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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[xx] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number: 33-2205-D
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NeuroCorp., Ltd.
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(Exact name of registrant as specified in its charter)
Nevada 22-2813990
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
45 Knollwood Road, Elmsford, New York 10523
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(Address of principal executive offices) (Zip Code)
(914) 631-3315
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(Registrant's telephone number, including area code)
150 White Plains Road, Tarrytown, New York, 10591
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(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) has filed all reports required to be filed by
section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports),
Yes [ ] No [xx]
and (2) has been subject to such filing requirements for the past 90 days.
Yes [xx] No [ ]
The issuer's revenues for its most recent fiscal year were $199,954.
The aggregate market value of the voting stock held by non-affiliates computed
by reference to the average bid and asked prices of such stock as of August 18,
1999 was $6,317,815.
The number of shares outstanding of each of the issuer's classes of common
equity as of the August 18,
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1999 11,231,672.
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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. Certain statements in
this annual report on Form 10-KSB are "forward-looking statements". These
forward-looking statements include, but are not limited to, statements about our
plans, objectives, expectations and intentions and other statements contained in
this annual report that are not historical facts. When used in this annual
report, the words "expect," "anticipate," "intend," "plan," "believe," "seek,"
"estimate," and similar expressions are generally intended to identify
forward-looking statements. Because these forward-looking statements involve
risks and uncertainties, there are important factors that could cause actual
results to differ materially from those expressed or implied by these
forward-looking statements, including our plans, objectives, expectations, and
intentions and other factors discussed in this report. We assume no obligation
to update such forward-looking statements.
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.
The Company has two wholly owned subsidiaries, HZI Research Center Inc.
("HZI") and Memory Centers of America Inc. ("MCAI"). The Company conducts almost
all of its activities through these subsidiaries. HZI is in the business of
contracting clinical research and performing data analysis for the Company and
MCAI provides non-medical management to licensed physicians and entities that
operate memory centers.
The Company has incurred losses over the past four years totaling
$9,964,753. The Company has been able to remain in business solely because of
its ability to raise investment capital. Its ability to continue to raise
capital to support its operations is hampered by the continuing and growing
losses. For the year ending December 31, 1998 the Company reported a net loss of
$5,654,834. This loss can be attributed to a number of factors, including the
following: HZI has not started any major new research contracts in two years and
had substantially finished all contracts prior to 1998; the Company incurred
substantial costs during the construction of a "Signature Memory Center" for
MCAI; prior to July 1998 the Company failed to create a successful marketing
plan for MCAI and therefore did not generate significant revenues from MCAI; the
Company had attempted to create and develop a number of different products and
services that stretched its resources and personnel in many different directions
and despite the reduction in revenue and work the Company did not reduce
overhead costs and payroll levels until the third quarter of 1998.
The Company has taken the following steps to curtail the losses. First,
management has been changed. The Company hired Vernon L. Wells as its Chief
Executive Officer and President in 1998. Mr. Wells replaced Dr. Turan Itil who
resigned May 15, 1998. Mr. Wells has brought in a new operations director for
MCAI, Herman Tong, and has assigned Kurt Z. Itil, Executive VP the
responsibility of marketing and obtaining contract research business for HZI. In
addition the
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company hired a new financial executive, Donald Albertie, and they
have restructured the financial department.
The new management has repositioned the Company to focus on a few core
businesses, which they believe will give the Company the best opportunity to end
the losses and eventually be profitable. HZI will concentrate on obtaining new
contract research work and while this business is not expected to have
significant long-term growth, the Company expects this business to realize
revenues of approximately $300,000 to $400,000 in 1999. HZI has not started any
major research contracts since 1997 and has not marketed its services in the
past few years. The Company has secured and started work for consulting services
to be performed over a two-year period and has produced revenues in excess of
$24,000 a month beginning in May 1999. Management expects HZI to generate
revenues to support the current expense base until MCAI begins to contribute
revenues and support growth in the Company
MCAI works primarily with physicians who offer diagnostic,
preventive and treatment services, that handle patients who have memory
problems that range from "benign" age-related forgetfulness to different
brain disturbances and Alzheimer's disease. The Signature Memory Center has
been designed to be a model for the Company to use for marketing the MCAI
business to other entities. The Company had previously planned on growing the
MCAI business by constructing Memory Center-TM- offices throughout the
country. This approach did not produce satisfactory results for a number of
reasons, including; the high costs associated with the construction of each
facility and with the marketing and advertising of MCAI services, which are
necessary to develop a large patient base.
The Company now plans to generate growth through affiliations with
physicians, hospitals, medical groups, and skilled nursing care facilities
and has been negotiating with a number of potential affiliates to open Memory
Centers-TM-. The Company will provide protocols, equipment, computers,
software and training at set-up and provide technical support and
consultative services thereafter. The Company has signed four non-binding
Letters of Intent that, if consummated, could result in the Company opening
twenty to twenty-five Memory Centers-TM- by the end of 1999. If the Company
were to close only one-half of the prospective contracts, it is likely the
Company would open only five to ten Memory Centers-TM- by the end of 1999.
Each Memory Center-TM- is expected to produce net cash flow of approximately
$5,000 to $8,000 per month, beginning two to three months after opening.
In the past, the Company marketed numerous other products that have not
contributed to revenues significantly in the past two years. The Company is not
planning to actively market these products or services over the next year. One
service, Tele-Map-TM-, contributes approximately $3,000 to $5,000 a month in
revenue. The Company anticipates marketing this in the future, but does not
expect this service to grow enough so as to provide significant revenue for the
Company.
The Company has also taken steps to reduce its expenses from an average
of over $315,000 per month during the first quarter of 1998 to under $200,000
per month during the third quarter of 1999. The number of full time employees
has been reduced from twenty-five at January 1, 1998 to fifteen at July 31,
1999, respectively. The Company moved out of its Tarrytown, NY headquarters
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and opened a new smaller and less expensive administrative office in Elmsford,
NY. In addition, the Company is working toward reducing its vehicle and
equipment lease expenses, has reduced or eliminated other expenses and continues
to look at other expense reduction options.
HZI Research Center Inc. and 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 conducts trials in Phase I to IV studies and also 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 accredited institutional review boards, drug companies, and the local and
federal offices of the FDA.
Competition
Three major companies dominate the worldwide market in the contract
research industry: Parexel International Corporation, Quintiles Transnational
Corporation and Besselear Associates. The Company has made only nominal efforts
to advertise or promote its contract research business and as a result, the
Company had not started any major new studies since 1997. 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 clinical
research 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.
As far as the Company's proprietary technology is concerned, such as
its Quantitative Pharmaco-EEG (QPEEG-TM-) method or its Brain Function
Monitoring (BFM) System-TM-, few of the Company's competitors in the United
States have similar technology. Since the FDA guidelines do not require them,
drug companies in the United States do not routinely conduct QPEEG-TM-
studies. QPEEG-TM- is a method developed by HZI to evaluate a drug's effect
on the central nervous system using its unique Computer-analyzed EEG
(CEEG-TM-) technology. HZI statistically analyzes the before and after
effects of a drug and correlates the changes with information in HZI's CEEG
drug data base to determine the optimal time or dosage window to yield
particular central nervous system effects. 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-TM- method to determine therapeutic opportunities for psychotropic
drugs in a cost-effective manner.
Marketing Strategy
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The Company's contract research has traditionally been dependent on the
publications by and personal contacts of its staff to develop and generate
contracts for clinical research studies.
In addition to the contacts developed by its professional staff, the
Company plans to make coordinated marketing efforts with other companies and
will make joint presentations to medical, pharmaceutical and biotechnology
companies. The Company also plans to more aggressively advertise its research
capabilities in professional journals and will continue to participate in
meetings of the professional scientific community, and present the results of
its clinical research studies.
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, that handle patients whose memory problems range from "benign"
age-related forgetfulness to different brain disturbances and Alzheimer's
disease. MCAI, through affiliated corporations, also supplies the diagnostic
testing, training and communication equipment used in Memory Centers-TM-.
Currently the Signature Center located in New York City, is the only
operating center. The Memory Center-TM- in Manhattan is operated under a
management agreement with A. Etemadi M.D., P.C. Under the terms of the
management agreement, MCAI will supply 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 management fees for its managerial services, and it is compensated
for its billing services and variable expenses, such as supplies, as they
occur.
In general, MCAI plans to establish Memory Centers-TM- with the offices
of physicians, skilled nursing care facilities, hospitals or other similarly
equipment medical centers. These facilities will have the necessary physician
supervision, medical equipment and technologies and office space to allow for
more economical start-up costs.
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
testing and training systems to each Memory Center-TM-. 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.
Competition
To the best of the Company's knowledge, there is no other commercial
enterprise that 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,
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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- offer. However, as
noted above, since memory disturbances are 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
disturbances, 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 disturbances, 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
disturbances 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 disturbance can be
objectively diagnosed and that early treatment may slow or even 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's 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.
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Tele-Map-TM-
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-TM- software
with or without Dynamic Brain Mapping-TM-, and these services are known
collectively as "Tele-Map-TM-."
In the Tele-Map-TM- program, HZI provides hospitals or physicians with
a conventional or specially designed modem used to transmit the data collected
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 two
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 expects competition in this
area will increase. 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-TM- services.
Government Regulation
Substantial segments of the Company's proposed operations are subject
to regulation and supervision by federal, state and local governmental
authorities. Such regulations apply not only to research, development and
manufacturing activities (whether by the Company or by licensees) but also to
the marketing of proposed systems and products, particularly those involving
medical applications. 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. Although the Company cannot estimate the cost of
compliance with various regulations, it expects such costs to be significant.
Personnel
The Company has 15 full-time employees, including five executives. In
addition the Company has three consultants.
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Item 2. PROPERTIES
Property
The Company owns three parcels 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.
Effective August 1, 1999 the Company entered into a contract to lease office
space at 45 Knollwood Road, Elmsford, New York. The lease is for three years and
requires annual lease payments of $17,314 the first two years and $17,613 the
third year. In addition, on August 3, 1997, MCAI entered into a contract to
lease its Signature Memory Center in Manhattan. The five-year lease 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.
Office rent and payments for non-cancelable equipment leases totaled $235,815
for the year ending December 31, 1998.
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
The Company's Common Stock has traded on the NASD OTC Bulletin Board
under the symbol "NURC" since March 2, 1995.
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 Low
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<S> <C> <C>
1997
First Quarter 12 3/4 8 1/2
Second Quarter 11 7/8 7 3/8
Third Quarter 9 3/4 7
</TABLE>
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<TABLE>
<S> <C> <C>
Fourth Quarter 9 3/4 5 5/8
1998
First Quarter 8 3/4 5
Second Quarter 9 4 5/8
Third Quarter 7 4 1/2
Fourth Quarter 6 3/8 4
1999
First Quarter 4 1/2 1 1/4
Second Quarter 2 1/4 1 1/4
Third Quarter (Through August 18) 1 1/2 3/8
</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 August 18, 1999 the last bid price reported on the NASD
Over-the-Counter Bulletin Board for the Common Stock was $ 9/16 per share. On
August 18, 1999 the Company had 11,231,672 shares of Common Stock outstanding
and 152 stockholders of record.
Dividends
The Company has never declared or paid cash dividends on its Common
Stock. The current policy of the Board of Directors is to retain any earnings to
provide for the development and growth of the Company. Consequently, no cash
dividends are expected to be paid in the foreseeable future on Shares of Common
Stock. The Company is obligated to pay dividends at the rate of $15,000 per year
in cash or Shares of Common Stock on its outstanding shares of Class B, Series 1
Preferred Stock.
The Class B, Series C Preferred Stock accrues cumulative cash dividends
at an annual rate equal to 8% of the monies paid for the purchase of the shares
as original principal. The dividend accrues and is paid quarterly. The Company
has the option, but only with the prior written consent of the investor, to pay
the cumulative dividends by the issuance of additional shares of the Series C
Preferred Stock. The stock dividend is payable upon the same terms as the cash
dividends payable provided that such stock dividends are payable at annual rate
of 13% of the monies paid to purchase the Preferred Stock. The stock dividends
shall be paid at a valuation rate equal to the lesser of the closing price for
the Common Stock on the last day of the quarterly period for which dividend is
due or three ($3.00) dollars per share, thereby establishing the number of
shares of stock to be issued.
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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Overview
The Company reported a net loss of $5,654,834 for the year ended December 31,
1998 as compared to a net loss of $2,397,750 for the year ended December 31,
1997.
Revenues for the years ended December 31, 1998 and 1997 amounted to $199,954 and
$ 1,121,482, respectively, a decrease of $921,528. Gross loss for 1998 amounted
to $621,507 compared to a gross profit of $482,405 for 1997.
The decrease in sales can be attributed to the following:
1. The Company has made minimal efforts to market its clinical research
business, therefore, the Company has not entered into any substantial
contracts since December 31, 1993 and the backlog of research work has
been substantially completed in prior years.
2. Net sales of the BFM Systems for the years ended 1998 and 1997 totaled
$0 and $68,256, respectively. The Company has not sold any systems
since the 3rd quarter of 1997.
3. Revenues from the Tele-Map-TM- division for the years ended 1998 and
1997 totaled $60,593 and $90,858, respectively. The decrease is a
result of the Company failing to market this product.
4. Revenues from the Tele-Neuro Psychiatry ("TNP") systems for the years
ended 1998 and 1997 totaled $0 and $463,171. The Company did not sell
any units in 1998 and received a return of two systems sold in 1997.
General and administrative expenses for the year ended December 31, 1998 totaled
$3,655,517 as compared to the year ended December 31, 1997 total of $2,770,625
or an increase of $884,892. The increase is the primarily the result of the
following factors.
1. Rent and leases for facilities and equipment increased $91,329 due to
the opening of MCAI Signature Center in Manhattan.
2. For the year ending December 31, 1998 labor costs including wages and
payroll taxes increased $267,282 over 1997 levels.
3. For the year ending December 31, 1998 consultant costs increased
$203,651 primarily due to the opening of the Manhattan Signature
Center.
4. For the years ended December 31, 1998 and December 31, 1997 the company
recorded bad debt expense of $809,918 and $244,125, respectively. The
Company is aggressively pursuing collection of all outstanding
receivables.
The Company reported a loss on capitalized database and product development
costs of $1,614,007 for the year ended December 31, 1998. In management's
opinion the carrying value of the intangible
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assets of the unamortized costs exceeds the net realizable value of the assets.
Due to the uncertainty of future revenues the remaining unamortized costs were
written off.
For the years ended December 31, 1998 and December 31, 1997 the company research
and development costs amounted to $0 and $97,830, respectively. The decrease is
principally due to the Company concentrating its efforts on the opening of the
Manhattan Signature Memory Center.
For the years ended December 31, 1998 and 1997 the Company recorded other
expense (net) of $3,803 and $35,700, respectively. Interest income for the years
ended December 31, 1998 and 1997 amounted to $16,002 and $28,882. Interest
Expense for the years ended December 31, 1998 and 1997 totaled $23,830 and
$64,582. The decrease in interest expense can be attributed to the Company
converting several loans into common stock.
Liquidity and Capital Resources
At December 31, 1998 the Company had negative working capital of $194,671
compared to positive working capital of $1,803,185 at December 31, 1997. The
cash balance at December 31, 1998 and December 31, 1997 was $795,739 and
$1,575,159, respectively. Accounts receivable (net) at December 31, 1998 and
December 31, 1997 totaled $6,400 and $650,505, a decrease of $644,105. The
decrease is a result of write-offs relating to uncollectible receivables. The
Company had inventory totaling $132,727 at December 31, 1997, which was written
off at December 31, 1998. Prepaid expenses at December 31, 1998 and December 31,
1997 amounted to $27,785 and $214,608, respectively, a decrease of $186,823.
Current liabilities amounted to $1,024,595 and $769,814 at December 31, 1998 and
December 31, 1997, respectively, an increase of $254,781. Included in this are
stockholder loans of $300,000. These loans were due December 15, 1998. The
Company has not made any payments against the loans.
For the years ended December 31, 1998 and 1997, the Company used cash from
operating activities of $2,615,445 and $2,591,046, respectively, resulting in an
increased use of cash from operations of $24,399.
For the years ended December 31, 1998 and 1997, the Company used cash from
investing activities of $460,553 and $316,337, respectively. Investing
activities primarily included investment in the MCAI Manhattan office in 1998
and 1997 and costs incurred for the development of databases and computer system
development costs in 1997.
For the years ended December 31, 1998 and 1997, net cash provided by financing
activities was $2,296,578 and $2,631,428, respectively, a decrease of $334,850.
The Company issued 411,466 shares of Common Stock and received proceeds of
$411,466 in 1998. In addition, the Company issued 733,333 shares of Class B,
Series C Convertible Preferred Stock resulting in proceeds of $2,000,000.
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Management's Plans
The Company plans center on the following objectives; secure affiliate Memory
Centers-TM- business, turn the Signature Memory Center into a profitable
operation, and secure new contract research business.
The Company is aggressively pursuing affiliate Memory Centers-TM- business,
as it believes this will enable a less costly and quicker growth strategy.
Previously, the Company had focused on starting Company owned and run Memory
Centers-TM- offices, but the high cost associated with the construction and
startup of such sites prohibits that approach. The Company is in negotiations
with a number of entities to start such affiliations. The Company is
negotiating with enterprises that will be able to provide the necessary
medical office space and patient base, such as hospitals, skilled nursing
facilities and physician groups. The Company has entered into four
non-binding Letters of Intent with entities that are interested in setting up
Memory Centers-TM- in their facilities. The Company may need to finance the
acquisition of computer and medical equipment that will be installed at each
location. The amount of capital that may be needed varies with each
affiliation as some affiliates may purchase the equipment up front and pay
reduced management fees in exchange.
The Company is pursuing a marketing strategy intended to create awareness of
Memory Centers-TM- and its services to potential patients and large existing
healthcare providers such as, multi-specialty physician groups, hospital
consortiums, and large assisted living center organizations. The Company has
entered into a contract for marketing services with a highly respected firm in
the New York City metropolitan area with a reputation for having relationships
at the highest level of these organizations.
The Company has entered into a consulting agreement with a major customer that
will provide a minimum of $480,000 in revenues over the next two years. This
contract, which is a result of previous contract research with the customer,
began in May 1999.
The Company also entered into contract with a large U.S. pharmaceutical company
to provide consultative services for a period of two years beginning in March
1999. This contract will provide a minimum of $96,000 in revenues over the next
two years.
The Company continues its quest for new and continuing contract research through
its HZI operation. The Company is has started work on a research contract for a
clinical study that could generate as much $288,000 in revenues. The Company is
also negotiating additional contracts, which it hopes to finalize in the third
quarter of 1999.
The Company believes the Tele-Map-TM- business can be marketed and provide a
consistent growing revenue stream. The Company is pursuing several options for
the purpose of expanding its Tele-Map-TM- business including joint venture
opportunities.
Going Concern
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. The Company has incurred
recurring losses from operations. The
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Company's continuation as a going concern is dependent upon the Company's
ability to return to profitability and to obtain capital or other financing to
fund future losses. The consolidated financial statements do not include any
adjustments relating to the recoverability and classification of assets or the
amounts of liabilities that might be necessary should the Company be unable to
continue as a going concern.
In May 1999, the Company completed an interim financing agreement with Pioneer
Ventures Associates Limited Partnership and Lancer Management Group LLC. The
Company received proceeds of $100,000 from Pioneer and issued 800,000 shares of
the Series C, 8% Convertible Preferred Stock. The Company will receive
additional funds of up to $1,000,000 at specified dates during the balance of
1999 from Pioneer based on the Company meeting certain specified financial
objectives. In return the Company will issue Pioneer shares of the Company's
Series C 8% Convertible Preferred Stock. The Company received $625,000 from
Lancer Offshore Inc., $300,000 from Lancer Partners LP and $100,000 from the
Orbital Fund Inc. Lancer Management Group LLC (Lancer) manages these funds. In
return the Company issued 8,200,000 shares of the Company's Series C 8%
Convertible Preferred Stock to Lancer. Each share of Preferred Stock is
convertible into one share of Common Stock. As further consideration to Lancer,
the Company issued warrants to purchase 500,000 shares of Common Stock at a
price of $1.00 per share. These warrants will be exercisable for a period of
five years. The Company repaid the $100,000 received from Pioneer, with interest
at the rate of 15% per annum, on June 30, 1999. The repayment was specified in
the financing agreement and will be reinvested in the Company at the final
closing of the investment agreement
Regarding current operations, 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 reductions
include salary deferrals, staff cuts, reducing office space and equipment leases
and reductions in other expenses. The Company expects that the anticipated
proceeds from Pioneer, together with current cash and projected cash from
operations will be sufficient to fund its activities for the next twelve to
eighteen months.
Accounting Pronouncements
Statement of Financial Accounting Standards No. 131, "Disclosures about segments
of an Enterprise and Related Information"("SFAS 131"), was issued in June 1997.
This statement establishes standards for the way public enterprises report
information about operating segments. The Company measures its operations on a
consolidated basis and therefore, has not adopted the reporting requirements of
this statement.
Effects on Inflation and Exchange Rates
The Company has not been materially effected by inflation or changes in foreign
exchange rates. However, there can be no assurance that the Company's business
will not be effected by inflation or foreign exchange rates in the future.
14
<PAGE>
Year 2000 Issues
The Company's current data processing systems are not yet fully Year 2000
compliant. The Company has developed and is currently executing a comprehensive
plan designed to make its computer systems, applications and facilities Year
2000 ready. The plan covers four stages including (i) inventory, (ii)
assessment, (iii) remediation, and (iv) testing and certification. At December
31, 1998 the Company had substantially completed the inventory stage for its
Company-owned systems and applications. The assessment and remediation processes
are currently underway and the Company is utilizing both internal and external
resources to reprogram, or replace where necessary, and test the software for
Year 2000 modifications. The remediation process is targeted to be largely
completed August 31, 1999. Testing and certification of these systems and
applications are targeted for completion by September 30, 1999.
The Company is embodying the Year 2000 issue with planned system augmentations.
Total year 2000 costs for Company-owned systems and applications are currently
estimated to be approximately $25,000 in 1999. A large majority of these costs
are currently believed to be one-time expenses that will not recur in the Year
2000 or thereafter.
The Company is initiating communications with its critical external
relationships to determine the extent to which the Company may be vulnerable to
such parties' failure to resolve their own Year 2000 issues. Where practical,
the Company will assess and attempt to mitigate its risks with respect to the
failure of such entities to be Year 2000 ready. The effect, if any, on the
Company's results of operations from failure of such parties to be Year 2000
ready, is not presently reasonably estimable.
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
The information required by this item is contained in a current report
of Form 8-K, filed on March 10, 1999, which is incorporated here by reference.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
15
<PAGE>
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>
Vernon L. Wells 41 Chief Executive Officer, President and Director.
Turan M. Itil 75 Director
Kurt Z. Itil 40 Director, Executive Vice President
Pierre LeBars 46 Chief Operating Officer
Aileen A. Kunitz 56 Vice President
Emin Eralp 41 Vice President
James Coady 51 Director
Paul Lerman 58 Director
</TABLE>
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. Each outside director of the Company
is entitled to receive an annual director's fee of $2,500 plus $350 for each
board meeting attended.
VERNON L. WELLS became President and Chief Executive Officer of the
Company in July 1998. He was the Vice President and General Manager for Quest
Diagnostics, Inc. in Teterboro, NJ, from 1984 to 1997. He became acting Chairman
of the Board when Dr. Itil resigned that position in 1999.
TURAN M. ITIL, M.D. was Chairman of the Board of the Company until his
resignation on May 15, 1999. Dr. Itil is a neurologist/psychiatrist with special
interests in electrophysiology (brain electrical activity studies) and
psychopharmacology (psychotropic drug treatment and research).
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. In 1997, Dr. Itil
was named Acting Chief Operating Officer of the Company and became Executive
Vice President in 1998. 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
16
<PAGE>
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. was named Chief Operating Officer and Vice
President Medical and Clinical Research and Development of the Company in 1998
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 was 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.
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.
EMIN ERALP is the Vice President of Technical Operations. He is a
graduate of the University of Akron. He has been with the Company for over 20
years and has been a co-author on more than 25 scientific publications.
JAMES COADY has been Treasurer and a Director of Pioneer Ventures Corp.
and a manager of Ventures Management Partners, LLC, the General Partner of
Pioneer Ventures Associates Limited Partnership since their founding in July
1997. From 1984 to 1988, Mr. Coady served as President and Registered Principal
of Constitution Securities, Inc. (a Broker Dealer licensed by the National
Association of Securities Dealers and the Securities and Exchange Commission).
This company is no longer active as a Broker Dealer.
17
<PAGE>
PAUL LERMAN, Ph.D., has been the Dean of the Silberman College of
Business Administration at Fairleigh Dickinson University, in Teaneck, NJ, since
1990. He has also been a Director for the New Jersey Trade Development
Corporation since 1997.
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, 1998,
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
- -------------------------------------------------------------------------------------------------------------------
# Share
Name & Year Salary Bonus Other Annual Underlying All Other
Principal Position Compensation1 Options Compensation
- ---------------------- -------- ------------------ --------------- ----------------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Vernon L.Wells
Chief Executive 1998 $88,4252 300,000
Officer
Turan Itil - 1998 $219,792
Former Chief
Executive Officer 1997 $250,000
1996 $250,0003
Kurt Z. Itil- 1998 $116,130
Executive Vice
President 1997 $108,500
Pierre LeBars- 1998 $139,640
Chief Operating $110,500
Officer 1997 $121,000
1996 $112,000 $50,000
Jonathan Raven 1998 $57,9254
CEO and President
of MCAI 1997 $150,150
</TABLE>
1 Does not include an annual car allowance of $9,000 for Dr. Itil and
$6,000 for Dr. LeBars. Dr. Itil resigned his position as Chief
Executive Officer effective May 1998. He continued as Chairman of the
Board until May 1999 and now remains as Director. His employment
18
<PAGE>
contract was modified for him to be retained as consultant until
September 20, 2002 and include annual compensation of $150,000 and a
vehicle and driver, subject to continuance until September 20, 2005 if
certain specified objections are satisfied and if they are not
satisfied the Agreement is subject to earlier termination.
2 Vernon Wells was hired July 1998 as President and Chief Executive
Officer of the Company.
3 For the year ended December 31, 1996 Dr. Itil deferred $21,000 of his
$250,000 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 shares have been granted under the Plan
respectively to Mr. Ron Horowitz, a former officer and director in September
1995. No other options were granted for the years ended December 31, 1998 and
1997.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth certain information as of July 31, 1999
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.
19
<PAGE>
<TABLE>
<CAPTION>
Name and Address Amount and Nature
of Beneficial Owner 1, 2 of Beneficial Ownership (2,7) Percentage of Class (7)
- ------------------------ ----------------------------- -----------------------
<S> <C> <C>
Vernon L. Wells
President, CEO and Director 50,000 *
Turan M. Itil,
Director 897,200 (3) 7.99%
Kurt Z. Itil,
Director, Executive Vice President 1,138,800 (3) 10.14%
Eleonore Itil 522,000 (3,4) 4.65%
Pierre LeBars,
Chief Operating Officer 210,000 (3) 1.87%
Aileen A. Kunitz,
Vice President 89,800 (3,5) *
Emin Eralp, 84,000 (3,6) *
Vice President
Yasmin Itil LeBars 723,000 (3,6) 6.44%
Trinity American Corporation
800 Kings Highway North
Cherry Hill, New Jersey 08034 271,666 (7) 2.42%
Lancer Partners, LP
Lancer Offshore, Inc.
Lancer Voyager Fund
Orbital Fund 12,713,052 65.41%
Michael Lauer, General Partner
200 Park Avenue
New York, NY
Pioneer Ventures Associates Limited Partnership
651 Day Hill Road 1,598,333 (3) 12.46%
Windsor, CT 06095
All directors and officers of the Company as a group 2,469,800 (7)
(5 individuals) 21.89%
</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.
20
<PAGE>
3 Each of these persons are party to a Voting and Shareholders Agreement,
pursuant to which each shareholder must obtain the consent of Pioneer
Ventures Associates Limited Partnership to transfer or sell any shares that
such shareholder owns or controls. The agreement also specifies that the
Company shall cause the nomination and election of two nominees to the
Board of Directors and if the Company defaults on the cumulative preferred
stock held by Pioneer and does not cure such default within 30 days, PVALP
shall nominate and the Company shall use its best efforts to have elected a
number of individuals to be added to the board to be a sufficient number to
constitute a majority of the total number of directors for PVALP.
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 1,400 shares owned by Mrs. Kunitz' son and 1,400 shares owned by
her daughter.
6 Includes 16,666 shares of Common Stock owned by Michael Salaman, son of
Abraham Salaman, the President and sole shareholder of Trinity. See
"Certain Relationships and Related Transactions."
7 The number of shares and percentage calculation for each of the named
persons or entities is based upon the number of common shares outstanding
as of July 31, 1999 plus the number of shares underlying currently
exercisable options, warrants or conversion privileges held by the
identified person.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Transactions with Management and Others
In December 1997, the Company reduced the exercise price of 1,100,000
Warrants purchased by Lancer Management Group LLC in 1996 from $4.00 to $1.00
per share, with the expiration date remaining 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.
In June 1998, Lancer exercised 400,000 warrants resulting in the
Company receiving proceeds of $400,000 and issuing 400,000 shares of Common
Stock. Lancer had received the warrants in December 1997.
Stockholder Notes and Loans
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1998
----------------- -----------------
<S> <C> <C>
Non interest bearing loans and
receivables* $ 14,586 $ 0
============= ===========
</TABLE>
21
<PAGE>
<TABLE>
<S> <C> <C>
Notes Payable bearing an interest
of 9% 100,000 100,000
Non interest bearing loan payable 200,000 200,000
------------- -----------
$ 300,000 $ 300,000
============= ===========
</TABLE>
* Stockholder notes and loans payable relates to advances made by HZI to its
Former Chairman of the Board which are due on demand.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
27 (a) Exhibits
(2) (a) Agreement and Plan of Reorganization between Company and HZI
(3) (a) Certificate of Incorporation as amended*
(b) Certificate of Amendment to Certificate of Incorporation**
(c) By-Laws*
(4) (a) Form of Common Stock Certificate
(b) Form of Class B Common Stock Purchase Warrant
(c) Form of Class B Common Stock Purchase Warrant
(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
(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.
(m) Investment Agreement dated as of July 30, 1998 between the
Company and Pioneer Ventures Associates Ltd.****
(m)(i) First Modification to Investment Agreement dated December 4,
1998****
(n) Voting and Shareholders Agreement dated as of July 30,
1998****
22
<PAGE>
(n)(i) First Modification to Voting and Shareholders Agreement dated
as of October 30, 1998****
(o) Response Letter from Scarano & Tomaro, P.C. regarding a change
in the Company's certifying accountants*****
* incorporated by reference to Registration Statement on Form S-18 No.
33-2205-D declared effective on July 28, 1987
** incorporated by reference to the Company's Annual Report on Form 10-K
for the period ending September 30, 1994
*** incorporated by reference to Registration Statement on Form SB-2 No.
333-1462 filed in February, 1996
**** incorporated by reference to the Company's Quarterly Report on Form
10-Q for the period ending September 30, 1998
***** incorporated by reference to the Form 8-K filed March 10, 1999
(b) Reports on Form 8-K
None.
23
<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 19th day of August, 1999.
Registrant) NEUROCORP, LTD.
By(Signature and Title) /s/ VERNON L, WELLS
-------------------------------------------
Vernon L. Wells,
President, Chief Executive Officer,
Acting Chief Financial Officer and Director
Date: August 24, 1999
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:
s/VERNON L. WELLS s/KURT Z. ITIL
- ----------------- --------------
Vernon L. Wells, President, Kurt Z. Itil
Chief Executive Officer, Acting Chief Financial Director
Officer (Principal Financial Officer) and Date: August 24, 1999
Director
Date: August 24, 1999
s/JAMES COADY s/PAUL LERMAN
- ------------- --------------
James Coady, Director Paul Lerman, Director
Date: August 24, 1999 Date: August 24, 1999
s/DONALD J. ALBERTIE
- --------------------
Donald J. Albertie, Controller
(Principal Accounting Officer)
Date: August 24, 1999
24
<PAGE>
NEUROCORP, LTD.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998 AND 1997
TOGETHER WITH
INDEPENDENT AUDITORS' REPORT
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
TABLE OF CONTENTS
Page
----
INDEPENDENT AUDITORS' REPORT 1
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheet 2
Consolidated Statement of Operations 3
Consolidated Statement of Changes in Stockholders' Equity 4
Consolidated Statement of Cash Flows 5
Notes to Consolidated Financial Statements 6
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
NeuroCorp., Ltd.
We have audited the consolidated balance sheet of NeuroCorp, Ltd. and
subsidiaries (Company) as of December 31, 1998, and the related consolidated
statements of operations, changes in stockholders' equity, and cash flows for
the year then ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit 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 financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of NeuroCorp, Ltd. and
subsidiaries as of December 31, 1998, and the results of their operations and
their cash flows for the year then ended in conformity with generally accepted
accounting principles.
We also audited the adjustment, to reflect the Company's change in reporting
entity described in Note 1, that was applied to the 1997 consolidated financial
statements. In our opinion, such adjustment is appropriate and has been properly
applied.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 10 to
the consolidated financial statements, the Company has suffered recurring losses
and negative cash flows from operations. These matters raise substantial doubt
about the Company's ability to continue as a going concern. Management's plans
in regard to these matters are also described in Note 10. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
Glastonbury, Connecticut
May 21, 1999
-1-
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
NeuroCorp., Ltd. and Subsidiaries
We have audited the accompanying consolidated statements of operations,
stockholders' equity, and cash flows for the year ended December 31, 1997 of
NeuroCorp, Ltd. and subsidiaries ("the Company"). 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit 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 audit provides a
reasonable basis for our opinion.
In our opinion, based on our audit, the consolidated financial statements
referred to above present fairly, in all material respects, the consolidated
results of operations and cash flows of the Company for the year ended December
31, 1997 in conformity with generally accepted accounting principles.
We also audited the adjustment, to reflect the Company's change in reporting
entity described in Note 1, that was applied to the 1997 consolidated financial
statements. In our opinion, such adjustment is appropriate and has been properly
applied.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 10 to
the consolidated financial statements, the Company has sustained significant
losses and negative cash flows from operations from operations for the year
ended December 31, 1997. These matters raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 10. The consolidated financial
statements do not include any adjustments relating to the recoverability and
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern.
/s/ Scarano & Tomaro, P.C.
- --------------------------
Scarano & Tomaro, P.C.
Syosset, New York
April 14, 1998
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1998
<TABLE>
<CAPTION>
ASSETS
1998
-------------
<S> <C>
CURRENT ASSETS
Cash and cash equivalents $ 795,739
Accounts receivable 6,400
Prepaid expenses and other current assets 27,785
-------------
Total current assets 829,924
-------------
PROPERTY AND EQUIPMENT, net 583,974
OTHER ASSETS 145,162
---------------
$ 1,559,060
===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Stockholder demand notes payable $ 300,000
Accounts payable 544,770
Accrued expenses 179,825
---------------
Total current liabilities 1,024,595
---------------
COMMITMENTS (Note 8) -
STOCKHOLDERS' EQUITY
Cumulative, convertible preferred stock, Class B, Series C,
$.001 par value, 5,000,000 shares authorized 733
Cumulative, non-convertible preferred stock, Class B, Series 1,
no par value, 5,000,000 shares authorized 150,000
Common stock, $.001 par value, 100,000,000 shares authorized 11,225
Additional paid-in-capital 9,172,919
Deficit (8,800,412)
---------------
534,465
---------------
$ 1,559,060
==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
-2-
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---------------- ---------------
<S> <C> <C>
NET SALES $ 199,954 $ 1,121,482
COST OF SALES, including amortization expense
of $-0- and $270,413, respectively 821,461 639,077
---------------- ---------------
Gross profit (loss) (621,507) 482,405
GENERAL AND ADMINISTRATIVE EXPENSES 3,655,517 2,770,625
LOSS ON CAPITALIZED DATABASE AND PRODUCT DEVELOPMENT COSTS 1,614,007 -
RESEARCH AND DEVELOPMENT - 97,830
---------------- ---------------
Loss from operations (5,891,031) (2,386,050)
OTHER INCOME (EXPENSE)
Interest income 16,002 28,882
Other, net 4,025 -
Interest expense (23,830) (64,582)
---------------- ---------------
(3,803) (35,700)
---------------- ---------------
Loss before benefit from
income taxes (5,894,834) (2,421,750)
BENEFIT FROM INCOME TAXES (240,000) (24,000)
---------------- ---------------
Net loss $ (5,654,834) $ (2,397,750)
=============== ==============
(LOSS) PER COMMON SHARE $ (0.51) $ (0.29)
=============== ==============
WEIGHTED AVERAGE SHARES OUTSTANDING 11,138,016 8,193,806
=============== ==============
</TABLE>
-3-
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
Preferred Stock Preferred Stock Preferred Stock
Class B, Series C Class B, Series 1 Class B, Series 2
Shares Amount Shares Amount Shares Amount
-------- ------------ ---------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996,
as originally reported - $ - 150,000 $ 150,000 250,000 $ 250,000
Adjustment to reflect change in
reporting entity - - - - - -
-------- ------------ ---------- ------------ ---------- ------------
Balance, December 31, 1996,
as restated - - 150,000 150,000 250,000 250,000
Issuance of common stock in
connection with exercise of
stock option - - - - - -
Issuance of common stock in
connection with exercise of
warrants - - - - - -
Issuance of common stock in
connection with conversion
of debt and preferred stock - - - - (250,000) (250,000)
Issuance of common stock in
connection with exercise of
warrants - - - - - -
Sale of common stock and
warrants - - - - - -
Preferred stock dividend - - - - - -
Net loss - - - - - -
-------- ------------ ---------- ------------ ---------- ------------
Balance, December 31, 1997 - - 150,000 150,000 - -
Issuance of common stock in
connection with exercise of
Class B warrants - - - - - -
Sale of preferred stock 733,333 733 - - - -
Preferred stock dividends - - - - - -
Net loss - - - - - -
-------- ------------ ---------- ------------ ---------- ------------
Balances, December 31, 1998 733,333 $ 733 150,000 $ 150,000 - $ -
======== ============= ========== ============= ========== ============
</TABLE>
<TABLE>
<CAPTION>
Additional Total
Common Stock Paid-in Stockholders'
Shares Amount Capital Deficit Equity
----------- ---------- ------------ ------------- --------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996,
as originally reported 7,723,806 $ 7,724 $ 3,357,687 $ (987,512) $ 2,777,899
Adjustment to reflect change in
reporting entity - - - 309,240 309,240
----------- ---------- ------------ ------------- --------------
Balance, December 31, 1996,
as restated 7,723,806 7,724 3,357,687 (678,272) 3,087,139
Issuance of common stock in
connection with exercise of
stock option 50,000 50 450 - 500
Issuance of common stock in
connection with exercise of
warrants 850,000 850 1,199,150 - 1,200,000
Issuance of common stock in
connection with conversion
of debt and preferred stock 690,000 690 706,810 - 457,500
Issuance of common stock in
connection with exercise of
warrants 1,100,000 1,100 1,098,900 - 1,100,000
Sale of common stock and
warrants 400,000 400 399,600 - 400,000
Preferred stock dividend - - - (15,000) (15,000)
Net loss - - - (2,397,750) (2,397,750)
----------- ---------- ------------ ------------- --------------
Balance, December 31, 1997 10,813,806 10,814 6,762,597 (3,091,022) 3,832,389
Issuance of common stock in
connection with exercise of
Class B warrants 411,466 411 411,055 - 411,466
Sale of preferred stock - - 1,999,267 - 2,000,000
Preferred stock dividends - - - (54,556) (54,556)
Net loss - - - (5,654,834) (5,654,834)
------------ ----------- ------------ -------------- ---------------
Balances, December 31, 1998 $ 11,225,272 $ 11,225 9,172,919 $ (8,800,412) $ 534,465
============ =========== ============ ============== ===============
</TABLE>
-4-
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
------------------ ------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (5,654,834) $ (2,397,750)
Adjustments to reconcile net loss to net
cash used in operating activities:
Loss on capitalized research and development 1,614,007 -
Bad debt expense (recovered) 809,918 (427,223)
Depreciation and amortization 67,225 321,977
Loss on sale of property and equipment 30,588 -
Amortization of deferred financing costs - 27,328
Deferred tax benefit (240,000) (24,000)
Changes in operating assets and liabilities:
Increase in accounts payable 374,940 16,104
Decrease (increase) in other assets 288,801 (48,138)
Decrease (increase) in prepaid expenses and
other current assets 186,823 (50,561)
Decrease (increase) in inventories 132,727 (103,371)
Billings in excess of costs and estimated earnings - (257,506)
(Decrease) increase in accrued expenses (59,827) 28,483
(Increase) decrease in accounts receivable (165,813) 323,611
------------------ ------------------
Net cash used in operating activities (2,615,445) (2,591,046)
------------------ ------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capitalized database development costs (13,930) (114,903)
Purchases of property and equipment (446,623) (201,434)
------------------ ------------------
Net cash used in investing activities (460,553) (316,337)
------------------ ------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of stock 2,411,466 2,700,500
Dividends paid (28,556) -
Repayment of stockholder demand notes (86,332) (69,072)
------------------ ------------------
Net cash provided by financing activities 2,296,578 2,631,428
------------------ ------------------
NET DECREASE IN CASH (779,420) (275,955)
CASH AND CASH EQUIVALENTS, beginning of year 1,575,159 1,851,114
------------------ ------------------
CASH AND CASH EQUIVALENTS, end of year $ 795,739 $ 1,575,159
================= =================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 344 $ 3,716
Income taxes - -
NON CASH INVESTING AND FINANCING ACTIVITIES
Issuance of common stock in consideration of loans - 457,500
Issuance of common stock in connection with conversion of
preferred stock - 250,000
Accrued dividends 26,000 15,000
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-5-
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The consolidated financial statements include the accounts of
NeuroCorp, Ltd. (NeuroCorp), and its wholly-owned subsidiaries,
HZI Research Center, Inc. (HZI) and Memory Centers of America,
Inc. (MCAI). Telemap, Inc. is a wholly-owned subsidiary of HZI
and has no material operations. All material intercompany
balances and transactions have been eliminated in consolidation.
NATURE OF OPERATIONS
The Company performs clinical research 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 hospitals and physicians. The Company also
manages a facility which diagnoses and treats memory disorders
and provides education and consultation to individuals who
suffer from memory impairment.
CHANGE IN REPORTING ENTITY
New York Institute for Medical Research, Inc. (NYI) is a
not-for-profit private foundation that in prior years' was
controlled by board members that also controlled NeuroCorp.
During 1998, the composition of NeuroCorp's board members
changed resulting in the deconsolidation of NYI. All prior
periods have been restated to reflect this change in reporting
entity.
USE OF ESTIMATES
The preparation of consolidated financial statements in
conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as of the date
of the consolidated financial statements, and the reported
amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
For the purpose of the statement of cash flows, the Company
defines cash equivalents as highly liquid instruments purchased
with original maturities of three months or less. The Company
had cash equivalents totaling $170,651 at December 31, 1998.
INVENTORY
Inventory, which consists primarily of computer equipment, is
stated at the lower of cost (first-in, first-out method) or
market.
-6-
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 1998 AND 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation and
amortization are computed using the straight-line method over
the estimated useful lives of the related assets, or, in the
case of leasehold improvements and leased property under capital
lease, over the remaining term of the related lease or estimated
useful life of the related asset, whichever is shorter.
Expenditures which substantially increase the useful lives of
the related assets are capitalized. Maintenance, repairs and
minor renewals on property and equipment are charged to
operations as incurred.
INTANGIBLE ASSETS
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 basis over
their estimated useful life of seventeen (17) years. Computer
system product development costs consist primarily of direct
labor costs associated in developing the Company's product. Such
costs are capitalized from the time the product is determined to
be technologically feasible to the time the product is available
for general release to customers. All costs prior to the
establishment of technological feasibility, such as the costs of
planning, designing and testing the computer system product, are
charged to research and development expense. The Company's
policy is to amortize such costs over an estimated useful life
of seven (7) years.
The recoverability of the carrying value of the database
development costs and intangible assets is evaluated by
management on a recurring basis. In management's opinion, the
net realizable value of the unamortized database development and
computer system product development costs exceeds the net
realizable value therefore, an 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.
Given the uncertainties surrounding future sales, management
elected to write off the value of the intangible assets, net
during 1998.
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
therefore, are 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
revenue and are recognized in the period in which the revisions
are determined. In addition, losses are recognized in full when
determinable. All other revenues are recognized as services are
rendered.
-7-
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 1998 AND 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
INCOME TAXES
The Company files consolidated federal and combined state
corporate income tax returns. Tax credits are recorded as a
reduction of income taxes in the year realized. The Company
recognizes deferred tax liabilities and assets for the expected
future tax consequences of events that have been included in the
consolidated financial statements or tax returns. 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.
STOCK OPTIONS
In 1997, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation", which establishes a fair value based method of
accounting for an employee stock option or similar equity
instrument. SFAS No. 123 gives entities a choice of recognizing
related compensation expense by adopting the new fair value
method or to continue to measure compensation using the
intrinsic value approach under Accounting Principles Board (APB)
Opinion No. 25, the former standard. If the former standard for
measurement is elected, SFAS No. 123 requires supplemental
disclosure to show the effects of using the new measurement
criteria. The Company intends to continue using the measurement
prescribed by APB Opinion No. 25, and accordingly, this
pronouncement will not affect the Company's consolidated
financial position or results of operations.
EARNINGS PER COMMON SHARE
In 1997, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 128, "Earnings Per Share". The objective of
SFAS No. 128 is to simplify the standards for computing earnings
per share (EPS) and make them comparable to international EPS
standards. It replaces the presentation of primary EPS with a
presentation of basic EPS. Net loss per common share was
computed based upon 11,138,016 and 8,193,806 weighted average
shares outstanding during the years ended December 31, 1998 and
1997, respectively. Diluted earnings per share was not presented
as the potentially dilutive convertible preferred stock and
stock purchase options are antidilutive.
SEGMENT INFORMATION
Statement of Financial Accounting Standards (SFAS) No. 131,
"Disclosures About Segments of an Enterprise and Related
Information," was issued effective for fiscal years ending after
December 15, 1998. The Company measures its operations on a
consolidated basis and, therefore, has not adopted the reporting
requirements of this Statement.
-8-
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 1998 AND 1997
NOTE 2 - FINANCIAL INSTRUMENTS
CONCENTRATIONS OF CREDIT RISK
The Company's financial instruments that are exposed to
concentrations of credit risk consist primarily of cash and cash
equivalents and trade accounts receivables:
o Cash and cash equivalents - The Company has cash
balances on deposit with banks at December 31, 1998
that exceeded federal depository insurance limits by
$695,239.
o Trade accounts receivable - Total sales to individual
customers which exceeded ten percent of net sales
during each of the years ended December 31, 1998 and
1997 aggregated 51% (4 customers) and 48% (3
customers), respectively. The Company performs
ongoing credit evaluations of its customers and
generally does not require collateral. Allowances for
potential credit losses are maintained and such
losses have been within management's expectations.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards (SFAS) No. 107,
"Fair Value of Financial Instruments," requires disclosure of
the fair value of financial instruments for which the
determination of fair value is practicable. SFAS No. 107
defines the fair value of a financial instrument as the amount
at which the instrument could be exchanged in a current
transaction between willing parties.
The carrying amounts of the Company's financial instruments
approximates their fair value as presented below:
o Cash and cash equivalents, trade receivables, trade
payables - The carrying amounts approximate their
fair value because of the short maturity of these
instruments.
o Stockholder demand notes payable - Management has
determined that it is not practicable to estimate the
fair value due to the lack of marketability of these
financial instruments.
The Company's financial instruments are held for other than
trading purposes.
-9-
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 1998 AND 1997
NOTE 3 - PROPERTY AND EQUIPMENT
A summary of property and equipment is as follows:
<TABLE>
<CAPTION>
1998
---------
<S> <C>
Equipment $ 301,606
Furniture and fixtures 211,616
Leasehold improvements 170,665
Vehicles -
---------
683,887
Less: accumulated depreciation and amortization 99,913
---------
$ 583,974
=========
</TABLE>
Depreciation and amortization expense totaled $67,225 and
$56,043 for the years ended December 31, 1998 and 1997,
respectively.
NOTE 4 - DATABASE DEVELOPMENT COSTS, NET
A summary of database development costs, net is as follows:
<TABLE>
<CAPTION>
1998
---------
<S> <C>
Database development costs $ -
Less: accumulated amortization -
---------
$ -
=========
</TABLE>
Amortization expense of capitalized database development costs,
net totaled $ -0- and $145,743 for the years ended December 31,
1998 and 1997, respectively.
NOTE 5 - COMPUTER SYSTEM PRODUCT DEVELOPMENT COSTS, NET
A summary of computer system product development costs, net is
as follows:
<TABLE>
<CAPTION>
1998
---------
<S> <C>
Computer system product development costs $ -
Less: accumulated amortization -
---------
$ -
=========
</TABLE>
Amortization expense of capitalized computer system product
development costs, net totaled $ - 0 - and $124,630 for the
years ended December 31, 1998 and 1997.
-10-
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 1998 AND 1997
NOTE 6 - STOCKHOLDER DEMAND NOTES PAYABLE
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 year or is payable out of the first
proceeds resulting from any exercise of outstanding Class B and
Class C warrants, whichever comes first. During June 1997, the
original maturity date of May 24, 1997 was extended to December
15, 1998.
On July 16, 1996, the Company entered into a loan agreement with
an unrelated shareholder. The note was for $100,000, bears
interest at 9% per annum and was due at the earlier of one 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 extended the note's maturity date to
December 15, 1998.
As of December 31, 1998, the above loans remain outstanding
without extension.
NOTE 7 - STOCKHOLDERS' EQUITY
PREFERRED STOCK
During 1998, the Company received proceeds of $2,000,000 from
Pioneer Ventures Associates Limited Partnership (Pioneer) and
issued 733,333 shares of Series C Senior Convertible Preferred
Stock, $.001 par value. Each share of preferred stock is
convertible into one share of common stock subject to adjustment
as set forth in the investment agreement. Pioneer is entitled to
an 8% cumulative quarterly cash dividend and a liquidation
preference equal to $10 per share subject to adjustment as set
forth in the investment agreement.
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.
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.
-11-
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 1998 AND 1997
NOTE 7 - STOCKHOLDERS' EQUITY (Continued)
STOCK OPTIONS
The Company has 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.
A summary of the status of the Company's stock options as of
December 31, 1998, and 1997 and changes during the years ending
on those dates is presented below:
<TABLE>
<CAPTION>
1998 1997
------------------------- ------------------------
Outstanding Price Outstanding Price
----------- ----- ----------- -----
<S> <C> <C> <C> <C>
Outstanding at beginning of year 750,000 $4.70 800,000 $4.41
Granted - - - -
Exercised - - (50,000) 0.01
Canceled (500,000) 7.00 - -
--------- -------
Outstanding at end of year 250,000 $ .10 750,000 $4.70
======== =======
</TABLE>
Effective January 1, 1997, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation." In accordance with the provisions of
SFAS No. 123, the Company applies APB Opinion No. 25 in
accounting for its stock option plans and, accordingly, does not
recognize compensation cost at the grant date. If the Company
had elected to recognize compensation cost based on the fair
value of the options granted at grant date as prescribed by SFAS
No. 123, net loss and loss per share would have been adjusted to
the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Net loss - as reported $ (5,654,834) $ (2,397,750)
============= =============
pro forma $ (5,654,834) $ (2,397,750)
============= =============
Basic EPS - as reported $ (.51) $ (.29)
======= =======
pro forma $ (.51) $ (.29)
======= =======
</TABLE>
ISSUANCE OF WARRANTS
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 one Warrant for one share of common stock basis and
comprised in the aggregate 800,000 Class B and 800,000 Class C
Warrants. 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 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.
-12-
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 1998 AND 1997
NOTE 7 - STOCKHOLDERS' EQUITY (Continued)
ISSUANCE OF WARRANTS (Continued)
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, 1998. During 1998, 411,466 Class B Warrants were exercised
which resulted in the Company receiving proceeds of $411,466 and
issuing 411,466 shares. During 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.
NOTE 8 - COMMITMENTS
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.
Future minimum lease payments on all operating leases for each
of the years succeeding December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Year ending December 31,
<S> <C>
1999 $122,002
2000 115,272
2001 115,000
2002 115,000
--------
$467,274
========
</TABLE>
Rent expense under all operating leases for the years ended
December 31, 1998 and 1997 totaled $235,815 and $144,486,
respectively.
EMPLOYMENT AGREEMENTS
The Company has employment agreements with its executive
officers and certain management personnel that provide for an
aggregate minimum annual base compensation of $412,000, expiring
on various dates through 2002. Certain agreements provide for
nonqualified stock options and a bonus based upon achieving
specified operational and financial goals. All agreements are
subject to extension upon expiration.
CONSULTING AGREEMENT
The Company entered into a five (5) year consulting agreement
expiring June 30, 2000 with an entity controlled by the
Company's former-President and Vice Chairman. The agreement
provides for a fee of $30,000 per annum.
-13-
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 1998 AND 1997
NOTE 9 - INCOME TAXES
The benefit from income taxes consists of the following:
<TABLE>
<CAPTION>
1998 1997
---------- ---------
<S> <C> <C>
Current
Federal $ - $ -
State - -
--- ---
- -
Deferred (240,000) (24,000)
---------- ---------
$ (240,000) $ (24,000)
=========== ==========
</TABLE>
The alternative minimum tax (AMT) had no effect on the tax
provision for financial reporting purposes, as the Company's AMT
income was completely offset by application of AMT net operating
loss carryforwards and the AMT exemption. For 1998 and 1997, the
Company had no liability for state taxes based upon income.
State taxes accrued were based on net worth and, accordingly,
included in general and administrative expenses.
The provision for income taxes differs from the amount computed
by applying the statutory rate of 34% to income before income
taxes for the years ended December 31, 1998 and 1997. The
principal reasons for this difference are listed in the
following table:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Statutory federal income tax (34)% (34)%
Change in valuation allowance 50 42
Change in deferred tax liability (4) (2)
State and local income taxes, net of
federal income tax benefit (16) (7)
-------- --------
(4)% (1)%
===== =====
</TABLE>
The significant components of the deferred tax provision are as
follows:
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Net operating loss - federal $ 1,685,000 $ 824,000
Net operating loss - state 427,000 201,000
Intangible assets, net (240,000) (24,000)
Valuation allowance (2,112,000) (1,025,000)
------------ -----------
$ (240,000) $ (24,000)
============ ===========
</TABLE>
-14-
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 1998 AND 1997
NOTE 9 - INCOME TAXES (Continued)
The components of the net deferred tax accounts as of December
31, 1998 are as follows:
<TABLE>
<CAPTION>
1998
-----------
<S> <C>
Deferred tax assets:
Net operating loss - federal $ 2,267,000
Net operating loss - state 428,000
Valuation allowance (2,695,000)
-----------
Total deferred tax asset -
Deferred tax liabilities:
Intangible assets, net ( - )
---------------
Total deferred tax liability ( - )
---------------
Net deferred tax asset (liability) $( - )
===============
</TABLE>
The Company has $8,286,000 of net operating losses for federal
income tax reporting purposes available for carryforward which
expire through 2018.
The Company establishes a valuation allowance in accordance with
the provisions of SFAS No. 109, "Accounting for Income Taxes".
The Company continually reviews the adequacy of the valuation
allowance and recognizes a benefit from income taxes only when
reassessment indicates that it is more likely than not that the
benefits will be realized. In 1998, the Company increased the
valuation allowance applied against the net operating loss
carryforwards by approximately $2,112,000 based upon reasonable
and prudent tax planning strategies and future income
projections.
NOTE 10 - 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, 1998 and 1997, the
Company incurred losses of $5,654,834 and $2,397,750,
respectively. Additionally, the Company generated negative cash
flows from operations of $2,615,445 and $2,591,046 for the years
ended December 1998 and 1997, 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
matters raise substantial doubt about the Company's ability to
continue as a going concern. The consolidated financial
statements do not include adjustments that might result from the
outcome of this uncertainty. Management's plans to mitigate the
Company's financial problems are outlined below.
-15-
<PAGE>
NEUROCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 1999, 1998 AND 1997
NOTE 10 - 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 expenses such as partial salary deferrals for
officers and reduction of operating costs.
NOTE 11 - SUBSEQUENT EVENTS
On January 4, 1999, the Company entered into an employment
agreement with the Director of Operations. The contract provides
for a base salary of $75,000, a bonus of 20% to 40% of base
salary based upon achieving specified operational and financial
goals, and 40,000 nonqualified stock options for the purchase of
common stock. The options are exercisable upon vesting at the
closing price of the stock upon signing. The options vest 25%
after 90 days, 25% after one year and 50% after 2 years.
On May 7, 1999 the Company completed an interim investment
agreement with Pioneer. The Company received $100,000 and issued
800,000 shares of the Series C, 8% Senior Convertible Preferred
Stock.
The Company received $1,025,000 from Lancer Management Group,
LLC (Lancer) in May, 1999 in exchange for 8,200,000 shares of
Series C, 8% Convertible Preferred Stock. These shares will not
be registered with U.S Securities and Exchange Commission and
shall, therefore, be restricted from resale to the public. As
consideration to Lancer, the Company shall issue 500,000
warrants convertible into 500,000 shares of common stock at a
price of $1.00 per share. These warrants will be excercisable
for a period of five years.
