<PAGE>
FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 1996
------------------
OR
[_] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from _______________ to _______________
Commission file number 0-21384
---------
INTERACTIVE MEDICAL TECHNOLOGIES LTD.
-------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3367421
------------------------------- -----------------------
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
1717 Stewart Street, Santa Monica, California 90404
---------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's Telephone number, including area code: (310) 586-5532
--------------
2193 Pontius Avenue, Los Angeles, California 90025
------------------------------------------------------------------
(former, name, address and former fiscal year, if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or 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
--- ---
State the number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date.
Outstanding at
Class of Common Stock October 31, 1996
--------------------- -----------------
$.001 par value 45,902,040 shares
Transitional Small Business Disclosure Format Yes No X
--- ---
Number of sequentially numbered pages in the document: 26
----
<PAGE>
FORM 10-QSB
Securities and Exchange Commission
Washington, D.C. 20549
INTERACTIVE MEDICAL TECHNOLOGIES LTD.
Index
<TABLE>
<CAPTION>
<S> <C>
PART I - FINANCIAL INFORMATION Page
----
Item 1. Consolidated Financial Statements
Condensed Consolidated Balance Sheets at
December 31, 1995 and September 30, 1996 (unaudited) 3
Condensed Consolidated Statements of Operations
for the three and nine months ended September 30, 1995
(unaudited) and 1996 (unaudited) 5
Condensed Consolidated Statements of Cash Flows
for the nine ended September 30, 1995 (unaudited)
and 1996 (unaudited) 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. 14
Item 3. Legal Proceedings 20
PART II. - OTHER INFORMATION
Item 5. Other Information 25
Item 6. Exhibits and Reports on Form 8-K 25
Signatures 26
</TABLE>
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<PAGE>
PART I. FINANCIAL INFORMATION
------------------------------
INTERACTIVE MEDICAL TECHNOLOGIES LTD AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
ASSETS
------
December 31, September 30,
1995 1996
------------ -------------
<S> <C> <C>
CURRENT ASSETS
Cash $ 374,128 $ 239,573
Accounts Receivable, net of allowance for doubtful
accounts of $20,516 in 1995 and $180,516 in 1996 65,377 82,740
Interest receivable, net of allowance for doubtful
accounts of $59,615 in 1995 and $55,615 in 1996 -- --
Notes receivable from shareholder, net of allowance
for doubtful accounts of $16,548 in 1995 and $141,548
in 1996 -- --
Leases receivable 79,241 145,547
Inventories -- 109,800
Prepaid Expenses -- 7,112
Due from related parties, net of allowance for doubtful
accounts of $109,593 in 1995 and 1996 1,725 1,725
---------- ----------
TOTAL CURRENT ASSETS 520,471 586,497
---------- ----------
PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS,
at cost, net of accumulated depreciation and amortization of
$1,303,661 in 1995 and $1,648,982 in 1996
Office Equipment 110,974 143,072
Leasehold improvements 145,860 79,098
Magnetic resonance imaging systems 1,298,247 1,081,869
---------- ----------
Total Property, Equipment and Leasehold Improvements, net 1,555,081 1,304,039
---------- ----------
OTHER ASSETS
Goodwill - Note 4 -- 897,504
Patents, net of accumulated amortization of $107,466 in 1995
and $125,532 in 1996 289,486 271,421
Deposits and other assets 74,568 143,557
---------- ----------
Total Other Assets 364,054 1,312,482
---------- ----------
TOTAL ASSETS $2,439,606 $3,203,018
========== ==========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
-3-
<PAGE>
INTERACTIVE MEDICAL TECHNOLOGIES LTD AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' DEFICIT
-------------------------------------
December 31, September 30,
1995 1996
-------------- --------------
<S> <C> <C>
CURRENT LIABILITIES
Loans payable $ 88,500 $ 78,330
Convertible notes 75,000 333,379
Current portion of long term note payable 318,171 403,144
Accrued compensation and payroll taxes 206,106 189,345
Professional services payable 413,135 267,456
Trade payables and other accrued expenses 75,500 123,595
Royalties payable 535,518 383,425
Pastels acquisition cost payable - Note 4 -- 215,000
Nutra Quest acquisition cost payable - Note 4 -- 560,000
Income taxes payable 3,946 5,965
Deferred rent 8,460 5,640
Interest payable - long term note 21,609 42,494
Interest payable - convertible notes 16,542 23,494
------------ ------------
Total Current Liabilities 1,762,487 2,631,267
------------ ------------
LONG TERM NOTE PAYABLE, net of current
portion 959,538 826,041
------------ ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' DEFICIT:
Common Stock, authorized 50,000,000 shares
of $.001 par value; issued and outstanding
32,282,082 in 1995 and 45,902,040 in 1996 32,282 42,832
Additional paid-in capital 15,083,445 16,177,713
Accumulated deficit (15,398,146) (16,474,835)
------------ ------------
Total Shareholders' Deficit (282,419) (254,290)
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $ 2,439,606 $ 3,203,018
============ ============
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements
-4-
<PAGE>
INTERACTIVE MEDICAL TECHNOLOGIES LTD AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
For the For the
Three Month Ended Nine Month Ended
September 30, September 30,
------------------------------ ----------------------------
1995 1996 1995 1996
<S> <C> <C> <C> <C>
REVENUES
Products and services $ 237,127 $ 200,452 $ 717,685 $ 443,526
Lease rentals 113,779 97,081 341,337 291,242
----------- ----------- ------------ ------------
350,906 297,533 1,059,022 734,768
COST AND EXPENSES
Cost of Revenues
Product and services 92,163 66,502 285,895 147,545
Lease Operations 120,339 72,126 361,017 216,378
----------- ----------- ------------ ------------
212,502 138,628 646,912 363,923
Research and development 38,177 71,177 184,968 199,804
Selling, general and administrative expenses 491,592 498,356 1,289,744 1,120,255
----------- ----------- ------------ ------------
742,271 708,161 2,121,624 1,683,982
----------- ----------- ------------ ------------
Loss from operations (391,365) (410,628) (1,062,602) (949,214)
INTEREST EXPENSE AND OTHER
Interest expense - other 88,031 6,952 309,477 9,880
Interest expense - lease operations 31,176 28,072 99,867 88,299
Interest Income (11,991) (3,802) (55,022) (10,502)
Settlements and arbitration award 9,721 35,000 136,325 35,000
----------- ----------- ------------ ------------
Total interest expense and other 116,937 66,222 490,647 122,677
----------- ----------- ------------ ------------
Loss before provision for state income taxes (508,302) (476,850) (1,553,249) (1,071,889)
PROVISION FOR STATE INCOME TAXES (Note 6) 800 800 2,400 4,800
----------- ----------- ------------ ------------
NET LOSS ($509,102) ($477,650) ($1,555,649) ($1,076,689)
=========== =========== ============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 19,817,305 45,875,066 18,243,811 38,621,477
=========== =========== ============ ============
NET LOSS PER SHARE ($0.03) ($0.01) ($0.09) ($0.03)
=========== =========== ============ ============
</TABLE>
The accompanying notes are an integral part of
these condensed financial statements
-5-
<PAGE>
INTERACTIVE MEDICAL TECHNOLOGIES LTD
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED STEPTEMBER 30, 1995 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
For the
Nine Month Ended
September 30,
--------------------------------
1995 1996
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss ($1,555,649) ($1,076,689)
Adjustments to reconcile net loss to net cash
(used in) operating activities:
Research and development efforts contributed as capital 30,000 --
Depreciation and amortization 930,741 271,581
Issuance of warrants 68,500 --
Decrease (increase) in:
Accounts receivables (72,458) (17,363)
Interest receivable (37,160) --
Notes receivable 43,638 --
Lease receivable (75,145) (66,306)
Inventories -- (109,800)
Prepaid expenses (225,000) (7,112)
Increase (decrease) in:
Due to related parties and former shareholders (103,981) --
Accrued compensation -- (16,761)
Professional fees and other payables 713,765 (249,677)
Income taxes payable -- 2,019
Deferred rent (2,430) (2,820)
Interest payable 76,579 27,837
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (208,600) (1,245,091)
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property, equipment and leasehold
improvements (15,970) (71,463)
Investments in Pastels and NutraQuest, net -- (122,504)
Expenditures for patents (26,597) --
Investments in KCD Incorporated (217,243) --
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (259,810) (193,967)
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock 466,246 1,104,818
Additional capital contribution from shareholders 121,946 --
Proceeds from issuance of convertible notes 300,000 --
Payments on long-term note (185,021) (48,524)
Proceeds from exercise of warrants, net 54,511 --
Proceeds from loans payable 75,000 258,379
Payments on loans payable -- (10,170)
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 832,682 1,304,503
----------- -----------
NET INCREASE (DECREASE) IN CASH 364,272 (134,555)
CASH, beginning of period 25,215 374,128
CASH, end of period $ 389,487 $ 239,573
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
condensed financial statements
-6-
<PAGE>
INTERACTIVE MEDICAL TECHNOLOGIES LTD. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
September 30, 1996
1. Significant Risks
-----------------
During 1995 consolidated revenues of Interactive Medical Technologies
Ltd. (Interactive) and subsidiaries (the Company) were generated from
royalties from the sale of fat sequestrant, the sale of colored microspheres,
and laboratory services, and lease revenues from magnetic resonance imaging
system. The licensing agreement for the fat sequestrants, which accounted
for 49% of revenues in 1995, was terminated during the first quarter of 1996.
The Company has incurred net losses since its inception in 1986. This
includes losses of $3,084,495 and $3,978,579 for the years ended December 31,
1994 and 1995 and $477,650 and $1,076,690 for the three and nine months ended
September 30, 1996. Continuing losses have adversely affected the liquidity
of the Company, as well as the Company's ability to raise necessary
additional capital. As of September 30, 1996, the Company had an accumulated
deficit of $16,474,835 and negative working capital of $2,044,770. In
addition, the Company is 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
and distribution issues. The Company and its former management have been
named in certain litigation. The Company has been subject to various claims,
lawsuits, lawsuit settlements and judgments. The Company's legal costs have
been paid from available funds and unpaid amounts have been accrued.
Although the Company has settled the majority of claims that were outstanding
at the beginning of the year and there have not been additional claims
presented or filed subsequent to December 31, 1996, there is no assurance
such funds will continue to be available, and the inability to pay judgments
when due or fees of defense counsel may result in settlement of the remaining
or new actions on unfavorable terms to the Company.
Beginning in June 1995, new management implemented a plan of
restructure. Initial efforts were focused on reducing losses, settling the
accumulation of debt and lawsuits referred to above, and raising working
capital. By October 1995, Management began shifting some of its resources to
the internal development of new dietary and food supplement products,
development of alternative financing for research projects, and the
acquisition of strategic consumer product companies.
The results of these efforts have produced a research grant for the
National Institute of Health (NIH) to help finance ongoing contrast
microshpere studies, a strategic partner agreement with E-Z EM which includes
a provision for funding advanced pre-clinical and FDA studies as well as
outlining a basic manufacturing and distribution understanding.
Additionally, the Company acquired two strategic consumer products companies,
each with a number of ready to market personal care and nutritional consumer
products. Those agreements also contain contingencies concerning
preestablished performance criteria based on gross product sales, which if
not achieved by the acquired companies allow for the Company to terminate the
agreements and convert the monies previously invested into promissory notes
to be repaid by those companies. During the balance of 1996 and well into
1997, Management has redirected its focus to the sales and marketing
-7-
<PAGE>
of the consumer products which were acquired or developed internally. The
Company has begun the initial phases of distribution, and sales and marketing
during the third calendar quarter.
Even though operating losses have been substantially reduced from
previous years, Management anticipates that the revenues from the sales of
existing microsphere products, laboratory services, MRI leasing operation and
the consumer products operations during their initial phases of distribution
will not be adequate to fund present scaled down commercial operations.
Management intends to raise additional working capital to fund present
commercial operations during the initial distribution phase of the new
consumer products.
Due to the above factors, losses are expected to continue at least for
the immediate future. In the event working capital is not available to the
Company, the Company would curtail all non commercial operations while
accelerating the distribution and sale of its consumer products and its
efforts to license its contrast microsphere technologies.
The Company believes it has made great progress during the past year and
revenues from new consumer products began during the third calendar quarter
and will continue grow well into the future. The Company intends to follow
the plan implemented in June of 1995, including seeking alternative sources
to fund contrast microsphere studies. According to current information, the
costs of FDA clinical studies, which are subject to the rules, regulations
and approval of protocols by the FDA, the Companys planned FDA studies could
range between $3,000,000 and $10,000,000 over a span of thirty months from
the date started. Operating revenues are not expected to be sufficient to
provide all of these funds, therefore the Company will seek assistance from
its strategic partners, and by collecting advanced royalty payments from
other potential strategic partners, and to some extend raise additional
capital from the sale of securities.
The Company carries no direct product liability insurance, relying
instead on the coverage afforded by its distributors and the manufacturers
from whom it obtains products. These coverages directly protect the insured
who pay the premiums and only secondarily the Company. There is no assurance
that such coverages will adequately cover any claims which may be brought
against the Company. In addition, the Company does not have any general
liability coverage.
These factors raise substantial doubt that the Company may be able to
continue as a going concern. The financial statements do not include any
adjustment relating to the realization or classification of liabilities that
might be necessary should the Company be unable to continue as a going
concern.
2. Summary of Significant Accounting Policies
------------------------------------------
Basis of Presentation
---------------------
The accompanying condensed consolidated financial statement have been
prepared assuming that the Company will continue as a going concern. Certain
matters raise substantial doubt about the Company's ability to continue as a
going concern. As discussed in Note 1, the Company operates under extreme
liquidity constraints and, because of recurring losses, increasing difficulty
in raising necessary additional capital. Management's plan in regard to
these matters is described above. The
-8-
<PAGE>
financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that might result should the Company be unable
to continue as a going concern.
As more fully discussed in Note 5, the Company is subject to various
claims, lawsuits, lawsuit settlements and judgments.
In the opinion of the management of the Company, the accompanying
condensed unaudited financial statements contain all adjustments, consisting
of only normal recurring accruals, necessary to present fairly the financial
position at September 30, 1996, the results of its operations for the three
and nine months ended September 30, 1996 and 1995 and the cash flows for the
nine months ended September 30, 1996 and 1995. Certain information and
footnote disclosures normally included in financial statements that would
have been prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission, although management of
the Company believes that the disclosures in these financial statements are
adequate to make the information presented therein not misleading. It is
suggested that these condensed financial statements and notes thereto be read
in conjunction with the financial statements and the notes thereto included
in the Company's December 31, 1995 Form 10-KSB.
The results of operations for the three and nine months ended September
30, 1996 are not necessarily indicative of the results of operations to be
expected for the full fiscal year ending December 31, 1996.
Income Taxes
------------
Income taxes are provided for the tax effects of transactions reported
in the financial statements and consist of taxes currently due plus deferred
taxes related primarily to differences between the adjusted bases of fixed
assets and patents for financial and income tax reporting. The deferred tax
assets and liabilities represent the future tax return consequences of those
differences, which will either be taxable or deductible when the assets and
liabilities are recovered or settled. Deferred taxes also are recognized for
operating losses that are available to offset future federal income taxes.
Goodwill
--------
Goodwill associated with the acquisition of Pastels International, Inc.
and Nutra Quest, Inc. (See Note 4. Acquisitions) under the purchase method of
accounting is being amortized over a 20 year period.
Loss Per Share
--------------
Loss per share is based upon weighted average number of common shares
outstanding during the periods.
-9-
<PAGE>
3. Capital Transactions and Long Term Debt
---------------------------------------
There were privately held warrants outstanding as of September 30, 1996,
to purchase a total of 14,818,556 shares of the Company's common stock at
purchase prices per share ranging from $0.10 to $4.00.
The Company's magnetic resonance imaging (MRI) system (the "Unit")
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 Unit to a third party finance company of $32,360 through
August 1999 and $68,589 in September 1999. As of September 30, 1996, the
balance of this debt aggregated $1,162,679 (including interest currently due
of $42,494) of which $403,144 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 Unit.
Tri-County was delinquent in making certain of its lease payments to VMI
under the terms of the lease agreement concerning the 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 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 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 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 November 10, 1996, Tri-County was current in making the payments
to the finance company.
The Company has issued for value received $100,000 convertible note.
The note is convertible to Company Common Shares at $0.125 per share, which
matures September 10, 1999, with interest at 10% per annum payable quarterly
in Company common shares.
The Company has assumed the debt of Pastels International, Inc. under
the acquisition agreement discussed in Note 4. The debt consists of a note
payable to the Small Business Administration for $73,600 with interest at
4%, with principal and interest of $355.00 payable monthly for 212 months and
a short term note payable of $20,000 due December 31, 1996. (See Note 4
Acquisitions)
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 share for every four old shares nor more
than one share for every eight old shares, with the specific exchange
-10-
<PAGE>
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.
4. Acquisitions
------------
During the quarter ended June 30, 1996, the Company entered into two
separate memorandums to acquire Pastels, International, Inc. (Pastels) and
Nutra Quest, Incorporated (Nutra Quest). Both agreements contain certain
contingencies relating to Pastels and Nutra Quest achieving predetermined
gross sales amounts prior to the Company making payments related to the
purchase price. In the event these gross sales contingencies are not met,
the Company has the option to terminate the agreements and convert any monies
advanced into a promissory note payable to the Company secured by assets.
The Company acquired Pastels for $250,000 in cash, the assumption of
debt in an approximate amount of $90,000 (subject to an accounting and
Pastels gross sales achieving predetermined amounts within a specified time
periods) and warrants to purchase 500,000 shares of the Companys common stock
at $.15 per share. The Company acquired Nutra Quest for $600,000, payable
$200,000 in cash over a period of 15 months subject to Nutra Quest gross
sales achieving predetermined amount within specified time periods) in
fifteen separate installments, the balance payable in shares of the Companys
common stock, valued at $.15 per share which is also subject to similar
performance criteria. The founders and Presidents of both Pastel and Nutra
Quest have been retained by the Company under employment agreements.
Although not indentical, both employment agreements contain provisions to
either purchase additional warrants of the Company common stock at prices
ranging from $.15 to $1.00, and to receive royalties ranging from 2% to 5% of
gross product sales from their existing and pending products. The value of
the employment agreements are in part subject to the performance of Pastels
and Nutra Quest gross sales.
5. Contingencies
-------------
Litigation
----------
In March 1995, Donald Seidel sued Clark 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 has
denied these allegations.
In February 1996, the Rudolf Steiner Research Foundation filed a
complaint in the Unites States District Court for the Central District of
California against Clark Holcomb, Lawrence Gibson, Murray Bettingen, Inc. and
the Company. This action alleges civil RICO, violation of the Securities
-11-
<PAGE>
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 Seattle Regional Office of the Federal Trade Commission had advised
the Company that the staff believed that the Company's sequestration product,
which was licensed to KCD, Incorporated under the brand name SeQuesterTM, had
been improperly represented in advertising claims, and the same sequestrant
product previously marketed by the Company under the Lipitrol brand was also
improperly represented in advertising claims. The staff indicated that it
was prepared to recommend that a complaint be filed against the licensee, the
Company and certain individuals in connection with the foregoing. The
Company and the FTC staff have since 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 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. This proposed settlement, which has
been accepted by the Company, awaits final approval by the Federal Trade
Commission.
Except as otherwise specifically indicated above, management believes
that the Company does not have any material liability for any lawsuits,
settlements, judgments or fees of defense counsel which have not been paid or
accrued as of September 30, 1996. The Company will continue to vigorously
defend against these actions.
There can be no assurance that the Company will prevail in either of the
foregoing lawsuits. The Company may incur substantial expense in connection
with this litigation and any unfavorable settlement or judgment against the
Company in which the Company is a defendant could have a material adverse
effect upon the Company.
Transactions in Company Securities
----------------------------------
In October 1995, the staff of the Securities and Exchange Commission
(SEC) advised the Company pursuant to certain private placements and resale
of unregistered Company shares, the Company was being investigated for
alleged violations of the federal securities laws. Subsequent to June 30,
1996, the Company agreed to a consent decree with the SEC which, without
admitting or denying any wrongdoing, enjoins the Company from violating the
registration provisions of the federal securities law. The agreement is
subject to final approval by the SEC.
6. Commitments
-----------
Research and License Agreements
-------------------------------
In January 1996, the Company entered into a broad based, long-term
agreement with E-Z-EM, Inc. ("E-Z-EM") for clinical testing of the Company's
contrast microspheres. Under the terms
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<PAGE>
of the agreement, E-Z-EM will commence clinical testing and provide funding
for phase one animal studies. During phase two, E-Z-EM will analyze the
impact of regulatory costs and expenses in preparation for capital funding to
conduct FDA approved clinical trial (IND). The agreement establishes the
Company as the product manufacturer, which E-Z-EM has an option for an
exclusive license (including the right to sub-license) to all products
developed under the patent and the rights to global sales and marketing of
the products and related services for the life of the patent or 10 years,
whichever is longer.
-13-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The Company commenced operations in 1990, when it acquired 82.5% of
See/Shell Biotechnology, Inc. ("S/S"), which was organized in 1987 and had
commenced operations in 1988. The Company's activities to date have
consisted primarily of planning, research and development, and marketing of
its microspheres and related products and services, performing clinical
trials and licensing of its fat sequestrant technology and development of its
biodegradable microspheres for human imaging applications, which the Company
believes represents a significant long-term growth opportunity. On June 30,
1993, the Company acquired Venus Management, Inc. ("VMI"), whose MRI leasing
operations are reflected in the Company's operating results since that date.
In May and August 1996 the Company acquired Pastels International, Inc. and
Nutra Quest, Inc. (See Note 4. Acquisitions). Both Pastels and Nutra Quest
are considered to be significant opportunities for future growth in revenues
and income.
RESULTS OF OPERATIONS
Three and Nine Months Ended September 30, 1995 Compared to September 30, 1996
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30 Ended September 30
----------------------------------------------------------------------------------
1995 1996 1995 1996
----------------------------------------------------------------------------------
($ Thousands) Amount % Amount % Amount % Amount %
---------- ---- ------- ---- --------- ---- ------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues - Products and Services
Microspheres and laboratory services $ 52 22% $ 201 100% $ 192 27% $ 354 80%
Fat sequestrant 185 78% 0 0% 526 73% 90 20%
----- ---- ----- ---- ----- ---- ----- ----
237 100% 201 100% 718 100% 444 100%
Cost of Revenues
Microspheres and laboratory services 34 65% 67 33% 115 60% 148 42%
Fat sequestrant 58 -- -- -- 83 -- -- --
----- ---- ----- ---- ----- ---- ----- ----
34 14% 67 33% 115 16% 148 33%
Gross Margin - Product and Services $ 203 86% $ 134 67% $ 603 84% $ 296 67%
===== ==== ===== ==== ===== ==== ===== ====
Revenues - Lease Rentals $ 114 100% $ 97 100% $ 227 100% $ 291 100%
Cost of revenues - lease operations 120 105% 100 103% 240 106% 304 104%
----- ---- ----- ---- ----- ---- ----- ----
Gross margin - lease operations ($6) -5% ($3) -3% ($13) -6% ($13) -4%
===== ==== ===== ==== ===== ==== ===== ====
</TABLE>
For the three and nine months ended September 30, 1996, revenues from
products and services were approximately $201,000 and $444,000, a decrease
of 16% and 38%, respectively, over comparable 1995 periods. The decreases
are due to the termination of the fat sequestrant license agreement with KCD
during the first three months of 1996. The Company has reserved all
receivables from KCD as uncollectible. The Company is currently developing
an advanced fat
-14-
<PAGE>
sequestrant product and is seeking new distributors for that product.
Revenues from product and services increased approximately $149,000 and
$162,000 (or 287% and 84%) for the three and nine months ended September 30,
1996, respectively, over 1995. The increases were due to the acquisition of
Pastels and Nutra Quest which accounted for approximately $97,000 of product
revenues during the quarter ended September 30, 1996. The remainder of the
increase was attributable to the increase sales of microspheres and related
laboratory services in part do to the completion of an entirely new, more
cost effective automated color microsphere counting system employing flow
cytometry technology through an OEM relationship.
While the Company to date has not encountered any significant
difficulties in connection with its sale of products in foreign markets, any
future developments such as significant increases in customs duties, export
quotas or other trade restrictions or large fluctuations in foreign currency
rates could have an adverse effect on the Company.
The overall cost of revenues for products and services as a percentage
of sales for the three and nine months ended September 30, 1996 were 33%,
compared to 14% and 16% for 1995, respectively. Increases in cost of revenues
as a percentage of sales resulted primarily from decrease in royalties from
KCD.
Research and development expense increased approximately $33,000 and
$15,000 for the three and nine month periods ended September 30, 1996 from
the comparable 1995 periods due to the increased efforts associated with the
Companys National Institute of Health research grant efforts, to the efforts
discussed below and the Company's consumer products research and development.
During 1994, the Company enhanced its production capability for contrast
microspheres for clinical trial purposes. The Company has identified four
specific imaging applications for its technology and initiated development on
two of them. These products include a contrast microsphere to CAT scan and
detect lung blood clots (pulmonary emboli), an ultrasound contrast
microsphere for detection of heart perfusion (myocardial perfusion), an MRI
contrast microsphere for abdominal visualization and a contrast microsphere
to compete with liquid x-ray contrast media. The Company anticipates that
any increases in research and development resources during 1996 and 1997 will
be devoted primarily to these projects.
SG&A expense decreased to approximately $1,120,000 from approximately
$1,290,000 for the nine months of 1996, from 1995, a reduction of 13%. For
the three months ended September 30, 1996 SG&A expense increased to
approximately $498,000 from approximately $491,000 in 1995, an increase of
1%. The decrease for the nine months were a result of 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 during 1995 due primarily from matters
related to the SEC investigation of Clark M. Holcomb's activities. Included
in 1995 are $220,420 of non-recurring financial consulting and legal fees.
The increase for the three months ended September 30, 1996 was a result of
the increased selling and administrative costs associated
-15-
<PAGE>
with the start up costs resulting from the acquisition of Pastels and Nutra
Quest. Pastels during the quarter incurred approximately $60,000 in media
development costs associated with its Direct Response TV which is currently
in market testing. Nutra Quest which is in its initial distribution phase, is
expected to start generating revenues in the fourth quarter of 1996.
Interest expense for operations decreased 92% and 97% for the three and
nine month periods ended September 30, 1996, respectively from comparable
1995 periods. The 1995 periods included non-cash expenditures for
amortization of deferred financing costs 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 of $18,000 and
$54,000 for the three and nine months ended September 30, 1995, respectively.
Interest income decreased to approximately $3,800 for the third quarter
of 1996 compared to approximately $12,000 for 1995. For the nine months
ended September 30, 1996 interest income decreased to $10,500 from $55,000
from the comparable 1995 nine month period. The decreases were due to
interest earned on an outstanding note receivable from a shareholder, an
outstanding note receivable from the sale of stock and delinquent royalties
receivable.
No provision was made for Federal income tax since the Company has
incurred significant net operating losses from inception. Through December
31, 1994, the Company incurred net operating losses for tax purposes of
approximately $9,700,000 and approximately $11,420,000 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 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. Historically, the
-16-
<PAGE>
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 be no assurance that a sufficient amount
of the Company's securities can or will be sold or 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. 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 continued as a going concern.
Management's 1996 Plan of Operations
------------------------------------
Objectives of the Plan
----------------------
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 itself is only a partial solution, what was needed was a major
restructuring. Management developed the operational plan described below:
1. make significant and lasting reductions in general and
administrative costs
-17-
<PAGE>
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
through cost cutting and 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 U.S.
government sponsored research grants; and,
8. develop investment banking and public relation alliances; and
9. make strategic acquisitions of consumer products companies.
Results of the Plan (As of November 10, 1996)
---------------------------------------------
The plan described above was phased in beginning in June 1995. The
Company accomplished the majority of the goals set out in the plan including
(1) the Company made significant and lasting reductions in G&A, temporarily
halted all research and development, which it later resumed in order to
manufacture contrast microspheres for pre-clinical testing required as a
result of a strategic agreement signed with E-Z-EM; and, (2) reorganizing the
E-Z Trac subdivision to operate as a profit center; and (3) secured
sequetrant licensing revenues (temporarily, KCD defaulted again and was
terminated); and, (4) increased E-Z Trac revenues (KCD was 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 a strategic agreement with E-Z-EM to develop contrast microspheres
for commercial applications; and, (8) applied for and received a research
grant from the National Institute of Health ("NIH"); and (9) developed
investment banking relationships; and (10) acquired two consumer products
companies; and (11) completed television advertisements (commercials) for
personal care product, as well as establishing a network marketing
distribution system. The Company expects to begin distribution of 20 or more
consumer products during the 4th quarter, primarily through network
marketing.
Additionally, the Company raised approximately $965,348 from private
placements from August 1995 to December 1995. From January 1, 1996 to
November 10, 1996, the Company has raised $1,100,000 in four private
placements, with an option of an additional $500,00 to fund prior to December
31, 1996. The Company also received a $100,000 grant funded by the National
Institute of Health grant, with up to $750,000 more conditioned on the
success of phase one.
As of September 30, 1996, the Company's working capital position
improved to a negative $1,112,000 from a negative $1,242,000 at December 31,
1995, primarily as a result of the working
-18-
<PAGE>
capital raised through the private placements that occurred during the second
quarter of 1996, this was offset by decreases in accrued compensation and
payroll taxes, professional services payable, trade payables and other
accrued expenses as well as increases in the allowance for doubtful accounts
and acquisition costs payable associated with the acquisitions of the
consumer products companies. At September 30, 1996, the Company's cash
position had decreased to $239,573 from $374,128 December 31, 1995.
At September 30, 1996, the Company had assets of $3,203,018 compared to
$2,439,606 on December 31, 1995. In addition, the Company had a total
shareholders' deficit of $254,290 on September 30, 1996 compared to
$282,419 on December 31, 1995, an increase of $28,129. The increase was the
result of the issuance of common stock valued at $1,104,818 offset by a net
loss from operations of $1,076,689. Payments on a long term note with a
balance of $1,162,679 (including interest currently due of $42,494) as of
September 30, 1996 of which $403,144 is due within the next twelve months had
been assumed by the Company as part of its acquisition of VMI; this note is
secured by guaranteed lease payments of an equivalent amount.
-19-
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
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
smaller number of individuals. Those issuances were structured in reliance
upon the advice of the Company's then securities counsel, and the Company
believes that these issuances, 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 issuances
or the resales to have been registered. All of the foregoing resales 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
resales 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 resales of these shares that were either directly
effected or were arranged for by Clark Holcomb. These transactions have been
the subject of an SEC investigation previously disclosed by the Company.
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
-20-
<PAGE>
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 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. Holcolm, 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.
Pursuant to the certain private placements and resale of unregistered
Company shares discussed above, the Company agreed to a consent decree with
the SEC that, without admitting or denying any wrongdoing, enjoins the
Company from violating the registration provisions of the federal securities
law. The agreement is subject to final approval by the SEC.
Proceeding 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 sequestrant product. Dr. Shell
has asserted in this action that Dynamic has sold the first generation fat
sequestrant 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 sequestrant 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 monies 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.
-21-
<PAGE>
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 filed an answer denying all of the allegations contained in the
Cross-Complaint. This matter was settled with a mutual release of claims
discussed below. The basis of this cross complaint appeared 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.
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 sequestrant product. The Company is seeking in
this lawsuit injunctive relief and damages in an unspecified amount from
defendants. This matter has been settled with a mutual release of claims
discussed below.
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 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, declatory
relief and permanent injunction. The action is abased 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,
Dr. 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, account and constructive.
The Company denied all of the claims and was settled in the mutual release of
claims discussed below.
The legal proceedings described above relating to Licensing Agreements,
Manufacturing Agreements, Royalty Agreements, and Patents involving the
Company and its subsidiaries, Dynamic Products, Inc., D&F Industries, FATCO,
KCD, Inc., and Dr. Shell have been dismissed under settlement agreements and
mutual releases of claims without liability to the Company and its
subsidiaries.
-22-
<PAGE>
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
was seeking in this lawsuit a judgement against MFA in the sum of $210,210
plus interest thereon with costs, attorney's fees and disbursements and other
relief. VMI was also seeking judgement for all unpaid lease payments
subsequent to August 1994 which total an additional $510,510 through December
31, 1995. However, it was determined not be in the Company's interests to
pursue the claims and the actions were dismissed.
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. The Company's position was 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. Although the Company believes VMI was
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 would be no assurance that VMI will prevail against either party
or that VMI will be able to collect any judgement that it may obtain against
MFA. The Company also 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. Subsequent to September 30, 1996, the
Company and J&J Finance signed an agreement agreeing to a mutual dismissal
of actions and a release of claims.
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 sequestrant
product, which currently is marketed by a licensee under the name
"SeQuester," has been improperly represented in advertising claims, and that
the sequestrant 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 sequestrant 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
-23-
<PAGE>
such programs or services. In addition, the Company would pay consumer
redress to the FTC in an aggregate amounts 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 doesn't have any material liability for any lawsuits,
settlements, judgements or fees of defense counsel which have not been paid
or accrued as of September 30, 1996.
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 an unfavorable
settlement or judgement 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 benefit of the Company.
There can be no assurance that the Company will prevail in any of the
foregoing lawsuits. The Company may incur substantial expense in connection
with this litigation and any unfavorable settlement or judgement against the
Company in which the Company is a defendant could have a material adverse
effect upon the Company.
The Company currently has no firm commitments for material capital
expenditures, with any such future commitments being dependent upon the
availability of funds. The Company does not anticipate that future
compliance with existing environmental and occupational safety regulations
will have a significant impact on its capital expenditures or on its
financial condition or future operating results.
EFFECT OF INFLATION
The Company does not believe that general inflation would have a
material effect on its operations.
-24-
<PAGE>
PART II. OTHER INFORMATION
---------------------------
ITEM 4. SUBMISSION OF MATTERS OF A VOTE TO SECURITY HOLDERS
On October 26, 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 share for every four old shares nor more
than one share for every eight old shares, 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.
ITEM 5. OTHER INFORMATION
On July 6, 1995, the Company's common stock was deleted from the Nasdaq
Small-Cap Market. The Company then requested a hearing before the Nasdaq
Hearing Review Committee ("Committee"). On September 22, 1995, the Committee
affirmed its original delisting decision.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
(a) During the six months ended June 30, 1996, no Form 8-K were
filed.
(10.24) 2nd & Final Revised Proposal to Acquire Pastels International,
Incorporated
(10.25) Revised Proposed Acquisition of Nutra Quest, Incorporated
(27) Financial Data Schedule (included only in EDGAR filing).
-25-
<PAGE>
SIGNATURES
----------
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.
-------------------------------------
(Registrant)
Date: 11-12-96 By: /s/ Steven R. Westlund
-------- -----------------------------
Steven Westlund
(Chief Executive Officer)
Date: 11-12-96 By: /s/ Peter T. Benz
-------- -----------------------------
Peter T. Benz
(President)
Date 11-12-96 By: /s/ William R. Neil
-------- -----------------------------
William R. Neil, CPA
(Chief Financial Officer)
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<PAGE>
EXHIBIT 10.24
[LETTERHEAD OF INTERACTIVE MEDICAL TECHNOLOGIES LTD]
May 17, 1996
Ms. Cecilia Lascu, President
Pastels International, Incorporated.
PO Box 1180
Pacific Palisades, CA 90272-1180
Re: 2nd & Final Revised Proposal to Acquire Pastels International,
------------------------------------------------------------------
Incorporated:
-------------
Dear Cecilia:
This 2nd & Final Revised Proposal contains all previously agreed to
conditions and terms from prior Proposals as well as the new addition
regarding Health Insurance contained in section Terms, Phase One, Item 5.
This 2nd & Final Revised Proposal should be regarded as the final proposal
superseding all previous Proposals and understandings either written or
verbal, as such it should be regarded as a legally binding agreement
between the parties as to the terms and conditions contained herein, and
shall remain so until such time as it is replaced by a more formal
agreement.
This 2nd Final Revised Proposal should not be regarded as a formal
agreement between the parties but rather the final Proposal containing all
agreed to terms and conditions by which IMT proposes to acquire Pastels in
a more formal agreement IMT encourages Pastels and Cecilia Lascu to seek
the advice of counsel while considering this Proposal.
PROPOSAL TO ACQUIRE PASTELS
IMT proposes to acquire Pastels in its entirety based on the proposed
terms described below, after which Pastels would become a wholly owned
subsidiary of IMT. The proposed acquisition shall include all Pastels
assets and liabilities including but not limited to all research and
development, all formulations, all formulation or manufacturing processes
including technical know how and trade secrets, all trade marks, all
registered trade names, logo's or other identifying or distinctive marks or
insignias, patents or patent applications, intellectual property, all
wholesale and retail consumer brands, all product inventory including raw
ingredients, all product components, all shipping materials including raw
and printed packaging and shipping containers, all sales and marketing
materials including inventories and works in progress, all distribution
agreements and relationships, all retail and consumer customer lists, all
manufacturing or co-packer
<PAGE>
agreements, all good will, all receivables, all liabilities* ( hereinafter
referred to as "the business" ), and the full time employment of Cecilia
Lascu for the periods defined below.
CONDITIONS & CONTINGENCIES
This Proposal has been intentionally structured in three separate
phases with each phase containing specific contingencies and or performance
bench marks to be satisfied or meet as well as to provide the time for a
smooth transition and assimilation of Pastels day to day business
operations, and to provide time to confirm the financial representations
made by each of the parties, and finally to establish a comfortable
business and working relationship between the parties.
1. Phase One, which is contingent upon the approval of IMT's Board of
Directors, IMT's due-diligence of Pastels and acceptance thereof within
thirty days from the effective date, Pastels due-diligence of IMT and
acceptance thereof within thirty days from the effective date, the
mutual approval by the parties of a Pastels sales and marketing plan
which shall be jointly developed by the parties and shall include
product sales projections for the period covering April 15, 1996 to
December 31, 1996 which product sales projections will based on the
combined gross sales of SKINERGY[TM] AND AloeBare[TM] products ( the
"Existing Pastels Products" ) achieving $300,000.00 gross sales or more
within thirty days from beginning telemarketing of AloeBare[TM] ("the
First Phase"), and achieving $600,000.00 gross sales or more by December
31, 1996, and shall also include the coordinated marketing plans with
the costs required to achieve such projected gross sales (hereinafter
referred to as "The Approved 1996 Sales and Marketing Plan" ), and the
execution of the formal agreement by the parties; and,
2. Phase Two is contingent upon achieving the gross sales projections
contained in First Phase of The Approved 1996 Sales and Marketing Plan;
and,
3. Phase Three is contingent upon achieving the gross sales projections
contained in The Approved 1996 Sales and Marketing Plan.
TERMS
PHASE ONE
Page 2
<PAGE>
Subject to the removal of Phase One contingencies contained above shall
become effective upon the later of the parties signature on this Proposal
("the effective date") and shall provide for,
1. Payment to Cecilia Lascu of $50,000.00 cash upon execution of the
formal agreement which is to be completed within 30 days of the
effective date, which such payment shall represent partial
consideration of the full cash purchase price of $250,000.00 for
Pastels; and,
2. Payment to Cecilia Lascu the sum of $5,000.00 (as salary or consulting
fees) per month for a period of four months; and,
3. Payment to Cecilia Lascu the sum equal to 5% of Pastels gross product
sales of AloeBare and SKINNERGY; and,
4. Issue Cecilia Lascu Warrants to purchase 250,000 shares of IMT
restricted common stock for a period of five years at the exercise
price of fifteen cents per share which issuance shall represent partial
consideration of the full stock purchase price of 500,000 shares of IMT
restricted common stock at the exercise price of fifteen cents per
share for Pastels; and,
5. Provide Cecilia Lascu with Medical Health Insurance comparable with the
policies of other new senior management, excluding Michael Grechko.
PHASE TWO
Subject to the removal of Phase Two contingencies above shall become
effective thirty days after television marketing, and in addition to Phase
One shall provide for,
1. Payment to Cecilia Lascu the sum of seven thousand dollars per month
for a period of four months; and, Payment to Cecilia Lascu the sum of
$50,000.00 cash in partial consideration of the full cash purchase
price of $250,000.00 for Pastels; and
PHASE THREE
Subject to the removal of Phase Three contingencies above shall become
effective on January 1, 1997 and shall provide in addition to the
provisions contained in Phase One and Phase Two for,
Page 3
<PAGE>
1. The payment to Cecilia Lascu of the sum of $150,000.00 cash which shall
represent the full cash payment of $250,000.00 for Pastels; and,
2. The Issuance of 250,000 additional Warrants to purchase 250,000 shares
of IMT restricted common stock for a period of five years at the
exercise price of fifteen cents per share which issuance represents the
full stock purchase price of 500,000 shares of IMT restricted common
stock at the exercise price of fifteen cents per share for a period of
five years for Pastels; and,
3. Provide Cecilia Lascu with an employment agreement covering the initial
period of three years with an option to renew for an additional three
years. The employment compensation contemplated in the Proposal which
is to paid by IMT will be paid from a combination of a 5% royalty of
Pastels future gross product sales of AloeBare and SKINNERGY products,
4% royalty of AloeBare and SKINNERGY line extensions, 3% royalty on new
Pastels products, 2% royalty from products originating from IMT, a
monthly base salary to be determined, Company benefits which shall be
equal to the benefits being provided by the Company to other senior
management, and Warrants to purchase 500,000 shares of IMT restricted
common stock at the exercise price of fifteen cents for a period of
five years.
4. IMT may at its sole discretion accelerate Phase Three.
Summary Compensation Table is provided as a summary only, the amounts shown here
may not be the actual, or final amounts.
Summary Table
-------------
<TABLE>
<S> <C>
Cash within 8 Months
--------------------
Purchase Price $250,000
Consulting Fees $ 48,000
Royalty's (Projected) $ 12,000
Total Cash $310,000
Stock within 8 Months
---------------------
500,000 Shares @ .15c Value unknown
Employment Agreement
First Three Years
-----------------
Cash Value (Estimated) $300,000
Benefits (Estimated) $ 50,000
Future Royalty's Value unknown
</TABLE>
Page 4
<PAGE>
PROPOSED ASSUMPTION OF PASTELS LIABILITIES*
IMT, subject to the removal of Phase One contingencies will assume the
responsibility of making Pastels ongoing business and operations related
payments which shall include trade and vendor payables, lines of credit,
and company debt including loans or pledges ("the Pastel Debt"), however,
IMT will not assume the obligation of the Pastel Debt or become guarantor
of the Pastel Debt during Phase One. Upon payment in full by IMT to Pastels
and the removal of the Phase Three contingencies, IMT will assume the
Pastel Debt obligation as well as the payment. IMT will not assume any
personal liabilities of any Pastels employees, related parties or
affiliates.
RESPONSIBILITIES OF THE PARTIES
Pastels and Cecilia Lascu responsibilities under Phase One, Phase Two and
the employment agreement contemplated in Phase Three shall initially
include but not be limited to the supervision of all aspects of the day to
day operations of Pastels and any additional responsibilities properly
assigned to Cecilia Lascu by IMT management in her capacity as Vice
President of IMT personal care products division. In the agreement as
contemplated, IMT's responsibilities shall include providing all necessary
working capital for operations relating to the manufacture, sales and
marketing of products covered under The Approved 1996 Sales and Marketing
Plan.
WARRANTS AND REPRESENTATIONS BY THE PARTIES
The parties warrant and represent that the parties individually and
collectively have all due authority to negotiate and consummate the
proposed transaction, and to bind, obligate, and to make significant
financial commitments on behalf of their respective company's.
IMT shall provide all necessary cooperation and assistance to Pastels
regarding its due-diligence of IMT including providing information relating
to Management's Plan of Future Operations which is contained in IMT's 1995
FORM 10KSB Amended 1 to be filed with the United States Securities and
Exchange Commission on or before May 15, 1996. IMT and its management
further encourage Pastels to seek the advice of counsel and or tax advisors
prior to accepting this Proposal. While time is of the essence, IMT will
agree to extend the Time for Acceptance to allow Pastels sufficient
opportunity to consult with such legal and tax consultants, if requested.
Page 5
<PAGE>
TIME FOR ACCEPTANCE
This Proposal including the specific terms and conditions contained herein
shall remain in full force and effect until 5 P.M., Pacific Standard Time,
Friday May 17, 1996 after which this Proposal shall be deemed by IMT to be
canceled unless extended by IMT in writing or accepted by Pastels.
Signatures
Agreed and Accepted Agreed and Accepted
Interactive Medical Technologies, Ltd. Pastels International, Inc.
By: /s/ Steven Weslsund By: /s/ Cecilia Lascu
---------------------------------- ---------------------------
Steven Westlund/CEO Cecilia Lascu/President
Effective Date: May 17, 1996 Effective Date: May 17, 1996
------------ ------------
cc: Peter Benz
Gus Reininger
Michael Grechko
Page 6
<PAGE>
ADDENDUM
SIGN OFF CHECK LIST
1. Acceptance of Revised Proposal
2. Acceptance of The Approved 1996 Sales & Marketing Plan
2.1. Based on Telemarketing of AloeBare
3. Sign Off of Phase One Contingencies including but not limited to:
3.1. Verification of AloeBare Marketing Rights
3.2. Verification of AloeBare Manufacturing Rights
3.3. Verification of Pastels 1995 Income
4. Sign Off of Final Purchase Agreement which shall establish or include:
4.1. Employment Agreement
Page 7
<PAGE>
EXHIBIT 10.25
August 2, 1996
Lawrence E. Sturchio
President & Chief Executive Officer
Nutra Quest International, Inc.
17595 Harvard, C-533
Irvine, CA 92714
Re: Revised Proposed Acquisition of Nutra Quest, Incorporated:
- --------------------------------------------------------------
Via Fax to (818) 704-7554
Dear Larry:
This Revised Proposal incorporates the terms and conditions from prior
Proposals, as well as the terms and conditions that were discussed and agreed to
during the meeting held at IMT on Thursday July 25, 1996. This Revised Proposal
supersedes all Previous Proposals and understandings, written or oral. Upon
signing, this Revised Proposal will become a legally binding agreement between
the parties as to the terms and conditions contained herein, and shall remain so
until such time as it is replaced by a more formal Purchase Agreement (the
"Purchase Agreement").
For the purpose of clarity, in the context of this letter the Parties have
agreed to the use and meaning of the Terms & Definitions listed below:
TERMS & DEFINITIONS:
- --------------------
ORGANIZATIONAL PHASE- AUGUST 1 TO SEPTEMBER 1
The period of time allotted for NQI to prepare for the start of commercial
operations. IMT will provide NQI with $100,000 during this phase.
START UP PHASE - SEPTEMBER 1 THROUGH NOVEMBER 30, 1996:
-------------------------------------------------------
NQI will begin commercial operations on september 1, 1996, providing a full
30 continuous days is allotted for LES to set up operations, computers,
phone systems, and the warehouse. if an extension is required due to the
leasing of the NQI office/warehouse, the starting phase will be executed
for the same number of days said set-up is delayed.
The Start Up Phase will continue until November 30, 1996, or until NQI
Gross Sales have reached $200,000, which ever comes first. IMT will provide
NQI with $250,000 during this phase, as follows. $100,000 during September,
$100,000 during October, and $75,000 during November. Portions may be
advanced, within reason to the previous month if LES deems it necessary.
the detailed Use of Proceeds called for $75,000 the fourth month (Nov),
$50,000 the fifth month (Dec), and $25,000 the sixth
August 2, 1996
<PAGE>
Lawrence E. Sturchio
Nutra Quest International, Inc.
PAGE 2 OF 9
month(Jan), I'd like to stay with that plan.
OPERATIONAL PHASE . BEGINS ON DECEMBER 1, 1996:
-----------------------------------------------
The period NQI is fully operational. This period is expected to continue as
long as NQI remains successful. IMT will continue to fund NQI @ $ 25,000
for January and February. Plus additional funding necessary for growth up
to $1 million in stages, as the infrastructure can handle growth.
PERFORMANCE CRITERIA:
---------------------
In the context of this acquisition the Parties have agreed that the
following NQI Gross Sales amounts and the dates by which these Gross Sales
are to be achieved for the purpose of the Employment Agreement shall be
referred to as the PERFORMANCE CRITERIA. Upon the successful completion of
the PERFORMANCE CRITERIA for the 3 years, or sooner, as outlined below,
the terms of the Employment Agreement shall be in full effect. With
options to renew, which will not be unreasonably withheld.
<TABLE>
<CAPTION>
EMPLOYMENT AGREEMENT PERFORMANCE CRITERIA GROSS SALES
----------------------------------------- -----------
<S> <C>
a) START UP PHASE $ 200,000
b) FIRST 12 MONTHS, COMMENCING WITH THE GRAND OPENING $ 2 MILLION
c) SECOND 12 MONTHS FOLLOWING THE GRAND OPENING $ 4 MILLION
d) THIRD 12 MONTHS FOLLOWING THE GRAND OPENING $ 10 MILLION
</TABLE>
* Twelve (12) months periods, or sooner.
The following performances are established for the purposes of the Purchase
Agreement. Upon the successful completion of the PERFORMANCE CRITERIA for
the first year, as outlined below, the terms of the Purchase Agreement
shall be in full effect.
<TABLE>
<CAPTION>
EMPLOYMENT AGREEMENT PERFORMANCE CRITERIA GROSS SALES
----------------------------------------- -----------
<S> <C>
A) START UP PHASE $ 200,000
B) FIRST 12 MONTHS, COMMENCING WITH THE GRAND OPENING $ 2 MILLION
</TABLE>
NQI GROSS SALES:
----------------
Gross dollars into NQI from any and all products, and sales aids or
material sold to distributors, or customers.
August 2, 1996
<PAGE>
Lawrence E. Sturchio
Nutra Quest International, Inc.
PAGE 3 OF 9
NQI PRODUCTS:
-------------
Shall include (CURRENT PRODUCTS), but not be limited to the Personalized
Nutrition Program, Kick Start, Melt Down, Melt Away, Cheaters Delight I &
II, Ultra Tone, Aloe Up, Nutra Meal, Nutra Fuel, (FUTURE PRODUCTS)
Essential Nutra Minerals, Nutra "C" & Nutra "C+" w/ Co Enzyme Q10, Nutra
Enzyme, OPC (Oligomeric Proantho Cyanididin) Grape Seed Extract with
Hawthorn Berry, Billberry, Ginko Biliba, Milk Thistle, Catalase, and Yacca,
Nutra Shield, Renew, Competitive Edge, Nutra Cal, LIPOSPRAY
products (CitriMax w/ Chromium, Melatonin/Kava Kava, Ginkgo Biliba, Oxygen
Combo, DHEA, CoEnzyme Q-10, Cats Claw, Sharks Cartilage, etc. ), Nutracap I
(Fruit) & Nutracap II (Vegetable)(Spray dried juice powder, from Carrots to
Garlic & Apples to Tangerine Juice), Premier Anti-Oxidant, OxyMax,
Nutrition In The Kitchen, The Senergy Stop Smoking Program & Stop Smoking
II Program, related products and replacement product therefore. NQI
Products includes New Products introduced or developed by an employee of
NQI, and is not limited to nutrition. (Providing the only cost to the
company is inventory, labels, and packaging).
GROSS RETAIL SALES:
-------------------
Defined as NQI and/or distributor sales of NQI Products to end users.
SOFT ROLL OUT:
--------------
The period before the Grand Opening (September through February).
GRAND OPENING:
--------------
Mass hotel meeting to be held during the middle of February. Introducing
management, IMT management & R & D personal, new products, etc.
COMPANY:
--------
Interactive Medical Technologies, Ltd.
TRAINING & OPPORTUNITY VIDEOS:
------------------------------
Videos produced by an outside vender such as Video Plus, at a cost of
$25,000 to $30,000 each.
NUTRA NEWS:
-----------
A NQI publication to be produced by NQI on a quarterly bases to start, then
monthly. this publication will be utilized as a sales and marketing tool to
be sent to all NQI distributors and customers.
EFFECTIVE DATE:
-----------------
August 2, 1996.
August 2, 1996
<PAGE>
Lawrence E. Sturchio
Nutra Quest International, Inc.
PAGE 4 OF 9
PROPOSAL
--------
IMT proposes to acquire NQI in its entirety based on the terms
described below, after which NQI would become a wholly owned subsidiary of
IMT. The proposed acquisition shall include all NQI assets and liabilities
including but not limited to all research and development; all
formulations, all formulation or manufacturing processes including
technical know how and trade secrets; all trade marks, brands, registered
trade mine, logo's or other identifying or distinctive marks or insignias;
all patents or patent applications; all intellectual property; all product
inventory, ingredients, packaging components, shipping materials, packaging
and shipping containers; all sales and marketing materials, inventories,
and works in progress, all information. materials, documentation, and
clinical information relating to personalized nutrition programs; all
distributor agreements, lists, and relationships; all customer lists; all
manufacturing or co-packer agreements; all computers, office furniture,
telephones, merchant account, all good will; all receivable; all
liabilities* ( hereinafter referred to as "the assets" ), IMT/NQI will hire
Lawrence E. Sturchio as a full time employee (as NQI President and Chief
Executive Officer) for the periods defined below.
( *AS DEFINED ON THE ATTACHED NQI LIABILITIES PAGE PROVIDED BY LES)
The acquisition will take place in two (2) separate phases. Phase One
consists of the combined Organizational and Start Up Phases. Phase Two is
the Operational Phase, however, Phase Two is conditioned upon NQI achieving
the start up phase performance criteria. this purchase agreement is not to
be considered an installment purchase. upon IMT'S approval of phase one
performance criteria, and implementation of phase two, IMT shall receive
and hold full title to NQI as if IMT had paid the full purchase price on
the Effective Date.
If IMT does not exercise it's option to continue the purchase of NQI at
any time, all assets, and all items and properties in the paragraph titled
"PROPOSAL" reverts back to LES immediately, and all moneys generated by
NQI, shall remain the property of NQI AND/OR LES.
1. PHASE ONE:
-------------
Subject to approval of the final terms and conditions by the IMT Board
of Directors, IMT agrees that during Phase One it will:
a) Advance LES $60,000 cash against the total NQI purchase price of
$600,000. Such advance shall be payable in three $20,000 payment,. The
August 2, 1996
<PAGE>
Lawrence E. Sturchio
Nutra Quest International, Inc.
PAGE 5 OF 9
first payment shall be due upon signing of this Letter Of Intent, the
second $20,000 payment shall be due 30 days from the Effective Date,
the final $20,000 payment is due 60 days from the Effective Date.
b) Pay LES a salary of $8500 per month as NQI President and Chief
Executive Officer beginning on the EFFECTIVE DATE and continuing for
four (4) months, or the end of the START UP PHASE.
c) Pay LES a $500 per month auto allowance beginning on the Effective
Date and continuing for four (4) months, or the end of the START UP
PHASE.
d) Pay LES an amount equal to 3% of NQI Gross Sales of NQI Products,
payable 120 days from the EFFECTIVE DATE. ( In the event of
termination, such royalty will be offset as repayment to IMT)
2. PHASE TWO:
-------------
Subject to satisfaction of the START UP PHASE PERFORMANCE CRITERIA, IMT
agrees that during Phase Two it will:
a) Complete the purchase of NQI assets in a total amount of $600,000,
payable $200,000 in cash (of which $60,000 was received in Phase I ),
and $400,000 in non-restricted IMT common stock(subject to approval of
SEC Form S-8, by the SEC) valued at $0.15 per share (equal to
2,666,666 shares), and assume NQI liabilities of $90,000. (IMT
reserves an option to arrange payment of such liabilities directly
with creditors), subject to approval of LES, which shall not
unreasonably be withheld.
b) IMT will pay the $140,000 balance of the cash purchase price at
$10,000 or more per month beginning 120 days after the Effective Date
and continuing until paid.
c) IMT to continue funding NQI @ $75,000 the fourth month (Nov), $50,000
the fifth month (Dec), and $25,000 the sixth month (Jan), six months
total for $450,000 as per USE OF PROCEEDS.
d) IMT WILL PAY THE STOCK PORTION OF THE PURCHASE PRICE AS FOLLOWS:
1) 500,000 shares @ $0.15 per share, upon executing the Agreement
this LETTER OF INTENT represents.
2) 500,000 shares @ $0.15 per share, upon NQI reaching $500,000
or more, Gross Sales in one month and reaching within $450,000
August 2, 1996
<PAGE>
Lawrence E. Sturchio
Nutra Quest International, Inc.
PAGE 6 OF 9
gross monthly sales the second month.
3) 366,666 shares, @ $0.15 per share, upon reaching $750,000 Gross
Sales per month for two consecutive months, or and reaching
within $675,000 Gross monthly sales the second month.
4) 650,000 shares, @ $0.15 per share, upon reaching $5,000,000
Gross Sales in any consecutive twelve month period.
5) 650,000 shares, @ $0.15 per share, upon reaching $12,500,000
Gross Sales in any consecutive twelve month period.
3. NQI EMPLOYMENT AGREEMENT:
--------------------------
LES is to enter into a five year Employment Agreement with IMT, with options
to renew in two year intervals with NQI/IMT, to be executed upon the signing
of the Agreement this Letter Of Intent represents. see EXHIBIT A for sample
Employment Agreement.
In consideration of services to be performed by LES, NQI will employ LES as
President and Chief Executive Officer on the terms and conditions contained
below. Further, IMT agrees to issue LES 1,733,334 additional Warrants to
purchase IMT common stock at prices and vesting dates described below:
a.) SALARY:
1) $8,500 per month for the first 4 months following the Effective Date,
and $8,500 for the 5th through 12th month provided that NQI achieves
the Start Up Phase Performance Criteria.
2) $10,000 for the second 12 months provided NQI achieved $2 million
Gross Sales the first 12 month, or sooner.
3) $12,000 per month upon NQI achieving Gross Sales of $4 Million in any
consecutive 12 month period, or sooner.
4) $16,000 per month upon NQI achieving Gross Sales of $10 Million in any
consecutive 12 month period, or sooner.
5) $20,000 per month upon NQI achieving Gross Sales of $20 Million in any
consecutive 12 month period, or sooner.
August 2, 1996
<PAGE>
Lawrence E. Sturchio
Nutra Quest International, Inc.
PAGE 7 OF 9
*IF ANY PERFORMANCE CRITERIA IS REACHED IN LESS THAN THE DESIGNATED PERIOD, THE
NEXT SALARY LEVEL SHALL COMMENCE THE FOLLOWING MONTH.
b) BENEFITS:
1) $500 per month automobile allowance.
2) Medical Insurance, Blue Cross was agreed to by all parties.
3) 4 Weeks Vacation (To be taken in accordance with Company policy).
4) Other benefits as normally provided to senior Company management.
c) ROYALTIES:
1) a 4% royalty of gross NQI Gross Sales of NQI Products created by or
introduced by LES and/or associates, payable monthly with Distributor
check runs. (PRODUCTS INTRODUCED BY OR THROUGH IMT AND DISTRIBUTED BY NQI
ARE NOT SUBJECT TO A ROYALTY, UNLESS SAID PRODUCT(S) REPLACES AN NQI
PRODUCT, SUCH AS CHEATERS DELIGHT I. IF AN IMT PRODUCT REPLACES AN NQI
PRODUCT, AND USES THE NQI NAME, SUCH AS CHEATERS DELIGHT I, THE ROYALTY
SHALL BE REDUCED TO 3%. IF AN NQI NAME IS NOT USED, SAID ROYALTY SHALL BE
REDUCED TO 2%, WITH A MAXIMUM NUMBER OF THREE (3) NQI PRODUCTS TO BE
REPLACED WITHIN THREE YEARS, AND A MAXIMUM NUMBER OF SIX (6) NQI PRODUCTS
TO BE REPLACED WITHIN TEN YEARS).
ROYALTY payments shall remain in effect for fifteen years, and if LES is
still employed by NQI, for an additional ten years.
d) OTHER TERMS AND CONDITIONS:
1) LES will serve as NQI director.
2) At the first anniversary, LES will be nominated for the Board and
current Board members will not withhold their vote for LES to become a
Director
e) WARRANTS TO PURCHASE:
1) 300,000 shares, @ $0.15 per share, upon reaching $40,000,000 Gross Sales
in any consecutive twelve month period.
2) 400,000 shares, @ $0.15 per share, upon reaching $50,000,000 Gross Sales
in any consecutive twelve month period.
August 2, 1996
<PAGE>
Lawrence E. Sturchio
Nutra Quest International, Inc.
PAGE 8 OF 9
3) 300,000 shares @ $0.15 per share upon reaching $65,000,000 Gross Sales
in any consecutive twelve month period.
4) 350,000 shares @ $.50 upon NQI reaching $75,000,000 Gross Sales in any
consecutive twelve month period.
5) 383,334 shares @ $.50 upon NQI reaching $100,000,000 Gross Sales in any
consecutive twelve month period.
6) 300,000 additional shares (above 4,400,000), @ $1.00 per share, for each
$50,000,000 increase in NQI Gross Sales above $100,000,000 in any
consecutive twelve month period.
4. ADDITIONAL TERMS AND CONDITIONS:
- -----------------------------------
a) IMT agrees to include certain key NQI personnel in a stock option plan
containing 1,000,000 warrants to purchase IMT common stock @ value
existing at the time the Employment and/or Distributor Agreement is
executed. These Warrants should be tied to personal income per week, and
time frame for vesting. i.e. (33 1/3 % vesting after one year, 66 2/3 %
vesting after two years, and full vesting after three years.)
b) In the event NQI fails to meet the Start Up Phase and first 12 months
PERFORMANCE CRITERIA and IMT does not exercise its option to continue with
the proposed acquisition, then all moneys provided by IMT, with the
exception of salaries, shall be converted into a Promissory Note payable
to IMT, payment not to exceed 10% of Gross Sales per month.
c) If terminated without cause, by IMT at any time, no debt to IMT, and
there will be no Note in favor of IMT.
This letter is intended to reflect the general understanding of the terms
and conditions of the proposed acquisition. If you agree that terms and
conditions contained herein accurately reflect the general understanding
between the Parties, please indicate so by executing page 9, the signature
page. Upon receipt of your signed copy, IMT will immediately begin
drafting the formal agreements in anticipation of the August 2, 1996
Organizational Phase.
Sincerely;
Interactive Medical Technologies, Ltd.
By: /s/ Steven Westlund
-----------------------------------
Steven Westlund/CEO & Chairman
cc: Peter Benz/IMT President
Robert Schulman, Esq./IMT Counsel
<PAGE>
August 2, 1996
Lawrence E. Sturchio
Nutra Quest International Inc.
PAGE 9 OF 9
SIGNATURE PAGE
FOR
THE PROPOSED ACQUISITION OF NUTRA QUEST, INCORPORATED
BY
INTERACTIVE MEDICAL TECHNOLOGIES, LTD.
INTERACTIVE MEDICAL TECHNOLOGIES, LTD. LAWRENCE E. STURCHIO & NQI
Agreed and Accepted By: Agreed and Accepted By:
/s/ Steven Westlund /s/ Lawrence E. Sturchio
- ------------------------------ -----------------------------------
Steven Westlund/CEO & Chairman Lawrence E. Sturchio/CEO & Chairman
Date: August 2 , 1996 Date: August 2 , 1996
--- ---
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996
<PERIOD-START> JUL-01-1996 JAN-01-1996
<PERIOD-END> SEP-30-1996 SEP-30-1996
<CASH> 239,573 239,573
<SECURITIES> 0 0
<RECEIVABLES> 82,740 82,740
<ALLOWANCES> 0 0
<INVENTORY> 109,800 109,800
<CURRENT-ASSETS> 586,497 586,497
<PP&E> 1,304,039 1,304,039
<DEPRECIATION> 1,648,982 1,648,982
<TOTAL-ASSETS> 3,203,018 3,203,018
<CURRENT-LIABILITIES> 2,631,267 2,631,267
<BONDS> 0 0
0 0
0 0
<COMMON> 42,832 42,832
<OTHER-SE> (297,122) (297,122)
<TOTAL-LIABILITY-AND-EQUITY> 3,203,018 3,203,018
<SALES> 297,533 734,768
<TOTAL-REVENUES> 297,533 734,768
<CGS> 138,628 363,923
<TOTAL-COSTS> 708,161 1,683,982
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 66,222 122,676
<INCOME-PRETAX> (476,850) (1,071,890)
<INCOME-TAX> 800 4,800
<INCOME-CONTINUING> (477,650) (1,076,690)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (477,650) (1,076,690)
<EPS-PRIMARY> (.01) (.03)
<EPS-DILUTED> (.01) (.03)
</TABLE>
