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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 1997
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)
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<S> <C>
NEVADA 87-0446395
(State or other Jurisdiction (I.R.S. Employer
of Identification No.)
Incorporation or
Organization)
7150 WHITE PLAINS ROAD,
TARRYTOWN, NEW YORK 10591
(Address of Principal (Zip Code)
Executive Offices)
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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: $1,121,482
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant, as of April 29, 1997 was $17,553,429 based on the average bid and
asked price on that date.
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ITEM 1. BUSINESS
NeuroCorp, Ltd. ("The Company"), formerly known as Tamarac Ventures, Ltd.,
was incorporated in the State of Nevada on March 18, 1987 and completed an
initial public offering in September, 1987. At the time of its initial public
offering, the Company was a "blind pool" wherein the Company's securities were
sold to the public to provide the Company with net proceeds of approximately $
178,000 capital to purchase unknown existing businesses or to acquire unknown
existing assets to establish a subsidiary business or businesses.
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 principal shareholder.
The Company is primarily involved in two businesses: (i) it sub-contracts
clinical research and performs data analysis for health agencies, research
organizations and pharmaceutical companies, and (ii) manages a group of
facilities that provide diagnostic, preventive and treatment services to
individuals suffering from memory disorders. In addition, as an outgrowth of its
research activities, the Company also designs diagnostic testing software and
equipment for neuropsychiatric applications and the Company performs
neurological testing services for hospitals and physicians. The Company conducts
these activities through two wholly-owned subsidiaries, HZI and Memory Centers
of America, Inc., ("MCAI"). In November 1994, the Company acquired all of the
issued and outstanding shares of HZI. HZI conducts contract research, designs
diagnostic software and equipment and performs neurological testing services. In
March 1996, the Company established MCAI, which manages four (4) Memory
Centers-TM- that treat memory disorders.
CONTRACT RESEARCH SERVICES
HZI's contract research business specializes in the analysis of data
collected in clinical studies of compounds that affect the central nervous
system. The Company obtains research contracts from pharmaceutical companies and
research organizations in both the United States and Europe, and subcontracts
the clinical studies to other institutions, doctors or researchers. The Company
monitors and analyzes the data collected by doctors and researchers who perform
these studies, but it does not conduct actual clinical research itself. Since
its inception in 1974, HZI has received aggregate revenues in excess of
$15,000,000 from its contract research services. Contract research accounted for
65.15% of the Company's revenues in 1996, and 41.3% of its revenues in 1997.
CONTRACT RESEARCH INDUSTRY
Contract research organizations provide clinical research to support the
development of new drugs. In order to develop and market a new drug, a company
must obtain approval from the FDA, which involves, in part, successfully testing
that drug in animal or human studies. Traditionally, very few animal research
studies have been contracted out to independent organizations, and then only to
academic centers or contract research companies with sophisticated animal
facilities. By contrast, research studies that involve human subjects are
increasingly conducted by independent investigators. In the past, when human
studies were contracted out to clinicians in private or academic centers, the
drug companies or health organizations initiating the research continued to
manage these studies. Today, though, these organizations hire contract research
organizations to organize, manage and monitor clinical research.
Contract research organizations are highly dependent on medical,
pharmaceutical and biotechnology companies. Contract research organizations
derive substantially all of their revenue from the research and
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development expenditures of these companies. The contract research industry
itself is extremely fragmented, ranging from several hundred small organizations
that provide very limited clinical services to international organizations that
provide pre-clinical evaluations, design studies, manage clinical trials,
collect data, and provide biostatistical analysis and product registration
support.
As the medical, pharmaceutical and biotechnology companies seeking to employ
contract research organizations have become more international in scope, the
contract research industry has begun to consolidate. It is often difficult for
small contract research organizations to compete with larger organizations that
have the expertise and resources to respond to the demands of international
clients. For example, international clients often require contract research
organizations to have broad therapeutic expertise, the ability to coordinate and
manage complex clinical trials that simultaneously take place within and across
several countries, the expertise to respond to the regulatory requirements in
different countries, and the ability to develop and maintain the complex
information technology systems required to integrate these capabilities. As a
result, larger research organizations that are able to offer a broader range of
services have acquired smaller contract research firms.
The Company believes that the following trends will create increased
opportunities for contract research organizations in the future, although there
can be no assurance that these opportunities will materialize:
DRUG COMPANIES WILL INCREASINGLY USE CONTRACT RESEARCH SERVICES. As drug
companies face pressure to improve their operating margins, they will
increasingly focus on identifying cheaper, more efficient ways to develop
new products. The growing use of generic drugs, the expiration of patents
and increased regulatory pressures have all contributed to the demands on
drug company executives to control costs. In response, the pharmaceutical
industry has begun to consolidate, centralize its research and development
process and outsource to contract research organizations. In so doing, drug
companies have been able to reduce the fixed costs associated with internal
drug development. Since contract research organizations specialize in
conducting and managing clinical trials, when compared with drug companies,
they can generally perform clinical studies with a greater degree of
expertise, more quickly and at a lower cost. The Company believes that it
will be able to take advantage of this trend in the future, particularly as
drug companies begin to focus on developing compounds to treat conditions
that affect the central nervous system.
INCREASINGLY COMPLEX AND STRINGENT REGULATION; NEED FOR TECHNOLOGICAL
CAPABILITIES. As regulatory requirements throughout the world have become
increasingly complex, there is greater demand for organizations that can
collect, analyze and manage the increasingly large volumes of data required
for regulatory filings. In fact, the FDA and corresponding regulatory
agencies in Canada, Japan and Western Europe have all begun to discuss the
need to harmonize the standards for preclinical and clinical studies as well
as the format and content of applications for new drug approvals. The
Company believes that in response to these regulatory demands, medical,
pharmaceutical and biotechnology companies will increasingly rely on the
ability of contract research organizations to collect, analyze and manage
data.
DRUG DEVELOPMENT PRESSURES. The Company believes that research and
development expenditures for medical, pharmaceutical and biotechnology
companies will increase as a result of the constant pressure to develop a
pipeline of new products. In particular, the Company believes these
expenditures will increase as companies try to respond to the demand for
products to meet the needs of an aging population, to treat chronic
disorders, such as Alzheimer's disease, and life-threatening conditions such
as infectious diseases, including AIDS. Any effort to develop therapies for
these disorders will require complex clinical trials and sophisticated
databases in order to demonstrate whether a particular therapy is effective
and whether there are any long-term side effects.
Growth in the Biotechnology Industry. The biotechnology industry in the
United States has grown dramatically over the last ten years and, as a
result, there will be significant numbers of new
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drug candidates that will require regulatory approval. Since many
biotechnology companies do not have the necessary experience or resources to
conduct clinical trials, many of these companies will outsource to contract
research organizations rather than expend significant time and resources to
develop internal clinical development capabilities. In addition, the
biotechnology industry is rapidly developing in western Europe, which will
provide significant opportunities for contract research organizations to
grow and expand in these areas.
The Company's management believes that its experience in analyzing the
effects of central nervous system drugs, its proprietary methodologies and
software, and its information databases will all position the Company to take
advantage of the anticipated growth in contract research related to central
nervous system drugs. In fact, despite its limited marketing efforts, the
Company has been invited to sponsor several significant studies, including a
study on the effects of Ginkgo Biloba the results of which were published in the
October 1997 Journal of the American Medical Association. The Company believes
that the publicity generated by this study will further enhance its ability to
take advantage of the expected growth in contract research related to central
nervous system drugs.
HZI'S CONTRACT RESEARCH SERVICES
The Company's contract research business specializes in clinical studies
(Phase I-IV) of compounds that affect the central nervous system for drug
companies and research organizations in the U.S. and abroad. These contracts
include studies conducted at both a single location and across multiple
locations; they include both asymptomatic volunteer studies (Phase I and Phase
Ib special studies with healthy subjects) and symptomatic volunteer studies
(Phase II-IV studies on patients). The Company does not conduct its own human
research, and as a result, does not take any responsibility for medical
treatment or liability. However, the Company monitors the studies conducted in
other organizations, it supervises data collection and it analyzes both data and
progress study reports. The Company's research studies adhere to strict federal
and local rules and regulations and they are supervised by local institutional
review boards, drug companies, and the local and federal offices of the FDA.
In a "typical" single center contract research project, the Company will
prepare the protocol and negotiate the financing for the study. The Company will
then subcontract the study to another organization or to individual
investigators, such as the New York Institute for Medical Research, Inc.
("NYI"), a private, not-for-profit organization, that will perform the research
under the Company's supervision. The Company closely adheres to local, state and
federal rules and regulations in conducting its studies, and it has not been
involved in any legal conflict with any regulatory authorities in regard to its
contract research since its inception in 1974.
The Company's single center studies fall into two categories: asymptomatic
volunteer studies (Phase I and Phase Ib special studies with healthy subjects)
and symptomatic volunteer studies (Phase II-IV studies on patients). Phase I and
Ib studies aim to establish the safety of a drug in healthy subjects. Phase II
trials are conducted to find a safe and effective dose. Phase III studies aim to
establish efficacy of a new compound. After the drug is approved by the FDA and
marketed, Phase IV trials are conducted for safety and/or with different types
of efficacy questions. In general, these studies focus on the effects of drugs
developed to treat conditions that include dementia/Alzheimer's, depression,
schizophrenia and anxiety disorders among others. The asymptomatic volunteer
studies use the Company's Quantitative Pharmaco-Electroencephalogram
("QPEEG-Registered Trademark-") method. As noted earlier,
QPEEG-Registered Trademark-is a methodology developed by HZI that evaluates a
drug's effect on the central nervous system using computer analyzed EEG. HZI
statistically analyzes the before and after effects of a drug and correlates the
changes with information in HZI's psychotropic drug data base to determine the
optimal time or dosage window to yield particular central nervous system
effects. Thus, in these so-called Phase I and Phase Ib special studies, the
Company develops information on the clinical usefulness and therapeutic doses of
new psychotropic drugs. In 1987, with the development of its Brain Function
Monitoring ("BFM") System-Registered Trademark-, the Company was able to
dramatically increase its capacity for conducting QPEEG-Registered Trademark-
studies. Prior to that time, the Company could
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only conduct 6 QPEEG-Registered Trademark- studies a year; however, with the BFM
System-Registered Trademark-, the Company has the potential to conduct up to 24
studies a year. The Company has conducted a total of 145
QPEEG-Registered Trademark- studies with 125 new drugs. These studies generate
between $30,000 -$450,000 in revenues per study.
The Company believes that there will be a growing interest in
QPEEG-Registered Trademark- trials in the United States. The FDA is increasingly
interested in the pharmaco-dynamics of new and existing drugs, and the Task
Force Committee of the American College of Neuropsychopharmacology has cited the
QPEEG-Registered Trademark- method as one of the methods to establish
pharmaco-dynamics of a psychotropic drug at the central nervous system level. In
addition, many of the drugs newly-developed by bio-technology companies, which
are based on receptor and specific biochemical models, do not have readily
identifiable toxic effects. Therefore, in both animal and human studies on these
drugs, it is very difficult to determine maximum tolerable doses, and thus, very
difficult to estimate therapeutic dosage levels.
In symptomatic volunteer (patient) studies (Phase II-IV), while the use of
the QPEEG-Registered Trademark- method is less frequent (although, in September
1997, the Company obtained such a contract from a U.S. pharmaceutical company),
the Company still relies on its BFM System-Registered Trademark- to identify
whether a drug has any therapeutic effects and in what doses. These studies are
conducted pursuant to subcontracts from the Company at organizations such as
NYI, hospitals or medical centers under the supervision and monitoring of both
the Company's and NYI's staff. One of the Company's Directors, Mr. Richard Katz,
is also the Chairman, Chief Executive Officer and President of NYI. The
Company's Chairman, Dr. Turan M. Itil, is an Honorary Chairman of NYI. None of
these individuals receive salaries from NYI.
In addition to its single-center studies, the Company has also begun to
conduct multi-center research studies. The Company was involved in its first
multicenter study in 1990, when it conducted a study on dementia in six centers.
Since then, the Company has been involved in a number of other multicenter
clinical studies, including a study of depression that involved 450 patients in
19 centers that were spread over 16 countries.
In general, with each new study, asymptomatic or symptomatic, the Company is
able to increase its database of information on central nervous system drugs. In
addition, the Company's researchers, with the permission and cooperation of the
drug companies or research organizations that hire the Company, will generally
seek to publish the results of the studies they conduct. For example, the
Company has published 44 studies based on the results of its
QPEEG-Registered Trademark- methodology.
COMPETITION
Three major companies dominate the worldwide market in the $500 million
contract research industry: Parexel International Corporation, Quintiles
Transnational Corporation and Besselear Associates. The Company has not made any
efforts to advertise or promote its contract research business and as a result,
the Company estimates that it has it has less than 1% market share. However, the
Company believes that contract research is a growing industry in the United
States. Major drug companies in the United States, Europe and Japan all conduct
their clinical research primarily in the United States since, given the high
level of regulatory oversight in the United States, the results of clinical
tests performed in this country, are generally held in high regard. Moreover,
the Company believes that drug companies will increasingly subcontract clinical
research projects, and that many of these projects will increasingly focus on
central nervous system drugs. In the United States alone, there are over 100 new
central nervous system-related drugs developed each year; in Europe and Japan,
the Company estimates that there are more than 200 central nervous
system-related drugs being developed every year.
As far as the Company's proprietary technology is concerned, such as its
QPEEG-Registered Trademark- method or its BFM System-Registered Trademark-, few
of the Companys' competitors in the United States have similar technology. Since
the FDA guidelines do not require such studies, drug companies in the United
States do not routinely conduct QPEEG-Registered Trademark- studies. However, as
noted above, given the increasing cost pressure on drug company executives, the
Company believes that there will be growing interest in clinical studies that
rely on the QPEEG-Registered Trademark- method to determine therapeutic
opportunities for psychotropic drugs in a cost effective manner.
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MARKETING STRATEGY
The Company's contract research has traditionally been dependent on the
publications and personal contacts of Dr. Turan Itil. The Company also plans to
rely on the personal contacts and professional reputation of its staff to
develop contacts and generate contracts for clinical research studies, including
Dr. Kurt Itil, Dr. Pierre Le Bars and Dr. I. Ahmed.
In addition to the contacts developed by its professional staff, the Company
plans to work with NYI on a coordinated marketing effort in which the Company
and NYI will make joint presentations to medical, pharmaceutical and
biotechnology companies. The Company also plans to more aggressively advertise
its research capabilities in professional journals.
In October, 1997, the Journal of the American Medical Association (JAMA)
published "A Placebo-Controlled, Double-Blind, Randomized Trial of an Extract of
Ginkgo Biloba for Dementia", the results of a drug study by Dr. P. LeBars, Dr.
T.M. Itil and other co-investigators, and in December, 1997, Dr. T.M. Itil, Dr.
I. Ahmed, E. Eralp and A. Kunitz together with another co-investigator submitted
for presentation at the 36th Annual Meeting of the American College of Neuro
Psychopharmacology, ("ACNP") "CNS Dose-Finding Study of MarinolR in Alzheimer's"
at the 36th Annual Meeting of the ACNP, December 8 -12, 1997, Waikoloa, Hawaii.
The results of a Drug Study by Dr. T.M. Itil, K.Z. Itil and E. Eralp, "Ginkgo
Biloba, Herbal Mixture in Dementia?" is to be presented at the Annual New
Clinical Drug Evaluation Unit of the National Institute of Mental Health Meeting
in May, 1998 and the results of a drug study by Dr. T.M. Itil, E. Eralp, Dr. I.
Ahmed and A. Kunitz and Dr. K.Z. Itil: "The Pharmacological Effects of Ginkgo
Biloba, A Plant Extract, on the Brains of Dementia Patients in Comparison to
Tacrine", presented at the 36th Annual New Clinical Drug Evaluation Unit of the
National Institute of Mental Health Meeting in May, 1996, is to be published in
Psychopharmacology Bulletin in 1998. The Company will also continue to
participate in meetings of the professional scientific community, and present
the results of its clinical research studies.
In the past, the Company has heavily relied on its ability to produce
scientific publications to promote and market its research capabilities.
However, the Company plans to focus on alternative marketing strategies, such as
media stories, advertising and a broader range of publications to promote its
activities.
MEMORY CENTERS-TM- OF AMERICA, INC.
MCAI provides non-medical management, educational, consultation and
marketing services to licensed physicians and entities controlled by them. These
physicians offer professional diagnostic, preventive and treatment services,
through a network of facilities, Memory Centers-TM-, that handle patients whose
memory problems range from "benign" age-related forgetfulness to different brain
disorders and Alzheimer's disease. MCAI, through affiliated corporations, also
supplies the diagnostic and communication equipment used in Memory Centers-TM-.
There are currently four Memory Centers-TM-: two are located in New York City
(Manhattan and Brooklyn), one in Tarrytown, New York, and one in Bakersfield,
California. The Memory Centers-TM- in Manhattan, Brooklyn and Tarrytown are
operated under a management agreement with Manhattan Westchester Medical
Services. The Memory Center in Bakersfield is operated under a management
agreement with Truxton Psychiatric Group. Under the terms of these management
agreements, MCAI supplies equipment, management, marketing, data handling and
personnel services for physicians, and the physicians provide all medical
services and employ all clinical staff. MCAI is compensated through fixed
management fees for its managerial services, and it is compensated for its
billing services and variable expenses, such as supplies, as they occur. These
agreements are for a fixed period of time, generally not less than one year. In
addition to the four Memory Centers-TM- described above, MCAI has signed a
Letter of Intent to open a Memory Center in Philadelphia, has received a down
payment for a Memory Center in Istanbul, Turkey, and continues to negotiate with
potential affiliates to open a new Memory Center-TM-in San Juan, Puerto Rico.
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MCAI management believes that as the population of elderly people in the
United States continues to grow, as scientists continue to perfect drugs and
procedures that improve memory and cognitive performance, and as the early
diagnosis of memory-related diseases continues to improve, there will be
increasingly strong demand for the services Memory Centers-TM- provide. From
January 1, 1996 through November 1, 1997, Memory Center facilities received 347
new patients. Between January 1, 1997 and December 31, 1997, Memory Centers-TM-
facilities received 292 new patients, and experienced 614 total patient visits
in its facilities.
BACKGROUND
MCAI is committed to providing professional help for a condition that is
largely ignored by medical practitioners. While the actual number of people
suffering from memory problems in the United States is difficult to determine,
MCAI's management estimates that there are in excess of 8 million persons in the
United States suffering from memory problems. According to the Alzheimer's
Association, as of 1997, 4 million Americans suffer from Alzheimer's Disease.
Patients with memory problems often do not show any significant physical or
mental symptoms. Medical professionals may not treat patients with memory
problems until they have significantly deteriorated, perhaps even to the point
where they are diagnosed as suffering from dementia, such as Alzheimer's
disease. Since memory disturbance on its own is not considered a "disease", it
does not have a diagnostic label or CPT code. Third party payors, such as
insurance companies or Medicare, generally do not accept charges to treat memory
disorders unless they are tied to other symptoms that they do cover.
The memory process, which includes the ability to receive information
through the senses, to store this information and to retrieve it when it is
needed, is one of the most sensitive, cognitive functions of the brain. Most
brain disorders are also associated with memory disturbances. For example,
memory disturbances are frequently seen in depression, anxiety, late symptoms of
drug abuse, attention-deficit disorders, head trauma, cerebrovascular disorders
and other cerebral diseases (such as syphilis, AIDS and brain tumors). Memory
disturbances may also be caused by deficiencies in vitamins and minerals or the
toxic effects of some drugs (such as anticholinergic antidepressants, Parkinson
drugs and drugs that control blood pressure). Until a few decades ago, memory
decline was considered the inevitable result of the aging process. In mild cases
it was called "senility"; in more severe forms, senile dementia. Even today, the
majority of physicians who are unaware of the significant developments in this
area do not take memory decline seriously, particularly in aged persons.
At present, there is no significant treatment for serious memory deficits
such as Alzheimer's disease. In recent decades, however, scientists have made a
series of important discoveries. First, they discovered chemicals that affect
the brain, and reverse brain disorders, such as schizophrenia, and reverse mood,
such as depression. Scientists also discovered chemicals called cognitive
activators (or "smart" pills) which reverse experimentally induced disturbances
of memory both in man and animals. Scientists have thus begun to quantify the
degree and the type of memory impairment, and they believe they may be able to
reverse its effects through chemical means. Large scientific studies have
demonstrated that, although older subjects more frequently suffer from memory
impairment, memory impairment is not the inevitable result of aging.
Even for Alzheimer's, scientists have begun to develop treatments for the
earlier stages of the disease. This includes the use of (i) ethical drugs, such
as anti-dementia drugs, cerebro-vascular drugs, hormones (male and female) and
cholesterol lowering agents, and (ii) "natural" substances and plant extracts,
the most important of which are Ginkgo Biloba, an extract of Ginkgo tree leaves,
and Glutathione. The only drugs that have been approved to treat Alzheimer's in
the United States are Cognex-Registered Trademark- and
Aricept-Registered Trademark-. While the FDA has approved these drugs as being
safe and effective drugs to treat memory disturbances in Alzheimer's cases, the
FDA has not approved any drugs to enhance memory in otherwise healthy subjects.
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The doctors who are being administratively managed by MCAI provide services
which will be particularly important as the demographics of the population in
the United States shifts towards the older groups that have typically suffered
from memory problems in the past. The U.S. Bureau of Census estimates that in
the United States, over 50 million people will be 65 or older by the year 2030,
and nearly 9 million will be 85 or older. Nearly 50% of all people aged 85 and
older are thought to have Alzheimer's Disease, according to the National
Institute on Aging and the National Institutes of Health's Report on Alzheimer's
Disease 1996.
MEMORY CENTERS-TM-
As described above, there are currently four Memory Centers-TM-. Two are
located in New York City (Manhattan and Brooklyn), one in Tarrytown, New York,
and one in Bakersfield, California. Memory Centers-TM- are operated by licensed
physicians that have entered into management agreements with MCAI. Under the
terms of these agreements, MCAI provides non-medical management, educational,
consultation and marketing services to licensed physicians, or entities
controlled by them, and the physicians provide professional diagnostic,
preventive and treatment services to persons who suffer from memory
disturbances. Three Memory Centers-TM-are operated under management agreements
with Manhattan Westchester Medical Services (Manhattan, Brooklyn, and
Tarrytown), and Truxton Psychiatric Group PC operates the one in Bakersfield
under a management agreement. These agreements are for a fixed period of time,
generally not less than one year. MCAI charges management fees from affiliated
centers based on negotiations with each center. These fees are fixed monthly
management fees which range from $1,000 to $4,000 per month for basic management
services. The average monthly management fee currently charged is $3,000. In
addition to the four Memory Centers-TM- described above, MCAI has begun to
negotiate with potential affiliates to open new Memory Centers-TM- in
Philadelphia, San Juan, Puerto Rico, Boca Raton, Florida and Istanbul, Turkey.
MCAI hopes to complete these negotiations by the end of the second quarter of
1998. As of December 31, 1997, Memory Centers-TM- had generated cumulative
management fees of $66,225 since they began operations in March 1996.
In general, MCAI plans to establish Memory Centers-TM- either on a
stand-alone basis and run by physicians, or where practical, in connection with
the offices of physicians. MCAI expects to operate Memory Centers-TM- in a
structural environment that will resemble medical practice management companies,
where local physicians or professional corporations conduct all aspects of the
medical services practice, and MCAI will provide certain management,
administrative, marketing and professional support services. For example, MCAI
will provide sophisticated, proprietary, high technology diagnostic and
treatment systems to each Memory Center. All Memory Centers-TM- will have the
ability to communicate via a tele-neuropsychiatry system with a central facility
where medical experts will evaluate tests, provide reports and recommend
treatment. MCAI will also be responsible for national advertising campaigns and
may, insofar as state regulations allow, supply physicians at individual Memory
Centers-TM- with medicinal products such as minerals, vitamins and alternative
herbal medicines.
Physicians at Memory Centers-TM- offer early diagnosis of memory
disturbances, followed by medically accepted treatments. Since the diagnostic
battery requires knowledge in neuropsychology, electrophysiology, neurology, and
psychiatry, accompanied by treatment which will include both conventional and
"unconventional" strategies, the majority of doctors are neither prepared nor
equipped to provide a complete "memory" evaluation and treatment. However, by
working in concert with the tele-diagnostic facilities provided at Memory
Centers-TM-, physicians can offer a full memory evaluation.
Memory Centers-TM- currently offer five programs tailored to specific groups
who have concerns with their memory:
1. MEMORY FITNESS FOR LIFE-TM-: a program for younger people who want
to learn how they can best contribute to their own long-term functioning and
cognitive abilities.
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2. EARLY DETECTION PROGRAM-TM-: a program for people who believe they
are experiencing mild forms of memory impairment.
3. SENIOR MEMORY-TM-: a program for seniors and younger patients with
early onset of memory problems.
4. FAMILY MEMORIES-TM- Supportive Counseling Program: a program to
address the special needs of caregivers.
5. EXECUTIVE MEMORY FITNESS-TM-: a program through which corporations
may offer their key executives a confidential baseline assessment of their
own mental performance and try to enhance their cognitive abilities.
The assessment phase of the Memory Centers-TM- program generally includes a
comprehensive history, an examination by a physician, a blood chemistry
analysis, neuropsychological and neurophysiological tests, and other steps that
are designed to identify the cause of the patient's problems. When an assessment
is complete, the physician will diagnose the patient and create an individual
treatment plan to address their particular needs. Herbal medicines, including
Ginkgo Biloba, are generally unregulated by the FDA, and they are widely sold
over-the-counter in retail establishments such as pharmacies, groceries,
health-food stores and discount stores. If, and to the extent that the FDA
regulates herbal medicines in the future, MCAI does not anticipate that it will
have any adverse impact on Memory Centers-TM-.
The services offered to patients at Memory Centers-TM-encompass
comprehensive diagnostic evaluations and a variety of treatment strategies which
can only be performed by licensed physicians. As such, Memory Centers-TM-
require professional medical supervision. MCAI, where practical, will establish
Memory Centers-TM- in sites (i.e., medical practices) that already have the
necessary administrative, diagnostic hardware-software systems in place. The
electrophysiological, neuropsychological and medical test data will be
transmitted telephonically to the main center located in Tarrytown, New York.
The data will be evaluated there by medical experts and licensed physicians and
a complete profile of the patient will be returned to the center with treatment
recommendations. The individual Memory Centers-TM- will be charged for each such
evaluation.
Each physician associated with a Memory Center-TM- will be responsible for
his or her own professional liability. MCAI will recommend that the medical
professionals that participate in Memory Center-TM- programs adhere to the
standard operating procedures developed by MCAI's Medical Advisory Board. MCAI
may recommend research projects, such as drug studies, that particular Memory
Centers-TM- may conduct.
MCAI's plans to develop Memory Centers-TM- will require substantial amounts
of capital without any assurance that they will be successful. Depending on
their size and location, MCAI estimates that each facility would require between
$70,000 and $250,000 for equipment, leasehold improvements, and working capital,
including corporate overhead, to operate the Memory Centers-TM-. Therefore, MCAI
estimates that its capital requirements will range from $4,000,000 to
$5,000,000, depending on the number of Memory Centers-TM- it actually opens.
MCAI intends to set up 240 Memory Centers-TM- within the next four years if
additional capital can be raised.
COMPETITION
To the best of the Company's knowledge, there is no other commercial
facility which is attempting to create an identifiable national network of
medically-based facilities offering preventive, diagnostic and therapeutic
services for memory disturbances. Historically, a number of neurologists,
psychiatrists and psychologists have developed memory oriented clinics, but
these have all focused on conducting research. While MCAI is not aware of any
existing or proposed programs that offer the services provided by Memory
Centers-TM-, the neurological departments of any hospital, Alzheimer's clinics
and even well-equipped neurologists in private practice will potentially compete
with the services Memory Centers-TM-
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offer. However, as noted above, since memory impairment is generally not
considered an illness, or a diagnostic category, doctors and hospitals have a
tendency to belittle or ignore the problem, and patients themselves generally
hesitate to address the problem until it becomes more severe. Patients with
severe memory problems, such as Alzheimer's disease, will generally go to
specialized Alzheimer's centers, neurology clinics or hospitals. However, for
patients with light to moderate memory problems, there are currently no
professional organizations available to help them. Memory Centers-TM- offer a
unique set of services for this group of people, and MCAI intends to capitalize
on the potential for Memory Centers-TM- to prevent memory problems that might
otherwise occur, particularly given the increasing size of the population aged
65 or older.
MARKETING
MCAI management plans to market Memory Centers-TM- to patients, third-party
payors, corporations and community service and government organizations. MCAI
plans to initiate an aggressive, concentrated advertising effort to inform
potential patients that memory impairment can be objectively diagnosed and that
early treatment can stop further memory deterioration. This media campaign will
include print, radio and direct mail sources as well as the internet. MCAI will
also make presentations at local organizations and community groups that include
whose members largely consist of potential patients.
MCAI will also market Memory Centers-TM- to physicians, both to inform them
about Memory Centers-TM- and the services they offer and to help build a network
of potential affiliates. By developing relationships with physicians, Memory
Centers-TM- will also build credibility and develop an important source of
referral business.
MCAI recognizes that it must develop a relationship with third party payors
to penetrate the managed care market and develop an affiliation with HMO's and
similar entities. In addition, to the extent the availability of coverage from
third party payors will significantly affect its patient base, it will be
important for MCAI to help third party payors become comfortable with the nature
of the services Memory Centers-TM- provide, and the billing patterns they
employ. MCAI also plans to market Memory Centers-TM- to corporations who can
sponsor wellness programs for their executives that include the services Memory
Centers-TM- offer.
Finally, MCAI intends to build relationships with community service groups
and government organizations. For example, local groups such as assisted living
centers, rehabilitation providers, senior centers and Alzheimer Associations,
all deal with populations that will be particularly interested in the services
Memory Centers-TM- provide. MCAI will also try to build relationships with
government organizations to create interest and support among government leaders
to fund programs that utilize Memory Centers-TM-. MCAI expects to be involved in
the public debate on issues such as third party payment, professional practice
standards and the regulation of telemedicine.
NEUROPSYCHIATRIC DIAGNOSTIC EQUIPMENT
HZI offers a line of proprietary neuropsychiatric diagnostic testing
equipment to physicians, researchers and hospitals. This equipment, known as the
CEEG-Scan System-Registered Trademark- enhances widely accepted diagnostic tests
(such as EEG) by quantifying their results, and it permits them to be performed
in a more practical and economical fashion than through other means. The
CEEG-Scan System-Registered Trademark- also includes proprietary software used
to perform Dynamic Brain Mapping-Registered Trademark-. Dynamic Brain
Mapping-Registered Trademark- is HZI's proprietary brain mapping technique that
summarizes a patients electrical brain activity on an anatomically correct,
color-coded image of the patient's brain. This software is sometimes sold
separately.
As of December 31, 1997, the Company has sold 118 CEEG-Scan
Systems-Registered Trademark-, 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, 1996, and 1997, revenues from sales of neuropsychiatric
diagnostic testing equipment accounted for 36%, 20%, and 47% respectively, of
the Company's total revenues. With respect to $556,187
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of sales of this equipment in 1995, $440,000 of receivables associated with
these sales were written off in 1996.
The CEEG Scan System-Registered Trademark-, which the FDA approved in March
1987, is currently being utilized by many of the world's largest psychiatric
research centers, such as the United States National Institute on Drug Abuse,
the National Institute of Mental Health in China, and the National Academia of
Medicine in Russia. This system, unlike those of its competitors, is primarily
based on proprietary software and off-the-shelf hardware. In addition, the
CEEG-Scan System-Registered Trademark- is based on the use of digital, rather
than analog, EEG. It was not until 1991 that the American Electroencephalography
Society began to accept the use of digital EEGs, instead of the more traditional
analog EEG presentation.
The Company has many competitors in this field, including leading
international academic centers and larger companies with greater financial
resources. The Company believes that some form of computer analysis of EEGs and
digital EEGs, with and without brain mapping, has been developed by
approximately a dozen companies in the United States, and perhaps another 35
companies outside the United States. These competitors are generally larger
organizations with far more resources than the Company. There is no assurance
that the Company's CEEG Scan System-Registered Trademark- software and systems
will continue to provide revenues. Nevertheless, the Company believes that its
CEEG-Scan System-Registered Trademark- offers physicians and other medical
professionals one of the most advanced, non-invasive, objective and economical
brain function monitoring tests.
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TELE-MAP-REGISTERED TRADEMARK-
HZI offers interactive neurological testing services to assist hospitals and
physicians in the diagnosis of brain disorders. These services include providing
diagnostic tests based on the Company's CEEG-Scan System-Registered Trademark-
with or without Dynamic Brain Mapping-Registered Trademark-, and these services
are known collectively as "Tele-Map-Registered Trademark-." Revenues of the
Tele-Map-Registered Trademark- division for the years ended 1997, 1996 and 1995
were $90,858, $129,622 and $146,119, respectively.
In the Tele-Map-Registered Trademark- program, HZI provides hospitals or
physicians with a conventional or specially-designed modem that the physician
uses to transmit the data they collect during a diagnostic test, via telephone,
to HZI. HZI employees will then record the data, and HZI's consultants and
experts will then analyze and interpret the data, and prepare reports that are
sent back to the physician within 2 business days of the test. HZI believes that
this interactive service will continue to be attractive to hospitals and
physicians alike, since it permits physicians to conduct EEG tests in their
individual offices, or hospitals, without having to invest in the equipment
needed to analyze and interpret results. HZI's technical experts will
communicate with the testing physicians as they record data during the procedure
to ensure the quality of the results.
There can be no assurance that HZI will be able to increase or even sustain
this business in the future. The Company has at least two competitors, one of
which, Telemedix Corporation, claims to have more than 500 subscribers. The
Company expects competition in this area will increase. There is no assurance
that the Company can expand or sustain its services and revenues at their
present level. Furthermore, since this service is regulated by the FDA, any
changes in FDA regulations or any changes in professional standards could
significantly affect the Company's Tele-Map-Registered Trademark- services.
DEVELOPMENTAL ACTIVITIES
The Company is currently engaged in developing other products and services
which it believes may offer commercial potential in the future, but which are
not yet marketable.
HARDWARE AND SOFTWARE
The Company is in the process of developing six new products. In February,
1998, the Company received FDA approval for its 510(k) Application for the
EEG/EP Amplifier, called "NeuroAmp". The Company intends to submit a 510(k)
Application for three products in late 1998 or early 1999: the Digital EEG
System software, the HZI Electrode Headset, and the enhanced Evoked Potential
Software. The Company also intends to submit a 510(k) Application for a fourth
product, the Pharmacologically Activated EEG (Test-Dose-Registered Trademark-)
Software, in the latter part of 1999. The Company has not yet decided when it
will resubmit the application for a fifth product, the a-2000 System. For the
fiscal years ended December 31, 1995, 1996, and 1997, the Company has spent
$181,512, $98,018, and $97,830 respectively, on research and development
activities for these proprietary items. The Company is not reimbursed for any
research or development expenses from its customers.
DRUG DEVELOPMENT
HZI plans to use its proprietary hardware, software, and databases in order
to try to develop, either alone or with others, proprietary drugs. HZI believes
that the combination of its expertise and its proprietary databases will enable
HZI to define neuropharmacological activity of central nervous system drugs.
HZI's physicians and research professionals have extensive experience in the
screening and testing of psychotropic drugs, as well as the measurement of brain
functions indicated by brain electrical activities.
HZI has compiled what it believes to be a database on the effects of
compounds on Alzheimer's disease and memory impairment. During the last ten
years, HZI has been involved, as a subcontractor for drug companies, in the
development of six new drugs for the treatment of Alzheimer's disease, such as
oxiracetam, suloctidil, nimodipine, pramiracetam, BMY-21502 and Ginkgo Biloba.
HZI also studied
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choline/lecithin, deprenyl, synthetic male hormone ("mesterolone"), thyroid
releasing hormone ("TRH"), physostigmine, tacrine ("THA"), neostigmine,
hydergine, velnacrine and propentofylline, all of which are claimed to be
effective in memory problems and Alzheimer's disease. HZI believes that it can
now study a variety of new chemical entities or naturally occurring substances
(such as plant extracts or vitamins) using its proprietary software and database
to search for potential treatments of memory dysfunctions.
HZI believes that its database can be used to expedite the overall drug
development process (i) by finding new uses for compounds already on the market,
and (ii) by refining and improving experimental drugs that manufacturers now
consider marginal. The Company believes that, through the use of HZI's
proprietary systems, it can discover previously unexplored effects and
potentially new applications at a relatively low cost since the bulk of the
basic research has already been completed.
In September 1995, the Company entered into a licensing agreement with
Mediator S.r.l., an Italian company ("Mediator"), which has exclusive rights
from SmithKline Beecham Farmaceutici Italia S.p.A to develop oxiracetam, an
anti-dementia drug. Mediator is a privately owned company that provides
consulting services to the pharmaceutical industry, conducts contract research
and acts as an intermediary to facilitate the licensing of drugs between
companies. Under its licensing agreement with Mediator, the Company had the
exclusive right to develop, use, sell and market oxiracetam in the United
States, and the right to market this product in other countries. The Agreement
expired on December 31, 1997 and the Company did not seek an extension, as it
believes that further development of oxiracetam is unwarranted, because of
several other new anti-dementia drugs that are expected to be marketed in the
near future. As at December 31, 1997, the Company estimates it has incurred
expenses related to this project of approximately $170,000. In January 1995, the
Company entered into an agreement with Tena, Ltd. ("Tena"), a company located in
Istanbul, Turkey, to jointly research and develop the Company's products, and to
market and sell the Company's products in the Mid-East, the former republics of
the Soviet Union and other areas in which the Company currently has no
distribution network. While to date, the Company has not entered into any
research and development projects with Tena, Tena has been involved in marketing
the Company's existing products. In June 1997, Tena ordered a TNP system, which
includes a full BFM System, in order to set up a Memory Center in Istanbul as a
joint venture. Tena is owned by two (2) nieces of Dr. Turan M. Itil, the
Company's Chairman.
Any effort by the Company to develop new drugs will require large amounts of
capital and be subject to substantial competition from established
pharmaceutical companies, among others. In addition, if the Company decides to
investigate a pharmaceutical product it will also incur the costs of the
burdensome government regulatory process. There is no assurance than any of the
projected drug developments of the Company will be successful even if the
required funds are available.
TELE-MEDICINE (TELE-NEURO-PSYCHIATRY)
Tele-Medicine started about 30 years ago with the goal of improving patient
care in rural areas without significantly increasing the cost. While technology
was expensive, until five years ago, a variety of companies have now developed
hardware/software systems which improved the quality of pictures and sound,
while reducing the cost.
TNP is the application of tele-medicine in neurological and psychiatric
patients. The Company's system includes clinical data collection and reporting;
psychological-psychiatric evaluations and reporting; interactive
neuro-psychological evaluations and reporting; neuro-physiological evaluations
and reporting; cognitive rehabilitation and reporting; and neuro-biofeedback.
All the data collection is done in a remote location by mental healthcare
workers under the medical-psychological-psychiatric supervision of experts in
the receiver center via a tele-video system. The experts provide confirmation of
the report and second opinions on the diagnosis and treatment. The Company has
developed its TNP system to use in its Memory Centers-TM- as well as in
multi-center contract research. Thus, Memory Centers-TM- can be located in
remote places but patients will be diagnosed and treated by experts in receiver
stations. Using TNP, even the most remote Memory Centers-TM- will be supervised
by memory experts, improving quality without a significant
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increase in the cost. In contract research, the data collection, quality control
and study monitoring will be done on-line from a central location. Management
believes the Company should have a competitive edge by providing high quality
data at a reduced cost. There are, however, a series of governmental and local
restrictions in the use of tele-medicine. There is no assurance whether TNP will
successfully be developed and/or applied. There is also no assurance that the
patients will accept video interviews in Memory Centers-TM- or that drug
companies or the FDA will approve such data collection procedures in
multi-center trials. In September 1997, Drs. Itil and Le Bars and Mr. Eralp
received a patent for certain data collection, analysis and transmission
procedures that the TNP system relies upon. The patent was assigned to the
Company as of December 5, 1997.
KIRKBRIDE/CORE CARE JOINT VENTURE
On September 4, 1997, the Company signed a letter of intent with CoreCare
Corporation, a regional provider of mental healthcare services, that
contemplates a joint venture to establish a Memory Center, a
tele-neuropsychiatric diagnostic laboratory and a specially equipped
neuropsychiatry clinic in Philadelphia. The joint venture, which will be 50%
owned by the Company, will be located at Kirkbride Center, a large medical
complex being developed in Philadelphia. The letter of intent also contemplates
that the companies will establish a 30 bed VIP-Neuropsychiatry clinic, a Phase I
in-patient drug research unit and a contract research site management venture. A
definitive joint venture agreement is being negotiated and construction and
renovation of the facility has begun.
The joint venture agreement has not yet been finalized. In
September, 1997, CoreCare ordered two TNP systems in order to set up a
Memory Center (each at $95,800), and a TNP diagnostic laboratory. The Company
hopes to finalize the joint venture agreement before the end of June 30, 1998.
The various aspects of the joint venture will require additional development and
capital. Accordingly, there can be no assurance that any aspect of the joint
venture can be developed within a reasonable amount of time or that any of these
will be successful, or that capital will be found to develop any of these
ventures.
GOVERNMENT REGULATIONS -- HZI
Substantial segments of the Company's proposed operations are expected to be
subject to regulation and supervision by federal, state and local governmental
authorities. Such regulations apply not only to research, development and
manufacturing activities (whether by the Company or by licensees) but also to
the marketing of proposed systems and products, particularly those involving
medical applications. Although the Company cannot estimate the cost of
compliance with various regulations, it expects such costs to be significant.
PRODUCT DEVELOPMENT
With respect to the manufacturing and marketing of its present and future
systems and products, the Company or its licensees must first obtain the
approval of the FDA, particularly if the products are to be marketed in the
United States. The Company conducts contract research. For every research
project to be conducted, the Company has to have an approval of an independent
Institutional Review Board ("IRB"). If the drug is being studied and is not a
marketed compound, FDA approval is required after filing an Investigational New
Drug Application ("IND"). Commonly, IND's are applied for by drug manufacturers
who subcontract to others. On many occasions, the Company may further
subcontract the research projects to other companies, not-for-profit
organizations and/or medical centers. The procedure of seeking and obtaining FDA
approval for medical products (e.g., hardware and software systems) and/or
pharmaceutical products involving humans involves many steps, including testing,
to determine safety and efficacy of the products. Seeking and obtaining FDA
approval of a medical product may take a number of years and expenditure of
substantial funds. FDA regulations also will govern the manufacturing process
and
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marketing activities, and may require that post-marketing surveillance programs
be undertaken to continuously monitor the safety of some products. If it
develops its own manufacturing and marketing capabilities, the Company will be
subject to substantial record keeping and manufacturing procedure requirements.
In general all new products are subject to a ninety (90) day pre-market
notification requirement. During that period, the FDA determines whether new
products are "substantially equivalent" to products already on the market.
Products found to be "substantially equivalent" to products already on the
market may be sold immediately. Products that are not found to be "substantially
equivalent" to products already on the market require filing of an application
for pre-market approval, which subjects to FDA scrutiny and gives the FDA one
hundred and eighty (180) days to approve or reject the product for immediate
sales. Therefore, any new products developed by the Company may be subject to
pre-market approval by the FDA or investigation under regulations administered
by the FDA. As a result, the Company may experience delays in new product
introduction. Regulations concerning importing and marketing of medical devices
and/or human pharmaceutical products are generally imposed by foreign
governments and may have an impact upon the Company's anticipated operations,
although the scope and impact of any such regulations cannot now be accurately
predicted.
TELEMEDICINE
New York law does provide for exceptions from its general physician
licensing laws for "consultations" with out-of-state physicians. In New York, a
license is not required for a physician who is licensed in another state to meet
a licensed physician licensed for the purposes of consultation.
However, this consultation exception does not address whether physicians
affiliated with central facilities in New York could lawfully treat patients in
other states. In that case, the governing licensure laws would be that of the
states in which the patients reside. State laws in this regard vary widely. Some
states have adopted broad consultation exceptions that are construed similarly
to the New York law, while others have enacted narrower consultation exceptions
that limit the practice of telemedicine or even laws that proscribe telemedicine
altogether.
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.
GOVERNMENT REGULATION -- MEMORY CENTERS-TM-
The activities of the Memory Centers-TM- will be regulated by a variety of
agencies on federal, state and possibly local levels. In particular, MCAI and
its operations are and will continue to be subject to extensive federal, state
and local laws, rules and regulations affecting the health care industry and the
delivery of health care, including, but not limited to, laws and regulations
prohibiting the corporate practice of medicine, fee-splitting, anti-kickback
laws and physician referral laws. 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.
CORPORATE PRACTICE OF MEDICINE AND FEE-SPLITTING
New York law contains a broad policy against the corporate practice of
medicine, which prohibits physicians from being employed by non-professional
business corporations. In particular, under New York law, it is illegal for any
person to share in fees for professional services provided by physicians unless
that person is authorized to practice medicine. These laws prohibit any
arrangement where the space, facilities,
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equipment or other services provided to a professional licensee are based on a
percentage of the income or receipts generated from the use of these services.
Since MCAI does not directly employ physicians, but rather only provides
managements services, it is not involved in the corporate practice of medicine.
More specifically, with respect to New York fee-splitting laws, when MCAI
provides management services to physician practices. Its fees are based on a
combination of fixed and variable costs determined in advance, not a percentage
of net or gross revenues.
ANTI-REFERRAL LAWS
MCAI must also adhere to federal and state anti-referral laws that forbid
physicians from referring patients to entities with which the referring
physician has a financial relationship. At the federal level, the regulations
only apply to the referral of Medicare or Medicaid patients to entities that
furnish certain designated health services. Similarly, New York law prohibits
physician referrals for designated services to a health care provider where the
referring physician has a financial relationship with that health care provider.
MCAI is not providing health services within the meaning of either federal or
New York self-referral laws; it is only providing management services to
physician practices.
The anti-referral regulations at both the federal and New York level also
prohibit referrals by a physician to its own practice. However, both the federal
and New York anti-referral regulations contain an exception for "in-office
ancillary cervices" under which if physicians in Memory Centers-TM- personally
furnish or directly supervise the provision of health services, provide these
services at qualified locations, bill for these services in their own name or
that of their group practice, they will comply with the regulation. However,
unlike the federal exception, under New York law, services not personally
performed by the physician or a member of the same group practice, must be
performed personally by persons who are employed by the group practice. As such,
the staff of each Memory CenterTM is employed by its respective professional
corporation, not MCAI.
ANTI-KICKBACK LAWS
In addition to the anti-referral laws, federal law also prohibits any type
of payment, direct or indirect, that is intended to induce someone to refer
Medicare, Medicaid or other federally funded state healthcare program patients,
or to purchase goods or services reimbursable under such programs. New York law
has a similar prohibition that covers both Medicaid patients, and patients
generally. MCAI management believes that since management services are not
reimbursable under Medicare or state healthcare programs, inducements to enter
management service contracts would not violate federal or state anti-kickback
laws. More generally, since management service agreements are based on the fair
market value of services provided, they do not constitute a kickback to induce
the referral of business.
COMPLIANCE
The Company believes that its existing and proposed administrative
structures, including its relationship with physicians, comply with relevant
regulations. However, no formal ruling regarding the Company's various
structures and relationships has been obtained from any government agency and
there can be no assurance that any such ruling would deem such structures or
relationships in compliance with applicable laws and regulations. There can be
no assurance that review of the Company's business by courts or healthcare, tax,
labor, and other regulatory authorities that have jurisdictions over matters
including, without limitation, the corporate practice of medicine, licensing of
facilities and equipment, and franchising will not result in determinations that
could adversely affect the operations of the Company or that the healthcare
regulatory environment will not change in a manner that would restrict the
Company's proposed operations or limit the expansion of the Company's business
or otherwise adversely affect the Company.
PERSONNEL
The Company has 24 full-time employees, including five executives. In
addition the Company has four consultants and one part-time employee.
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ITEM 2. PROPERTIES
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 leases expiring in November, 1998. Office rent
and payments for non-cancelable equipment leases totaled $ 144,846 for
the year ending December 31, 1997. In addition, on August 3, 1997, MCAI entered
into a contract to lease its Manhattan Memory Center. The five year lease which
commences in June, 1998 requires annual lease payments of $ 110,000
during the first two years, and $ 120,000 the remaining three years.
Management believes its present facilities may not be adequate for any required
expansion but that new space is readily available.
ITEM 3. PENDING LITIGATION
There are no pending legal proceedings other than ordinary routine
litigation incidental to the Company's business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
In connection with the Company's acquisition of HZI, the Company issued to
each of its public stockholders of record on November 1, 1994 on Class B and one
Class C Warrant for each Share of the Company's Common Stock held by such
stockholders, for an aggregate of 800,000 Class B and 800,000 Class C Warrants
(after giving effect to a 50 to 1 reverse stock split); of these Warrants,
400,000 have been exercised to date. Each Class B and Class C Warrant entitles
the holder to purchase one share of the Company's Common Stock. The Warrants
will not be tradeable or exercisable until a Registration Statement has been
declared effective by the Securities and Exchange Commission. The number of
Shares underlying the Warrants, and the exercise price of the Warrants, may be
adjusted downward or upward at any time by the Company's Board of Directors. The
Warrants are redeemable by the Company at any time upon thirty days written
notice, at a price of $.001 per Warrant.
The Company's Common Stock has traded publicly on the NASD OTC Bulletin
Board under the symbol "NURC" since March 2, 1995. Prior to that time, there had
been no public trading in the Company's Common Stock.
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The table below sets forth the high and low range of quotations for the
Company's Common Stock for the quarters indicated as reported by the NASD:
<TABLE>
<CAPTION>
HIGH
-----
<S> <C> <C>
1996
First Quarter..................................................................................... 4
Second Quarter.................................................................................... 13
Third Quarter..................................................................................... 20
Fourth Quarter.................................................................................... 17 3/4
1997
First Quarter..................................................................................... 12 3/4
Second Quarter.................................................................................... 11 7/8
Third Quarter..................................................................................... 9 3/4
Fourth Quarter.................................................................................... 9 3/4
1998
First Quarter..................................................................................... 8 3/4
Second Quarter (through April 29th)............................................................... 6 3/4
<CAPTION>
LOW
-----
<S> <C> <C>
1996
First Quarter..................................................................................... 1 7/8
Second Quarter.................................................................................... 3
Third Quarter..................................................................................... 12 1/2
Fourth Quarter.................................................................................... 6
1997
First Quarter..................................................................................... 8 1/2
Second Quarter.................................................................................... 7 3/8
Third Quarter..................................................................................... 7
Fourth Quarter.................................................................................... 5 5/8
1998
First Quarter..................................................................................... 5
Second Quarter (through April 29th)............................................................... 4 5/8
</TABLE>
Such over-the-counter market quotations reflect interdealer prices without
retail mark-up, mark-down or commission, and may not necessarily represent
actual transactions. The Company's Common Stock has not been actively traded.
On April 29, 1998 the last bid price reported on the NASD Over-the-Counter
Bulletin Board for the Common Stock was $ 6 3/4 per share. On March 30,
1998, the Company had 10,813,806 shares of Common Stock outstanding. The Company
has 146 stockholders of record.
DIVIDENDS
The Company has never declared or paid cash dividends on its Common Stock.
The current policy of the Board of Directors is to retain any earnings to
provide for the development and growth of the Company. Consequently, no cash
dividends are expected to be paid in the foreseeable future on Shares of Common
Stock. The Company is obligated to pay dividends at the rate of $ 15,000
per year in cash or Shares of Common Stock on its outstanding shares of Class B
Series Preferred Stock. In November, 1997 the Company issued 10,840 shares of
Common Stock in payment of dividends accrued through such date.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company was incorporated in the State of Nevada on March 18, 1987 with
the name Tamarac Ventures, Ltd. On November 23, 1994, in connection with the
reverse acquisition of HZI Research Center, Inc., a New York corporation
("HZI"), the Company amended its Certificate of Incorporation to change its name
to NeuroCorp, Ltd. and to reduce its authorized common stock from 200,000,000
shares to 100,000,000 shares and to authorize 5,000,000 shares of preferred
stock.
The Company is primarily involved in two businesses: (i) it sub-contracts
clinical research and performs data analysis for health agencies, research
organizations and pharmaceutical companies, and (ii) it manages a group of
facilities that diagnose and treat memory disorders. In addition, as an
outgrowth of its research activities, the Company also designs diagnostic
testing software and equipment for neuropsychiatric applications and the Company
performs neurological testing services for hospitals and physicians. The Company
conducts these activities through two wholly owned subsidiaries, HZI and Memory
Centers-TM- of America, Inc. ("MCAI"), a Delaware Corporation. In November 1994,
the Company
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
acquired all of the issued and outstanding shares of HZI. HZI conducts contract
research, designs diagnostic software and equipment and performs neurological
testing services. In March 1996, the Company established MCAI to provide
non-medical management, educational, consultation and marketing services to
licensed physicians and entities controlled by them. These physicians offer
professional diagnostic, preventive and treatment services, through pilot
facilities, Memory Centers-TM-, to persons who suffer from memory disturbances.
MCAI, through affiliated corporations, also supplies the medical equipment used
in Memory Centers-TM-. There are currently four pilot Memory Centers-TM- two
located in New York City (Manhattan and Brooklyn), one in Tarrytown, New York,
and one in Bakersfield, California. These Memory Centers-TM- are operated under
management agreements with Manhattan Westchester Medical Services (Manhattan,
Brooklyn and Tarrytown), and the Truxton Psychiatric Group PC (Bakersfield).
Under the terms of these management agreements, MCAI supplies equipment,
management, marketing, data handling and personnel services for physicians, and
the physicians provide all medical services and employ all clinical staff. MCAI
is compensated through fixed management fees for its managerial services, and it
is compensated for its billing services and variable expenses, such as supplies,
as they occur. These agreements are for a fixed period of time, generally not
less than one year. MCAI began full operation of the pilot program at the end of
the second quarter of 1996. Each facility is estimated to cost between $70,000
to $250,000 for equipment, leasehold improvements and working capital which
includes administration costs. Revenues from this wholly-owned subsidiary were
$36,000 and $30,225 for the years ended December 31, 1997 and 1996,
respectively.
During the second quarter, the Company created a new division within
NeuroCorp Ltd., called Tele-Neuro Psychiatry ("TNP"). The TNP division is
responsible for marketing Tele-Neuro Psychiatric systems which are based on the
Company's proprietary software and hardware equipment. The TNP system provides
data communication with off-site experts. Furthermore, the Company believes the
new TNP system is useful for enhancing quality controls in research programs.
The Company is currently utilizing TNP systems in the four (4) MCAI centers. In
September 1997, Drs. Itil and Le Bars and Mr. Eralp received a patent for
certain data collection, analysis and transmission procedures that the TNP
system relies upon. This patent was assigned to the Company. In connection with
maintaining and recruiting the talents necessary in meeting its objectives, the
Company entered into employment agreement with certain individuals as follows:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Cont'd)
Overview (Cont'd)
1. On September 20, 1995, the Company's Chairman of the Board entered
into an employment agreement providing for a base salary of $250,000 per
year. The agreement is for an initial term of 10 years and is renewable on a
month to month basis thereafter. The agreement provides that on each
anniversary date the Chairman's salary shall be increased in good faith
subject to negotiations between the Chairman and the Company. 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.
2. 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
18
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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.
3. On December 18, 1996, the Company and MCAI entered into an
employment agreement with the CEO and President of MCAI and an Executive
Vice President of the Company providing for a base salary of $150,000 in
year one, $225,000 in year two and increasing by the Consumer Price Index
("CPI") change each year thereafter. The agreement expires on January 1,
2000 and is renewable on a year to year basis thereafter. The agreement
provides for 500,000 qualified stock options for purchase of common stock
exercisable at the lower of $7.00 per share or fair market value. The
options are exercisable upon vesting and expire January 6, 2007. On January
6, 1997, 200,000 of such options vest and 150,000 options each vest on
January 6, 1998 and 1999. On March 16, 1998, such executive submitted his
resignation as an officer.
4. On December 31, 1996, the Company entered into an employment
agreement with its then Chief Financial Officer providing for a base salary
of $85,000 per year with annual increases. The agreement expires on January
1, 2000 and is renewable on a year to year basis thereafter. This agreement
was later amended to document that her official title and duties are Vice
President, Administration and Special Assistant to the Chairman.
5. On July 1, 1997, the Company entered into an employment agreement
with the Vice President of Technical Operations, providing for a base salary
of $80,000 per year with annual increases. This agreement expires on July 1,
2000 and is renewable for successive one-year terms thereafter.
6. On July 1, 1997 MCAI and the Company entered into an employment
agreement with the Managing Director of MCAI. This agreement provides for a
base salary of $75,000 per year with annual increases, expiring on July 1,
1999 and is renewable on a year to year basis thereafter.
The Company recognizes revenue and costs from its contracts under the
percentage of completion method. Cost of revenues include all direct material
and labor costs and those indirect costs related to contract performance.
General and administrative expenses are accounted for as period costs and are,
therefore, not included in the calculation of the estimates to complete
contracts in progress. Changes in each contracts's performance, conditions and
estimated profitability including those arising from contract penalty
provisions, and final contract settlements may result in revisions to costs and
income and are recognized in the period in which the revisions are determined.
In addition, losses are recognized in full when determinable. The liability,
"Billings in excess of contract revenues on uncompleted contracts", represent
billings in excess of revenues recognized.
As of December 31, 1997, billings in excess of costs and estimated earnings
on uncompleted contracts amounted to $18,920, and have been included in accounts
payable.
Revenue from computer system sales, which include BFM
Systems-Registered Trademark-, are recognized upon the shipment of the turnkey
systems. All other service revenues are recognized as they are rendered on the
accrual basis of accounting.
19
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
YEAR ENDED DECEMBER 31, 1997 AS COMPARED TO THE YEAR ENDED DECEMBER 31, 1996
The Company reported a net loss of $2,423,602 for the year ended December
31, 1997 as compared to a net loss of $1,634,675 for the year ended December 31,
1996. The increase in the loss for 1997 amounting to $788,927 is directly
attributable to the increase in selling, general and administrative expenses as
further discussed below.
Revenues for the years ended December 31, 1997 and 1996 amounted to
$1,121,482 and $1,068,891. respectively. Revenues increased slightly by $52,591
or approximately 5% for the year ended December 31, 1997 as compared to the year
ended December 31, 1996. Gross profit for the years ended December 31, 1997 and
1996 amounted to $482,405 and $362,312 respectively or a net increase of
$120,093. Gross profit percentage for years ended December 31, 1997 and 1996
amounted to 43% and 34%, respectively, or a net increase of 9%. The Company
includes in the cost of sales amortization of its database and computer system
product development costs. For the year ended December 31, 1997 and 1996
amortization charges amounted to $270,413 and $264,790, respectively, or a net
increase of $5,623.
Furthermore, the increase in sales and gross profit during the year ended
December 31, 1997 as compared to the year ended December 31 of 1996 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, 1997 and 1996,
the Company received $405,700 and $759,000, respectively, of new contracts.
Revenues from contracts for the year ended December 31, 1997 as compared to
the year ended December 31, 1996 amounted to $463,197 and $696,359,
respectively, or a net decrease of $233,162. The contract division's low
revenues for the December 31, 1997 and 1996 period is attributable to the
Company's lack of major new contracts during the last nine 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 to new research contracts.
The Company believes that demand for more effective central nervous system
drugs with fewer negative side effects, will continue to stimulate the
demand for contract research on central nervous system drugs.
1. (Cont'd)
The gross profit percentage from contracts for the year ended December
31, 1997 is 38% as compared to December 31, 1996 which was 35%. The increase
in gross profit for the year ended December 31, 1997 as compared to the year
ended December 31, 1996, is a result of efficiencies introduced within the
contract division.
As of December 31, 1997 the Company's contract division had a backlog of
approximately $197,000 from uncompleted contracts. The Company expects to
realize a minimum of $60,000 during 1998 from said contracts.
The contract research division during the 1996 fiscal year has performed
significant work for a major foreign customer, resulting in a large increase
in their accounts receivable. In accordance with the initial contract, a
significant portion of the receivable will be paid by this customer upon
completion of the initial statistical report. During the fourth quarter of
the 1996 calendar year, the Company completed the statistical report for the
foreign customer and collected the remaining portion of the outstanding
receivable from September 30, 1996 which amounted to $50,000. In connection
with a second contract, the foreign customer has amended the original
contract to include
20
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
additional patients, which resulted in a change of the estimated completion
date from December 1996 to December 1997. As of December 31, 1997, the
receivable amount from this foreign customer amounted to $220,200 of which
$100,000 is expected to be collected by June 30, 1998. The remaining balance
will be collected upon completion of the project's final report.
2. Net sales of BFM Systems-Registered Trademark- for the years ended
1997 and 1996 amounted to $68,256 and $212,685, respectively or a net
decrease of $144,428. Gross profit percentage for the years ended 1997 and
1996 amounted to 42% and 28%, respectively, or a net increase of 14%. During
the last three months of the year ended December 31, 1997, the Company did
not sell any BFM Systems-Registered Trademark-.
3. Revenues of the TeleMap-Registered Trademark- division for the years
ended December 31, 1997 and 1996 amounted to $90,858 and $129,622,
respectively, or net decrease of $38,764. Gross profit percentage for the
years ended 1997 and 1996 amounted to 37% and 48%, respectively. The
decrease in gross profit is attributable to the Company reassigning part of
the internal staff to the TeleMap-Registered Trademark- division.
4. Pilot Memory Centers-TM- revenue from date of commencement, March
1996 to December 31, 1996 amounted to approximately $30,000. This revenue
was derived entirely from Manhattan Westchester through a pilot program
conducted under the management of MCAI. Manhattan Westchester is a medical
practice that is controlled by the Company's Chairman. While MCAI does not
receive any direct insurance reimbursements, it does receive a management
fee from Manhattan Westchester. Insurance reimbursements are received by the
medical practice conducting the program based on rates established by third
party payors which are in turn based on the number of visits and type of
service performed. For the year ended December 31, 1997 revenue from the
pilot Memory Centers-TM- amounted to $36,000.
5. The TNP division completed its fourth sale during the third quarter
1997. The total sales for 1997: for the TNP division amounted to $463,171.
General and administrative expenses for the year ended December 31, 1997
totalled $2,894,307 as compared to the year ended December 31, 1996 of
$1,799,751 or an increase of $1,094,556 or 61%. The increase in general and
administrative expenses for the year ended December 31, 1997 is attributable to
the following major factors outlined below.
a. Increase in development costs associated with the Company's new
subsidiary, MCAI, amounting to approximately $715,000. The intended business
of MCAI is to manage and distribute to professional medical practitioners a
program that will evaluate and treat mild memory disturbances.
b. Costs associated with the registration of the Company's securities
which amounted to approximately $185,000.
c. The remainder of the increase in general and administrative
expenses, amounting to approximately $194,000, is made up of increases in
salaries, professional fees, and various consultants.
Research and development costs for the year ended December 31, 1997 were
$97,830 as compared to the year ended December 31, 1996 of $98,018. At the end
of 1995, Management relocated its research facility to its main operating
division at HZI, in order to enhance communications between operational and
research personnel and to lower fixed costs, such as rent, depreciation and
other associated fixed costs. The Company plans on maintaining the same level of
research and development, with lower fixed costs associated therewith.
During 1997 and 1996, the Company recorded bad debt expense of $244,125 and
$440,000, respectively for uncollectible foreign receivables. Management has
concluded that the costs of legally pursuing
21
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
the customers associated with these receivables, which consisted principally of
foreign research centers, would outweigh the benefits.
Effective January 1, 1996 the Company revised its estimate of the useful
life of 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 an
aggregate of approximately $700,000, net of repayments, from their shareholders
and their affiliates (see Liquidity and Capital Resources for sources and terms
of such loans). These loans were used principally to finance losses from
operations. As a result of these additional borrowings, interest expense for the
year ended December 31, 1997 and 1996 amounted to $64,582 and $126,793,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997, the Company had working capital of $1,722,952. The
Company's cash balance at December 31, 1997, amounting to $1,597,825 is
primarily made up of an influx of $1,500,000 of capital on December 31, 1997.
The Company's net accounts receivable, which amounted to $650,505 at December
31, 1997, are expected to be collected prior to June 30, 1998, except for
$120,000 to be received upon completion of a project's final report to a foreign
customer, expected to be completed prior to December 31, 1998.
As of December 31, 1997, of the Company's current liabilities amounting to
$872,713, $300,000 represents stockholder loans which are not due until December
31, 1998.
For the years ended December 31, 1997 and 1996, the Company used cash for
operations of $2,568,380 and $897,382, respectively, resulting in an increased
use of cash for operations of $1,670,998. The net increase for the year ended
December 31, 1997 is primarily the result of loss from operations amounting to
$2,423,602 as compared to the loss from operations for the year ended December
31, 1996 of $1,634,675. The Company incurred approximately $715,000 of
development costs for its new subsidiary, MCAI.
For the years ended December 31, 1997 and 1996, cash used by investing
activities, mainly in connection with the acquisition of equipment and fixtures,
costs incurred for development of databases and computer system development
costs, amounted to $316,337 and $132,395, respectively.
A majority of proceeds from stockholders were received by the Company from
July 1995 to through December 31, 1996. The amounts and related terms of such
loans are outlined below:
i) On July 19, September 14, October 12, 1995 and February 26, 1996,
the Company and the Chairman of the Board entered into letter agreements
with Trinity to borrow $100,000, $40,000, $60,000 and $75,000, respectively.
The $100,000 and $60,000 loans have an interest rate of 9% per annum,
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 due within 90 days and six months, respectively,
from the date of issuance with 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 were exercised in their entirety if
prior to September 30, 1997. As additional consideration for the $100,000
loan, the Company agreed to issue 49,998 shares of restricted common stock
to Trinity. The Company recorded the additional consideration as interest
expense, with a cost of $14,061, which is based upon fifty percent (50%) of
the fair market value of the common stock issued
22
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
on July 19, 1995, the date of the agreement. Further, the letter agreements
give Trinity the option to convert said loans into 550,000 shares of common
stock.
On September 13, 1996 the Company borrowed from Trinity $50,000, which
is payable from any future private placement proceeds. Said loan bears
interest at 9.5% per annum. Further the loan agreement gives Trinity the
option to convert each $4.00 of debt into one (1) unit. Trinity and the
Company agreed to extend the due dates of the above loans to December 15,
1998 or the date a substantial percentage (90% or more) of the Class B and C
Warrants are exercised. Each unit will consist of one (1) share of Common
Stock of the Company and two (2) Warrants. Each Warrant is exercisable into
one (1) share of Common Stock of the Company at $8.00 per share until August
31, 1997, 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.
ii) On July 16, 1996 the Company entered into two loan agreements
amounting to $200,000 with two unrelated shareholders. Each loan was for
$100,000 and bear interest at 9% per annum and is due within one (1) year,
or from the proceeds of the Company's securities including the exercise of
Class B and C Warrants. On April 30, 1997, the Company liquidated one loan
obligation amounting to $100,000 and extended the second loan maturity date
to December 15, 1998, or the date a substantial percentage (90% or more) of
the Class B and Class C Warrants are exercised.
iii) On May 24, 1996, the Company entered into an agreement with a
shareholder to borrow $200,000. The loan is non-interest bearing and is
payable 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. The implicit rate of interest for
this loan is 67% per year. During June 1997, the original maturity date of
May 24, 1997 was extended to December 15, 1998. 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 as
such costs did not involve the outlay of Company funds.
For the years ended December 31, 1997 and 1996, cash provided by financing
activities amounted to $2,631,428 and $2,740,372, 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) 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 exercise price of the warrants was reduced
to $1 per share during December 1997. 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. During the year ended December 31, 1997,
the Company provided $2,700,500 of cash as a result of certain shareholder
exercising warrants and by additional sale of common stock.
23
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
At December 31, 1997, the Company's outstanding debt with respect to
borrowings amounted to $386,332 after several outstanding obligations were
converted into common stock as discussed below..
In November 1997, Trinity released the Company from its obligations in
regard to (i) a $200,000 loan plus $32,825 in accrued interest, (ii) 250,000
Class B, Series II Preferred Shares, (iii) a $75,000 loan plus $9,286 in accrued
interest, (iv) a $50,000 loan plus $3,302 in accrued interest and (v) $28,387 in
accrued dividends on Preferred Stock. As consideration for being released from
these obligations, the Company, as instructed by Trinity, issued 630,000 shares
of Common Stock to Lancer Partners.
In November 1997, SRS Partners released the Company from its obligation
under a note due in the amount of $28,696, including accrued interest. As
consideration for being released from this obligation, the Company, as
instructed by SRS partners, issued 10,000 shares of Common Stock to Lancer
Partners.
In November 1997, the Company issued 40,000 shares of Common Stock to Dr.
Itil upon conversion of a loan made to the Company.
The Company expects to repay the remaining debt from internally generated
funds or additional public or private sales of its securities.
MANAGEMENT'S PLAN
The intended development of the 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 $70,000 to $250,000 for equipment, leasehold improvements, and working
capital, including corporate overhead attributable to operating the Memory
Centers-TM-. Therefore, the Company estimates that its short term capital
requirements for approximately 30 fully functioning Memory Centers-TM- in 1998
will be in the range of $4,000,000 to $5,000,000.
During December 1996, the Company completed a private placement of its
securities which provided $2,001,618. Approximately 60% of the proceeds of this
private placement was intended to be used for the initial development and
expansion of Memory Centers-TM-, including advertising, working capital and new
management. For the year ended December 31,1997, the Company has spent
approximately $1,021,000 for such Memory Centers-TM-, the remaining amount,
which amounts to approximately $180,000 was spent on general corporate overhead
of HZI and NeuroCorp. The Company intends to set up 240 centers within the next
4 years if additional capital can be raised. Long term capital requirements for
these centers based on the same assumptions as set forth above, could range from
$15,000,000 to $20,000,000. The Company intends to raise such capital through
public and private sale of its securities as well as by debt financing.
Additionally the Company is exploring joint ventures and strategic alliances
with other companies. No assurance can be given that such capital will be raised
or that strategic alliances or joint ventures will be formed.
As a result of a successful research project, the Company's largest 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. 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-Registered Trademark- study. In
September 1997, the Company obtained another contract in the amount of $230,708
pursuant to which a U.S. pharmaceutical company will use
QPEEG-Registered Trademark- in their multi-center drug trial.
QPEEG-Registered Trademark- is a methodology developed by HZI that evaluates a
drug's effect on the central nervous system using computer analyzed EEG. HZI
statistically analyzes the before and after effects of a drug and correlates the
changes with
24
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
information in HZI's psychotropic drug data base to determine the optimal time
or dosage window to yield particular central nervous system effects.
In January, 1995, the Company entered into a joint venture arrangement with
Tena, Ltd. in Istanbul, Turkey, for the purpose of further research and
development of the Company's products and the marketing and sales of its
products in the Mid-East, former U.S.S.R. countries and in other geographical
areas in which the Company has no distribution. Each project assigned to the
joint venture requires a statement of work to be completed, and a budget with
funding responsibility to be decided by the respective parties. The Company
entered into this joint venture anticipating that certain of its products could
be developed by the joint venture at a cost below that attainable in the United
States. While no development work has been assigned to Tena to date, Tena is
involved in marketing the Company's products. Accordingly, there are at present
no capital or other funding requirements anticipated with respect to this
venture. However, during the second quarter of 1997, Tena ordered a TNP system,
including a full BFM system, in order to set up a Memory Center in Istanbul,
Turkey. A letter of intent in connection with this joint venture was signed in
September 1997, by Tena for two systems. However, they subsequently reduced this
to one system.
On September 4, 1997, the Company signed a letter of intent with the
CoreCare Corporation, a regional provider of mental health care services, to
form a joint venture. The joint venture, which, if consummated, will be 50%
owned by the Company, will be located at Kirkbride Center, a large medical
complex being developed in Philadelphia. Within the Kirkbride Hospital complex,
the agreement contemplates that the joint venture will establish a Memory Center
and a Tele-Neuro psychiatric diagnostic laboratory. A definitive agreement has
been negotiated and the joint venture will begin operating during the second
quarter of 1998. In September 1997, CoreCare ordered two TNP systems in order to
set up a Memory Center (each at $95,800), and a TNP diagnostic laboratory. The
various aspects of the joint venture will require additional development and
capital. Accordingly, there can be no assurance that any aspect of the joint
venture can be developed within a reasonable amount of time or that any of these
will be successful, or that capital will be found to develop any of these
ventures.
The Company successfully obtained the 510K approval for its EEG/EP amplifier
and currently the 510K application for the digital EEG system is being prepared.
Two of the products require improved prototypes and the software product is in
the final testing stage. The aggregate cost for finishing the products and
completing the 510(k) applications is estimated at $90,000, which funds will be
derived from currently available working capital. A patent for proprietary
telephonic test dose system is being prepared and the a pre-marketing approval
will be sought.
The Company's financial statements have been prepared assuming that the
Company will continue as a going concern. At December 31, 1997, the Company has
an accumulated deficit of $3,426,114. For the years ended December 31, 1997 and
1996, the Company reported net losses of $2,423,602 and $1,634,675,
respectively. Additionally, the Company generated negative cash flows from
operations of $2,568,380 and $897,382 for the years ended December 31, 1997 and
1996, respectively.
The Company's ability to continue as a going concern is currently dependent
on its ability to obtain an immediate influx of cash. The company is currently
negotiating with Pioneer Ventures Associates Limited Partnership ("Pioneer") for
Pioneer to invest up to $4,500,000 pursuant to a letter of intent dated April 7,
1998.
25
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING INFORMATION
The Private Securities Litigation Reform Act of 1995 provides a safe harbor
for forward-looking information made on behalf of the Company. All statements,
other than statements of historical facts, which address the Company's
expectations of sources of capital or which express the Company's expectation
for the future with respect to financial performance or operating strategies can
be identified as forward-looking statements. Forward-looking Statements made by
the Company are based on knowledge of the environment in which it operates, but
because of the factors previously listed, as well as the factors beyond the
control of the Company, actual results may differ materially from the
expectations expressed in the forward-looking statements.
ITEM 7. FINANCIAL STATEMENTS:
SEE INDEX TO CONSOLIDATED FINANCIAL STATEMENTS APPEARING IN THE CONSOLIDATED
FINANCIAL STATEMENT ANNEXED HERETO
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
26
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
27
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
NUMBER
----------
<S> <C>
Independent auditors' report.......................................................................... F-1
Consolidated balance sheet at December 31, 1997....................................................... F-2
Consolidated statements of operations for the years ended December 31, 1997 and 1996.................. F-3
Consolidated statement of stockholders' equity for the years ended December 31, 1997 and 1996......... F-4
Consolidated statements of cash flows for the years ended December 31, 1997 and 1996.................. F-5-F-6
Notes to consolidated financial statements............................................................ F-7-F-20
</TABLE>
28
<PAGE>
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, 1997 and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years ended December 31, 1997 and 1996. 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, 1997, and the consolidated
results of its operations and cash flows for the years ended December 31, 1997
and 1996 in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
2 to the consolidated financial statements, the Company has sustained
significant losses and negative cash flows from operations for the years ended
December 31, 1997 and 1996. These matters raise substantial doubt about the
Company's ability to continue as a going concern. Management's plan in regard to
these matters are also described in Note 2. The consolidated financial
statements do not include any adjustments relating to the recoverability and
classification of recorded asset amounts or the amounts or classifications of
liabilities that might be necessary should the Company be unable to continue as
a going concern.
Scarano & Tomaro, P.C.
Syosset, New York
April 14, 1998
29
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash.......................................................................... $1,597,825
Accounts receivable, net of allowance for doubtful accounts of $40,777........ 650,505
Inventory..................................................................... 132,727
Prepaid expenses and taxes.................................................... 152,979
Other current assets.......................................................... 61,629
----------
Total current assets...................................................... 2,595,665
----------
Equipment and fixtures, net..................................................... 236,002
----------
Other assets:
Database development costs, net............................................... 1,228,189
Computer system product development costs, net................................ 371,888
Other......................................................................... 178,266
----------
Total other assets........................................................ 1,778,343
----------
Total assets.................................................................... $4,610,010
----------
----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................................................. $ 271,129
Accrued expenses.............................................................. 215,252
Stockholder notes and loans payable........................................... 386,332
----------
Total current liabilities................................................. 872,713
----------
Long-term liabilities:
Deferred income taxes......................................................... 240,000
----------
Commitments and contingencies (Note 10)......................................... --
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
Common stock, $.001 par value, 100,000,000 shares authorized 10,813,806 issued
and outstanding............................................................. 21,514
Additional paid-in capital.................................................... 6,751,897
Accumulated deficit........................................................... (3,426,114)
----------
Total stockholders' equity................................................ 3,497,297
----------
Total liabilities and stockholders' equity...................................... $4,610,010
----------
----------
</TABLE>
See accompanying notes to consolidated financial statements.
30
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Sales............................................................................... $ 1,121,482 $ 1,068,891
Cost of sales, including amortization expense of $270,413 and $264,790 for the years
ended December 31, 1997 and 1996, respectively.................................... 639,077 706,579
------------- -------------
Gross profit........................................................................ 482,405 362,312
------------- -------------
Expenses:
General and administrative expenses............................................... 2,796,477 1,701,733
Research and development.......................................................... 97,830 98,018
------------- -------------
Total expenses................................................................ 2,894,307 1,799,751
------------- -------------
Loss from operations before other income (expense) and income tax benefit........... (2,411,902) (1,437,439)
------------- -------------
Other income (expense):
Cumulative effect of change of accounting estimate................................ -- (125,745)
Interest income................................................................... 28,882 10,302
Interest expense.................................................................. (64,582) (126,793)
------------- -------------
Total other income (expense).................................................. (35,700) (242,236)
------------- -------------
Loss before benefit for income tax.................................................. (2,447,602) (1,679,675)
Income tax benefit.................................................................. 24,000 45,000
------------- -------------
Net loss............................................................................ $ (2,423,602) $ (1,634,675)
------------- -------------
------------- -------------
Net loss applicable to common shares................................................ $ (2,438,602) $ (1,649,675)
------------- -------------
------------- -------------
Basic:
Net loss.......................................................................... $ (.30) $ (.23)
------------- -------------
------------- -------------
Net loss applicable to common shares.............................................. $ (.30) $ (.24)
------------- -------------
------------- -------------
Weighted average number of shares outstanding....................................... 8,193,806 7,002,279
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements
31
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
PREFERRED STOCK
CLASS B
SERIES 1 SERIES 2 COMMON STOCK ADDITIONAL
-------------------- -------------------- -------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
--------- --------- --------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1995.................. 150,000 $ 150,000 250,000 $ 250,000 6,107,141 $ 16,807 $ 838,699
Sale of common stock........................... -- -- -- -- 1,000,000 1,000 399,000
Costs associated with SB-2 registration
statement.................................... -- -- -- -- -- (25,046) --
Issuance of common stock in lieu of financing
cost......................................... -- -- -- -- 66,665 67 133,266
Sale of common stock and warrants.............. 550,000 550 2,001,068
Preferred stock dividend....................... -- -- -- -- -- -- --
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 3,346,987
Issuance of common stock in connection with
exercise of stock option..................... -- -- -- -- 50,000 50 450
Issuance of common stock in connection with
exercise of warrants......................... 850,000 850 1,199,150
Issuance of common stock in connection with
conversion of debt and preferred stock....... -- -- (250,000) (250,000) 690,000 690 706,810
Issuance of common stock in connection with
exercise of warrants......................... -- -- -- -- 1,100,000 1,100 1,098,900
Sale of common stock and warrants.............. -- -- -- -- 400,000 400 399,600
Preferred stock dividend....................... -- -- -- -- -- -- --
Net loss for the year ended December 31,
1997......................................... -- -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- -----------
Balances at December 31, 1997.................. 150,000 $ 150,000 -- $ -- 10,813,806 $ 21,514 $6,751,897
--------- --------- --------- --------- --------- --------- -----------
--------- --------- --------- --------- --------- --------- -----------
<CAPTION>
RETAINED
EARNINGS TOTAL
(ACCUMULATED STOCKHOLDERS'
DEFICIT) EQUITY
------------ ------------
<S> <C> <C>
Balances at December 31, 1995.................. $ 662,163 $1,917,669
Sale of common stock........................... -- 400,000
Costs associated with SB-2 registration
statement.................................... (25,046)
Issuance of common stock in lieu of financing
cost......................................... -- 133,333
Sale of common stock and warrants.............. -- 2,001,618
Preferred stock dividend....................... (15,000) (15,000)
Net loss for the year ended December 31,
1996......................................... (1,634,675) (1,634,675)
------------ ------------
Balances at December 31, 1996.................. (987,512) 2,777,899
Issuance of common stock in connection with
exercise of stock option..................... -- 500
Issuance of common stock in connection with
exercise of warrants......................... -- 1,200,000
Issuance of common stock in connection with
conversion of debt and preferred stock....... -- 457,500
Issuance of common stock in connection with
exercise of warrants......................... -- 1,100,000
Sale of common stock and warrants.............. -- 400,000
Preferred stock dividend....................... (15,000) (15,000)
Net loss for the year ended December 31,
1997......................................... (2,423,602) (2,423,602)
------------ ------------
Balances at December 31, 1997.................. $(3,426,114) $3,497,297
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements
32
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Cash flows for operating activities:
Net loss from operations........................................................ $ (2,423,602) $ (1,634,675)
Adjustments to reconcile net loss to net cash provided used for operating
activities:
Depreciation and amortization................................................... 321,977 300,630
Bad debt expense................................................................ (427,223) 428,080
Amortization of deferred financing costs........................................ 27,328 79,818
Cumulative effect of change in accounting estimate.............................. -- 125,745
Deferred income taxes........................................................... (24,000) (45,000)
Decrease (increase) in:
Accounts receivable............................................................. 323,611 (258,323)
Due from affiliates............................................................. (58,359) 85,673
Inventory....................................................................... (103,371) 629
Prepaid expenses and taxes...................................................... (31,552) (66,234)
Security deposit................................................................ (19,009) --
Cost and estimated earnings in excess of billings on uncompleted contracts...... -- 26,954
Increase (decrease) in:
Accounts payable................................................................ 74,843 13,767
Accrued expenses................................................................ 23,749 (30,046)
Income taxes payable............................................................ 4,734 (1,893)
Customer deposits............................................................... -- 2,400
Billings in excess of costs and estimated earnings on uncompleted contracts..... (257,506) 75,093
------------- -------------
Net cash flows used for operating activities........................................ (2,568,380) (897,382)
------------- -------------
Cash flows for investing activities:
Purchase of equipment and fixtures.............................................. (201,434) (36,056)
Database development costs capitalized.......................................... (109,953) (91,913)
Patent cost capitalized......................................................... (4,950) (2,150)
Computer system development costs capitalized................................... -- (2,276)
------------- -------------
Net cash flows used for investing activities........................................ (316,337) (132,395)
------------- -------------
Cash flows from financing activities:
Line of credit repayments....................................................... -- (50,000)
Repayment of stockholders loans................................................. (14,855) (46,694)
Proceeds from stockholders loans................................................ -- 525,000
Principal payments on long-term debt............................................ (54,217) (64,506)
Offering/registration costs incurred............................................ -- (25,046)
Proceeds from exercise of warrants and sale of common stock..................... 2,700,500 2,401,618
------------- -------------
Net cash flows provided by financing activities..................................... 2,631,428 2,740,372
------------- -------------
Net (decrease) increase in cash..................................................... (253,289) 1,710,595
Cash at beginning of period......................................................... 1,851,114 140,519
------------- -------------
Cash at end of period............................................................... $ 1,597,825 $ 1,851,114
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements
33
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest.............................................................................. $ 3,716 $ 17,197
---------- ----------
---------- ----------
Income taxes.......................................................................... $ 14,351 $ 12,508
---------- ----------
---------- ----------
Supplemental disclosures of non-cash investing and financing activities:
Issuance of 640,000 shares of common stock in consideration for loans and accrued
interest.............................................................................. $ 457,500 $ --
---------- ----------
---------- ----------
Issuance of 50,000 shares of common stock in connection with conversion of preferred
stock................................................................................. $ 250,000 $ --
---------- ----------
---------- ----------
Issuance of restricted common stock in connection with financing costs associated with a
loan.................................................................................. $ -- $ 133,333
---------- ----------
---------- ----------
Accrued dividends on Series 1 preferred stock........................................... $ 15,000 $ 15,000
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
34
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
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").
The Company is primarily involved in two business. Through its wholly-owned
subsidiary, HZI, the Company sub-contracts clinical research and performs data
analysis for health agencies, research organizations and pharmaceutical
companies. In addition, as an outgrowth of its research activities, the Company
also designs diagnostic testing software and equipment for neuropsychiatric
applications and performs neurological testing services for hospital and
physicians. Through its wholly-owned subsidiary Memory Centers of America, Inc.
("MCAI") a Delaware corporation, the Company manages a group of facilities which
diagnose and treat memory disorders. MCAI provides non-medical management of
facilities as well as educational and consultation to individual who suffer from
memory impairment. Revenues from this wholly-owned subsidiary were immaterial
for the years ended December 31, 1997 and 1996.
HZI assigns certain clinical research Contracts to the New York Institute
for Medical Research, Inc. ("NYI"), a not-for-profit private foundation that
is controlled by board members that also control the Company. TeleMap, Inc.,
a wholly-owned subsidiary of HZI has no material business operations.
NOTE 2--GOING CONCERN
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. For the years ended
December 31, 1997 and 1996, the Company incurred losses of $2,423,602 and
$1,634,675. Additionally, the Company generated negative cash flows from
operations of $2,568,380 and $897,382 for the years ended December 1997 and
1996, respectively. The Company's ability to continue as a going concern is
currently dependent on its ability to successfully attain profitability and
positive cash flows from operations as well as obtain capital or other financing
to fund future losses and intended expansion. These factors raise substantial
doubt about the Company's ability to continue as a going concern. The financial
statements do not include adjustments relating to the recoverability and
realization of assets and classification of liabilities that might be necessary
should the Company be unable to continue in operation.
Managements plans to mitigate the Company's financial problems are outlined
below.
On April 7, 1998, the Company signed a Letter of Intent with Pioneer
Ventures Associates Limited Partnership ("Pioneer") whereby the Company would
receive a minimum of $2,000,000 to a maximum of $4,500,000 in exchange for
issuing cumulative preferred stock convertible into common stock at $3 per share
with an 8% dividend. Prior to the Company receiving any funds, Pioneer will
perform due diligence which, if completed to its satisfaction, will result in
the Company receiving an initial installment $2,000,000. Pioneer has imposed
certain other conditions which include requiring the Company to bring in a new
chief executive officer and the election of two (2) Pioneer representatives to
the Board of Directors.
The Company expects to receive $2,000,000 from Pioneer during June 1998.
During the due diligence process, Pioneer is evaluating the capital requirements
of MCAI and HZI's contract research division and will invest up to a total of
$4,500,000 based on terms and conditions to be agreed upon. The Company is also
exploring additional options to obtain capital or financing.
35
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
NOTE 2--GOING CONCERN (CONTINUED)
Regarding current operations, in order to maintain its liquidity and
economic viability in the interim, the Company is continuing its ongoing
marketing efforts to obtain contracts for its contract research division and has
implemented several measures to reduce current expenditures such as partial
salary deferrals for officers, reduction of expenses and aggressive collection
efforts on its receivables.
NOTE 3--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, TeleMap and MCAI. The consolidated
financial statements also include the accounts of NYI since controlling
shareholders and officers of the Company also are the controlling members of the
board of NYI. All significant intercompany transactions have been eliminated in
consolidation.
b) CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers all
highly liquid investments purchased with an original maturity of three months or
less to be cash equivalents.
The Company maintains its cash deposits in accounts which are in excess of
Federal Deposit Insurance Corporation limits by $1,398,419
c) ACCOUNTS RECEIVABLE
The allowance for doubtful accounts is based on management's evaluation of
outstanding accounts receivable at the end of the year. Bad debt expense for the
years ended December 31, 1997 and 1996 amounted to $244,125 and $440,000,
respectively.
d) INVENTORY
Inventory, which consists primarily of computer equipment, is stated at the
lower of cost (first-in, first-out method) or market.
e) 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.
f) DATABASE DEVELOPMENT COSTS
Database development costs consist of capitalized 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 their estimated useful life of seventeen (17)
years.
g) 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
36
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the computer system product, are charged to research and development expense.
The Company's policy is to amortize such costs over an estimated useful life of
seven (7) years.
h) 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.
i) INCOME TAXES
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.
j) REVENUE RECOGNITION
The Company recognizes revenue and costs from its research 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. As of December 31, 1997, billings in excess of costs and estimated
earnings on uncompleted contracts amounted to $18,920 which has been included in
accounts payable. In addition, losses are recognized in full when determinable.
All other service revenues are recognized as they are rendered on the accrual
basis of accounting.
k) EARNINGS PER SHARE
During the year ended December 31, 1997, the Company adopted the provisions
of SFAS No. 128, "Earnings per Share". Basic earnings per share is computed by
dividing income (loss) available to common stockholders by the weighted average
number of common shares outstanding. The computation of dilutive earnings per
share is similar to the computation of basic earnings per share except that the
denominator is increased to include the number of additional common shares that
would have been outstanding if the dilutive potential common shares had been
issued. Pursuant to SFAS No, 128 no dilutive shares are computed for years which
have a net loss.
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) ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company elected to continue to measure compensation cost using
Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued
to Employees", as is permitted by SFAS No. 123,
37
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
"Accounting for Stock-Based Compensation". Accordingly, compensation cost has
been recognized for the options issued under the Senior Management Incentive
Plan based on the difference between the exercise price and market value at date
of grant. For companies that choose to continue applying APB No. 25, SFAS No.
123 requires certain pro forma disclosures as if the fair value method had been
utilized. Had compensation cost for the Company's stock-based compensation plan
been determined based on the fair value of the options at the grant dates for
awards under the plan consistent with the method of SFAS No. 123, the Company's
net income and earnings per share would have been reduced to the pro forma
amounts indicated below. For the proforma presentation below, the options have
been valued using the Black-Scholes Model.
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Net income--as reported......................................... $ (2,471,752) $ (1,634,675)
------------- -------------
------------- -------------
pro forma........................................... $ (2,471,752) $ (5,079,675)
------------- -------------
------------- -------------
Basic EPS--as reported.......................................... $ (.30) $ (.23)
------------- -------------
------------- -------------
pro forma............................................. $ (.30) $ (.73)
------------- -------------
------------- -------------
</TABLE>
The Company does not believe that any other recently issued accounting
standards, not yet adopted by the Company, will have a material impact on its
financial position and results of operations when adopted.
n) FAIR VALUE DISCLOSURE AS OF DECEMBER 31, 1997
The carrying value of cash, accounts receivable, accounts payable, accrued
expenses and short-term debt are a reasonable estimate of their fair value.
NOTE 4--EQUIPMENT AND FIXTURES, NET
Equipment and fixtures, net consists of the following at December 31, 1997:
<TABLE>
<S> <C>
Furniture and fixtures........................................... $ 24,137
Equipment........................................................ 790,598
Vehicles......................................................... 15,840
---------
830,575
Less: accumulated depreciation................................... (594,573)
---------
$ 236,002
---------
---------
</TABLE>
Depreciation expense amounted to $56,397 and $33,573 for the years ended
December 31, 1997 and 1996, respectively.
38
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
NOTE 5--DATABASE DEVELOPMENT COSTS, NET
<TABLE>
<S> <C>
Balance, beginning of period.................................... $1,264,018
Capitalized costs during the period............................. 109,954
Amortization charged to cost of revenues........................ (145,783)
---------
Balance, end of period.......................................... $1,228,189
---------
---------
</TABLE>
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, 1997.
NOTE 6--COMPUTER SYSTEM PRODUCT DEVELOPMENT COSTS, NET
<TABLE>
<S> <C>
Balance, beginning of period...................................... $ 496,518
Capitalized costs during the year................................. --
Amortization charged to cost of revenues.......................... (124,630)
---------
Balance, end of period............................................ $ 371,888
---------
---------
</TABLE>
In management's opinion, the net realizable value of the unamortized
computer system product development costs exceeds the carrying value, net,
therefore, no additional adjustment to carrying value is required. Net
realizable value is measured by estimating future sales of these products and
reducing them by the estimated costs of completing and disposing of the
products, including the costs of performing maintenance and support required
under the sales.
NOTE 7--ACCRUED EXPENSES
Accrued expenses consists of the following at December 31, 1997:
<TABLE>
<S> <C>
Salary and related taxes.......................................... $ 70,018
Legal and accounting fees......................................... 101,750
Interest.......................................................... 17,309
Other............................................................. 26,175
---------
$ 215,252
---------
---------
</TABLE>
39
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
NOTE 8--INCOME TAX BENEFIT
Income tax benefits are comprised of the following at December 31,:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Current:
Federal............................................................. $ -- $ --
State............................................................... -- --
---------- ----------
$ -- $ --
---------- ----------
Deferred:
Federal............................................................. $ (24,000) $ (45,000)
State............................................................... -- --
---------- ----------
(24,000) (45,000)
---------- ----------
Total income tax benefits........................................... $ (24,000) $ (45,000)
---------- ----------
---------- ----------
</TABLE>
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 for the year
ended December 31,:
<TABLE>
<CAPTION>
1997 1996
------------ -----------
<S> <C> <C>
U.S. Federal statutory rate applied to pretax loss................. $ (848,550) $ (566,800)
State and local income taxes, net of federal income tax benefit.... (177,150) (97,400)
Increase in valuation allowance, net............................... 1,025,700 664,200
Current provision (benefit) for Federal and State taxes............ -- --
(Decrease) increase in deferred tax liability...................... (24,000) (45,000)
------------ -----------
Total income tax (benefit)..................................... $ (24,000) $ (45,000)
------------ -----------
------------ -----------
</TABLE>
Income taxes are provided for the tax effects of transactions reported in
the financial statements and consist of taxes currently due plus deferred taxes
related to differences between the financial and tax basis of assets and
liabilities for financial and income tax reporting purposes. Deferred tax assets
and liabilities represent the future tax return consequences of these temporary
differences, which will either be taxable or deductible in the year when the
assets or liabilities are recovered or settled.
The Company has a policy of capitalizing database development costs and
computer system product development costs attributable to the current year for
financial statement purposes and expensing such amounts currently for tax
reporting purposes.
The Company expects to continue this policy for an indeterminable time
period. Accordingly, measurement of the deferred tax liability attributable to
the book-tax basis differentials related to the database and computer system
product development costs is computed at a rate of 15% pursuant to SFAS No. 109.
40
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
NOTE 8--INCOME TAX BENEFIT (CONTINUED)
The tax effect of significant items comprising the Company's deferred tax
assets are as follows as of December 31, 1997:
<TABLE>
<S> <C>
Net operating loss carry forwards................................. $ 582,750
Valuation allowance............................................... (582,750)
---------
Long-term portion of deferred tax assets.......................... $ --
---------
---------
</TABLE>
The tax effect of significant items comprising the Company's deferred tax
liability are as follows as of December 31, 1997:
<TABLE>
<S> <C>
Database development costs........................................ $ 184,225
Computer system product development costs......................... 55,775
---------
Long-term portion of deferred tax liability....................... $ 240,000
---------
---------
</TABLE>
The Company and HZI, MCAI and TeleMap file a consolidated tax return.
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, 1997, the Company, its subsidiaries and NYI have net
operating loss carry forwards (NOL's) of approximately $3,885,000. The Company
has recorded a full valuation allowance against the deferred tax asset at
December 31, 1997 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 nine year testing period.
On November 23, 1994, the Company's ownership changed by more than 50%.
HZI has a tax credit carry forward 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 carry forward period is allowed
as a deduction in the year following the expiration of the carry forward period.
With respect to the total carryforwards of NOL's and tax credits said
amounts expire between the years 2004 and 2013.
NOTE 9--STOCKHOLDERS' EQUITY
a) SALE OF COMMON STOCK
During December 1996, the Company sold 550,000 units for a total of
$2,001,068 pursuant to a private placement memorandum. Each unit was comprised
of one (1) share of common stock and two (2) stock purchase warrants. Each
warrant entitled the holder to purchase one (1) share of common stock at $8.00
per share until August 31, 1997, thereafter at $10 per share. The warrants
expired on August 31, 1997. During December 1997, the Board of Directors reduced
the exercise price of said warrants from $8 to $1 and extended the expiration
date to December 31, 1998. On December 31, 1997, the Company issued
41
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
NOTE 9--STOCKHOLDERS' EQUITY (CONTINUED)
1,100,000 shares of common for $1,100,000 in connection with the exercise of the
1,100,000 warrants. Simultaneously with such exercise, the Company also sold to
the same investor for $400,000, 400,000 units comprising of 400,000 shares of
common stock and 400,000 warrants to purchase one share of common stock at $5
per share which expire on December 31, 1998.
b) ISSUANCE OF WARRANTS
Pursuant to the plan of reorganization on November 23, 1994 with HZI, the
Board of Directors of the Company authorized the issuance of Class B and Class C
Warrants to all stockholders of the Company of record as of November 1, 1994.
The Warrants were distributed on a 1 Warrant for 1 share of common stock basis
and comprised in the aggregate 800,000 Class B and 800,000 Class C Warrants,
each of which was exercisable into one share of Common Stock of the Company. The
Class B Warrants were exercisable at $2.25 per share and the Class C Warrants
are exercisable at $2.75 per share, and were to expire September 30, 1996. The
shares of Common Stock underlying the Warrants must be registered with the
Securities and Exchange Commission ("SEC") prior to the Warrants becoming
exercisable. The 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.
During 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. During the year ended December 31, 1997, 500,000 Class B
warrants and 350,000 Class C warrants were exercised which resulted in the
Company receiving proceeds of $1,200,000 and issuing 850,000 shares of common
stock.
c) PREFERRED STOCK
During December 1994, the Company issued two classes of preferred stock for
total consideration of $400,000. 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. At December 31, 1997, the Company had
accrued dividends of $1,250 related to this preferred stock after a payment of
$28,750 in the form of common stock. (See Note 9(d)(i) for additional
information).
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, 1996 through September 30, 1996 one (1) share of preferred stock
could have been converted into two (2) shares of common stock. After September
30, 1996, the conversion feature is reduced to five (5) shares of preferred
stock to one (1) share of common stock. During November 1997, the Company
authorized the conversion of the 250,000 shares of Series B preferred stock by
issuing 50,000 shares of common stock. (See Note 9(d)(1) for additional
information).
d)ISSUANCE OF COMMON STOCK AS CONSIDERATION AND LIQUIDATION OF LOANS
(1) Between July 1995 and February 1996, the Company borrowed a total of
$275,000 from Trinity American Corporation ("Trinity") at interest rates
varying from 9% to 10% and repayable between 90 days to six months. On
December 16, 1996, Trinity and the Company agreed to extend the due dates of
the above loans to December 31, 1998. As additional consideration for the
such
42
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
NOTE 9--STOCKHOLDERS' EQUITY (CONTINUED)
extension, the Company issued 49,998 shares of restricted common stock.
Further, the terms of the loans give Trinity the option to convert said
loans into 550,000 shares of common stock.
(2) On September 13, 1996 the Company borrowed $50,000 from Trinity
which was 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.
(3) On November 16, 1995, the Company borrowed $25,000 from SRS
Partners, a partnership which is affiliated with Trinity. The loan bears
interest at a rate of 9% and was due within the sooner of six months or out
of the proceeds of the first funding of a Reg. "S" transaction.
(4) Pursuant to a note dated January 30, 1996, advances made by the
Company's Chairman amounting to $20,000 were convertible into 40,000 shares
of common stock.
During November 1997, the Company issued a total of 602,500 shares of common
stock relating to the conversion of the above loans per items 1, 2, and 4 above.
The Company also issued 50,000 common shares for the conversion of 250,000
shares of convertible Series B preferred stock. 37,500 shares were issued by the
Company to pay the loan per item 3 above and accrued interest and dividends.
(5) On May 24, 1996, the Company entered into an agreement with a
shareholder to borrow $200,000. The loan is non-interest bearing and was
payable within one (1) year or 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 66,666
shares of restrictive common stock. During June 1997, the original maturity
date of May 24, 1997 was extended to December 15, 1998. Lastly, the Company
has agreed to register said shares. 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 11(c). Further, the Company has agreed
to register said shares. (See Note 9(f)).
e) SENIOR MANAGEMENT INCENTIVE PLAN
On November 23, 1994, the Company adopted an incentive stock option plan
that provides 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 statutory
stock options or non-statutory stock options. Options to purchase shares may be
granted under the incentive stock option plan to persons who are employees or
officers of the Company.
On September 19, 1995, December 15, 1995 and December 18, 1996, the Company
granted 250,000, 50,000 and 500,000 options respectively to purchase shares of
common stock pursuant to the Company's Incentive Plan. 250,000 options were
granted to the former President of the Company, 50,000 to a consultant, and
500,000 options were granted to the former President of MCAI. The exercise price
of the options was fixed at $.10, $.01 and the lower of $7.00 or fair market
value per share respectively. Such options expire between September 2002 and
January 2007.
43
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
NOTE 9--STOCKHOLDERS' EQUITY (CONTINUED)
A summary of the status of the Company's stock options outstanding as of
December 31, 1997 and changes during the two years then ended is as follows:
<TABLE>
<CAPTION>
1997 1996
---------------------- ----------------------
<S> <C> <C> <C> <C>
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
STOCK OPTIONS SHARES PRICE SHARES PRICE
- -------------------------------------------------- --------- ----------- --------- -----------
Outstanding at beginning of year.................. 800,000 $ 4.41 300,000 $ .085
Additional options granted........................ -- -- 500,000 7.00
Options exercised................................. (50,000) .01 -- --
--------- ----- --------- -----
Outstanding at end of year........................ 750,000 $ 4.70 800,000 4.41
--------- ----- --------- -----
--------- ----- --------- -----
Options exercisable at year end................... 450,000 $ 3.17 300,000 $ .085
--------- ----- --------- -----
--------- ----- --------- -----
Weighted average fair value of options granted
during the year................................. $ -- $ 6.49
----- -----
----- -----
</TABLE>
f) REGISTRATION OF COMMON STOCK
During February, 1996, the Company commenced the process of registering
common shares and warrants pursuant to certain registration rights, and other
contractual obligations incurred in connection with the issuance of such common
shares and warrants pursuant to the HZI acquisition agreement signed in November
1994 and the sale of common shares in December 1995. The Company will not
receive any of the proceeds from the sale of the common shares or warrants since
all respective shares are being offered by the selling stockholders. The Company
has also agreed to pay the costs related to the registration.
NOTE 10--COMMITMENTS AND CONTINGENCIES
a) OPERATING LEASES
The Company and its subsidiaries have entered into lease agreements for
administrative offices and certain equipment under noncancellable operating
leases expiring in various dates through December 2002. The administrative
office leases contain a provision for additional rent which is equal to the
Company's pro rated share of future real estate taxes.
A schedule of all future minimum rental payments at December 31, 1997 is as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- ----------------------------------------------------------------------------------
<S> <C>
1998.............................................................................. $ 171,515
1999.............................................................................. 122,002
2000.............................................................................. 115,572
2001.............................................................................. 115,000
2002.............................................................................. 115,000
----------
$ 639,089
----------
----------
</TABLE>
44
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
NOTE 10--COMMITMENTS AND CONTINGENCIES (CONTINUED)
Rent expense under all operating leases for the years ended December 31,
1997 and 1996 was $144,846 and $145,369, respectively.
b) CONCENTRATION OF CREDIT RISK
For the years ended December 31, 1997 and 1996, approximately 48% and 63%,
respectively, of sales were derived from three and two unrelated customers, who
are in the pharmaceutical industry. As of December 31, 1997, approximately 90%
of accounts receivable, net, are due from four 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. 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 transportation
arrangements funded by the Company. Through December 31, 1996, 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, 1997 premiums paid on such policy amounted to $9,506.
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. As of December 31, 1997, the Board of Directors did
not approve any bonus to such individual. If the employee is terminated
within the contract period due to a 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) times 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 then 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. This agreement was later
amended to document that her official title and duties are Vice
President, Administration, and Special Assistant to the Chairman.
iv) On December 18, 1996, the Company and MCAI entered into an employment
agreement with the CEO and President of MCAI who was also 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
45
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
NOTE 10--COMMITMENTS AND CONTINGENCIES (CONTINUED)
or fair market value. The options are exercisable upon vesting and expire
January 6, 2007. On January 6, 1997, 200,000 of such options vested and
150,000 options each vest on January 6, 1998 and 1999. During March
1998, such individual resigned as an officer, and accordingly, lost the
right to the options which would have vested January 6, 1999.
v) On July 1, 1997, the Company entered into an employment agreement with
the Vice President of Technical Operations, providing for a base salary
of $80,000 per year with annual increases. This agreement expires on
July 1, 2000 and is renewable for successive one-year terms thereafter.
vi) On July 1, 1997 MCAI and the Company entered into an employment
agreement with the Managing Director of MCAI. This agreement provides
for a base salary of $75,000 per year with annual increases, expiring on
July 1, 1999 and is renewable on a year to year basis thereafter.
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 11--RELATED PARTY TRANSACTIONS
a) REVENUES FROM AFFILIATES
Manhattan Westchester Medical Services, P.C. ("Manhattan Westchester")
reimburses the Company for the use of certain employees as well as office and
laboratory space (administration services) of the Company. The Company and
Manhattan Westchester also operate under an oral agreement whereby the Company
is paid $1,000 per month for each of the Memory Centers owned by Manhattan
Westchester. Manhattan Westchester is 95% owned by the Company's Chairman. Net
revenues from Manhattan Westchester for the year ended December 31, 1997 and
1996 amounted to $50,289 and $ 65,782, respectively.
b) SERVICES PROVIDED BY AFFILIATES
During 1994, HZI and Manhattan Westchester entered into an arrangement
whereby Manhattan Westchester would provide medical consulting services to HZI's
TeleMap business. Services provided by Manhattan Westchester to HZI for the
years ended December 31, 1997 and 1996 amounted to approximately $0 and $14,000,
respectively.
c) STOCKHOLDER NOTES AND LOANS PAYABLE
Stockholder notes and loans payable consisted of the following at December
31, 1997:
<TABLE>
<S> <C>
Non-interest bearing loans (See (i) below)........................ $ 86,332
Notes payable (See (ii) and (iii) below).......................... 300,000
---------
Total............................................................. $ 386,332
---------
---------
</TABLE>
46
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
NOTE 11--RELATED PARTY TRANSACTIONS (CONTINUED)
(i) These stockholder loans relate to advances made to HZI and NYI by its
Chairman of the Board which are due on demand.
(ii) On May 24, 1996, the Company entered into an agreement with a
shareholder to borrow $200,000. The note is non-interest bearing and was
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
66,666 shares of restricted common stock. During June 1997, the original
maturity date of May 24, 1997 was extended to December 15, 1998. Lastly,
the Company agreed to include said shares in its pending Registration
Statement.
(iii) On July 16, 1996, the Company entered into two loan agreements
amounting to $200,000 with two unrelated shareholders. Each note was for
$100,000, bears interest at 9% per annum and was due at the earlier of
one (1) year or from any of the proceeds of a sale of the Company's
securities including the exercise of Class B and C Warrants. On April 30,
1997, the Company liquidated one note amounting to $100,000 and extended
the second note's maturity date to December 15, 1998.
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, 1997 such options have not been exercised.
e) CONSULTING AGREEMENT
On July 1, 1995, the Company entered into a five (5) year consulting
agreement (subsequently amended) with an entity controlled by its then Vice
Chairman for an annual fee of $30,000.
f) DUE FROM AFFILIATES
Manhattan Westchester Medical Services, P.C. ("Manhattan Westchester")
reimburses the Company for the use of certain employees as well as office and
laboratory space (administration services) of the Company. The Company and
Manhattan Westchester also operate under an oral agreement whereby the Company
is paid $1,000 per month for each of the Memory Centers owned by Manhattan
Westchester. Manhattan Westchester is 95% owned by the Company's Chairman. At
December 31, 1997, amounts due from Manhattan Westchester, principally for
management and administrative services, amounted to $57,193, which have been
included in other current assets.
NOTE 12--SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates primarily in a single industry segment which is
comprised of contract medical research and the operation and management of
facilities which diagnose and treat memory disorders utilizing the Company's
proprietary database and software. The Company has no foreign operations. The
Company included in sales during the years ended December 31, 1997 and 1996,
sales to unaffiliated
47
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
NOTE 12--SEGMENT AND GEOGRAPHIC INFORMATION (CONTINUED)
customers in foreign countries ("export sales") of approximately $380,000 and
$770,000, respectively. These sales were not concentrated in any specific
geographic area.
NOTE 13--SUBSEQUENT EVENT
On April 7, 1998, the Company signed a Letter of Intent with Pioneer
Ventures Associates Limited Partnership ("Pioneer") whereby the Company would
receive a minimum of $2,000,000 to a maximum of $4,500,000 in exchange for
issuing cumulative preferred stock convertible into common stock at $3 per share
with an 8% dividend. Prior to the Company receiving any funds, Pioneer will
perform due diligence which, if completed to its satisfaction, will result in
the Company receiving an initial installment $2,000,000. Pioneer has imposed
certain other conditions which include requiring the Company to bring in a new
chief executive officer and the election of two (2) Pioneer representatives to
the Board of Directors.
The Company expects to receive $2,000,000 from Pioneer during June 1998.
During the due diligence process, Pioneer is evaluating the capital requirements
of MCAI and HZI's contract research division and will invest up to a total of
$4,500,000 based on terms and conditions to be agreed upon.
48
<PAGE>
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 directors and the executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Turan M. Itil........................................ 73 Chairman of the Board, Chief Executive Officer,
President and Director
I. Ronald Horowitzp.................................. 75 Director, Acting Chief Executive Officer of MCAI
Kurt Z. Itil.........................................
39 Director, Acting Chief Operating Officer
Pierre LeBars (1).................................... 45 Director and Executive Vice President
Aileen A. Kunitz..................................... 55 Vice President
Richard Katz, Esq. (1,2)............................. 55 Director
Joseph DioGuardi, CPA (1,2).......................... 57 Director, Chief Financial Officer
</TABLE>
- ------------------------
(1) Member of Audit Committee
(2) Member of Compensation Committee
Each director is elected for a period of one year, expiring on the date of
the next annual meeting and thereafter until his or her successor shall have
been elected and qualified or until his or her death, resignation or removal.
Officers are appointed and serve at the will of the Board of Directors subject
to the terms of any employment agreements. The Company does not currently pay
any cash or other compensation to directors for serving in that capacity.
TURAN M. ITIL, M.D. has been Chairman of the Board and Director of the
Company since November 23, 1994 and Chairman of the Board and a Director of HZI,
the Company's medical research subsidiary since he founded HZI in 1974. In
January 1997, upon the resignation of Ronald Horowitz as President, Dr. Itil
resumed the Presidency of the Company. Dr. Itil is a neurologist/psychiatrist
with special interests in electrophysiology (brain electrical activity studies)
and psychopharmacology (psychotropic drug treatment and research). Dr. Itil is
Honorary Chairman of the Board of the New York Institute for Medical Research, a
not-for-profit organization.
Dr. Itil was Dozent (Associate Professor) of the University of
Erlangen-Nurenberg, Germany for two years; Associate Professor and Full
Professor of the University of Missouri for ten years; and Full Professor at New
York Medical College for sixteen years. At present, he is Clinical Professor at
New York University Medical Center.
Dr. Itil was appointed a member of the World Health Organization Expert
Advisory Panel in October 1995; he is also Past-President of the American
Psychiatric Electrophysiology Association; Past Vice President, International
Pharmaco-EEG Society; Secretary General, Academia, Medicinal & Psychiatric
Foundation; Co-Editor, Journal of Integrative Psychiatry; on the Board of
Examiners of the American Medical EEG Association. He is a Life Fellow of the
American Psychiatric Association, American Psychosomatic Association, and
American College of Neuro-psychopharmacology. Dr. Itil is on the Editorial Board
of more than 15 scientific journals; Board Member of Mental Hygiene of the State
of New
49
<PAGE>
York. Dr. Itil has written/edited seven books and is the author of more than 535
scientific articles. Dr. Itil is the inventor of 13 patents issued and has two
patent applications pending. Seven of the patents owned by Dr. Itil have been
assigned to the Company and six others have been assigned to major drug
companies.
I. RONALD HOROWITZ, Esq., became Vice Chairman, President and Director of
the Company in 1995. He resigned in 1997 as President and subsequently as
Vice Chairman. In June 1997, he became Executive Vice President of MCAI. In
March, 1998 Mr. Horowitz became acting Chief Executive Officer of MCAI. Mr.
Horowitz has been a practicing lawyer and member of the New York Bar for over
40 years. From 1974 to 1977 he was President and Vice Chairman of the Board
of Vagabond Hotels Inc., a publicly held West Coast chain of 56 hotels and
motels. From 1969 to 1972 he was President of Paramount Studios Inc. a motion
picture company. From 1970 to 1972 he was President of Paramount Immobiliare,
a joint venture between Paramount Studios and Societa Immobiliare, Italy's
largest real estate Company and from 1967 to 1969 he was Executive Vice
President and Chief Operating Officer of Gulf & Western Realty Corp.
Mr. Horowitz is a Fellow of Academia, Medicinae and Psychiatriae Foundation
and has also served as Justice of the Peace for the City of Stamford,
Connecticut, special counsel for the New Haven Railroad and was a Trustee of
Grand Central Hospital in New York City. He has also been active as a private
investor.
KURT Z. ITIL, Ph.D. (Honorary) has been a Director of the Company since
November 23, 1994 and has been President of HZI since 1983 and 1997, Dr. Itil
was assigned as the Acting Chief Operating Officer of the Company. In 1981, Dr.
Itil graduated from Boston University (B.A.--Psychology). He obtained an
honorary Doctorate of Philosophy from Medicina Alternativa based on his
publications and his contribution to science. Dr. Itil has participated in
business and management seminars at the Massachusetts Institute of Technology.
He was Vice President of HZI from 1977-1980. Dr. Itil was Vice President (Sales
& Marketing) of International Drug Experts Associates from 1981-1982.
Since 1983, he has served as President of HZI and he is responsible for
sales, promotion and marketing of services and products and administration.
Dr. K. Itil is a Fellow of Academia, Medicinae and Psychiatriae Foundation
and a Member of the American Psychiatric Electrophysiology Association. Dr. Itil
has more than 45 scientific publications to his credit. Dr. Kurt Itil is the son
of Dr. Turan Itil.
PIERRE LE BARS, M.D., Ph.D. has been a Director and Executive Vice President
and Chief of Research and Development of the Company since November 23, 1994 and
has been Executive Vice President and Chief of Research and Development of HZI
since 1992.
Dr. Le Bars obtained his M.D. in 1978 in France. Subsequently, he obtained
his Ph.D. in Neurophysiology from the University of Picardie and Pierre et Marie
Curie in France. He became a Research Fellow in 1988 at New York Medical
College. Since 1991, Dr. Le Bars has been employed by HZI as Vice President for
Research and Development and since 1993, as Executive Vice President. Dr. Le
Bars also had an appointment as a Research Fellow at Massachusetts Mental Health
Center of the Harvard Medical School since 1992. Dr. Le Bars is Assistant Editor
of the journal of Integrative Psychiatry. He is a member of numerous French and
U.S. professional societies and author/co-author of a series of scientific
publications. Dr. Le Bars is the son-in-law of Dr. Turan Itil.
AILEEN A. KUNITZ has served as Vice President of the Company since November
23, 1994. She also served as a Director until July 1997 and as Chief Financial
Officer ("CFO") until June 1997. After she resigned as Director and CFO, she
continued her employment with the Company as Vice-President. Ms. Kunitz joined
HZI in 1974 as a Research Coordinator. In 1976, she became Chief Research
Coordinator. In 1980 she was appointed Administrator; in 1984 she became
Executive Administrator and in 1990, Vice President of Finance. She studied
mathematics at the University of Detroit and received training in EEG technology
through Wayne University in Detroit, Michigan and was employed by the University
of Missouri as a Technologist from 1968--1974.
50
<PAGE>
RICHARD A. KATZ, Esq. has been a Director of the Company since November 23,
1994 and has been a Director of HZI since 1984. Mr. Katz graduated from Hunter
College in June, 1964 (B.A.) and Brooklyn Law School, June 1967 (LBar on
December 18, 1967 and admitted to both the Southern and Eastern Federal District
Courts and has been a practicing attorney since that time. Mr. Katz has been a
member of the law firm of Foreht Last Waltman & Katz, P.C. since March 1, 1997
which firm performs legal services for the Company and was a partner in the law
firm of Opton Handler Feiler and Katz, LLP from January 1, 1995 through February
28, 1997 which firm serves as special counsel to the Company. From January 1,
1994 to December 31, 1994 he was counsel to said firm. Prior to January 1994
thereto and for a period of 23 years he was a partner in the New York law firm
of Garrell Siegal & Katz. Mr. Katz is President of the New York Institute for
Medical Research.
JOSEPH DIOGUARDI, CPA. Mr. DioGuardi became a Director of the Company in
March 1996. He became "Special Assistant" to the Chairman in November 1996,
Acting CFO in June 1997 and CFO on July 1, 1997. Since leaving Congress in 1989,
Mr. DioGuardi established Truth In Government, a non-partisan foundation,
through which he continues his activities for federal fiscal reforms. From 1985
to 1989, Mr. DioGuardi was a member of the U.S. Congress for New York's
Twentieth Congressional District. While in Congress, he was Member, Committee on
Government Operations; Ranking Minority Member, Subcommittee on Employment and
Housing; Member, Committee on Banking, Finance and Urban Affairs; Chairman,
House Republican Research Committee Task Force on Federal Budgeting and
Financial management. From 1962 to 1984 he was with Arthur Andersen & Co., the
international accounting, auditing and consulting firm, where he was a tax
partner from 1972. He received a Bachelor of Science Degree with honors from the
College of Business Administration of Fordham University in 1962.
EMPLOYMENT ARRANGEMENTS
Dr. Turan M. Itil entered into an employment agreement with the Company,
effective September 20, 1995, providing for a base salary of $250,000 per year
plus annual increases and bonuses. The agreement is for an initial term of 10
years and is renewable on a month to month basis thereafter unless either party
notifies the other in writing at least 30 days before the end of the initial
term or any month thereafter, of its intention to cancel. Dr. Itil waived
$146,347 of his base salary for the year ended December 31, 1995. Dr. Itil has
waived negotiations for salary increases for 1996 and 1997.
The Company is required to maintain a life insurance policy on the life of
Dr. Itil, in the amount of $1,000,000 payable to his designated beneficiary and
to provide Dr. Itil with a car and driver. Dr. Itil waived the life insurance
requirement for the year ended December 31, 1995 and 1996. The life insurance
policy was effective as of May 26, 1997; the Company is a 50% beneficiary of the
policy.
Dr. Pierre Le Bars entered into an employment agreement with the Company,
effective December 7, 1994, providing for a base salary of $100,000 per year
plus annual increases and bonuses. The agreement is for an initial term ending
January 1, 2000 and is renewable on a year to year basis thereafter.
IRH Corporation, a personal service company owned by I. Ronald Horowitz,
entered into an employment agreement with the Company effective July 1, 1995
pursuant to which it will supply the services of Mr. Horowitz to act as a
business consultant to the Company for a five year period at an annual retainer
of $75,000 per year, which amount was reduced, by mutual agreement, to $30,000
effective June 1, 1996. Mr. Horowitz subsequently agreed to serve as Vice
Chairman and President of the Company with no additional compensation. On
September 19, 1995 Mr. Horowitz was granted a seven year Incentive Stock Option
to purchase 250,000 shares of the Company's Common Stock at $.10 per share. In
January, 1997 Mr. Horowitz resigned from the position of President of the
Company and subsequently as Vice Chairman.
Aileen A. Kunitz entered into an employment agreement with the Company
effective January 1, 1997 providing for annual base salary of $85,000 plus
annual increases and bonuses. The agreement is for initial term ending January
1, 2000 and is renewable on a year to year basis thereafter.
51
<PAGE>
Joseph DioGuardi, a Director of the Company, has, since November 16, 1996,
acted as a Special Assistant to the Chairman of the Company working on various
financial projects and business plans in connection with private placements, and
the Registration Statement of which this Prospectus is a part, as well as the
development of budgeting, accounting, reporting and management information. In
addition, Mr. DioGuardi became Acting CFO and CFO in June and July 1997,
respectively. Mr. DioGuardi works a minimum of 3 days per week, and receives
compensation of $7,500 per month.
ITEM 10. 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, 1997,
the Chief Executive Officer and each of the most highly compensated officers, to
the extent each earned more than $100,000 in salary and bonus.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
-------------------------------- --------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
# SHARE
NAME & OTHER ANNUAL UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1) OPTIONS COMPENSATION
- -------------------------------------------- --------- ---------- --------- ---------------- ------------- -----------------
1997 $ 250,000 -- -- -- --
Turan Itil-................................. 1996 $ 250,000 -- -- -- --
Chief Executive Officer 1995 $ 106,653(2) -- $ 11,000 -- --
Pierre LeBars -............................. 1997 $ 121,000 -- -- -- --
Chief Executive 1996 $ 112,000 $ 50,000 -- -- --
Vice President 1995 $ 100,000(3) -- -- -- --
Jonathan Raven.............................. 1997 $ 150,150 -- -- -- --
CEO and President of MCAI
</TABLE>
- ------------------------
(1) Does not include an annual car allowance of $9,000 for Dr. Itil and $6,000
for Dr. LeBars.
(2) For the year ended December 31, 1995 Dr. Itil waived $ 146,347 of his
$250,000 base salary and for the year ended December 31, 1996, Dr. Itil
deferred $21,000 of his $250,000 base salary.
(3) For the year ended December 31, 1995 Dr. LeBars waived $ 5,857 of his
$100,000 base salary.
(4) Mr. Raven resigned as an Officer and Director of MCAI, and the Company on
March 16, 1998.
STOCK OPTION PLAN
On November 23, 1994 the Company adopted a stock option plan (the "Plan")
providing for the granting of options to purchase up to 1,500,000 shares of the
Company's Common Stock. Options granted pursuant to the Plan may be either
incentive options or non qualified stock options. Incentive stock options may be
granted to persons who are employees or officers of the Company. Non-statutory
stock options may be granted to employees, officers, non-employee directors and
consultants to the Company.
The Plan provides for its administration by a committee chosen by the Board
of Directors which committee shall have full discretionary authority to
determine the number of shares to be granted and the individuals to whom, the
times at which, and the exercise price for which options will be granted. In the
case of statutory stock options the committee's authority to establish the terms
and conditions of such options including, but not limited to their exercise
price, shall be subject to restrictions imposed by Section 422 of the Internal
Revenue Code. Options for 250,000 and 500,000 shares have been granted under the
52
<PAGE>
Plan respectively to Mr. Horowitz in September, 1995 and Mr. Raven during
December 1996. No other options were granted for the year ended December 31,
1997.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of March 31, 1998
regarding shares of Common Stock of the Company beneficially owned by each
director of the Company, each executive officer of the Company and by all
officers and directors as a group, and by persons known to the Company to be
beneficial owners of more than 5% of the Company's Common Stock.
<TABLE>
<CAPTION>
AMOUNT AND NATURE
NAME AND ADDRESS OF BENEFICIAL PERCENTAGE OF CLASS
OF BENEFICIAL OWNER (1),(2) OWNERSHIP(2) (10)
- ---------------------------------------------------------------- ------------------------ -----------------------
<S> <C> <C>
Turan M. Itil,.................................................. 897,200(3),(7) 8.30%
Chairman, CEO, President and Director
I. Ronald Horowitz,............................................. 250,000(5),(7) 2.26%
Director
Kurt Z. Itil,................................................... 1,138,800(3),(7) 10.53%
Director
Eleonore Itil................................................... 522,000(3),(4 (7) 4.83%
Pierre LeBars,.................................................. 210,000(7) 1.94%
Executive Vice President and Director
Aileen A. Kunitz,............................................... 90,800(6),(7) *
Vice President
Richard Katz,................................................... 147,000(3),(7) 1.36%
Director
Joseph DioGuardi,............................................... 3,000 *
Chief Financial Officer and Director
Yasmin Itil LeBars.............................................. 723,000(3),(7) 6.69%
Trinity American Corporation.................................... 825,998(8) 7.33%
800 Kings Highway North
Cherry Hill, New Jersey 08034
Lancer Partners, LP............................................. 4,507,500(9) 40.20%
Lancer Offshore, Inc.
Lancer Voyager Fund
Michael Lauer, General Partner
200 Park Avenue
New York, NY
All directors and officers of the Company as a group (7 2,726,800(10) 24.74%
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.
53
<PAGE>
(3) Each of these persons are party to a Voting Trust Agreement expiring in
January 2012, pursuant to which the Trustee, Turan M. Itil has the exclusive
right to vote such shares or give written consents in lieu of voting at all
meetings of the Company's shareholders, and in all proceedings where the
vote or written consent of shareholders may be required or authorized by
law. Turan M. Itil is the Trustee and Kurt Z. Itil is the Successor Trustee.
(4) Mrs. LeBars is the wife of Pierre LeBars and the daughter of Turan Itil.
Mrs. Itil is the wife of Turan Itil and the mother of Mrs. LeBars.
(5) Includes 250,000 options currently exercisable at $.10 per share, expiring
June 30, 2002.
(6) Includes 2,400 shares owned by Mrs. Kunitz' son and 1,400 shares owned by
her daughter.
(7) In connection with a recent private placement of the Company's securities
each of these persons extended the duration of their "lock-up" agreements
prohibiting the sale of their shares for a three month period ending
February 22, 1998. If the Company raises an additional $1 million during
that time, the lock-up agreements may be extended to May 22, 1998; if the
Company raises an additional $4 million by that time, the lock-ups may be
extended to August 22, 1998.
(8) Includes shares underlying 151,000 Class B Warrants currently exercisable at
$1.00 per share and 301,000 Class C Warrants currently exercisable at $2.00
per share, both of which expire September 30, 1998; and 16,666 shares of
Common Stock owned by each of three adult sons of Abraham Salaman, the
President and sole shareholder of Trinity. See "Certain Relationships and
Related Transactions."
(9) Includes shares underlying 400,000 currently exercisable warrants, each of
which entitles the holder to purchase one additional share of Common Stock
at $1.00 per share until December 31,1998, the expiration date of the
Warrant. See "Certain Relationships and Related Transactions."
(10) The percentage calculation for each of the named persons or entities is
based upon common shares outstanding as of March 31, 1998 plus the number of
shares underlying currently exercisable options, warrants or conversion
privileges held by the identified person.
54
<PAGE>
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 120,000 post-split shares
of the Company's Common Stock in consideration of Trinity's identifying HZI as a
potential acquisition candidate for the Company. Previously, on March 24, 1994,
HZI received a bridge loan of $75,000 from Trinity. It was subsequently agreed
that HZI shall have no responsibility for the repayment of such bridge loan. On
November 23, 1994, Trinity contributed $400,000 to the Company's capital account
with no further issuance of stock. In December 1994, the Company and Trinity
reached an agreement whereby in consideration for the $400,000 paid on November
23, 1994 two classes of preferred stock aggregating 400,000 shares were issued
to Trinity. Note 9c) of "Notes to the Consolidated Financial Statements."
Abraham Salaman is the President and sole shareholder of Trinity.
By a Stock Purchase Agreement dated as of October 25, 1994, Mr. Arndt agreed
to sell 556,000 of his post-split shares of the Company's Common Stock to
Trinity, for a purchase price of $40,000, which shares were transferred to
Trinity immediately upon the completion of the Company's acquisition of HZI.
Trinity has the right to transfer a portion of the shares purchased to other
nonaffiliated persons.
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. As additional
consideration for the $100,000 loan, the Company agreed to issue an aggregate of
49,998 shares of restricted Common Stock to the President of Trinity's three
sons. Further, the agreements gave Trinity the option to convert said loans into
550,000 shares of Common Stock.
On September 13, 1996, the Company borrowed $50,000 from Trinity, payable
from any future private placement proceeds. The loan bore interest at 9.5% per
annum. Further, the loan agreement gives Trinity the option to convert each
$4.00 of debt into one (1) unit. Each unit will consist of one (1) share of
Common Stock of the Company and two (2) Warrants. Each Warrant is exercisable
into one (1) share of Common Stock of the Company at $8.00 per share until
August 31, 1997, thereafter $10.00 per share. The Warrants expire on August 31,
1998.
In November 1997, Trinity released the Company from its obligations with
respect to these loans including (i) $45,421 in accrued interest, (ii) 250,000
Class B, Series II Preferred Shares, and (iii) $27,500 in accrued dividends on
Preferred Stock. As consideration for being released from these obligations, the
Company, as instructed by Trinity, issued 640,000 shares of Common Stock to
Lancer Partners.
On November 16, 1995, the Company entered into a letter agreement with SRS
Partners, a partnership affiliated with Trinity to borrow $25,000. The loan had
an interest rate of 9%, and was due within nine months.
In November 1997, SRS Partners released the Company from obligations in the
amount of $28,696.25, including accrued interest. As consideration for being
released from this obligation, the Company, as instructed by SRS Partners,
issued 10,000 shares of Common Stock to Lancer Partners.
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 November, 1997, Dr. Itil converted the loan into 40,000 Shares of the
Company's Common Stock.
In December 1995 the Company sold an aggregate of 1,000,000 shares of Common
Stock to four investors for $250,000 (the "December 1995 Private Placement"). As
a condition of this private placement
55
<PAGE>
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.
On February 5, 1996, the Company borrowed from Trinity an additional $50,000
from Trinity which was due on demand. This loan has an interest rate of 10% and
was repaid during April, 1996. In March 1996, the Company sold 333,333 shares of
Common Stock to Anker Bank, Zurich, Switzerland, for $133,333 and in April the
Company sold 333,333 shares of Common Stock to Avi Herson, for $133,333 and
333,334 shares of Common Stock to Georges Hauchecorne for $133,334. All of these
sales were made to foreign investors. Subsequently, these shareholders each sold
300,000 of their shares respectively to Four Acres Limited, Jersey, Channel
Islands; Meadowbrook Investments, Ltd., Nevis, West Indies; and JLB Equities,
Inc. Elmsford, New York ("JLB Equities"). Subsequently, JLB Equities, which had
purchased 250,000 shares of the Company's Common Stock in a December 1995
Private Placement and purchased 300,000 additional shares from the above
referenced foreign investors sold an aggregate of 500,000 of its 550,000 shares
which it owned to Lancer Partners, L.P. and Lancer Offshore, Inc. The Company
agreed to include the aggregate of 100,000 shares retained by Anker Bank, Risco
Investment Trust and Mr. Hauchecorne, in a pending Registration Statement, as
well as the 500,000 shares sold to Lancer Partners L.P. and Lancer Offshore,
Inc., by JLB Equities. These shares may be sold at such time as the Registration
Statement becomes effective.
In May 1996, the Company borrowed $200,000 from Elvena, Inc. Mr. Lynn Dixon,
a shareholder of the Company, is the beneficial owner of Elvena. The loan is
non-interest bearing and is payable within one (1) year or is payable out of the
first proceeds resulting from any exercise of outstanding Class B and Class C
Warrants, whichever comes first. As additional consideration the Company issued
66,666 shares of restricted common stock to Elvena, Inc. In July 1996, Elvena
loaned the Company an additional $100,000 in a non-interest-bearing loan. Both
of the foregoing loans from Elvena, originally for periods of twelve months,
have been extended to the earlier of the date the Class B and C Warrants are
exercised in their entirety, or December 15, 1998.
In July 1996, JLB Equities, a shareholder, loaned the Company $100,000. This
loan bore interest at 9% per year, was payable monthly, and was repaid in full
in April 1997.
On August 14, 1996, Dr. Itil and his wife Eleonore Itil, each contributed
12,500 shares of the Company's Common Stock owned by them to the National Ethnic
Albanian-American Foundation, Inc. ("Foundation"), a nonprofit corporation
organized exclusively to receive and administer funds for religious, charitable,
scientific, literacy and educational purposes. Joseph J. DioGuardi, a director
of the Company is a director and President of the foundation.
As of December 31, 1996 Dr. Itil was the personal guarantor of bank loans to
the Company in the amount of approximately $18,500. The Company has agreed to
indemnify Dr. Itil should he be called upon for payment pursuant to such
guarantee. As of June 30, 1997 said loan has been paid in full.
In December 1996 the Company sold an aggregate of 550,000 Units for an
aggregate of $2,001,068 ($3.64 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 $4.00 per
share until December 31, 1997 and at $6.00 per share thereafter and until
December 31, 1998, the expiration date of the Warrants. The purchasers of the
Units have not been granted registration rights with respect to the Units.
In two separate private transactions, Lancer Partners L.P. and Lancer
Offshore, Inc. (collectively, "Lancer"), two of the three investors who
purchased 550,000 Units in December, 1996, purchased an aggregate of 500,000
shares of the Company's Common Stock from J.L.B. Equities, a shareholder of the
Company, and purchased 200,000 Class B Warrants and 200,000 Class C Warrants
from Trinity. In March,
56
<PAGE>
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. In October, 1997, 150,000 Class B Warrants and 150,000
Class C Warrants were exercised by Lancer and in November 1997 150,000 Class B
Warrants were exercised by Trinity. The Company agreed to register the 500,000
shares purchased from JLB Equities and they are included in the Registration
Statement; as are the 850,000 shares of Common Stock issued upon the exercise of
the Class B and Class C Warrants.
In December 1996, Lancer acquired an aggregate of 200,000 Class B and
200,000 Class C Warrants from Trinity. In March, 1997, Lancer was issued 400,000
shares of the Company's Common Stock for which they paid an aggregate of
$600,000.
In October 1997, the Company received $600,000 of capital in connection with
the exercise of Class B and C Warrants. Accordingly, in connection with such
exercise, the Company issued 450,000 shares of common stock.
In November 1997, Howard Katz sold 67,500 shares of Common Stock to Lancer
Partners.
In November 1997, Kurt Itil and Yasmin LeBars each sold 75,000 shares of
Common Stock to Lancer Partners.
In December 1997, the Company reduced the exercise price of the 1,100,000
Warrants purchased by Lancer to $1.00 per share, with the expiration date to
remain at December 31, 1998. On December 29, 1997, Lancer exercised these
Warrants and also purchased 400,000 newly issued shares of Common Stock
providing aggregate proceeds to the Company of $1,500,000.
SERVICES PROVIDED BY AFFILIATES
HZI subcontracts material amounts of its patient testing performed in
connection with servicing contracts to NYI, a not for profit medical research
entity. One of the Company's Directors, Mr. Richard Katz, is also the Chairman,
Chief Executive Officer and President of NYI. The Company's Chairman, Dr. Turan
M. Itil, is an Honorary Chairman of NYI. Expenses incurred with such contractor
for the years ending December 31, 1996 and 1995, respectively, were $-0- and
$40,715, respectively. Net payables to this contractor amounted to $-0- and
$37,583 at December 31, 1996 and 1995, respectively.
During 1994, HZI and Manhattan Westchester Medical Services, P.C.
("Manhattan Westchester") entered into an arrangement whereby Manhattan
Westchester would provide medical consulting services to HZI's
Tele-Map-Registered Trademark- business. This arrangement was suspended during
1995 and reactivated during 1996. Services provided by Manhattan Westchester to
HZI for the years ended December 31, 1996 and 1995 amounted to approximately
$14,000 and $15,400 respectively. No services were provided during the year
ended December 31, 1997. Manhattan Westchester is a professional corporation of
which Dr. Turan M. Itil, Chairman of the Company owns the majority of shares
outstanding.
REVENUES FROM AFFILIATES
The Company charges NYI, as well as Manhattan Westchester for the use of
certain employees and office and laboratory (administration services) of the
Company. Net revenues from these affiliates for the years ended December 31,
1997, 1996 and 1995 amounted to $50,289, $65,782, and $186,123, respectively.
57
<PAGE>
Stockholders Notes and Loans:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1997
----------------- -----------------
<S> <C> <C>
Notes Payable bearing an interest of 5% to 9% *............................ $ 550,000 $ 100,000
Non interest bearing loans and payables(i)................................. 108,687 86,332
Non interest bearing loan payable.......................................... 200,000 200,000
-------- --------
$ 858,687 $ 386,332
-------- --------
-------- --------
</TABLE>
- ------------------------
* Stockholder notes and loans payable relates to advances made to HZI by its
Chairman of the Board which are due on demand.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
27 (a) Exhibits
<TABLE>
<S> <C> <C> <C>
(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 ***
(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) (iv) Employment Agreement between the Company and Aileen Kunitz
(d) (i) Lease Agreement for premises situated at 150 White Plains Road, Tarrytown, New
York
(e) Voting Trust Agreement
(f) Licensing Agreement between the Company and Mediator S.r.I.
(g) Joint Venture Agreement between the Company and Tena, Ltd.
(h) (i) Research Contract between the Company and Schwabe Company, dated October 23,
1996****
(h) (ii) Research Contract between the Company and Hoechst-Roussel Pharmaceuticals, Inc.
dated April 12, 1995****
(h) (iii) Research Contract between the Company and Hoechst-Roussel Pharmaceuticals, Inc.
dated April 28, 1995****
(h) (iv) Research Contract between the Company and Boehringer Ingelheim Pharmaceuticals,
Inc. dated October 6, 1997****
(h) (v) Research Contract between New York Institute and Unimed Pharmaceutical
Incorporated, dated December 6, 1996****
(i) Clinical Trial Agreement between New York Institute and Ciba-Geigy Corporation,
dated April 20, 1996****
(j) Consulting Contract between the Company and Boehringer Ingelheim
Pharmaceuticals, Inc. dated October 6, 1997****
(k) Financing Documents between the Company, Trinity American Corporation and
Elvena, Inc.
</TABLE>
- ------------------------
* incorporated by reference to Registration Statement on Form S-18 No.
33-2205-D declared effective on July 28, 1987
58
<PAGE>
** incorporated by reference to the Company's Annual Report on Form 10-K for
the period ending September 30, 1994
incorporated by reference to Registration Statement on Form SB-2 No.
333-1462 filed in February, 1996
(B) REPORTS ON FORM 8-K
None.
59
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) 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 on the 11th day of May , 1998.
<TABLE>
<S> <C> <C>
(REGISTRANT) NEUROCORP, LTD.
BY(SIGNATURE AND TITLE) /s/ TURAN M. ITIL
-------------------------------------------
Turan M. Itil,
CHAIRMAN, CHIEF EXECUTIVE OFFICER,
PRESIDENT AND DIRECTOR
Date: May 11, 1998
</TABLE>
In accordance with the requirements of the Securities and Exchange Act of
1934, this report has been signed by the following persons in the capacities and
on the dates indicated:
<TABLE>
<S> <C>
/s/ TURAN M. ITIL /s/ I. RONALD HOROWITZ
- ------------------------------------------- -------------------------------------------
Turan M. Itil I. Ronald Horowitz
Chairman, Chief Executive Officer, President Director
and Director (principal executive officer) Date: May 11, 1998
Date: May 11, 1998
/s/ RICHARD KATZ /s/ DONALD L. GIANNATTASIO
- ------------------------------------------- -------------------------------------------
Richard Katz, Director Donald L. Giannattasio, Controller
Date: May 11, 1998 (Principal Accounting Officer)
Date: May 11, 1998
/s/ JOSEPH DIOGUARDI
- -------------------------------------------
Joseph DioGuardi, Chief Financial Officer
and Director (Principal Financial Officer)
Date: May 11, 1998
</TABLE>
60
<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 7 of this Form 10-KSB and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,597,825
<SECURITIES> 0
<RECEIVABLES> 691,282
<ALLOWANCES> (40,777)
<INVENTORY> 132,727
<CURRENT-ASSETS> 2,595,665
<PP&E> 830,575
<DEPRECIATION> (594,573)
<TOTAL-ASSETS> 4,610,010
<CURRENT-LIABILITIES> 872,713
<BONDS> 0
0
150,000
<COMMON> 21,514
<OTHER-SE> 3,325,783
<TOTAL-LIABILITY-AND-EQUITY> 4,610,010
<SALES> 1,121,482
<TOTAL-REVENUES> 1,121,482
<CGS> 639,077
<TOTAL-COSTS> 639,077
<OTHER-EXPENSES> 2,894,307
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 64,582
<INCOME-PRETAX> (2,447,602)
<INCOME-TAX> (24,000)
<INCOME-CONTINUING> (2,423,602)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,423,602)
<EPS-PRIMARY> (0.30)
<EPS-DILUTED> (0.30)
</TABLE>
