed
to issued 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. The implicit rate of
interest for this loan is 37% per year.
27
<PAGE>
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Cont'd)
Year ended December 31, 1996 as compared to the year ended December 31, 1995
(Cont'd)
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 process 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
Year ended December 31, 1996 as compared to the year ended December 31, 1995
At December 31, 1996 and December 31, 1995, the Company had working capital of
$1,082,613 and a working capital deficiency of $6,765, respectively. The
$1,089,378 net increase in working capital for the year ended December 31, 1996
as compared to the year ending December 31, 1995 is attributable to cash
increasing by $1,710,595 and loans from shareholder increasing by $478,306 or a
net increase in working capital of $1,232,289 from these two items. The increase
is primarily the result of the Company selling 550,000 units in a private
placement during December 31, 1996 for $2,001,618. The Company at December 31,
1996 increased its borrowings from shareholders net of repayments by $478,306,
as compared to the December 31, 1995 year end. These additional borrowings were
used to supplement the Company's working capital prior to the sale of the
550,000 units during December 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 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 receivable were deemed uncollectible
and provided for addition reserves of $440,000. Lastly, the company incurred
approximately $205,000 of initial development costs for its new subsidiary, MC
Inc. The effect of these four items increased the loss from operations by
$1,328,000.
28
<PAGE>
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Cont'd)
LIQUIDITY AND CAPITAL RESOURCES (Cont'd)
Year ended December 31, 1996 as compared to the year ended December 31, 1995
For the years ended December 31, 1996 and 1995 cash used by investing activities
mainly in connection with cost 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 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. 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.
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
550,000 units for $2,001,068. Each unit is comprised of one (1) share of common
stock and two (2) stock purchase warrants. Each warrants 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 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 the terms of the preferred stock.
At December 31, 1996 the Company's outstanding debt with respect to borrowings
amounted to $922,142. 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.
MANAGEMENTS'S PLAN
Since 1974, the Company has conducted a series of research programs and studies
on memory-enhancing drugs. In these programs, a series of tests have been used
which are useful for the establishment of the cause and degree of memory
disturbances. The Company has written software programs which it believes make
these tests cost-effective and acceptable to third parties. Furthermore, the
Company provides telephone services for the diagnosis of brain disorders. These
services were enhanced with new hardware and software to be useful for the
diagnosis of memory-disturbed patients. The Company has been developing
tele-neuropsychiatry systems to be applied in multi-national clinical trials.
The existing hardware/software for these systems was also modified for the
diagnosis of memory disturbances. The Company also has databases for use in
diagnosis and for prescribing drugs. The databases related to memory
disturbances (e.g. age-associated memory disturbance and different types of
dementia, such as Alzheimer's) and to memory drugs (e.g. cognitive activators,
psychostimulants, anti-Alzheimer's drugs) were prepared for use in the diagnosis
and treatment of memory disturbances.
All of this work set the stage to set up a wholly-owned subsidiary, Memory
Centers of America(TM), Inc. (MCA). To test the validity and reliability of the
Company's proprietary hardware and software in day to day practice and to
provide multi-disciplinary diagnostic and therapeutic help for people who
suffer from memory impairment, the Company has established two "Memory Centers
(TM)" in collaboration with Manhattan Westchester in New York City, and
Tarrytown, New York as pilot centers. The Company intends to have 10 Memory
Centers opened by the calendar year 1997. These centers are to be operated under
expert medical supervision which will include up-to-date diagnostic tools so as
to provide the best available treatment. In January 1997, the Company hired an
experienced executive as President and CEO of Memory Centers, Inc.
29
<PAGE>
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Cont'd)
MANAGEMENTS'S PLAN (Cont'd)
The intended development of these 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. Therefore, the Company estimates that its short term capital
requirements for 10 fully functioning Memory Centers 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 75% of the proceeds of this
private placement are intended to be used for the initial development and
expansion of the number of Memory Centers (TM), including advertising, working
capital and new management. In addition, the Company has earmarked $600,000
raised from the exercise of Warrants in March 1997 for this purpose. The balance
of the funds from the private placement are intended to be used to enhance
management of the Company and to promote the products and services for HZI. The
Company intends to set up 100 centers within the next 5 years if the pilot
program is successful and only 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
CNS effects and thus, should be more therapeutically effective than that of the
current marketed dose. This has resulted in this customer making 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 study
protocol, as well as commitments for $285,000 to continue its statistical
analysis work on its (CNS) effects of 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 study to establish the effective dose
for this new clients product.
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 costs 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 presently
no capital or other funding requirements anticipated with respect to this
venture.
30
<PAGE>
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Cont'd)
MANAGEMENTS'S PLAN (Cont'd)
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 $70,000, 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 and its HZI operations for at least the next twelve months through cash
flow from operations based on its current contract backlog amounting to $748,000
at December 31, 1996, future contracts currently under negotiation and $500,000
of the $2,001,618 received during December 31, 1996 as a result of selling
550,000 units in a private placement.
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 ("Act") 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.
31
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
SEE INDEX TO CONSOLIDATED FINANCIAL STATEMENTS APPEARING IN THE
CONSOLIDATED FINANCIAL STATEMENTS ANNEXED HERETO.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On March 29, 1995 the Company filed a current report on Form 8-K with the
Securities and Exchange Commission reporting respectively, the resignation of
its previous accountants Bernard Wolper, CPA and the engagement of Scarano and
Lipton, PC. There were no disputes or disagreements with respect to accounting
or financial disclosure. This report is incorporated herein by reference.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
Directors and Executive Officers
The following table sets forth the names and positions of the executive
officers and the directors of the Company.
Name Age Position with the Company
---- --- -------------------------
Turan M. Itil 72 Chairman, CEO, President and
Director of the Company and
Chairman and Director of HZI
I. Ronald Horowitz 74 Vice Chairman and Director of
the Company
Kurt Z. Itil 38 Director of the Company and
Director, President and CEO of
HZI
Pierre LeBars(1) 44 Director and Executive Vice
President of the Company and
33
<PAGE>
Executive Vice President
of HZI
Jonathan E. Raven 46 Director and Executive Vice
President of the Company and
President and CEO of Memory
Centers(TM)
Aileen A. Kunitz(1) 54 Vice President, CFO and
Director of the Company and
Director of HZI
Evelyn Sommer, Esq.(2) 70 Director of the Company
Richard Katz, Esq.(1) (2) 53 Director of the Company and HZI
Joseph DioGuardi, CPA(1) (2) 56 Director of the Company
- ----------
(1) Member of Audit Committee
(2) Member of Compensation Committee
Each director is elected for a period of one year at the Company's Annual
Meeting of Shareholders and serves until his successor is duly elected by the
shareholders. 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 will 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.
34
<PAGE>
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; Vice President, International Pharmaco-EEG
Society; Secretary General, Academia, Medicinae & Psychiatriae 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 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
owner of 13 patents issued and has four patent applications pending. Seven of
the patents owned by Dr. Itil have been assigned to HZI and six others have been
assigned to major drug companies.
I. RONALD HOROWITZ, ESQ.
I. Ronald Horowitz, became Vice Chairman, President and Director of the Company
in 1995. 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 served as President from September, 1995 to January, 1997.
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.
35
<PAGE>
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 the International Drug Experts Associates from 1981-1982.
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 M. 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 has 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. Mr. Raven became a Director and Executive Vice President of
the Company and President and CEO of MC Inc. 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, upon its acquisition by American Vision Centers, Inc. in June
1995, was a multi-state optometric and optical provider through mall-based and
group vision care delivery systems including manufacturing and distribution of
custom eyewear with annual system-wide 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.
36
<PAGE>
JOSEPH DIOGUARDI, CPA. Mr. DioGuardi became a Director of the Company in March
1996. 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, responsible for Public and Non Profit
Sectors. He received a Bachelor of Science Degree with honors from the College
of Business Administration of Fordham University in 1962. Mr. DioGuardi is
presently acting as "Special Assistant" to the Chairman.
RICHARD A. KATZ, ESQ. has been a Director of the Company since November 23, 1994
and has been a Director of HZI since 1994. 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 partner in the law firm of Opton Handler
Gottlieb Feiler & Katz which firm serves as counsel to the Company since January
1, 1995. From January 1, 1994 to December 31, 1994 he was counsel to the 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.
AILEEN A. KUNITZ was a Director, Vice President and Chief Financial officer of
the Company from November 23, 1994 until September 1995 when she resigned as
Chief Financial Officer but continued her employment with HZI and the Company as
Vice-President and Director of the Company. In January 1996, she resumed
responsibility as Chief Financial Officer. Mrs. 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.
37
<PAGE>
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'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.
Employment Arrangements
Dr. Turan M. Itil entered into an employment agreement with the Company,
effective September 20th, 1995, 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 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. Other principal terms of the agreement
provide that on each anniversary date of this agreement, Dr. Itil's salary shall
be increased in good faith negotiations between Dr. Itil and Company taking into
consideration such factors as the financial condition of the Company, and the
quality and extent of Employee's services hereunder during the prior year. In
addition the Company agrees to review the services rendered by Dr. Itil at least
annually and, at the discretion of the Board of Directors of the Company,
exercised in good faith and, depending upon the financial condition of the
Company and Dr. Itil's performance during the period, award bonuses, either
directly or by way of contributions to a deferred compensation plan in an amount
to be determined by the Board. Dr. Itil waived $146,347 of his base salary for
the year ended December 31, 1995. Dr. Itil has waived negotiations for salary
increase for 1996.
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 (but has
not yet done so) and to provide Dr. Itil with a car and driver. Dr. Itil waived
the life insurance requirement for the years ended December 31, 1995 and 1996.
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.
The agreement is for an initial term ending January 1, 2000 and is renewable on
a year to year basis thereafter unless either party notifies the other in
writing at least six months before the end of the initial term or any year
thereafter, of its intention to cancel. Other principal terms of the agreement
provide that effective January 1 of each year he shall be entitled to a 10%
salary increase. In addition, he shall be entitled to an annual bonus equal to
at least fifty percent (50%) of his base salary, provided that the Board of
Directors determines that he has met performance goals which were approved by
the Board at the beginning of each year. If a change in control of the Company
occurs, and if within five
38
<PAGE>
(5) years thereafter Dr. Le Bars' contract is terminated (other than for cause,
death or disability), he shall be entitled to a lump sum payment equal to five
(5) times his gross annual compensatory salary at the rate in effect when notice
of termination is given, and any bonuses commissions and stock options to which
he would normally be entitled.
For the three year period after such termination, the Company shall arrange to
provide him with life and health insurance benefits substantially similar to
those which he was receiving immediately prior to the notice of termination. A
change in control shall be deemed to have occurred when a person or entity
acquires 51% or more of the combined voting power of the Company's then
outstanding securities, or as a result of, or in connection with, any tender or
exchange offer, merger or other business combination, sale of assets or
contested election, or any combination of the foregoing the persons who were
directors of the Company immediately before such a transaction shall cease to
constitute a majority of the Board of the Company or any successor to the
Company.
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.
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 unless either party notifies the other in
writing, at least 12 months before the end of the initial term of any year
thereafter, of its intention to cancel. 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 MC Inc. may be located within the general metropolitan
area of Lansing, Michigan. The agreement further provides that if the Company or
MC Inc. transfer to any other person substantially all of its business and
assets by merger, consolidation, sale of assets or otherwise, they must transfer
its obligations under the agreement to such other Person and such other Person
must accept such transfer and assume the obligations under the agreement.
39
<PAGE>
Aileen A. Kunitz entered into an employment agreement with the Company effective
January 1, 1997 providing for annual base salary of $ 85,000. She shall be
entitled to receive an incentive compensation bonus, based on performance,
during the term of the agreement pursuant to an annual executive incentive plan
to be developed by the Company. The Executive Committee of the Board of
Directors has a right to reduce the base salary by up to 10% for failure to meet
annual goals to be set with respect to revenues and expenses. The agreement is
for initial term ending January 1, 2000 and is renewable on a year to year basis
thereafter unless either party notifies the other in writing at least 3 months
before the end of the initial term, or any year thereafter, of its intention to
cancel. The agreement further provides that if the Company transfers to any
other Person substantially all of its business and assets by merger,
consolidation, sale of assets or otherwise, they must transfer its obligations
under the agreement to such other Person and such other Person must accept such
transfer and assume the obligations under the agreement.
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, the
Registration Statement of which this Prospectus is a part, as well as the
development of budgeting, accounting, reporting and management information
systems. This arrangement, which is not the subject of a written agreement,
provides that Mr. DioGuardi works a minimum of 30 hours per week, and receives
compensation of $ 10,000.00 per month, and that it may be terminated at any time
by the Chairman of the Company.
The Company's employment agreements with Dr. Itil, Dr. Le Bars, IRH Corporation,
Jonathan Raven, Aileen Kunitz, and employment arrangements with other
significant employees impose customary confidentiality obligations.
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 (a total of
one person), to the extent each earned more than $ 100,000 in salary and bonus.
40
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION
AWARDS
Name & Other # Shares
Principal Annual Underlying All Other
Position Year Salary Bonus Compensation(1) Options Compensation
- -------- ---- ------ ----- --------------- ------- ------------
<S> <C> <C> <C> <C> <C> <C>
Turan Itil 1996 $250,000 --- --- --- ---
1995 $106,653(2) --- --- --- ---
CEO 1994 $255,000 --- $11,000 --- ---
Pierre
LeBars 1996 $112,000 $50,000 --- --- ---
Executive 1995 $100,000(3) --- --- --- ---
Vice
President
</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.
(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.
41
<PAGE>
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. See
"Employment Arrangements". No options were granted for the year ended December
31, 1996.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of March 31, 1997 with
respect to 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.
<TABLE>
<CAPTION>
Name and Address Amount and Nature of Percentage
of Beneficial Owner (1)(2) Beneficial Ownership (2) of Class
- -------------------------- ------------------------ ----------
<S> <C> <C>
Turan M. Itil, 941,700 (3)(4)(8) 12.02%
Chairman, President and Director
I. Ronald Horowitz, 250,000 (6)(8) 2.98%
Vice Chairman and Director
Kurt Z. Itil, 1,259,300 (4)(8) 15.50%
Director
Eleonore Itil 566,000 (4) (5)(8) 6.96%
Pierre Le Bars, 210,000 (4)(8) 2.58%
Executive Vice President and Director
Aileen A. Kunitz, 86,400 (4)(7)(8) 1.06%
Vice President, CFO and Director
Richard Katz, 214,500 (4)(8)(9) 2.64%
Director
42
<PAGE>
<CAPTION>
Name and Address Amount and Nature of Percentage
of Beneficial Owner (1)(2) Beneficial Ownership (2) of Class
- -------------------------- ------------------------ -----------
Evelyn Sommer, 1,000 *
Director
Joseph DioGuardi, 1,000 *
Director
Yasmin Itil Le Bars 798,000 (4)(8) 9.82%
Jonathan E. Raven 400,000 (10) 4.69%
Executive Vice President
and Director
Trinity American Corporation 2,693,598 (11) 28.46%
800 North Kings Highway
Cherry Hill, New Jersey 08034
Lancer Partners, LP 2,550,000 (12) 27.64%
Lancer Offshore, Inc.
Michael Lauer, General Partner
200 Park Avenue
New York, NY
All directors and officers of the 3,363,900 41%
Company as a group (9 individuals)
</TABLE>
* 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 Transactions".
43
<PAGE>
(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 through 2002
and Kurt Z. Itil becomes the Trustee thereafter. Kurt Z. Itil is also the
Successor Trustee in the event of the resignation or death of Turan M.
Itil prior to 2003.
(5) Mrs. Le Bars is the wife of Pierre Le Bars and the daughter of Turan M.
Itil. Mrs. Itil is the wife of Turan M. 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 American Corporation.* See "Certain 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 June 30, 1997; 250,000 shares of Class B Series 2
Preferred Stock currently convertible into 50,000 shares of common stock;
$ 350,000 of loans currently convertible into 587,500 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 American
Corporation. * See "Certain Transactions".
(12) Includes 1,100,000 currently exercisable warrants, each of which entitles
the holder to purchase one additional share of Common Stock at $8.00 per
share until August 31, 1997 and at $10.00 per share thereafter and until
August 31, 1998, the expiration date of the warrants.* See "Certain
Transactions".
44
<PAGE>
* A currently exercisable option, warrant or conversion privilege is one which
is exercisable within 60 days from the date hereof.
The percentage calculation for each of the named persons or entities is
based upon 8,123,807 common shares outstanding as of March 31, 1997 plus the
number of shares underlying currently exercisable options, warrants or
conversion privileges held by the identified or entity.
ITEM 12. 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 American Corporation
("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 pursuant to the March 24, 1994
agreement that HZI shall have no responsibility for the repayment of such bridge
loan because certain financing was not timely arranged by Trinity. 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 American Corporation.
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.
45
<PAGE>
Services Provided By Affiliates
HZI subcontracts material amounts of its patient testing performed in connection
with servicing contracts to New York Institute, 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 New York Institute (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's subsidiary Tele-Map, Inc. and Manhattan Westchester Medical
Services, P.C. ("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 in 1996.
Manhattan Westchester currently provides medical consulting services to the
Company and its subsidiaries. Services provided by Manhattan Westchester to
HZI's Tele-Map business for the years ended December 31, 1996 and 1995 amounted
to approximately $ 14,000 and $ 15,400, respectively. Manhattan Westchester is
controlled by the Company's Chairman.
Revenues from Affiliates
The Company charges NYI, as well as Manhattan Westchester for the use of certain
employees and office and laboratory space of the Company. Manhattan Westchester
and NYI are under the common control of the Company's Chairman. Net revenues
from these affiliates for the years ended December 31, 1996 and 1995 amounted to
$ 65,782 and $ 186,123, respectively.
Stockholders Notes and Loans:
December 31, 1996
Notes Payable bearing an interest
of 5% to 9% * $ 550,000
Non interest bearing loans and
payables (i), except for 108,687
$ 20,000 which bears interest at
10% per annum
Non interest bearing loan payable 200,000
---------
$ 858,687
=========
46
<PAGE>
i) Stockholder notes and loans payable relates to advances made to HZI and
NYI 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 converrted into 40,000 shares of Common Stock.
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, respectively, 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 16,666 shares of restricted
common stock to each of the President of Trinity's three sons for a total of
49,998 shares. 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 an additional $ 50,000 from Trinity
which is 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
which had an interest rate of 9%, and was due within nine months. As of December
16, 1996 the maturity date was extended to December 31, 1998 and interest was
reduced to 5%.
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) 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. As of December 16, 1996 the maturity date
was extended to December 31, 1998 and the interest rate reduced to 5%.
Manhattan Westchester is a professional corporation of which Dr. Turan M. Itil,
Chairman of the Company owns the majority of shares outstanding.
47
<PAGE>
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.
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. Each investor purchased the respective
number of shares set forth under "Selling Stockholders". 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.
During February 1996, Trinity loaned the Company $ 125,000. In April 1996, upon
receipt of the funds received from the sale of common stock Trinity was repaid $
50,000 towards these loans.
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 Risco Investment Trust, c/o 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 J.L.B.
Equities, Inc., Elmsford, New York. Subsequently, J.L.B. Equities, Inc., which
had purchased 250,000 shares of the Company's Common Stock in the December 1995
private placement and purchased 300,000 additional shares from the above
referenced foreign investors sold an aggregate of 500,000 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 a Registration Statement filed with the Securities and Exchange
Commission (the "Registration Statement"). Accordingly, all of the foregoing
shares, namely, 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 J.L.B. Equities, Inc. and the 50,000 shares still
owned by J.L.B. Equities, Inc. (an aggregate of 1,550,000 shares) may be sold at
such time as the Registration Statement becomes effective.
48
<PAGE>
In May 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. These shares may be sold pursuant to the Registration Statement. 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, J.L.B. Equities, a shareholder, loaned the Company $ 100,000. This
loan bears interest at 9% per year, payable monthly, and is payable in July
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 and a consultant to the Company is a director and President of the
foundation.
In September 1996, Trinity American Corporation loaned the Company $ 50,000.
This had an interest rate of 10% per year which, effective December 16, 1996,
was reduced to 5%. The loan, originally payable within one year, has been
extended to the earlier of the date the Class B and C Warrants are fully
exercised or December 15, 1998.
In December 1996 the Company sold an aggregate of 550,000 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. 269,755 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 $ 8.00 per share
until August 31, 1997 and at $ 10.00 per share thereafter and until August 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.
49
<PAGE>
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 an aggregate of 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.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(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****
(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)(v) 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.
(16)(a) Letter re: changes in certifying accountant***
(24)(a) Consent of Scarano & Lipton P.C. (included in Part II of
Registration Statement)
50
<PAGE>
(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 27, 1987.
** Incorporated by reference to the Company's Annual Report on Form 10-K for
the period ending September 30, 1994.
*** Incorporated by reference to Current Report on Form 8-K for November 23,
1994.
**** Incorporated by reference to Registration Statement on Form SB-2 No.
333-1462 filed in February 1996 and Amendment Nos. 1, 2 and 3 thereto
(b) Reports on Form 8-K
NONE
51
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the Registrant has fully caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
(Registrant) NEUROCORP, LTD.
By (Signature and Title) S/TURAN M. ITIL
----------------------------------
Turan M. Itil,
Chairman, Chief Executive Officer
President, and Director
Date: April 15, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registration and
in the capacities indicated on April 15, 1997.
/S/ TURAN M. ITIL /S/ I. RONALD HOROWITZ
- ----------------------------------- ----------------------------------
Turan M. Itil I. Ronald Horowitz
Chairman, Chief Executive Officer, Vice Chairman
President and Director
Date: April 15, 1997 Date: April 15, 1997
/S/ KURTZ Z. ITIL /S/ RICHARD KATZ
- ----------------------------------- ----------------------------------
Kurt Z. Itil, Director Richard Katz, Director
Date: April 15, 1997 Date: April 15, 1997
/S/ EVELYN SOMMER /S/ PIERRE LeBARS
- ----------------------------------- ----------------------------------
Evelyn Sommer, Director Pierre Le Bars,
Date: April 15, 1997 Executive Vice President
& Director
Date: April 15, 1997
52
<PAGE>
/S/ JOSEPH DioGUARDI /S/ AILEEN A. KUNITZ
- ----------------------------------- ----------------------------------
Joseph DioGuardi, Director Aileen A. Kunitz, Vice President
Date: April 15, 1997 Director, Principal Financial Officer
Principal Accounting Officer
Date: April 15, 1997
/S/ JONATHAN E. RAVEN
- -----------------------------------
Jonathan E. Raven, Director
and Executive Vice President
Date: April 15, 1997
53
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
number
------------
Independent auditors' report F-1
Consolidated balance sheet at December 31, 1996 F-2
Consolidated statements of operations for the years ended
December 31, 1996 and 1995 F-3
Consolidated statements of stockholders' equity for the years ended
December 31, 1996 and 1995 F-4 - F-5
Consolidated statements of cash flows for the years ended
December 31, 1996 and 1995 F-6 - F-7
Notes to consolidated financial statements F-8 - F-27
<PAGE>
[LETTERHEAD OF SCARANO & LIPTON, P.C.]
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.
/s/ Scarano & Lipton, P.C.
Scarano & Lipton, P.C.
Mitchel Field, New York
March 8, 1997, except for
Note 13a as to which the
date is March 12, 1997 and
Note 13b as to which the
date is March 26, 1997
F-1
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996
ASSETS
------
<TABLE>
<CAPTION>
Current assets:
<S> <C>
Cash $ 1,851,114
Accounts receivable, net of allowance for
doubtful accounts of $468,000 550,163
Inventory 29,356
Prepaid expenses and taxes 119,548
Deferred financing costs 53,516
Other current assets 1,879
------------
Total current assets 2,605,576
------------
Equipment and fixtures, net 83,549
------------
Other assets:
Database development costs, net 1,264,018
Computer system product development costs, net 496,518
Other 130,703
------------
Total other assets 1,891,239
------------
Total assets $ 4,580,364
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 166,232
Accrued expenses 167,265
Stockholder notes and loans payable 858,687
Income taxes payable 6,400
Current portion of long-term debt 47,953
Billings in excess of costs and estimated earnings
on uncompleted contracts 276,426
------------
Total current liabilities 1,522,963
Long-term liabilities:
Long-term debt 15,502
Deferred income taxes 264,000
------------
Total liabilities 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 of $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
Common stock, $.001 par value, 100,000,000 shares authorized
7,723,806 issued and outstanding 46,924
Less: discount on common stock (28,500)
Additional paid-in capital 3,246,987
Contributed capital 100,000
Accumulated deficit (987,512)
------------
Total stockholders' equity 2,777,899
------------
Total liabilities and stockholders' equity $ 4,580,364
============
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
1996 1995
----------- -----------
Net sales $1,068,891 $1,543,363
Cost of sales, including amortization expense
of $264,790 and $179,308, respectively 706,579 637,746
----------- -----------
Gross profit 362,312 905,617
Expenses:
General and administrative expenses 1,249,022 1,013,233
Research and development 98,018 181,512
Bad debt expense 440,000 -
----------- -----------
Loss from operations before other income (expense)
and income tax benefit (1,424,728) (289,128)
Other income (expense):
Cumulative effect of change of accounting estimate (125,745) -
Interest income 10,302 11,760
Interest expense (126,793) (45,986)
Gain on sale of asset - 31,280
----------- -----------
Loss before income tax benefit (1,666,964) (292,074)
Income tax benefit 32,289 29,580
----------- -----------
Net loss $(1,634,675) $(262,494)
=========== ===========
Net loss applicable to common shares $(1,649,675) $(262,494)
=========== ===========
Loss per common equivalent share:
Primary:
Loss before income tax benefit $(.24) $(.06)
Income tax benefit .01 .01
----------- -----------
Net loss $(.23) $(.05)
=========== ===========
Net loss applicable to common shares $(.24) $(.05)
=========== ===========
Weighted average number of shares outstanding 7,002,279 5,484,586
=========== ===========
See accompanying notes to consolidated financial statements
F-3
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
Preferred Stock Class B
Series 1 Series 2 Common Stock
Shares Amount Shares Amount Shares Amount
--------------- -------------- -------------- --------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balances at
December 31, 1994 150,000 $ 150,000 250,000 $ 250,000 5,400,000 $ 16,100
Sale of common stock - - - - 57,143 57
Issuance of common stock
in connection with loan - - - - 49,998 50
Cancellation of common stock
contributed by shareholder - - - - (400,000) (400)
Sale of common stock - - - - 1,000,000 1,000
Issuance of stock option
in consideration for
compensation and consulting
fees - - - - - -
Capital contribution in
connection with waived
Chairman's compensation - - - - - -
Net loss for the year ended
December 31, 1995 - - - - - -
--------------- -------------- -------------- --------------- -------------- -------------
Balances at
December 31, 1995 150,000 150,000 250,000 250,000 6,107,141 16,807
<CAPTION>
Retained
Additional Earnings Total
Paid-in Contributed (Accumulated Stockholders'
Capital Capital Deficit) Equity
-------------- -------------- ------------- -----------------
<S> <C> <C> <C>
Balances at
December 31, 1994 262,123 - $ 924,657 $ 1,602,880
Sale of common stock 99,943 - - 100,000
Issuance of common stock
in connection with loan 14,011 - - 14,061
Cancellation of common stock
contributed by shareholder (99,600) 100,000 - -
Sale of common stock 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 738,699 100,000 662,163 1,917,669
</TABLE>
See accompanying notes to consolidated financial statements
F-4
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
Preferred Stock Class B
Series 1 Series 2 Common Stock
Shares Amount Shares Amount Shares Amount
--------------- -------------- -------------- --------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balances at
December 31, 1995 150,000 $ 150,000 250,000 $ 250,000 6,107,141 $ 16,807
Sale of common stock - - - - 1,000,000 1,000
Cost associated with the
registration for selling
shareholders and warrant holders - - - - - -
Issuance of 66,666 shares
of common stock in lieu of
financing cost - - - - 66,665 67
Accrued preferred stock
dividend - - - - - -
Sale of common stock 550,000 550
Net loss for the year ended
December 31, 1996 - - - - - -
--------- --------- --------- --------- --------- ---------
Balances at December 31, 1996 150,000 $ 150,000 250,000 $ 250,000 7,723,806 $ 18,424
========= ========= ========= ========= ========= =========
<CAPTION>
Retained
Additional Earnings Total
Paid-in Contributed (Accumulated Stockholders'
Capital Capital Deficit) Equity
-------------- -------------- ------------- ----------------
<S> <C> <C> <C> <C>
Balances at
December 31, 1995 $ 738,699 $ 100,000 $ 662,163 $ 1,917,669
Sale of common stock 399,000 - 400,000
Cost associated with the
registration for selling
shareholders and warrant holders (25,046) - (25,046)
Issuance of 66,666 shares
of common stock in lieu of
financing cost 133,266 - - 133,333
Accrued preferred stock
dividend - - (15,000) (15,000)
Sale of common stock 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 $ 3,246,987 $ 100,000 $ (987,512) $ 2,777,899
=========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
F-5
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1996 1995
--------------------- ----------------------
<S> <C> <C>
Cash flows for operating activities:
Net loss from operations $ (1,634,675) $ (262,494)
Adjustments to reconcile net loss to net cash
provided by (used for) operating activities:
Depreciation and amortization 300,630 230,546
Change in allowance for doubtful accounts 428,080 7,245
Amortization of deferred financing costs 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
Changes in operating assets and liabilities:
Accounts receivable (258,323) (568,798)
Due from affiliates 85,673 62,527
Inventory 629 (11,592)
Prepaid expenses and taxes (66,234) 23,768
Cost and estimated earnings in excess of billings on uncompleted contracts 26,954 121,341
Accounts payable 13,767 (55,429)
Accrued expenses (30,046) 60,087
Income taxes payable (1,893) (83,573)
Customer deposits 2,400 1,930
Billings in excess of costs and estimated earnings on uncompleted contracts 75,093 (412,666)
--------------------- ---------------------
Net cash flows used for operating activities (897,382) (660,652)
--------------------- ---------------------
Cash flows for investing activities:
Purchase of equipment and fixtures (36,056) (47,955)
Database development costs capitalized (91,913) (60,478)
Patent cost capitalized (2,150) (5,380)
Computer system development costs capitalized (2,276) (138,635)
Proceeds from insurance on vehicle - 34,271
--------------------- ---------------------
Net cash flows used for investing activities (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
Repayment of stockholders loans (46,694) (79,000)
Proceeds from stockholders loans 525,000 312,674
Principal payments on long-term debt (64,506) (71,943)
Offering costs incurred (25,046) -
Proceeds from sale of common stock 2,401,618 350,000
--------------------- ---------------------
Net cash flows provided by financing activities 2,740,372 682,843
--------------------- ---------------------
Net increase (decrease) in cash 1,710,595 (195,986)
Cash at beginning of period 140,519 336,505
--------------------- ---------------------
Cash at end of period $ 1,851,114 $ 140,519
===================== =====================
</TABLE>
See accompanying notes to consolidated financial statements
F-6
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1996 1995
------------- ------------
<S> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 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 $ 15,000 $ -
============= ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
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 at December 31, 1996 and 1995
represent the assets and liabilities of HZI and it's affiliates and
the results of their operations and cash flows for the two years
then ended. All costs incurred in connection with the reverse
acquisition have been charged to additional paid-in capital at the
completion of the transaction. On the closing date, the Company's
Board of Directors were replaced by directors designated by HZI and
the Company changed its name from Tamarac Ventures, Ltd. to
NeuroCorp, Ltd.
The Company, through its wholly-owned subsidiary, HZI, is primarily
involved in three inter-related businesses all of which involve the
interaction or utilization of the Company's proprietary software,
databases and medical devices for the diagnosis and treatment of
brain-related disorders. The three businesses are as follows: (i)
performing long-term contract services for medical research for
major domestic and international pharmaceutical firms; (ii)
designing and producing proprietary neuropsychiatric diagnostic
testing equipment, which is currently known as their Brain
Functioning Monitor (BFM) system; and (iii) providing interactive
diagnostic testing services and analysis to physicians and hospitals
via the telephone, through HZI's subsidiary, Tele-Map, Inc.
("TeleMap").
In January 1996, the Company created a new wholly-owed subsidiary
known as 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 11(b) for
additional information.
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, MC Inc. 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 consolidated 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.
F-8
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
b) Inventory
Inventory, which consists solely of finished goods, is stated at the
lower of cost (first-in, first-out method) or market.
c) 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.
d) 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.
e) 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.
f) 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.
F-9
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
g) 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.
h) Revenue recognition
The Company recognized 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.
i) 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.
j) 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.
k) Research and development costs
Research and development costs are charged to operations when
incurred.
F-10
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
l) 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.
m) 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.
n) 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.
o) 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 - BILLINGS IN EXCESS OF COSTS AND ESTIMATED EARNINGS ON
UNCOMPLETED CONTRACTS
December 31,
1996
------------
Costs incurred on uncompleted contracts $2,080,641
Estimated earnings 1,654,834
------------
3,735,475
Less: Billings to date 4,011,901
------------
Billing in excess of costs and estimated
earnings on uncompleted contracts $ (276,426)
============
F-11
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
NOTE 4 - EQUIPMENT AND FIXTURES, NET
Equipment and fixtures, net consists of the following at December
31, 1996:
Furniture and fixtures $ 9,009
Equipment 570,016
Vehicles 50,117
-----------
629,142
Less: accumulated depreciation (545,593)
-----------
$ 83,549
===========
Depreciation expense amounted to $27,086 and $49,224 for the years
ended December 31, 1996 and 1995, respectively. All equipment and
fixtures are pledged pursuant to a note payable. (See Note 8).
NOTE 5 - DATABASE DEVELOPMENT COSTS, NET
December 31,
1996
-----------
Balance, beginning of year $ 1,312,246
Capitalized costs during the year 91,913
Amortization charged to cost of revenues (140,241)
-----------
Balance, end of year $ 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.
NOTE 6 - COMPUTER SYSTEM PRODUCT DEVELOPMENT COSTS, NET
December 31,
1996
-----------
Balance, beginning of year $ 744,551
Capitalized costs during the year 2,261
Amortization charged to cost of revenues (124,549)
Cumulative effect of change in accounting estimate (125,745)
-----------
Balance, end of year $ 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(e)
exceeds the carrying value, net, therefore, no 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.
F-12
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
NOTE 7 - ACCRUED EXPENSES
Accrued expenses consists of the following at December 31, 1996:
Salary and related taxes $ 71,334
Legal and accounting fees 44,272
Dividends 15,000
Interest 36,659
-----------
$ 167,265
===========
NOTE 8 - LONG-TERM DEBT
Long-term debt consists of the following at
December 31, 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
===========
F-13
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
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:
<TABLE>
<CAPTION>
December 31, December 31,
1996 1995
------------ ------------
<S> <C> <C>
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 (41,5800)
Prior year under accrual recorded
in current year 6,311 -
(Decease) increase in deferred tax
liability (45,000) 12,000
--------- ---------
Total income tax (benefit) $ (32,289) $ (29,580)
========= =========
</TABLE>
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.
F-14
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
NOTE 9 - INCOME TAX BENEFIT (Cont'd)
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. MC Inc. 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 and NYI had net operating loss
carryforwards (NOL's) of approximately $1,090,000 and $325,000,
respectively. The Companies have 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 three 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).
F-15
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
NOTE 9 - INCOME TAX BENEFIT (Cont'd)
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.
F-16
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
NOTE 10 - 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 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 June 30, 1997. As described in
Note 10(m), in February 1996, the Company filed a registration
statement in order to register such warrants. As of December 31,
1996 no warrants have been exercised, except as described in Note
13(a).
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.
F-17
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
NOTE 10 - STOCKHOLDERS' EQUITY (Cont'd)
g) Reverse acquisition of subsidiary (Cont'd)
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 December 31, 1996, the Company accrued
a dividend of $15,000 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 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.
F-18
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
NOTE 10 - STOCKHOLDERS' EQUITY (Cont'd)
h) Stock Option Plan Transactions (Cont'd)
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.
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. (See Note 13).
On December 18, 1996, the Company granted a total of 500,000
qualified stock options to MC Inc.'s CEO and President, and an
Executive Vice-President of the Company for the 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. 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.
F-19
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
NOTE 10 - 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.
Effective December 16, 1996, the above loans were revised to a
maturity date of December 31, 1998 and an interest rate of 5%
per annum.
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 66,665 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)).
F-20
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
NOTE 10 - STOCKHOLDERS' EQUITY (Cont'd)
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 $25,046 of the costs related to
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 three 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.
F-21
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
NOTE 11 - COMMITMENTS AND CONTINGENCIES (Cont'd)
a) Operating leases (Cont')
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.
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. As of December
31, 1996, approximately 61% of accounts receivable is due from two
unrelated customers.
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, the Company's
Chairman waived his right to receive the term life insurance
as provided for in the employment agreement.
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 10(n)).
F-22
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
NOTE 11 - COMMITMENTS AND CONTINGENCIES (Cont'd)
c) Employment Agreements (Cont'd)
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 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.
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 MC Inc. entered into an
employment agreement with the CEO and President of MC Inc. 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. 200,000 of such options vest on
January 6, 1997, 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 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 year ended December 31, 1996
and 1995 amounted to $65,782 and $186,123, respectively.
The above transactions between HZI and NYI have been eliminated in
the consolidated financial statements.
F-23
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
NOTE 12 - 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 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. Expenses incurred with NYI for the years ended
December 31, 1996 and 1995 were $0 and $40,715, respectively. The
net payable due NYI at December 31, 1996 and 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 suspended during 1995
and reactivated during 1996. Services provided by Manhattan West to
HZI for the year ended December 31, 1996 and 1995 amounted to
approximately $14,000 and $15,400, respectively.
c) Stockholder notes and loans payable
Stockholder notes and loans payable consisted of the following at
December 31, 1996:
Non-interest bearing loans and payables,
except for $20,000 which bears interest at
10% per annum (See i below) $ 108,687
Notes payable bearing an interest of
5% to 9% (See (ii) and (iii) below) 550,000
Non-interest bearing loan payable
(See (iv) below) 200,000
---------
$ 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.
F-24
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
NOTE 12 - RELATED PARTY TRANSACTIONS (Cont'd)
c) Stockholder notes and loans payable (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 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 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 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 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.
Effective December 16, 1996, the maturity dates on the above
notes were extended to December 31, 1998 with an interest rate
of 5% per annum.
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.
As of December 31, 1996, the Company has not repaid such
loans.
F-25
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
NOTE 12 - RELATED PARTY TRANSACTIONS (Cont'd)
c) Stockholder notes and loans payable (Cont'd)
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. As of December 31, 1996, amortization expense
amounted to $79,417. Further, the Company agreed to register
said shares. (See Note 10(m)). Lastly, as of December 31,
1996, the Company has not repaid such Loan.
v) At December 31, 1996, accrued interest related to such notes
and loans amounted to $36,376 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 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)).
F-26
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
NOTE 12 - RELATED PARTY TRANSACTIONS (Cont'd)
g) Due from affiliates
The Company charges Manhattan West for the use of certain employees,
laboratory space and management fees related to MC Inc.'s services.
Manhattan West 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. At December
31, 1996, amounts due from Manhattan West for these services
amounted to $33,495 which has been included in accounts receivables.
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.
NOTE 13 - SUBSEQUENT EVENTS
a) 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.
b) On March 26, 1997, the Company issued of 50,000 shares of restricted
common stock pursuant to the terms of a stock option agreement
granted to a consultant on December 15, 1995. (See Note 10(h)).
F-27
