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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One) ANNUAL REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE
(X) SECURITIES AND EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1995
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
( ) THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the Transition Period From ________to_________
COMMISSION FILE NUMBER 0-21384
INTERACTIVE MEDICAL TECHNOLOGIES LTD.
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( Exact name of Registrant as specified in its charter )
Delaware 13-3367421
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( State or other jurisdiction of ( I.R.S. Employer
incorporation or organization ) Identification No.)
2139 Pontius Avenue, Los Angeles, California 90025
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (310) 312-9652
Securities registered under 12(b) of the Exchange Act: NONE
Securities registered under Section 12(g)of the Act:
COMMON STOCK ($.001 PAR VALUE )
INDICATE BY CHECK MARK WHETHER THE REGISTRANT HAS (1) FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS; AND, (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES: (X) NO: ( )
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
OF REGULATION S-B IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-KSB OR ANY AMENDMENT TO
THIS FORM 10-KSB. YES: ( ) NO: (X)
For the year ended December 31, 1995, the Registrant's revenues were
approximately $1,184,552.
As of March 31, 1996, the aggregate market value of the shares of the
Registrant's common stock held by non-affiliates was approximately
$4,185,839.00
As of March 31, 1996, the Registrant had 32,871,194 shares of common stock
outstanding.
Documents Incorporated by Reference: NONE
Transitional Small Business Format. YES: ( ) NO: (X)
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ITEM 1. DESCRIPTION OF BUSINESS
The Company's founding purpose and mission is to increase the early
detection of restrictions or blockages in human blood flow through
significantly improved diagnostic imagery. Since commencing operations in
1986, the Company and its founding predecessors ( Spheres Research Partners
and See/Shell Biotechnology, Inc., the "Founding Predecessor's") have been
engaged in the study, discovery, research and development, manufacturing and
sales and marketing of diagnostic imaging products and services relating to
blood flow in animals, and humans. Later, the Company (while operating as S/S
Biotechnology, Inc.) developed a unique fat sequesterant technology which
involved the selective entrapment or sequestration of dietary fat from food
while in the gastrointestinal tract, theoretically preventing the absorption
of that fat into the blood stream and ultimately the body. However, to date
clinical studies do not support the efficacy of that technology.
ORGANIZATION
In 1986, William Shell, MD., and Jackie See, MD., formed Spheres Research
Partners ("SRP") a medical partnership. On August 17, 1987, SRP changed its
name to See/Shell Biotechnology, Incorporated., ("S/S"), becoming a
California corporation. In September of 1987 S/S formed E-Z TRAC, Inc., ("E-Z
Trac") as a wholly owned subsidiary and simultaneously assigned E-Z Trac all
of S/S's rights relating to a proprietary technology for the measurement of
blood flow utilizing micron sized particles ("the colored microsphere
products") which had been recently developed by S/S. In 1988, E-Z Trac
commenced operations when it began the sales and marketing the colored
microsphere products to research facilities and Universities engaged in
animal blood flow studies. On January 17, 1990, Interactive Principles,
Incorporated., (IPI) a company that had been previously incorporated in
Delaware in 1986 for the purpose of acquiring other companies, and who was
unaffiliated with the Company (the "Public Predecessor"), acquired 82.5% of
S/S, and simultaneously changed its name to "Interactive Medical
Technologies, Ltd." (the "Company"). In 1987 IPI completed a $150,000 private
placement of its securities. However, during the three yeasr preceding its
acquisition of S/S, IPI had no business or operations that the Company is
aware of. In May 1990, the Company organized Effective Health, Incorporated,
("Effective Health") as a wholly owned subsidiary to license market products
based on the sequesterant technology as well as other dietary and food
supplement products.
OPERATING HISTORY
In 1988, S/S developed a technology for the measurement of blood flow in
laboratory animals utilizing a non biodegradable, non radioactive plastic
"labeled" micron sized particle (the "colored microspheres"). Also in 1988,
S/S developed a second microsphere which unlike the previous plastic
microsphere was biodegradable and composed of the human blood protein
albumin, and other ordinarily available FDA approved contrast agents. The
second microsphere or "contrast" microsphere was developed for human
applications and designed to significantly improve the speed, accuracy, and
resolution of diagnostic imaging of human organs visualized through existing
x-ray, computer-assisted tomography ("CAT") scanning, ultrasound, or
magnetic resonance imaging ("MRI") equipment. From 1988 to 1990, S/S
developed several potential diagnostic imaging applications for humans
utilizing the contrast microspheres visualized through existing x-ray, CAT
scan, ultrasound and magnetic resonance imaging systems.
On January 17, 1990, the Company commenced operations through the
acquisition of S/S. Initially, the Company's operations consisted of the
sales and marketing of the colored microsphere products to research
facilities engaged in animal blood flow research through E-Z Trac. Soon
after, the Company began marketing Lipitrol a weight loss product based on
the sequesterant technology. The Company sold this product directly to
doctors, consumers, and to a number small local distributors. The Company
subsequently discontinued selling the product directly in favor of licensing
the technology to established sales and marketing companies.
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In May 1991, the Company formed Effective Health, Inc. ("EHI"), as a wholly
owned subsidiary to market products based its fat sequesterant technology and
other dietary and food supplement technologies and products which the Company
intended to develop. In September 1991, S/S became a wholly owned subsidiary
of the Company as a result of Dr. See canceling the remaining 17.5% of S/S
outstanding shares.
In 1992, the Company expanded operations with the introduction of the
"Investigator Partners Service" ("IPS") program. The IPS program combines a
national reference service with automated laboratory analysis and counting of
colored microspheres used in animal blood flow studies, and in study of
microsphere delivery systems for pharmaceutical drugs. The program was
initially designed to service E-Z Trac colored microsphere customers.
In 1993, the E-Z Trac IPS business had grown past the capabilities of its
imaging analyzer. Seeking to increase production capacity, E-Z Trac developed
an improved imaging analyzer based on flow cytometry technology. The improved
image analyzer is based on a Becton-Dickenson flow cytometer and uses
proprietary software developed by E-Z Trac technicians which increased the
speed and sensitivity range of flow cytometer significantly. The improved
image analyzer increased IPS production capacity and accuracy as well as
increasing the range of microsphere color distinction from two to as many as
eight. Subsequent bench tests confirmed the improved analyzer's reliability.
E-Z Trac placed the improved unit in service where it currently processes as
many as 800 samples per week. E-Z Trac began marketing the unit later that
year.
In June of 1993, the Company acquired Venus Management, Incorporated.
(See Acquisition)
In July of 1993, as a result of the Company's growing concerns relating to
sales and the subsequent resale of the Company securities, the Company formed
an independent committee of its Board of Directors whose purpose was to
investigate whether certain prior private placements of the Company's
securities complied with all of the registration requirements of federal and
state securities laws. In certain prior private placements of the Company's
shares, a total of approximately 2,506,982 shares of the Company's Common
Stock was issued to a small number of individuals. Those issuance's had been
structured in reliance upon the advice of the securities counsel the Company
was using at that time, and the Company believes that these issuance's,
standing alone, would have qualified for exemptions from registration under
federal and state securities laws. However, certain subsequent resale of
these shares, commencing in June 1992, by the original purchasers or their
transferees to a total of approximately 330 investors raised an issue as to
whether a technical distribution occurred that might have required either the
original issuance or the resale to have been registered. All of the foregoing
resale's were either directly effected or arranged for by Clark M. Holcomb.
October of 1993, the Company filed a registration statement with the SEC
to register all of the foregoing 2,506,982 shares with the Securities and
Exchange Commision ("SEC"). However, even if the registration statement
should become effective so as to permit public resale's by the holders of the
shares involved in the transactions described above, these holders could have
a right of rescission to recover the purchase price they paid for their
shares plus interest from the date of purchase against the persons from whom
they acquired the shares. The Company believes (based in part upon the
opinion of its current special securities counsel) that these holders do not
have a valid and enforceable right to such rescission from the Company.
However, subject to any applicable statutes of limitation that might bar such
future claims, these shareholders could assert such claims, and the Company
has not set aside any reserves to fund any potential liabilities that it
might incur in connection with any such future potential claims, which could
be material. Should the Company incur any such liabilities, it might seek
indemnification or contribution for such liabilities from Clark M. Holcomb,
or other third parties.
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Part 1 Continued
In 1994, the National Association of Securities Dealers ("NASD") began
quoting the Company's common stock on its national quotation system. This was
based on the Company's stock price, assets and liquidity meeting the amounts
specified by NASD.
The Company's common stock had been previously quoted on the electronic
bulletin board (EBB).
The Company, through its Effective Health subsidiary entered into a
exclusive Licensing Agreement with KCD, Incorporated, a company recently
formed by Clark M. Holcomb and who represented to have distribution access to
national drug and health food chains. At the time the Company entered into
the agreement, KCD had very limited management experience and financial
resources. The agreement provided KCD with exclusive sales and marketing
rights to the Company's fat sequestration technology for the United States
and Canada. The agreement required KCD to pay an initial licensing fee of
$100,000, and to make minimum monthly royalty payments to maintain the
license. KCD began marketing SeQuester-TM- in 1994 which is a product based
on the Company's sequestration technology. The agreement also required KCD to
conduct clinical studies designed to establish and validate marketing claims.
It further required the KCD assume sole responsibility for marketing claims,
and to market their product in accordance with established FTC guidelines. In
September 1994 KCD became delinquent in making it royalty payments to the
Company as provided for in the Licensing agreement.
RECENT DEVELOPMENTS
In January of 1995, the Company entered into a an exclusive agreement to
conduct human clinical tests of an advanced generation sequestration
technology recently developed by the Company with a large well known European
nutritional company engaged in the business of manufacturing and marketing
food supplements and weight loss products internationally. The clinical test
protocol was designed as a double blind trial by a research group affiliated
with the European company. The protocol was sent to the Company for approval,
and was subsequently reviewed and approved by William Shell, the Company's
Chief Scientific Officer. In December of 1995, the Company was informed that
the results of the were not statistically significant. The Company's Science
Officer disputed the results, however, the European company did not exercise
its option to acquire foreign sales and marketing rights to the product.
In April of 1995, had reached a critical cash shortage due in part to the
failure of KCD to make the royalty payments as required under the terms of
the license agreement. As of March 1996 KCD was approximately $425,000 in
arrear These events complicated negotiations with investors who had
previously committed to a substantial private placement, which was
subsequently withdrawn out of a concern on the part of the investors that the
Company would not be able to collect the royalties due from KCD, and that any
additional capital invested now would be used to fund operations which
according to the investors were disproportionately high compared to the
Company's revenues. The loss of the financing commitment compounded by KCD's
withholding royalty payments prevented the Company from meeting its financial
obligations, including employee payroll, which the Company believes
contributed in part to the resignation of William Pelzer, then the Chief
Executive Officer and President. Mr. Pelzer's resignation letter cited
failure on the part of the Company to provide compensation, and personal
reasons.
In May of 1995, Mr. Steven R. Westlund joined the Company as Chief
Executive Officer, President, and a director. Mr. Westlund replaced former
Chief Executive Officer and President William Pelzer. Mr. Westlund was
experienced in restructuring financially troubled companies as well as having
experience developing consumer products and markets. Mr. Westlund had been
previously introduced to the Company by Company investors.
In June of 1995, at the request of Steven Westlund, Peter Benz joined the
Company as Chief Financial Officer and a director. Westlund and Benz had
recently worked together as senior management during the restructure of
another similar
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Company. Mr. Benz was experienced in restructuring financially troubled
companies as well, as in developing investment banking relationships. With
Westlund and Benz (new senior management) in place as new senior management
and members of the Board of Directors, the Company made significant changes
in operations which began with significant cost cutting including
reorganizing its subsidiaries to operate as profit centers, and reducing
general and administrative ("G&A") costs. Changes were also made in the
Company's priorities which were shifted toward revenue generating
activities, securing existing revenue base (resolving KCD default of
licensing royalty's), developing new markets for existing products, creation
of a new product development unit and new products, development of
alternative financing sources such as government sponsored research grants,
development of strategic partners to help fund research and commercial
development, as well as other measures (hereinafter referred to as
"Management's 1996 Plan of Operation")
Also in June of 1995, the Company amended KCD's original licensing
agreement as a result of demands that the current royalty payment which was
calculated on 15% of net sales was creating problems for KCD in the marketing
of SeQuester-TM-, and could ultimately prevent KCD from being able to market
SeQuester-TM- profitability. Further, the high royalty was preventing KCD
from meeting its current financial obligations, included making its royalty
payments to the Company. Considering the Company's financial condition at
that time the Company believed that it was in its best interests to reduce
the royalty assuming that such a reduction would enable KCD to meet its
financial obligations. The amended agreement lowered the KCD's royalty from
15% of net sales to 6% of gross sales. In exchange KCD agreed to pay the
Company all delinquent royalty's and future royalty's through a factor, which
the Company believed would prevent KDC from further interference (See
Licensing Agreements).
In July of 1995, the National Association of Securities Dealers ("NASD")
removed the Company's common stock from its NASD national quotation system.
The removal was based on the Company's failure to maintain a minimum one
dollar stock price as well as the minimum liquidity and assets specified by
NASD. The Company appealed the decision on the grounds the Company was in
technical compliance, however, the review committee rejected the Company's
argument citing that technical compliance was insufficient given the
Company's its unprofitable history. The Company's common stock is currently
quoted on the electronic bulletin board under the ITAM symbol.
In October of 1995, the Company submitted an application to the National
Institute of Health ("NIH") for a research grant to support the research and
development of the Company's contrast microspheres in human diagnostic
applications. In January of 1996, the Company was notified by the National
Institute of Health's ("NIH") medical and scientific review panel that the
Company's application for a research grant had been given a favorable score
and recommendation. The research grant, if approved, would provide $100,000
to the Company immediately, with an additional $750,000 funding conditioned
on the success of phase one. (See Grants - Under Research and Development).
In March of 1996, the National Institute of Health ("NIH") notified the
Company that it had "informally" approved the Company's application for a
research grant to develop its contrast microspheres for human applications.
The Company expects to receive formal NIH notification and first phase
funding within 60 days.
Also in October of 1995, the Company began development of new dietary and
personal care products which the Company intends to market beginning in the
second half of 1996. This development, which began in October 1995 has been
conducted at the Company's facilities as well as at various other facilities
and laboratories by members of a newly formed product development team
comprised of regulatory consultants, nutritional experts and medical
consultants. The product new development group is responsible for the
development of unique dietary and food supplement products which the Company
can market beginning in the later part of 1996 under Management's 1996 Plan
of Operations. The new product development group is also responsible for
developing valid supportable marketing claims based on a combination of
existing data and combined with data obtained through
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Company sponsored clinical studies.
In October of 1995, the Seattle Regional Office of the Federal Trade
Commission advised the Company that the staff believes that the Company's
sequesterant product, which was licensed to KCD and marketed by KCD under the
SeQuester-TM- trade mark, has been improperly represented in advertising
claims, and the same sequesterant product previously marketed by the Company
under as Lipitrol-TM- was also improperly represented in advertising claims.
The staff advised the Company that it is prepared to recommend that a
complaint be filed against the licensee, the Company and certain individuals
in connection with the foregoing. The staff also indicated its belief there
is insufficient substantiation of the efficacy of the product for weight loss
or fat sequestration. The Company and the FTC staff have agreed upon the
terms of a proposed settlement in this matter, pursuant to which the Company
would consent to a permanent injunction prohibiting it from making
misrepresentations relating to weight loss or weight reduction products or
services, or with respect to tests or studies relating to such programs or
services. In addition, the Company would pay consumer redress to the FTC in
an aggregate amount of $35,000 over a period of twelve months. The Company's
Board of Directors voted to accept the proposal in March 1996, which now must
be formally approved by the FTC.
In October of 1995, the staff of the Securities and Exchange Commission
("SEC") advised the Company that it was considering recommending that the
commission file a civil injunctive action against the Company and Dr. William
Shell for alleged violations of the registration provisions of the federal
securities laws. These alleged violations appear to relate to the sale by the
Company of unregistered shares of its common stock which involved a series of
resale's of these same shares that were either directly effected or were
arranged for by Clark M. Holcomb. These transactions have been the subject of
an SEC investigation previously disclosed by the Company. The Company is
negotiating with the SEC regarding a potential settlement of any SEC claims
against the Company with respect to the above transactions. The Company
anticipates that the settlement would require the Company to consent to a
permanent injunction, without admitting or denying any liability, that would
bar the Company from and future violations of the registration requirements
of the federal securities laws. The Company believes that such a settlement
would not have a materially adverse effect on the Company or its operations.
However, there can be no assurance that a settlement as described above ( or
a settlement with any other terms ) will ultimately be reached with the SEC.
The Company and Dr. Shell are subject to a 1992 permanent injunction
enjoining them from violating the federal securities laws.
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Also in December of 1995, the Company's Board of Directors called a special
meeting of the Board of Directors for the specific purpose of forming a
standing Executive Committee of the Board of Directors consisting of all
directors except William Shell MD. After being duly formed the Executive
Committee was empowered to direct management in all matters relating to the
operations and business of the Company, and specifically in matters relating
to the Securities and Exchange Commission investigation into the possible
violations of the registration provisions of the federal securities laws by
Dr. Shell and the Company, which has been disclosed by the company
previously. The Company had previously been in discussions with the SEC
enforcement staff in connection with this matter, and based in those
discussions the Company believed that it was in its best interests that Dr.
Shell resign from the Board of Directors. Dr. Shell did not resign from the
Board of Directors as requested by the Company.
Effective December 31, 1995, Richard Shell resigned as a director and as
Vice President and in house counsel..
In January of 1996, the Company entered into a broad based, long-term
agreement with E-Z-EM, Inc., ("E-Z-EM"), a global leader in the sales and
marketing of oral radiographic contrast agents with annual revenues in excess
of $90,000,000 to conduct pre clinical and FDA approved clinical trials of
the Company's contrast microspheres for certain human applications, and to
develop manufacture and market products, applications and services relating
to the Company's contrast microspheres.. Initially, E-Z EM will fund pre
clinical animal studies which are to begin as soon as possible. The agreement
as contemplated reflects E-Z-EM's intention analyze the full impact of
regulatory costs and expenses in preparation for additional capital funding
to conduct FDA approved clinical trials as a Investigational New Drug ("IND")
with the FDA. The agreement further establishes the commercial relationship
between the two company's where the Company will retain the rights to
manufacture contrast microsphere products while E-Z EM have the exclusive
option to license, including the right to sub-license, all products developed
under the agreement, and subsequent patent if any, with rights to global
sales and marketing of the products and related services for the life of the
patent or 10 years, whichever is longer. The Company believes the strategic
partnering of E-Z EM and the Company will accelerate the development of
contrast microspheres for human applications and will substantially improve
the possibility of these products being commercialized. In March of 1996, the
Company and E-Z EM began pre clinical animal studies of the contrast
microspheres for the detection of pulmonary emboli (lung blood clots) at
Dartmouth Hitchcock Medical Center, and at the University of Massachusetts
Medical Center.
In January of 1996, the Company discovered that a number of Company checks
were missing and presumed to have been taken during the Christmas holiday at
which time the Company's normal daily business activities had been scaled
down. Upon investigation, the Company discovered that certain of the missing
checks appeared to have been endorsed and recently cashed by William Shell.
The checks also contained the signature of the Michael Grechko, the Company's
Chief Operating Officer. Michael Grechko denied having signed these checks
and stated that his signature had been forged. After further investigation of
the matter, the Executive Committee of the Company's Board of Directors met
with William Shell to discuss the matter. Dr. Shell confessed that he cashed
the checks.
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In a subsequent meeting the Company informed William Shell that
he must resign from the Board of Directors, which he did on January 23, 1996.
On February 6, 1996, the Company terminated William Shell's employment
agreement for cause. Although the Company is attempting to settle various
open issues with William Shell amicably, he has disputed the Company's
accounting of certain FATCO royalty's which had been previously assigned to
the Company by William Shell and reported by the Company on its previous
financial statements. However, Dr. Shell recently informed the Company that
he has rescinded his assignment of FATCO royalty to the Company effective
January 1, 1993. Given these issues, and the possibility of other issues
developing there can be no assurance an amicable settlement will be reached
between Dr. Shell and the Company, or that Dr. Shell will not file a law suit
against the Company relating to the termination of his employment agreement,
the Company's accounting of FATCO royalty, or on any number of other matters.
The Company intends to vigorously defend any proceedings initiated by Dr.
Shell against the Company, and although the ultimate outcome of such defense
is uncertain and not free from doubt, the Company believes, on the basis of
facts currently known that the Company would prevail, or, should the Company
not prevail that the Company would not have any material liability.
On February 29, 1996, KCD informed the Company that special KCD patent
counsel had recently reviewed the Company's patent covering the sequestration
technology, which is the licensed formula and technology used in the
manufacture of KCD's SeQuester-TM- weight loss product, that on the advice
of special patent counsel KCD now believes that the patent does not apply to
the product licensed to KCD by Effective Health. KCD alleges the Company and
Effective Health deceived and induced KCD to enter into a license agreement
knowing the patent did not apply to the product KCD intended to market. which
resulting in damages to KCD. The letter demands that unless the Company
return all licensing fees and royalty's paid to it within five days, KCD
would seek to recover such licensing fees and royalty payments through
litigation. The Company and Effective Health deny all of the forgoing. KCD
was fully informed by the Company and Effective Health during numerous
meetings prior to KCD entering into the first and amended licensing
agreements with Effective Health. The Company considers this action by KCD,
who is an affiliate of Clark M. Holcomb, as an attempt to divert attention
away from KCD's inability to make the royalty payments due the Company under
the terms of the original and First Amended License agreement. As of March
31, 1996, KCD had not challenged the patent, however, there can be no
assurance that KCD will not initiate legal proceedings for that purpose.
On March 1, 1996, KCD failed to cure a default which had begun in January
1996 as a result of their failure to make past due and current royalty
payments resulting in the termination of the license by the Company. The
Company has depended on the licensing and royalty payments which represented
a significant contribution to the Company's cash flow, and which, depending
on the preceding months sales of SeQuester-TM- have been as much as 71% of
the Company's total cash flow. In March 1996, the Company, on behalf of its
subsidiary EHI, filed an action against KCD in Los Angeles County Superior
Court. This action alleges causes of action against KCD for Breach of the
Amended License, Declaratory Relief and Permanent Injunction. The action is
based upon the failure of KCD to pay the royalties due pursuant to the
contract and their use of advertising claims in connection with the sale of
the licensed products which were in excess of those which the Company
authorized KCD to make. On April 8, 1996, KCD filed a cross complaint against
the Company, Effective Health, William Shell and William Pelzer alleging
causes of action for Breach of Contract, Breach of Implied Conversion,
Rescission, Good Faith and Fair Dealing, Negligence, Intentional
Misrepresentation, Accounting and Constructive Trust. The Company denies all
of the claims and intends to fully defend this cross complaint.
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ACQUISITIONS
Although the Company had no previous experience as magnetic resonance
imaging service providers, the Company believed that given the nature of its
contrast microsphere studies and understanding of the MRI process that it
could become a successful MRI service provider. The Company also believed
that as the owners of MRI units, the Company could utilize these units during
down time for the Company's own research and development of contrast
microspheres in MRI applications. In 1993, the Company acquired Venus
Management, Incorporated, ("VMI") a company which was incorporated in New
York on August 1, 1989 and who's assets consisted of two magnetic resonance
imaging (MRI) systems (the "Units") one of which was operating as a mobile
unit and was leased to a MRI service provider in New York, the other unit was
not assembled, or operational but had been leased to another MRI service
provider.
Pursuant to an Exchange of Stock Agreement and Plan of Reorganization dated
as of May 6, 1993 (the "Exchange Agreement"), and effective on June 30, 1993,
the Company acquired all of the outstanding capital stock of VMI from
Associated Funding, Inc. and Diagnostics Resource Funding, Inc. (the then
sole stockholders of VMI) for an aggregate consideration of 1,000,000 shares
of Common Stock issued by the Company. The assets of VMI (which was
incorporated in New York on August 1, 1989) consist of two magnetic resonance
imaging (MRI) systems (the "Units") that are owned by VMI, whose sole source
of revenue currently is the lease payments it receives from leasing the
Units.
The Company, and the selling shareholders each are required to pay a third
party that is unaffiliated with the Company a finder's fee in connection with
this transaction of 10,000 unregistered shares of the Company's Common Stock.
The Company has delayed issuing the 10,000 shares of Common Stock that it
is required to deliver to this party pending the resolution of certain lease
payment delinquencies discussed below. The Units were acquired by VMI from
Medical Funding of America ("MFA") on June 30, 1993 in connection with the
Company's acquisition of VMI. VMI did not pay any additional consideration to
MFA in connection with VMI's acquisition of the Units but formally assumed
the obligation to repay a note issued by MFA to a third party finance company
that financed MFA's original acquisition of one of the Units (the "First Unit
Note").
Accordingly, VMI will be required to make the payments under the First Unit
Note, the payment of which is secured by one of the Units. The other Unit was
owned by MFA and transferred to VMI free of any security liens or other
obligations. As part of VMI's acquisition of the Units, MFA also assigned to
VMI its interest as lessor under an existing lease of one of the Units
described below. One of the two Units is installed and operating as a mobile
unit in New York state. The second Unit has not been placed in service.
Issuance of a second 1,000,000 shares of Common Stock to the sellers was
contingent on MFA's presenting to the Company prior to January 27, 1994 an
operating agreement with a third-party user with respect to the second Unit
that would have provided net present value payments to the Company (utilizing
a 12% per annum discount factor) of at least $1,350,000, as determined by the
Company. However, MFA failed to present such an operating agreement to the
Company by the required date, and, accordingly, the second 1,000,000 shares
of Common Stock was not issued to the sellers.
The number of shares issued in consideration of the acquisition of VMI was
determined by negotiation, taking into account the market price of the Common
Stock of the Company, the fact that the Common Stock issuable under the
Exchange Agreement would be issued without registration under the Securities
Act and therefore could not readily be disposed of, the original cost of the
Units owned by VMI (which was, in the aggregate, approximately $3,370,000),
and the operating history of the one Unit that is currently installed.
One of the Company's two magnetic resonance imaging (MRI) systems (the
"Units") is currently installed and operating as a mobile unit in Jefferson
Valley, New York and has been in continual use since September 1992 and is
leased to Tri-County
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Mobil MRI, L.P. ("Tri-County"), whose general partner is Diagnostics Resource
Funding.
This lease provides for monthly payments of $37,926 to Venus Management,
Inc. ("VMI") through August 1999 and $68,589 in September 1999 (with such
payments being guaranteed by Medical Funding of America, Inc., "MFA"), and
VMI is required to make monthly installment for the first Unit to a third
party finance company of $32,360 through August 1999 and $68,589 in September
1999.
MRI lease operations resulted in a (continuing) net loss of $304,290 and a
net loss of $620,123 for the years ended December 31,1995 and 1994,
respectively. Lease revenues of $687,459 for 1994) were offset by interest on
lease obligations of $143,750 and depreciation on the two units of required
payments of interest and principal to a third party finance company. Lease
revenues for 1994 include $270,270 of delinquent payments with respect to the
second unit owned by VMI, for which none of the scheduled lease payments have
been received by VMI. Receivables related to these lease payments were
written off during 1994. In August 1994, VMI commenced litigation to collect
delinquent lease payments with respect to this unit. Lease revenues for 1995
were $319,072 which includes only one unit, were offset by interest on lease
obligations of $142,005 and depreciation on the two units of $481,357.
In April of 1995, Johnson & Johnson Finance Corp. ("J&J Finance") brought
an action against MFA and VMI in connection with a loan made by J&J Finance
to MFA that was secured by a lien granted by MFA on the Resonex MRI unit
which at the time was owned by VMI. After MFA defaulted on the foregoing
loan, J&J Finance obtained a writ of attachment in June 1995 on the Resonex
MRI unit and took physical possession of that unit. The Company's position is
MFA had no authority to secure the foregoing loan with VMI's MRI unit since
the loan was made solely for the benefit of MFA, the lien was placed on the
MRI unit without VMI's knowledge or consent, and none of the loan proceeds
were received by VMI or the Company.
The Company is in settlement discussions with J&J that would require the
Company and VMI to forfeit their interest in the MRI unit in exchange for J&J
releasing VMI and the Company from any damages. Although the Company believes
VMI is entitled to recover the MRI unit from J&J Finance and that VMI should
prevail in its claims against MFA should J&J Finance, be permitted to retain
the MRI unit, there can be no assurance that VMI will prevail against either
party or that VMI will be able to collect any judgment that it may obtain
against MFA. As a result of the foregoing, the Company has written off the
net book value of the second unit of $964,286 as of December 31, 1995. VMI
has commenced litigation against MFA seeking payment of delinquent lease
payments, however, there can be no assurance that MFA will be able to make
any of those required lease payments to VMI. Receivables of $270,270 related
to a portion of these lease payments were written off during 1994 (See Notes
to Consolidated Financial Statements, Note 4.) and none were accrued for
1995.
As of February 29, 1996, Tri-County was delinquent in making the January
and February 1996 lease payments and MFA and VMI failed to make these
payments under their guarantee to the finance company which has issued a
notice of default. MFA has also failed to make these payments to VMI under
its guarantee of Tri-County's payments to VMI. Accordingly, VMI had not made
certain payments due to the third party finance company for the first Unit.
Should Tri-County fail to make its future lease payments to VMI and should
VMI be unable to make its future required payments to the finance company (i)
VMI could lose ownership and possession of the first Unit and (ii) the entire
remaining balance of the MFA note would become immediately payable, with VMI
and the Company being liable, together with MFA, for any deficiency in
repayment of the note. Both MRI leases are delinquent. The operational unit
is two months delinquent, no payments have been made on the second unit.
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Pursuant to the Exchange Agreement, the Chairman of the Board of Directors
of MFA, Gerald A. Brauser, was elected to the Board of Directors of the
Company on June 23, 1993, effective upon the Company's acquisition of the
outstanding stock of VMI. He subsequently resigned as a director of the
Company in April 1994 for personal reasons. Prior to the transactions
described herein, Mr. Brauser's wife held 156,285 shares of the Company's
Common Stock.
BUSINESS
The Company is engaged in the business of developing, manufacturing, and
sales and marketing of proprietary diagnostic imaging products and services
relating to blood flow research in animals, and although not commercially
available for sometime, the Company also developed proprietary diagnostic
imaging products and procedures for human applications using existing imaging
equipment such as x-ray, CAT scan, MRI, and ultra sound. Out of the Company's
interest in blood flow research, the Company developed, manufacturers, and
licensed a proprietary technology for the selective entrapment or
sequestration of dietary fat from food while in the gastrointestinal tract,
thereby preventing the absorption of that fat into the blood stream and
ultimately the body. Beginning in October 1995, the Company expanded its
research and development of dietary and food supplement products with the
intention of commercializing such new products beginning in the later part of
1996.
The Company's mission and goal is to increase the early detection of
restrictions or blockages in human blood flow through significantly improved
diagnostic imagery. To achieve this the Company has focused its research and
development on the use of micron sized solid particles comprised of either
blood protein mixed with other contrast agents, or plastic styrene spheres
which are either biodegradable, intended for human applications, and non-
biodegradable, intended for animal blood flow research. In actual use,
spheres which have been "labeled" with color or dye are injected in the
arterial blood flow were mix and ultimately lodge in tissue. Sample tissue is
liquefied using an reagent extraction process which then calculates the
number of microspheres contained in the sample. The goal in developing the
colored microsphere was to produce a product of superior quality capable of
maintaining a high percentage of its original dye concentration over extended
periods. Such a product would improve diagnosticians ability to make rapid
identification and discrimination under microscopic examination enabling
early detection of restrictions or blockages in blood flow. The Company's use
contrast and colored microspheres for diagnostic imaging of human organs,
animal blood flow research, and as a delivery system for pharmaceutical
drugs, and contain various imaging agents or other reflective indicators
which label or mark the microspheres creating a distinctive reflection which
is detectable when visualized by through imaging equipment such as x-ray, CAT
scanning, ultrasound or MRI. The Company has developed two type of
microsphere products which are:
PRIMARY PRODUCTS AND SERVICES
NON-BIODEGRADABLE COLORED MICROSPHERE PRODUCTS FOR ANIMAL BLOOD FLOW RESEARCH
The Company has developed a method for measuring arterial blood flow to the
major organs on laboratory animals using color "labeled" non-radioactive
polystyrene spheres ranging in size from one to twenty five microns. One of
two classes of non radioactive markers, either a series of chemically linked
colored dyes, or non animal enzyme markers are attached to the microspheres
giving them a distinctive signal when visualized through the Company's flow
cytometer imaging system. The patented process also involves a technology
for separating both colored and enzyme-linked spheres from tissue and blood.
The number of colored microspheres contained in tissue or organ samples is
determined by direct computerized counting of the individual colored
microspheres when visualized by a flow cytometer, or through other imaging
systems. E-Z Trac has successfully demonstrated the feasibility and efficacy
of its non-radioactive colored microspheres in previous animal blood flow
studies which utilized black non-radioactive colored microspheres and
alkaline hydrolysis of tissue and blood samples. The use of color "labeled"
(identifiable by color during diagnostic visualization) microspheres is
important in experimental studies of organ
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blood flow distribution and other pathologies. Simultaneous blood flow
measurements following coronary artery occlusion which compared radioactive
microspheres and colored microspheres have shown similar measurement
correlation's of regional myocardial blood flow in zones of normal,
intermediate and low blood flow. The standard measurement technique of using
radioactive microspheres prevents their use by institutions that are
unable to dispose of or afford the disposal cost of the radioactive waste.
Now, with the availability of the Company's non-radioactive microspheres in
multiple colors and a range of sizes, such institutions are no longer
prevented from conducting such research.
INVESTIGATOR PARTNER PROGRAM SERVICE FOR COLORED MICROSPHERE PRODUCTS
The program provides a national reference laboratory service for
pharmaceutical companies and academic centers engaged in animal blood flow
research, and automated laboratory services for customers using E-Z Trac's
colored microsphere products. In this program, investigators (customers) buy
E-Z Trac's colored microspheres, perform their experiments, and send the
tissue samples to E-Z Trac for automated analysis and counting in the
Company's automated analysis and counting imager. To date, customers have
included the National Institutes of Health, Columbia and New York
Universities, the University of Southern California, Bristol Myers/Squibb and
Rorer Pharmaceutical. E-Z Trac currently has the capacity to process up to
800 samples per week. The Company believes that the Investigator Partner
program will also augment the Company's sales of colored microspheres as well
as the automated counting machines.
AUTOMATED ANALYSIS AND COUNTING MACHINE FOR COLORED MICROSPHERE PRODUCTS
In November of 1994, the Company entered into an agreement with the
Immunocytometry Systems Division of Becton Dickenson Company ("Becton") to
manufacture on an OEM basis, an advanced Becton flow cytometer to count
colored microspheres. The contract was entered into after the Company had
demonstrated that the Becton machine could be converted into a prototype flow
cytometer to count colored microspheres. The converted flow cytometer counts
colored microspheres as much as eight times faster than the previous imaging
system while simultaneously improving the accuracy of its count and expanding
the range of color to include up to eight separate colors. Although the
Company believes the automated counting machine will augment the IPS program,
only one unit has been sold to date. The Company believes that the $40,000
sales price of the current flow cytometer is preventing potential customers,
many of whom are funded by research grants that do not provide for the
purchase of equipment, from purchasing the unit. The Company is currently
studying the feasibility of building a second image analyzer, equal to the
first in performance and accuracy, but marketed in the $20,000 price range.
Informal market surveys conducted by the Company indicate that such a machine
would be a more realistic acquisition given the limited research budgets of a
number Universities and research facilities. However, even if the Company did
development such a machine there are no assurances that such a machine could
be sold, or that the size of the potential market for such a machine would
warrant the Company spending time and money to develop.
BIODEGRADABLE CONTRAST MICROSPHERES FOR HUMAN DIAGNOSTIC IMAGING APPLICATIONS
In 1988 the Company developed a proprietary technology and product
designed to observe arterial and capillary circulation in humans through the
use of biodegradable contrast microspheres which significantly improve the
images provided by existing x-ray, CAT scanning, ultrasound and MRI
equipment. The contrast microspheres are composed of albumin (a human blood
protein) and other commonly available FDA-approved contrast agents. Since
1988, through the Company's ongoing research, several potential human
applications have been identified and are under development including:
- Pulmonary Embolism.-Lung Imaging with CAT Scan Machines. Contrast
microspheres, larger than human blood cells are injected into a
peripheral vein where they are carried by the blood flow into
the lung capillaries. As these contrast microspheres are
larger than the capillaries the become temporarily lodged in
place becoming a highly reflective stationary signal allowing
significantly enhanced detection and visualization when compared
against the currently used liquid contrast agents which are not
stationary and
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rapidly dilute in the blood flow. These same contrast microspheres can
also be utilized to detect blood clots in the lung with CAT Scan
machines.
- Heart Muscle Visualization.-Heart Imaging with Ultrasound. Contrast
microspheres, smaller than blood cells are injected into a common
peripheral vein and pass through the lung, and into the general
circulation where they re-circulate until they dissolve. These
small contrast microspheres can be detected by ultrasound and have
been used to detect heart muscle and liver blood flow.
- MRI Applications. X-ray contrast media is replaced with an MRI
contrast microspheres which have been sized for the intended
imaging application.
The Company believes that they will be useful as diagnostic agents in humans
to detect heart disease and tumors using non-radioactive ultrasound. The
Company has also produced small experimental contrast microspheres where the
contents (experimental or research drugs ) of the microsphere are
intentionally leaked into the blood flow providing a timed drug delivery
system.
SEQUESTERANT PRODUCTS
The Company's fat sequesterant technology involves the selective entrapment
or sequestration of dietary fat from food while in the gastrointestinal
tract, thereby preventing the absorption of that fat into the blood stream
and ultimately the body. However, clinical studies to date have not
substantiated the efficacy of the technology.
The are substantial existing markets for dietary and weight loss products
in general, including the Company's fat sequesterant products. Domestically
these markets include retail, over the counter, warehouse clubs, multilevel
marketing, direct response, infomercials, as well as others. The weight
loss/dietary products category is one of the largest segments within the food
supplement category. Independent industry analysts estimate the category in
the hundreds of millions dollars annually. The Company believes, based on
the historical sales performance of the various products which have been
based on the first generation sequestration technology that there is
indications of consumer approval and acceptance for these fat sequestration
products. The Company believes that if marketed in a responsible manner
whereby the claims are reasonable and are supported by approved clinical
studies that significant revenues can be generated from these products.
FIRST GENERATION FAT SEQUESTERANT.
The first generation fat sequesterant product is an activated fiber
combination of bile and cellulose which is currently formulated and
manufactured as tablets under the Company's trade secret process. The
product's expected effect on fat absorption is believed to contribute to
weight loss by reducing intake of fat calories while increasing the excretion
of fat in the stools by preventing absorption and storage of fat by the body.
However, to date clinical studies conducted by the Company are inclusive as
to the products ability to absorb, or sequester fat. (See subsequent events
relating to the FTC complaint regarding the marketing of SeQuester-TM-, and
Lipitrol-TM-).
ADVANCED OR SECOND GENERATION FAT SEQUESTERANT
The Company has completed initial development on a advanced or second phase
fat sequestration product utilizing vegetable sterol. The second generations
selective entrapment action is similar, however, there is some variation. The
Company believes this new product does not violate the patent covering the
first generation product. However, to date clinical studies conducted by the
Company and a foreign licensee are inclusive as to the products ability to
absorb, or sequester fat. The Company anticipates that the advanced
generation product if marketed by a separate company under a different trade
name would compete directly against the first generation product, however,
the Company is unable to predict the effect such competition would have on
the price or market share of either product.
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MAGNETIC RESONANCE IMAGING LEASING OPERATIONS
MRI is a sophisticated diagnostic imaging modality utilizing a strong
magnetic field in conjunction with low energy electromagnetic waves which are
processed by a dedicated computer to produce a high resolution images of body
tissue. As with other diagnostic imaging technologies, MRI is non invasive.
Since its introduction in 1983, MRI services has grown to become a $45
billion dollar market. MRI service providers generally provide diagnostic
imaging services to patients referred by physicians who are either in private
practice or affiliated with managed care providers or other groups. MRI
service providers charge patients a fee for the service which is typically
paid by the patients insurance company. Although the Company had no previous
experience operating an MRI service, the Company believed that given its
understanding of the MRI process it could become a successful MRI service
provider. Secondarily, the Company believed that as the owners of MRI
unit(s), the Company could utilize these units during down time to conduct
tests of the Company's contrast microspheres for MRI applications.
In 1993, the Company acquired Venus Management, Incorporated, ("VMI") a
company which was incorporated in New York on August 1, 1989 and who's
principle assets consisted of two MRI systems (the "Units") one of which was
leased to MRI service provider who was operating the unit in New York state,
while the second unit, which was not assembled, or operational but had also
been leased to another MRI service provider. The Company intended to joint
venture the second unit with the service provider who leased the second unit.
(See Acquisitions above) Add something regarding the Company's intentions
regarding the MRI lease operation.
PRODUCT LIABILITY INSURANCE
Although the Company believes its products are safe, it may be subject to
product liability claims from persons injured through the use of the
Company's marketed products, services, or products undergoing clinical
trials. The Company carries no direct product liability or clinical trials
liability insurance, relying instead on the coverage maintained by its
distributors and manufacturing sources from whom it obtains product. This
insurance protects the insured who pay the claims and only indirectly
protects the Company (by providing a source of payment for any claims brought
against both such distributors or manufacturers and the Company). There is no
assurance that this insurance will adequately cover any liability claims
brought against the Company.
There also can be no assurance that the Company will be able to obtain its
own liability insurance (should it seek to do so) on economically feasible
terms. The Company's failure to maintain its own liability insurance could
materially adversely affect its ability to sell its products in the future.
Although no product liability claims have been brought against the Company to
date, were any such claims to be brought against the Company, the cost of
defending against such claims and any damages paid by the Company in
connection with such claims could have a materially adverse impact upon the
Company.
DISTRIBUTION
COLORED MICROSPHERE PRODUCTS AND SERVICES
The Company currently sells colored microsphere products and services to
pharmaceutical companies, universities, hospitals, and other academic centers
engaged in blood flow and pharmaceutical research directly and through its
distributor, Triton Technologies.
In February 1991, the Company (through its E-Z Trac subsidiary) entered
into an exclusive two-year worldwide manufacturing and distribution agreement
with Triton Technology, Inc. ("Triton"), a US company located in San Diego,
California, where they are engaged in the development and sale of
physiological monitoring products, pursuant to which the Company is to
provide custom manufactured dye release plastic microspheres to Triton's
specifications. The companies formally extended the contract under the
original terms to February 1994, and have subsequently renewed the contract,
which obligates Triton to make $20,000 in minimum annual purchases, which is
automatically renewed for additional one year periods unless terminated by
either party on 30 days written notice.
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In October 1995, Triton established a home page on the world wide web to
market its non competitive products as well as E-Z Trac's colored
microspheres. E-Z Trac's products are marketed as in the non radioactive
products group as " NuFLOWo FLUORESCENT MICROSPHERES WITH PROCESSING
SERVICE". Triton's world wide web home page can be viewed at
http://www.physiology.com. E-Z Trac and Triton believe the world wide web
offers a opportunity to target vast numbers of pre qualified consumers at a
very competitive cost. E-Z Trac believes that the world wide web is a
important informational tool in scientific research communities.
Triton and E-Z Trac are discussing expanding world wide web marketing and
distribution efforts with the intention to expand Company presence and its E-
Z Trac products and services in the research community. E-Z Trac and Triton
will continue to market the colored microsphere products through trade show
exhibits, and advertising in targeted journals as well. E-Z Trac assembles
and ships the colored microspheres directly from its Los Angeles laboratory
facilities. IPS service is also conducted at the Company's laboratory
facility. Colored microspheres are sold separately, or bundled with an E-Z
Trac reagent extraction kit containing enough material to conduct six
regional blood flow experiments. E-Z Trac also markets a supplemental reagent
extraction kit. E-Z Trac is aggressively pressuring new customers both
directly and through Triton Technologies. The Company and E-Z Trac are also
developing alternative markets. The Company is currently studying the
adaptability of colored microsphere products and services for use in
commercial (human) pathology applications.
Sales of colored microspheres and related products including IPS laboratory
services were approximately $298,000 in 1993, sales declined to approximately
$211,000 in 1994 during the transition to the new flow cytometer system for
automated counting, then increased again to $247,000 in 1995 with the
integration of the Flow Cytometer. The Company estimates E-Z Trac's current
market share for blood flow products at approximately 10%.
CONTRAST MICROSPHERES
The Contrast microsphere is in development stage and is not in commercial
distribution. The Company intends to license the sales and marketing rights
for the contrast microspheres to an established distributor of contrast
imaging products and services. As stated above, the Company has recently
singed a broad based agreement with E-Z EM, Inc., a recognized global leader
in sales and marketing of oral radiographic contrast agents, which, as
contemplated provides E-Z-EM with the exclusive option to acquire global
sales and marketing rights for contrast microspheres products and related
services. The Company intends to license sales and marketing rights to the
contrast microspheres to a company with established distribution, such as E-Z
EM. The Company's market research indicates there is a substantial commercial
market opportunity for the application of its contrast microspheres in
certain diagnostic procedures utilizing x-ray, cat scan, MRI and ultra sound
equipment. Customers converting to contrast microsphere products and services
will not be required to purchase new diagnostic imaging equipment as the
technology was designed to be easily adapted for use with existing installed
equipment.
SEQUESTERANT AGENTS
The Company's fat sequesterant products have been sold in the US and
foreign countries since 1987 under various trade names including
Lipitrol-TM-, SeQuester-TM-, and others. From 1990 to 1993, E-Z Trac
distributed Lipitrol-TM- a product based on the Company's sequestration
technology directly to doctors, consumers, and also to small local
distributors. In 1993, the Company phased out its existing relationships
with doctors, consumers, and small local distributors, and as a result, the
Company no longer generates any revenues from its own direct distribution of
sequesterant products. The Company experienced excessive administrative costs
as well as control problems in connection with the Company's direct
distribution to doctors, consumers, and small local distributors and that
this "grass roots" distribution method, although less costly, would require
substantially longer time to build a national distribution system.
Accordingly, the Company determined that it was in its best long-term
interests to develop relationships with companies having access to well
established
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nationwide sales and distribution networks and who followed responsible sales
and marketing practices.
In 1994, the Company through its Effective Health subsidiary entered into a
exclusive Licensing Agreement with KCD, Incorporated, (KCD) a company
recently formed by Clark M. Holcomb. (KCD is an affiliate of Clark M.
Holcomb, also see Item 3. Legal Proceedings). KCD represented to the Company
that it had access to national drug and health food chains. However, at the
time the Company entered into the agreement with KCD, it had very limited
management experience and financial resources, and it had no experience
building a national retail distribution system. The agreement provided KCD
with exclusive sales and marketing rights to the Company's fat sequestration
technology for the United States and Canada. KCD began distributing and
marketing SeQuester-TM- in 1994 which was a product based on the Company's
sequestration technology.
The Company received $ 811,068 in licensing fees and royalty's through
December 31, 1995, from KCD. However, on March 1, 1996 KCD defaulted on
certain of the provisions of the licensing agreement which resulted in
termination of KCD's sales and marketing rights as provided in the First
Amended Licensing Agreement. The Company has notified designated
manufacturers that they are no longer permitted to manufacturer products
based on the Company's sequestration technology, and specifically they are
not permitted to manufacture such products for KCD. Company is in discussions
with several established distributors who have expressed an interest in
marketing products based on sequester technology. Based on sales history, the
Company believes that if the product is distributed and marketed in a
responsible manner, sales of a sequester type product can become significant
within several months of its reintroduction. The Company also believes there
is an equally strong demand for a sequester based product in foreign markets
and intends to seek a strategic partner for foreign distribution. However,
additional testing of the sequester product will be required to substantiate
efficacy.
STATUS OF NEW PRODUCTS, OR SERVICES
The Company announced the completion of first stage development of its
expanded dietary and personal care product line which had been initiated by
the Company in October 1995. The Company believes it is on schedule to
introduce a number of new dietary and personal care products during the later
half of 1996. However, there can be no assurance that the Company's will be
able to complete development on these new products, or that any of these new
products will be successful in the consumer marketplace.
COMPETITION
The Company and its subsidiaries operate in a highly competitive marketing
and technology environment. The Company competes primarily on the basis of
product uniqueness by establishing a point of difference usually based on
technological content, on quality, service (where applicable), and
reliability, as perceived by the user, and to a lesser extent on the basis of
price. The Company competes or will compete, either directly or indirectly,
with other companies in each of its product categories many of whom are
larger companies with substantially more resources available, including
greater financial resources, larger research and development staffs, greater
sales volume, and larger sales forces.
Although the Company believes that its colored and contrast are unique in
application and performance, there is no assurance that a highly competitive
market with more powerful competitors will not emerge if competitors are able
to develop microsphere products substantially similar to, or better than
those of the Company. Although the Company knows of only two other
competitors at this time using non-radioactive microspheres for measuring
animal blood flow, the Company does compete directly against companies
producing radioactive microspheres.
The Company is not aware of any direct competitor for its contrast
microsphere product for the detection of pulmonary emboli, although one
competitor has recently received FDA approval for a microsphere product for
echocardiography. However, this product, unlike the Company's product can
only be used with ultrasound. The Company is aware of other companies
developing microsphere and microbubble technologies for use as human
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contrast imaging agents.
COLORED MICROSPHERE PRODUCTS AND SERVICES
The Company believes it is the first to develop non-radioactive colored
microspheres for animal blood flow measurements and as such is the first
Company to directly challenge the established radioactive products, which is
the Company's most significant competition. There are other Company's using
microspheres in blood flow and diagnostic imaging research, however, the
Company believes that no other Company has developed a highly reflective
microsphere capable of being visualized for extended periods, producing
substantially superior images with increased color sensitivity and
distinction, and combined with the speed and accuracy of flow cytometer
analysis. Further, the Company believes that the increasing regulatory
restrictions and public concern will work to its advantage by , forcing
researchers using radioactive products to explore alternative non-radioactive
solutions. In the near term, the Company believes that sales of its colored
microsphere products and services will continue to increase despite the
present resistance "to change from the established methods". However, the
Company believes that change will occur through political and social
pressures, at which time sales of the Company's colored microspheres and
services should increase faster.
The Company believes that its colored microspheres are superior to the
existing products in a number of ways that provide blood flow researchers
with the improved ability to:
- produce diagnostic images of at least equal, and possibly superior
quality and detail compared to diagnostic images obtained using
radioactive microspheres, all without the nvironmental hazard and
costs associated with the radioactive products and its waste disposal.
- extend imaging times as the result of the colored microspheres
ability to maintain high dye concentrations for prolonged periods.
- visualize as many as nine different colors simultaneously.
CONTRAST MICROSPHERES
The Company believes that its contrast microspheres are superior to the
existing technologies in that they provide diagnosticians with the ability
to:
- obtain faster, higher resolution images from existing x-ray, MRI or
Ultrasound equipment when compared to studies without contrast agents,
or with studies using liquid contras agents.
- perform diagnostic imaging services at reduced costs.
- increase the throughput from existing imaging equipment such as
digital radiographs, CAT-scans, cine CAT-scans and MRI scans.
- in certain indications, obtain usable images from equipment that
previously could not provide such usable images when using other
(other than the Company's colored microspheres) diagnostic media.
The Company believes that its contrast microspheres provide extended
imaging time thereby yielding higher resolution images with improved clarity
which increases diagnosticians ability to make an early detection of blood
flow problems, and is readily adapted for use in a wider range of installed
imaging equipment. The Company believes its contrast microsphere technology
for blood circulatory visualization represents a significant advance in
diagnostic imaging. The production of large contrast microspheres labeled
with an x-ray contrast agent is expected to allow imaging of various organs
without radioisotopes, where, the small dense microspheres (four microns)
will pass through the lung blood vessels and enter the general circulation
where they will re-circulate continuously until they dissolve. The Company
believes there is one existing competitor who has obtained FDA approval for
their product which has a similar capability to produce microspheres that
pass through the lung capillaries, however, the Company believes that this
competitor's "microbubble" product could have a tendency to break down and
disappear soon after injection, resulting
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in only limited imaging time when compared to the Company's contrast
microsphere. Moreover, the Company believes the competitive product
can only be imaged by ultrasound, while the Company's small microspheres
can be visualized by x-ray and MRI, as well as ultrasound, thereby expanding
the potential to provide physicians with additional diagnostic capabilities.
SEQUESTERANT AGENTS- DIETARY, WEIGHT LOSS AND FOOD SUPPLEMENT PRODUCTS
The sales and marketing of retail products for general weight loss is very
competitive, and closely regulated by the Federal Trade Commission ("FTC"),
and in the case of pharmaceticual drugs the Food and Drug Adminstration
("FDA"). Several companies with resources much greater than those of the
Company, manufacture, distribute and market general weight loss products and
are direct competition for the Company. In its one attempt (the sequestrant
technology) the Company has successfully competed against these larger
companies by establishing a consumer point of difference based on technology.
The Company plans to introduce new weight loss and nutritional products in
1996 and 1997 that are suffuicenly unique both technologology and in benefit
from those of the larger companies. However, no assurance can be given that
the Company will release its new products as schedueled, or that competiting
companies will not develop and market products which are similar to those the
Compnay intends to market before the Company can, or that the Company's
products will be successful.
RAW MATERIALS, SUPPLIERS, AND MANUFACTURING
COLORED MICROSPHERE PRODUCTS
The Company purchases raw microspheres in bulk from unaffiliated suppliers
which are then treated, sized, and labeled using the Company's trade secret
process. The processing is carried out at the Company's corporate laboratory
facilities. To date, E-Z Trac has not encountered difficulty obtaining raw
microspheres from suppliers. Product delivery is F.O.B. at the Company's
facilities., with customers or distributors (Triton) assuming all delivery
and storage costs, taxes, insurance, freight, and any other charges involved
in transportation or thereafter.
CONTRAST MICROSPHERES
The Company purchases raw microspheres in bulk form from unaffiliated
suppliers which are then processed by mechanical and chemical treatment to
create a sphere in a specific size and composition intended for specific
clinical applications. Sizes range from one micron to twenty five microns.
The Company is currently producing contrast microspheres on a regular basis
for the Dartmouth Hitchcock Medical Center and University of Massachusetts
pre clinical animal studies. The Company has not encountered any difficulty
purchasing raw microspheres. The Company intends to manufacture contrast
microspheres for commercial distribution.
SEQUESTERANT PRODUCTS
Products based on the sequesterant technology have manufactured by
independent manufacturers under confidentially and secrecy agreements with
the Company for the Company and it licensees. There have been several of
these manufacturers since the product was first introduced by the Company.
Initially the product was manufactured by D&F Industries under the Company's
sub-license from FATCO (See Item 3. Legal Proceedings). The raw materials
used to manufacture the product are naturally occurring substances that are
readily available from multiple suppliers. The Company, or its designated
manufacturers have not experienced any difficulty purchasing the raw
ingredients used to manufacture this product. The Company does not intend to
manufacture products based on the sequesterant technology.
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CUSTOMERS AND BACKLOG.
For the year ended December 31, 1995, KCD accounted for over 10% of the
Company's revenues which were $618,788 representing royalty's payments from
the sales products based on the sequesterant technology. MRI lease revenues
from the Tri-County represented more than 10% of the Company's total
operating revenues for 1995, however, the Company's monthly installment
payments to a third party finance company with respect to the operational
unit offsets the full cash revenues generated from the lease and will
continue to do so through the remainder of the lease. The leases of the two
MRI systems by VMI to Tri-County and MFA each generated in excess of 10% of
the Company's total operating revenues for 1994 as well.
Excluding E-Z Trac sales of colored microspheres and services, who sells
products and services to over thirty customers, and is not dependent on any
few customers, however, overall, the Company was dependent on two (2)
customers, KCD and Tri-County, each of whom represent over 10% of the
Company's total 1995 revenues, As of March 1, 1996, KCD defaulted on its
royalty payments resulting in the loss of its license, and the Company loss
of the royalty income. Tri-County was three (3) months delinquent in making
its lease payments. As of March 1, 1996, the Company's only cash flow from
operations is from E-Z Trac sales of products and services. The Company will
be dependent on investment capital to support the balance of its operations
until such time as the Company introduces new dietary and food supplement
products, which have been in development since October of 1995, or is able to
find a replacement for KCD. The Company is in discussions with distributors
as well as sales and marketing companies who have expressed an interest in
distributing and marketing a product based on the sequesterant technology.
However, no assurances can be given that the Company will find a suitable
replacement for KCD, or that such a replacement will be successful in
marketing a product based on the Company's sequesterant technology.
E-Z Trac sells its colored microspheres, and laboratory services to a
number of scientific researchers, universities, hospitals and pharmaceutical
companies. To date, customers have included the National Institutes of
Health, Columbia and New York Universities, the University of Southern
California, Bristol Myers/Squibb and Rorer Pharmaceutical.
E-Z Trac currently has approximately thirty customers all of whom have
repurchased colored microsphere products and services a number of times. The
laboratory service is also growing. Currently, the Company can process up to
800 samples per week. The Company anticipates adding additional flow
cytometers as needed.
The Company generally carry's an inventory of its colored microsphere
products. Orders are filled and shipped from inventory with inventory being
restocked as needed. The Company does not maintain an inventory larger than a
few months sales thereby minimizing inventory costs. The Company sells its
products and services on a current basis and does not maintain any
significant backlog of orders for any of these products or services.
PATENTS, LICENSES, AND ROYALTY AGREEMENTS
Proprietary protection, including that afforded by patent protection is
important to the Company and its business. However, there is no assurance
that the validity of any patent including those owned or licensed by the
Company would be upheld if challenged by others in litigation, or would not
infringe on patents or licenses owned by others. Additionally, there is no
assurance that any of the patent applications filed by the Company will be
approved, or if approved, more importantly, that competitors will not develop
functionally similar competitive products outside the protection of the
Company's patents. The Company's technology and proprietary research is by
nature dynamic and evolving, not withstanding its existing patents and patent
applications, in the interests of safeguarding the Company's proprietary
technologies and research, the Company is relying more heavily on trade
secret protection, confidentiality agreements, and the placing of tight
restrictions on the disclosure of proprietary information.
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PATENTS
The Company holds a United States patent for the use of colored
microspheres in measuring blood flow in laboratory animals as well as for
methods of separating the microspheres from blood and body tissue and
determining the number of microspheres in tissue without separation, that
expires in 2003. Similar patents are held by the Company for Canada,
Australia, and Israel. The Company also has pending patent applications for
its colored microspheres in nine additional countries.
The Company holds a United States patent for the preparation and
application of contrast microspheres in the detection of pulmonary emboli and
certain other conditions which expires in 2004, as well as similar patents
in Canada and eleven other countries. The Company also has pending patent
applications for its contrast microspheres in two additional countries. In
addition the Company has prepared patent applications for use of its contrast
microspheres in ultrasound applications and for an oral application using
various imaging modalities. The Company has registered Maxispheres-TM-, as
the trademark for its contrast microspheres.
The Company holds a United States patent for the first generation fat
sequesterant product and its use in reducing dietary fat absorption that
expires in 2006. The Company also has pending patent applications for this
product in Canada and Japan.
LICENSING AGREEMENTS
In 1994, the Company through its Effective Health subsidiary entered into a
exclusive Licensing Agreement with KCD, Incorporated, a company recently
formed by Clark M. Holcomb. KCD represented to the Company prior to entering
into the agreement that it had access to national drug and health food
chains. At the time the Company entered into the agreement with KCD, KCD had
recently been formed by Clark M. Holcomb and had very limited management
experience and financial resources. The agreement provided KCD with
exclusive sales and marketing rights to the Company's fat sequestration
technology for the United States and Canada. The agreement required KCD to
pay an initial licensing fee of $100,000, and to make minimum monthly royalty
payments to maintain the license. KCD began marketing SeQuester-TM- in 1994
which is a product based on the Company's sequestration technology. The
agreement also required KCD to conduct clinical studies designed to establish
and validate marketing claims. It further required the KCD assume sole
responsibility for marketing claims, and to market their product in
accordance with established FTC guidelines. By November 1994, KCD was in
default of its minimum royalty payments and was demanding the Company amend
the Licensing Agreement. Specifically KCD demanded the royalty of 15% of net
sales be reduced to 6% of gross sales. KCD cited the higher royalty was
creating significant cash flow problems and would prevent KCD from being able
to market SeQuester-TM- profitably. KCD assured the Company that if the
Company amended the Licensing Agreement in such a manner that KCD would
become current and would remain so regarding the payments of royalty's.
In May 1995, the Company and KCD entered into a First Amended License
Agreement. The amended agreement called for a reduction in the minimum
royalty payments from 15% of net sales to 6% of gross sales. The agreement
also established specific provisions in the event of a default by KCD on its
minimum royalty payments. The amended agreement also provided for the payment
of past due royalties and well as establishing that the physical payment of
all royalties would be made through a third party factor thus assuring the
Company would be paid without interference from KCD, or any of its
affiliates. By October 1995, KCD payments were not being paid through the
third party factor as agreed to by KCD, and the payments had started being
short of the full amount and late in arriving forcing the Company to issue a
Notice of Default to KCD.
The Company is in discussions with several established distributors who
have expressed an interest in marketing products based on sequester
technology. Based on sales history, the Company believes that if the product
is marketed in a responsible manner, sales of a sequester type product can
become significant within several months of its reintroduction. The Company
also believes there is an equally strong demand for a sequester based product
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based in foreign markets and intends to seek a strategic partner for foreign
distribution. The revenues the Company received from licensing fees and
royalty's of the sequesterant technology to KCD contributed approximately 71%
of the Company total cash flow for the year ended December 31, 1995. The
Company has filed a law suit against KCD seeking payment of back royalty's
among other things (See Item 3. Legal Proceedings), however, there can be no
assurance that the Company will be successful collecting any back royalty's
from KCD, and further, there can be no assurance the Company will be
successful in licensing the sequesterant technology to another group, which
the Company believes will require additional testing of the sequester product
to substantiate its efficacy.
In January 1996, the Company entered into a broad based, strategic long-
term agreement with E-Z-EM, Inc. See "Recent Developments".
ROYALTY AGREEMENTS
The Company is required to pay inventors royalty's equal to 6% of the
Company's sales of sequesterant products to William Shell, MD., and Jackie
See, MD., who developed the sequesterant technology, and Francis Pizzulli, an
practicing attorney and partner of the the Company's predecessor, who
acquired a 50% interest in Jackie See's royalty income of the sequesterant
technology. The Company has been delinquent in making in these royalty
payments to William Shell, Jackie See and Francis Pizzulli due to KCD
delinquencies (See Item 3. Legal Proceedings). Dr. Shell had assigned his
portion of inventors royalty income from the licensing of the sequesterant
technology to the Company in a previous assignment.
Both See and Pizzulli had initiated arbitration proceedings relating to the
payment of royalty's pursuant to the existing Royalty Agreements between the
Company and See Dr. Jackie See and Francis Pizzulli filed initiated an
arbitration proceeding regarding the Company's delinquent royalty payments.
In August 1995, the Company, Dr. Jackie See and Francis Pizzulli entered into
preliminary settlement agreements regarding the pending arbitration
proceedings before the Judicial Arbitration and Mediation Service, Inc. in
Santa Monica, California. Subsequently, the Company, Dr. Jackie See and
Francis Pizzulli entered into a formal settlement agreement relating to the
above arbitration proceedings. (See Item 3. Legal Proceedings)
The Company and Dr. Shell are settling various open issues relating Dr.
Shell's termination by the Company, one of which is the payment of inventor
royalty's. Dr. Shell has disputed the accounting of the royalty's the Company
provided to him, which was based on Dr. Shell's previous assignment of such
royalty's to the Company. The Company and Dr. Shell are attempting to settle
this and other issues amicably, however, there can be no assurance that the
Company will be able to reach a settlement with Dr. Shell on this matter, or
that Dr. Shell will not commence litigation against the Company in
connection with this, or other issues.
GOVERNMENT REGULATIONS AND APPROVALS
FOOD AND DRUG ADMINISTRATION
All pharmaceutical and medical diagnostic equipment manufacturers are
subject to extensive regulation by the federal government, principally
through the FDA, and to a lesser extent, by state governments. The Federal
Food Drug and Cosmetic Act and other federal statutes and regulations govern
or affect the testing, manufacturing safety, labeling, storage, record
keeping, approval, advertising and promotion of the Company's products.
Noncompliance with applicable requirements can result in seizures,
injunctions and prosecution. Refusal by the government to enter into supply
contracts private companies, or to approve an applicants new drug
applications can be the result of the aforementioned actions. FDA approval
is required before any "new" drug can be marketed. A new drug is one which
has to be proven as safe and effective via a clinical pathway to achieve
approval by the FDA before marketing.
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The Company's fat sequesterant product is generally considered to be a
"food" product and, therefore, is not subject to FDA approval, provided the
manufacturer or distributor does not, in the course of marketing or
advertising such product, make claims of a medicinal or therapeutic nature.
Moreover, the Company's over-the-counter fat sequesterant product currently
does not require FDA pre-market approval as a food additive, since it meets
the criteria established by the FDA for product ingredients generally
recognized as safe ("GRAS") by experts for food use. All of the ingredients
comprising the fat sequesterant product are included in published FDA
regulations that specify GRAS ingredients. Their criteria are determined by
the FDA, and anyone wishing to use these ingredients commercially can conform
their product to the GRAS list without notifying the FDA. Any intended use
for the ingredients that differ from those promulgated or accepted on the
GRAS list are then subject to potential FDA review. Moreover, the Nutrition
Labeling and Education Act ("NLEA") of 1990 regulating food supplements was
recently enacted, and the FDA recently has announced that it intends to
become more active with respect to regulating dietary supplements such as the
Company's fat sequesterant product. While no specific changes have yet been
announced or implemented by the FDA or the NLEA of which the Company is
aware, it is possible that the Company's fat sequesterant product will be
subject to more extensive FDA regulation in the future.
The FDA does not require the Company prove the safety and efficacy of the
Company's colored microspheres for animal blood flow research to market those
products.
The Company's contrast microspheres or any other pharmaceutical products
likely to be developed by the Company will require FDA approval for human
testing and marketing, primarily through the submission of Investigational
New Drug ("IND") and New Drug Application ("NDA"). To file, the drug's
sponsor must conduct and submit to the FDA complete pre clinical and clinical
studies to establish to the FDA's satisfaction the drug's safety and
efficacy. Required testing may include bio availability and bio equivalence
studies. "Bio availability" indicates the rate of absorption and levels of
concentration of a drug in the blood stream needed to produce a therapeutic
effect. "Bio equivalence" compares one drug product with another. Other
requirements include extensive data on the chemistry and manufacturing
controls for the drug product.
The Company is required to obtain FDA approval before marketing its
contrast microspheres. In order to obtain such approval the Company must
demonstrate the safety and efficacy of the contrast microspheres for each of
their intended applications. The effects of such government regulations on
the Company are significant in that to demonstrate the safety and efficacy of
certain products such as the Company's contrast microspheres which are
intended for human applications, the Company is required to conduct and fund
studies which can cost as much as several million dollars each. There is no
assurance that the Company will have sufficient funds for such studies which
could prevent the Company from marketing certain of its products such as the
contrast microspheres, at all.
In the case of the Company's intended contrast microsphere applications,
each of which will require separate FDA approved human clinical studies to be
conducted prior to the FDA approving marketing of a product or application,
which can cost several million dollars each, the effect of the government
regulations are significantly compounded placing the combined costs possibly
well into the tens of millions of dollars. Given the current regulations, the
real effect of government regulations (as least new medical products or
applications) is that they place smaller companies such as this Company at a
competitive disadvantage to larger companies with substantially more
resources available to them. Ultimately such regulations can prevent smaller
companies from ever bringing a product or application such as the contrast
microspheres to market. There are programs, many of which or Government
sponsored programs such as the National Institute of Health (the "NIH") which
provide financial assistance in the form of research grants. The Company has
applied to the NIH for such a research grant in October 1995 for the
development of its contrast microspheres in human applications. In March
1996, the NIH review board informed the Company the that the NIH had
"informally" approved the Company's grant application (See "Research and
Development"). The NIH grant provides for $100,000 to be funded immediately,
and $750,000 to be funded conditioned upon the success of phase
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one. The Company believes that it will successfully prove the initial
principles underlying the contrast microsphere products and technology in
phase one thereby becoming eligible for the additional funding.
Such programs are extremely valuable to small companies, however these
programs are also available to large companies with substantially more
resources that the Company. Consequently, there can be no assurance that the
Company will be able to complete clinical trials or commence marketing of the
product as these activities will be dependent upon establishing the safety
and efficacy of this products before the FDA will permit commercial
marketing, and there can be no assurance that the Company will have adequate
funds or will be able to secure adequate funds to complete such clinical
trails.
FEDERAL TRADE COMMISSION
The commercial marketing of the Company's fat sequesterant technology
requires compliance with the FTC's regulations requiring truthful and
substantiated advertising of a food supplement or over-the-counter drug. The
FTC, along with the FDA, is charged with the regulatory oversight of
companies promoting and marketing products that make claims of certain
efficacy and performance, which includes the Company's fat sequesterant
product which has been promoted as a weight loss product.
FTC regulations establish guidelines for the development and marketing of
these products. Moreover, the Nutrition Labeling and Education Act of 1990
("NLEA") regulating the standardized labeling of food products including food
supplements and dietary weight loss products, and the FDA recently have
announced their intention to take a more active interest in regulating
dietary supplements such as the Company's fat sequesterant products. While
the Company is not aware of any specific changes that have been announced or
implemented by the FDA, or the NLEA it is possible that development and
marketing of products such as the fat sequesterant will be subject to more
extensive regulation in the future, which could materially affect the
Company's ability to market such products in the future.. Since the product
formulations for both the first and advanced fat sequesterant products
contain ingredients commonly found in the average diet, FDA approval to
market these products is not required.
GOVERNMENT REGULATORY PROCEEDINGS
In April 1991, Dr. Shell, Allied International Corp. ("Allied") and certain
other parties agreed to a preliminary judgment of permanent injunction with
the FTC, which among other things required more extensive human clinical
trials to substantiate advertising claims made by Allied for the Company's
fat sequesterant product before further marketing of that product would be
permitted, and imposed certain administrative conditions upon Dr. Shell as
the Company's then chief executive officer.
In October 1995, the Seattle Regional Office of the Federal Trade
Commission advised the Company that the staff believes that the Company's
sequestration product, which was licensed ( see subsequent events ) to and
marketed by KCD under the SeQuester-TM- trade mark, has been improperly
represented in advertising claims, and the same sequesterant product
previously marketed by the Company under the Lipitrol-TM- trade name was also
improperly represented in advertising claims. The staff advised the Company
that it is prepared to recommend that a complaint be filed against the
licensee, the Company and certain individuals in connection with the
foregoing. The staff also indicated its belief there is insufficient
substantiation of the efficacy of the product for weight loss and fat
sequestration. The Company and the FTC staff have agreed upon the terms of a
proposed settlement in this matter, pursuant to which the Company would
consent to a permanent injunction prohibiting it from making
misrepresentations relating to weight loss or weight reduction products or
services, or with respect to tests or studies relating to such programs or
services. In addition, the Company would pay consumer redress to the FTC in
an aggregate amount of $35,000 over a period of twelve months. The Company's
Board of Directors voted to accept the FTC proposal in March 1996, which now
must be formally approved by the FTC.
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FUTURE LEGISLATION AND REGULATIONS
Federal and state legislation and regulations concerning various aspects of
the health care industry are under almost constant review. Accordingly, the
Company is unable to predict at this time the passage of additional
legislation, nor can it predict the extent to which it may be affected by
legislative and regulatory developments concerning its products and the
health care field generally.
RESEARCH AND DEVELOPMENT
MICROSPHERE STUDIES
Since 1988, the Company's primary research activities have relating to
colored and contrast microspheres for animal blood flow research and for
diagnostic imaging of human blood flow restrictions and arterial branch
blockage. Early research was involved animal based pulmonary emboli studies
at the Universities of Iowa, Washington, Pennsylvania and California at Los
Angeles, in which each study produced positive indications.
The Company has also conducted preliminary feasibility studies of oral
applications for visualizing the gastrointestinal tract in humans. These four
potential human diagnostic imaging applications ( detect lung blood clots
using CAT scanning, ultrasound contrast microsphere for detection of
myocardial perfusion, oral contrast microsphere for gastrointestinal tract
visualization, and an MRI contrast microsphere to replace x-ray contrast
media in detecting liver, heart or brain dysfunction) are targeted toward
radiologists and other physicians doing body imaging (capturing picture like
images of human organs while outside the body).
The Company is conducting pre clinical studies (See E-Z EM below) of
pulmonary emboli (lung blood clots) application at Dartmouth Hitchcock
Medical Center and the University of Massachusetts Medical Center which began
in March 1996 and are expected to continue approximately six months. The
Company's goal regarding detection of pulmonary emboli is to substantially
improve quality and detail of diagnostic imaging of pulmonary artery
circulation thereby increasing the probability of early detection of arterial
branch blockage. Current test procedures use less accurate radioactive scans,
or invasive catheter placement in the lung. Using current procedures, the
presence of pulmonary emboli is often undetected before autopsy. The Company
has demonstrated the ability to detect a pulmonary emboli before autopsy with
x-ray equipment in limited animal experiments during which an artificial
pulmonary emboli was induced. In test use contrast microspheres labeled with
x-ray dye were injected into a peripheral vein and were carried in the blood
flow to the lungs where they lodged revealing the presence and location of
the artificial emboli during x-ray visualization. The contrast
microspheres dissolved a short time later leaving no residue.
FUTURE CONTRAST MICROSPHERE STUDIES
The Company hopes to file an Investigational New Drug (" IND") with the FDA
in late 1996 or 1997 for approval to commence human testing of the contrast
microspheres for certain applications including pulmonary emboli. The
foregoing FDA clinical trials will require substantial expenditures and may
be dependent upon the applicant obtaining additional funding (See Effects of
Government Regulations above).
Although the Company believes that it will be granted marketing approval of
its first indication for contrast microspheres, should there be significant
delays in obtaining funding, in completing the clinical trials, or in the
FDA's review of the application, commencement of any commercial marketing of
the contrast microspheres could be substantially delayed. There can be no
assurance that the Company, or will have adequate financial resources to
complete all of the required testing, or that the Company will be able to
successfully complete the clinical trials for any potential indication for
its contrast microspheres, or that the Company will be able to obtain FDA
marketing approval for any such indications.
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SEQUESTERANT PRODUCT STUDIES
In February 1995, the Company entered into a an exclusive agreement to
conduct human clinical tests of an advanced generation sequestration
technology recently developed by the Company with a large well known European
nutritional company engaged in the business of manufacturing and marketing
food supplements and weight loss products internationally. The clinical test
protocol was designed as a double blind trial by a research group affiliated
with the European company. The protocol was sent to the Company for approval,
and was subsequently reviewed and approved by William Shell the Company's
Chief Scientific Officer. The European company completed the test in October
1995 and informed the Company in November 1995 that product tested did not
produce statistically significant results. Based on the negative test
results, the European company did not exercise their options to acquire
foreign sales and marketing rights.
STRATEGIC RELATIONSHIPS
In January of 1996, the Company entered into a broad based, long-term
agreement with E-Z-EM, Inc., ("E-Z-EM"), a global leader in the sales and
marketing of oral radiographic contrast agents with annual revenues in excess
of $90,000,000 to conduct pre clinical and FDA approved clinical trials of
the Company's contrast microspheres for certain human applications, and to
develop manufacture and market products, applications and services relating
to the Company's contrast microspheres.. Initially, E-Z EM will fund pre
clinical animal studies which are to begin as soon as possible. The agreement
as contemplated reflects E-Z-EM's intention analyze the full impact of
regulatory costs and expenses in preparation for additional capital funding
to conduct FDA approved clinical trials as a Investigational New Drug ("IND")
with the FDA. The agreement further establishes the commercial relationship
between the two company's where the Company will retain the rights to
manufacture contrast microsphere products while E-Z EM have the exclusive
option to license, including the right to sub-license, all products developed
under the agreement, and subsequent patent if any, with rights to global
sales and marketing of the products and related services for the life of the
patent or 10 years, whichever is longer. The Company believes the strategic
partnering of E-Z EM and the Company will accelerate the development of
contrast microspheres for human applications and will substantially improve
the possibility of these products being commercialized. In March of 1996, the
Company and E-Z EM began pre clinical animal studies of the contrast
microspheres for the detection of pulmonary emboli (lung blood clots) at
Dartmouth Hitchcock Medical Center, and at the University of Massachusetts
Medical Center.
1996 RESEARCH AND DEVELOPMENT PLAN
The Company spent $ 259,608 in 1995 as compared to $429,393 in 1994 on
research and development. The decline in 1995 is the result of limited
operating capital. The Company considers its research and development
programs as the foundation upon which everything else is to be built and has
been assigned the highest priority, second only to generating more immediate
revenues. The Company intends to balance future research budgets and
activities between long term diagnostic imaging programs based on the
Company's colored and contrast microspheres, and less complex commercial
programs which can develop more immediate revenues such as the dietary and
food supplement products currently in development.
During 1996, the colored and contrast microsphere programs will be funded
from grants such as the NIH grant (see below), and from strategic partners
such as E-Z EM (see below), and to some extend from operating funds. The
dietary and food supplement programs, which are significantly less costly
than the microsphere programs, will be funded from operational funds.
The new product development group, which was established in October 1995,
and which will grow as needed, will act as project coordinator with the
responsibility of managing the Company's research and development programs,
including supervising clinical studies for both food supplement and
diagnostic programs, management of regulatory affairs including FDA and FTC
related matters, managing and coordinating the Company's
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new research grant program(See Grant Programs below) in which the Company
intends to apply for simultaneous grants in four potential human diagnostic
imaging applications including detection of lung blood clots using CAT
scanning, ultrasound contrast microspheres for detection of myocardial
perfusion, oral contrast microsphere for gastrointestinal tract
visualization, and an MRI contrast microsphere to replace x-ray contrast
media in detecting liver, heart or brain dysfunction, all of which are
applications targeted toward radiologists and other physicians doing body
imaging, which is the non invasive imaging of human organs from outside the
body. The research team is also project coordinator for off site programs
such as the current contrast microsphere pre clinical program being conducted
Dartmouth Hitchcock Medical Center, and the University of Massachusetts
Medical Center with E-Z EM, the Company's contrast microsphere strategic
partner.
RESEARCH AND DEVELOPMENT GRANT PLAN
The US government sponsors a number of programs intended to give promising
technologies and companies competitive chance to get their products or
applications through the daunting and costly government regulatory process,
such as the FDA regulatory process which affects the Company's contrast
microsphere products. One such organization is the National Institute of
Health (the "NIH") who provides financial assistance in the form of research
grants for promising technologies. In October 1995, the Company applied to
the NIH for such a research grant for the development of its contrast
microspheres in human applications (See Item 6A. Management's 1996 Plan of
Operations). In March 1996, the NIH review board informed the Company the
that the NIH had "informally" approved the Company's grant application (See
Research and Development section ahead). The NIH grant provides for $100,000
to be funded immediately, and $750,000 to be funded conditioned upon the
success of phase one. The Company believes that it will successfully prove
the initial principles underlying the contrast microsphere products and
technology in phase one thereby becoming eligible for the additional funding.
Such programs are extremely valuable to small companies which in many have
little or no alternative.
As stated above, the Company's 1996 research and development program
includes applying for grants in four potential human diagnostic imaging
applications which include, detection of lung blood clots using CAT scanning,
ultrasound contrast microspheres for detection of myocardial perfusion, oral
contrast microsphere for gastrointestinal tract visualization, and an MRI
contrast microsphere to replace x-ray contrast media in detecting liver,
heart or brain dysfunction, all of which are applications targeted toward
radiologists and other physicians doing body imaging, which is the non
invasive imaging of human organs from outside the body. The Company also
intends to apply for grants actual FDA clinical studies of pulmonary emboli
application of contrast microspheres. The Company's product development unit
will coordinate submission of applications, assignment of principle
investigators, and manage the individual programs from inception through the
clinical study, and market development. However, there can be no assurance
that the Company will be able to complete clinical trials or commence
marketing of the product as these activities will be dependent upon
establishing the safety and efficacy of this products before the FDA will
permit commercial marketing, and there can be no assurance that the Company
will have adequate funds or will be able to secure adequate funds to complete
such clinical trails.
ENVIRONMENTAL COMPLIANCE
The Company's products are not subject to material environmental regulation
at this time. While the Company's current scope of microsphere operations is
relatively limited and all of the product is used without wastage, issues of
environmental compliance could arise in the future if increased manufacturing
of the microspheres were to require disposal of hazardous chemicals.
EMPLOYEES
The Company currently has eight employees of which seven are full time
employees, three of whom are engaged in management, marketing, administrative
and support activities, with the remaining four comprising one secretarial,
and three technical, research and development and scientific staff engaged in
microsphere manufacturing and development.. One
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part time employee is used general office and shipping products. The
Company retained two consultants in October 1995 who formed the
initial new product development team, and who coordinate and
administrate the Company's research and development programs and
activities. In January 1996, these two consultants became full time. The
Company also utilizes the services of three other consultants in the
new product development group on an as needed basis which the Company
expects will transition toward full time as new product development
activity increases during the year. The Company does not currently
have a accountant as the result of its previous controller resigning
(See Conflict of Interests below).
The Company's ability to develop marketable products and to establish and
maintain its competitive position in an industry with constant technological
changes will depend to a certain extent on its ability to attract and retain
qualified technical, marketing and management personnel. None of the
Company's employees are subject to a collective bargaining agreement, and the
Company believes its relations with its remaining employees are good. During
the initial restructuring and reductions in general and administrative costs
which began in May 1995, the Company did reduce the number of full time
clerical employees by 2, with one additional resigning to take a better
position.
CONFLICTS OF INTEREST
The Company believes it has a potential conflict of interest relating to
the Company's former controller who resigned to work for KCD, the Company's
former licensee of the sequesterant technology, (KCD is an affiliate of Clark
M. Holcomb) and who is the subject of numerous legal proceedings including
the SEC investigation into certain sales and the subsequent resale's of the
Company's common stock to a large number of individuals (which was previously
disclosed by the Company) all of which were affected by or arranged by Clark
M. Holcomb, and in which the Company has also been named.
An additional potential conflict of interest concerns the law suit filed
by the Company against KCD in March 1996 as a result of KCD's failure to make
their royalty payments (See Item 3. Legal Proceedings).
The Company also believes it has a potential conflict of interest with
William Shell, the Company's former Chairman of the Board, Chief Executive
Officer, member of the Board of Directors, and founder relating a legal
proceeding brought against D&F (See Item 3. Legal Proceedings) by William
Shell and the Company previously, which legal fees have been paid by the
Company, concerning an agreement whereby William Shell has a "right of
approval" to any potential settlement the Company might make with D&F.
The possibility for conflict relates to separate interests of Dr. Shell
and the Company regarding the D&F proceedings. In March 1996, the Company
initiated settlement discussions with D&F principles. As a result of William
Shell's February 6, 1996 termination by the Company, the previous conflict of
interest relating to his operating a private medical practice is no longer
relevant.
ITEM 2. DESCRIPTION OF PROPERTY
In February 1992, the Company entered into a three-year lease for its
presently occupied premises from an unaffiliated third party for 4,400 square
feet of space in Los Angeles, California at $4,750 per month for the first
year, $5,200 per month for the second year and $5,700 per month for the third
year, with an option to extend for an additional two years at $6,000 per
month. During February 1995, the Company exercised this option. The offices
are used for manufacturing and laboratory research and development as well as
the Company corporate and executive offices. The Company believes these
facilities are adequate for its current needs.
Page 26 of 56
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
SEC PROCEEDINGS
In 1990, the Securities and Exchange Commission's New York Regional and
Enforcement staff commenced an inquiry into possible securities violations
of the registration, anti-fraud, notice and reporting provisions under
various provisions of the federal securities laws that may have occurred
between July 1989 through January 1990 resulting from the actions of the
Company and certain members of its management during that period. As part of
a settlement agreement, the Company, Dr. William Shell, and Philip Dascher,
the Company's former President, neither admitted nor denied any violations,
and without any findings of fact consented in August 1992 to the entry of a
judgment for a permanent injunction enjoining them from violations of various
provisions of the federal securities laws. The settlement included a
rescission offer that was made by the Company to 17 individuals who had
previously exercised warrants to purchase the Company's common stock at a
time when a current registration statement was not in effect. None of the
individuals, however, elected to exercise this right of rescission.
SEC AND SHAREHOLDER PROCEEDINGS RELATING TO MATTERS DIRECTLY BY EFFECTED BY
OR ARRANGED BY CLARK M. HOLCOMB
In July 1993, based on a concern the Company formed an independent
committee of its Board of Directors who's purpose was to determine whether
certain prior private placements of the Company's securities complied with
all of the registration requirements of federal and state securities laws. In
certain prior private placements of the Company's shares, a total of
approximately 2,506,982 shares of the Company's Common Stock was issued to a
small number of individuals. Those issuance's were structured in reliance
upon the advice of the Company's then securities counsel, and the Company
believes that these issuance's, standing alone, would have qualified for
exemptions from registration under federal and state securities laws.
However, certain subsequent resale's of these shares, commencing in June
1992, by the original purchasers or their transferees to a total of
approximately 330 investors raised an issue as to whether a technical
distribution occurred that might have required either the original issuance's
or the resale's to have been registered. All of the foregoing resale's were
either directly effected or arranged for by Clark M. Holcomb.
In October 1993, the Company filed a registration statement with the SEC to
register all of the foregoing 2,506,982 shares with the SEC. However, even if
the registration statement becomes effective so as to permit public resale's
by the holders of the shares involved in the transactions described above,
these holders could have a right of rescission to recover the purchase price
they paid for their shares plus interest from the date of purchase against
the persons from whom they acquired the shares.
The Company believes (based in part upon the opinion of its current special
securities counsel) that these holders do not have a valid and enforceable
right to such rescission. However, subject to any applicable statutes of
limitation that might bar such future claims, these shareholders could assert
such claims, and the Company has not set aside any reserves to fund any
potential liabilities that it might incur in connection with any such future
potential claims, which could be material. Should the Company incur any such
liabilities, it might seek indemnification or contribution for such
liabilities from Mr. Holcomb, or other third parties.
In October 1995, the staff of the SEC advised the Company that it was
considering recommending that the SEC file a civil injunctive action against
the Company and Dr. William Shell for alleged violations of the registration
provisions of the federal securities laws. The alleged violations appear to
relate to the sale by the Company of unregistered shares of its common stock
which involved a series of resale's of these shares that were either directly
effected or were arranged for by Clark M. Holcomb. These transactions have
been the subject of an SEC investigation previously disclosed by the Company.
Page 27 of 56
<PAGE>
In April 1994, Rod Sherman and Computer Buddy sued Clark M. Holcomb and the
Company in Superior Court for the County of Los Angeles for breach of an
alleged oral contract pursuant to which Holcomb and the Company were to pay
Sherman a finder's fee for all shares of the Company's stock sold to third
parties introduced by Sherman to Holcomb or the Company of which Sherman
alleges that $58,000 remains owing to him. Sherman is seeking this amount in
his lawsuit although the Company believes that it has no obligation or
liability to Sherman in connection with this matter. A trial date has
currently been scheduled for May 1996. The Company denies the allegations and
intends to vigorously contest the matter.
In March 1995, Donald Seidel sued Clark M. Holcomb, Dr. Shell, George
Berger and the Company in the Superior Court for the County of Los Angeles,
which was served on the Company in May 1995. This action alleges breach of
contract, fraud, non-payment for services, conspiracy to defraud, unjust
enrichment and conversion. Plaintiff is seeking general and compensatory
damages of at least $692,000 and special and consequential damages of not
less than $170,000, together with exemplary and punitive damages. It is
alleged that the Company conspired to defraud plaintiff of his shares of
Company stock and deprive him of payment for services. The Company denies
these allegations and intends to vigorously contest the matter.
In April 1995, Richard Willman and Nancy Holling sued Clark M. Holcomb, KCD
Incorporated, Dr. Shell and the Company in Superior Court for the County of
Ventura for rescission, breach of contract, breach of fiduciary duty, fraud,
negligent misrepresentation, constructive trust and negligence all regarding
the sales in July 1993 and September 1993 by Holcomb to Holling and Wilman of
Company stock. Willman and Holling allege general damages of $107,250 and
$4,275 respectively plus interest, as well as punitive damages in an amount
to be proven at time of trial. In July 1995, the Company executed a
Settlement Agreement with Nancy Holling. There was no money demanded and none
paid in connection with this settlement. The Company believes it has no
obligation to Willman or Holling in connection with this matter. The Company
denies the allegations and intends to contest the matter. A trial date was
scheduled for April 1996 with respect to Wilman, however, in a mandatory
settlement conference in March 1996, Clark M. Holcomb and the Company entered
into a settlement with Willman, in which Holcomb agreed to pay Willman
$100,000 in cash and to deliver to Willman 50,000 shares of restricted KCD
common stock. In addition, Holcomb had previously delivered to Willman 40,000
shares of the Company's common stock which Willman will be permitted to
retain as part of the settlement. The Company agreed to pay $5,000 in full
settlement of this claim rather than go through the expense and time required
to defend the action in trial. In July 1995, the Company executed a
Settlement Agreement with Nancy Holling. There was no money demanded and none
paid in connection with this settlement. The Company believes it has no
obligation to Wilman or Holling in connection with this matter.
In April 1995, David Eastman filed a complaint in the Superior Court of the
County of Orange, California against Clark M. Holcomb, Anita Kavanagh, Dr.
Shell and the Company. This action alleges fraud, negligent
misrepresentation, rescission and restitution, securities fraud and
conspiracy to defraud. This action was served on Dr. Shell and the Company in
July 1995. The only allegations of wrong doing are directed at Holcomb and
Holcomb is alleged to have been acting as an agent of the other defendants.
It is alleged that Holcomb represented that although the shares purchased by
the plaintiff contained a legend, they would be free trading in sixty to
ninety days. It is also alleged that Holcomb misrepresented the financial
condition of the Company. The complaint seeks damages in the amount of
$200,000 as well as unspecified punitive damages. The Company and Dr. Shell
deny that Holcomb was their agent. A trial date has currently been scheduled
for May 1996. The Company denies the allegations and intends to vigorously
contest the matter. In February 1996, Eastman obtained a default judgment
against Holcomb in the amount of $200,000 in compensatory damages and $50,000
in punitive damages.
In February 1996, the Rudolf Steiner Research Foundation filed a complaint
in the United States District Court for the Central District of California
against Clark M. Holcomb,
Page 28 of 56
<PAGE>
Lawrence Gibson, Murray Bettingen, Bettingen, Inc., and the Company. This
action alleges civil RICO, violation of the Securities Act of 1933,
violation of California Corporation Code, fraud, deceit and intentional
misrepresentation, negligent misrepresentation, conversion, constructive
trust and breach of contract. The complaint seeks damages of $201,333,
rescission, punitive and exemplary damages. The Company believes it has no
obligation to the Rudolf Steiner Research Foundation in connection with the
matter. The Company denies the allegations and intends to vigorously contest
the matter.
The Company is negotiating with the SEC regarding a potential settlement
of any SEC claims against the Company with respect to the above
transactions. The Company anticipates that the settlement would
require the Company to consent to a permanent injunction, without
admitting or denying any liability, that would bar the Company from
and future violations of the registration requirements of the federal
securities laws. The Company believes that such a settlement would not
have a materially adverse effect on the Company or its operations.
However, there can be no assurance that a settlement as described
above ( or a settlement with any other terms ) will ultimately be
reached with the SEC. The Company and Dr. Shell are subject to a 1992
permanent injunction enjoining them from violating the federal
securities laws.
PROCEEDINGS RELATED TO LICENSING AGREEMENTS, MANUFACTURING AGREEMENTS,
ROYALTY AGREEMENTS, AND PATENT INFRINGEMENTS
In September 1993, Dr. Shell commenced an action against Dynamic Products,
Inc. ("Dynamic"), D&F Industries ("D&F") in his capacity as a 25% shareholder
of FATCO in the Orange County Superior Court of the State of California
seeking damages from these parties for their alleged breach of contract and
misappropriation of certain trade secrets of FATCO and the Company relating
to the first generation fat sequesterant product. Dr. Shell has asserted in
this action that Dynamic has sold the first generation fat sequesterant
product to Herbalife for resale in the United States without the required
payment of royalties to FATCO (which is obligated to pay Dr. Shell 25% of its
royalty income, which Dr. Shell then contributes to the Company) based on
those sales.
In October 1994, Dr. Shell filed a related lawsuit against FATCO in the
same court seeking the termination of a 1987 agreement between FATCO and
Shell licensing certain fat sequesterant technology of Dr. Shell to FATCO
based upon failure of FATCO to fully exploit the transferred technology for
the benefit of Shell, failure to fully exploit the products, knowingly
permitting sales of products made utilizing the technology transferred to
continue even though no royalties were being paid on those sales, refusing to
pursue legal action to collect the unpaid royalties and stopping the
unauthorized sales, and by entering into a renewal of an agreement with a
distributor on the same unfavorable terms which previously existed and which
diverted moneys which should have been paid to FATCO to other entities owned
and controlled by some of the shareholders and members of the Board of
Directors of FATCO. FATCO has filed a cross-complaint in this action against
Shell alleging breach of the licensing agreement between Shell and FATCO.
In January 1996, FATCO filed a First Amended Cross-Complaint alleging
causes of action against Dr. Shell, the Company, EHI and KCD for Breach of
Contract, Breach of Fiduciary Duty, Interference with Prospective Economic
Advantage, Misappropriation of Trade Secrets, Conversion, Constructive Trust,
Accounting and Permanent Injunction. Each of these causes of action relate to
the action of the Company in entering into the License Agreement with KCD.
The Company has filed an answer denying all of the allegations contained in
the Cross-Complaint and intend to fully defend this matter. The basis of this
cross complaint appears to pertain to the license agreement between EHI and
KCD, Inc., which as of March 1, 1996 was canceled as a result of KCD's
failure to make royalty payments to the Company. (See Item 4. Legal
Proceedings, below).
In March 1994, the Company and S/S sued Herbalife (settled with respect to
Herbalife) and D&F in Superior Court for the County of Orange, California for
fraud, breach of contract and conspiracy to misappropriate trade secrets. The
Company alleges in this lawsuit that S/S provided certain confidential
information and trade secrets to D&F, which misappropriated this information
to manufacture an advanced fat sequesterant product. The
Page 29 of 56
<PAGE>
Company is seeking in this lawsuit injunctive relief and damages in an
unspecified amount from defendants. This matter has been consolidated for
trial with the action against Dynamic Products, Inc. and the action against
the officers and Directors of Dynamic Products, Inc. and D&F Industries, Inc.
In January 1995, Dr. Shell, on behalf of FATCO, filed another action in the
Orange County Superior Court of the State of California substantially similar
to the action filed by Dr. Shell in 1993 against Dynamic Products, Inc. This
newly filed action names certain individual shareholders and directors of
FATCO, Dynamic and D&F Industries as well as Herbalife International Inc.
("Herbalife"). In March 1995, this action and the lawsuit against Herbalife
described below were settled with respect to Herbalife and its directors,
with neither party making any payments to the other in connection with this
settlement.
In March 1996, the Company, on behalf of its subsidiary EHI, filed an
action against KCD in Los Angeles County Superior Court. This action alleges
causes of action against KCD for Breach of the Amended License, Declaratory
Relief and Permanent Injunction. The action is based upon the failure of KCD
to pay the royalties due pursuant to the contract and their use of
advertising claims in connection with the sale of the licensed products which
were in excess of those which the Company authorized KCD to make (See April
8, 1996 KCD Cross Complaint). On April 8, 1996, KCD filed a cross complaint
against the Company, Effective Health, William Shell and William Pelzer
alleging causes of action for Breach of Contract, Breach of Implied
Conversion, Rescission, Good Faith and Fair Dealing, Negligence, Intentional
Misrepresentation, Accounting and Constructive. The Company denies all of the
claims and intends to fully defend this cross complaint.
In August 1995, the Company, Dr. Jackie See and Francis Pizzulli entered
into preliminary settlement agreements regarding the pending arbitration
proceedings before the Judicial Arbitration and Mediation Service, Inc., in
Santa Monica, California. Subsequently, the Company, Dr. Jackie See and
Francis Pizzulli entered into a formal settlement agreement relating to the
above arbitration proceedings, Both See and Pizzulli had initiated
arbitration proceedings relating to the payment of royalty's pursuant to the
existing Royalty Agreements between the Company and See. See had previously
transferred a 50% interest in his Royalty Agreements with the Company to
Pizzulli.
With respect to the formal settlement of the Royalty issues with See, the
Company has agreed to: ( 1 ) Pay See, beginning in July 1995 a total of 1
1/2% of the Company's net sales of products and 10% of the Company's receipt
of royalties from the Company's licensees under certain patents owned by the
Company covering colored microspheres, contrast microspheres and fat
sequestration products; and, ( 2 ) pay See, over time, the sum of $32,417
which represents past due royalties for the period up to June 30, 1995; and,
( 3 ) pay See, over time, the sum of $33,062 which represents the award of
attorney fees and costs to See in connection with the arbitration; and, ( 4 )
pay See, over time, the sum of $65,731 of which $35,227 is subject to
adjustment based upon an accounting and $30,504 of which was conditioned upon
receipt of royalties from the Company's sequesterant licensee; and, ( 5 )
transfer 10,000 restricted shares of KCD common stock to See.
With respect to the formal settlement of the Royalty issues executed in
January 1996 with Pizzulli, the Company has agreed to ( 1 ) pay Pizzulli,
starting in July 1995 a total of 1 1/2% of the net sales of the Company's
products and 20% of the Company's receipt of royalties from the Company's
licensees under certain patents owned by the Company covering colored
microspheres, contrast microspheres and fat sequestration products; and,
( 2 ) pay Pizzulli over time the sum of $93, 542 which represents the award
of attorneys fees and costs to Pizzulli in connection with the arbitration;
and, ( 3 ) pay Pizzulli over time the sum of $ 13, 787 which represents past
due royalties or the period up to June 30, 1995; and, ( 4 ) pay Pizzulli
over time the sum of $72, 244 of which $37,177 is subject to adjustment
based upon an accounting and $ 35,067 of which was conditioned upon receipt
of royalties from the Company's licensee; and, (5) transfer 15,000 restricted
shares of KCD common stock to Pizzulli.
Pizzulli, in addition to the arbitration pertaining to royalty issues
initiated a arbitration proceeding pertaining to the timing of the sale of
his restricted shares of the Company's
Page 30 of 56
<PAGE>
stock. A formal settlement of the claim was entered into in January 1996.
With respect to the formal settlement the Company agreed to (1) pay Pizzulli
the sum of $25,000 on the execution of the agreement; and, ( 2 ) pay Pizzulli
the additional sum of $75,000 on or before March 1, 1996; and, ( 3 ) pay
Pizzulli, subject to certain adjustments, the additional sum of $100,000 on
or before March 1, 1997; and, ( 4 ) assign to Pizzulli all of the Company's
interest in and to the Promissory Note dated May 13, 1993 in the face amount
of $ 265,000 payable to the Company by Clark M. Holcomb; and, ( 5 ) transfer
to Pizzulli 75,000 restricted shares of KCD common stock; and, ( 6 ) transfer
to Pizzulli 70,000 free trading shares of the Company's common stock; and,
( 7 ) transfer to Pizzulli 300,000 shares of the Company's restricted common
stock. In addition the Company has agreed to file FORM S-3, or other forms
as may be appropriate to register the shares of the Company's common stock
being transferred to Pizzulli. There are also provisions in the settlement
which would require the Company to issue additional shares of its restricted
common stock to Pizzulli in the event that either the registration of the
300,000 restricted shares is unreasonably delayed and/or the price of the
Company' common stock does not reach a specified price within an eight month
period of filing the of FORM S-3.
PROCEEDINGS RELATED TO MRI LEASE OPERATIONS
In August 1994, VMI sued MFA in Supreme Court for the County of New York,
New York, for breach of contract and accounts due. VMI alleges in this
lawsuit that MFA breached an equipment lease agreement for VMI's second MRI
unit, the Resonex Machine, by failure to make lease payments due January 27,
1994, and thereafter in the sum of $210,210 as well as interest thereon. VMI
is seeking in this lawsuit a judgment against MFA in the sum of $210,210 plus
interest thereon with costs, attorney's fees and disbursements and other
relief. VMI will also seek a judgment for all unpaid lease payments
subsequent to August 1994 which total an additional $510,510 through December
31, 1995. However, the Company has not been successful in serving the notice
on MFA principles including Jerald Brauzer, nor has a trail date been set.
In April, 1995, Johnson & Johnson Finance Corp. ("J&J Finance") brought an
action against MFA and VMI in connection with a loan made by J&J Finance to
MFA that was secured by a lien granted by MFA on the Resonex MRI unit which
at the time was owned by VMI. After MFA defaulted on the foregoing loan, J&J
Finance, in June 1995, obtained a writ of attachment on the Resonex MRI unit
and has taken physical possession of that unit. The Company's position is MFA
had no authority to secure the foregoing loan with VMI's MRI unit since the
loan was made solely for the benefit of MFA, the lien was placed on the MRI
unit without VMI's knowledge or consent, and none of the loan proceeds were
received by VMI or the Company. VMI, and the Company are in settlement
discussions with J&J that would require the Company and VMI to forfeit their
interest in the MRI unit in exchange for J&J releasing VMI and the Company
from any damages. Although the Company believes VMI is entitled to recover
the MRI unit from J&J Finance and that VMI should prevail in its claims
against MFA should J&J Finance. There can be no assurance that VMI will
prevail against either party or that VMI will be able to collect any judgment
that it may obtain against MFA. The Company also recently learned that the
current fair market value of the Resonex MRI unit is substantially below
previous estimates and as such may not be worth the cost of continuing
litigation. As a result of all the foregoing the Company has written off the
net book value of the second unit of $964,286 as of December 31, 1995.
FEDERAL TRADE COMMISSION PROCEEDINGS
The Seattle Regional Office of the Federal Trade Commission has advised the
Company that the staff believes that the Company's fat sequesterant product,
which was marketed by KCD licensee under the name "SeQuester," has been
improperly represented in advertising claims, and that the sequesterant
product, when previously marketed by the Company under the name "Lipitrol",
also was improperly represented in advertising claims. The staff has
indicated that it is prepared to recommend that a complaint be filed against
the licensee, the Company and certain individuals in connection with the
foregoing. The Company presently is discussing this matter with the FTC staff
with the objective of settling the matter. There is no assurance that a
settlement will be reached or as to the impact on
Page 31 of 56
<PAGE>
the Company of any settlement, although it is presently believed that
any settlement may impact the claims utilized in the marketing of the
sequesterant product and is likely to involve the payment of a fine or other
financial penalty by the Company. The Company and the FTC staff have agreed
upon the terms of a proposed settlement in this matter, pursuant to which the
Company would consent to a permanent injunction prohibiting it from making
misrepresentations relating to weight loss or weight reduction products or
services, or with respect to tests or studies relating to such programs or
services. In addition, the Company would pay consumer redress to the FTC in
an aggregate amount of $35,000 over a period of twelve months. The Company's
Board of Directors voted to accept the proposal in March 1996, which now must
be formally approved by the FTC.
Except as otherwise specifically indicated above, management believes that
the Company does have any material liability for any law suits, settlements,
judgments or fees of defense counsel which have not been paid or accrued as
of December 31, 1995.
While the ultimate outcome of these issues, if claims were asserted and
litigated, is complicated and not free from doubt, management with the advice
of legal counsel believes, on the basis of the facts currently known, that it
is not probable that the Company would have any material liability. However,
there can be no assurance that the Company will prevail in any of the above
proceedings. Also the Company may be required to continue to defend itself
resulting in substantial additional expense. In the event the Company is
unable to pay the defense costs associated with the foregoing a unfavorable
settlement or judgment could be awarded against the Company which could have
a material adverse effect upon the Company. Additionally, starting in June
1995, the Company began taking the steps it considered necessary to insure
that the Company, its subsidiaries, employees, consultants and affiliated
companies and individuals are not involved in any activities, operations, or
relationships which are not solely for the benefit of the Company.
Page 32 of 56
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
PROXY STATEMENT
On Thursday October 26, 1995, the Company held its annual shareholders
meeting at 10:00 Pacific Time, at the Olympic Collection, 11301 Olympic
Boulevard, Suite 204, West Los Angeles, California 90064 for the following
purposes:
1. To elect five (5) directors, William Shell, Richard Shell, Steven
Westlund, Peter Benz, and John Osborne, to serve until the
next Annual Meeting of Shareholders and until their successors
are duly elected; and.
2. To consider and vote upon proposed amendments to the Company's
Certificate of Incorporation that would:
(i) Effect a reverse stock split of not less the 1 for 4, and not
more that 1 for 8 shares of the Company's common stock; and,
(ii) Authorize the issuance of 5,000,000 shares of Preferred Stock
with a par value of $.01 per share in one or more series from
time to time with designations, rights, preferences, privileges
and other terms of each series to be determined by the Board of
Directors; and,
(iii) Increase the number of authorized shares of Common Stock
from 25,000,000 to 50,000,000.
3. To transact such other business as may properly come before the
meeting.
During the meeting the votes were counted by the Company Secretary who
confirmed that as the record date the number of Shares Issued and Outstanding
were 21,788,121, and the number of Shares Needed for a Quorum was 10,984,061;
and, the Number of Shares Voted was 13,346,336. The secretary confirmed that
on the basis on the total number of shares voted that the meeting had a
quorum. The results of the voting were as follows,
<TABLE>
<CAPTION>
Results of Shareholder Vote Approve Reject Carried
-----------------------------------------------------------------
<S> <C> <C> <C>
Election of 5 Directors 13,207,336 273,000 Yes
Reverse Split 12,207,249 993,860 Yes
Authorize Class of Preferred Stock 7,207,249 983,000 No
Increase in Authorized Shares 12,926,681 553,345 Yes
</TABLE>
There was no other business discussed and the meeting was adjourned.
The Company is not currently planning to effect a reverse split of its
common stock until such time as the Company's operations and revenues have
improved substantially, either through the sales of its products and
services, or through the acquisition of other products or companies, unless
the acquisition such products or companies would not be possible without
effecting a reverse split.
Page 33 of 56
<PAGE>
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is quoted on the OTC Electronic Bulletin Board
under the symbol "ITAM". The high and low bid prices for the Common Stock, as
reported by the National Quotation Bureau, Inc., are indicated for the
periods described below. Such prices are inter-dealer prices without retail
markups, markdowns or commissions, and may not necessarily represent actual
transactions.
<TABLE>
<CAPTION>
Bid Prices
Year Quarter High Low
---- ------- ---- ----
<S> <C> <C> <C>
1994 1st 3 9/16 2.0
2nd 3 1/16 2 1/4
3rd 2 23/32 1 7/8
4th 2 1/32 29/32
1995 1st 2 1/32 29/32
2nd 1 13/32 1/4
3rd 15/16 1/32
4th .32 .01
</TABLE>
To date, the Company has not declared or paid any cash dividends with
respect to its Common Stock, and the current policy of the Board of Directors
is to retain earnings, if any, to provide for the growth of the Company.
Consequently, no cash dividends are expected to be paid on the Common Stock
in the foreseeable future. Further, there can be no assurance that the future
operations of the Company will generate the revenues and cash flow needed to
declare a cash dividend or that the Company will have legally available funds
to pay dividends
There are approximately 533 stockholders of record as of March 31, 1996
Page 34 of 56
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CURRENT OPERATIONS
BUSINESS
The Company has been engaged in the business of developing, manufacturing,
and the sales and marketing of proprietary diagnostic imaging products and
services relating to blood flow research in animals, and the research and
development of proprietary diagnostic imaging products and procedures for
human applications using existing imaging equipment such as x-ray, CAT scan,
MRI, and ultra sound. The Company is also engaged in the business of
developing and licensing proprietary technologies for weight reduction
products including a technology for the selective entrapment or sequestration
of dietary fat from food while in the gastrointestinal tract, thereby
preventing the absorption of that fat. The Company has also acquired two
magnetic resonance imaging (MRI) units which are leased to MRI service
providers, which the Company has little day to day involvement in the
operations of that business (See Acquisitions, and Item 4. Legal Proceedings)
Until May 1995, the Company's primary research has been to increase the
early detection of restrictions or blockages in human blood flow through
significantly improved diagnostic imagery using two different micron sized
solid particles (microspheres) of which one is a biodegradable mixture of
blood protein and other contrast agents intended for human applications, and
the other a non biodegradable plastic styrene sphere intended for animal
blood flow research. The Company does not yet earn revenues from human
applications of microspheres, it does however, generate revenues from the
sales of colored microspheres products and services for animal blood flow
research. The also Company earned revenues from the licensing and royalty's
of its sequesterant technology, which in 1995 accounted for approximately 71%
of the Company's total 1995 (cash flow) revenues. However, KCD's license was
terminated (See Recent Developments)
RESULTS OF OPERATIONS 1994 COMPARED TO 1995
<TABLE>
<CAPTION>
For the Year Ended December 31
------------------------------
1994 1995
% of % of
$ Revenues $ Revenues
- -------- - --------
<S> <C> <C> <C> <C>
Revenues - Products & Services
Microspheres and laboratory services $210,815 29% $ 246,643 29%
Fat sequesterant - Product 3,645
Licensing fees and
royalties 504,18 70% 618,787 71%
------ --- ------- ---
$718,641 100% $ 865,480 100%
-------- ---- --------- ----
Cost of Revenues - Products & Services
Microspheres and laboratory services $221,318 105% $ 123,438 50%
Fat sequesterant 41,800 8% $ 274,800 44%
------ -- --------- ---
$263,118 37% $ 398,238 46%
-------- --- --------- ---
Gross Margin - Products & Services $455,523 63% $ 467,242 54%
-------- --- --------- ---
-------- --- --------- ---
Revenues - Lease Rentals $687,459 100% $ 319,072 100%
Cost of Revenues - aseperations $481,356 70% $ 481,357 151%
-------- --- --------- ----
Gross Margin - Lease Operations $206,103 30% $(162,285) (30)%
-------- --- --------- -----
-------- --- --------- -----
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REVENUES FROM ALL PRODUCTS
Revenues from all products and services totaled $865,480, representing an
increase of $146,839 (or 20%) over the year ended December 31, 1994. The
increase in 1995 was primarily due to a mid year change in Company management
made substantial changes in the Company's operations including a significant
reduction in operating expenses beginning in May, the effect of which began
in June. Overall, the Company reduced total operating expenses approximately
$1,066,359 (or 34%) for the period beginning in May and ending December 31,
1995. Management also redirected the Company activities toward development
and commercialization of weight loss, food supplement, and personal care
consumer products which the Company intends to begin marketing in the later
part of 1996. Since May 1995, the Company has made significant strides toward
commercialization of a number of such products, however, until such time as
one or more of those products are established in the marketplace, the Company
will continue to be dependent, to a lesser degree as a result of downsizing,
on private or institutional investment capital to support a percentage of the
planned 1996 operations. restructured the Company's operations. Management
also increased revenues with an immediate effect seen with an $114,606
increase in licensing fees and royalties received from the licensee of the
Company's sequesterant technology. However, these increases in royalties were
partially offset by a reduction in the royalty rate from 15% of net sales, to
6% of gross sales of products based on the sequesterant technology.
LICENSING FEES AND ROYALTY PAYMENTS FROM KCD
The Company and KCD, the sequesterant technology licensee negotiated a
reduction in the royalty from 15% of net sales, to 6% of gross sales
effective April 1, 1995 as a result of demands made by KCD that the current
royalty payment which was calculated on 15% of net sales was creating
problems for KCD in the marketing of SeQuester-TM- and could ultimately
prevent KCD from being able to market SeQuester-TM- profitability, and that
the 15% royalty was preventing KCD from meeting its financial obligations
included making its royalty payments to the Company. The Company was not in
favor of the reduction, however, it did so out of a concern KCD would either
terminate the agreement or would unnecessarily withhold royalty payments as
it had done previously. The royalties received from KCD accounted for
approximately ??% of the Company's total revenue base. The Amended License
Agreement incorporated the terms of the original License Agreement which
provided for a licensing fee of $100,000 (which KCD paid between March and
May 1994), and minimum royalty payments to keep the agreement in effect over
the first three years of the agreement of at least $1,258,000. Over the
balance of the term of the agreement (which was to run until at 2014), KCD
was required to pay minimum royalties in accordance with a formula but in no
event less than $436,000 per year. Through December 31, 1995, the Company
received licensing fees and royalties of $811,068, 100,000 KCD restricted
common shares (as partial payment of past royalty's, valued at $217,243)
including additional royalties of $138,620. The amended license agreement
provides for payment of a remaining past due balance in twelve monthly
installments of $18,104 plus monthly payment of interest at 1.5% per month on
the outstanding balance beginning July 1, 1995. This remaining balance was
$108,620 as of December 31, 1995. The amended agreement also established
specific default provisions and a secure method of payment intended to
prevent KCD from unnecessarily withholding or interfering with royalty
payments. However, regardless of the reductions, KCD was again delinquent in
making royalty payments to the Company during the latter part of 1995, and on
March 1, 1996 defaulted which resulted in the termination of their license
as provided for in the licensing agreement. . The Company subsequently filed
an action against KCD for breach of contract relating to past and current
royalty's as well as the FTC matter among other issues. (See Item 3. Legal
Proceedings). The Company intends to replace KCD, and is in discussions with
companies who have expressed an interest in the sequesterant technology.
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E-Z TRAC
Revenues from colored microspheres and IPS services increased $35,828 (or
17%) for the year ended December 31, 1995, over 1994. The Company allocated a
portion of its resources to the development of an automated analysis and
counting system based on A Beckton-Dickenson flow cytometry. This improved
flow cytometer became operational early in the year and immediately increased
E-Z Trac's production capacity. The Company anticipates E-Z Trac revenues
will continue to increase as the Company expands its customer base through
direct marketing efforts and through its distributor, Triton Technologies.
MRI LEASE OPERATIONS
MRI lease operations resulted in a net loss of $304,290 and a net loss of
$620,123 for the years ended December 31,1995 and 1994, respectively. Lease
revenues of $687,459 for 1994 which included two MRI units ( the Company
believed the second had no associated debt obligations ) were offset by
interest on lease obligations of $143,750 and depreciation on the two units
of $481,356. Cash flows from lease revenues for one of the two units owned by
VMI are offset in full by required payments of interest and principal to a
third party finance company. Lease revenues do not contribute any cash to
Company operations. Lease revenues for 1994 include $270,270 of delinquent
payments with respect to the second unit owned by VMI, for which none of the
scheduled lease payments have been received by VMI. Receivable's related to
these lease payments were written off during 1994. In August 1994, VMI
commenced litigation to collect delinquent lease payments with respect to
this unit. Lease revenues for 1995 were $319,072 which includes only one
unit, were offset by interest on lease obligations of $142,005 and
depreciation on the two units of $481,357.
Of the Company's two magnetic resonance imaging (MRI) systems (the "Units")
one is currently installed and operating as a mobile unit in Jefferson
Valley, New York and has been in continual use since September 1992 and is
leased to Tri-County Mobil MRI, L.P. ("Tri-County"), whose general partner is
Diagnostics Resource Funding. This lease provides for monthly payments of
$37,926 to Venus Management, Inc. ("VMI") through August 1999 and $68,589 in
September 1999 (with such payments being guaranteed by Medical Funding of
America, Inc., "MFA"), and VMI is required to make monthly installment
payments (which includes interest at 10.5% per annum on the unpaid principal
balance) for the first Unit to a third party finance company of $32,360
through August 1999 and $68,589 in September 1999.
In April, 1995, Johnson & Johnson Finance Corp. ("J&J Finance") brought an
action against MFA and VMI in connection with a loan made by J&J Finance to
MFA that was secured by a lien granted by MFA on the Resonex MRI unit which
at the time was owned by VMI. After MFA defaulted on the foregoing loan, J&J
Finance, in June 1995, obtained a writ of attachment on the Resonex MRI unit
and has taken physical possession of that unit.
The Company's position is MFA had no authority to secure the foregoing loan
with VMI's MRI unit since the loan was made solely for the benefit of MFA,
the lien was placed on the MRI unit without VMI's knowledge or consent, and
none of the loan proceeds were received by VMI or the Company. VMI, and the
Company are in settlement discussions with J&J that would require the Company
and VMI to forfeit their interest in the MRI unit in exchange for J&J
releasing VMI and the Company from any damages. Although the Company believes
VMI is entitled to recover the MRI unit from J&J Finance and that VMI should
prevail in its claims against MFA should J&J Finance, be permitted to retain
the MRI unit, there can be no assurance that VMI will prevail against either
party or that VMI will be able to collect any judgment that it may obtain
against MFA. As a result of the foregoing, the Company has written off the
net book value of the second unit of $964,286 as of December 31, 1995. VMI
has commenced litigation against MFA for payment of delinquent lease
payments, there can be no assurance that MFA will be able to make any of
those required lease payments to VMI. Receivable's of $270,270 related to a
portion of these lease payments were written off during 1994 ( Note 4 ) and
none were accrued for 1995.
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As of February 29, 1996, Tri-County was delinquent in making the December
1995, January and February 1996 lease payments and MFA and VMI failed to make
these payments under their guarantee to the finance company which has issued
a notice of default. MFA has also failed to make these payments to VMI under
its guarantee of Tri-County's payments to VMI. Accordingly, VMI had not made
certain payments due to the third party finance company for the first Unit.
Should Tri-County fail to make its future lease payments to VMI and should
VMI be unable to make its future required payments to the finance company (i)
VMI could lose ownership and possession of the first Unit and (ii) the entire
remaining balance of the MFA note would become immediately payable, with VMI
and the Company being liable, together with MFA, for any deficiency in
repayment of the note.
RESULTS OF OPERATIONS
1995 COMPARED TO 1994
On December 31, 1995, the Company had assets of $2,425,012 compared to
$4,006,321 on December 31, 1994. In addition, the Company had a total
shareholders' deficit of $(282,419) on December 31, 1995 compared to
$1,040,627 on December 31, 1994, a decrease of $1,323,046. The decrease was
the result of a net loss from operations of $3,978,579 offset by a
contribution to capital of research and development expense of $30,000,
payments from FATCO contributed to capital of $141,446, amortization of
prepaid consulting and financing cost offset against equity of $385,374,
conversion of debt to equity of $89,459, issuance of warrants of $68,500 and
proceeds from exercise of warrants of $74,511, issuance of stock for note
conversions and sale of stock of $1,866,244. Payments on a long term note
with a balance of $1,284,724 (including interest currently due of $21,609) as
of December 31, 1995 of which $339,780 is due within the next twelve months
have been assumed by the Company as part of its acquisition of VMI; and this
note is secured by guaranteed lease payments of an equivalent amount.
As of December 31, 1995, the Company's working capital position increased
by $123,727 from a negative $1,380,337 at December 31, 1994 to a negative
$1,256,610, primarily as a result of decreases in convertible debt which was
converted to equity offset by increases in accrued compensation and payroll
taxes, professional services payable, royalties payable, trade payables and
other accrued expenses. At December 31, 1995, the Company's cash position had
increased to $374,128 from $25,215 on December 31, 1994. Cash was provided by
issuance of notes of $50,000, exercise of warrants of $74,511 and private
placements of the Company's common stock and convertible notes of $1,041,244,
offset by payments on notes payable of $209,887. Cash requirements to fund
losses of $3,978,579 through December 31, 1995 were reduced by significant
non-cash charges for depreciation and amortization of $1,146,804, contributed
research and development of $30,000, the write-off of the remaining net book
value of the second MRI unit of $964,286, and $68,500 for warrants issued for
financial advisory and shareholders services.
Negative cash flow from operations for the year ended December 31, 1995 of
$3,978,579 was reduced by non-cash charges of $1,244,954 for depreciation and
amortization, $30,000 for research and development (relating to William
Shell), the write-off of the remaining net book value of the second MRI unit
of $964,286 and $68,500 for warrants issued for financial advisory and
shareholder services. Negative cash flow from operations for the year ended
December 31, 1994 of $3,084,495 were reduced by non-cash charges of $795,606
for depreciation and amortization, $200,000 for research and development,
$251,873 for stock issued for executive compensation under previously
contracted obligations, $172,019 for stock and $58,150 for warrants issued
for interest, financial consulting and legal services. In addition, the
Company recorded provisions for possible non collectible notes of $125,000
(which is an offset to equity). Negative cash flow from operations after
reduction for non-cash charges (of $2,307,740 in 1995 and $1,602,648 in 1994)
was $1,670,839 and $1,481,847 for the years ended December 31, 1995 and 1994,
respectively.
For the year ended December 31, 1995, total operating expenses were
$3,320,606 compared to $4,301,629 for 1994. Total expenses for the year ended
December 31, 1995, included selling, general and administrative (SG&A) of
$2,061,403, cost of revenues for
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products and services of $398,238, cost of revenues for lease
operations of $481,357 and research and development of $259,608, compared
to $3,127,762 for SG&A, $263,118 for cost of revenues for products and
services, $481,356 cost of revenues for lease operations and $429,393 for
research and development, in 1994. This decrease directly reflects the
costs cutting programs implemented by the Company beginning in May 1995.
The overall cost of revenues for products and services as a percentage of
sales decreased for 1995 to 54% from 63% for 1994, improving gross profit
margins approximately 9%. Decreases in cost of revenues for 1995 resulted
primarily from increased sales of high margin microspheres to large volume
customers which were somewhat offset by increases in employee wages.
Increases in inventor royalty payments were due to settlement of royalty
litigation which resulted in an increase in sequesterant inventor royalties
from 6% to 36%. 1995 royalty revenues paid to the Company on sales of
SeQuester-TM- were $618,787, with minor associated direct cost of revenues
other than royalty expense of $274,800.
Research and development expense decreased to $259,608 from $429,393 for
the year ended December 31, 1995 from 1994 due to the Company's financial
condition. As of May 1995, research and development activities were re-
organized with a priority emphasis given to commercial product applications
(See Item 6A. Management's 1996 Plan of Operations).
SG&A expense decreased to $2,061,403 from $3,127,762 for 1995 from 1994,
amounting to an overall reduction of approximately $1,066,359, or 34%,
resulting from restructuring and down sizing of operations which includes
significant reductions in accounting fees, salaries, wages, selling and
marketing expenses, and shareholder expenses all of which were phased in
beginning in June 1995. Included in 1995 are non-cash expenditures for
amortization of prepaid consulting fees of $371,375 for shareholder services.
In addition the Company incurred officers' and directors' fees of $92,000
during 1995. The Company experienced increases in legal fees of $160,917
during 1995 due primarily from matters related the SEC investigation of Clark
M. Holcomb activities. Included in 1994 are $220,420 of non-recurring
financial consulting and legal fees. These fees were paid to unaffiliated
third parties for (i) services in the areas of shareholder and financial
public relations paid in the form of 55,000 shares of the Company's Common
Stock and warrants to purchase an additional 107,500 shares of such stock
(ii) legal services rendered paid in the form of 36,000 shares of the
Company's Common Stock and warrants to purchase an additional 36,000 shares
of such stock, and (iii) services in connection with a private placement of
Company Common Stock paid in the form of warrants to purchase an additional
305,000 shares of such stock. Also included in 1994 is a provision for non-
collectible lease revenues receivable of $270,270.
Interest expense for operations for 1995 was $368,526 compared to $72,748
for 1994, an increase of $295,778. Interest expense for 1995 includes non-
cash expenditures for amortization of deferred financing costs of $276,466
incurred in connection with financial advisory services and a private
placement of convertible notes in November 1994 as well as accrued interest
on such notes. Interest expense for MRI lease operations decreased to
$142,005 in 1995 from $143,750 in 1994.
Interest income increased to $70,624 for 1995 compared to $31,350 for 1994
due to interest earned on an outstanding note receivable from a shareholder
and interest on delinquent royalties receivable.
Settlements for an employee termination, an arbitration award in connection
with royalty matters and certain litigation aggregating $554,757 were
incurred during 1995. In addition as of December 31, 1995, the Company
elected to write-off the remaining net book value of the second MRI unit in
the amount of $964,286.
As of December 31, 1995, the Company's working capital position increased
by $123,727 from a negative $1,380,337 at December 31, 1994 to a negative
$1,256,610, primarily as a result of decreases in convertible debt which was
converted to equity offset by increases in accrued compensation and payroll
taxes, professional services payable, royalties
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payable, trade payables and other accrued expenses. At December 31, 1995,
the Company's cash position had increased to $374,128 from $25,215 on
December 31, 1994. Cash was provided by issuance of notes of $50,000,
exercise of warrants of $74,511 and private placements of the Company's
common stock and convertible notes of $1,041,244, offset by payments on
notes payable of $209,887. Cash requirements to fund losses of $3,978,579
through December 31, 1995 were reduced by significant non-cash charges
for depreciation and amortization of $1,146,804, contributed research and
development of $30,000, the write-off of the remaining net book value of
the second MRI unit of $964,286, and $68,500 for warrants issued for
financial advisory and shareholders services.
Negative cash flow from operations for the year ended December 31, 1995 of
$3,978,579 was reduced by non-cash charges of $1,244,954 for depreciation and
amortization, $30,000 for research and development, the write-off of the
remaining net book value of the second MRI unit of $964,286 and $68,500 for
warrants issued for financial advisory and shareholder services. Negative
cash flow from operations for the year ended December 31, 1994 of $3,084,495
were reduced by non-cash charges of $795,606 for depreciation and
amortization, $200,000 for research and development, $251,873 for stock
issued for executive compensation under previously contracted obligations,
$172,019 for stock and $58,150 for warrants issued for interest, financial
consulting and legal services. In addition, the Company recorded provisions
for possible non collectible notes of $125,000 (which is an offset to
equity). Negative cash flow from operations after reduction for non-cash
charges (of $2,307,740 in 1995 and $1,602,648 in 1994) was $1,670,839 and
$1,481,847 for the years ended December 31, 1995 and 1994, respectively.
On December 31, 1995, the Company had assets of $2,425,012 compared to
$4,006,321 on December 31, 1994. In addition, the Company had a total
shareholders' deficit of $(282,419) on December 31, 1995 compared to
$1,040,627 on December 31, 1994, a decrease of $1,323,046. The decrease was
the result of a net loss from operations of $3,978,579 offset by a
contribution to capital of research and development expense of $30,000,
payments from FATCO contributed to capital of $141,446, amortization of
prepaid consulting and financing cost offset against equity of $385,374,
conversion of debt to equity of $89,459, issuance of warrants of $68,500 and
proceeds from exercise of warrants of $74,511, issuance of stock for note
conversions and sale of stock of $1,866,244. Payments on a long term note
with a balance of $1,284,724 (including interest currently due of $21,609) as
of December 31, 1995 of which $339,780 is due within the next twelve months
have been assumed by the Company as part of its acquisition of VMI; and this
note is secured by guaranteed lease payments of an equivalent amount.
There are no assurances that increases in sales of microspheres, the
Investigator Partner Services program, sales or royalties from the re-
licensing of a fat sequesterant product or the introduction of new products
will be achieved during 1996, or that the Company will ultimately generate
revenues from the contrast microspheres in the future. Moreover, the Company
estimates that to initiate and complete the clinical development program for
the first diagnostic indication for its contrast microspheres will require an
significant expenditure which the Company does not believe will be available
from operating revenues. The Company expects that it will need to finance
some portions of clinical development through the sale of additional
securities, payments from potential strategic partners such as E-Z EM,
licensees, research grants such as the National Institute of Health grant, or
a combination of these. (See Item 6A. Management's 1996 Plan of Operations)
No provision was made for Federal income tax since the Company has incurred
significant net operating losses from inception. Through December 31, 1995,
the Company incurred net operating losses for tax purposes of approximately
$14,000,000 and approximately $15,398,000 for accounting purposes.
Differences between accounting and tax losses consist primarily of
differences in the accounting and tax treatment of depreciation, allowance
for doubtful accounts and research and development expenses. The net
operating loss carry forward may be used to reduce taxable income through the
year 2008. The Company's tax returns have not been audited by the Internal
Revenue Service. The carry forward amounts may therefore be subject to audit
and adjustment. As a result of the Tax Reform Act, the availability of net
operating loss carry forwards can be deferred, reduced or
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eliminated under certain circumstances. Net operating losses in the State
of California were not available for use during 1992 and the carry forward
period has generally been reduced from fifteen years to five years beginning
in 1993.
LIQUIDITY AND CAPITAL RESOURCES
Since the inception of S/S, the Company has received capital for operations
and research from private investors, issuance of private party debt, bank
financing, and from licensing and product sales. Revenues have been
insufficient to cover operating expenses, research and development, costs of
litigation, construction costs, and patent development, which costs have been
unnecessarily well above the revenues from licensing and product sales. The
Company, therefore, has been dependent on private placements of securities,
bank debt, loans from private investors and the exercise of warrants in order
to sustain operations. To correct this imbalance management made significant
cuts and changes in the Company's operations resulting in reduced 1995
operating expenses approximately $1,066,359 (or 34%) compared to 1994.
However, until such time as the Company can increase revenues the Company
will continue to be dependent on private or institutional investment capital
to support a percentage of the planned 1996 operations. (See Item 6A.
Management's 1996 Plan of Operations). Historically, the Company has been
able to generate private placement funds to provide capital for operations
and growth. During 1995, new management was responsible for approximately
$965,348 received by the Company from August through the balance of the year
from private placements, and the conversion of approximately $839,458 of
Company debt from a previous private placement. However, there can be no
assurances that private or other capital will continue to be available, or
that revenues will increase to meet the Company's cash needs, and there can
no assurance that a sufficient amount of the Company's securities can or will
be sold or the that any warrants will be exercised to fund any operating
needs of the Company or its research and development programs. (Even assuming
all of the warrants outstanding as of December 31, 1995 with exercise prices
at or below the current market price of the Common Stock were to be
exercised, the total gross proceeds to the Company from such exercise would
be insignificant.)
The Company's consolidated financial statements have been prepared on the
assumption the Company will continue as a going concern. The Company has
suffered recurring losses from operations, has an accumulated deficit and has
negative working capital, and faces significant product development and
distribution issues that raise substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these matters
are described below in Item 6A. Management's 1996 Plan of Operations. The
financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount of
liabilities that might result should the Company be unable to continue as a
going concern.
In April 1994, the Company completed a private placement of its securities
to foreign investors in an offering under Regulation S in which it raised net
proceeds of approximately $640,000. In November 1994, the Company completed a
private placement to foreign investors in an offering under Regulation S of
$900,000 one-year convertible promissory notes in which it raised net
proceeds of approximately $715,000. In November 1995 the Company (i)
$775,000 of these notes were converted into 6,328,000 shares of Company
common stock (ii) $50,000 of these notes were repaid. The remaining $75,000
of these notes were extended for an additional six-month period.
In August 1995, the Company completed a private placement of its securities
to foreign investors in an offering under Regulation S in which it raised net
proceeds of approximately $140,348. In connection with the completed
offering, the Company issued 725,168 shares of restricted stock at prices
ranging from $0.36 to $0.42 per share, plus 725,168 warrants to purchase
additional shares of restricted common stock at $0.50 per share during a two-
year period. During August 1995, 116,279 of these warrants were exercised.
In August 1995, the Company completed a private placement of 10%
convertible subordinated notes to foreign investors in the aggregate amount
of $300,000 which mature
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on December 31, 1995. In order to fulfill the Company's obligation to
deliver shares of the Company's common stock upon conversion of the
notes, an aggregate of 2,000,000 shares have been issued under Regulation S
and are being held in escrow. During September 1995, $100,000 these
notes were converted into 549,448 shares of Company common stock. In
October 1995, an additional $200,000 of these notes were converted into
1,716,736 shares of Company common stock.
In October and November 1995, the Company issued 328,886 restricted shares
in exchange for settlement of $64,458 of accrued payables and professional
fees.
In November 1995, the Company completed a private placement, to foreign
investors under Regulation S (with a six month lock-up) of 4,200,000 shares
of common stock in which it raised gross proceeds of approximately $525,000.
ITEM 6A. MANAGEMENT'S 1996 PLAN OF OPERATIONS
The Company has lost money since its inception. As of December 31, 1995,
the Company had an accumulated deficit of $15,398,146 and negative working
capital of $1,256,610. To survive, the Company has depended on capital from
private investors, issuance of private party debt, and bank financing to fund
operations. Historically, the Company has been able to generate funds from
private placements to provide capital to help sustain operations and for
growth, including approximately $965,348 received by the Company from August
1995 to December 1995. However, the accumulative effect of the continuing
losses became evident in April 1995 when investors withdrew the financing
commitment. Raising investment capital to fund losses will become impossible
in the future. Unless the Company can reduce expenses and increase revenues
It will only become more difficult in the future all which raise substantial
doubt about the Company's ability to continue as a going concern.
Beginning in May 1995, the Company's newly installed management began
developing a plan intended to move the Company away from its dependence on
investment capital and toward profitability. Management began by making
significant cuts in the Company's operational expense, the effect of which
began in June 1995, and resulted in an overall decrease of 1995 operating
expenses of approximately $ 1,066,359, or 34% as compared to 1994. However,
that in it self is only a bandaid. What is needed is an overhaul. Management
developed the operational plan described below:
OBJECTIVES OF THE PLAN
1. make significant and lasting reductions in general and
administrative costs while centralizing administrative
operations, temporarily reduce spending on all research
and development programs not directed at producing
immediate revenues; and,
2. reorganize all Company subsidiaries to operate as profit
centers
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by cost cutting, elimination of non essential operations, and
by the elimination of duplicate general and administrative
costs; and,
3. secure existing revenue base by eliminating licensees default;
and,
4. increase revenues from existing products; and,
5. develop new markets for existing products; and,
6. develop new products for existing and new markets; and,
7. develop strategic partners for distribution, sales and
marketing, research and development, commercialization of
products; and develop alternative research and development
financing sources such as US Government sponcered reasearch
grants; and,
8. develop investment banking and public relations alliances; and,
9. make strategic acquisitions of consumer products companies.
RESULTS OF THE PLAN(AS OF APRIL 10, 1996)
The plan as outlined above was implemented in stages during the latter part
of 1995. The results are (1) the Comapny made significant and lasting
reductions in G&A, temporarily halted all research and development, which it
later resumed inorder to manufcature contrast microsphere for cliniucal
testing as a result of the strategic agreement with E-Z EM; and, (2) casusing
the E-Z Trac subdivision to operate as a profit center; and (3) secured
sequesterant licensing revenues (temporarily, KCD defaulted again and was
terminated); and, (4) increased E-Z Trac and sequesterant licensing revenues
(KCD is terminated); and, (5) began studying the feasibility of adapting the
colored microsphere products for commercial pathology applications; and, (6)
began development on a series of new products in October 1995, which the
Company announced completion of first stage development of those products in
March 1996; and, (7) signed an strategic agreement with E-Z EM to develop
contrast microsphere for commercial applications; and, 8) applied for and
received a research grant from the National Institute of Health ("NIH"); and,
(9) begun developing investment banking relationships, however, no such
relationship has been established to date; and (10) developed two potential
consumer product companies acquisition candidates. Additionally, the Company
raised approximately $965,348 from private placements from August 1995 to
December 1995. As of April 10, 1996, the Company has raised $200,000 in one
private placement, $150,000 of a $500,000 commitment of a second private
placement with the balance to fund in May, received a third private placement
commitment of $500,000 to close on April 28, 1996 with a option of a second
$500,000 to fund prior to December 31, 1996. The Company also expects
$100,000 to be funded from the National Institute of Health grant, with
$750,000 more conditioned on the success of phase one.
RESEARCH AND DEVELOPMENT COMPONENT OF MANAGEMENT'S 1996 PLAN OF OPERATIONS
The Company spent $ 259,608 in 1995 as compared to $429,393 in 1994 on
research and development. The decline in 1995 is the result of limited
operating capital. The Company considers its research and development
programs as the foundation upon which everything else is to be built and has
been assigned it the highest priority, second only to generating immediate
revenues. The Company intends to balance future research budgets and
activities between long term diagnostic imaging programs based on the
Company's colored and contrast microspheres, and less complex commercial
programs which can develop more immediate revenues such as the dietary and
food supplement products currently in development. During 1996, the colored
and contrast microsphere programs will be funded from grants such as the NIH
grant (see below), and from strategic partners such as E-Z EM (see below),
and to some extend from operating funds. The dietary and food supplement
programs, which are significantly less costly than the microsphere programs,
will be funded
Page 43 of 56
<PAGE>
from operational funds. The new product development group, which was
established in October 1995, and which will grow as needed, will act
as project coordinator with the responsibility of managing the Company's
research and development programs, including supervising clinical studies for
both food supplement and diagnostic programs, management of regulatory
affairs including FDA and FTC related matters, managing and coordinating the
Company's new research grant program (See Grant Programs below) in which the
Company intends to apply for simultaneous grants in four potential human
diagnostic imaging applications including detection of lung blood clots using
CAT scanning, ultrasound contrast microspheres for detection of myocardial
perfusion, oral contrast microsphere for gastrointestinal tract
visualization, and an MRI contrast microsphere to replace x-ray contrast
media in detecting liver, heart or brain dysfunction, all of which are
applications targeted toward radiologists and other physicians doing body
imaging, which is the non invasive imaging of human organs from outside the
body. The research team is also project coordinator for off site programs
such as the current contrast microsphere pre clinical program being conducted
Dartmouth Hitchcock Medical Center, and the University of Massachusetts
Medical Center with E-Z EM, the Company's contrast microsphere strategic
partner.
GRANT PROGRAM
The US government sponsors a number of programs intended to give promising
technologies and companies a competitive chance to get their products or
applications through the government regulatory process. Such programs are
extremely valuable to small companies. The Company's 1996 research and
development program includes applying for grants in four potential human
diagnostic imaging applications which include, detection of lung blood clots
using CAT scanning, ultrasound contrast microspheres for detection of
myocardial perfusion, oral contrast microsphere for gastrointestinal tract
visualization, and an MRI contrast microsphere to replace x-ray contrast
media in detecting liver, heart or brain dysfunction, all of which are
applications targeted toward radiologists and other physicians doing body
imaging, which is the non invasive imaging of human organs from outside the
body. The Company also intends to apply for grants actual FDA clinical
studies of pulmonary emboli application of contrast microspheres. The
Company's product development unit will coordinate submission of
applications, assignment of principle investigators, and manage the
individual programs from through the clinical study.
While the Company believes that the plan as described above is working to a
large extent, and the Company believes that its is on schedule to release new
products during 1996, there can be no assurance that the Company's plan will
be successful, or that the failure of one or more components of the plan will
not result in the Company's overall failure to execute the plan.
Page 44 of 56
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
The following financial statement and schedules are filed as part of this
Form 10-KSB.
Page Number
------------
1. Financial Statements:
Report of Independent Public Accountants
Interactive Medical Technologies, Ltd. And
Subsidiaries Consolidated Financial
Statements:
Consolidated Balance Sheets as of December 31,
1994 and 1995
Consolidated Statements of Operations for
the years ended December 31, 1993, 1994 and
1995
Consolidated Statements of Shareholders'
Investment for the years ended December 31,
1993, 1994 and 1995
Consolidated Statements of Cash Flows for
the years ended December 31, 1993, 1994 and
1995
Notes to Consolidated
2. Financial Statement Schedules for the years ended
December 31, 1993, 1994 and1995.
None.
Page 45 of 56
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
INSERT COMING FROM BECKMAN/HOLLANDER,
THE COMANY'S NEW INDEPENDENT PUBLIC ACCOUNTS
F-1
<PAGE>
<TABLE>
<CAPTION>
INTERACTIVE MEDICAL TECHNOLOGIES LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - DECEMBER 31, 1994 AND 1995
ASSETS
For the Year Ended
December 31,
1994 1995
---------- ----------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 25,215 $ 374,128
Accounts receivable, net of allowance for doubtful
accounts of $170,000 in 1994 and $90,516 in 1995 110,587 65,377
Interest receivable, net of allowance for doubtful
accounts of $45,000 in 1994 and $59,615 in 1995 3,795 --
Notes receivable from shareholder, net of allowance
for doubtful accounts of $16,548 in 1995 60,186 --
Leases receivable 114,414 64,647
Inventory 11,200 -
Deferred financing cost 168,967 -
Due from related parties, net of allowance for
doubtful accounts of $109,593 in 1995 5,590 1,725
---------- ----------
Total current assets 499,954 505,877
---------- ----------
PROPERTY, EQUIPMENT AND LEASEHOLD
IMPROVEMENTS, at cost, net of
accumulated depreciation and amortization of
$1,021,857 in 1994 and $1,303,661 in 1995
Office equipment 166,357 110,974
Leasehold improvements 253,710 145,860
Magnetic resonance imaging systems 2,743,890 1,298,247
---------- ----------
Property, equipment and leasehold
improvements, net 3,163,957 1,555,081
---------- ----------
OTHER ASSETS:
Patents, net of accumulated amortization of
$84,371 in 1994 and $107,466 in 1995 282,510 289,486
Deposits and other assets 59,900 74,568
---------- ----------
Total other assets 342,410 364,054
---------- ----------
TOTAL ASSETS $4,006,321 $2,425,012
---------- ----------
---------- ----------
The accompanying notes are an integral part of
these consolidated balance sheets.
</TABLE>
F-2
<PAGE>
<TABLE>
<CAPTION>
INTERACTIVE MEDICAL TECHNOLOGIES LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - DECEMBER 31, 1994 AND 1995
LIABILITIES AND SHAREHOLDERS' DEFICIT
-------------------------------------
For the Year Ended
December 31,
1994 1995
--------- --------
<S> <C> <C>
CURRENT LIABILITIES
Loans payable $ 34,437 88,500
Convertible notes 900,000 75,000
Current portion long term note payable 387,599 318,171
Accrued compensation and payroll taxes 68,512 203,911
Professional services payable 207,383 413,135
Trade payables and other accrued expenses 104,305 77,695
Royalties payable 100,000 535,518
Income taxes payable 3,200 3,946
Deferred revenue - -
Deferred rent 12,300 8,460
Unearned deposit 15,000 -
Interest payable - long term note 38,555 21,609
Interest payable - convertible notes 9,000 16,542
Total current liabilities 1,880,291 1,762,487
---------- ----------
LONG TERM NOTE PAYABLE,
net of current portion 1,085,403 944,944
---------- ----------
COMMITMENTS AND CONTINGENCIES (Note 4)
SHAREHOLDERS' DEFICIT:
Common stock, authorized 50,000,000 shares
of $.001 par value; issued and outstanding
17,173,121 in 1994 and 32,282,082 in 1995 17,173 32,282
Additional paid-in capital 12,828,395 15,083,445
Accumulated deficit (11,419,567) (15,398,146)
---------- ----------
1,426,001 (282,419)
---------- ----------
Prepaid consulting and financing cost (385,374)
---------- ----------
Total shareholders' deficit 1,040,627 (282,419)
---------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' DEFICIT $4,006,321 $2,425,012
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of
these consolidated balance sheets.
F-3
<PAGE>
<TABLE>
<CAPTION>
INTERACTIVE MEDICAL TECHNOLOGIES LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
For the Year Ended
December 31,
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
REVENUES
Products and services $441,300 $718,641 $865,480
Lease rentals 227,558 687,459 319,072
------------- ------------- -------------
668,858 1,406,100 1,184,552
------------- ------------- -------------
COST AND EXPENSES:
Cost of revenues
Products and services 221,229 263,118 398,238
Lease operations 144,250 481,356 481,357
------------- ------------- -------------
365,479 744,474 879,595
Research and development 317,274 429,393 259,608
Selling, general and
administrative expenses 2,870,351 3,127,762 2,061,403
------------- ------------- -------------
3,553,104 4,301,629 3,320,606
------------- ------------- -------------
Loss from operations (2,884,246) (2,895,529) (2,016,054)
------------- ------------- -------------
INTEREST EXPENSE AND OTHER:
Interest expense - other 100,364 72,748 368,526
Interest expense - lease obligations 89,820 143,750 142,005
Interest income (19,637) (31,350) (70,624)
Settlements and arbitration award - - 554,757
Abandonment of MRI equipment - - 964,286
------------- ------------- -------------
Total interest expense and other, net 170,547 185,148 1,958,950
------------- ------------- -------------
Loss before provision
for state income taxes (3,054,793) (3,080,677) (3,975,004)
PROVISION FOR STATE INCOME TAXES 2,400 3,818 3,575
------------- ------------- -------------
NET LOSS $(3,057,193) $(3,084,495) (3,978,579)
------------- ------------- -------------
------------- ------------- -------------
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 14,473,000 16,639,000 20,495,000
------------- ------------- -------------
------------- ------------- -------------
NET LOSS PER SHARE $(.21) $(.19) $(.19)
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
INTERACTIVE MEDICAL TECHNOLOGIES LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' INVESTMENT (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
Notes
Common Stock Receivable
------------------------ Additional and PrePaid Accum-
Shares Paid in Consulting and ulated
Outstanding Amount Capital Financing Cost Deficit
----------- ------ ------- -------------- -------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31,
1992 10,928,958 $10,928 $5,047,947 $(419,000) $(5,277,879)
Issuance of common stock for
cash in Private Placement 500,000 500 321,500 - -
Reduction of judgment
paid by co-defendant - - (104,000) 104,000 -
Professional fees payable
converted to equity 132,754 133 223,340 - -
Issuance of common stock
for compensation 522,500 523 369,945 - -
Issuance of common stock
for financial consulting services 301,268 301 446,080 - -
Debt payable converted to
equity 326,948 327 273,775 - -
Issuance of warrants - - 67,215 - -
Issuance of common
stock in connection with
acquisition of Company 1,000,000 1,000 1,563,151 - -
Issuance of common stock
to officer in
settlement of litigation 150,000 150 104,100
Issuance of common stock
upon exercise of warrants, net 2,051,450 2,052 2,137,850 - -
Issuance of common stock in
satisfaction of judgment 283,000 283 190,129 - -
Payments on note from shareholder
to fund construction - - - 120,000 -
Additional capital contribution
from shareholder - - 232,884 - -
Receivable from
exercise of warrants - - - (35,075) -
Net loss - - - - (3,057,193)
----------- ----------- ----------- ----------- -----------
</TABLE>
F-5
<PAGE>
<TABLE>
<CAPTION>
Continued
Notes
Receivable
Additional and Prepaid Accum-
Shares Paid-in Consulting and ulated
Outstanding Amount Capital Financing Cost Deficit
----------- ------ ------- -------------- -------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31,
1993 16,196,878 $ 16,197 $10,873,916 $(230,075) $(8,335,072)
Payments on note from shareholder
to fund construction - - - 70,000 -
Sale of stock 32,000 32 60,128 - -
Cash received from
exercise of warrants - - - 35,075 -
Issuance of warrants for services - - 33,150 - -
Issuance of common stock
upon exercise of warrants, net 50,150 50 46,276 - -
Issuance of common stock
for financial consulting
services 55,500 55 104,284
Issuance of common stock
for shareholder
services and cash 150,000 150 309,300 - -
Issuance of common stock
for legal services 36,000 36 67,644
Issuance of common stock
for cash in Private Placement 360,000 360 639,767
Issuance of warrants
in connection
with Private Placements 23,125
Issuance of common stock
for compensation 292,593 293 251,580 - -
Issuance of warrants for
shareholder services - - 57,500 - -
Issuance of warrants for
interest on note - - 9,750 - -
Issuance of warrants for
financial consulting services - - 110,000 - -
Additional capital contribution
from shareholder - - 241,975 - -
Provision for uncollectible
accounts on balance of
shareholder loan - - - 125,000 -
Prepaid consulting and
financing cost - - - (385,374) -
Net loss - - - - (3,084,495)
----------- ----------- ----------- ----------- -----------
</TABLE>
F-6
<PAGE>
<TABLE>
<CAPTION>
Continued
Notes
Common Stock Receivable
------------------------ and Prepaid Accum-
Shares Paid-in Consulting and ulated
Outstanding Amount Capital Financing Cost Deficit
----------- ------ ------- -------------- -------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31,
1994 17,173,121 $17,173 $12,828,395 $(385,374) $(11,419,567)
Cash received from
exercise of warrants 566,279 566 73,945
Issuance of warrants for services 68,500
Issuance of common stock
upon conversion of notes 6,328,000 6,328 768,672
Issuance of common stock
for cash in Private Placements 7,746,907 7,747 1,083,497
Issuance of common stock
for debt converted to equity 467,775 468 88,991
Additional capital contribution
from shareholder 171,446
Prepaid consulting and
financing cost 385,374
Net loss (3,978,579)
----------- ----------- ----------- ----------- ------------
BALANCE, December 31,
1995 $32,282,082 $32,282 $15,083,446 $ $(15,398,146)
----------- ----------- ----------- ----------- ------------
----------- ----------- ----------- ----------- ------------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-7
<PAGE>
<TABLE>
<CAPTION>
INTERACTIVE MEDICAL TECHNOLOGIES LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
For the Year Ended
December 31,
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss $(3,057,193) $(3,084,495) (3,978,579)
Adjustments to reconcile net loss to
net cash (used in)
operating activities:
Research and development
efforts contributed as capital 200,000 200,000 30,000
Issuance of warrants 67,215 58,150 68,500
Depreciation and amortization 306,538 795,606 1,244,954
Abandonment of MRI system - - 964,286
Provision for uncollectible accounts
on balance of shareholder loan - 125,000 -
Stock issued for compensation 370,468 251,873 -
Stock issued for financial
consulting and legal services 446,381 172,019 -
Stock issued below market price
recorded as interest expense 75,204 - -
Decrease (increase) in:
Accounts receivable 24,168 (84,322) 45,210
Interest receivable (18,992) 16,597 3,795
Notes receivable 25,717 24,283 60,186
Lease receivable (141,705) 27,291 49,767
Inventory 30,306 27,552 11,200
Other (24,188) (6,898) (14,668)
Increase (decrease) in:
Due related parties
and former shareholders (135,167) (5,590) 3,865
Professional fees and
other payables (175,065) 213,009 829,326
Deferred revenues 6,448 (6,448) -
Unearned deposit 15,000 - -
Income taxes payable (800) 800 -
Deferred rent 11,340 960 (3,840)
Interest payable 59,280 (11,725) (9,404)
------------ ------------ ------------
Net cash used in
operating activities (1,915,045) (1,286,338) (695,402)
------------ ------------ ------------
</TABLE>
F-8
<PAGE>
<TABLE>
<CAPTION>
CONTINUED
For the Year Ended
December 31,
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM INVESTING
ACTIVITIES:
Expenditures for property,
equipment and leasehold improvements $(239,659) $ (43,986) $(22,928)
Expenditures for patents (55,017) (61,721) (30,071)
------------ ------------ ------------
Net cash used in
investing activities (294,676) (105,707) (52,999)
------------ ------------ ------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds (repayment) - bank line of credit (28,000)
Payments on notes payable (205,000) - (50,000)
Payments on long-term note (45,313) (287,030) (209,887)
Proceeds from exercise of warrants 2,104,827 81,401 74,511
Proceeds from loans payable - 34,437 50,000
Net proceeds from issuance
of convertible notes - 714,770 -
Net proceeds from sale of
common stock 322,000 715,287 1,091,244
Additional capital contribution
from shareholders 32,884 41,975 141,446
Proceeds from repayment of
shareholder loan - 70,000 -
------------ ------------ ------------
Net cash provided by
financing activities 2,181,398 1,370,840 1,097,314
------------ ------------ ------------
NET INCREASE
(DECREASE) IN CASH (28,323) (21,205) 348,913
CASH, beginning of period 74,743 46,420 25,215
------------ ------------ ------------
CASH, end of period $ 46,420 $ 25,215 374,128
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-9
<PAGE>
INTERACTIVE MEDICAL TECHNOLOGIES LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1993, 1994 AND 1995
NOTE 1. SIGNIFICANT RISK RESULTING FROM CONTINUING LOSSES
During 1993, 1994, and 1995 consolidated revenues of Interactive
Medical Technologies Ltd. and subsidiaries (collectively "the Company")
were generated from the sale and royalties from the sale of fat
sequesterant, the sale of colored microspheres. Beginning in July 1993,
consolidated revenues include lease revenues from magnetic resonance
imaging systems.
The Company has incurred net losses of $3,057,193 and $3,084,495 for
the years ended December 31, 1993 and 1994 and $3,978,579 for the year
ended December 31, 1995. The continuing losses are the result of
unprofitable operations, excessive litigation and defense costs resulting
from the Company's previous business relationships and activities including
repeated regulatory agency investigations relating to possible securities
violations and false or misleading marketing claims for its dietary pructs,
an imbalanced G&A expense ( excessive in light of the Company's
unprofitable history), inability to successfully commercialize and market
products. The accumulative effect of the continuing losses have adversely
affected the liquidity of the Company, as well as the Company's ability to
raise necessary future working capital.
As of December 31, 1995, the Company had an accumulated deficit of
$15,398,146 and negative working capital of $1,256,610. In addition, the
Company remains subject to various business risks including but not limited
to its ability to maintain vendor and supplier relationships by paying
bills when due, and overcoming future and ongoing product development,
distribution and marketing issues. Also the Company and certain of its
previous management, officers and directors have been named in various
litigation, along with the Company, resulting in the Company being the
subject of various claims, counter claims, lawsuits, counter law suits,
settlements and judgments, all placing a signiicant drain on the Company
limited capital. The Company's significant legal costs relating to the
foregoing have been paid from available funds including investment captial
and has contributed significantly to the acclimated deficit with unpaid
legal fees being accrued.
MANAGEMENT'S 1996 PLAN OF OPERATIONS
The Company has lost money since its inception. As of December 31, 1995,
the Company had an accumulated deficit of $15,398,146 and negative working
capital of $1,256,610. To survive, the Company has depended on capital from
private investors, issuance of private party debt, and bank financing to
fund operations. Historically, the Company has been able to generate funds
from private placements to provide capital to help sustain operations and
for growth, including approximately $965,348 received by the Company from
August 1995 to December 1995, However, the accumulative effect of the
continuing losses became evident in April 1995 when investors withdrew the
financing commitment. Raising investment capital to fund losses will become
impossible in the future. Unless the Company can reduce expenses and
increase revenues It will only become more difficult in the future all
which raise substantial doubt about the Company's ability to continue as a
going concern.
Beginning in May 1995, the Company's newly installed management began
developing a plan intended to move the Company away from its dependence on
investment capital and toward profitability. Management began by making
significant cuts in the Company's operational expense, the effect of which
began in June 1995, and resulted in an overall decrease of 1995 operating
expenses of approximately $ 1,066,359, or 34% as compared to 1994.
F-10
<PAGE>
However, that in it self is only a bandaid. What is needed is an
overhaul.Management developed the operational plan described below:
OBJECTIVES OF THE PLAN
1. make significant and lasting reductions
in general and administrative costs while
centralizing administrative operations,
temporarily reduce spending on all research
and development programs not directed at
producing immediate revenues; and,
2. reorganize all Company subsidiaries to
operate as profit centers by cost cutting,
elimination of non essential operations,
and by the elimination of duplicate general
and administrative costs; and,
3. secure existing revenue base by eliminating
licensees default; and,
4. increase revenues from existing products;
and,
5. develop new markets for existing products;
and,
6. develop new products for existing and new
markets; and,
7. develop strategic partners for distribution,
sales and marketing, research and development,
commercialization of products; and develop
alternative research and development financing
sources such as US Government sponcered
reasearch grants; and,
8. develop investment banking and public
relations alliances; and,
9. make strategic acquisitions of consumer
products companies.
RESULTS OF THE PLAN
The plan as outlined above was implemented in stages during the latter
part of 1995. The results are (1) the Company made significant and lasting
reductions in G&A, temporarily halted all research and development, which
it later resumed inorder to manufcature contrast microsphere for clinical
testing as a result of the strategic agreement with E-Z EM; and, (2)
causing the E-Z Trac subdivision to operate as a profit center; and (3)
secured sequesterant licensing revenues (temporarily, KCD defaulted again
and was terminated); and, (4) increased E-Z Trac and sequesterant licensing
revenues (KCD is terminated); and, (5) began studying the feasibility of
adapting the colored microsphere products for commercial pathology
applications; and, (6) began development on a series of new products in
October 1995, which the Company announced completion of first stage
development of those products in March 1996; and, (7) signed an strategic
agreement with E-Z EM to develop contrast microsphere for commercial
applications; and, 8) applied for and received a research grant from the
National Institute of Health ("NIH"); and, (9) begun developing investment
banking relationships, however, no such relationship has been established
to date; and (10) developed two potential consumer product companies
acquisition candidates. Additionally, the Company raised approximately
$965,348 from private placements from August 1995 to December 1995. As of
April 10, 1996, the Company has raised $200,000 in one private placement,
$150,000 of a $500,000 commitment of a second private placement with the
balance to fund in May, received a third private placement commitment of
$500,000 to close on April 28, 1996 with a option of a second $500,000 to
fund prior to December 31, 1996. The
F-11
<PAGE>
Company also expects $100,000 to be funded from the National Institute of
Health grant, with $750,000 more conditioned on the success of phase one.
RESEARCH AND DEVELOPMENT COMPONENT OF MANAGEMENT'S 1996 PLAN OF OPERATIONS
The Company spent $259,608 in 1995 as compared to $429,393 in 1994 on
research and development. The decline in 1995 is the result of limited
operating capital. The Company considers its research and development
programs as the foundation upon which everything else is to be built and
has been assigned it the highest priority, second only to generating
immediate revenues. The Company intends to balance future research budgets
and activities between long term diagnostic imaging programs based on the
Company's colored and contrast microspheres, and less complex commercial
programs which can develop more immediate revenues such as the dietary and
food supplement products currently in development. During 1996, the colored
and contrast microsphere programs will be funded from grants such as the
NIH grant (see below), and from strategic partners such as E-Z EM (see
below), and to some extent from operating funds. The dietary and food
supplement programs, which are significantly less costly than the
microsphere programs, will be funded from operational funds. The new
product development group, which was established in October 1995, and which
will grow as needed, will act as project coordinator with the
responsibility of managing the Company's research and development programs,
including supervising clinical studies for both food supplement and
diagnostic programs, management of regulatory affairs including FDA and FTC
related matters, managing and coordinating the Company's new research grant
program (See Grant Programs below) in which the Company intends to apply
for simultaneous grants in four potential human diagnostic imaging
applications including detection of lung blood clots using CAT scanning,
ultrasound contrast microspheres for detection of myocardial perfusion,
oral contrast microsphere for gastrointestinal tract visualization, and an
MRI contrast microsphere to replace x-ray contrast media in detecting
liver, heart or brain dysfunction, all of which are applications targeted
toward radiologists and other physicians doing body imaging, which is the
non invasive imaging of human organs from outside the body. The research
team is also project coordinator for off site programs such as the current
contrast microsphere pre clinical program being conducted Dartmouth Hitch-
cock Medical Center, and the University of Massachusetts Medical Center
with E-Z EM, the Company's contrast microsphere strategic partner.
GRANT PROGRAM
The US government sponsors a number of programs intended to give
promising technologies and companies a competitive chance to get their
products or applications through the government regulatory process. Such
programs are extremely valuable to small companies. The Company's 1996
research and development program includes applying for grants in four
potential human diagnostic imaging applications which include, detection of
lung blood clots using CAT scanning, ultrasound contrast microspheres for
detection of myocardial perfusion, oral contrast microsphere for
gastrointestinal tract visualization, and an MRI contrast microsphere to
replace x-ray contrast media in detecting liver, heart or brain
dysfunction, all of which are applications targeted toward radiologists and
other physicians doing body imaging, which is the non invasive imaging of
human organs from outside the body. The Company also intends to apply for
grants actual FDA clinical studies of pulmonary emboli application of
contrast microspheres. The Company's product development unit will
coordinate submission of applications, assignment of principle
investigators, and manage the individual programs from through the clinical
study.
While the Company believes that the plan as described above is working
to a large extent, and the Company believes that it is on schedule to
release new products during 1996, there can be no assurance that the
Company's plan will be successful, or that the failure of one or more
components of the plan will not result in the Company's overall failure to
execute the plan.
F-12
<PAGE>
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BUSINESS AND BASIS OF
PRESENTATION
Interactive Medical Technologies Ltd. (formerly Interactive Principles
Ltd.) (Interactive or the Company) was incorporated under the laws of
Delaware on June 2, 1986. Until it merged with See/Shell Biotechnology,
Inc. (See/Shell or S/S), it had no significant operations.
See/Shell was incorporated on August 17, 1987 and designs, develops
and markets certain types of biologic systems. The Company was inactive
until January 1, 1988. See/Shell has been a multifaceted food supplement,
clinical testing, diagnostic reagent and drug company. See/Shell's primary
efforts have been directed towards the development of its products.
The consolidated financial statements include the activity of
See/Shell and its subsidiary E-Z Trac, Inc. consolidated with Interactive
Medical Technologies Ltd. from January 17, 1990 when Interactive and
See/Shell merged as well as the Company's subsidiary Effective Health, from
it's inception in May 1990. The merger is reflected as a recapitalization
of See/Shell and the issuance of stock for cash for See/Shell. Effective
June 30, 1993, the Company acquired Venus Management, Inc. which has been
included in the consolidated financial statements since that date.
All significant inter-company accounts and transactions have been
eliminated in consolidation. The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect reported amounts
of the assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements, and revenues and
expenses during the reporting period.
REVENUE RECOGNITION - PRODUCTS AND SERVICES
The Company markets its products and technology through distributors,
license agreements and Company personnel. Revenue from products is
recognized upon shipment and revenue from services is recognized when the
service has been performed. Revenue from products and services is
comprised of the following:
<TABLE>
<CAPTION>
For the Years Ended Decvember 31,
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Sales of Microspheres and
laboratory services $263,361 $210,815 $246,692
Saless of Flow Cytomter $35,000
Sales of fat Sequesterant$ $142,939 $3,645
Licensing fees and royalties
fat sequesterant $504,181 $618,788
-------- -------- --------
$441,300 $718,641 $865,480
-------- -------- --------
-------- -------- --------
</TABLE>
For the year ended December 31, 1993, three customers each accounted
for over 10% of Company revenues from products and services. Revenues from
each of these customers accounted for 19, 15 and 11% for the year ended
December 31, 1993.
The Company's largest customer in 1993 (19% of revenues from products
and services) has ceased its operations as a result of recent FTC
regulatory action unrelated to the Company's products. Related receivables
have been written off in 1993.
F-13
<PAGE>
For the years ended December 31, 1994 and 1995, one customer accounted for
over 10% of Company revenues from products and services. Revenues from this
customer accounted for 70% in 1994 and 70% in 1995.
Foreign revenues were approximately 14, 5, and 7% of revenues from
products and services for the years ended December 31, 1993, 1994 and
1995. Foreign revenues of 7, 3 and 5% of revenues from products and
services were from Japan for the years ended December 31, 1993, 1994, and
1995. During the year ended December 31, 1993, 7% of revenues from products
and services were from Australia, Canada, England and Poland. During the
year ended December 31, 1994, 2% of revenues from products and services
were from Australia, Canada, England and Poland. During the year ended
December 31, 1995, 2% of revenues from products and services were from
Canada, New Zealand, Australia and Europe.
REVENUE RECOGNITION - LEASE OPERATIONS
Revenues from lease operations which commenced on June 30, 1993 are
recognized when earned and were $227,558 for the year ended December 31,
1993, $687,459 for the year ended December 31, 1994 (Note 3) and $319,072
for the year ended December 31, 1995.
INVENTORY
Inventory consists of automated counting machines and components and
fat sequesterant product (finished goods). All are stated at the lower of
cost (first-in, first-out) or net realizable value. There was no inventory
as of December 31, 1995.
DEPRECIATION AND AMORTIZATION
Depreciation is provided principally through the use of the
straight-line method over the estimated useful lives of the assets
(primarily three to five years for office equipment). Magnetic resonance
imaging systems are depreciated over seven years, once placed in service or
commencement of lease payments whichever occurs first. Amortization of
leasehold improvements is computed using the straight-line method over the
lesser of the asset life or the life of the respective lease.
The Company capitalizes expenditures that materially increase asset
lives and charges ordinary repairs and maintenance to operations as
incurred. When assets are sold or otherwise disposed of, the cost and
related accumulated depreciation and amortization are removed from the
accounts and any gain or loss is included in operations.
CAPITALIZED PATENT COSTS
The Company capitalizes cost of perfecting patent rights for certain
products. Amortization of capitalized patent cost is provided on a
straight-line basis over 17 years or the average remaining life of the
patent
INCOME TAXES
No provision was made for Federal income tax since the Company has
incurred significant net operating losses from inception. Through December
31, 1995 the Company incurred net operating losses for tax purposes of
approximately $14,000,000 and approximately $15,398,000 for accounting
purposes. Differences between accounting and tax losses consist primarily
of differences in the accounting and tax treatment of depreciation,
allowance for doubtful accounts and research and development expenses. The
net operating loss carryforward may be used to reduce taxable income
through the year 2008.
F-14
<PAGE>
The Company's tax returns have not been audited by the Internal Revenue
Service. The carryforward amounts may therefore be subject to audit and
adjustment. As a result of the Tax Reform Act, the availability of net
operating loss carryforwards can be deferred, reduced or eliminated under
certain circumstances. Net operating losses in the State of California were
not available for use during 1992 and the carryforward period has generally
been reduced from fifteen years to five years beginning in 1993.
LOSS PER SHARE
Loss per share is based upon weighted average number of common shares
outstanding during the periods. Common share equivalents are not
considered as they would be anti-dilutive.
NOTE 3. CAPITAL TRANSACTIONS AND LONG TERM DEBT
The Company currently has public warrants outstanding as follows:
242,050 "B" warrants at $0.30 per share, 508,950 "C" warrants at $0.40 per
share, and 710,000 "D" warrants at $0.50 per share. From January 1, 1993
through December 31, 1995, 2,095,100 public warrants were exercised at
$2,210,965 less transfer agent fees of $24,800. As of December 31, 1995,
1,461,000 publicly traded warrants may potentially be exercised, which
would generate approximately $631,195 additional gross proceeds if all of
such warrants are exercised. These warrants, are scheduled to expire June
30, 1996.
Exercise of the extended warrants is subject to an effective
registration statement with the Securities and Exchange Commission. Each
class of the extended warrants also will be redeemable at any time by the
Company (either separately or collectively) upon 30 days prior notice to
the warrant holders by the Company at $.01 for each un-exercised warrant.
Each warrant entitles the holder thereof the right to purchase one share of
the Company's common stock. In addition, there were other privately held
warrants outstanding as of December 31, 1995, to purchase a total of
14,151,889 shares of the Company's common stock at purchase prices per
share ranging from $.10 to $4.00.
In February 1993, the Company issued 283,000 restricted shares to
Francis Pizzulli in satisfaction of an obligation towards a settlement
judgment (Note 4).
In February 1993, the Company issued 550,000 shares to Irwin Elson in
satisfaction of $200,000 of debt. This transaction was rescinded in April
1993 at which time the debt was converted to 263,000 restricted shares and
warrants to purchase 287,000 shares at $3.50 per share over a five-year
period. In addition, the Company entered into a consulting agreement with
Irwin Elson for a total consideration of $60,000.
In February 1993, the Company hired a new President/CEO. In connection
with his employment agreement, he was granted 150,000 restricted shares as
a signing bonus. During the first quarter of fiscal 1993, the shares were
issued and $104,250 was recorded as compensation. In the first quarter of
1993, 50,000 additional restricted shares were issued as performance
compensation and $34,750 was recorded as compensation expense (Note 4).
In March 1993, the Company issued 101,268 restricted shares to an
unaffiliated third party for financial consulting services and recorded
$70,381 as consulting fees.
In March 1993, the Company issued a total of 500,000 restricted shares
to Egger & Co., Gerlach & Co. and Rush & Co., European investment funds,
for $350,000. The funds were used for operating capital and construction
costs. In connection with obtaining these funds the Company also paid an 8
percent commission to an unaffiliated party.
F-15
<PAGE>
In April 1993, the Company issued 312,500 restricted shares to an
officer in connection with his employment agreement and recorded $217,188
as compensation in satisfaction of amounts due in the first quarter of 1993
(Note 4).
In May 1993, Dr. Shell applied $44,064 of consulting fees due him from
the Company and executed a $60,186 promissory note to the Company
representing the value of 150,000 restricted shares of the Company's common
stock issued to the Kavanagh estate on his behalf in connection with the
settlement of certain litigation in which he was a defendant. The terms of
the note provided for interest at the rate of 6% per annum, or the maximum
rate permitted by law, whichever is lower, on the unpaid principal balance
of such note, with all unpaid principal and interest due and payable on May
24, 1994. As of December 31, 1995, the balance of principal and interest
of this note was $20,478 and the Company has recorded a provision for
doubtful accounts for that amount. The Company and Dr. Shell currently are
negotiating the terms of his termination and repayment of the balance of
this note.
In June 1993, 10,000 restricted shares were issued by the Company to
an unaffiliated third party for consulting services and the Company
recorded $14,280 as compensation expense.
In June 1993, the Company issued 57,754 restricted shares in exchange
for the settlement of $34,639 of accrued payables for professional fees.
The difference between fair market value of the shares on the date of
issuance and value of the debt extinguished of $47,834 was recorded as
interest expense.
In June 1993, the Company issued 63,948 restricted shares in exchange
for the settlement of $50,000 in notes payable plus accrued interest of
$13,948. The difference between fair market value of the shares on the date
of issuance and the debt extinguished of $27,370 was recorded as additional
interest expense.
In September 1993, the Company issued 75,000 restricted shares in
exchange for the settlement of $141,000 of accrued payables for
professional fees.
In October 1993, the Company issued 200,000 warrants to purchase
shares at $2.75 per share over a five-year period and 100,000 warrants to
purchase shares at $3.00 per share over a five-year period in exchange for
financial advisory services and recorded as the value of the warrants,
$25,000 as consulting fees. These warrants contain certain anti-dilute
provisions and registration rights.
In December 1993, the Company issued 200,000 restricted shares and
50,000 warrants to purchase restricted shares at $1.88 per share over a
three-year period to unaffiliated third parties for financial consulting
services and recorded as consulting fees $376,000 as the value of the
shares and $25,000 as the value of the warrants.
In February 1994, the Company issued 20,000 warrants to purchase
restricted shares at $1.88 per share over a three-year period to
unaffiliated third parties for financial consulting services and recorded
$10,000 as the value of the warrants, as consulting fees.
In March 1994, the Company issued 87,500 warrants to purchase
restricted shares at $4.00 per share over a five-year period to an
unaffiliated third party for financial advisory services and recorded
$8,750 as the value of the warrants, as consulting fees.
In March 1994, the Company issued 55,500 shares of restricted stock to
an unaffiliated third party for financial advisory services and recorded
$104,340 as consulting fees and issued an additional 32,000 restricted
shares in exchange for $60,160.
F-16
<PAGE>
In April 1994, the Company issued 36,000 restricted shares and 36,000
warrants to purchase restricted shares at $2.05 per share over a three-year
period to an attorney for legal services rendered. The Company recorded
$67,680 as the value of the shares and $14,400 as the value of the warrants
as legal fees.
In April 1994, the Company completed a private placement of its
securities to foreign investors in an offering under Regulation S in which
it raised net proceeds of approximately $640,000. In connection with the
completed offering, the Company issued 360,000 units. Each unit consists
of one share of restricted common stock at $2.00 per share, plus a warrant
to purchase one-half additional share of restricted common stock at $3.00
per share during a three-year period. The placement agent for the initial
closing received warrants to purchase 125,000 shares of the Company's
restricted common stock on the same terms as the Regulation S investors.
The Company recorded $15,250 as the value of the warrants as financing and
consulting fees.
In September 1994, the Company issued 150,000 shares of common stock
to an unaffiliated third party in consideration for shareholder services to
be provided over a two year period and $15,000 of cash consideration. The
Company recorded $309,450 as the value of the shares, and $294,450 as
prepaid consulting fees as an offset to equity.
In October 1994, the Company issued 2,500 warrants to purchase restricted
shares at $.01 per share over a three-year period to unaffiliated parties
for consideration of a short-term promissory note in the amount of $50,000.
The Company recorded $3,750 as the value of the warrants as interest
expense.
These warrants were exercised in December 1994.In November 1994, the
Company issued 4,000 warrants to purchase restricted shares at $.01 per
share over a three year period to unaffiliated third parties for
consideration of extension of a short-term promissory note. The Company
recorded $6,000 as the value of the warrants as interest expense. These
warrants were exercised in Dec 1994.
In November 1994, the Company completed a private placement to foreign
investors in an offering under Regulation S of $900,000 one-year
convertible promissory notes in which it raised net proceeds of
approximately $714,770. The notes are convertible, commencing four months
from issue date, into Company common stock at $1.20 per share plus 90-day
warrants to acquire additional shares at $.01 per share in an amount equal
to 40% of the shares issued upon conversion. The convertible promissory
notes accrue interest at 8% per annum which is payable quarterly. The
placement agent received warrants to purchase 157,500 shares of Company
common stock at $2.00 per share over a three year period valued at $7,875
which was recorded as deferred financing costs.
In November 1995, $775,000 of these notes were converted into
6,328,000 shares of common stock, $50,000 of these notes were repaid and
the balance of $75,000 of these notes were extended to April 1996 under the
original terms and conditions.
In November 1994, the Company concluded agreements under which
Raifinanz AG, Zurich, Switzerland ("RAI"), will assist the Company in
securing strategic partnering agreements for its products and technologies
and will provide financial advisory services to the Company. This
agreement was terminated in November 1995. In connection with these agree-
ments, the Company issued 500,000 warrants to purchase shares issued under
Regulation S over a three-year period as follows:
F-17
<PAGE>
Number of Exercise Vesting
Warrants Price Date Value
------- ---------- ---- ---------
100,000 $ .01 Nov 94 $ 90,000
100,000 $ .86 Nov 94 $ 5,000
150,000 $ 2.00 Nov 94 $ 7,000
150,000 $Mkt Price 25,000
@Vesting Per Month
Starting 11/94
-------- --------
5000,000 $110,000
-------- --------
The value of these warrants of $110,000 was recorded as prepaid
financing cost as an offset to equity. 100,000 of these warrants were
exercised in January 1995.
In December 1994, the Company issued 242,593 restricted shares to an
officer in connection with his employment agreement and recorded $208,630
as compensation in satisfaction of amounts due in the first quarter of 1994
(Note 4).
In December 1994, the Company issued 300,000 warrants to an
unaffiliated third party in consideration for financial advisory services
to be provided over a two year period as follows:
Number of Exercise Vesting
Warrants Price Date Value
------- ---------- ---- ---------
50,000 $ .01 Dec 1994 $ 45,000
150,000 $ 1.00 Dec 1994 $ 7,500
50,000 $ 1.50 Jun 1995 $ 2,500
50,000 $ 2.00 Dec 1995 $ 2,500
------- ----------
300,000 $ 57,500
------- ----------
The warrants have a term of three years from vesting date and contain
registration rights. The Company recorded $57,500 as the value of the
warrants, as prepaid consulting fees as an offset to equity. In February,
1995, these warrants were modified as follows:
Number of Exercise Vesting
Warrants Price Date Value
------- ---------- ---- --------
150,000 $ .01 Feb 95 $118,500
50,000 $ .75 Feb 95 $ 2,500
50,000 $ 1.00 Aug 95 $ 2,500
50,000 $ 1.50 Feb 96 $ 2,500
------- --------
300,000 $126,000
------- --------
The Company recorded an additional $68,500 as the value of the
modification of the warrants, as prepaid consulting fees as an offset to
equity. 150,000 of these warrants were exercised in April 1995. Effective
as of May 15, 1995, these services were terminated, the remaining 150,000
warrants were canceled and the remaining balance of prepaid consulting fees
was written off.
In May 1995, the Company issued 555,555 shares of restricted stock and
400,000 warrants to purchase restricted shares at $.10 per share in
exchange for $100,000, to a current shareholder. These warrants contain
certain registration rights. During November 1995, 200,000 of these
warrants were exercised.
F-18
<PAGE>
In May 1995, the Company issued 200,000 warrants to purchase
restricted shares at $.16 per share in lieu of compensation, to a current
employee. These warrants contain certain registration rights.
In May 1995, the Company authorized issuance of 5,200,000 warrants (of
which 1,560,000 immediately vested) to purchase restricted shares at prices
ranging from $.30 to $.50 per share, vesting over a 24-month period, to
current officers and directors. In January 1996, 3,950,000 of these
warrants were canceled and an additional 8,000,000 warrants were issued at
$0.15 per share which vest in June 1996 and contain registration rights.
In June 1995, the Company issued 500,000 warrants to purchase restricted
shares at $0.50 in connection with private placements of Company
securities.
In August 1995, the Company completed a private placement of its
securities to foreign investors in an offering under Regulation S in which
it raised net proceeds of approximately $140,348. In connection with the
completed offering, the Company issued 725,168 shares of restricted stock
at prices ranging from $0.36 to $0.42 per share, plus 725,168 warrants to
purchase additional shares of restricted common stock at $0.50 per share
during a two-year period. During August 1995, 116,279 of these warrants
were exercised.
In August 1995, the Company completed a private placement of 10%
convertible subordinated notes to foreign investors in the aggregate amount
of $300,000 which were due to mature on December 31, 1995. In order to
fulfill the Company's obligation to deliver shares of the Company's common
stock upon conversion of the notes, an aggregate of 2,000,000 shares were
issued under Regulation S and were being held in escrow. During September
1995, $100,000 of these notes were converted into 549,448 shares of Company
common stock. In October 1995, an additional $200,000 of these notes were
converted into 1,716,736 shares of Company common stock.
In October 1995, the Company entered into a third party advisory and
consulting agreement, effective as of May 1995. In consideration of the
consulting services to be provided by consultant to the Company under this
agreement, and for services previously rendered to the Company, the Company
issued to consultant an aggregate of 1,000,000 warrants, which shall become
exercisable as follows: 600,000 warrants shall be immediately exercisable;
an additional 50,000 warrants shall become exercisable every three months
from the date of this agreement until the second anniversary of the date of
this agreement. Each warrant shall be exercisable to purchase one share of
common stock of the Company at a purchase price of $0.35 per share. Each
warrant shall be exercisable for a period of two years from the date of
issue. These warrants contain demand registration rights. In January 1996,
the exercise price of these warrants was modified to $0.15.
In October and November 1995, the Company issued 328,886 restricted
shares in exchange for settlement of $64,458 of accrued payables and
professional fees.
In November 1995, the Company completed a private placement of its
securities to foreign investors in an offering under Regulation S in which
it raised proceeds of approximately $525,000 and issued 4,200,000 shares of
restricted stock.
In November 1995, the Company issued 50,000 warrants to purchase
restricted shares at $0.30 per share in lieu of compensation, to a
consultant. These warrants contain registration rights. In connection with
a $150,000 debt offering in 1991 (which was re-paid in March 1993), the
Company had outstanding 150,000 basic warrants and 150,000 incentive
warrants all exercisable at $1.00 per share. The lenders subsequently
extended the original repayment schedule to March 1993 at the request of
the Company, in exchange for which exercise prices were modified to range
from $.30 to $1.00 per share and each of the outstanding basic and
incentive warrant agreements were increased to 225,000 warrants.
F-19
<PAGE>
The basic warrants expire on the later of December 31, 1995 or 12 months
after the effective date of the registration of stock underlying the
warrants. The incentive warrants expire 90 days after the effective date of
the registration of stock underlying the warrants. If all such underlying
stock is registered and the warrants subsequently exercised, additional
gross proceeds of approximately $310,000 would be available to the Company.
Exercise of the basic and incentive warrants is subject to an effective
registration statement with the Securities and Exchange Commission. The
basic and incentive warrants contain certain anti-dilute provisions.
Pursuant to an Exchange of Stock Agreement and Plan of Reorganization
dated as of May 6, 1993, effective on June 30, 1993, the Company acquired
all of the outstanding capital stock of Venus Management, Inc. ("VMI") from
Associated Funding, Inc. and Diagnostics Resource Funding, Inc. (the then
sole stockholders of VMI) for an aggregate consideration of 1,000,000
restricted Company shares. The assets of VMI consist of two magnetic
resonance imaging (MRI) systems (the "Units"). (See Commitments and
Contingencies - Litigation Below )
One of the Company's two magnetic resonance imaging (MRI) systems (the
"Units") currently is installed in a mobile van at an operating site in
Jefferson Valley, New York and has been in use since September 1992 and is
leased to Tri-County Mobil MRI, L.P. ("Tri-County"), whose general partner
is Diagnostics Resource Funding. This lease provides for monthly payments
of $37,926 to Venus Management, Inc. ("VMI") through August 1999 and
$68,589 in September 1999 (with such payments being guaranteed by Medical
Funding of America, Inc., "MFA"), and VMI is required to make monthly
installment payments (which includes interest at 10.5% per annum on the
unpaid principal balance) for the first Unit to a third party finance
company of $32,360 through August 1999 and $68,589 in September 1999. As of
December 31, 1995, the balance of this debt aggregated $1,284,724
(including interest currently due of $21,609) of which $339,780 is due
within the next twelve months. This lease provides for a purchase option at
the expiration of the initial term of such lease equal to the then fair
market value of the first Unit.
Tri-County was delinquent in making certain of its lease payments to
VMI under the terms of the lease agreement concerning the first Unit, and
MFA failed to make these payments to VMI under its guarantee of Tri-
County's payments to VMI. Accordingly, VMI had not made certain payments
due to the third party finance company for the first Unit. As a result,
the third party finance company commenced a lawsuit against MFA and the
Company in which it sought repayment in full of MFA's note to that company
(the debt service on which was to be serviced by VMI) and return of the
first Unit to that company. The finance company subsequently dismissed its
lawsuit without prejudice. Should Tri-County fail to make its future lease
payments to VMI and should VMI be unable to make its future required
payments to the finance company (i) VMI could lose ownership and possession
of the first Unit and (ii) the entire remaining balance of the MFA note
would become immediately payable, with VMI and the Company being liable,
together with MFA, for any deficiency in repayment of the note.
As of March 15, 1996, Tri-County was delinquent in making the December
1995, January and February 1996 lease payments and MFA and VMI failed to
make these payments under their guarantee to the finance company which has
issued a notice of default.
The second of the two Units was never placed in service. MFA had
leased the second Unit from VMI under a five-year lease. The payments under
this lease were to commence as of January 27, 1994. No payments were ever
made under this lease. The lease provided for monthly payments of $30,030.
Although VMI has commenced litigation against MFA for payment of
delinquent lease payments, there can be no assurance that MFA will be able
to make any of those required lease payments to VMI.
F-20
<PAGE>
Receivables of $270,270 related to a portion of these lease payments
were written off during 1994 and none were accrued for 1995 (Note 4).
Depreciation on the second Unit commenced during the first quarter of 1994.
This lease provides for a purchase option at the expiration of the initial
term of such lease equal to the then fair market value of the second Unit,
but not to exceed fifteen percent (15%) of the original capitalized cost
($1,350,000), payable during the year following the expiration of the
initial term of such lease in twelve equal monthly payments.
In April, 1995, Johnson & Johnson Finance Corp. ("J&J Finance")
brought an action against MFA and VMI in connection with a loan made by J&J
Finance to MFA that was secured by a lien granted by MFA on the Resonex MRI
unit owned by VMI. After MFA defaulted on the foregoing loan, J&J Finance,
in June 1995, obtained a writ of attachment on the Resonex MRI unit and has
taken physical possession of that unit.
It is the Company's position that MFA had no authority to secure the
foregoing loan with VMI's MRI unit since the loan was made solely for the
benefit of MFA, the lien was placed on the MRI unit without VMI's knowledge
or consent, and none of the loan proceeds were received by VMI or the
Company. In the event J&J Finance prevails in its assertion that it was
entitled to foreclose upon and retain the MRI unit and any proceeds from
the sale of that unit, VMI and the Company intend to assert their rights
against MFA for fraudulently pledging the MRI unit to J&J Finance. Although
the Company believes VMI is entitled to recover the MRI unit from J&J
Finance and that VMI should prevail in its claims against MFA should J&J
Finance be permitted to retain the MRI unit, there can be no assurance that
VMI will prevail against either party or that VMI will be able to collect
any judgment that it may obtain against MFA. In December 1995, the Company
elected to write-off the remaining net book value of $964,286 for this MRI
unit.
In October 1995, the shareholders of the Company approved amendments
to the Company's certificate of Incorporation to provide for: (i) a reverse
stock split of not less than one for every four, nor more than one for
every eight shares of the Company's, with the specific exchange ratio to be
determined by the Board of Directors; (ii) an increase in the number of
authorized shares of common stock from 25,000,000 to 50,000,000.
NOTE 4. COMMITMENTS AND CONTINGENCIES
LITIGATION - LEGAL PROCEEDINGS
SEC PROCEEDINGS
In 1990, the Securities and Exchange Commission's New York Regional
and Enforcement staff commenced an inquiry into possible securities
violations of the registration, anti-fraud, notice and reporting provisions
under various provisions of the federal securities laws that may have
occurred between July 1989 through January 1990 resulting from the actions
of the Company and certain members of its management during that period. As
part of a settlement agreement, the Company, Dr. William Shell, and Philip
Dascher, the Company's former President, neither admitted nor denied any
violations, and without any findings of fact consented in August 1992 to
the entry of a judgment for a permanent injunction enjoining them from
violations of various provisions of the federal securities laws. The
settlement included a rescission offer that was made by the Company to 17
individuals who had previously exercised warrants to purchase the Company's
common stock at a time when a current registration statement was not in
effect. None of the individuals, however, elected to exercise this right of
rescission.
SEC AND SHAREHOLDER PROCEEDINGS RELATING TO MATTERS DIRECTLY BY EFFECTED BY
OR ARRANGED BY CLARK M. HOLCOMB
In July 1993, based on a concern the Company formed an independent
committee of its Board of Directors who's purpose was to determine whether
certain prior private placements of the Company's securities complied with
all of the registration requirements of
F-21
<PAGE>
federal and state securities laws. In certain prior private placements of
the Company's shares, a total of approximately 2,506,982 shares of the
Company's Common Stock was issued to a small number of individuals. Those
issuance's were structured in reliance upon the advice of the Company's
then securities counsel, and the Company believes that these issuance's,
standing alone, would have qualified for exemptions from registration under
federal and state securities laws. However, certain subsequent resale's of
these shares, commencing in June 1992, by the original purchasers or their
transferees to a total of approximately 330 investors raised an issue as to
whether a technical distribution occurred that might have required either
the original issuance's or the resale's to have been registered. All of the
foregoing resale's were either directly effected or arranged for by Clark
M. Holcomb.
In October 1993, the Company filed a registration statement with the
SEC to register all of the foregoing 2,506,982 shares with the SEC.
However, even if the registration statement becomes effective so as to
permit public resale's by the holders of the shares involved in the
transactions described above, these holders could have a right of rescis-
sion to recover the purchase price they paid for their shares plus interest
from the date of purchase against the persons from whom they acquired the
shares.
The Company believes (based in part upon the opinion of its current
special securities counsel) that these holders do not have a valid and
enforceable right to such rescission. However, subject to any applicable
statutes of limitation that might bar such future claims, these
shareholders could assert such claims, and the Company has not set aside
any reserves to fund any potential liabilities that it might incur in
connection with any such future potential claims, which could be material.
Should the Company incur any such liabilities, it might seek
indemnification or contribution for such liabilities from Mr. Holcomb, or
other third parties.
In October 1995, the staff of the SEC advised the Company that it was
considering recommending that the SEC file a civil injunctive action
against the Company and Dr. William Shell for alleged violations of the
registration provisions of the federal securities laws. The alleged
violations appear to relate to the sale by the Company of unregistered
shares of its common stock which involved a series of resale's of these
shares that were either directly effected or were arranged for by Clark M.
Holcomb. These transactions have been the subject of an SEC investigation
previously disclosed by the Company.
In April 1994, Rod Sherman and Computer Buddy sued Clark M. Holcomb
and the Company in Superior Court for the County of Los Angeles for breach
of an alleged oral contract pursuant to which Holcomb and the Company were
to pay Sherman a finder's fee for all shares of the Company's stock sold to
third parties introduced by Sherman to Holcomb or the Company of which
Sherman alleges that $58,000 remains owing to him. Sherman is seeking this
amount in his lawsuit although the Company believes that it has no
obligation or liability to Sherman in connection with this matter. A trial
date has currently been scheduled for May 1996. The Company denies the
allegations and intends to vigorously contest the matter.
In March 1995, Donald Seidel sued Clark M. Holcomb, Dr. Shell, George
Berger and the Company in the Superior Court for the County of Los Angeles,
which was served on the Company in May 1995. This action alleges breach of
contract, fraud, non-payment for services, conspiracy to defraud, unjust
enrichment and conversion. Plaintiff is seeking general and compensatory
damages of at least $692,000 and special and consequential damages of not
less than $170,000, together with exemplary and punitive damages. It is
alleged that the Company conspired to defraud plaintiff of his shares of
Company stock and deprive him of payment for services. The Company denies
these allegations and intends to vigorously contest the matter.
In April 1995, Richard Willman and Nancy Holling sued Clark M.
Holcomb, KCD Incorporated, Dr. Shell and the Company in Superior Court for
the County of Ventura for rescission, breach of contract, breach of
fiduciary duty, fraud, negligent misrepresentation, constructive trust and
negligence all regarding the sales in July 1993 and September 1993
F-22
<PAGE>
by Holcomb to Holling and Wilman of Company stock. Willman and Holling
allege general damages of $107,250 and $4,275 respectively plus interest,
as well as punitive damages in an amount to be proven at time of trial. In
July 1995, the Company executed a Settlement Agreement with Nancy Holling.
There was no money demanded and none paid in connection with this
settlement. The Company believes it has no obligation to Willman or Holling
in connection with this matter. The Company denies the allegations and
intends to contest the matter. A trial date was scheduled for April 1996
with respect to Wilman, .however, in a mandatory settlement conference in
March 1996, Clark M. Holcomb and the Company entered into a settlement with
Willman, in which Holcomb agreed to pay Willman $100,000 in cash and to
deliver to Willman 50,000 shares of restricted KCD common stock. In
addition, Holcomb had previously delivered to Willman 40,000 shares of the
Company's common stock which Willman will be permitted to retain as part of
the settlement. The Company agreed to pay $5,000 in full settlement of this
claim rather than go through the expense and time required to defend the
action in trial. In July 1995, the Company executed a Settlement Agreement
with Nancy Holling. There was no money demanded and none paid in connection
with this settlement. The Company believes it has no obligation to Wilman
or Holling in connection with this matter.
In April 1995, David Eastman filed a complaint in the Superior Court
of the County of Orange, California against Clark M. Holcomb, Anita
Kavanagh, Dr. Shell and the Company. This action alleges fraud, negligent
misrepresentation, rescission and restitution, securities fraud and
conspiracy to defraud.
This action was served on Dr. Shell and the Company in July 1995. The only
allegations of wrong doing are directed at Holcomb and Holcomb is alleged
to have been acting as an agent of the other defendants. It is alleged that
Holcomb represented that although the shares purchased by the plaintiff
contained a legend, they would be free trading in sixty to ninety days. It
is also alleged that Holcomb misrepresented the financial condition of the
Company. The complaint seeks damages in the amount of $200,000 as well as
unspecified punitive damages. The Company and Dr. Shell deny that Holcomb
was their agent. A trial date has currently been scheduled for May 1996.
The Company denies the allegations and intends to vigorously contest the
matter. In February 1996, Eastman obtained a default judgment against
Holcomb in the amount of $200,000 in compensatory damages and $50,000 in
punitive damages.
In February 1996, the Rudolf Steiner Research Foundation filed a
complaint in the United States District Court for the Central District of
California against Clark M. Holcomb, Lawrence Gibson, Murray Bettingen,
Bettingen, Inc., and the Company. This action alleges civil RICO, violation
of the Securities Act of 1933, violation of California Corporation Code,
fraud, deceit and intentional misrepresentation, negligent misrepresenta-
tion, conversion, constructive trust and breach of contract. The complaint
seeks damages of $201,333, rescission, punitive and exemplary damages. The
Company believes it has no obligation to the Rudolf Steiner Research
Foundation in connection with the matter. The Company denies the
allegations and intends to vigorously contest the matter.
The Company is negotiating with the SEC regarding a potential
settlement of any SEC claims against the Company with respect to the above
transactions. The Company anticipates that the settlement would require the
Company to consent to a permanent injunction, without admitting or denying
any liability, that would bar the Company from and future violations of the
registration requirements of the federal securities laws. The Company be-
lieves that such a settlement would not have a materially adverse effect on
the Company or its operations. However, there can be no assurance that a
settlement as described above ( or a settlement with any other terms )
will ultimately be reached with the SEC. The Company and Dr. Shell are
subject to a 1992 permanent injunction enjoining them from violating the
federal securities laws.
F-23
<PAGE>
PROCEEDINGS RELATED TO LICENSING AGREEMENTS, MANUFACTURING AGREEMENTS,
ROYALTY AGREEMENTS, AND PATENT INFRINGEMENTS
In September 1993, Dr. Shell commenced an action against Dynamic
Products, Inc. ("Dynamic"), D&F Industries ("D&F") in his capacity as a 25%
shareholder of FATCO in the Orange County Superior Court of the State of
California seeking damages from these parties for their alleged breach of
contract and misappropriation of certain trade secrets of FATCO and the
Company relating to the first generation fat sequesterant product. Dr.
Shell has asserted in this action that Dynamic has sold the first
generation fat sequesterant product to Herbalife for resale in the United
States without the required payment of royalties to FATCO (which is
obligated to pay Dr. Shell 25% of its royalty income, which Dr. Shell then
contributes to the Company) based on those sales.
In October 1994, Dr. Shell filed a related lawsuit against FATCO in
the same court seeking the termination of a 1987 agreement between FATCO
and Shell licensing certain fat sequesterant technology of Dr. Shell to
FATCO based upon failure of FATCO to fully exploit the transferred
technology for the benefit of Shell, failure to fully exploit the products,
knowingly permitting sales of products made utilizing the technology
transferred to continue even though no royalties were being paid on those
sales, refusing to pursue legal action to collect the unpaid royalties and
stopping the unauthorized sales, and by entering into a renewal of an
agreement with a distributor on the same unfavorable terms which previously
existed and which diverted moneys which should have been paid to FATCO to
other entities owned and controlled by some of the shareholders and members
of the Board of Directors of FATCO. FATCO has filed a cross-complaint in
this action against Shell alleging breach of the licensing agreement
between Shell and FATCO.
In January 1996, FATCO filed a First Amended Cross-Complaint alleging
causes of action against Dr. Shell, the Company, EHI and KCD for Breach of
Contract, Breach of Fiduciary Duty, Interference with Prospective Economic
Advantage, Misappropriation of Trade Secrets, Conversion, Constructive
Trust, Accounting and Permanent Injunction. Each of these causes of action
relate to the action of the Company in entering into the License Agreement
with KCD. The Company has filed an answer denying all of the allegations
contained in the Cross-Complaint and intend to fully defend this matter.
The basis of this cross complaint appears to pertain to the license
agreement between EHI and KCD, Inc., which as of March 1, 1996 was canceled
as a result of KCD's failure to make royalty payments to the Company. (See
Item 4. Legal Proceedings, below).
In March 1994, the Company and S/S sued Herbalife (settled with
respect to Herbalife) and D&F in Superior Court for the County of Orange,
California for fraud, breach of contract and conspiracy to misappropriate
trade secrets. The Company alleges in this lawsuit that S/S provided
certain confidential information and trade secrets to D&F, which
misappropriated this information to manufacture an advanced fat
sequesterant product. The Company is seeking in this lawsuit injunctive
relief and damages in an unspecified amount from defendants. This matter
has been consolidated for trial with the action against Dynamic Products,
Inc. and the action against the officers and Directors of Dynamic Products,
Inc. and D&F Industries, Inc.
In January 1995, Dr. Shell, on behalf of FATCO, filed another action
in the Orange County Superior Court of the State of California
substantially similar to the action filed by Dr. Shell in 1993 against
Dynamic Products, Inc. This newly filed action names certain individual
shareholders and directors of FATCO, Dynamic and D&F Industries as well as
Herbalife International Inc. ("Herbalife"). In March 1995, this action and
the lawsuit against Herbalife described below were settled with respect to
Herbalife and its directors, with neither party making any payments to the
other in connection with this settlement.
F-24
<PAGE>
In March 1996, the Company, on behalf of its subsidiary EHI, filed an
action against KCD in Los Angeles County Superior Court. This action
alleges causes of action against KCD for Breach of the Amended License,
Declaratory Relief and Permanent Injunction. The action is based upon the
failure of KCD to pay the royalties due pursuant to the contract and their
use of advertising claims in connection with the sale of the licensed
products which were in excess of those which the Company authorized KCD to
make (See April 8, 1996 KCD Cross Complaint). On April 8, 1996, KCD filed a
cross complaint against the Company, Effective Health, William Shell and
William Pelzer alleging causes of action for Breach of Contract, Breach of
Implied Conversion, Rescission, Good Faith and Fair Dealing, Negligence,
Intentional Misrepresentation, Accounting and Constructive. The Company
denies all of the claims and intends to fully defend this cross complaint.
In August 1995, the Company, Dr. Jackie See and Francis Pizzulli
entered into preliminary settlement agreements regarding the pending
arbitration proceedings before the Judicial Arbitration and Mediation
Service, Inc., in Santa Monica, California. Subsequently, the Company, Dr.
Jackie See and Francis Pizzulli entered into a formal settlement agreement
relating to the above arbitration proceedings, Both See and Pizzulli had
initiated arbitration proceedings relating to the payment of royalty's
pursuant to the existing Royalty Agreements between the Company and See.
See had previously transferred a 50% interest in his Royalty Agreements
with the Company to Pizzulli.
With respect to the formal settlement of the Royalty issues with See,
the Company has agreed to: ( 1 ) Pay See, beginning in July 1995 a total of
1-1/2% of the Company's net sales of products and 10% of the Company's
receipt of royalties from the Company's licensees under certain patents
owned by the Company covering colored microspheres, contrast microspheres
and fat sequestration products; and, ( 2 ) pay See, over time, the sum of
$32,417 which represents past due royalties for the period up to June 30,
1995; and, ( 3 ) pay See, over time, the sum of $33,062 which represents
the award of attorney fees and costs to See in connection with the
arbitration; and, ( 4 ) pay See, over time, the sum of $65,731 of which
$35,227 is subject to adjustment based upon an accounting and $30,504 of
which was conditioned upon receipt of royalties from the Company's
sequesterant licensee; and, ( 5 ) transfer 10,000 restricted shares of KCD
common stock to See.
With respect to the formal settlement of the Royalty issues executed
in January 1996 with Pizzulli, the Company has agreed to ( 1 ) pay
Pizzulli, starting in July 1995 a total of 1-1/2% of the net sales of the
Company's products and 20% of the Company's receipt of royalties from the
Company's licensees under certain patents owned by the Company covering
colored microspheres, contrast microspheres and fat sequestration products;
and, ( 2 ) pay Pizzulli over time the sum of $93, 542 which represents the
award of attorneys fees and costs to Pizzulli in connection with the
arbitration; and, ( 3 ) pay Pizzulli over time the sum of $ 13, 787 which
represents past due royalties or the period up to June 30, 1995; and, ( 4 )
pay Pizzulli over time the sum of $72, 244 of which $37,177 is subject to
adjustment based upon an accounting and $ 35,067 of which was conditioned
upon receipt of royalties from the Company's licensee; and, (5) transfer
15,000 restricted shares of KCD common stock to Pizzulli.
Pizzulli, in addition to the arbitration pertaining to royalty issues
initiated a arbitration proceeding pertaining to the timing of the sale of
his restricted shares of the Company's stock. A formal settlement of the
claim was entered into in January 1996. With respect to the formal
settlement the Company agreed to (1) pay Pizzulli the sum of $25,000 on the
execution of the agreement; and, ( 2 ) pay Pizzulli the additional sum of
$75,000 on or before March 1, 1996; and, ( 3 ) pay Pizzulli, subject to
certain adjustments, the additional sum of $100,000 on or before March 1,
1997; and, ( 4 ) assign to Pizzulli all of the Company's interest in and to
the Promissory Note dated May 13, 1993 in the face amount of $ 265,000
payable to the Company by Clark M. Holcomb; and, ( 5 ) transfer to Pizzulli
75,000 restricted shares of KCD common stock; and, ( 6 ) transfer to
Pizzulli 70,000 free trading shares of the Company's common stock; and,
( 7 ) transfer to Pizzulli 300,000 shares of the Company's restricted
common stock. In addition the Company has agreed to file FORM S-3,
F-25
<PAGE>
or other forms as may be appropriate to register the shares of the
Company's common stock being transferred to Pizzulli. There are also
provisions in the settlement which would require the Company to issue
additional shares of its restricted common stock to Pizzulli in the event
that either the registration of the 300,000 restricted shares is
unreasonably delayed and/or the price of the Company' common stock does not
reach a specified price within an eight month period of filing the of FORM
S-3.
PROCEEDINGS RELATED TO MRI LEASE OPERATIONS
In August 1994, VMI sued MFA in Supreme Court for the County of New
York, New York, for breach of contract and accounts due. VMI alleges in
this lawsuit that MFA breached an equipment lease agreement for VMI's
second MRI unit, the Resonex Machine, by failure to make lease payments due
January 27, 1994, and thereafter in the sum of $210,210 as well as interest
thereon. VMI is seeking in this lawsuit a judgment against MFA in the sum
of $210,210 plus interest thereon with costs, attorney's fees and
disbursements and other relief. VMI will also seek a judgment for all
unpaid lease payments subsequent to August 1994 which total an additional
$510,510 through December 31, 1995. However, the Company has not been
successful in serving the notice on MFA principles including Jerald
Brauzer, nor has a trail date been set.
In April, 1995, Johnson & Johnson Finance Corp. ("J&J Finance")
brought an action against MFA and VMI in connection with a loan made by J&J
Finance to MFA that was secured by a lien granted by MFA on the Resonex
MRI unit which at the time was owned by VMI. After MFA defaulted on the
foregoing loan, J&J Finance, in June 1995, obtained a writ of attachment on
the Resonex MRI unit and has taken physical possession of that unit. The
Company's position is MFA had no authority to secure the foregoing loan
with VMI's MRI unit since the loan was made solely for the benefit of MFA,
the lien was placed on the MRI unit without VMI's knowledge or consent, and
none of the loan proceeds were received by VMI or the Company. VMI, and the
Company are in settlement discussions with J&J that would require the
Company and VMI to forfeit their interest in the MRI unit in exchange for
J&J releasing VMI and the Company from any damages. Although the Company
believes VMI is entitled to recover the MRI unit from J&J Finance and that
VMI should prevail in its claims against MFA should J&J Finance. There can
be no assurance that VMI will prevail against either party or that VMI will
be able to collect any judgment that it may obtain against MFA. The Company
also recently learned that the current fair market value of the Resonex
MRI unit is substantially below previous estimates and as such may not be
worth the cost of continuing litigation. As a result of all the foregoing
the Company has written off the net book value of the second unit of
$964,286 as of December 31, 1995.
FEDERAL TRADE COMMISSION PROCEEDINGS
The Seattle Regional Office of the Federal Trade Commission has
advised the Company that the staff believes that the Company's fat
sequesterant product, which was marketed by KCD licensee under the name
"SeQuester," has been improperly represented in advertising claims, and
that the sequesterant product, when previously marketed by the Company
under the name "Lipitrol", also was improperly represented in advertising
claims. The staff has indicated that it is prepared to recommend that a
complaint be filed against the licensee, the Company and certain
individuals in connection with the foregoing. The Company presently is
discussing this matter with the FTC staff with the objective of settling
the matter. There is no assurance that a settlement will be reached or as
to the impact on the Company of any settlement, although it is presently
believed that any settlement may impact the claims utilized in the
marketing of the sequesterant product and is likely to involve the payment
of a fine or other financial penalty by the Company. The Company and the
FTC staff have agreed upon the terms of a proposed settlement in this
matter, pursuant to which the Company would consent to a permanent
injunction prohibiting it from making misrepresentations relating to weight
loss or weight reduction products or services, or with respect to tests or
studies relating to such programs or services. In addition, the Company
would pay consumer redress to the FTC in an aggregate amount of $35,000
over a period of twelve
F-26
<PAGE>
months. The Company's Board of Directors voted to accept the proposal in
March 1996, which now must be formally approved by the FTC.
Except as otherwise specifically indicated above, management believes
that the Company does have any material liability for any law suits,
settlements, judgments or fees of defense counsel which have not been paid
or accrued as of December 31, 1995.
While the ultimate outcome of these issues, if claims were asserted
and litigated, is complicated and not free from doubt, management with the
advice of legal counsel believes, on the basis of the facts currently
known, that it is not probable that the Company would have any material
liability. However, there can be no assurance that the Company will
prevail in any of the above proceedings. Also the Company may be required
to continue to defend itself resulting in substantial additional expense.
In the event the Company is unable to pay the defense costs associated with
the foregoing a unfavorable settlement or judgment could be awarded against
the Company which could have a material adverse effect upon the Company.
Additionally, starting in June 1995, the Company began taking the steps it
considered necessary to insure that the Company, its subsidiaries,
employees, consultants and affiliated companies and individuals are not
involved in any activities, operations, or relationships which are not
solely for the benefit of the Company.
LICENSE AGREEMENTS
In March 1994, the Company entered into a license agreement for
the Company's fat sequesterant technology in the United States and Canada
with KCD, a recently formed distribution organization having access to the
major domestic retail pharmacy and health food chains. KCD was seriously
delinquent in making royalty payments to the Company. In May 1995, the
Company and KCD entered into an amended license agreement. Under the terms
of the amended agreement, one-half ($217,243) of past due royalties and
interest (aggregating $434,487) as of April 1, 1995 is scheduled to be paid
in twelve equal monthly installments of $18,104 plus monthly payment of
interest at 1.5% per month on the outstanding balance beginning July 1,
1995. The remaining one-half ($217,243) of past due royalties and interest
was satisfied by KCD's issuance to the Company of 100,000 shares of KCD
restricted common stock. The amended agreement generally provides for a
royalty equal to 6% of gross sales (less freight and shipping) of licensed
products payable monthly within thirty days. Through December 31, 1995, the
Company has received from KCD licensing fees and royalties of $811,068
100,000 KCD restricted common shares ($217,243), and has earned additional
royalties of $138,620. KCD has advised the Company that during the period
April 1994 through December 31, 1995, net sales of the product covered
under the license have approximated $8,500,000 at wholesale value. The
license agreement also provides for initial licensing fees from KCD of
$100,000 (paid between March and May 1994) and minimum total royalty
payments to the Company to keep the agreement in effect over the first
three years of the agreement of at least $1,258,000. Over the balance of
the term of the agreement (which runs until at least 2014), KCD shall be
required, in order to keep the agreement in effect, to pay minimum
royalties in accordance with a formula but in no event less than $436,000
per year. (See subsequent Events)
Although the Company believes that it is entitled to terminate the
license agreement providing FATCO with the right to exclusively manufacture
and market the fat sequesterant product under the Company's patent as a
result of certain breaches of the agreement by FATCO (and Dr. Shell has
filed a lawsuit as the licensor of record to terminate his license
agreement with FATCO), FATCO could assert that its agreement with the
Company is still in effect and that the provisions of the Company's
agreement permitting KCD to manufacture the fat sequesterant product
violate the terms of FATCO's agreement with the Company. Should FATCO
successfully assert that its agreement with the Company is still in effect,
the Company believes that it would nonetheless be permitted to license the
marketing of the fat sequesterant technology to KCD in the event KCD would
be willing to license the marketing (but not the manufacture) of this
product. KCD is an affiliate of Clark Holcomb.
F-27
<PAGE>
In February 1995, the Company entered into an agreement with a large
European nutritional food company for a new formulation of the Company's
fat sequesterant technology. Under the terms of the agreement, human
clinical studies of the Company's fat (lipid) sequesterant technology were
conducted to evaluate its applicability as a food supplement, medical food,
functional food, and/or food additive to aid in weight control. In
November 1995, the Swiss company declined its option to exercise its
exclusive rights to purchase, manufacture, use and sell this technology in
Europe and other markets
LEASES
The Company leased its office facility during 1991 under an operating
lease on a month to month basis. In January 1992, the Company signed a 5
month lease at $4,000 per month through June 1992. In February 1992, the
Company signed a three year lease, in the same location, for the period
July 1992 through June 1995 at $4,750 per month in the first year, $5,200
per month in the second year and $5,700 per month in the third year. The
lease has an option to extend for an additional two years at $6,000 per
month. During February 1995, the Company exercised this option. Total
rental expense related to this facility lease was approximately $71,490,
$66,860 and $61,002 for the years ended December 31, 1993, 1994 and 1995.
EMPLOYMENT CONTRACTS
In May 1995 (revised in January 1996), the Board of Directors approved
a compensation agreement with Steven R. Westlund, President, Chief
Executive Officer and Director. Pursuant to the agreement, Mr. Westlund's
salary is $6,000 per month from July 1995 until such time as the Company's
revenues exceed expenditures by an amount sufficient to increase his
salary, or at the choosing of the Board of Directors, his salary will then
be increased in increments based on the Company's ability to pay, up to a
maximum amount of $15,000 per month. As soon as practicable Mr. Westlund
will be added to the Company's medical insurance and the Company will
obtain directors and officers insurance. Mr. Westlund employment agreement
is three years. In partial consideration for his services, Mr.
F-28
<PAGE>
Westlund was to receive warrants to acquire up to 1.5 million shares of
Common Stock, Exercisable for a period of 5-years from date of issuance
with vesting to occur over the term of the agreement at exercise prices
ranging from thirty to fifty cents per share. In January 1996, the
agreement was modified as to the number warrants he was to receive which
were increased from 1.5 million to 3 million with an exercise price of
$.15CENTS for a period of three years beginning June 1996 and ending June
1999.
In June 1995 (revised in January 1996), the Board of Directors
approved a compensation agreement with Peter Benz, Chief Financial Officer
and Director. Pursuant to the agreement, Mr. Benz salary is $4,000 per
month from July 1995 until such time as the Company's revenues exceed
expenditures by an amount sufficient to increase his salary, or at the
choosing of the Board of Directors, his salary will then be increased in
increments based on the Company's ability to pay, up to a maximum amount of
$10,000 per month. As soon as practicable Mr. Benz will be added to the
Company's medical insurance and the Company will obtain directors and
officers insurance. Mr. Benz employment agreement is three years. In
partial consideration for his services, Mr. Benz was to receive warrants to
acquire up to 750,000 shares of Common Stock, Exercisable for a period of 3
years from date of issuance with vesting to occur over the term of the
agreement at exercise prices ranging from thirty to fifty cents per share.
In January 1996, the agreement was modified as to the number warrants he
was to receive which were increased from 750,000 to 2 million with an
exercise price of $.15CENTS for a period of three years beginning June 1996
and ending June 1999.
In June 1995, the Board of Directors approved a compensation
agreement with William Shell, MD, former Chairman of the Board and Chief
Scientific Officer. Dr. Shell's salary was to $6,000 per month from July
1995 until such time as the Company's revenues exceed expenditures by an
amount sufficient to increase his salary, or at the choosing of the Board
of Directors, his salary will then be increased in increments based on the
Company's ability to pay, up to a maximum amount of $15,000 per month. In
partial consideration for his services, Dr. Shell was to receive warrants
to acquire up to 1.5 million shares of Common Stock, Exercisable for a
period of 3-years from date of issuance with vesting to occur over the term
of the agreement at exercise prices ranging from thirty to fifty cents per
share. In January 1996, the Company terminated Dr. Shell's employment with
the Company. As of the termination, 750,000 had vested with an exercise
price of $.30CENTS. The balance of the options were canceled.
In January 1996, the Board of Directors approved a compensation
agreement with Michael Grechko, Chief Operating Officer. Pursuant to the
agreement, Mr. Grechko's salary is $6,000 per month beginning in January
1996. Mr. Grechko's employment agreement is three years. In partial
consideration for his services, Mr. Grechko will receive warrants to
acquire up to 1 million shares of Common Stock, Exercisable for a period of
3 years from date of issuance with vesting to occur over the term of the
agreement at exercise prices of $.15CENTS.
In June 1995 (revised in January 1996), the Board of Directors
approved a compensation agreement with John Osborne, a member of the Board
of Directors and Business Development consultant to the Company. The
Company agreed to pay Mr. Osborne $4,000 per month consulting fees. Mr.
Osborne's is responsible for developing potential acquisition candidates
for the Company as well as developing foreign markets for the Company's
products. In partial consideration for his services, Mr. Osborne received
warrants to acquire up to 1 million shares of Common Stock, Exercisable for
a period of 3 years beginning June 1996 and ending June 1999 at exercise
price of $15CENTS.
In December 1992, the Company entered into a three-year employment
agreement with William Pelzer as its President and Chief Executive Officer.
The agreement, which was effective as of February 1993, provides for a base
salary of $150,000 per year, increasing to $180,000 per year upon the
attainment of certain criteria that already have been exceeded.
The base salary has increased to $240,000 per year effective July 1993
as the result of the capital paid into the Company after December 15, 1992
exceeding $3,000,000.
F-29
<PAGE>
The base salary will further increase to $300,000 per year in the
event annual Company sales exceed $5,000,000, capital paid into the Company
after December 15, 1992 exceeds $4,000,000 or the Company's market
capitalization equals or exceeds $200,000,000. Pursuant to the terms of
that agreement, Mr. Pelzer's family trust was permitted to purchase 150,000
restricted shares of Common Stock at $0.001 per share in February 1993 and
an additional 50,000 restricted shares of Common Stock at $0.001 per share
in June 1993 upon the satisfaction of certain of the foregoing criteria,
with the holder of such shares also receiving from the Company certain
registration rights with respect to those shares. Mr. Pelzer also has been
granted by the Company under this agreement options to purchase 600,000
shares of the Company's Common Stock at the market price at the time of
grant, vesting equally over a three-year period commencing in 1994, under a
Company stock option plan described below. In connection with the Company
entering into the foregoing agreement, Clark M. Holcomb agreed to make
additional payments to Mr. Pelzer to bring his annual base salary payments
to $300,000 each year and to assign to Mr. Pelzer 100,000 shares of the
Company's Common Stock owned by Mr. Holcomb. However, to date Mr. Holcomb
has failed to perform certain of his obligations under this agreement.
March 31, 1995, Mr. Pelzer notified the Company of his intention to
terminate his employment with the Company as both chief executive officer
and director effective April 13, 1995. Mr. Pelzer's resignation cited both
cause due to failure of consideration under the terms of his December 24,
1992 employment agreement as well as personal reasons. The Company is
currently negotiating a settlement agreement with Mr. Pelzer.
In 1989, S/S entered into a five-year employment agreement with
Michael Grechko, who has served as the Company's Chief Operating Officer
since January 1990. Upon execution of that agreement, Mr. Grechko was
issued shares of the Company's Common Stock equal to 2% of the then
outstanding shares, and the fair market value of the shares issued was
recorded as a compensation expense of $100,000. The agreement provided
originally for a salary of $60,000 per year, which was subject to increase
to $100,000 per year in the event sales exceeded $600,000 per year or the
Company's shareholders' equity exceeded $4,000,000. The agreement also
provided for additional issuance's of shares of the Company's Common Stock
to Mr. Grechko at a price of $0.001 per share based upon the market
valuation of the Company's outstanding shares, and 312,500. In April 1993,
312,500 shares were issued and in December 1994, 242,593 shares were issued
to Mr. Grechko under the provisions of his agreement, and the Company
agreed to increase his salary to $100,000 per year. As of January 1994, a
salary increase to $104,000 per year was approved by the Company. Mr.
Grechko continues to be retained by the Company on a month-to-month basis
upon the same terms as his prior agreement with the Company but without
restricted stock awards.
Directors received no compensation for their services as such for the
fiscal year ended December 31, 1995. The Company reimburses directors for
out-of-pocket expenses they incur on behalf of the Company.
The Company offers health and disability insurance, reimbursement of
medical expenses, and other medical benefits to its full-time employees. No
retirement, pension, profit sharing, or other similar programs have been
adopted by the Company. However, benefits may be adopted in the future, if
they are authorized by the Board of Directors. In May 1993, the Company's
shareholders approved the adoption of Stock Option Plans pursuant to which
options covering a total of up to 1,500,000 shares of the Company's Common
Stock may be granted to the Company's officers, directors, employees and
other persons providing services to the Company. No shares have been
granted under such plan. (See "Certain Transactions" for a description of
the securities issued to the Company's officers and directors in 1994)
On March 31, 1995, Mr. Pelzer notified the Company of his intention to
terminate his employment with the Company as both chief executive officer
and director effective April 13, 1995. Mr. Pelzer's resignation cited both
cause due to failure of consideration under the terms of his December 24,
1992 employment agreement as well as personal reasons. The Company is
negotiating a settlement with Mr. Pelzer.
F-30
<PAGE>
NOTE 5. STOCK OPTION PLANS
In May 1993, the Company's shareholders approved the adoption of Stock
Option Plans pursuant to which options covering a total of up to 1,500,000
shares of the Company's common stock may be granted to the Company's
officers, directors, employees and other persons providing services to the
Company. To date, the Company has granted options, at fair market value as
of the grant date (which range from $0.875 to $2.625 per share), to
officers, directors and employees covering 673,000 shares of common stock
under a plan that will be formally adopted by the Company's Board of
Directors pursuant to the foregoing shareholder authorization. None of the
issued options have been exercised as of December 31, 1995. Any shares
issued under these Plans are subject to an effective registration statement
with the Securities and Exchange Commission.
NOTE 6. RELATED PARTIES
Receivables due from Dr. Shell were $5,590 and $1,725 at December 31,
1994 and 1995 respectively. The receivable due from Dr. Shell at December
31, 1995 is net of a provision for doubtful accounts of $109,593. The
Company and Dr. Shell currently are negotiating the terms of his
termination and repayment of this receivable.
Dr. Shell contributed research support services which were accounted
for as a contribution to capital with an offsetting charge to research and
development expense in the Company's statement of operations. These
services were performed by Dr. Shell (who also operates a medical practice
which performs traditional clinical medicine) at his own facility, and
primarily involved usage of imaging equipment and computers, along with
salaries for research personnel. The equipment included computers, digital
imaging equipment to analyze x-ray and ultrasound images, and a full color
flow Doppler echocardiographic imaging device with digital acquisition
capability. The personnel included a research nurse and data analyst who
devoted their full time to research. Utilization of the resources of this
facility for Company projects ranged from 25% to 75% during 1993, 1994, and
up to 50% for a portion of 1995, which management believes is a reasonable
allocation, and the value assigned to the time and use of facilities and
computer equipment by Dr. Shell was $200,000 for each of the years 1993,
1994 and $30,000 for 1995. The Company has terminated Dr. Shell's
services.
FATCO is a company formed by Drs. See, Shell and others to research
and develop a product formulation to reduce and bind dietary fat intake
into the blood resulting in weight control. FATCO owns two license
agreements concerning market rights of the fat sequesterant product from
which it receives royalties. Dr. Shell acquired 25 percent of the issued
and outstanding FATCO stock. Dr. Shell has assigned any FATCO income due
him to the Company and reduces his fees under a consulting agreement with
the Company by the amount of FATCO income he might receive directly. Total
royalties offset against consulting fees and applied as contributed capital
from Dr. Shell in 1993, 1994 and 1995 were $32,884, $41,975 and $141,446.
(Note 4)
In February 1995, the Company entered into an agreement and issued a
promissory note in the principal amount of $50,000 with Sam Shell, father
of Dr. Shell and Richard N. Shell, in consideration of Sam Shell's loan to
the Company of $50,000. The note was due on December 31, 1995 together
with interest at the rate of 8% per annum.
At any time during the term of this note, the holder may elect to take
payment of the principal and accrued interest thereon in the form of
restricted shares of Company common stock at a price equal to that provided
in the Company's next private placement after the date of the note. Sam
Shell exercised his option to convert $25,000 of the principal amount of
this note in July, 1995 and received 138,889 restricted shares of the
Company's common
F-31
<PAGE>
stock, and warrants to acquire an additional 100,000 restricted shares of
the Company's common stock at $.10 per share. In January 1995, the Company
and Sam Shell agreed to exercise 50,000 warrants to purchase 50,000 shares
of restricted common stock and to repay the balance of the note plus
accrued interest in installments through April 15, 1996.
In March 1995, Richard N. Shell guaranteed $20,000 of debt to an
unrelated third party on behalf of the Company. In April, 1995, the Company
entered into an agreement and issued a promissory note in the principal
amount of $25,000 with Richard N. Shell in consideration of Richard Shell's
loan to the Company of $25,000. The note was due on December 31, 1995
together with interest at the rate of 8% per annum. At any time during the
term of this note, the holder may elect to take payment of the principal
and accrued interest thereon in the form of restricted shares of the
Company common stock at a price equal to that provided in the Company's
next private placement after the date of the note. In January 1995, the
Company and Richard Shell agreed to convert the $25,000 note into 200,000
shares of restricted common stock. Additional related party disclosures are
at Notes 3 and 4.
NOTE 7. STATEMENTS OF CASH FLOWS
The Company prepares its statements of cash flows using the indirect
method as defined under the Financial Accounting Standard No. 95. Cash
equivalents include cash in banks and short-term money market funds with
original maturaties of less than three months.
During 1993, 1994 and 1995, a shareholder contributed research and
development efforts and the value assigned was accounted for as
contribution to capital.
The Company paid interest of $54,695, $169,036, and $139,923 in 1993,
1994 and 1995.
During 1993, the Company purchased all of the outstanding stock of VMI
in exchange for 1,000,000 restricted shares. The value of the assets
acquired totaled $3,369,496 and debt assumed aggregated $1,805,346. There
was no cash acquired in this transaction.
During 1993, the Company converted $422,371 of outstanding liabilities
into 459,702 restricted shares. During 1995, the Company converted $89,459
of outstanding liabilities into 467,775 restricted shares.
During 1993, Improtech relinquished 50,000 shares of Company common
stock in satisfaction and forgiveness of a $50,000 note from Improtech plus
accrued interest of $5,046.
During 1993 and 1994, warrants were issued in connection with
financial advisory and consulting services. The value of the warrants of
$67,215 for the year ended December 31, 1993, $18,750 for the year ended
December 31, 1994 was charged to consulting expense.
During the year ended December 31, 1994, 36,000 warrants were issued
for legal services rendered. The value of the warrants of $14,400 was
charged to legal expense.
During the year ended December 31, 1994, warrants were issued for
interest expense on a short term note. The fair market value of the
warrants of dates of grant of $9,750 was charged to interest expense.
During the year ended December 31, 1994, warrants were issued in
connection with a private placement of Company shares. The value of the
warrants of $15,250 was charged to consulting expense.
F-32
<PAGE>
During the year ended December 31, 1994, 157,500 warrants were issued
in connection with a private placement of $900,000 of convertible notes and
expenses of $185,230 were incurred. The value of the warrants of $7,875 and
expenses of $185,230 were charged to deferred financing costs. During the
year ended December 31, 1994, $24,138 was amortized to interest expense.
During the year ended December 31, 1994, 500,000 warrants were issued
for financial advisory services to be provided over a six-month period. The
value of the warrants of $110,000 was charged to prepaid financing cost as
an offset to equity. During the year ended December 31, 1994, $27,501 was
amortized to interest expense.
In September 1994, the Company issued 150,000 shares of common stock
for shareholder services to be provided over a two year period and $15,000
of cash. The Company recorded $309,450 as the value of the shares and
$294,450 as prepaid consulting fees as an offset to equity. During the year
ended December 31, 1994, $49,075 was amortized to consulting expense.
In December 1994, the Company issued 300,000 warrants for financial
advisory and consulting services to be provided over a two year period. The
value of the warrants of $57,500 was charged to prepaid consulting fees as
an offset to equity. In February 1995 these warrants were modified and an
additional $68,500 was charged to prepaid consulting fees.
In September and October 1995, the Company issued 2,266,184 shares of
Company common stock in connection with conversion of $300,000 of
convertible notes.
In November 1995, the Company issued 6,328,000 shares of Company
common stock in connection with conversion of $825,000 of convertible
notes.
NOTE 8. UNAUDITED QUARTERLY RESULTS
Unaudited quarterly results of operations for each of the quarters in the
three years ended December 31, 1995.
Fiscal 1995 By Quarter
- ------------------------------
First Second Third Fourth
--------- --------- --------- -----------
Revenues $ 398,378 $ 309,738 $ 350,906 $ 125,530
Gross profit $ 230,518 $ 131,190 $ 138,404 $ (203,318)
Net loss $(721,630) $(460,940) $(509,102) $(2,286,907)
Net loss per share $ (.04) $ (.03) $ (.03) $ (.09)
Fiscal 1994 By Quarter
- ------------------------------
First Second Third Fourth
--------- --------- --------- -----------
Revenues $ 277,055 $ 303,064 $ 484,224 $ 341,757
Gross profit $ 122,275 $ 142,194 $ 335,895 $ 61,262
Net loss $(682,095) $(846,968) $(431,982) $(1,123,450)
Net loss per share $ (.04) $ (.05) $ (.03) $ (.07)
Fiscal 1993 By Quarter
- ------------------------------
First Second Third Fourth
--------- --------- --------- -----------
Revenues $ 182,206 $ 113,954 $ 190,302 $ 182,396
Gross profit $ 89,608 $ 46,014 $ 102,469 $ 65,288
Net loss $(780,383) $(731,728) $(543,537) $(1,001,545)
Net loss per share $ (.07) $ (.05) $ (.03) $ (.06)
F-33
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES.
None.
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT, PROMOTERS AND CONTROL
PERSONS: COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
OFFICERS AND DIRECTORS
The officers and directors of the Company are:
Name Age Position Since
- --------------------------------------------------------------------------------
Steven R. Westlund 50 Chairman of the Board & 1995
Chief Executive Officer
Peter T. Benz 36 President/Chief Financial Officer 1995
& Director
Michael Grechko 52 Chief Operating Officer 1990
John Osborne 42 Director 1995
All directors hold office until the next annual meeting of
stockholders, and until their successors have been elected and qualified.
Officers serve at the discretion of the Board of Directors.
STEVEN R. WESTLUND - has been the Chief Executive Officer and a
director of the Company since May 1995. Mr. Westlund was Chairman of the
Board and Chief Executive Officer of Vitafort International Corporation
from May 1993 through May 1995. Vitafort was a financially troubled public
company engaged in research and development of functional foods ( foods
having bio/medical value ) vitamin enriched beverages, and proprietary
feeds for farm bred salmon. Mr. Westlund restructured and converted
Vitafort into an operational company engaged in the manufacture, sales and
marketing of fat free foods. He was Chief Executive Officer of
Lorenz/Germaine Incorporated from January 1991 through May 1993, and
Chairman of the Board and Chief Executive Officer of Auto Giant from
January 1991 through June 1992. Mr. Westlund specializes in corporate
restructuring and market development. Mr. Westlund was elected Chairman of
the Board by the Company's Board of Directors in December 1995. (See
subsequent events)
PETER T. BENZ - has been Chief Financial Officer and a director of the
Company since May 1995 and was elected President of the Company in
December 1995. Mr. Benz was a Senior Vice President and a Partner at
Gilford Securities, Inc., a New York based banking firm from 1989 through
1992. He was Chief Operating Officer and a Director of Vitafort
International Corporation, a public company in the fat free food business
from 1992 through 1994. From 1994 to date, Mr. Benz has been a private
investor and an investment banker. He graduated from the University of
Notre Dame with a BS in Business Administration in 1982.
JOHN OSBORNE - has been President and Chief Executive Officer of
Intermarkt USA LLC, an investment advisory firm specializing in advanced
technology evaluation and acquisition, interim management and corporate
restructuring since 1994. Intermarkt focuses on the funding of U.S.
publicly traded corporations through European institutional partnerships.
From 1990 through 1994, Mr. Osborne was President of Osborne Associates, a
venture capital and financial consulting firm, and was a Partner in Osborne
Applegate, a business consulting firm, from 1992 through 1994. For over 15
years, Mr. Osborne has held senior and executive positions in financial
services and investment corporations. He has contributed to the growth of
dozens of widely varied development state companies utilizing a variety of
strategies, including limited partnerships, domestic and offshore private
placements, convertible offerings and bridge financing. Mr. Osborne earned
a bachelors degree
Page 46 of 56
<PAGE>
from Hamilton College and a masters degree from Yale University. He became
a director of the Company in May 1995.
MICHAEL GRECHKO - has been the Company's Secretary and Chief Operating
Officer since January 1990. In the past, he has held various marketing and
business development positions in the health care industry. More recently
he was Program Development Manager with a division of American Hospital
Supply (now Baxter International) from April 1983 through December 1987.
He joined S/S as Managing Director in January 1988 and still holds that
position. Mr. Grechko received a Masters of Science degree in electrical
engineering from the University of Pennsylvania in 1967.
Under the federal securities laws, the Company's directors, executive
officers, and any persons holding more than 10% of the Company's Common
Stock are required to report their ownership of the Company's Common Stock
and any changes in that ownership to the Securities and Exchange
Commission. Specific due dates for these reports have been established, and
the Company is required to report in this Form 10-KSB any failure to file
by these dates during 1995. The Company believes that all of these filing
requirements were satisfied by its directors, officers and 10%
stockholders, except for Dr. William E. Shell who was delinquent in filing
a Form 4 which became due with respect to certain transactions in the
Company's stock.
In making these statements, the Company has relied upon a review of
Forms 3 and 4 and amendments thereto furnished to the Company pursuant to
Rule 16a-3 under the Securities Exchange Act of 1934 during fiscal year
1995 and the written representation of its incumbent directors and
officers.
Page 47 of 56
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth the compensation Dr. William E. Shell, the
former Chairman of the Board and Chief Scientific Officer, William Pelzer, the
former President and Chief Executive Officer, and Michael Grechko, Chief
Operating Officer and Secretary, of the Company (collectively, the "Named
Executive Officers"). No other executive of the Company received more than
$100,000 total annual compensation during that period.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensaton
Other Stock Underlying LTIP Other
Name And Current (1) Annual Awards Options/ Payouts Compensation
Principle Position Year Salary Bonus Compensation ($) Saris (#) ($) ($)
------------------ ---- ------ ----- ------------ --- --------- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Michael Grechko 1995 $72,000
COO & Sec 1994 $104,000 $208,630
1993 $99,385 $217,188
Dr. William Shell 1995 $72,00
Former Chief 1994 $150,000 (2)$6,000
Science Officer
1993 $150,000 $6,000
William Pelzer 1995
Former Pres/CEO 1994 (1)$240,000 $9,000
1993 $192,500 $8,250 $139,000
</TABLE>
1. Shell was compensated by the Company pursuant to a consulting agreement and
not as an employee of the Company.
2. Included in Dr. Shell's compensation is a $500.00 monthly automobile
allowance.
3. Represents the value at the time of issuance of phases of the Company's
common stock award based on certain performance criteria being satisified.
4. of this amount has been accured but not paid as of December 31, 1994. Mr.
Pelzer's compensation includes a $750.00 monthly auto allowance.
Page 48 of 56
<PAGE>
STOCK OPTION EXERCISES AND OPTION VALUES
None of the Named Executive Officers exercised any stock options during
1995. The following table contains information concerning stock options un
exercised at the end of fiscal year 1995 with respect to the Named
Executive Officers. No options have been exercised through June 30, 1995.
Fiscal Year - End Option Values
<TABLE>
<CAPTION>
Number of Number of
Unexercised Unexercised
Options Shares at In the Money Options
Fiscal Year-End at Fiscal Year-End (1)
Name Date Exercisable Unexercised Exercisable Unexercised
---- ---- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Steven Westlund Jan 96 3,000,000 3,000,000 $ $
(2) (2)
Peter Benz Jan 96 2,000,000 2,000,000
(2) (2)
John Osborne Jan 96 2,000,000 2,000,000
(2) (2)
Michael Jan 96 1,000,000 1,000,000
Grechko (2) (2)
William Shell Aug 95 750,000 (3) 750,000 (3)
William Pelzer 94 200,000 400,000 $0 $0
</TABLE>
(1) Represents the amount by which the aggregate market price of the shares of
the Company's Common Stock subject to such options exceeded the exercise
prices of such options on December 31, 1995.
(2) Represents options that were actually awarded January 6, 1996, which become
exercisable on June 20, 1996, and expire on June 20, 1999.
EMPLOYMENT AGREEMENTS AND DIRECTORS' COMPENSATION
In May 1995 (revised in January 1996), the Board of Directors approved
a compensation agreement with Steven R. Westlund, President, Chief
Executive Officer and Director. Pursuant to the agreement, Mr. Westlund's
salary is $6,000 per month from July 1995 until such time as the Company's
revenues exceed expenditures by an amount sufficient to increase his
salary, or at the choosing of the Board of Directors, his salary will then
be increased in increments based on the Company's ability to pay, up to a
maximum amount of $15,000 per month. As soon as practicable Mr. Westlund
will be added to the Company's medical insurance and the Company will
obtain directors and officers insurance. Mr. Westlund employment agreement
is three years. In partial consideration for his services, Mr. Westlund was
to receive warrants to acquire up to 1.5 million shares of Common Stock,
Exercisable for a period of 5-years from date of issuance with vesting to
occur over the term of the agreement at exercise prices ranging from thirty
to fifty cents per share. In January 1996, the agreement was modified as to
the number warrants he was to receive which were increased from 1.5 million
to 3 million with an exercise price of $.15CENTS for a period of three
years beginning June 1996 and ending June 1999.
In June 1995 (revised in January 1996), the Board of Directors
approved a compensation agreement with Peter Benz, Chief Financial Officer
and Director. Pursuant to the agreement, Mr. Benz salary is $4,000 per
month from July 1995 until such time as the
Page 49 of 56
<PAGE>
Company's revenues exceed expenditures by an amount sufficient to increase
his salary, or at the choosing of the Board of Directors, his salary will
then be increased in increments based on the Company's ability to pay, up
to a maximum amount of $10,000 per month. As soon as practicable Mr. Benz
will be added to the Company's medical insurance and the Company will
obtain directors and officers insurance. Mr. Benz employment agreement is
three years. In partial consideration for his services, Mr. Benz was to
receive warrants to acquire up to 750,000 shares of Common Stock,
Exercisable for a period of 3 years from date of issuance with vesting to
occur over the term of the agreement at exercise prices ranging from thirty
to fifty cents per share. In January 1996, the agreement was modified as to
the number warrants he was to receive which were increased from 750,000 to
2 million with an exercise price of $.15CENTS for a period of three years
beginning June 1996 and ending June 1999.
In June 1995, the Board of Directors approved a compensation agreement
with William Shell, MD, former Chairman of the Board and Chief Scientific
Officer. Dr. Shell's salary was to $6,000 per month from July 1995 until
such time as the Company's revenues exceed expenditures by an amount
sufficient to increase his salary, or at the choosing of the Board of
Directors, his salary will then be increased in increments based on the
Company's ability to pay, up to a maximum amount of $15,000 per month. In
partial consideration for his services, Dr. Shell was to receive warrants
to acquire up to 1.5 million shares of Common Stock, Exercisable for a
period of 3-years from date of issuance with vesting to occur over the term
of the agreement at exercise prices ranging from thirty to fifty cents per
share. In January 1996, the Company terminated Dr. Shell's employment with
the Company. As of the termination, 750,000 had vested with an exercise
price of $.30CENTS. The balance of the options were canceled.
In January 1996, the Board of Directors approved a compensation
agreement with Michael Grechko, Chief Operating Officer. Pursuant to the
agreement, Mr. Grechko's salary is $6,000 per month beginning in January
1996. Mr. Grechko's employment agreement is three years. In partial
consideration for his services, Mr. Grechko will receive warrants to
acquire up to 1 million shares of Common Stock, Exercisable for a period of
3 years from date of issuance with vesting to occur over the term of the
agreement at exercise prices of $.15CENTS.
In June 1995 (revised in January 1996), the Board of Directors
approved a compensation agreement with John Osborne, a member of the Board
of Directors and Business Development consultant to the Company. The
Company agreed to pay Mr. Osborne $4,000 per month consulting fees. Mr.
Osborne's is responsible for developing potential acquisition candidates
for the Company as well as developing foreign markets for the Company's
products. In partial consideration for his services, Mr. Osborne received
warrants to acquire up to 1 million shares of Common Stock, Exercisable for
a period of 3 years beginning June 1996 and ending June 1999 at exercise
price of $15CENTS.
In December 1992, the Company entered into a three-year employment
agreement with William Pelzer as its President and Chief Executive Officer.
The agreement, which was effective as of February 1993, provides for a base
salary of $150,000 per year, increasing to $180,000 per year upon the
attainment of certain criteria that already have been exceeded. The base
salary has increased to $240,000 per year effective July 1993 as the result
of the capital paid into the Company after December 15, 1992 exceeding
$3,000,000. The base salary will further increase to $300,000 per year in
the event annual Company sales exceed $5,000,000, capital paid into the
Company after December 15, 1992 exceeds $4,000,000 or the Company's market
capitalization equals or exceeds $200,000,000. Pursuant to the terms of
that agreement, Mr. Pelzer's family trust was permitted to purchase 150,000
restricted shares of Common Stock at $0.001 per share in February 1993 and
an additional 50,000 restricted shares of Common Stock at $0.001 per share
in June 1993 upon the satisfaction of certain of the foregoing criteria,
with the holder of such shares also receiving from the Company certain
registration rights with respect to those shares. Mr. Pelzer also has been
granted by the Company under this agreement options to purchase 600,000
shares of the Company's Common Stock at the market price at the time of
grant, vesting equally over a three-year period commencing in 1994, under a
Company stock option plan described
Page 50 of 56
<PAGE>
below. In connection with the Company entering into the foregoing
agreement, Clark M. Holcomb agreed to make additional payments to Mr.
Pelzer to bring his annual base salary payments to $300,000 each year and
to assign to Mr. Pelzer 100,000 shares of the Company's Common Stock owned
by Mr. Holcomb. However, to date Mr. Holcomb has failed to perform certain
of his obligations under this agreement. March 31, 1995, Mr. Pelzer
notified the Company of his intention to terminate his employment with the
Company as both chief executive officer and director effective April 13,
1995. Mr. Pelzer's resignation cited both cause due to failure of
consideration under the terms of his December 24, 1992 employment agreement
as well as personal reasons. The Company is currently negotiating a
settlement agreement with Mr. Pelzer.
In 1989, S/S entered into a five-year employment agreement with
Michael Grechko, who has served as the Company's Chief Operating Officer
since January 1990. Upon execution of that agreement, Mr. Grechko was
issued shares of the Company's Common Stock equal to 2% of the then
outstanding shares, and the fair market value of the shares issued was
recorded as a compensation expense of $100,000. The agreement provided
originally for a salary of $60,000 per year, which was subject to increase
to $100,000 per year in the event sales exceeded $600,000 per year or the
Company's shareholders' equity exceeded $4,000,000. The agreement also
provided for additional issuance's of shares of the Company's Common Stock
to Mr. Grechko at a price of $0.001 per share based upon the market
valuation of the Company's outstanding shares, and 312,500. In April 1993,
312,500 shares were issued and in December 1994, 242,593 shares were issued
to Mr. Grechko under the provisions of his agreement, and the Company
agreed to increase his salary to $100,000 per year. As of January 1994, a
salary increase to $104,000 per year was approved by the Company. Mr.
Grechko continues to be retained by the Company on a month-to-month basis
upon the same terms as his prior agreement with the Company but without
restricted stock awards.
Directors received no compensation for their services as such for the
fiscal year ended December 31, 1995. The Company reimburses directors for
out-of-pocket expenses they incur on behalf of the Company.
The Company offers health and disability insurance, reimbursement of
medical expenses, and other medical benefits to its full-time employees. No
retirement, pension, profit sharing, or other similar programs have been
adopted by the Company. However, benefits may be adopted in the future, if
they are authorized by the Board of Directors. In May 1993, the Company's
shareholders approved the adoption of Stock Option Plans pursuant to which
options covering a total of up to 1,500,000 shares of the Company's Common
Stock may be granted to the Company's officers, directors, employees and
other persons providing services to the Company. No shares have been
granted under such plan. (See "Certain Transactions" for a description of
the securities issued to the Company's officers and directors in 1994)
Page 51 of 56
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The table below sets forth certain information regarding the
beneficial ownership of the Company's Common Stock as of February 29, 1996
based on information available to the Company by (i) each person who is
known by the Company to own more than 5% of the outstanding Common Stock
based upon reports filed by such persons within the Securities and Exchange
Commission; (ii) each of the Company's directors; (iii) each of the Named
Executive Officers; and (iv) all officers and directors of the Company as a
group.
Name and Address of Number of Shares Percentage
Beneficial Owner Benficially Owned of Class (1)
---------------- ----------------- ------------
Dr. William E. Shell 929,000(2)(5) XX%
2139 Pontius Avenue
Los Angeles, CA 90025
Michael Grechko 672,433 XX%
2139 Pontius Avenue
Los Angeles, CA 90025
Dr. Louis Potyondy 1,261,676(3) XX%
9765 Crestview Circle
Villa Park, CA 92667
Directors and Officers
as a Group (Six Persons) 672,433(4) XX%
1. Included for purposes of this calculation are shares of Common
Stock outstanding as of February 28, 1996, plus in the case of a
particular person or group the shares of Common Stock subject to
currently exercisable options and warrants (which are deemed to
include options and warrants exercisable within 60 days after
February 28, 1996) held by that person or group.
2. Includes 11,000 shares held in an Individual Retirement Account
entitled "William E. Shell, MD, IRA."
3. Includes 200,000 shares issuable upon exercise of warrants.
4. Includes shares issuable upon exercise of warrants.
5. No longer an Officer or Director
Page 52 of 56
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In April 1993 and in December 1994, the Company issued 312,500 and
242,593 unregistered shares of Common Stock to Michael Grechko (an officer
of the Company) at $0.001 per share under the terms of his prior employment
agreement with the Company.
During 1994 and 1995, Dr. Shell has provided certain research support
facilities and services to the Company at no charge. Dr. Shell has been
treating this as a contribution to capital and the Company has been
expensing the value of these facilities and services ($200,000 in 1994 and
$30,000 in 1995).
In February 1995, the Company entered into an agreement and issued a
promissory note in the principal amount of $50,000 with Sam Shell, father
of Dr. Shell and Richard N. Shell, in consideration of Sam Shell's loan to
the Company of $50,000. The note is due on December 31, 1995 together with
interest at the rate of 8% per annum. At any time during the term of this
note, the holder may elect to take payment of the principal and accrued
interest thereon in the form of restricted shares of Company common stock
at a price equal to that provided in the Company's next private placement
after the date of the note. Sam Shell exercised his option to convert
$25,000 of the principal amount of this note on July 3, 1995 and received
138,889 shares of the Company's common stock, and warrants to acquire an
additional 100,000 shares of the Company's common stock.
In March 1995, Richard N. Shell guaranteed $20,000 of debt to an
unrelated third party on behalf of the Company. In April, 1995, the Company
entered into an agreement and issued a promissory note in the principal
amount of $25,000 with Richard N. Shell in consideration of Richard Shell's
loan to the Company of $25,000. The note is due on December 31, 1995
together with interest at the rate of 8% per annum. At any time during the
term of this note, the holder may elect to take payment of the principal
and accrued interest thereon in the form of restricted shares of the
Company common stock at a price equal to that provided in the Company's
next private placement after the date of the note.
In August 1995, a consulting company, wholly owned by Mr. Benz, was
paid a fee of $25,000 for consulting services rendered to the Company. (See
Executive Compensation)
Page 53 of 56
<PAGE>
ITEM 13. EXHIBITS, AND REPORTS ON FORM 8K
(a) Exhibits
3 Articles of Incorporation and by-laws of the Company, as amended. (1)
4.1 Form of Warrant Agreement between the Company and Jersey Stock
Transfer and Trust Company, including the Form of Warrant (as
modified). (4)
4.2 Form of Stock Purchase Warrant (issued with promissory note). (2)
10.1 License Agreement between F.A.T. Co. Research, Inc. and Dynamic
Products, Inc. (1)
10.2 Agreements between F.A.T. Co. Research, Inc. and Dr. William Shell and
Jackie See for Development and Exploitation of Patented Invention. (1)
10.3 Consulting Agreements between See/Shell and Drs. William Shell and
Jackie See. (1)
10.4 Original Equipment Manufacturing Agreement between Olympus Corporation
and E-Z Trac, Inc. (3)
10.5 Distribution Agreement between E-Z Trac Inc., and Triton Technology,
Inc. (3)
10.6 Employment Agreement between the Company and William Pelzer, Jr. dated
December 24, 1992. (4)
10.7 Agreement between William Pelzer, Jr. and Clark M. Holcomb dated
February 1, 1993. (4)
10.8 Exchange of Stock Agreement and Plan of Reorganization among the
Company, Venus Management, Inc. and the stockholders of Venus
Management, Inc. (4)
10.9 Co-Management Agreements dated June 30, 1993 between Venus Management,
Inc. and Medical Funding of America, Inc. (4)
10.10 Agreement dated June 30, 1993 between Venus Management, Inc. and
Medical Funding of America, Inc. (4)
10.11 Letter dated August 20, 1993 between the Company and Lewis, D'Amato,
Brisbois & Bisgaard re Debt Conversion Agreement. (4)
10.12 Letter agreement dated March 13, 1993 between the Company and Clark M.
Holcomb; Sale of Stock Agreement, dated November 1, 1992 by and
between the Company and Clark M. Holcomb; and related Promissory Note
from Clark M. Holcomb to the Company. (4)
10.13 Agreement concerning MRI System, dated as of February 10, 1994 by and
between Siemens Credit Corporation, Venus Management, Inc., the
Company, Medical Funding of America, Inc. and Tri-County Mobile MRI,
L.P. and related Transfer of Interest Agreement, Corporate Guaranty by
the Company, Amendment to Promissory Note of Medical Funding of
America, Inc. payable to Siemens Credit Corporation and Agreement
concerning Lease Payment between Venus Management, Inc. and Tri-County
Mobile MRI, L.P. (4)
10.14 Agreement dated August 27, 1992 by and between Dr. William Shell and
Clark M.Holcomb related to shares of the Company's Common Stock owned
by Dr. Shell. (4)
10.15 Agreement dated September 23, 1993 by and between Ladenburg, Thalmann
Co., Inc. and the Company. (4)
10.16 Consulting Agreement for Financial Public Relations dated as of
February 25, 1994 by and between the Company and Robert Bienstock and
Richard Washor. (4)
10.17 License Agreement, dated March 23, 1994 by and between Effective
Health, Inc. and KCD Incorporated. (4)
10.18 Professional Services Agreement, dated April 15, 1994 by and between
RAI Finanz, and theCompany. (4)
10.19 Consulting Agreement and Stock Plan dated as of August 25, 1994 by and
between the
Page 54 of 56
<PAGE>
Company and Hy Ochberg. (4)
10.20 Memorandum of Understanding dated as of August 16, 1994 by and between
the Company and Raifinanz (USA), Inc. (4)
10.21 Resonex Equipment Lease as of June 30, 1993 between Venus Management
Company and Medical Funding of America. (4)
10.22 Becton Dickenson Supply Agreement dated November 2, 1994.
10.23 Form 12b-25 dated March 30, 1995.
22.1 Subsidiaries of the Company -- See/Shell Biotechnology, Inc. (1)
22.2 Subsidiaries of the Company -- E-Z Trac, Inc. -- Articles of
Incorporation, Amendments and By-Laws. (1)
22.3 Subsidiaries of the Company -- Effective Health, Inc. -- Articles of
Incorporation, Amendments and By-Laws. (1)
22.4 Subsidiaries of the Company -- Venus Management, Inc. -- Certificate
of Incorporation, Amendments and By-Laws. (Included in Exhibit 10.9.)
2.5 Subsidiaries of the Company. (4)
__________________________________
(1) Previously filed as an exhibit to the Company's registration statement
on Form S-18, file number 33-17548-NY, as amended on August 7, 1990,
and incorporated herein by reference.
(2) Previously filed as an exhibit to the Company's registration statement
on Form S-18, file number 33-17548-NY, as amended on February 12,
1991, and incorporated herein by reference.
(3) Previously filed as an exhibit to the Company's registration statement
on Form S-18, file number 33-17548-NY, as amended on June 24, 1991,
and incorporated herein by reference.
(4) Previously filed as an exhibit to the Company's Registration Statement
on Form SB-2, file number 33-51684-NY, as amended on September 19,
1994, and incorporated herein by reference.
(b) Reports on Form 8-K:
On March 14, 1995, the Company filed a report on Form 8-K which reported
under Item 5 of such form.
On June 21, 1995, the Company filed a report on Form 8-K which reported
under Item 5 ofsuch form.
On July 5, 1995, the Company filed a report on Form 8-K which reported under
Items 5 and 7 of such form.
On August 4, 1995, the Company filed a report on Form 8-K which reported
under Item 5 of such form.
On August 21, 1995, the Company filed a report on Form 8-K which reported
under Item 5 of such form.
On December 28, 1995, the Company filed a report on Form 8-K which reported
under Item 4 of such form.
(27) Financial Data Schedule (included only in EDGAR filing).
Page 55 of 56
<PAGE>
Pursuant to the requirements of 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.
INTERACTIVE MEDICAL TECHNOLOGIES LTD.
Dated: April, 12, 1996 By: /s/ Peter T. Benz
Peter T.Benz,_____________________________
President, Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Steven R. Westlund
_____________________________ Chief Executive Officer April 12, 1996
Steven R. Westlund and Director
/s/ Peter T. Benz
_____________________________ President, Chief Financial April 12, 1996
Peter T. Benz Officer and Director
/s/ Michael Grechko
_____________________________ Chief Accounting Officer April 12, 1996
Michael Grechko and Secretary
/s/ John C. Osborne
_____________________________ Director April 12, 1996
John C. Osborne
Page 56 of 56
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