<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[xx] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1997
------------------------------------------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
----------- -----------------------------------
Commission File Number: 33-2205-D
-------------------------------------------------------
NeuroCorp., Ltd.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Nevada 87-0446395
- ------------------------------ ----------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
150 White Plains Road, Tarrytown, New York 10591
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(914) 631-3315
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) has filed all reports required to be filed by
section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [xx] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court.
Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity as of the latest practicable date: 8,173,806 Shares as of March 31, 1997.
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PART 1 - FINANCIAL INFORMATION:
ITEM I - FINANCIAL STATEMENTS Page
Number
------
Consolidated balance sheets at March 31, 1997 (unaudited)
and December 31, 1996 F-1
Consolidated statements of operations (unaudited)
for the three months ended March 31, 1997 and 1996 F-2
Consolidated statement of stockholders' equity (unaudited)
for the three months ended March 31, 1997 F-3
Consolidated statements of cash flows (unaudited)
for the three months ended March 31, 1997 and 1996 F-4 - F-5
Notes to consolidated financial statements F-6 - F-16
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS F-17 - F-24
PART II - OTHER INFORMATION F-25
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
------
(Unaudited)
March 31, 1997 December 31, 1996
Current assets: -------------- -----------------
<S> <C> <C>
Cash $ 1,876,176 $ 1,851,114
Accounts receivable, net of allowance for
doubtful accounts of $468,000 at March 31, 1997
and December 31, 1996 621,261 550,163
Inventory 22,594 29,356
Prepaid expenses and taxes 43,017 36,982
Deferred financing costs 20,182 53,516
Other current assets 71,059 84,445
------------ ------------
Total current assets 2,654,289 2,605,576
------------ ------------
Equipment and fixtures, net 84,390 83,549
------------ ------------
Other assets:
Database development costs, net 1,283,242 1,264,018
Computer system product development costs, net 465,361 496,518
Deferred registration costs 85,876 -
Other 175,790 130,703
------------ ------------
Total other assets 2,010,269 1,891,239
------------ ------------
Total assets $ 4,748,948 $ 4,580,364
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 131,607 $ 166,232
Accrued expenses 157,280 176,503
Stockholder notes and loans payable 856,854 858,687
Income taxes payable 9,700 6,400
Current portion of long-term debt 13,460 38,715
Billings in excess of costs and estimated earnings
on uncompleted contracts 210,476 276,426
------------ ------------
Total current liabilities 1,379,377 1,522,963
Long-term liabilities:
Long-term debt - 15,502
Deferred income taxes 264,000 264,000
------------ ------------
Total liabilities 1,643,377 1,802,465
------------ ------------
Commitments and contingencies (Note 4)) - -
Stockholders' equity:
Preferred stock, authorized 5,000,000 shares,
issued as follows:
Cumulative Preferred stock, class B,
series 1, no par value, issued and
outstanding 150,000 shares, full
liquidation value $150,000 150,000 150,000
Convertible Preferred stock, class B, series 2,
no par value, issued and outstanding 250,000 shares,
full liquidation value $250,000 250,000 250,000
Common stock, $.001 par value, 100,000,000
shares authorized 8,173,806 and 7,723,806
issued and outstanding, respectively 47,374 46,924
Less: discount on common stock (28,500) (28,500)
Additional paid-in capital 3,847,037 3,246,987
Contributed capital 100,000 100,000
Accumulated deficit (1,260,340) (987,512)
------------ ------------
Total stockholders' equity 3,105,571 2,777,899
------------ ------------
Total liabilities and stockholders' equity $ 4,748,948 $ 4,580,364
------------ ------------
------------ ------------
See accompanying notes to consolidated financial statements (unaudited).
</TABLE>
F-1
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31,
(UNAUDITED)
1997 1996
-------- --------
Net sales $ 275,487 $ 382,448
Cost of sales, including amortization expense
of $67,201 and $66,197, respectively 169,843 201,386
------------ ------------
Gross profit 105,644 181,062
Expenses:
General and administrative expenses 320,047 214,096
Research and development 17,475 27,966
------------ ------------
Total expenses 337,522 242,062
------------ ------------
Loss from operations before other income (expense)
and income tax expense (231,878) (61,000)
Other income (expense):
Cumulative effect of change of accounting estimate - (125,745)
Interest income 11,416 3,689
Interest expense (47,316) (10,983)
------------ ------------
Loss before income tax expense (267,778) (194,039)
Income tax expense 1,300 -
------------ ------------
Net loss $ (269,078) $ (194,039)
------------ ------------
------------ ------------
Net loss applicable to common shares $ (272,878) $ (197,789)
------------ ------------
------------ ------------
Loss per common equivalent share:
Primary:
Loss before income tax expense $ (.03) $ (.03)
Income tax expense - -
------------ ------------
Net loss $ (.03) $ (.03)
------------ ------------
------------ ------------
Net loss applicable to common shares $ (.03) $ (.03)
------------ ------------
------------ ------------
Weighted average number of shares outstanding 7,819,959 6,218,251
------------ ------------
------------ ------------
See accompanying notes to consolidated financial statements (unaudited).
F-2
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1997
(UNAUDITED)
<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, 1996 150,000 $ 150,000 250,000 $ 250,000 7,723,806 $ 18,424
Accrued preferred stock
dividend - - - - - -
Issuance of common stock
in connection with exercise
of warrants 400,000 400
Issuance of common stock
in connection with exercise
of stock option - - - - 50,000 50
Net loss for the three months
ended March 31, 1997 - - - - - -
------- --------- ------- --------- --------- ---------
Balances at March 31, 1997 150,000 $ 150,000 250,000 $ 250,000 8,173,806 $ 18,874
------- --------- ------- --------- --------- ---------
------- --------- ------- --------- --------- ---------
Additional Total
Paid-In Contributed (Accumulated Stockholders
Capital Capital Deficit) Equity
----------- ---------- ------------- ------------
<S> <C> <C> <C> <C>
Balances at
December 31, 1996 $ 3,246,987 $ 100,000 $ (987,512) $ 2,777,899
Accrued preferred stock
dividend - - (3,750) (3,750)
Issuance of common stock
in connection with exercise
of warrants 599,600 - - 600,000
Issuance of common stock
in connection with exercise
of stock option 450 - - 500
Net loss for the three months
ended March 31, 1997 - - (269,078) (269,078)
----------- ---------- ------------ -----------
Balances at March 31, 1997 $ 3,847,037 $ 100,000 $ (1,260,340) $ 3,105,571
----------- ---------- ------------ -----------
----------- ---------- ------------ -----------
</TABLE>
See accompanying notes to consolidated financial statements (unaudited).
F-3
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31,
(UNAUDITED)
1997 1996
---- ----
Cash flows for operating activities:
Net loss from operations $ (269,078) $ (194,039)
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation and amortization 78,359 70,858
Amortization of deferred financing costs 33,334 -
Cumulative effect of change in accounting estimate - 125,745
Decrease (increase) in:
Accounts receivable (71,098) (250,920)
Due from affiliates (2,889) (5,510)
Inventory 6,762 (6,962)
Prepaid expenses and taxes (6,035) 51,359
Other current assets 13,386 -
Increase (decrease) in:
Accounts payable (34,625) 83,032
Accrued expenses (22,973) (95,772)
Income taxes payable 3,300 (6,997)
Billings in excess of costs and estimated
earnings on uncompleted contracts (65,950) 67,645
------------ ------------
Net cash flows used for operating activities (337,507) (161,561)
------------ ------------
Cash flows for investing activities:
Purchase of equipment and fixtures (32,973) -
Database development costs capitalized (55,268) (18,692)
Patent cost capitalized - (2,150)
Computer system development costs capitalized - (1,277)
Other assets (45,087) -
Proceeds from sale of automobile 1,660 -
------------ ------------
Net cash flows used for investing activities (131,668) (22,119)
------------ ------------
Cash flows from financing activities:
Repayments of demand note - line of credit - (50,000)
Repayment of stockholders loans (1,833) -
Proceeds from stockholders loans - 98,827
Principal payments on long-term debt (18,054) (17,404)
Registration costs incurred (85,876) (25,046)
Proceeds from exercise of warrants and
sale of common stock 600,000 133,334
------------ ------------
Net cash flows provided by financing activities 494,237 139,711
------------ ------------
Net increase (decrease) in cash 25,062 (43,969)
Cash at beginning of period 1,851,114 140,519
------------ ------------
Cash at end of period $ 1,876,176 $ 96,550
------------ ------------
------------ ------------
See accompanying notes to consolidated financial statements (unaudited).
F-4
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31,
(UNAUDITED)
1997 1996
---- ----
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 9,684 $ 3,225
---------- ----------
---------- ----------
Income taxes $ 1,300 $ 545
---------- ----------
---------- ----------
Schedule of non-cash investing and financing activities:
Accrued dividends on Series 1 preferred stock $ 3,750 $ 3,750
---------- ----------
---------- ----------
Bank note liquidated in exchange for automobile $ 22,703 -
---------- ----------
---------- ----------
See accompanying notes to consolidated financial statements (unaudited).
F-5
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)
NOTE 1 - GENERAL
NeuroCorp, Ltd. (the "Company") was incorporated in the State of
Nevada on March 18, 1987. On November 23, 1994 the Company entered
into an agreement and a plan of reorganization with HZI Research
Center, Inc. ("HZI") to exchange 100% of HZI's outstanding common
stock for 4,600,000 post-split $.001 par value common shares of the
Company. Simultaneously, the Company effectuated a 1 for 50 reverse
stock split thereby reducing its outstanding common shares from
40,000,000 to 800,000. The financial statements give effect to the
reverse stock split. This transaction has been accounted for as a
reverse acquisition of HZI, whereby its assets and liabilities have
been recorded at their historical costs. Prior to this transaction
the Company had no significant assets, liabilities or operations.
Accordingly, the financial statements at March 31, 1997 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 4(b) for additional
information.
The unaudited interim financial statements for the three months ended
March 31, 1997 and 1996 included herein have been prepared by the
Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission and, in the opinion of the Company,
reflect all adjustments (consisting only of normal recurring
adjustments) and disclosures which are necessary for a fair
presentation. The results of operations for the three months ended
are not necessarily indicative of the results for the full year. For
further information, refer to the Company's audited financial
statements and footnotes thereto at December 31, 1996, included in
Form 10-KSB filed with the Securities and Exchange Commission.
F-6
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)
NOTE 2 - LONG-TERM DEBT
<TABLE>
<CAPTION>
Long-term debt consists of the following at:
March 31,
1997 December 31,
(Unaudited) 1996
----------- ------------
<S> <C> <C>
Note payable due in thirty-six (36)
monthly installments of $6,175 including
interest at prime plus 1% per annum due
May 1997. The note is collateralized by
equipment, receivables and general
intangible assets and has been personally
guaranteed by certain officers. $ 13,460 $ 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 (13,460) (38,715)
-------- --------
Long-term portion $ - $ 15,502
-------- --------
-------- --------
Long-term debt matures as follows:
Year ended
December 31,
------------
1997 $ 38,715
1998 8,134
1999 7,368
--------
$ 54,217
--------
--------
</TABLE>
NOTE 3 - STOCKHOLDERS' EQUITY
a) 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.
F-7
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)
NOTE 3 - STOCKHOLDERS' EQUITY (Cont'd)
a) ISSUANCE OF WARRANTS (Cont'd)
In January 1996, the Company's Board of Directors reduced the exercise
price of the Class B and Class C warrants from $2.25 to $1.00 per
share and from $2.75 to $2.00 per share, respectively and the
expiration dates were extended to December 31, 1997. As described in
Note 3(e), in February 1996, the Company filed a registration statement
in order to register such warrants.
On March 12, 1997, two (2) shareholders exercised in the aggregate
200,000 Class B Warrants and 200,000 Class C Warrants, which resulted
in the Company receiving proceeds of $600,000 and issuing 400,000
shares of common stock.
b) STOCK OPTION PLAN TRANSACTIONS
On November 23, 1994, the Company adopted an incentive stock option
plan that will provide for the granting of options to purchase up to
1,500,000 shares of the Company's common stock that are intended to
qualify either as incentive stock options within the meaning of
Section 422 of the Internal Revenue Code or a non-statutory stock
option plan. Options to purchase shares may be granted under the
statutory stock option plan to persons who are employees or officers
of the Company. If the Company adopts a non-statutory stock option
plan, options shall be granted to, employees, officers, non-employee
directors, and consultants to the Company.
The stock option plan provides for its administration by a committee
chosen by the Board of Directors. The committee shall have full
discretionary authority to determine the number of shares to be
granted, the grantees receiving the options, the exercise period, and
the exercise price for which options will be granted. In the case of
statutory stock option plans, the committee's authority to establish
the terms and conditions of such options, including, but not limited
to their exercise price, shall be subject to restrictions imposed by
Section 422 of the Internal Revenue Code.
On September 19, 1995, the Company granted to its then President and
Vice Chairman a 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.
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.
F-8
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)
NOTE 3 - STOCKHOLDERS' EQUITY (Cont'd)
b) STOCK OPTION PLAN TRANSACTIONS (Cont'd)
On December 18, 1996, the Company granted qualified stock options to
MC Inc.'s CEO and President, and an Executive Vice-President of the
Company for the purchase of total of 500,000 shares of common stock
exercisable at the lower of $7.00 per share or the fair market value.
The options are exercisable upon vesting and expire on January 6,
2007. On January 6, 1997, 200,000 of such options vested, and the
remaining 300,000 options vest 50% on January 6, 1998 and 50% on
January 6, 1999.
c) 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 extended to
December 31, 1998 with a revised interest rate of 5% per annum.
F-9
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)
NOTE 3 - STOCKHOLDERS' EQUITY (Cont'd)
c) ISSUANCE OF COMMON STOCK AS CONSIDERATION FOR LOANS (Cont'd)
ii) On May 24, 1996, the Company entered into an agreement with a
shareholder to borrow $200,000. The loan is non-interest bearing
and is payable within one (1) year or is payable out of the first
proceeds resulting from any exercise of outstanding Class B and
Class C warrants (See Note 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.
d) 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.
e) 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 for such costs related to the
registration. Said costs have been deferred and will be charged to
additional paid in capital upon the successful completion of the
registration.
f) 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.
F-10
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)
NOTE 4 - COMMITMENTS AND CONTINGENCIES
a) OPERATING LEASES
The Company leases its office facilities under a noncancellable
operating lease expiring during 1998. The lease contains a provision
for additional rent which is equal to the Company's pro rated share of
future real estate taxes. In addition, the Company has a
noncancellable operating lease for office equipment expiring in 1997.
A schedule of future minimum rental payments at December 31, 1996 is
as follows:
Year Ended December 31,
-----------------------
1997 $ 92,557
1998 77,868
-----------
$ 170,425
-----------
-----------
Rent expense under all operating leases for the three months ended
March 31, 1997 and 1996 was $28,821 and $34,434, respectively.
b) CONCENTRATION OF CREDIT RISK
For the three months ended March 31, 1997 and 1996, approximately 67%
and 52%, respectively, of net sales were derived from two unrelated
customers, who are in the pharmaceutical industry. As of March 31,
1997 and December 31, 1996, approximately 63% and 61% respectively, 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 three months ended March 31, 1997 and 1996,
the Company's Chairman waived his right to receive the term life
insurance as provided for in the employment agreement.
F-11
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)
NOTE 4 - 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
granted a qualified stock options for a total purchase of 500,000
shares of common stock exercisable at the lower of $7.00 per
share or the fair market value. The options are exercisable upon
vesting and expire January 6, 2007. On January 6, 1997, 200,000
of such options vest and 150,000 options each vest on January 6,
1998 and 1999.
d) CONSULTING AGREEMENT
On July 1, 1995, the Company entered into a five (5) year consulting
agreement with an entity controlled by the Company's former President
and Vice Chairman. Said agreement provided for a fee of $75,000 per
annum. The agreement was amended on July 12, 1996 to provide for a
reduced fee of $30,000 per annum.
NOTE 5 - 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
F-12
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)
Chairman. Net revenues from these affiliates for the three months
ended March 31, 1997 and 1996 amounted to $21,252 and $18,325,
respectively.
NOTE 5 - RELATED PARTY TRANSACTIONS (Cont'd)
a) REVENUES FROM AFFILIATES (Cont'd)
The above transactions between HZI and NYI have been eliminated in the
consolidated financial statements.
b) SERVICES PROVIDED BY AFFILIATES
During 1994 HZI and Manhattan West entered into an arrangement whereby
Manhattan West would provide medical consulting services to HZI's
TeleMap business. This arrangement was suspended during 1995 and
reactivated during 1996. No services were provided by Manhattan West
to HZI for the three months ended March 31, 1997 and 1996.
c) STOCKHOLDER NOTES AND LOANS PAYABLE
Stockholder notes and loans payable consisted of the following at:
March
31, 1997 December
(Unaudited) 31, 1996
Non-interest bearing loans and
payables, except for $20,000
which bears interest at 10% per
annum (See (i) below) $ 106,854 $ 108,687
Notes payable bearing an interest of
5% to 9% (See (ii) and (iii) below) 550,000 550,000
Non-interest bearing loan payable
(See (iv) below) 200,000 200,000
---------- ----------
$ 856,854 $ 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 a note dated January 30,
1996 amounting to $20,000, said note can be converted into 40,000
shares of common stock.
F-13
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)
NOTE 5 - 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 above loans to September 30, 1997 or the date the
Class B and C Warrants are exercised in their entirety.
Each unit will consist of one (1) share of Common Stock of the
Company and two (2) Stock Purchase Warrants. Each Warrant is
exercisable into one (1) share of Common Stock of the Company at
$8.00 per share until August 31, 1997, thereafter $10.00 per
share. The Stock Purchase Warrants expire on August 31, 1998.
Effective December 16, 1996, the maturity dates on the above
notes were extended to December 31, 1998 with a revised 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 March 31, 1997, the Company has not repaid such loans.
F-14
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)
NOTE 5 - 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, 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. For the three months ended March
31, 1997, amortization expense amounted to $33,333. Further, the
Company agreed to register said shares (See Note 3(e)). Lastly,
as of March 31, 1997, the Company has not repaid such loan.
v) At March 31, 1997 and December 31, 1996, accrued interest related
to such notes and loans amounted to $47,459 and $36,376,
respectively, and is included in accrued expenses.
d) SHAREHOLDER TRANSACTIONS
On September 19, 1995 the Company granted to its Vice Chairman a
non-qualified stock option to purchase 250,000 shares of common stock
at an exercised price of $.10 per share. This option expires seven
(7) years from the date of grant and the underlying common shares
related to the option are restricted. At the date of grant the
Company recorded compensation expense of $50,000 based upon the fair
value of the stock option at that date. As of March 31, 1997 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 3(e)).
F-15
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)
NOTE 5 - 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 three months ended March 31, 1997 and 1996 such charges
amounted to $35,881 and $5,108, respectively. At March 31, 1997 and
December 31, 1996, amounts due from Manhattan West for these services
amounted to $52,246 and $33,495, respectively, which has been
included in accounts receivable.
F-16
<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. ("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 one of its wholly-owed subsidiaries, 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 contract medical research services
(principally conducting clinical trials which include "special"
proprietary quantitative Pharmaco-electroencephalogram
(QPEEG-Registered Trademark- studies) for health agencies, other
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-Registered
Trademark- (BFM) and selling these to physicians, researchers and
hospitals and (iii) providing telephonic neurological diagnostic
testing services, including electroencephalogram ("EEG") and Dynamic
Brain Mapping-Registered Trademark- to physicians and hospitals known
as TeleMap-Registered Trademark-.
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. Each facility is estimated to cost between $150,000 to
$200,000 for equipment, leasehold improvements and working capital
which includes administration costs. Revenues from this wholly owned
subsidiary are considered insignificant for the three months ended
March 31, 1997.
THREE MONTHS MARCH 31, 1997 AS COMPARED TO THE THREE MONTHS ENDED
MARCH 31, 1996
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 shipment of the turnkey systems. Service revenues such as
TeleMap, are recognized as they are rendered.
The Company reported a net loss of $269,078 for the three months ended
March 31, 1997 as compared to a net loss of $194,039 for the three
months ended March 31, 1996.
F-17
<PAGE>
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Cont'd)
THREE MONTHS ENDED MARCH 31, 1997 AS COMPARED TO THE THREE MONTHS
ENDED MARCH 31, 1996 (Cont'd)
Revenues for the three months ended March 31, 1997 and 1996 amounted
to $275,487 and $382,448, respectively. Revenues decreased by
$106,961 or 28% for the three months ended March 31, 1997 as compared
to the three months ended March 31, 1996. Gross profit for the three
months ended March 31, 1997 and 1996 amounted to $105,644 and
$181,062, respectively or a net decrease of $75,418. Gross profit
percentage for three months ended March 31, 1997 and 1996 amounted to
38% and 47%, respectively, or a net decrease of 9%. The Company
includes in the cost of sale amortization of its database and computer
system product development costs. Commencing, January 1, 1996 the
Company revised its estimate of the useful life of the software
development cost from 17 years to 7 years. This change was made to
better reflect the estimated period during which the assets will
remain in service. For the three months ended March 31, 1997 and 1996
amortization charges amounted to $67,201 and $66,197, respectively,
resulting in a reduction of the Company's overall gross profit
percentage by 24% and 17%, respectively.
Furthermore, the net reduction of sales and gross profit during the
three months ended March 31, 1997 as compared to the three months
ended March 31, 1996 is attributable to the following:
1. The Company's contract research division 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 three months ended March 31, 1997 as
compared to the three months ended March 31, 1996 amounted to
$211,872 and $205,861, respectively, or a net increase of $6,011.
The contract division's low revenues for the March 31, 1997 and
1996 quarters is attributable to the Company's lack of major new
contracts during the last three years. Management believes that
the drug research industry has temporarily been negatively
impacted due to consolidation in the pharmaceutical industry,
which has resulted in the reduction of the available pool of new
research contracts. The Company believes that demand for more
effective drugs with fewer negative side effects, in the area of
the Company's competence, will continue to stimulate research
activity in the long term.
The gross profit percentage from contracts for the three months
ended March 31, 1997 is 59% as compared to March 31, 1996 which
was 31%. The increase in gross profit for the three months ended
March 31, 1997 as compared to the three months ended March 31,
1996, is a result of efficiencies introduced within the contract
division.
As of March 31, 1997 the Company contract division had a backlog
of approximately $536,000 from uncompleted contracts. The
Company expects to realize a minimum of $400,000 of revenue during
1997 from said contracts.
F-18
<PAGE>
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Cont'd)
THREE MONTHS ENDED MARCH 31, 1997 AS COMPARED TO THE THREE MONTHS
ENDED MARCH 31, 1996 (Cont'd)
1. (Cont'd)
The contract research division during the December 31, 1996 year
end 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 1996
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 March 31, 1997, the receivable amounts from this
foreign customer amounted to $320,000 of which $100,000 is
expected to be collected during the second quarter and the
remainder is expected to be collected during the third and fourth
quarters. 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 three months ended March 31,
1997 and 1996 amounted to $24,394 and $150,600, respectively or a
net decrease of $126,206. Gross profit amounts for the three
months ended March 31, 1997 amounted to a negative $46,508
whereby for the three months ended March 31, 1996, the gross
profit amounted to $99,708, or a net decrease of $146,216. As
noted previously, the Company changed its amortization of
software development costs, resulting in an increased charge to
the BFM division. Amortization expense for three months ended
March 31, 1997 and 1996 amounted to $45,574 and $44,338,
respectively. During the last nine months for the period ended
March 31, 1997, the Company has not sold any major 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 three months ended March
31, 1997 and 1996 amounted to $24,592 and $25,987, respectively.
Gross profit percentage for the three months ended March 31, 1997
and 1996 amounted to 51% and 64%, respectively due to a slight
increase in labor costs.
4. Pilot memory centers revenue for the three months ended March 31,
1997 amounted to $14,629. 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.
F-19
<PAGE>
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Cont'd)
THREE MONTHS ENDED MARCH 31, 1997 AS COMPARED TO THE THREE MONTHS
ENDED MARCH 31, 1996 (Cont'd)
General and administration expenses include overhead, administration
salaries, selling and consulting costs. Further, the Company
classifies the costs of planning, designing and establishing the
technological feasibility of its computer system products as research
and development costs and charges those costs to expense when
incurred. After technological feasibility has been established, costs
of producing a marketable product and its prototype are capitalized.
Capitalized database and computer system development costs are
composed mainly of payroll and other direct employee costs. Costs
associated with above, which are not capitalized during the period are
charged to either general and administrative or research and
development expense.
General and administrative expenses for the three months ended March
31, 1997 were $337,522 as compared to the three months ended March
31, 996 of $214,096 or an increase of $123,426 or 58%. The increase
in general and administrative expenses for the three months ended
March 31, 1997 is due to the Company increasing its development
costs for its new subsidiary, MC Inc. by $104,000 as compared to the
three months ended March 31, 1996. The intended business of MC Inc.
is to manage and distribute through professional medical practioners
a program that will evaluate and treat mild memory disturbances.
Research and development costs ("R&D") for the three months ended
March 31, 1997 were $17,475 as compared to the three months ended
March 31, 1996 of $27,966 or a decrease of $10,491.
Commencing July 19, 1995 through September 13, 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 three months ended March 31, 1997
as compared to the three months ended March 31, 1996 increased by
$36,333.
On May 24, 1996, the Company entered into an agreement with a
shareholder to borrow $200,000. The loan is non-interest bearing and
is payable within one (1) year or is payable out of the first proceeds
resulting from any exercise of outstanding Class B and Class C
warrants, whichever comes first. As consideration for such loan the
company issued 66,665 shares of restricted common stock. The Company
has valued the common stock at $133,333 or fifty percent (50%) of the
fair value on May 24, 1996, the date of the transaction. The Company
recorded deferred financing costs and increased stockholders' equity
by $133,333 for this transaction. The deferred financing costs are
being amortized over one year, which is the maximum term of the loan,
or will be charged to operations if paid prior to May 24, 1997. The
implicit rate of interest for this loan is 67% per year. At the time
of the loan from such stockholder, the Company was unable to borrow at
lower interest rates due to its financial condition and the size of
the loan. Accordingly, management considered the importance to the
Company of obtaining such funding which in its opinion outweighed the
cost, particularly since the costs of issuing its securities did not
impair the Company's cash flows since such costs did not involve the
outlay of Company funds. The Company is negotiating an extension on
this loan.
F-20
<PAGE>
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Cont'd)
LIQUIDITY AND CAPITAL RESOURCES
THREE MONTHS ENDED MARCH 31, 1997 AS COMPARED TO THE THREE MONTHS
ENDED MARCH 31, 1996
At March 31, 1997 and December 31, 1996, the Company had working
capital of $1,274,912 and a working capital of $1,082,613,
respectively. The $192,299 net increase in working capital for the
three months ended March 31, 1997 as compared to the year ending
December 31, 1996 is the result of the Company raising $600,000 from
the exercise of warrants during March 1997. These funds were used to
supplement the Company's working capital.
For the three months ended March 31, 1997 and 1996, the Company used
cash for operations of $337,507 and $161,561, respectively, resulting
in increased use of cash for operations by $175,946. The net increase
for the three months ended March 31, 1997 is the result of loss from
operations amounting to $269,078 as compared to the loss from
operations for the three months ended March 31, 1996 of $194,039. As
noted previously, the Company's sales for the three months ended March
31, 1997 were $106,961 less than the March 31, 1996 period,
principally from the BFM division. Additionally, the Company changed
its amortization policy for computer system product development costs
effective January 1, 1996 resulting in additional non-cash charge to
operation of $125,745 for the three months ended March 31, 1996. The
Company increased its development costs expenditures by $104,000 for
its new subsidiary, MC Inc. for the three months ended March 31, 1997
as compared to the three months ended March 31, 1996. The effect of
these items net of the non-cash charge to the March 31, 1996
operations for additional amortization resulting from the change in
the Company's amortization policy, increased the loss from operations
by $210,961.
For the three months ended March 31, 1997 and 1996 cash used by
investing activities amounted to $131,668 and $22,119, respectively,
or a net increase in use of cash of $109,549. The increased use in
cash for investing activities for the three months ended March 31,
1997 was attributable to the following: (i) purchase of equipment and
fixtures amounting to $32,973, (ii) $36,576 increase in database
development costs and (iii) costs incurred in organizing memory
centers amounting to approximately $40,000. The increase in the
database development costs was the result of a large amount of EEG
studies inputted into the database. The Company during the three
months ended March 31, 1997 purchased equipment and incurred
organization costs amounting to approximately $72,000 principally for
its new subsidiary MC Inc. The organization costs expenditures were
in connection with future operating sites, legal documentation etc.
For the three months ended March 31, 1997 and 1996 cash provided by
financing activities amounted to $494,237 and $139,711,
respectively. For the three months ended March 31, 1997 the Company
received $600,000 in connection with the exercise of 200,000 Class B
and 200,000 Class C warrants, which resulted in the Company issuing
400,000 shares of common stock. During March 1996 the company sold
333,000 shares of common stock for $133,333 to foreign investors
utilizing regulations "S". Furthermore, during the three months
ended March 31, 1996 the company repaid a line of credit which
amounted to $50,000. The Company incurred costs for the three
months ended March 31, 1997 and 1996 amounting to $85,876 and
$25,046, respectively, in connection with registering shares of
common stock and warrants pursuant to contractual obligations with
certain stockholders. At March 31, 1997 and 1996, the company
accrued $3,750 of dividends for Series 1 preferred stock as required
under terms of the preferred stock.
F-21
<PAGE>
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Cont'd)
LIQUIDITY AND CAPITAL RESOURCES (Cont'd)
THREE MONTHS ENDED MARCH 31, 1997 AS COMPARED TO THE THREE MONTHS
ENDED MARCH 31, 1996 (Cont'd)
At March 31, 1997 the Company's outstanding debt with respect to
borrowings amounted to $870,314. 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 may assist in the establishment of the
cause and degree of memory disturbances. Furthermore, the Company
provides telephonic services to assist in diagnosis of brain
disorders. These services were enhanced with new hardware and
software. The Company has been developing tele-neuropsychiartry
systems to be applied in multinational clinical trials. The existing
hardware/software for these systems was also modified to assist in the
diagnosis of memory disturbances. The Company also has databases that
contain data from patients in several diagnostic categories and from
the computer-analyzed EEG (CEEG-Registered Trademark-) profiles of
numerous neuropsychiatric medications. 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-Alzheimers' drugs)
were prepared to assist doctors in the diagnosis and treatment of
memory disturbances.
All of this work set the stage to form a wholly-owned subsidiary,
MC Inc. 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 Medical Services, P.C. in New York City, and
Tarrytown, New York as pilot centers. The Company intends to have 5
to 10 Memory Centers opened by the calendar year end 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.
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.
F-22
<PAGE>
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Cont'd)
MANAGEMENTS'S PLAN (Cont'd)
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 Memory Centers (TM), including
advertising, working capital and new management. In addition, the
Company has earmarked approximately $200,000 of the $600,000 raised
from the exercise of Warrants in March 1997. The balance of the funds
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 customer has
made new commitments to the Company. In this connection the Company
received from this customer, as of December 31, 1996, $100,000 to
support the efforts of an Advisory Committee of a prominent
international health organization to develop an Alzheimer's Study
protocol, as well as commitments for $285,000 to continue its work on
the plant extract product. Management believes that this recent
significant support by the Company's largest customer will have a
positive effect on future business. The Company, during the fourth
quarter of 1996, also obtained a new contract ($140,000) from a U.S.
pharmaceutical company to conduct a QPEEG study.
In January, 1995, the Company entered into a joint venture arrangement
with Tena, Ltd. in Istanbul, Turkey, for the purpose of further
research and development of the Company's products and the marketing
and sales of its products in the Mid-East, former U.S.S.R. countries
and in other geographical areas in which the Company has no
distribution. Each project assigned to the joint venture requires a
statement of work to be completed, and a budget with funding
responsibility to be decided by the respective parties. The Company
entered into this joint venture anticipating that certain of its
products could be developed by the joint venture at a cost below that
attainable in the United States. While no development work has been
assigned to Tena to date, Tena is involved in marketing the Company's
products. Accordingly, there are at present no capital or other
funding requirements anticipated with respect to this venture.
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.
F-23
<PAGE>
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Cont'd)
MANAGEMENTS'S PLAN (Cont'd)
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 $536,000 at March 31, 1997, future contracts
currently under negotiation and the balance of the $2,601,618 received
during December 1996 and March 1997 as a result of selling units in a
private placement and the exercise of warrants as previously
discussed.
The Company does not presently have any long term capital commitments
for its HZI and general corporate operations and does not expect to
have major capital expenditures for these activities.
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING INFORMATION
The Private Securities Litigation Reform Act of 1995 ("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.
F-24
<PAGE>
PART II - OTHER INFORMATION
ITEM 1 - Legal Proceedings:
None
ITEM 2 - Changes in Securities:
None
ITEM 3 - Defaults Upon Senior Securities:
None
ITEM 4 - Submission of Matters to a Vote of Security Holders:
None
ITEM 5 - Other Information:
None
ITEM 6 - Exhibits and Reports on Form 8-K:
a) Exhibits
None
b) Reports on Form 8-K
None
F-25
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NeuroCorp., Ltd.
Date: May 23, 1997 By: /s/ Aileen A. Kunitz
------------ ----------------------------------------
Aileen A. Kunitz
Vice President & Chief Financial Officer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Balance
Sheet, Statement of operations, Statement of Cash Flows and Notes thereto
incorporated in Part I, Item I of this Form 10-QSB and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<S> <C>
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<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
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<BONDS> 0
0
400,000
<COMMON> 18,874
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</TABLE>
