<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB-A1
--
(Mark One) ANNUAL REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE
/ X / SECURITIES AND EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1995
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
/ / THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the Transition Period From to
-------- ---------
COMMISSION FILE NUMBER 0-21384
INTERACTIVE MEDICAL TECHNOLOGIES LTD.
--------------------------------------
( 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 No.)
2139 Pontius Avenue, Los Angeles, California 90025
-------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (310) 312-9652
Securities registered under 12(b) of the Exchange Act: NONE
Securities registered under Section 12(g) of the Act:
COMMON STOCK ( $.001 PAR VALUE )
INDICATE BY CHECK MARK WHETHER THE REGISTRANT HAS (1) FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS; AND, (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS. YES: /X/ NO: / /
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
OF REGULATION S-B IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-KSB OR ANY AMENDMENT TO
THIS FORM 10-KSB. YES: / / NO: /X/
For the year ended December 31, 1995, the Registrant's revenues were
approximately $1,184,552.
As of March 31, 1996, the aggregate market value of the shares of the
Registrant's common stock held by non-affiliates was approximately $4,185,839.00
As of March 31, 1996, the Registrant had 32,871,194 shares of common stock
outstanding.
Documents Incorporated by Reference: NONE
----
Transitional Small Business Format. YES: / / NO: / X /
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
1. DESCRIPTION OF BUSINESS
The Company's mission is to increase the early detection of
restrictions or blockages in human blood flow through significantly
improved diagnostic imagery. Since commencing operations in 1986,
Spheres Research Partners, and later and See/Shell Biotechnology,
Inc., (the Company's "Founding Predecessor's") have been engaged in
the discovery, research and development, manufacturing, and marketing
of diagnostic imaging products and services relating animal blood flow
research, and for the detection of arterial restrictions and blockages
in human blood flow. While operating as S/S Biotechnology, Inc., the
Company developed a unique technology for the selective entrapment or
sequestration of dietary fat from food while in the gastrointestinal
tract (the "sequesterant technology"), which in theory prevents the
absorption of fat into the blood stream and tissue. However, to date
clinical studies do not support the efficacy of that technology.
Organization
In 1986, William Shell, MD. ("Dr. Shell"), and Jackie See, MD.,
formed Spheres Research Partners ("SRP", a medical partnership). On
August 17, 1987, SRP reformed as See/Shell Biotechnology,
Incorporated., ("S/S", a California corporation). In September of 1987
S/S formed E-Z TRAC, Inc., ("E-Z Trac") as a wholly owned subsidiary.
S/S subsequently assigned E-Z Trac all of its rights relating to a
proprietary technology for the measurement of blood flow in research
animals utilizing micron sized particles ("the colored microsphere
products") which S/S had recently developed. In 1988, E-Z Trac
commenced operations when it began marketing colored microsphere
products to research facilities and Universities engaged in animal
blood flow research. On January 17, 1990, Interactive Principles,
Incorporated., ("IPI", the "Public Predecessor"), an unaffiliated
company previously incorporated in Delaware in 1986 for the purpose of
acquiring other companies, acquired 82.5% of S/S, and became
"INTERACTIVE MEDICAL TECHNOLOGIES, LTD.", (the "Company"). In 1987 IPI
completed a $150,000 private placement of its securities, during the
next three years IPI had no business or operations that the Company is
aware of. In May 1990, the Company organized Effective Health,
Incorporated, ("Effective Health") as a wholly owned subsidiary to
market and license products based on the sequesterant technology as
well as other dietary and food supplement products.
Operating History
In 1988, S/S developed a technology for the measurement of blood
flow in laboratory animals utilizing a non biodegradable, non
radioactive, micron sized styrene particle (the "colored
microspheres"). Also in 1988, S/S developed a second microsphere which
unlike the previous colored microsphere was biodegradable and composed
of the human blood protein albumin, and other FDA approved contrast
agents. The contrast microsphere significantly improves the speed and
accuracy, and resolution of diagnostic images of arterial restrictions
and blockages in human blood flow and organs when visualized through
existing x- ray, computer-assisted tomography ("CAT") scanning,
ultrasound, or magnetic resonance imaging ("MRI") equipment. From 1988
to 1990, S/S developed several potential human applications based on
the contrast microspheres visualized through existing x-ray, CAT scan,
ultrasound and magnetic resonance imaging systems.
On January 17, 1990, the Company commenced operations through the
acquisition of S/S. Initially, the Company's operations consisted of
marketing colored microsphere products to research facilities engaged
in animal blood flow research through E-Z Trac.
Page 1
<PAGE>
The Company also began marketing Lipitrol-TM-, a weight loss
product based on the sequesterant technology. The Company sold
Lipitrol-TM- directly to doctors, consumers, and to a number small
local distributors who distributed Lipitrol-TM- local southern
California area. The Company subsequently discontinued direct selling
in favor of licensing marketing rights to established marketing
companies.
In May 1991, the Company formed Effective Health, Incorporated.
("EHI"), as a wholly owned subsidiary to market products based its
sequesterant technology and other dietary and food supplement
technologies the Company intended to develop. In September 1991, S/S
became a wholly owned subsidiary of the Company as a result of Dr. See
canceling the remaining 17.5% of S/S's outstanding shares.
In 1992, the Company introduced the "Investigator Partners
Service" ("IPS") program. The IPS program combines a national
reference service with automated laboratory analysis and counting of
colored microspheres used in animal blood flow studies, and in study
of microsphere delivery systems for pharmaceutical drugs. The program
was initially designed to service E-Z Trac colored microsphere
customers.
In 1993, the volume of IPS laboratory analysis had grown beyond
the production capabilities of its then current colored microsphere
imaging analyzer. To increase production, the Company developed an
improved imaging analyzer based on flow cytometry technology. The
improved analyzer is based on a Becton-Dickenson flow cytometer. The
improvements came through proprietary software developed by the
Company which increased the processing speed and sensitivity range of
Becton-Dickenson flow cytometer. The improved analyzer increased IPS
production capacity, count accuracy, as well as extending the range of
distinction from two to as many as eight microspheres. Subsequent
bench tests confirmed reliability. The unit was placed in service
where it currently analyzes some 800 samples per week. The Company
began marketing the unit later that year.
In June of 1993, the Company acquired Venus Management,
Incorporated. (See Acquisition)
In July of 1993, as a result of the Company's growing concerns
relating to sales and the subsequent resale of certain of the Company
securities, the Company formed an independent committee of its Board
of Directors whose purpose was to investigate whether certain prior
private placements of the Company's securities complied with all of
the registration requirements of federal and state securities laws. In
certain prior private placements of the Company's shares, a total of
approximately 2,506,982 shares of the Company's Common Stock was
issued to a small number of individuals. Those issuance's had been
structured in reliance upon the advice of the securities counsel the
Company was using at that time, and the Company believes that these
issuance's, standing alone, would have qualified for exemptions from
registration under federal and state securities laws. However, certain
subsequent resale of these shares, commencing in June 1992, by the
original purchasers or their transferees to a total of approximately
330 investors raised an issue as to whether a technical distribution
occurred that might have required either the original issuance or the
resale to have been registered. All of the foregoing resale's were
either directly effected by or arranged for by Clark M. Holcomb.
October of 1993, the Company filed a registration statement with
the Securities and Exchange Commission ("SEC") to register all of the
foregoing 2,506,982 shares with the SEC. However, even if the
registration statement should become effective so as to permit public
resale's by the holders of the shares involved in the transactions
Page 2
<PAGE>
described above, these holders could have a right of rescission to
recover the purchase price they paid for their shares plus interest
from the date of purchase against the persons from whom they acquired
the shares. The Company believes (based in part upon the opinion of
its current special securities counsel) that these holders do not have
a valid and enforceable right to such rescission from the Company.
However, subject to any applicable statutes of limitation that might
bar such future claims, these shareholders could assert such claims,
and the Company has not set aside any reserves to fund any potential
liabilities that it might incur in connection with any such future
potential claims, which could be material. Should the Company incur
any such liabilities, it might seek indemnification or contribution
for such liabilities from Clark M. Holcomb, or other third parties.
In 1994, the National Association of Securities Dealers ("NASD")
began quoting the Company's common stock on its national quotation
system. The Company's common stock was previously quoted on the
electronic bulletin board (EBB).
The Company, through its Effective Health subsidiary entered into
a exclusive Licensing Agreement with KCD, Incorporated, a company
recently formed by Clark M. Holcomb, who represented to the Company to
have the ability to distribute a consumer weight loss product based on
the Company's sequesterant technology to national drug and health food
chains. At the time the Company entered into the agreement, KCD had
very limited management experience and financial resources. The
agreement provided KCD with exclusive sales and marketing rights to
the sequestration technology in the territories of the United States
and Canada. The agreement required KCD to pay an initial licensing fee
of $100,000, and to make minimum monthly royalty payments to maintain
the license. In 1994, KCD began marketing SeQuester-TM-, a consumer
weight loss product based on the sequesterant technology. The
agreement also required KCD to conduct clinical studies intended to
establish and validate marketing claims, for which KCD was required to
assume the sole responsibility for the accuracy and validity of such
marketing claims, and further to market their product in accordance
with established Federal Trade Commission ("FTC") guidelines. In
September 1994, was delinquent in making certain of its required
royalty payments to the Company.
Recent Developments
In January of 1995, the Company entered into a an exclusive
agreement to conduct human clinical studies of a second generation of
the sequesterant technology with a very large and respected European
company engaged in the business of manufacturing and marketing food
supplements and weight loss products internationally. The clinical
test protocol was designed as a double blind trial by a research group
affiliated with the European company. The protocol was sent to the
Company for approval where it was reviewed and subsequently approved
by Dr. Shell, then the Company's Chief Scientific Officer. In December
of 1995, the Company was informed that the results of the double blind
clinical study were not statistically significant. The Company's
Science Officer disputed the results, however, the European company
did not exercise its option to acquire foreign sales and marketing
rights to the product.
In April of 1995, the Company's cash reserves had become
critically low due in part to KCD's delinquent royalty payments, which
as of March 1996, were approximately $425,000 in arrears. These events
complicated negotiations with investors who had previously committed
to make a substantial private placement. That commitment was
subsequently withdrawn out of a concern that the Company would
Page 3
<PAGE>
not collect KCD past due royalties causing the Company to remain
dependent on investment capital to sustain operations. The loss of the
financing commitment compounded by KCD's withholding royalty payments
prevented the Company from meeting its financial obligations including
employee payroll. The Company believes that was a contributing factor
in William Pelzer's resignation, then the Chief Executive Officer and
President. Mr. Pelzer's resignation letter cited failure on the part
of the Company to provide compensation, and personal reasons.
In May of 1995, Steven R. Westlund joined the Company as Chief
Executive Officer, President, and a director. Mr. Westlund replaced
former Chief Executive Officer and President William Pelzer. Mr.
Westlund was experienced in restructuring financially troubled
companies as well as having experience developing consumer products
and markets. Mr. Westlund was introduced to the Company by certain of
its shareholders and investors.
In June of 1995, at the request of Steven Westlund, Peter Benz
joined the Company as Chief Financial Officer and a director. Mr.
Westlund and Mr. Benz worked together as senior management during the
restructure of a similar public Company from 1992 to 1994. Mr. Benz
was experienced in restructuring financially troubled public companies
as well as developing investment banking relationships. With Westlund
and Benz (new senior management) in place as new senior management
Directors, the Company began making significant cuts in non essential
of financially burdensome Company operations. Specifically, the
subsidiaries were reorganized to operate as profit centers, reducing
general and administrative ("G&A") overhead, shifting the Company's
priorities toward revenue generating activities, securing the
Company's existing revenue base, collecting delinquent royalty and
other payments. The Company also began developing new markets for
existing products, created a new product development group with the
intention of developing and marketing new consumer food supplement
products, began development of alternative financing programs such as
US government sponsored research grants, and developing strategic
partners for contrast microsphere research and commercial applications
development, as well as other measures (all hereinafter referred to as
"Management's 1996 Plan of Operation").
Later that month the Company amended KCD's original licensing
agreement as a result of demands that the current royalty payment
which had be calculated on 15% of net product sales was creating
problems for KCD in the marketing of SeQuester-TM-, and that it could
ultimately prevent KCD from being able to market SeQuester-TM-
profitability. Further, KCD stated that the 15% royalty was preventing
KCD from meeting its current financial obligations, included making
royalty payments to the Company. In consideration of the Company's
financial problems, the Company believed was in its best interests to
amend the agreement and reduce the percentage of product sales KCD
would pay as a royalty. The Company also believed that such a
reduction would enable KCD to meet its financial obligations. The
amended agreement lowered the percentage of product sales KCD would
pay as a royalty from the then 15% of net sales, to 6% of gross sales.
In exchange KCD agreed to pay the Company all delinquent royalty's and
future royalty's through a factor, which the Company believed would
prevent KDC from further interference (See Licensing Agreements).
In July of 1995, the National Association of Securities Dealers
("NASD") removed the Company's common stock from its NASD national
quotation system.
Page 4
<PAGE>
The removal was based on the Company's failure to maintain a
minimum one dollar stock price as well as the minimum liquidity and
assets specified by NASD. The Company appealed the decision on the
grounds the Company was in technical compliance, however, the review
committee rejected the Company's argument citing that technical
compliance was insufficient given the Company's its unprofitable
history. The Company's common stock is currently quoted on the
electronic bulletin board under the ITAM symbol.
In October of 1995, the Company submitted an application to the
National Institute of Health ("NIH") for a research grant to support
the research and development of the Company's contrast microspheres in
human diagnostic applications. In January of 1996, the Company was
notified by the National Institute of Health's ("NIH") medical and
scientific review panel that the Company's application for a research
grant had been given a favorable score and recommendation. The
research grant, if approved, would provide $100,000 to the Company
immediately, with an additional $750,000 funding conditioned on the
success of phase one. (See Grants - Under Research and Development).
In March of 1996, the National Institute of Health ("NIH") notified
the Company that it had "informally" approved the Company's
application for a research grant to develop its contrast microspheres
for human applications. The Company expects to receive formal NIH
notification and first phase funding within 60 days.
Also in October of 1995, the Company began development of new
dietary and personal care products which the Company intends to market
beginning in the second half of 1996. This development, which began in
October 1995 has been conducted at the Company's facilities as well as
at various other facilities and laboratories by members of a newly
formed product development group comprised of regulatory consultants,
nutritional experts, and medical consultants. The product new
development group is responsible among other things for the
development of unique dietary and food supplement products which the
Company plans to market beginning in the later part of 1996 under
Management's 1996 Plan of Operations. The new product development
group is also responsible for developing valid, supportable marketing
claims based on a combination of existing clinical data combined with
new data obtained through Company sponsored clinical studies.
In October of 1995, the Seattle Regional Office of the Federal
Trade Commission ("FTC") advised the Company that the FTC staff
believes that the Company's sequesterant product, which was licensed
to KCD and marketed by KCD under the SeQuester-TM- trade mark, has
been improperly represented in advertising claims, and the same
sequesterant product previously marketed by the Company under as
Lipitrol-TM- was also improperly represented in advertising claims.
The FTC staff advised the Company that it is prepared to recommend
that a complaint be filed against the licensee, the Company and
certain individuals in connection with the foregoing. The FTC staff
also indicated its belief there is insufficient substantiation of the
efficacy of the product for weight loss or fat sequestration. The
Company and the FTC staff have agreed upon the terms of a proposed
settlement in this matter, pursuant to which the Company would consent
to a permanent injunction prohibiting it from making
misrepresentations relating to weight loss or weight reduction
products or services, or with respect to tests or studies relating to
such programs or services. In addition, the Company would pay consumer
redress to the FTC in an aggregate amount of $35,000 over a period of
twelve months. The Company's Board of Directors voted to accept the
proposal in March 1996, which now must be formally approved by the
FTC.
Page 5
<PAGE>
In October of 1995, the staff of the Securities and Exchange
Commission ("SEC") advised the Company that it was considering
recommending that the commission file a civil injunctive action
against the Company and Dr. Shell for alleged violations of the
registration provisions of the federal securities laws. These alleged
violations appear to relate to the sale by the Company of unregistered
shares of its common stock which involved a series of resale's of
these same shares that were either directly effected or were arranged
for by Clark M. Holcomb. These transactions have been the subject of
an SEC investigation previously disclosed by the Company. The Company
is negotiating with the SEC regarding a potential settlement of any
SEC claims against the Company with respect to the above transactions.
The Company anticipates that the settlement would require the Company
to consent to a permanent injunction, without admitting or denying any
liability, that would bar the Company from and future violations of
the registration requirements of the federal securities laws. The
Company believes that such a settlement would not have a materially
adverse effect on the Company or its operations. However, there can be
no assurance that a settlement as described above (or a settlement
with any other terms) will ultimately be reached with the SEC. The
Company and Dr. Shell are subject to a 1992 permanent injunction
enjoining them from violating the federal securities laws.
Also in December of 1995, the Company's Board of Directors held a
special meeting of the Board of Directors for the specific purpose of
forming a standing Executive Committee of the Board of Directors
consisting of all directors except Dr. Shell. The Executive Committee
was formed to direct management in all matters relating to the normal
operations and business of the Company, and specifically in all
matters relating to the Securities and Exchange Commission
investigation into the possible violations of the registration
provisions of the federal securities laws by Dr. Shell and the
Company, which has been disclosed by the company previously. The
Company had previously been in discussions with the Securities and
Exchange Commission's enforcement staff in connection with this
matter. Based on those discussions the Company believed that it was in
its best interests that Dr. Shell resign from the Board of Directors.
The Company requested that Dr. Shell resign. Dr. Shell did not resign
from the Board of Directors as requested by the Company at that time.
Effective December 31, 1995, Richard Shell, the Company's Vice
President, In House counsel and director resigned all positions with
the Company.
In January of 1996, the Company entered into a broad based, long-
term agreement with E-Z-EM, Inc., ("E-Z-EM"), a global leader in the
sales and marketing of oral radiographic contrast agents with annual
revenues in excess of $90,000,000 to conduct pre clinical and FDA
approved clinical trials of the Company's contrast microspheres for
certain human applications, and to develop, manufacture, and market
contrast microsphere products and services. Initially, E-Z EM will
fund the pre clinical animal studies which are to begin as soon as
possible. The agreement as contemplated also reflects E-Z-EM's
intention analyze the full impact of regulatory costs and expenses
in preparation for additional capital funding to conduct FDA
approved clinical trials as a Investigational New Drug ("IND") with
the FDA. The agreement further establishes the future commercial
relationship between the two company's where the Company will retain
the rights to manufacture contrast microsphere products, while E-Z
EM have the exclusive option to license, including the right to
sub-license, all products developed under the agreement, and
subsequent patent if any, with rights to global sales and marketing
of the products and related services for the life of the patent or
10 years, whichever is longer. The Company believes the strategic
partnering of E-Z EM and the Company will accelerate the
development of human applications of the contrast microspheres and
will substantially improve the possibility of these products
Page 6
<PAGE>
being commercialized. In March of 1996, the Company and E-Z EM began
pre clinical animal studies of the contrast microspheres for the
detection of pulmonary emboli (lung blood clots) at Dartmouth
Hitchcock Medical Center, and at the University of Massachusetts
Medical Center.
In January of 1996, the Company discovered that a number of
Company checks were missing. The Company presumed the checks had been
taken during the Christmas holiday during which time the Company's
normal business had been scaled down. Upon investigation, the Company
discovered that certain of the missing checks appeared to have been
endorsed and recently cashed by Dr. Shell. The checks also contained
the signature of the Michael Grechko, the Company's Chief Operating
Officer. Michael Grechko denied having signed these checks and stated
that his signature had been forged. After further investigation of the
matter, the Executive Committee of the Company's Board of Directors
met with Dr. Shell to discuss the matter. Dr. Shell confessed that he
cashed the checks. In a subsequent meeting the Company informed Dr.
Shell that he must resign from the Board of Directors, which he did on
January 23, 1996. On February 6, 1996, the Company terminated Dr.
Shell's employment agreement for cause. Although the Company is
attempting to settle various open issues with Dr. Shell amicably, he
has disputed the Company's accounting of certain FATCO royalty's which
had been previously assigned to the Company by Dr. Shell and reported
by the Company in its previous financial statements. Dr. Shell also
recently informed the Company that he has rescinded his assignment of
FATCO royalty to the Company effective January 1, 1993. Given these
issues, and the possibility of other issues developing there can be no
assurance an amicable settlement will be reached between Dr. Shell and
the Company, or that Dr. Shell will not file a law suit against the
Company relating to the termination of his employment agreement, the
Company's accounting of FATCO royalty, or on any number of other
matters. The Company intends to vigorously defend any proceedings
initiated by Dr. Shell, and although the ultimate outcome of such
defense is uncertain and not free from doubt, the Company believes it
would not have any material liability.
On February 29, 1996, KCD informed the Company that special
patent counsel had recently reviewed the Company's patent covering the
sequesterant technology, which is the licensed technology used in the
manufacture of SeQuester-TM-, KCD's weight loss product, that on the
advice of special patent counsel KCD now believes that the patent does
not apply to the product licensed to KCD by Effective Health. KCD
alleges the Company and Effective Health deceived and induced KCD to
enter into a license agreement knowing the patent did not apply to the
product KCD intended to market, which resulted in damages to KCD. The
letter demands that the Company return all licensing fees and
royalty's paid to it within five days, or KCD would seek to recover
such licensing fees and royalty payments through litigation. The
Company and Effective Health deny all of the forgoing. KCD was fully
informed by the Company and Effective Health during numerous meetings
prior to KCD entering into the first and amended licensing agreements
with Effective Health. The Company considers this action by KCD, who
is an affiliate of Clark M. Holcomb as an attempt to divert attention
away from KCD's inability to make the royalty payments due the Company
under the terms of the original and First Amended License agreement.
On March 1, 1996, KCD failed to cure a default which had begun in
January 1996 as a result of their failure to make past due and current
royalty payments resulting in the termination of the license by the
Company. The Company depended on the licensing fees and royalty
payments it received from licensing of the sequesterant technology
KCD, which licensing fees and royalty's represented a 48% contribution
to
Page 7
<PAGE>
the Company's 1995 sales. In March 1996, the Company, on behalf of its
subsidiary EHI, filed an action against KCD in Los Angeles County
Superior Court. This action alleges causes of action against KCD for
Breach of the Amended License, Declaratory Relief and Permanent
Injunction. The action is based upon the failure of KCD to pay the
royalties due pursuant to the contract and their use of advertising
claims in connection with the sale of the licensed products which were
in excess of those which the Company authorized KCD to make. On April
8, 1996, KCD filed a cross complaint against the Company, Effective
Health, 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,
Accounting and Constructive Trust. The Company denies all of the
claims and intends to fully defend this cross complaint.
Acquisitions
Venus Management (MRI Units)
Although the Company had no previous experience as magnetic
resonance imaging service providers, the Company believed that given
the nature of its contrast microsphere studies and understanding of
the MRI process that it could become a successful MRI service
provider. The Company also believed that as the owners of MRI units,
the Company could utilize these units during down time for the
Company's own research and development of contrast microspheres in MRI
applications. In 1993, the Company acquired Venus Management,
Incorporated, ("VMI") a company which was incorporated in New York on
August 1, 1989 and who's assets consisted of two magnetic resonance
imaging (MRI) systems (the "Units") one of which was operating as a
mobile unit and was leased to a MRI service provider in New York, the
other unit was not assembled, or operational but had been leased to
another MRI service provider.
Pursuant to an Exchange of Stock Agreement and Plan of
Reorganization dated as of May 6, 1993 (the "Exchange Agreement"), and
effective on June 30, 1993, the Company acquired all of the
outstanding capital stock of VMI from Associated Funding, Inc. and
Diagnostics Resource Funding, Inc. (the then sole stockholders of VMI)
for an aggregate consideration of 1,000,000 shares of Common Stock
issued by the Company. The assets of VMI (which was incorporated in
New York on August 1, 1989) consist of two magnetic resonance imaging
(MRI) systems (the "Units") that are owned by VMI, whose sole source
of revenue currently is the lease payments it receives from leasing
the Units.
The Company, and the selling shareholders each are required to
pay a third party that is unaffiliated with the Company a finder's fee
in connection with this transaction of 10,000 unregistered shares of
the Company's Common Stock.
The Company has delayed issuing the 10,000 shares of Common Stock
that it is required to deliver to this party pending the resolution of
certain lease payment delinquencies discussed below. The Units were
acquired by VMI from Medical Funding of America ("MFA") on June 30,
1993 in connection with the Company's acquisition of VMI. VMI did not
pay any additional consideration to MFA in connection with VMI's
acquisition of the Units but formally assumed the obligation to repay
a note issued by MFA to a third party finance company that financed
MFA's original acquisition of one of the Units (the "First Unit
Note").
Accordingly, VMI will be required to make the payments under the
First Unit Note, the payment of which is secured by one of the Units.
The other Unit was owned
Page 8
<PAGE>
by MFA and transferred to VMI free of any security liens or other
obligations. As part of VMI's acquisition of the Units, MFA also
assigned to VMI its interest as lessor under an existing lease of one
of the Units described below. One of the two Units is installed and
operating as a mobile unit in New York state. The second Unit has not
been placed in service. Issuance of a second 1,000,000 shares of
Common Stock to the sellers was contingent on MFA's presenting to the
Company prior to January 27, 1994 an operating agreement with a third-
party user with respect to the second Unit that would have provided
net present value payments to the Company (utilizing a 12% per annum
discount factor) of at least $1,350,000, as determined by the
Company. However, MFA failed to present such an operating agreement
to the Company by the required date, and, accordingly, the second
1,000,000 shares of Common Stock was not issued to the sellers.
The number of shares issued in consideration of the acquisition
of VMI was determined by negotiation, taking into account the market
price of the Common Stock of the Company, the fact that the Common
Stock issuable under the Exchange Agreement would be issued without
registration under the Securities Act and therefore could not readily
be disposed of, the original cost of the Units owned by VMI (which
was, in the aggregate, approximately $3,370,000), and the operating
history of the one Unit that is currently installed.
One of the Company's two magnetic resonance imaging (MRI) systems
(the "Units") is currently installed and operating as a mobile unit in
Jefferson Valley, New York and has been in continual use since
September 1992 and is leased to Tri-County Mobil MRI, L.P.
("Tri-County"), whose general partner is Diagnostics Resource Funding.
This lease provides for monthly payments of $37,926 to Venus
Management, Inc. ("VMI") through August 1999 and $68,589 in September
1999 (with such payments being guaranteed by Medical Funding of
America, Inc., "MFA"), and VMI is required to make monthly installment
for the first Unit to a third party finance company of $32,360 through
August 1999 and $68,589 in September 1999.
MRI lease operations resulted in a (continuing) net loss of
$304,290 and a net loss of $620,123 for the years ended December
31,1995 and 1994, respectively. Lease revenues of $687,459 for 1994)
were offset by interest on lease obligations of $143,750 and
depreciation on the two units of required payments of interest and
principal to a third party finance company. Lease revenues for 1994
include $270,270 of delinquent payments with respect to the second
unit owned by VMI, for which none of the scheduled lease payments have
been received by VMI. Receivables related to these lease payments
were written off during 1994. In August 1994, VMI commenced litigation
to collect delinquent lease payments with respect to this unit. Lease
revenues for 1995 were $319,072 which includes only one unit, were
offset by interest on lease obligations of $142,005 and depreciation
on the two units of $481,357.
In April of 1995, Johnson & Johnson Finance Corp. ("J&J Finance")
brought an action against MFA and VMI in connection with a loan made
by J&J Finance to MFA that was secured by a lien granted by MFA on the
Resonex MRI unit which at the time was owned by VMI. After MFA
defaulted on the foregoing loan, J&J Finance obtained a writ of
attachment in June 1995 on the Resonex MRI unit and took physical
possession of that unit. The Company's position is MFA had no
authority to secure the foregoing loan with VMI's MRI unit since the
loan was made solely for the benefit of MFA, the lien was placed on
the MRI unit without VMI's knowledge or consent, and none of the loan
proceeds were received by VMI or the Company.
Page 9
<PAGE>
The Company is in settlement discussions with J&J that would
require the Company and VMI to forfeit their interest in the MRI unit
in exchange for J&J releasing VMI and the Company from any damages.
Although the Company believes VMI is entitled to recover the MRI unit
from J&J Finance and that VMI should prevail in its claims against MFA
should J&J Finance, be permitted to retain the MRI unit, there can be
no assurance that VMI will prevail against either party or that VMI
will be able to collect any judgment that it may obtain against MFA.
As a result of the foregoing, the Company has written off the net book
value of the second unit of $964,286 as of December 31, 1995. VMI has
commenced litigation against MFA seeking payment of delinquent lease
payments, however, there can be no assurance that MFA will be able to
make any of those required lease payments to VMI. Receivables of
$270,270 related to a portion of these lease payments were written off
during 1994 (See Notes to Consolidated Financial Statements, Note 4.)
and none were accrued for 1995.
As of February 29, 1996, Tri-County was delinquent in making the
January and February 1996 lease payments and MFA and VMI failed to
make these payments under their guarantee to the finance company which
has issued a notice of default. MFA has also failed to make these
payments to VMI under its guarantee of Tri-County's payments to VMI.
Accordingly, VMI had not made certain payments due to the third party
finance company for the first Unit. Should Tri-County fail to make its
future lease payments to VMI and should VMI be unable to make its
future required payments to the finance company (i) VMI could lose
ownership and possession of the first Unit and (ii) the entire
remaining balance of the MFA note would become immediately payable,
with VMI and the Company being liable, together with MFA, for any
deficiency in repayment of the note. Both MRI leases are delinquent.
The operational unit is two months delinquent, no payments have been
made on the second unit.
Pursuant to the Exchange Agreement, the Chairman of the Board of
Directors of MFA, Gerald A. Brauser, was elected to the Board of
Directors of the Company on June 23, 1993, effective upon the
Company's acquisition of the outstanding stock of VMI. He subsequently
resigned as a director of the Company in April 1994 for personal
reasons. Prior to the transactions described herein, Mr. Brauser's
wife held 156,285 shares of the Company's Common Stock.
Business
The Company is engaged in the business of developing,
manufacturing, and marketing of proprietary diagnostic imaging
products and services relating to blood flow research in animals, a
proprietary diagnostic imaging technology for use in human
applications utilizing existing imaging equipment such as x-ray, CAT
scan, MRI, and ultra sound. The Company also developed and licensed a
proprietary technology for the selective entrapment or sequestration
of dietary fat from food while in the gastrointestinal tract, thereby
preventing the absorption of that fat into the blood stream and
ultimately the body. Beginning in October 1995, the Company expanded
its research and development of dietary and food supplement products
with the intention of commercializing such new products beginning in
the later part of 1996.
The Company's principle mission is to provide imaging
diagnosticians with a procedure to increase early detection of
restrictions or blockages in human blood flow through. To achieve this
the Company has developed technologies that significantly improve
images obtained from diagnostic imaging equipment.
Page 10
<PAGE>
The technology is based on micron sized solid particles, or
microspheres. The challenge in developing the microsphere products was
to produce products of such superior quality they are capable of
retaining a high percentage of their original color or dye
concentrations over extended periods. Such products would improve
imaging diagnosticians ability to make rapid identification and
discrimination under microscopic examination enabling early detection
of restrictions or blockages in blood flow. The Company's microsphere
products were designed for diagnostic imaging of human blood flow and
organs, animal blood flow research, and as a potential delivery
systems for pharmaceutical drugs. The Company's microspheres contain
various imaging agents or other reflective indicators which create a
distinctive reflection which is detectable when visualized through
diagnostic imaging equipment such as x-ray, CAT scanning, ultrasound
or MRI. The Company's microsphere products are described below.
Primary Products and Services
Non-biodegradable Colored Microsphere Products for Animal Blood Flow
Research
The Company developed a method for measuring arterial blood flow
to the major organs on laboratory animals using non-radioactive
polystyrene spheres ranging in size from one to twenty five microns.
One of two classes of non radioactive markers, either a series of
chemically linked colored dyes, or non animal enzyme markers are
attached to the microspheres giving them a distinctive signal when
visualized through the Company's flow cytometer imaging system. The
patented process also involves a technology for separating both
colored and enzyme-linked spheres from tissue and blood. The number of
colored microspheres contained in tissue or organ samples is
determined by direct computerized counting of the individual colored
microspheres when visualized by a flow cytometer, or through other
imaging systems. E-Z Trac has successfully demonstrated the
feasibility and efficacy of its non-radioactive colored microspheres
in previous animal blood flow studies which utilized black
non-radioactive colored microspheres and alkaline hydrolysis of tissue
and blood samples. The use of color "labeled" (identifiable by color
during diagnostic visualization) microspheres is important in
experimental studies of organ blood flow distribution and other
pathologies. Simultaneous blood flow measurements following coronary
artery occlusion which compared radioactive microspheres and colored
microspheres have shown similar measurement correlation's of regional
myocardial blood flow in zones of normal, intermediate and low blood
flow. The standard measurement technique of using radioactive
microspheres prevents their use by institutions that are unable to
dispose of or afford the disposal cost of the radioactive waste.
Investigator Partner Program Service for Colored Microsphere Products
The Investigator Partner Service ("IPS") program provides a
national reference laboratory service for pharmaceutical companies and
academic centers engaged in animal blood flow research, as well as
automated laboratory services for customers using E-Z Trac's colored
microsphere products. In IPS program, investigators (customers) buy
E-Z Trac's colored microspheres, perform their experiments, and send
the tissue samples to E-Z Trac for automated analysis and counting in
the Company's Flow Cytometer imager. To date, customers have included
the National Institutes of Health, Columbia and New York Universities,
the University of Southern California, Bristol Myers/Squibb and Rorer
Pharmaceutical. E-Z Trac currently has the capacity to process up to
800 samples per week. The IPS program will also augment the sales of
colored microspheres as well as the automated counting machines.
Page 11
<PAGE>
Automated Analysis and Counting Machine for Colored Microsphere
Products
In November of 1994, the Company entered into an agreement with
the Immunocytometry Systems Division of Becton Dickenson Company
("Becton") to manufacture an advanced flow cytometer to count colored
microspheres. The contract was entered into after the Company had
demonstrated that the Becton machine could be converted into a
prototype flow cytometer to count colored microspheres. The converted
flow cytometer counts colored microspheres as much as eight times
faster than the previous imaging system while simultaneously improving
the accuracy of its count. Although the Company believes the
automated counting machine will augment the IPS program, only one unit
has been sold to date. Informal market studies recently conducted by
the Company indicate the that the $40,000 cost of the Becton flow
cytometer is to expensive for the majority of potential users. The
Company is currently studying the feasibility of developing a second
image analyzer, equal in performance and accuracy, but marketed in the
$20,000 price range. The same informal study indicate that such a
machine would fit the limited research budgets of many potential
users. However, even if the Company did development such a machine
there are no assurances that such a machine could be sold, or that the
size of the potential market, or the number of potential users will
justify the development costs of such a machine.
Biodegradable Contrast Microspheres for Human Diagnostic Imaging
Applications
In 1988 the Company developed a proprietary technology and
product designed to observe arterial and capillary circulation in
humans through the use of biodegradable contrast microspheres which
significantly improve the images provided by existing x- ray, CAT
scanning, ultrasound and MRI equipment. The contrast microspheres are
composed of albumin (a human blood protein) and other commonly
available FDA approved contrast agents. Since 1988, the Company has
identified and developed a number of potential human applications
including:
Pulmonary Embolism-Lung Imaging with CAT Scan Machines. Contrast
microspheres, larger than human blood cells are injected into a
peripheral vein where they are carried by the blood flow into the lung
capillaries. As these contrast microspheres are larger than the
capillaries the become temporarily lodged in place becoming a highly
reflective stationary signal allowing significantly enhanced detection
and visualization when compared against the currently used liquid
contrast agents which are not stationary and rapidly dilute in the
blood flow. These same contrast microspheres can also be utilized to
detect blood clots in the lung with CAT Scan machines.
Heart Muscle Visualization.-Heart Imaging with Ultrasound.
Contrast microspheres, smaller than blood cells are injected into a
common peripheral vein and pass through the lung, and into the
general circulation where they re-circulate until they dissolve.
These small contrast microspheres can be detected by ultrasound and
have been used to detect heart muscle and liver blood flow.
MRI Applications. X-ray contrast media is replaced with an MRI
contrast microspheres which have been sized for the intended imaging
application.
The Company believes that they will be useful as diagnostic
agents in humans to detect heart disease and tumors using
non-radioactive ultrasound. The Company has also produced small
experimental contrast microspheres where the contents (experimental or
research drugs ) of the microsphere are intentionally leaked into the
blood flow providing a controlled drug delivery system.
Page 12
<PAGE>
Sequesterant Products
The Company's fat sequesterant technology involves the selective
entrapment or sequestration of dietary fat from food while in the
gastrointestinal tract, thereby in theory preventing the absorption of
that fat into the blood stream and ultimately the body. However,
clinical studies to date have not substantiated the efficacy of the
technology.
The are substantial existing markets for dietary and weight loss
products in general, including the Company's fat sequesterant
products. Domestically these markets include retail, over the counter,
warehouse clubs, multilevel marketing, direct response, infomercials,
as well as others. The weight loss/dietary products category is one of
the largest segments within the food supplement category. Independent
industry analysts estimate the category in the hundreds of millions
dollars annually. Based on historical performance of sequesterant
technology products, the Company believes that if re-marketed in a
responsible manner basing claims only on valid clinical data that
potentially significant revenues can be generated from a new
sequesterant technology product. First Generation Fat Sequesterant.
The first generation sequesterant technology is based on
activated fiber combination of bile and cellulose which is currently
formulated and manufactured as tablets under the Company's trade
secret process. The product's expected effect on fat absorption is
believed to contribute to weight loss by reducing intake of fat
calories while increasing the excretion of fat in the stools by
preventing absorption and storage of fat by the body. However, to date
clinical studies conducted by the Company are inclusive as to the
products ability to absorb, or sequester fat. (See subsequent events
relating to the FTC complaint regarding the marketing of SeQuester-TM-
and Lipitrol-TM-).
Advanced or Second Generation Fat Sequesterant
The Company has completed initial development on a advanced or
second phase sequesterant technology based on a vegetable sterol
blend. The Company believes this new product does not violate the
patent covering the first generation product. However, to date
clinical studies conducted by the Company and a foreign licensee are
inclusive as to the products ability to absorb, or sequester fat. The
Company anticipates that the advanced generation product if marketed
by a separate company under a different trade name would compete
directly against the first generation product, however, the Company is
unable to predict the effect such competition would have on the price
or market share of either product.
Magnetic Resonance Imaging Leasing Operations
MRI is a sophisticated diagnostic imaging modality utilizing a
strong magnetic field in conjunction with low energy electromagnetic
waves which are processed by a dedicated computer to produce a high
resolution images of body tissue. As with other diagnostic imaging
technologies, MRI is non invasive. Since its introduction in 1983, MRI
services have grown to become a $45 billion dollar market. MRI service
providers generally provide diagnostic imaging services to patients
referred by physicians who are either in private practice or
affiliated with managed care providers or other groups. MRI service
providers charge patients a fee for the service which is typically
paid by the patients insurance company. Although the Company had no
previous experience operating an MRI service, the Company believed
that based on its knowledge of the MRI process it could become a
successful MRI service provider. Secondarily, the Company believed
that as the owners of MRI unit(s), the Company could utilize these
Page 13
<PAGE>
units during down time to conduct tests of the Company's contrast
microspheres for MRI applications.
In 1993, the Company acquired Venus Management,
Incorporated, ("VMI") a company which was incorporated in New York on
August 1, 1989 and who's principle assets consisted of two MRI systems
(the "Units") one of which was leased to MRI service provider who was
operating the unit in New York state, while the second unit, which was
not assembled, or operational but was leased to another MRI service
provider. The Company intended to enter into a joint venture agreement
on the second unit with the lease. (See Acquisitions above)
Product Liability Insurance
Although the Company believes its products are safe, it may
be subject to product liability claims from persons injured through
the use of the Company's marketed products, services, or products
undergoing clinical trials. The Company carries no direct product
liability or clinical trials liability insurance, relying instead on
the coverage maintained by its distributors and manufacturing sources
from whom it obtains product. This insurance protects the insured who
pay the claims and only indirectly protects the Company (by providing
a source of payment for any claims brought against both such
distributors or manufacturers and the Company). There is no assurance
that this insurance will adequately cover any liability claims brought
against the Company. There also can be no assurance that the Company
will be able to obtain its own liability insurance (should it seek to
do so) on economically feasible terms. The Company's failure to
maintain its own liability insurance could materially adversely affect
its ability to sell its products in the future. Although no product
liability claims have been brought against the Company to date, were
any such claims to be brought against the Company, the cost of
defending against such claims and any damages paid by the Company in
connection with such claims could have a materially adverse impact
upon the Company.
Distribution
Colored Microsphere Products and Services
The Company currently sells colored microsphere products and
services to pharmaceutical companies, universities, hospitals, and
other academic centers engaged in blood flow and pharmaceutical
research directly and through its distributor, Triton Technologies.
In February 1991, the Company (through its E-Z Trac subsidiary)
entered into an exclusive two-year worldwide manufacturing and
distribution agreement with Triton Technology, Inc. ("Triton"), a US
company located in San Diego, California, where they are engaged in
the development and sale of physiological monitoring products,
pursuant to which the Company is to provide custom manufactured dye
release plastic microspheres to Triton's specifications. The companies
formally extended the contract under the original terms to February
1994, and have subsequently renewed the contract, which obligates
Triton to make $20,000 in minimum annual purchases, which is
automatically renewed for additional one year periods unless
terminated by either party on 30 days written notice.
In October 1995, Triton established a home page on the world wide
web to market its non competitive products as well as E-Z Trac's
colored microspheres. E-Z Trac's products are marketed as in the non
radioactive products group as "NuFLOWo FLUORESCENT MICROSPHERES WITH
PROCESSING SERVICE". Triton's world
Page 14
<PAGE>
wide web home page can be viewed at http://www.physiology.com. E-Z
Trac and Triton believe the world wide web offers a opportunity to
target vast numbers of pre qualified consumers at a very competitive
cost. E-Z Trac believes that the world wide web is a important
information tool in scientific research communities.
Triton and E-Z Trac are discussing expanding world wide web
marketing and distribution efforts with the intention to expand
Company presence and its E-Z Trac products and services in the
research community. E-Z Trac and Triton will continue to market the
colored microsphere products through trade show exhibits, and
advertising in targeted journals as well. E-Z Trac assembles and ships
the colored microspheres directly from its Los Angeles laboratory
facilities. IPS service is also conducted at the Company's laboratory
facility. Colored microspheres are sold separately, or bundled with an
E-Z Trac reagent extraction kit containing enough material to conduct
six regional blood flow experiments. E-Z Trac also markets a
supplemental reagent extraction kit. E-Z Trac is aggressively
pressuring new customers both directly and through Triton
Technologies. The Company and E-Z Trac are also developing alternative
markets. The Company is currently studying the adaptability of colored
microsphere products and services for use in commercial (human)
pathology applications.
Sales of colored microspheres and related products including IPS
laboratory services were approximately $298,000 in 1993, sales
declined to approximately $211,000 in 1994 during the transition to
the new flow cytometer system for automated counting, then increased
again to $247,000 in 1995 with the integration of the Flow Cytometer.
The Company estimates E-Z Trac's current market share for blood flow
products at approximately 10%.
Contrast Microspheres
The Contrast microsphere is in development stage and is not in
commercial distribution. The Company intends to license the sales and
marketing rights for the contrast microspheres to an established
distributor of contrast imaging products and services. As stated
above, the Company has recently singed a broad based agreement with
E-Z EM, Inc., a recognized global leader in sales and marketing of oral
radiographic contrast agents, which. The agreement as contemplated
provides E-Z-EM with the exclusive option to acquire global sales and
marketing rights for contrast microspheres products and related
services. The Company's market research indicates there is a
substantial commercial market opportunity for the application of its
contrast microspheres in certain diagnostic procedures utilizing
x-ray, cat scan, MRI and ultra sound equipment. Customers converting to
the Company's contrast microsphere products and services will not be
required to purchase new diagnostic imaging equipment as the
technology was designed to be readily adapted for use with installed
equipment.
Sequesterant Agents
Products based on the Company's sequesterant technology have been
marketed and sold in the US and foreign countries since 1987 under
various trade names including Lipitrol-TM-, SeQuester-TM-, and others.
From 1990 to 1993, Effective Health distributed Lipitrol-TM-, the
Company's product based sequesterant technology. The Company sold
directly to doctors, consumers, and also to small local distributors.
In 1993, the Company phased out its existing relationships with
doctors, consumers, and small local distributors, and as a result,
the Company no longer generates any revenues from its own direct
distribution of sequesterant products. The Company experienced
excessive administrative costs as well as control problems in
connection with the Company's direct distribution to doctors,
consumers, and small local distributors and
Page 15
<PAGE>
determined that a "grass roots" distribution approach, though less
costly initially, would require substantially longer time to build a
national distribution system. Accordingly, the Company decided that it
was in its best long-term to license marketing rights to such products
to established companies to established and reputable marketing
companies.
In 1994, the Company, through its Effective Health subsidiary
entered into a exclusive Licensing Agreement with KCD, Incorporated, a
company recently formed by Clark M. Holcomb, who represented to the
Company to have the ability to distribute a consumer weight loss
product based on the Company's sequesterant technology to national
drug and health food chains. At the time the Company entered into the
agreement, KCD had very limited management experience and financial
resources. The agreement provided KCD with exclusive sales and
marketing rights to the sequestration technology in the territories of
the United States and Canada. The agreement required KCD to pay an
initial licensing fee of $100,000, and to make minimum monthly royalty
payments to maintain the license. In 1994, KCD began marketing
SeQuester-TM-, a consumer weight loss product based on the
sequesterant technology. The agreement also required KCD to conduct
clinical studies intended to establish and validate marketing claims,
for which KCD was required to assume the sole responsibility for the
accuracy and validity of such marketing claims, and further to market
their product in accordance with established Federal Trade Commission
("FTC") guidelines. In September 1994, was delinquent in making
certain of its required royalty payments to the Company.
The Company received $ 811,068 in licensing fees and royalty's
through December 31, 1995, from KCD. However, on March 1, 1996 KCD
defaulted on certain of the provisions of the licensing agreement
which resulted in termination of KCD's sales and marketing rights as
provided in the First Amended Licensing Agreement. The Company has
notified designated manufacturers that they are no longer permitted to
manufacturer products based on the Company's sequestration technology,
and specifically they are not permitted to manufacture such products
for KCD. Company is in discussions with several established
distributors who have expressed an interest in marketing products
based on sequester technology. However, additional testing of the
sequester product will be required to substantiate efficacy.
Status of New Products, or Services
The Company announced the completion of first stage development
of its expanded dietary and personal care product line which had been
initiated by the Company in October 1995. The Company believes it is
on schedule to introduce a number of new dietary and personal care
products during the later half of 1996. However, there can be no
assurance that the Company's will be able to complete development on
these new products, or that any of these new products will be
successful in the consumer marketplace.
Competition
The Company and its subsidiaries operate in a highly competitive
marketing and technology environment. The Company competes primarily
on the basis of product uniqueness by establishing a point of
difference usually based on technological content, on quality, service
(where applicable), and reliability, as perceived by the user, and to
a lesser extent on the basis of price. The Company competes or will
compete, either directly or indirectly, with other companies in each
of its product categories many of whom are larger companies with
substantially more resources available, including greater financial
resources, larger research and development
Page 16
<PAGE>
staffs, greater sales volume, and larger sales forces.
Although the Company believes that its colored and contrast are
unique in application and performance, there is no assurance that a
highly competitive market with more powerful competitors will not
emerge if competitors are able to develop microsphere products
substantially similar to, or better than those of the Company.
Although the Company knows of only two other competitors at this time
using non-radioactive microspheres for measuring animal blood flow,
the Company does compete directly against companies producing
radioactive microspheres.
The Company is not aware of any direct competitor for its
contrast microsphere product for the detection of pulmonary emboli,
although one competitor has recently received FDA approval for a
microsphere product for echocardiography. However, this product,
unlike the Company's product can only be used with ultrasound. The
Company is aware of other companies developing microsphere and
microbubble technologies for use as human contrast imaging agents.
Colored Microsphere Products and Services
The Company believes it is the first to develop non-radioactive
colored microspheres for animal blood flow measurements and as such is
the first Company to directly challenge the established radioactive
products, which is the Company's most significant competition. There
are other Company's using microspheres in blood flow and diagnostic
imaging research, however, the Company believes that no other Company
has developed a highly reflective microsphere capable of being
visualized for extended periods, producing substantially superior
images with increased color sensitivity and distinction, and combined
with the speed and accuracy of flow cytometer analysis. Further, the
Company believes that the increasing regulatory restrictions and
public concern will work to its advantage by , forcing researchers
using radioactive products to explore alternative non-radioactive
solutions. In the near term, the Company believes that sales of its
colored microsphere products and services will continue to increase
despite the present resistance to change from the established methods.
However, the Company believes that change will occur through political
and social pressures, at which time sales of the Company's colored
microspheres and services should increase faster.
The Company believes that its colored microspheres are superior
to the existing products in that they provide blood flow researchers
with the ability to:
1. produce diagnostic images of at least equal, and possibly
superior quality and detail compared to diagnostic images
obtained using radioactive microspheres, all without the
environmental hazard and costs associated with the
radioactive products and its waste disposal.
2. extend imaging times as the result of the colored
microspheres ability to maintain high dye concentrations for
prolonged periods.
3. visualize as many as eight different colors simultaneously.
Contrast Microspheres
The Company believes that its contrast microspheres are
superior to the existing technologies in that they provide
diagnosticians with the ability to:
1. obtain faster, higher resolution images from existing x-ray,
MRI or Ultrasound equipment when compared to studies without
contrast agents, or with studies using liquid contras
agents.
2. perform diagnostic imaging services at reduced costs.
Page 17
<PAGE>
3. increase the throughput from existing imaging equipment such
as digital radiographs, CAT-scans, cine CAT-scans and MRI
scans.
4. in certain indications, obtain usable images from equipment
that previously could not provide such usable images when
using other (other than the Company's colored microspheres)
diagnostic media.
The Company believes that its contrast microspheres provide
extended imaging time thereby yielding higher resolution images with
improved clarity which increases diagnosticians ability to make an
early detection of blood flow problems, and is readily adapted for use
in a wider range of installed imaging equipment. The Company believes
its contrast microsphere technology for blood circulatory
visualization represents a significant advance in diagnostic imaging.
The production of large contrast microspheres labeled with an x-ray
contrast agent is expected to allow imaging of various organs without
radioisotopes, where, the small dense microspheres (four microns) will
pass through the lung blood vessels and enter the general circulation
where they will re-circulate continuously until they dissolve. The
Company believes there is one existing competitor who has obtained FDA
approval for their product which has a similar capability to produce
microspheres that pass through the lung capillaries, however, the
Company believes that this competitor's "microbubble" product could
have a tendency to break down and disappear soon after injection,
resulting in only limited imaging time when compared to the Company's
contrast microsphere. Moreover, the Company believes the competitive
product can only be imaged by ultrasound, while the Company's small
microspheres can be visualized by x-ray and MRI, as well as
ultrasound, thereby expanding the potential to provide physicians with
additional diagnostic capabilities.
Sequesterant Agents- Dietary, Weight Loss and Food Supplement Products
The sales and marketing of retail products for general weight
loss is very competitive, and closely regulated by the Federal Trade
Commission ("FTC"), and in the case of pharmaceticual drugs the Food
and Drug Adminstration ("FDA"). Several companies with resources much
greater than those of the Company, manufacture, distribute and market
general weight loss products and are direct competition for the
Company. In its one attempt (the sequestrant technology) the Company
has successfully competed against these larger companies by
establishing a consumer point of difference based on technology. The
Company plans to introduce new weight loss and nutritional products in
1996 and 1997 that are sufficiently unique both technologology and in
benefit from those of the larger companies. However, no assurance can
be given that the Company will release its new products as schedueled,
or that competiting companies will not develop and market products
which are similar to those the Compnay intends to market before the
Company can, or that the Company's products will be successful.
Raw Materials, Suppliers, and Manufacturing
Colored Microsphere Product
The Company purchases raw microspheres in bulk from unaffiliated
suppliers which are then treated, sized, and labeled using the
Company's trade secret process. The processing is carried out at the
Company's corporate laboratory facilities. To date, E-Z Trac has not
encountered difficulty obtaining raw microspheres from suppliers.
Product delivery is F.O.B. at the Company's facilities., with
customers or distributors (Triton) assuming all delivery and storage
costs, taxes, insurance, freight, and any other charges involved in
transportation or thereafter.
Page 18
<PAGE>
Contrast Microspheres
The Company purchases raw microspheres in bulk form from
unaffiliated suppliers which the Company then processes by mechanical
and chemical treatment to create a sphere in a specific size and
composition intended for specific clinical applications. Sizes range
from one micron to twenty five microns. The Company is currently
producing contrast microspheres on a regular basis for the Dartmouth
Hitchcock Medical Center and University of Massachusetts pre clinical
animal studies as part of the Company's agreement with E-Z EM. The
Company has not encountered any difficulty purchasing raw
microspheres. The Company intends to remain as the manufacturer of
contrast microspheres for commercial distribution and applications.
Sequesterant Products
Products based on the sequesterant technology have been
manufactured by independent manufacturers under confidentially and
secrecy agreements for the Company and it licensees. There have been
several of these manufacturers since the product was first introduced
by the Company. Initially the product was manufactured by D&F
Industries under the Company's sub-license from FATCO (See Item 3.
Legal Proceedings). The raw materials used to manufacture the product
are naturally occurring substances that are readily available from
multiple suppliers. The Company, or its designated manufacturers have
not experienced any difficulty purchasing the raw ingredients used to
manufacture this product. The Company does not intend to manufacture
products based on the sequesterant technology.
Customers and Backlog.
For the year ended December 31, 1995, KCD accounted for over 10%
of the Company's revenues which were $618,788 representing royalty's
payments from the sales products based on the sequesterant
technology. MRI lease revenues from the Tri-County represented more
than 10% of the Company's total operating revenues for 1995, however,
the Company's monthly installment payments to a third party finance
company with respect to the operational unit offsets the full cash
revenues generated from the lease and will continue to do so through
the remainder of the lease. The leases of the two MRI systems by VMI
to Tri-County and MFA each generated in excess of 10% of the Company's
total operating revenues for 1994 as well.
Excluding E-Z Trac sales of colored microspheres and services,
who sells products and services to over thirty customers, and is not
dependent on any few customers, however, overall, the Company was
dependent on two (2) customers, KCD and Tri-County, each of whom
represent over 10% of the Company's total 1995 revenues, As of March
1, 1996, KCD defaulted on its royalty payments resulting in the loss
of its license, and the Company loss of the royalty income. Tri-County
was three (3) months delinquent in making its lease payments. As of
March 1, 1996, the Company's only cash flow from operations is from
E-Z Trac sales of products and services. The Company will be dependent
on investment capital to support the balance of its operations until
such time as the Company introduces new dietary and food supplement
products, which have been in development since October of 1995, or is
able to find a replacement for KCD. The Company is in discussions with
distributors as well as sales and marketing companies who have
expressed an interest in distributing and marketing a product based
on the sequesterant technology. However, no assurances can be given
that the Company will find a suitable replacement for KCD, or that
such a replacement will be successful in marketing a product based on
the Company's sequesterant technology.
Page 19
<PAGE>
E-Z Trac sells its colored microspheres, and laboratory services
to a number of scientific researchers, universities, hospitals and
pharmaceutical companies. To date, customers have included the
National Institutes of Health, Columbia and New York Universities, the
University of Southern California, Bristol Myers/Squibb and Rorer
Pharmaceutical. E-Z Trac currently has approximately thirty customers
all of whom have repurchased colored microsphere products and services
a number of times. The laboratory service is also growing. Currently,
the Company can process up to 800 samples per week. The Company
anticipates adding additional flow cytometers as needed.
The Company generally carry's an inventory of its colored
microsphere products. Orders are filled and shipped from inventory
with inventory being restocked as needed. The Company does not
maintain an inventory larger than a few months sales thereby
minimizing inventory costs. The Company sells its products and
services on a current basis and does not maintain any significant
backlog of orders for any of these products or services.
Patents, Licenses, and Royalty Agreements
Proprietary protection, including that afforded by patent
protection is important to the Company and its business. However,
there is no assurance that the validity of any patent including those
owned or licensed by the Company would be upheld if challenged by
others in litigation, or would not infringe on patents or licenses
owned by others. Additionally, there is no assurance that any of the
patent applications filed by the Company will be approved, or if
approved, more importantly, that competitors will not develop
functionally similar competitive products outside the protection of
the Company's patents. The Company's technology and proprietary
research is by nature dynamic and evolving, not withstanding its
existing patents and patent applications, in the interests of
safeguarding the Company's proprietary technologies and research, the
Company is relying more heavily on trade secret protection,
confidentiality agreements, and the placing of tight restrictions on
the disclosure of proprietary information.
Patents
The Company holds a United States patent for the use of colored
microspheres in measuring blood flow in laboratory animals as well as
for methods of separating the microspheres from blood and body tissue
and determining the number of microspheres in tissue without
separation, that expires in 2003. Similar patents are held by the
Company for Canada, Australia, and Israel. The Company also has
pending patent applications for its colored microspheres in nine
additional countries.
The Company holds a United States patent for the preparation and
application of contrast microspheres in the detection of pulmonary
emboli and certain other conditions which expires in 2004, as well as
similar patents in Canada and eleven other countries. The Company also
has pending patent applications for its contrast microspheres in two
additional countries. In addition the Company has prepared patent
applications for use of its contrast microspheres in ultrasound
applications and for an oral application using various imaging
modalities. The Company has registered Maxispheres-TM-, as the
trademark for its contrast microspheres.
The Company holds a United States patent for the first generation
fat sequesterant product and its use in reducing dietary fat
absorption that expires in 2006. The Company also has pending patent
applications for this product in Canada and Japan.
Page 20
<PAGE>
Licensing Agreements
In 1994, the Company through its Effective Health subsidiary
entered into a exclusive Licensing Agreement with KCD, Incorporated, a
company recently formed by Clark M. Holcomb. KCD represented to the
Company prior to entering into the agreement that it had access to
national drug and health food chains. At the time the Company entered
into the agreement with KCD, KCD had recently been formed by Clark M.
Holcomb and had very limited management experience and financial
resources. The agreement provided KCD with exclusive sales and
marketing rights to the Company's fat sequestration technology for the
United States and Canada. The agreement required KCD to pay an initial
licensing fee of $100,000, and to make minimum monthly royalty
payments to maintain the license. KCD began marketing SeQuester-TM- in
1994 which is a product based on the Company's sequestration
technology. The agreement also required KCD to conduct clinical
studies designed to establish and validate marketing claims. It
further required the KCD assume sole responsibility for marketing
claims, and to market their product in accordance with established FTC
guidelines. By November 1994, KCD was in default of its minimum
royalty payments and was demanding the Company amend the Licensing
Agreement. Specifically KCD demanded the royalty of 15% of net sales
be reduced to 6% of gross sales. KCD cited the higher royalty was
creating significant cash flow problems and would prevent KCD from
being able to market SeQuester-TM- profitably. KCD assured the Company
that if the Company amended the Licensing Agreement in such a manner
that KCD would become current and would remain so regarding the
payments of royalty's.
In May 1995, the Company and KCD entered into a First Amended
License Agreement. The amended agreement called for a reduction in the
minimum royalty payments from 15% of net sales to 6% of gross sales.
The agreement also established specific provisions in the event of a
default by KCD on its minimum royalty payments. The amended agreement
also provided for the payment of past due royalties and well as
establishing that the physical payment of all royalties would be made
through a third party factor thus assuring the Company would be paid
without interference from KCD, or any of its affiliates. By October
1995, KCD payments were not being paid through the third party factor
as agreed to by KCD, and the payments had started being short of the
full amount and late in arriving forcing the Company to issue a Notice
of Default to KCD.
The Company is in discussions with several established
distributors who have expressed an interest in marketing products
based on sequester technology. Based on sales history, the Company
believes that if the product is marketed in a responsible manner,
sales of a sequester type product can become significant within
several months of its reintroduction. The Company also believes there
is an equally strong demand for a sequester based product based in
foreign markets and intends to seek a strategic partner for foreign
distribution. The revenues the Company received from licensing fees
and royalty's of the sequesterant technology to KCD contributed
approximately 71% of the Company total cash flow for the year ended
December 31, 1995. The Company has filed a law suit against KCD
seeking payment of back royalty's among other things (See Item 3.
Legal Proceedings), however, there can be no assurance that the
Company will be successful collecting any back royalty's from KCD, and
further, there can be no assurance the Company will be successful in
licensing the sequesterant technology to another group, which the
Company believes will require additional testing of the sequester
product to substantiate its efficacy.
Page 21
<PAGE>
In January 1996, the Company entered into a broad based,
strategic long-term agreement with E-Z-EM, Inc. See "Recent
Developments".
Royalty Agreements
The Company is required to pay inventors royalty's equal to 6% of
the Company's sales of sequesterant products to Dr. Shell, MD., and
Jackie See, MD., who developed the sequesterant technology, and
Francis Pizzulli, an practicing attorney and partner of the Company's
Founding Predecessor, who acquired a 50% interest in Dr. See's
royalty income of the sequesterant technology. The Company has been
delinquent in making in these royalty payments to Dr. Shell, Dr. See
and Francis Pizzulli due to KCD delinquencies (See Item 3. Legal
Proceedings). Dr. Shell had assigned his portion of inventors royalty
income from the licensing of the sequesterant technology to the
Company in a previous assignment.
Both See and Pizzulli had initiated arbitration proceedings
relating to the payment of royalty's pursuant to the existing Royalty
Agreements between the Company and See Dr. Jackie See and Francis
Pizzulli filed initiated an arbitration proceeding regarding the
Company's delinquent royalty payments. In August 1995, the Company,
Dr. Jackie See and Francis Pizzulli entered into preliminary
settlement agreements regarding the pending arbitration proceedings
before the Judicial Arbitration and Mediation Service, Inc. in Santa
Monica, California. Subsequently, the Company, Dr. Jackie See and
Francis Pizzulli entered into a formal settlement agreement relating
to the above arbitration proceedings. (See Item 3. Legal Proceedings)
The Company and Dr. Shell are settling various open issues
relating Dr. Shell's termination by the Company, one of which is the
payment of inventor royalty's. Dr. Shell has disputed the accounting
of the royalty's the Company provided to him, which was based on Dr.
Shell's previous assignment of such royalty's to the Company. The
Company and Dr. Shell are attempting to settle this and other issues
amicably, however, there can be no assurance that the Company will be
able to reach a settlement with Dr. Shell on this matter, or that Dr.
Shell will not commence litigation against the Company in connection
with this, or other issues.
Government Regulations and Approvals
Food and Drug Administration
All pharmaceutical and medical diagnostic equipment manufacturers
are subject to extensive regulation by the federal government,
principally through the FDA, and to a lesser extent, by state
governments. The Federal Food Drug and Cosmetic Act and other federal
statutes and regulations govern or affect the testing, manufacturing
safety, labeling, storage, record keeping, approval, advertising and
promotion of the Company's products. Noncompliance with applicable
requirements can result in seizures, injunctions and prosecution.
Refusal by the government to enter into supply contracts private
companies, or to approve an applicants new drug applications can be
the result of the aforementioned actions. FDA approval is required
before any "new" drug can be marketed. A new drug is one which has to
be proven as safe and effective via a clinical pathway to achieve
approval by the FDA before marketing.
Products base on the Company's sequesterant technology are
generally considered to be a "food" product and, therefore, are not
subject to FDA approval, provided the manufacturer or distributor does
not, in the course of marketing or advertising such product, make
claims of a medicinal or therapeutic nature. Moreover over-the-counter
sequesterant technology products do not currently require FDA pre-
Page 22
<PAGE>
market approval as a food additive, since it meets the criteria
established by the FDA for product ingredients generally recognized as
safe ("GRAS") by experts for food use. All of the ingredients
comprising the sequesterant technology products are included in
published FDA regulations that specify GRAS ingredients. Their
criteria are determined by the FDA, and anyone wishing to use these
ingredients commercially can conform their product to the GRAS list
without notifying the FDA. Any intended use for the ingredients that
differ from those promulgated or accepted on the GRAS list are then
subject to potential FDA review. Moreover, the Nutrition Labeling and
Education Act ("NLEA") of 1990 regulating food supplements was
recently enacted, and the FDA recently has announced that it intends
to become more active with respect to regulating dietary supplements
such as the Company's sequesterant based products. While no specific
changes have yet been announced or implemented by the FDA or the NLEA
of which the Company is aware, it is possible that the Company's
sequesterant products will be subject to more extensive FDA regulation
in the future.
The FDA does not require the Company prove the safety and
efficacy of the Company's colored microspheres for animal blood flow
research to market those products.
The Company's contrast microspheres or any other pharmaceutical
products likely to be developed by the Company will require FDA
approval for human testing and marketing, primarily through the
submission of Investigational New Drug ("IND") and New Drug
Application ("NDA"). To file, the drug's sponsor must conduct and
submit to the FDA complete pre clinical and clinical studies to
establish to the FDA's satisfaction the drug's safety and efficacy.
Required testing may include bio availability and bio equivalence
studies. "Bio availability" indicates the rate of absorption and
levels of concentration of a drug in the blood stream needed to
produce a therapeutic effect. "Bio equivalence" compares one drug
product with another. Other requirements include extensive data on the
chemistry and manufacturing controls for the drug product.
The Company is required to obtain FDA approval before marketing
its contrast microspheres. In order to obtain such approval the
Company must demonstrate the safety and efficacy of the contrast
microspheres for each of their intended applications. The effects of
such government regulations on the Company are significant in that to
demonstrate the safety and efficacy of certain products such as the
Company's contrast microspheres which are intended for human
applications, the Company is required to conduct and fund studies
which can cost as much as several million dollars each. There is no
assurance that the Company will have sufficient funds for such studies
which could prevent the Company from marketing certain of its products
such as the contrast microspheres, at all.
In the case of the Company's intended contrast microsphere
applications, each of which will require separate FDA approved human
clinical studies to be conducted prior to the FDA approving marketing
of a product or application, which can cost several million dollars
each. Given the current regulations, the real effect of government
regulations (as least for new medical products or applications) is
that they place smaller companies such as this Company at a
competitive disadvantage to larger companies with substantially more
resources available to them. Ultimately such regulations can prevent
such smaller companies from ever bringing a product or application
such as the contrast microspheres to market. There are programs, many
of which are Government sponsored programs such as the National
Institute of Health (the "NIH") which provide financial assistance in
the form of research grants. The Company has applied to the NIH for
such a research grant in October 1995 for the
Page 23
<PAGE>
development of its contrast microspheres in human applications. In
March 1996, the NIH review board informed the Company the that the NIH
medical revenue board had "informally" approved the Company's grant
application (See "Research and Development"). The NIH grant provides
for $100,000 to be funded immediately, and $750,000 to be funded
conditioned upon the success of phase one Such programs are extremely
valuable to small companies, however these same programs are also
available to large companies with substantially more resources that
the Company. Consequently, there can be no assurance that the Company
will be able to complete clinical trials or commence marketing of the
product as these activities will be dependent upon establishing the
safety and efficacy of this products before the FDA will permit
commercial marketing, and there can be no assurance that the Company
will have adequate funds or will be able to secure adequate funds to
complete such clinical trails.
Federal Trade Commission ("FTC")
The commercial marketing of products based on the Company's
sequesterant technology requires marketing compliance with the FTC's
regulations requiring truthful and substantiated advertising of a food
supplement or over-the-counter drug. The FTC, along with the FDA, are
charged with the regulatory oversight of companies promoting and
marketing products that make claims of certain efficacy and
performance, which includes products based on the Company's
sequesterant technology which products have been promoted as a weight
loss product.
FTC regulations establish guidelines for the development and
marketing of these products. Moreover, the Nutrition Labeling and
Education Act of 1990 ("NLEA") regulating the standardized labeling of
food products including food supplements and dietary weight loss
products, and the FDA recently have announced their intention to take
a more active interest in regulating dietary supplements such as the
Company's fat sequesterant products. While the Company is not aware of
any specific changes that have been announced or implemented by the
FDA, or the NLEA it is possible that development and marketing of
products such as the fat sequesterant will be subject to more
extensive regulation in the future, which could materially affect the
Company's ability to market such products in the future. Since the
product formulations for both the first and advanced fat sequesterant
products contain ingredients commonly found in the average diet, FDA
approval to market these products is not required.
Government Regulatory Proceedings
In April 1991, Dr. Shell, Allied International Corp. ("Allied")
and certain other parties agreed to a preliminary judgment of
permanent injunction with the FTC, which among other things required
more extensive human clinical trials to substantiate advertising
claims made by Allied for the Company's fat sequesterant product
before further marketing of that product would be permitted, and
imposed certain administrative conditions upon Dr. Shell as the
Company's then chief executive officer.
In October 1995, the Seattle Regional Office of the Federal Trade
Commission advised the Company that the FTC staff believes that the
Company's sequestration product, which was licensed ( see subsequent
events ) to and marketed by KCD under the SeQuester-TM- trade mark,
has been improperly represented in advertising claims, and the same
sequesterant product previously marketed by the Company under the
Lipitrol-TM- trade name was also improperly represented in advertising
claims. The FTC staff advised the Company that it is prepared to
recommend that a complaint be filed against the licensee, the Company
and certain individuals in connection with the foregoing. The FTC
staff also indicated its belief there is insufficient substantiation
Page 24
<PAGE>
of the efficacy of the product for weight loss and fat sequestration.
The Company and the FTC staff have agreed upon the terms of a proposed
settlement in this matter, pursuant to which the Company would consent
to a permanent injunction prohibiting it from making
misrepresentations relating to weight loss or weight reduction
products or services, or with respect to tests or studies relating to
such programs or services. In addition, the Company would pay consumer
redress to the FTC in an aggregate amount of $35,000 over a period of
twelve months. The Company's Board of Directors voted to accept the
FTC proposal in March 1996, which now must be formally approved by the
FTC.
Future Legislation and Regulations
Federal and state legislation and regulations concerning various
aspects of the health care industry are under almost constant review.
Accordingly, the Company is unable to predict at this time the passage
of additional legislation, nor can it predict the extent to which it
may be affected by legislative and regulatory developments concerning
its products and the health care field generally.
Research and Development
Microsphere Studies
Since 1988, the Company's primary research activities have
relating to colored and contrast microspheres for animal blood flow
research and for diagnostic imaging of human blood flow restrictions
and arterial branch blockage. Early research was involved animal based
pulmonary emboli studies at the Universities of Iowa, Washington,
Pennsylvania and California at Los Angeles, in which each study
produced positive indications.
The Company has also conducted preliminary feasibility studies of
oral applications for visualizing the gastrointestinal tract in
humans. These four potential human diagnostic imaging applications (
detect lung blood clots using CAT scanning, ultrasound contrast
microsphere for detection of myocardial perfusion, oral contrast
microsphere for gastrointestinal tract visualization, and an MRI
contrast microsphere to replace x-ray contrast media in detecting
liver, heart or brain dysfunction) are targeted toward radiologists
and other physicians involved in body imaging (capturing picture like
images of human organs while outside the body).
The Company is conducting pre clinical studies (See E-Z EM below)
of pulmonary emboli (lung blood clots) application at Dartmouth
Hitchcock Medical Center and the University of Massachusetts Medical
Center which began in March 1996 and are expected to continue
approximately six months. The Company's goal regarding detection of
pulmonary emboli is to substantially improve quality and detail of
diagnostic imaging of pulmonary artery circulation thereby increasing
the probability of early detection of arterial branch blockage.
Current test procedures use less accurate radioactive scans, or
invasive catheter placement in the lung. Using current procedures, the
presence of pulmonary emboli is often undetected before autopsy. The
Company has demonstrated the ability to detect a pulmonary emboli
before autopsy with x-ray equipment in limited animal experiments
during which an artificial pulmonary emboli was induced. In test use
contrast microspheres labeled with x-ray dye were injected into a
peripheral vein and were carried in the blood flow to the lungs where
they lodged revealing the presence and location of the artificial
emboli during x-ray visualization. The contrast microspheres dissolved
a short time later leaving no residue.
Page 25
<PAGE>
Future Contrast Microsphere Studies
The Company hopes to file an Investigational New Drug (" IND")
with the FDA in late 1996 or 1997 for approval to commence human
testing of the contrast microspheres for certain applications
including pulmonary emboli. The foregoing FDA clinical trials will
require substantial expenditures and may be dependent upon the
applicant obtaining additional funding.
Although the Company believes that it will be granted marketing
approval of its first indication for contrast microspheres, should
there be significant delays in obtaining funding, in completing the
clinical trials, or in the FDA's review of the application,
commencement of any commercial marketing of the contrast microspheres
could be substantially delayed. There can be no assurance that the
Company, or will have adequate financial resources to complete all of
the required testing, or that the Company will be able to successfully
complete the clinical trials for any potential indication for its
contrast microspheres, or that the Company will be able to obtain FDA
marketing approval for any such indications.
Sequesterant Product Studies
In February 1995, the Company entered into a an exclusive
agreement to conduct human clinical tests of an advanced generation
sequestration technology recently developed by the Company with a
large well known European nutritional company engaged in the business
of manufacturing and marketing food supplements and weight loss
products internationally. The clinical test protocol was designed as a
double blind trial by a research group affiliated with the European
company. The protocol was sent to the Company for approval, and was
subsequently reviewed and approved by Dr. Shell the Company's Chief
Scientific Officer. The European company completed the test in October
1995 and informed the Company in November 1995 that product tested
did not produce statistically significant results. Based on the
negative test results, the European company did not exercise their
options to acquire foreign sales and marketing rights.
Strategic Relationships
In January of 1996, the Company entered into a broad based,
long-term agreement with E-Z-EM, Inc., ("E-Z-EM"), a global leader in
the sales and marketing of oral radiographic contrast agents with
annual revenues in excess of $90,000,000 to conduct pre clinical and
FDA approved clinical trials of the Company's contrast microspheres for
certain human applications, and to develop manufacture and market
products, applications and services relating to the Company's contrast
microspheres. Initially, E-Z EM will fund pre clinical animal studies
which are to begin as soon as possible. The agreement as contemplated
reflects E-Z-EM's intention analyze the full impact of regulatory
costs and expenses in preparation for additional capital funding to
conduct FDA approved clinical trials as a Investigational New Drug
("IND") with the FDA. The agreement further establishes the commercial
relationship between the two company's where the Company will retain
the rights to manufacture contrast microsphere products while E-Z EM
have the exclusive option to license, including the right to
sub-license, all products developed under the agreement, and subsequent
patent if any, with rights to global sales and marketing of the
products and related services for the life of the patent or 10 years,
whichever is longer. The Company believes the strategic partnering of
E-Z EM and the Company will accelerate the development of contrast
microspheres
Page 26
<PAGE>
for human applications and will substantially improve the possibility
of these products being commercialized. In March of 1996, the Company
and E-Z EM began pre clinical animal studies of the contrast
microspheres for the detection of pulmonary emboli (lung blood clots)
at Dartmouth Hitchcock Medical Center, and at the University of
Massachusetts Medical Center.
Research and Development Plan
The Company spent $ 259,608 in 1995 as compared to $429,393 in
1994 on research and development. The decline in 1995 is the result of
limited operating capital. The Company considers its research and
development programs as the foundation upon which everything else is
to be built and has been assigned the highest priority, second only to
generating more immediate revenues. The Company intends to balance
future research budgets and activities between long term diagnostic
imaging programs based on the Company's colored and contrast
microspheres, and less complex commercial programs which can develop
more immediate revenues such as the dietary and food supplement
products currently in development.
During 1996, the colored and contrast microsphere programs will
be funded from grants such as the NIH grant (see below), and from
strategic partners such as E-Z EM (see below), and to some extend from
operating funds. The dietary and food supplement programs, which are
significantly less costly than the microsphere programs, will be
funded from operational and private placement funds when possible.
The new product development group, which was established in
October 1995, and which will grow as needed, will act as project
coordinator with the responsibility of managing the Company's research
and development programs, including supervising clinical studies for
both food supplement and diagnostic programs, management of regulatory
affairs including FDA and FTC related matters, managing and
coordinating the Company's new research grant program (See Grant
Programs below) in which the Company intends to apply for simultaneous
grants in four potential human diagnostic imaging applications
including detection of lung blood clots using CAT scanning, ultrasound
contrast microspheres for detection of myocardial perfusion, oral
contrast microsphere for gastrointestinal tract visualization, and an
MRI contrast microsphere to replace x-ray contrast media in detecting
liver, heart or brain dysfunction, all of which are applications
targeted toward radiologists and other physicians doing body imaging,
which is the non invasive imaging of human organs from outside the
body. The research team is also project coordinator for off site
programs such as the current contrast microsphere pre clinical program
being conducted Dartmouth Hitchcock Medical Center, and the University
of Massachusetts Medical Center with E-Z EM, the Company's contrast
microsphere strategic partner.
Research and Development Grant Plan
The US government sponsors a number of programs intended to give
promising technologies and companies competitive chance to get their
products or applications through the daunting and costly government
regulatory process, such as the FDA regulatory process which affects
the Company's contrast microsphere products. One such organization is
the National Institute of Health (the "NIH") who provides financial
assistance in the form of research grants for promising technologies.
In October 1995, the Company applied to the NIH for such a research
grant for the development of its contrast microspheres in human
applications (See Item 6A. Management's 1996 Plan of Operations). In
March 1996, the NIH review board informed the Company the that the NIH
had "informally" approved the Company's grant application (See
Research and Development section ahead). The NIH grant provides for
$100,000 to be funded immediately, and $750,000 to be funded
conditioned upon the success of phase one. The Company believes that
it will successfully prove the initial principles underlying the
contrast microsphere products and technology in phase one thereby
becoming eligible for the additional funding.
Page 27
<PAGE>
Such programs are extremely valuable to small companies which in many
have little or no alternative.
As stated above, the Company's 1996 research and development
program includes applying for grants in four potential human
diagnostic imaging applications which include, detection of lung blood
clots using CAT scanning, ultrasound contrast microspheres for
detection of myocardial perfusion, oral contrast microsphere for
gastrointestinal tract visualization, and an MRI contrast microsphere
to replace x-ray contrast media in detecting liver, heart or brain
dysfunction, all of which are applications targeted toward
radiologists and other physicians doing body imaging, which is the non
invasive imaging of human organs from outside the body. The Company
also intends to apply for grants actual FDA clinical studies of
pulmonary emboli application of contrast microspheres. The Company's
product development unit will coordinate submission of applications,
assignment of principle investigators, and manage the individual
programs from inception through the clinical study, and market
development. However, there can be no assurance that the Company will
be able to complete clinical trials or commence marketing of the
product as these activities will be dependent upon establishing the
safety and efficacy of this products before the FDA will permit
commercial marketing, and there can be no assurance that the Company
will have adequate funds or will be able to secure adequate funds to
complete such clinical trails.
Environmental Compliance
The Company's products are not subject to material environmental
regulation at this time. While the Company's current scope of
microsphere operations is relatively limited and all of the product is
used without wastage, issues of environmental compliance could arise
in the future if increased manufacturing of the microspheres were to
require disposal of hazardous chemicals.
Employees
The Company currently has eight employees of which seven are full
time employees, three of whom are engaged in management, marketing,
administrative and support activities, with the remaining four
comprising one secretarial, and three technical, research and
development and scientific staff engaged in microsphere manufacturing
and development.. One part time employee is used general office and
shipping products. The Company retained two consultants in October
1995 who formed the initial new product development team, and who
coordinate and administrate the Company's research and development
programs and activities. In January 1996, these two consultants became
full time. The Company also utilizes the services of three other
consultants in the new product development group on an as needed
basis which the Company expects will transition toward full time as
new product development activity increases during the year. The
Company does not currently have a accountant as the result of its
previous controller resigning (See Conflict of Interests below).
The Company's ability to develop marketable products and to
establish and maintain its competitive position in an industry with
constant technological changes will depend to a certain extent on its
ability to attract and retain qualified technical, marketing and
management personnel. None of the Company's employees are subject to a
collective bargaining agreement, and the Company believes its
relations with its remaining employees are good. During the initial
restructuring and reductions in general and administrative costs which
began in May 1995, the Company did reduce the number of full time
clerical employees by 2, with one additional resigning to take a
better position.
Page 28
<PAGE>
Conflicts of Interest
The Company believes it has a potential conflict of interest
relating to the Company's former controller who after resigning from
the Company began working for KCD, the Company's former licensee of
the sequesterant technology, (KCD is an affiliate of Clark M. Holcomb)
and who is the subject of numerous legal proceedings including the SEC
investigation into certain sales and the subsequent resale's of the
Company's common stock to a large number of individuals (which was
previously disclosed by the Company) all of which were affected by or
arranged by Clark M. Holcomb, and in which the Company has also been
named. An additional potential conflict of interest concerns the law
suit filed by the Company against KCD in March 1996 as a result of
KCD's failure to make their royalty payments (See Item 3. Legal
Proceedings).
The Company also believes it has a potential conflict of interest
with Dr. Shell, the Company's former Chairman of the Board, Chief
Executive Officer and founder relating to a legal proceeding brought
against D&F (See Item 3. Legal Proceedings) by Dr. Shell and the
Company previously, which legal fees have been paid by the Company,
concerning an agreement whereby Dr. Shell has a "right of approval" to
any potential settlement the Company might make with D&F. The
possibility for conflict relates to separate interests of Dr. Shell
and the Company regarding the D&F proceedings. In March 1996, the
Company initiated settlement discussions with D&F principles. As a
result of Dr. Shell's February 6, 1996 termination by the Company, the
previous conflict of interest relating to his operating a private
medical practice is no longer relevant.
2. DESCRIPTION OF PROPERTY
February 1992, the Company entered into a three-year lease for
its presently occupied premises from an unaffiliated third party for
4,400 square feet of space in Los Angeles, California at $4,750 per
month for the first year, $5,200 per month for the second year and
$5,700 per month for the third year, with an option to extend for an
additional two years at $6,000 per month. During February 1995, the
Company exercised this option. The offices are used for manufacturing
and laboratory research and development as well as the Company
corporate and executive offices. The Company believes these facilities
are adequate for its current needs.
3. LEGAL PROCEEDINGS
SEC Proceedings
In 1990, the Securities and Exchange Commission's New York
Regional and Enforcement staff commenced an inquiry into possible
securities violations of the registration, anti-fraud, notice and
reporting provisions under various provisions of the federal
securities laws that may have occurred between July 1989 through
January 1990 resulting from the actions of the Company and certain
members of its management during that period. As part of a settlement
agreement, the Company, Dr. Shell, and Philip Dascher, the Company's
former President, neither admitted nor denied any violations, and
without any findings of fact consented in August 1992 to the entry of
a judgment for a permanent injunction enjoining them from violations
of various provisions of the federal securities laws. The settlement
included a rescission offer that was made by the Company to 17
individuals who had previously exercised warrants to purchase the
Company's common stock at a time when a current registration statement
was not in effect. None of the individuals, however, elected to
exercise this right of rescission.
Page 29
<PAGE>
SEC and Shareholder Proceedings Relating to Matters Directly by
Effected by or Arranged by Clark M. Holcomb
In July 1993, based on a concern the Company formed an
independent committee of its Board of Directors who's purpose was to
determine whether certain prior private placements of the Company's
securities complied with all of the registration requirements of
federal and state securities laws. In certain prior private placements
of the Company's shares, a total of approximately 2,506,982 shares of
the Company's Common Stock was issued to a small number of
individuals. Those issuance's were structured in reliance upon the
advice of the Company's then securities counsel, and the Company
believes that these issuance's, standing alone, would have qualified
for exemptions from registration under federal and state securities
laws. However, certain subsequent resale's of these shares, commencing
in June 1992, by the original purchasers or their transferees to a
total of approximately 330 investors raised an issue as to whether a
technical distribution occurred that might have required either the
original issuance's or the resale's to have been registered. All of
the foregoing resale's were either directly effected or arranged for
by Clark M. Holcomb.
In October 1993, the Company filed a registration statement with
the SEC to register all of the foregoing 2,506,982 shares with the
SEC. However, even if the registration statement becomes effective so
as to permit public resale's by the holders of the shares involved in
the transactions described above, these holders could have a right of
rescission to recover the purchase price they paid for their shares
plus interest from the date of purchase against the persons from whom
they acquired the shares.
The Company believes (based in part upon the opinion of its
current special securities counsel) that these holders do not have a
valid and enforceable right to such rescission. However, subject to
any applicable statutes of limitation that might bar such future
claims, these shareholders could assert such claims, and the Company
has not set aside any reserves to fund any potential liabilities that
it might incur in connection with any such future potential claims,
which could be material. Should the Company incur any such
liabilities, it might seek indemnification or contribution for such
liabilities from Mr. Holcomb, or other third parties.
In October 1995, the staff of the SEC advised the Company that it
was considering recommending that the SEC file a civil injunctive
action against the Company and Dr. Shell for alleged violations of the
registration provisions of the federal securities laws. The alleged
violations appear to relate to the sale by the Company of unregistered
shares of its common stock which involved a series of resale's of
these shares that were either directly effected or were arranged for
by Clark M. Holcomb. These transactions have been the subject of an
SEC investigation previously disclosed by the Company.
In April 1994, Rod Sherman and Computer Buddy sued Clark M.
Holcomb and the Company in Superior Court for the County of Los
Angeles for breach of an alleged oral contract pursuant to which
Holcomb and the Company were to pay Sherman a finder's fee for all
shares of the Company's stock sold to third parties introduced by
Sherman to Holcomb or the Company of which Sherman alleges that
$58,000 remains owing to him. Sherman is seeking this amount in his
lawsuit although the Company believes that it has no obligation or
liability to Sherman in connection with this matter. A trial date has
currently been scheduled for May 1996. The Company denies the
allegations and intends to vigorously contest the matter.
Page 30
<PAGE>
In March 1995, Donald Seidel sued Clark M. Holcomb, Dr. Shell,
George Berger and the Company in the Superior Court for the County of
Los Angeles, which was served on the Company in May 1995. This action
alleges breach of contract, fraud, non-payment for services,
conspiracy to defraud, unjust enrichment and conversion. Plaintiff is
seeking general and compensatory damages of at least $692,000 and
special and consequential damages of not less than $170,000, together
with exemplary and punitive damages. It is alleged that the Company
conspired to defraud plaintiff of his shares of Company stock and
deprive him of payment for services. The Company denies these
allegations and intends to vigorously contest the matter.
In April 1995, Richard Willman and Nancy Holling sued Clark M.
Holcomb, KCD Incorporated, Dr. Shell and the Company in Superior Court
for the County of Ventura for rescission, breach of contract, breach
of fiduciary duty, fraud, negligent misrepresentation, constructive
trust and negligence all regarding the sales in July 1993 and
September 1993 by Holcomb to Holling and Willman of Company stock.
Willman and Holling allege general damages of $107,250 and $4,275
respectively plus interest, as well as punitive damages in an amount
to be proven at time of trial. In July 1995, the Company executed a
Settlement Agreement with Nancy Holling. There was no money demanded
and none paid in connection with this settlement. The Company believes
it has no obligation to Willman or Holling in connection with this
matter. The Company denies the allegations and intends to contest the
matter. A trial date was scheduled for April 1996 with respect to
Willman, .however, in a mandatory settlement conference in March 1996,
Clark M. Holcomb and the Company entered into a settlement with
Willman, in which Holcomb agreed to pay Willman $100,000 in cash and
to deliver to Willman 50,000 shares of restricted KCD common stock.
In addition, Holcomb had previously delivered to Willman 40,000 shares
of the Company's common stock which Willman will be permitted to
retain as part of the settlement. The Company agreed to pay $5,000 in
full settlement of this claim rather than go through the expense and
time required to defend the action in trial. In July 1995, the Company
executed a Settlement Agreement with Nancy Holling. There was no money
demanded and none paid in connection with this settlement. The Company
believes it has no obligation to Willman or Holling in connection with
this matter.
In April 1995, David Eastman filed a complaint in the Superior
Court of the County of Orange, California against Clark M. Holcomb,
Anita Kavanagh, Dr. Shell and the Company. This action alleges fraud,
negligent misrepresentation, rescission and restitution, securities
fraud and conspiracy to defraud. This action was served on Dr. Shell
and the Company in July 1995. The only allegations of wrong doing are
directed at Holcomb and Holcomb is alleged to have been acting as an
agent of the other defendants. It is alleged that Holcomb represented
that although the shares purchased by the plaintiff contained a
legend, they would be free trading in sixty to ninety days. It is also
alleged that Holcomb misrepresented the financial condition of the
Company. The complaint seeks damages in the amount of $200,000 as well
as unspecified punitive damages. The Company and Dr. Shell deny that
Holcomb was their agent. A trial date has currently been scheduled for
May 1996. The Company denies the allegations and intends to vigorously
contest the matter. In February 1996, Eastman obtained a default
judgment against Holcomb in the amount of $200,000 in compensatory
damages and $50,000 in punitive damages.
In February 1996, the Rudolf Steiner Research Foundation filed a
complaint in the United States District Court for the Central District
of California against Clark M. Holcomb, Lawrence Gibson, Murray
Bettingen, Bettingen, Inc., and the Company. This action alleges civil
RICO, violation of the Securities Act of 1933, violation of California
Corporation Code, fraud, deceit and intentional misrepresentation,
negligent
Page 31
<PAGE>
misrepresentation, conversion, constructive trust and breach of
contract. The complaint seeks damages of $201,333, rescission,
punitive and exemplary damages. The Company believes it has no
obligation to the Rudolf Steiner Research Foundation in connection
with the matter. The Company denies the allegations and intends to
vigorously contest the matter.
The Company is negotiating with the SEC regarding a potential
settlement of any SEC claims against the Company with respect to the
above transactions. The Company anticipates that the settlement would
require the Company to consent to a permanent injunction, without
admitting or denying any liability, that would bar the Company from
and future violations of the registration requirements of the federal
securities laws. The Company believes that such a settlement would not
have a materially adverse effect on the Company or its operations.
However, there can be no assurance that a settlement as described
above (or a settlement with any other terms) will ultimately be
reached with the SEC. The Company and Dr. Shell are subject to a 1992
permanent injunction enjoining them from violating the federal
securities laws.
Proceedings Related to Licensing Agreements, Manufacturing Agreements,
Royalty Agreements, and Patent Infringements
In September 1993, Dr. Shell commenced an action against Dynamic
Products, Inc. ("Dynamic"), D&F Industries ("D&F") in his capacity as
a 25% shareholder of FATCO in the Orange County Superior Court of the
State of California seeking damages from these parties for their
alleged breach of contract and misappropriation of certain trade
secrets of FATCO and the Company relating to the first generation fat
sequesterant product. Dr. Shell has asserted in this action that
Dynamic has sold the first generation fat sequesterant product to
Herbalife for resale in the United States without the required payment
of royalties to FATCO (which is obligated to pay Dr. Shell 25% of its
royalty income, which Dr. Shell then contributes to the Company) based
on those sales.
In October 1994, Dr. Shell filed a related lawsuit against FATCO
in the same court seeking the termination of a 1987 agreement between
FATCO and Shell licensing certain fat sequesterant technology of Dr.
Shell to FATCO based upon failure of FATCO to fully exploit the
transferred technology for the benefit of Shell, failure to fully
exploit the products, knowingly permitting sales of products made
utilizing the technology transferred to continue even though no
royalties were being paid on those sales, refusing to pursue legal
action to collect the unpaid royalties and stopping the unauthorized
sales, and by entering into a renewal of an agreement with a
distributor on the same unfavorable terms which previously existed and
which diverted moneys which should have been paid to FATCO to other
entities owned and controlled by some of the shareholders and members
of the Board of Directors of FATCO. FATCO has filed a cross-complaint
in this action against Shell alleging breach of the licensing
agreement between Shell and FATCO.
In January 1996, FATCO filed a First Amended Cross-Complaint
alleging causes of action against Dr. Shell, the Company, EHI and KCD
for Breach of Contract, Breach of Fiduciary Duty, Interference with
Prospective Economic Advantage, Misappropriation of Trade Secrets,
Conversion, Constructive Trust, Accounting and Permanent Injunction.
Each of these causes of action relate to the action of the Company in
entering into the License Agreement with KCD. The Company has filed an
answer denying all of the allegations contained in the Cross-Complaint
and intend to fully defend this matter. The basis of this cross
complaint appears to pertain to the license agreement between EHI and
KCD, Inc., which as of March 1, 1996 was
Page 32
<PAGE>
canceled as a result of KCD's failure to make royalty payments to the
Company. (See Item 4. Legal Proceedings, below).
In March 1994, the Company and S/S sued Herbalife (settled with
respect to Herbalife) and D&F in Superior Court for the County of
Orange, California for fraud, breach of contract and conspiracy to
misappropriate trade secrets. The Company alleges in this lawsuit that
S/S provided certain confidential information and trade secrets to
D&F, which misappropriated this information to manufacture an advanced
fat sequesterant product. The Company is seeking in this lawsuit
injunctive relief and damages in an unspecified amount from
defendants. This matter has been consolidated for trial with the
action against Dynamic Products, Inc. and the action against the
officers and Directors of Dynamic Products, Inc. and D&F Industries,
Inc.
In January 1995, Dr. Shell, on behalf of FATCO, filed another
action in the Orange County Superior Court of the State of California
substantially similar to the action filed by Dr. Shell in 1993 against
Dynamic Products, Inc. This newly filed action names certain
individual shareholders and directors of FATCO, Dynamic and D&F
Industries as well as Herbalife International Inc. ("Herbalife"). In
March 1995, this action and the lawsuit against Herbalife described
below were settled with respect to Herbalife and its directors, with
neither party making any payments to the other in connection with this
settlement.
In March 1996, the Company, on behalf of its subsidiary EHI,
filed an action against KCD in Los Angeles County Superior Court. This
action alleges causes of action against KCD for Breach of the Amended
License, Declaratory Relief and Permanent Injunction. The action is
based upon the failure of KCD to pay the royalties due pursuant to the
contract and their use of advertising claims in connection with the
sale of the licensed products which were in excess of those which the
Company authorized KCD to make (See April 8, 1996 KCD Cross
Complaint). On April 8, 1996, KCD filed a cross complaint against the
Company, Effective Health, 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, Accounting and Constructive. The Company denies all
of the claims and intends to fully defend this cross complaint.
In August 1995, the Company, Dr. Jackie See and Francis Pizzulli
entered into preliminary settlement agreements regarding the pending
arbitration proceedings before the Judicial Arbitration and Mediation
Service, Inc., in Santa Monica, California. Subsequently, the Company,
Dr. Jackie See and Francis Pizzulli entered into a formal settlement
agreement relating to the above arbitration proceedings, Both See and
Pizzulli had initiated arbitration proceedings relating to the payment
of royalty's pursuant to the existing Royalty Agreements between the
Company and See. See had previously transferred a 50% interest in his
Royalty Agreements with the Company to Pizzulli.
With respect to the formal settlement of the Royalty issues with
See, the Company has agreed to: (1) Pay See, beginning in July 1995 a
total of 1.5% of the Company's net sales of products and 10% of the
Company's receipt of royalties from the Company's licensees under
certain patents owned by the Company covering colored microspheres,
contrast microspheres and fat sequestration products; and, (2) pay
See, over time, the sum of $32,417 which represents past due royalties
for the period up to June 30, 1995; and, (3) pay See, over time, the
sum of $33,062 which represents the award of attorney fees and costs
to See in connection with the arbitration; and, (4) pay See, over
time, the sum of $65,731 of which $35,227 is
Page 33
<PAGE>
subject to adjustment based upon an accounting and $30,504 of which
was conditioned upon receipt of royalties from the Company's
sequesterant licensee; and,( 5) transfer 10,000 restricted shares of
KCD common stock to See.
With respect to the formal settlement of the Royalty issues
executed in January 1996 with Pizzulli, the Company has agreed to (1)
pay Pizzulli, starting in July 1995 a total of 1.5% of the net sales
of the Company's products and 20% of the Company's receipt of
royalties from the Company's licensees under certain patents owned by
the Company covering colored microspheres, contrast microspheres and
fat sequestration products; and, (2) pay Pizzulli over time the sum
of $93, 542 which represents the award of attorneys fees and costs to
Pizzulli in connection with the arbitration; and, (3) pay Pizzulli
over time the sum of $ 13, 787 which represents past due royalties or
the period up to June 30, 1995; and, (4) pay Pizzulli over time the
sum of $72, 244 of which $37,177 is subject to adjustment based upon
an accounting and $ 35,067 of which was conditioned upon receipt of
royalties from the Company's licensee; and, (5) transfer 15,000
restricted shares of KCD common stock to Pizzulli.
Pizzulli, in addition to the arbitration pertaining to royalty
issues initiated a arbitration proceeding pertaining to the timing of
the sale of his restricted shares of the Company's stock. A formal
settlement of the claim was entered into in January 1996. With respect
to the formal settlement the Company agreed to (1) pay Pizzulli the
sum of $25,000 on the execution of the agreement; and, (2) pay
Pizzulli the additional sum of $75,000 on or before March 1, 1996;
and, (3) pay Pizzulli, subject to certain adjustments, the additional
sum of $100,000 on or before March 1, 1997; and, (4) assign to
Pizzulli all of the Company's interest in and to the Promissory Note
dated May 13, 1993 in the face amount of $ 265,000 payable to the
Company by Clark M. Holcomb; and, (5) transfer to Pizzulli 75,000
restricted shares of KCD common stock; and, (6) transfer to Pizzulli
70,000 free trading shares of the Company's common stock; and, (7)
transfer to Pizzulli 300,000 shares of the Company's restricted common
stock. In addition the Company has agreed to file FORM S-3, or other
forms as may be appropriate to register the shares of the Company's
common stock being transferred to Pizzulli. There are also provisions
in the settlement which would require the Company to issue additional
shares of its restricted common stock to Pizzulli in the event that
either the registration of the 300,000 restricted shares is
unreasonably delayed and/or the price of the Company' common stock
does not reach a specified price within an eight month period of
filing the of FORM S-3.
Proceedings Related to MRI Lease Operations
In August 1994, VMI sued MFA in Supreme Court for the County of
New York, New York, for breach of contract and accounts due. VMI
alleges in this lawsuit that MFA breached an equipment lease agreement
for VMI's second MRI unit, the Resonex Machine, by failure to make
lease payments due January 27, 1994, and thereafter in the sum of
$210,210 as well as interest thereon. VMI is seeking in this lawsuit a
judgment against MFA in the sum of $210,210 plus interest thereon with
costs, attorney's fees and disbursements and other relief. VMI will
also seek a judgment for all unpaid lease payments subsequent to
August 1994 which total an additional $510,510 through December 31,
1995. However, the Company has not been successful in serving the
notice on MFA principles including Jerald Brauzer, nor has a trail
date been set.
In April, 1995, Johnson & Johnson Finance Corp. ("J&J Finance")
brought an action against MFA and VMI in connection with a loan made
by J&J Finance to MFA that was secured by a lien granted by MFA on
the Resonex MRI unit which at the
Page 34
<PAGE>
time was owned by VMI. After MFA defaulted on the foregoing loan, J&J
Finance, in June 1995, obtained a writ of attachment on the Resonex
MRI unit and has taken physical possession of that unit. The Company's
position is MFA had no authority to secure the foregoing loan with
VMI's MRI unit since the loan was made solely for the benefit of MFA,
the lien was placed on the MRI unit without VMI's knowledge or
consent, and none of the loan proceeds were received by VMI or the
Company. VMI, and the Company are in settlement discussions with J&J
that would require the Company and VMI to forfeit their interest in
the MRI unit in exchange for J&J releasing VMI and the Company from
any damages. Although the Company believes VMI is entitled to recover
the MRI unit from J&J Finance and that VMI should prevail in its
claims against MFA should J&J Finance. There can be no assurance that
VMI will prevail against either party or that VMI will be able to
collect any judgment that it may obtain against MFA. The Company also
recently learned that the current fair market value of the Resonex
MRI unit is substantially below previous estimates and as such may not
be worth the cost of continuing litigation. As a result of all the
foregoing the Company has written off the net book value of the second
unit of $964,286 as of December 31, 1995.
Federal Trade Commission Proceedings
The Seattle Regional Office of the Federal Trade Commission has
advised the Company that the staff believes that the Company's fat
sequesterant product, which was marketed by KCD licensee under the
name "SeQuester," has been improperly represented in advertising
claims, and that the sequesterant product, when previously marketed by
the Company under the name "Lipitrol", also was improperly represented
in advertising claims. The staff has indicated that it is prepared to
recommend that a complaint be filed against the licensee, the Company
and certain individuals in connection with the foregoing. The Company
presently is discussing this matter with the FTC staff with the
objective of settling the matter. There is no assurance that a
settlement will be reached or as to the impact on the Company of any
settlement, although it is presently believed that any settlement may
impact the claims utilized in the marketing of the sequesterant
product and is likely to involve the payment of a fine or other
financial penalty by the Company. The Company and the FTC staff have
agreed upon the terms of a proposed settlement in this matter,
pursuant to which the Company would consent to a permanent injunction
prohibiting it from making misrepresentations relating to weight loss
or weight reduction products or services, or with respect to tests or
studies relating to such programs or services. In addition, the
Company would pay consumer redress to the FTC in an aggregate amount
of $35,000 over a period of twelve months. The Company's Board of
Directors voted to accept the proposal in March 1996, which now must
be formally approved by the FTC.
Except as otherwise specifically indicated above, management
believes that the Company does have any material liability for any law
suits, settlements, judgments or fees of defense counsel which have
not been paid or accrued as of December 31, 1995.
While the ultimate outcome of these issues, if claims were
asserted and litigated, is complicated and not free from doubt,
management with the advice of legal counsel believes, on the basis of
the facts currently known, that it is not probable that the Company
would have any material liability. However, there can be no assurance
that the Company will prevail in any of the above proceedings. Also
the Company may be required to continue to defend itself resulting in
substantial additional expense. In the event the Company is unable to
pay the defense costs associated with the foregoing a unfavorable
settlement or judgment could be awarded against the Company which
could have a material adverse effect upon the Company. Additionally,
starting in June
Page 35
<PAGE>
1995, the Company began taking the steps it considered necessary to
insure that the Company, its subsidiaries, employees, consultants and
affiliated companies and individuals are not involved in any
activities, operations, or relationships which are not solely for the
benefit of the Company.
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
Proxy Statement
On Thursday October 26, 1995, the Company held its annual
shareholders meeting at 10:00 Pacific Time, at the Olympic Collection,
11301 Olympic Boulevard, Suite 204, West Los Angeles, California 90064
for the following purposes:
- To elect five (5) directors, Dr. Shell, Richard Shell,
Steven Westlund, Peter Benz, and John Osborne, to serve
until the next Annual Meeting of Shareholders and until
their successors are duly elected; and,
To consider and vote upon proposed amendments to the Company's
Certificate of Incorporation that would:
1. Effect a reverse stock split of not less the 1 for 4,
and not more that 1 for 8 shares of the Company's
common stock; and,
2. Authorize the issuance of 5,000,000 shares of Preferred
Stock with a par value of $.01 per share in one or more
series from time to time with designations, rights,
preferences, privileges and other terms of each series
to be determined by the Board of Directors; and,
3. Increase the number of authorized shares of Common
Stock from 25,000,000 to 50,000,000.
4. To transact such other business as may properly come
before the meeting.
During the meeting the votes were counted by the Company
Secretary who confirmed that as the record date the number of Shares
Issued and Outstanding were 21,788,121, and the number of Shares
Needed for a Quorum was 10,984,061; and, the Number of Shares Voted
was 13,346,336. The secretary confirmed that on the basis on the total
number of shares voted that the meeting had a quorum. The results of
the voting were as follows,
Results of Shareholder Vote Approve Reject Carried
--------------------------------------------------------------------
Election of 5 Directors 13,207,336 273,000 Yes
Approve Reverse Split 12,207,249 993,860 Yes
Authorization of Preferred Stock 7,207,249 983,000 No
Increase in Authorized Shares 12,926,681 553,345 Yes
There was no other business discussed and the meeting was adjourned.
The Company is not planning to effect a reverse split of its
common stock until such time as the Company's operations and revenues
have improved substantially, either through the sales of its products
and services, or through the acquisition of other products or
companies, unless the acquisition of such products or companies would
not be possible without effecting a reverse split.
Page 36
<PAGE>
5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's Common Stock is quoted on the OTC Electronic
Bulletin Board under the symbol "ITAM". The high and low bid prices
for the Common Stock, as reported by the National Quotation Bureau,
Inc., are indicated for the periods described below. Such prices are
inter-dealer prices without retail markups, markdowns or commissions,
and may not necessarily represent actual transactions.
Bid Prices
Year Quarter High Low
1994 1st 3 9/16 2.0
2nd 3 1/16 2 1/4
3rd 2 23/32 1 7/8
4th 2 1/32 29/32
1995 1st 2 1/32 29/32
2nd 1 13/32 1/4
3rd 15/16 1/32
4th .32 .01
To date, the Company has not declared or paid any cash dividends
with respect to its Common Stock, and the current policy of the Board
of Directors is to retain earnings, if any, to provide for the growth
of the Company. Consequently, no cash dividends are expected to be
paid on the Common Stock in the foreseeable future. Further, there can
be no assurance that the future operations of the Company will
generate the revenues and cash flow needed to declare a cash dividend
or that the Company will have legally available funds to pay dividends
There are approximately 533 stockholders of record as of March
31, 1996.
6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CURRENT OPERATIONS
Business
The Company has been engaged in the business of developing,
manufacturing, and marketing proprietary diagnostic imaging products
and services relating to blood flow research in animals, and the
research and development of proprietary diagnostic imaging products
and procedures for human applications using existing imaging equipment
such as x-ray, CAT scan, MRI, and ultra sound. The Company is also
engaged in the business of developing and licensing proprietary
technologies for weight reduction products including a technology for
the selective entrapment or sequestration of dietary fat from food
while in the gastrointestinal tract, thereby preventing the absorption
of that fat. The Company has also acquired two magnetic resonance
imaging (MRI) units which are leased to MRI service providers, which
the Company has little day to day involvement in the operations of
that business (See Acquisitions, and Item 4. Legal Proceedings). Until
May 1995, the Company's primary
Page 37
<PAGE>
research has been to increase the early detection of restrictions or
blockages in human blood flow through significantly improved
diagnostic imagery using two different micron sized solid particles
(microspheres) of which one is a biodegradable mixture of blood
protein and other contrast agents intended for human applications, and
the other a non biodegradable plastic styrene sphere intended for
animal blood flow research. The Company does not yet earn revenues
from human applications of microspheres, it does however, generate
revenues from the sales of colored microspheres products and services
for animal blood flow research. The also Company earned revenues from
the licensing and royalty's of its sequesterant technology, which in
1995 accounted for approximately 71% of the Company's total 1995 (cash
flow) revenues. However, KCD's license was terminated (See Recent
Developments)
Results of Operations
Summary Table for 1994 Compared to 1995
<TABLE>
<CAPTION>
For the Year Ended December 31
------------------------------
1994 1995
% of % of
$ Revenues $ Revenues
-------- -------- --------- --------
<S> <C> <C> <C> <C>
Revenues - Products & Services
Microspheres and laboratory $210,815 29% $ 246,643 29%
services
Fat sequesterant -Product 3,645
Licensing fees and
royalties 504,18 70% 618,787 71%
-------- -------- --------- --------
$718,641 100% $ 865,480 100%
-------- -------- --------- --------
Cost of Revenues - Products &
Services
Microspheres and laboratory services $221,318 105% $ 123,438 50%
Fat sequesterant 41,800 8% $ 274,800 44%
-------- -------- --------- --------
$263,118 37% $ 398,238 46%
-------- -------- --------- --------
Gross Margin - Products & Services $455,523 63% $ 467,242 54%
-------- -------- --------- --------
-------- -------- --------- --------
Revenues - Lease Rentals $687,459 100% $ 319,072 100%
Cost of Revenues - Lease Operations $481,356 70% $ 481,357 151%
-------- -------- --------- --------
Gross Margin - Lease Operations $206,103 30% $(162,285) (30)%
-------- -------- --------- --------
-------- -------- --------- --------
</TABLE>
Revenues from all Products
Revenues from all products and services totaled $865,480, representing
an increase of $146,839 (or 20%) over the year ended December 31, 1994. The
increase in 1995 was primarily due to a mid year change in Company
management made substantial changes in the Company's operations including a
significant reduction in operating expenses beginning in May, the effect of
which began in June. Overall, the Company reduced total operating expenses
approximately $1,066,359 (34%) for the period beginning in May and ending
December 31, 1995. Management also redirected the Company activities toward
development and commercialization of weight loss, food supplement, and
personal care consumer products which the Company intends to begin
marketing in the later part of 1996. Since May 1995, the Company has made
significant strides toward commercialization of a number of such products,
however, until such time as one or more of those products are established
in the marketplace, the Company will continue to be dependent, to a lesser
degree as a result of downsizing, on private or institutional investment
capital to support a percentage of the planned 1996 operations.
restructured the Company's operations.
Page 38
<PAGE>
Management also increased revenues with an immediate effect seen with
an $114,606 increase in licensing fees and royalties received from the
licensee of the Company's sequesterant technology. However, these increases
in royalties were partially offset by a reduction in the royalty rate from
15% of net sales, to 6% of gross sales of products based on the
sequesterant technology.
Licensing Fees and Royalty Payments from KCD
The Company and KCD, the sequesterant technology licensee negotiated a
reduction in the royalty from 15% of net sales, to 6% of gross sales
effective April 1, 1995 as a result of demands made by KCD that the current
royalty payment which was calculated on 15% of net sales was creating
problems for KCD in the marketing of SeQuester-TM- and could ultimately
prevent KCD from being able to market SeQuester-TM- profitability, and that
the 15% royalty was preventing KCD from meeting its financial obligations
included making its royalty payments to the Company. The Company was not in
favor of the reduction, however, it did so out of a concern KCD would
either terminate the agreement or would unnecessarily withhold royalty
payments as it had done previously. The royalties received from KCD
accounted for approximately 48% of the Company's total 1995 sales. The
Amended License Agreement incorporated the terms of the original License
Agreement which provided for a licensing fee of $100,000 (which KCD paid
between March and May 1994), and minimum royalty payments to keep the
agreement in effect over the first three years of the agreement of at least
$1,258,000. Over the balance of the term of the agreement (which was to run
until at 2014), KCD was required to pay minimum royalties in accordance
with a formula but in no event less than $436,000 per year. Through
December 31, 1995, the Company received licensing fees and royalties of
$811,068, 100,000 KCD restricted common shares (as partial payment of past
royalty's, valued at $217,243) including additional royalties of $138,620.
The amended license agreement provides for payment of a remaining past due
balance in twelve monthly installments of $18,104 plus monthly payment of
interest at 1.5% per month on the outstanding balance beginning July 1,
1995. This remaining balance was $108,620 as of December 31, 1995. The
amended agreement also established specific default provisions and a secure
method of payment intended to prevent KCD from unnecessarily withholding or
interfering with royalty payments. However, regardless of the reductions,
KCD was again delinquent in making royalty payments to the Company during
the latter part of 1995, and on March 1, 1996 defaulted which resulted in
the termination of their license as provided for in the licensing
agreement. . The Company subsequently filed an action against KCD for
breach of contract relating to past and current royalty's as well as the
FTC matter among other issues. (See Item 3. Legal Proceedings). The Company
intends to replace KCD, and is in discussions with companies who have
expressed an interest in the sequesterant technology.
E-Z Trac
Revenues from colored microspheres and IPS services increased $35,828
(or 17%) for the year ended December 31, 1995, over 1994. The Company
allocated a portion of its resources to the development of an automated
analysis and counting system based on A Beckton-Dickenson flow cytometry.
This improved flow cytometer became operational early in the year and
immediately increased E-Z Trac's production capacity. The Company
anticipates E-Z Trac revenues will continue to increase as the Company
expands its customer base through direct marketing efforts and through its
distributor, Triton Technologies.
MRI Lease Operations
MRI lease operations resulted in a net loss of $304,290 and a net loss
of $620,123 for the years ended December 31,1995 and 1994, respectively.
Lease revenues of
Page 39
<PAGE>
$687,459 for 1994 which included two MRI units ( the Company believed the
second had no associated debt obligations ) were offset by interest on
lease obligations of $143,750 and depreciation on the two units of
$481,356. Cash flows from lease revenues for one of the two units owned by
VMI are offset in full by required payments of interest and principal to a
third party finance company. Lease revenues do not contribute any cash to
Company operations. Lease revenues for 1994 include $270,270 of delinquent
payments with respect to the second unit owned by VMI, for which none of
the scheduled lease payments have been received by VMI. Receivables related
to these lease payments were written off during 1994. In August 1994, VMI
commenced litigation to collect delinquent lease payments with respect to
this unit. Lease revenues for 1995 were $319,072 which includes only one
unit, were offset by interest on lease obligations of $142,005 and
depreciation on the two units of $481,357.
Of the Company's two magnetic resonance imaging (MRI) systems (the
"Units") one is currently installed and operating as a mobile unit in
Jefferson Valley, New York and has been in continual use since September
1992 and is leased to Tri-County Mobil MRI, L.P. ("Tri-County"), whose
general partner is Diagnostics Resource Funding. This lease provides for
monthly payments of $37,926 to Venus Management, Inc. ("VMI") through
August 1999 and $68,589 in September 1999 (with such payments being
guaranteed by Medical Funding of America, Inc., "MFA"), and VMI is required
to make monthly installment payments (which includes interest at 10.5% per
annum on the unpaid principal balance) for the first Unit to a third party
finance company of $32,360 through August 1999 and $68,589 in September
1999.
In April, 1995, Johnson & Johnson Finance Corp. ("J&J Finance")
brought an action against MFA and VMI in connection with a loan made by J&J
Finance to MFA that was secured by a lien granted by MFA on the Resonex
MRI unit which at the time was owned by VMI. After MFA defaulted on the
foregoing loan, J&J Finance, in June 1995, obtained a writ of attachment on
the Resonex MRI unit and has taken physical possession of that unit.
The Company's position is MFA had no authority to secure the foregoing
loan with VMI's MRI unit since the loan was made solely for the benefit of
MFA, the lien was placed on the MRI unit without VMI's knowledge or
consent, and none of the loan proceeds were received by VMI or the Company.
VMI, and the Company are in settlement discussions with J&J that would
require the Company and VMI to forfeit their interest in the MRI unit in
exchange for J&J releasing VMI and the Company from any damages. Although
the Company believes VMI is entitled to recover the MRI unit from J&J
Finance and that VMI should prevail in its claims against MFA should J&J
Finance, be permitted to retain the MRI unit, there can be no assurance
that VMI will prevail against either party or that VMI will be able to
collect any judgment that it may obtain against MFA. As a result of the
foregoing, the Company has written off the net book value of the second
unit of $964,286 as of December 31, 1995. VMI has commenced litigation
against MFA for payment of delinquent lease payments, there can be no
assurance that MFA will be able to make any of those required lease
payments to VMI. Receivables of $270,270 related to a portion of these
lease payments were written off during 1994 ( Note 4 ) and none were
accrued for 1995.
As of February 29, 1996, Tri-County was delinquent in making the
December 1995, January and February 1996 lease payments and MFA and VMI
failed to make these payments under their guarantee to the finance company
which has issued a notice of default. MFA has also failed to make these
payments to VMI under its guarantee of Tri-County's payments to VMI.
Accordingly, VMI had not made certain
Page 40
<PAGE>
payments due to the third party finance company for the first Unit. Should
Tri-County fail to make its future lease payments to VMI and should VMI be
unable to make its future required payments to the finance company (i) VMI
could lose ownership and possession of the first Unit and (ii) the entire
remaining balance of the MFA note would become immediately payable, with
VMI and the Company being liable, together with MFA, for any deficiency in
repayment of the note.
Results of Operations - 1955 Compared to 1994
On December 31, 1995, the Company had assets of $2,425,012 compared to
$4,006,321 on December 31, 1994. In addition, the Company had a total
shareholders' deficit of $(282,419) on December 31, 1995 compared to
$1,040,627 on December 31, 1994, a decrease of $1,323,046. The decrease was
the result of a net loss from operations of $3,978,579 offset by a
contribution to capital of research and development expense of $30,000,
payments from FATCO contributed to capital of $141,446, amortization of
prepaid consulting and financing cost offset against equity of $385,374,
conversion of debt to equity of $89,459, issuance of warrants of $68,500
and proceeds from exercise of warrants of $74,511, issuance of stock for
note conversions and sale of stock of $1,866,244. Payments on a long term
note with a balance of $1,284,724 (including interest currently due of
$21,609) as of December 31, 1995 of which $339,780 is due within the next
twelve months have been assumed by the Company as part of its acquisition
of VMI; and this note is secured by guaranteed lease payments of an
equivalent amount.
As of December 31, 1995, the Company's working capital position
increased by $123,727 from a negative $1,380,337 at December 31, 1994 to a
negative $1,256,610, primarily as a result of decreases in convertible debt
which was converted to equity offset by increases in accrued compensation
and payroll taxes, professional services payable, royalties payable, trade
payables and other accrued expenses. At December 31, 1995, the Company's
cash position had increased to $374,128 from $25,215 on December 31, 1994.
Cash was provided by issuance of notes of $50,000, exercise of warrants of
$74,511 and private placements of the Company's common stock and
convertible notes of $1,041,244, offset by payments on notes payable of
$209,887. Cash requirements to fund losses of $3,978,579 through December
31, 1995 were reduced by significant non-cash charges for depreciation and
amortization of $1,146,804, contributed research and development of
$30,000, the write-off of the remaining net book value of the second MRI
unit of $964,286, and $68,500 for warrants issued for financial advisory
and shareholders services.
Negative cash flow from operations for the year ended December 31,
1995 of $3,978,579 was reduced by non-cash charges of $1,244,954 for
depreciation and amortization, $30,000 for research and development
(relating to Dr. Shell), the write-off of the remaining net book value of
the second MRI unit of $964,286 and $68,500 for warrants issued for
financial advisory and shareholder services. Negative cash flow from
operations for the year ended December 31, 1994 of $3,084,495 were reduced
by non-cash charges of $795,606 for depreciation and amortization, $200,000
for research and development, $251,873 for stock issued for executive
compensation under previously contracted obligations, $172,019 for stock
and $58,150 for warrants issued for interest, financial consulting and
legal services. In addition, the Company recorded provisions for possible
non collectible notes of $125,000 (which is an offset to equity). Negative
cash flow from operations after reduction for non-cash charges (of
$2,307,740 in 1995 and $1,602,648 in 1994) was $1,670,839 and $1,481,847
for the years ended December 31, 1995 and 1994, respectively.
Page 41
<PAGE>
For the year ended December 31, 1995, total operating expenses were
$3,320,606 compared to $4,301,629 for 1994. Total expenses for the year
ended December 31, 1995, included selling, general and administrative
(SG&A) of $2,061,403, cost of revenues for products and services of
$398,238, cost of revenues for lease operations of $481,357 and research
and development of $259,608, compared to $3,127,762 for SG&A, $263,118 for
cost of revenues for products and services, $481,356 cost of revenues for
lease operations and $429,393 for research and development, in 1994. This
decrease directly reflects the costs cutting programs implemented by the
Company beginning in May 1995.
The overall cost of revenues for products and services as a percentage
of sales decreased for 1995 to 54% from 63% for 1994, improving gross
profit margins approximately 9%. Decreases in cost of revenues for 1995
resulted primarily from increased sales of high margin microspheres to
large volume customers which were somewhat offset by increases in employee
wages. Increases in inventor royalty payments were due to settlement of
royalty litigation which resulted in an increase in sequesterant inventor
royalties from 6% to 36%. 1995 royalty revenues paid to the Company on
sales of SeQuester-TM- were $618,787, with minor associated direct cost of
revenues other than royalty expense of $274,800.
Research and development expense decreased to $259,608 from $429,393
for the year ended December 31, 1995 from 1994 due to the Company's
financial condition. As of May 1995, research and development activities
were re-organized with a priority emphasis given to commercial product
applications (See Item 6A. Management's 1996 Plan of Operations).
SG&A expense decreased to $2,061,403 from $3,127,762 for 1995 from
1994, amounting to an overall reduction of approximately $1,066,359, or
34%, resulting from restructuring and down sizing of operations which
includes significant reductions in accounting fees, salaries, wages,
selling and marketing expenses, and shareholder expenses all of which were
phased in beginning in June 1995. Included in 1995 are non-cash
expenditures for amortization of prepaid consulting fees of $371,375 for
shareholder services. In addition the Company incurred officers' and
directors' fees of $92,000 during 1995. The Company experienced increases
in legal fees of $160,917 during 1995 due primarily from matters related
the SEC investigation of Clark M. Holcomb activities. Included in 1994 are
$220,420 of non-recurring financial consulting and legal fees. These fees
were paid to unaffiliated third parties for (i) services in the areas of
shareholder and financial public relations paid in the form of 55,000
shares of the Company's Common Stock and warrants to purchase an additional
107,500 shares of such stock (ii) legal services rendered paid in the form
of 36,000 shares of the Company's Common Stock and warrants to purchase an
additional 36,000 shares of such stock, and (iii) services in connection
with a private placement of Company Common Stock paid in the form of
warrants to purchase an additional 305,000 shares of such stock. Also
included in 1994 is a provision for non-collectible lease revenues
receivable of $270,270.
Interest expense for operations for 1995 was $368,526 compared to
$72,748 for 1994, an increase of $295,778. Interest expense for 1995
includes non-cash expenditures for amortization of deferred financing costs
of $276,466 incurred in connection with financial advisory services and a
private placement of convertible notes in November 1994 as well as accrued
interest on such notes. Interest expense for MRI lease operations decreased
to $142,005 in 1995 from $143,750 in 1994.
Page 42
<PAGE>
Interest income increased to $70,624 for 1995 compared to $31,350 for
1994 due to interest earned on an outstanding note receivable from a
shareholder and interest on delinquent royalties receivable.
Settlements for an employee termination, an arbitration award in
connection with royalty matters and certain litigation aggregating $554,757
were incurred during 1995. In addition as of December 31, 1995, the Company
elected to write-off the remaining net book value of the second MRI unit in
the amount of $964,286.
As of December 31, 1995, the Company's working capital position
increased by $123,727 from a negative $1,380,337 at December 31, 1994 to a
negative $1,256,610, primarily as a result of decreases in convertible debt
which was converted to equity offset by increases in accrued compensation
and payroll taxes, professional services payable, royalties payable, trade
payables and other accrued expenses. At December 31, 1995, the Company's
cash position had increased to $374,128 from $25,215 on December 31, 1994.
Cash was provided by issuance of notes of $50,000, exercise of warrants of
$74,511 and private placements of the Company's common stock and
convertible notes of $1,041,244, offset by payments on notes payable of
$209,887. Cash requirements to fund losses of $3,978,579 through December
31, 1995 were reduced by significant non-cash charges for depreciation and
amortization of $1,146,804, contributed research and development of
$30,000, the write-off of the remaining net book value of the second MRI
unit of $964,286, and $68,500 for warrants issued for financial advisory
and shareholders services.
Negative cash flow from operations for the year ended December 31,
1995 of $3,978,579 was reduced by non-cash charges of $1,244,954 for
depreciation and amortization, $30,000 for research and development, the
write-off of the remaining net book value of the second MRI unit of
$964,286 and $68,500 for warrants issued for financial advisory and
shareholder services. Negative cash flow from operations for the year ended
December 31, 1994 of $3,084,495 were reduced by non-cash charges of
$795,606 for depreciation and amortization, $200,000 for research and
development, $251,873 for stock issued for executive compensation under
previously contracted obligations, $172,019 for stock and $58,150 for
warrants issued for interest, financial consulting and legal services. In
addition, the Company recorded provisions for possible non collectible
notes of $125,000 (which is an offset to equity). Negative cash flow from
operations after reduction for non-cash charges (of $2,307,740 in 1995 and
$1,602,648 in 1994) was $1,670,839 and $1,481,847 for the years ended
December 31, 1995 and 1994, respectively.
On December 31, 1995, the Company had assets of $2,425,012 compared to
$4,006,321 on December 31, 1994. In addition, the Company had a total
shareholders' deficit of $(282,419) on December 31, 1995 compared to
$1,040,627 on December 31, 1994, a decrease of $1,323,046. The decrease was
the result of a net loss from operations of $3,978,579 offset by a
contribution to capital of research and development expense of $30,000,
payments from FATCO contributed to capital of $141,446, amortization of
prepaid consulting and financing cost offset against equity of $385,374,
conversion of debt to equity of $89,459, issuance of warrants of $68,500
and proceeds from exercise of warrants of $74,511, issuance of stock for
note conversions and sale of stock of $1,866,244. Payments on a long term
note with a balance of $1,284,724 (including interest currently due of
$21,609) as of December 31, 1995 of which $339,780 is due within the next
twelve months have been assumed by the Company as part of its acquisition
of VMI; and this note is secured by guaranteed lease payments of an
equivalent amount.
Page 43
<PAGE>
There are no assurances that increases in sales of microspheres, the
Investigator Partner Services program, sales or royalties from the re-
licensing of a fat sequesterant product or the introduction of new products
will be achieved during 1996, or that the Company will ultimately generate
revenues from the contrast microspheres in the future. Moreover, the
Company estimates that to initiate and complete the clinical development
program for the first diagnostic indication for its contrast microspheres
will require an significant expenditure which the Company does not believe
will be available from operating revenues. The Company expects that it will
need to finance some portions of clinical development through the sale of
additional securities, payments from potential strategic partners such as
E-Z EM, licensees, research grants such as the National Institute of Health
grant, or a combination of these. (See Item 6A. Management's 1996 Plan of
Operations)
No provision was made for Federal income tax since the Company has
incurred significant net operating losses from inception. Through December
31, 1995, the Company incurred net operating losses for tax purposes of
approximately $14,000,000 and approximately $15,398,000 for accounting
purposes. Differences between accounting and tax losses consist primarily
of differences in the accounting and tax treatment of depreciation,
allowance for doubtful accounts and research and development expenses. The
net operating loss carry forward may be used to reduce taxable income
through the year 2008. The Company's tax returns have not been audited by
the Internal Revenue Service. The carry forward amounts may therefore be
subject to audit and adjustment. As a result of the Tax Reform Act, the
availability of net operating loss carry forwards can be deferred, reduced
or eliminated under certain circumstances. Net operating losses in the
State of California were not available for use during 1992 and the carry
forward period has generally been reduced from fifteen years to five years
beginning in 1993.
Liquidity and Capital Resources
Since the inception of S/S, the Company has received capital for
operations and research from private investors, issuance of private party
debt, bank financing, and from licensing and product sales. Revenues have
been insufficient to cover operating expenses, research and development,
costs of litigation, construction costs, and patent development, which
costs have been unnecessarily well above the revenues from licensing and
product sales. The Company, therefore, has been dependent on private
placements of securities, bank debt, loans from private investors and the
exercise of warrants in order to sustain operations. To correct this
imbalance management made significant cuts and changes in the Company's
operations resulting in reduced 1995 operating expenses approximately
$1,066,359 (or 34%) compared to 1994. However, until such time as the
Company can increase revenues the Company will continue to be dependent on
private or institutional investment capital to support a percentage of the
planned 1996 operations. (See Item 6A. Management's 1996 Plan of
Operations). Historically, the Company has been able to generate private
placement funds to provide capital for operations and growth. During 1995,
new management was responsible for approximately $965,348 received by the
Company from August through the balance of the year from private
placements, and the conversion of approximately $839,458 of Company debt
from a previous private placement. However, there can be no assurances that
private or other capital will continue to be available, or that revenues
will increase to meet the Company's cash needs, and there can no assurance
that a sufficient amount of the Company's securities can or will be sold or
the that any warrants will be exercised to fund any operating needs of the
Company or its research and development programs. (Even assuming all of the
warrants outstanding as of December 31, 1995 with exercise prices at or
below the current market price of the
Page 44
<PAGE>
Common Stock were to be exercised, the total gross proceeds to the Company
from such exercise would be insignificant.)
The Company's consolidated financial statements have been prepared on
the assumption the Company will continue as a going concern. The Company
has suffered recurring losses from operations, has an accumulated deficit
and has negative working capital, and faces significant product development
and distribution issues that raise substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these matters
are described below in Item 6A. Management's 1996 Plan of Operations. The
financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount
of liabilities that might result should the Company be unable to continue
as a going concern.
In April 1994, the Company completed a private placement of its
securities to foreign investors in an offering under Regulation S in which
it raised net proceeds of approximately $640,000. In November 1994, the
Company completed a private placement to foreign investors in an offering
under Regulation S of $900,000 one-year convertible promissory notes in
which it raised net proceeds of approximately $715,000. In November 1995
the Company (i) $775,000 of these notes were converted into 6,328,000
shares of Company common stock (ii) $50,000 of these notes were repaid. The
remaining $75,000 of these notes were extended for an additional six-month
period.
In August 1995, the Company completed a private placement of its
securities to foreign investors in an offering under Regulation S in which
it raised net proceeds of approximately $140,348. In connection with the
completed offering, the Company issued 725,168 shares of restricted stock
at prices ranging from $0.36 to $0.42 per share, plus 725,168 warrants to
purchase additional shares of restricted common stock at $0.50 per share
during a two-year period. During August 1995, 116,279 of these warrants
were exercised.
In August 1995, the Company completed a private placement of 10%
convertible subordinated notes to foreign investors in the aggregate amount
of $300,000 which mature on December 31, 1995. In order to fulfill the
Company's obligation to deliver shares of the Company's common stock upon
conversion of the notes, an aggregate of 2,000,000 shares have been issued
under Regulation S and are being held in escrow. During September 1995,
$100,000 these notes were converted into 549,448 shares of Company common
stock. In October 1995, an additional $200,000 of these notes were
converted into 1,716,736 shares of Company common stock.
In October and November 1995, the Company issued 328,886 restricted
shares in exchange for settlement of $64,458 of accrued payables and
professional fees.
In November 1995, the Company completed a private placement, to
foreign investors under Regulation S (with a six month lock-up) of
4,200,000 shares of common stock in which it raised gross proceeds of
approximately $525,000.
Management's 1996 Plan of Operations
The Need for a Plan
The Company has lost money since its formation. As of December 31,
1995, the Company had an accumulated deficit of $15,398,146 and negative
working capital of $1,256,610. To survive, the Company has depended on
capital from private investors, issuance of private party debt, and bank
financing to fund operations. Historically, the
Page 45
<PAGE>
Company has been able to generate funds from private placements to provide
capital to help sustain operations and for growth, including approximately
$965,348 received by the Company from August 1995 to December 1995.,
However, the accumulative effect of the continuing losses became evident in
April 1995 when investors withdrew a private placement commitment. In the
future raising investment capital to fund losses will become impossible
unless the Company can reduce expenses and increase revenues.
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 it self is only a Band-Aid. What is needed is an overhaul.
Management developed the operational plan described below:
* make significant and lasting reductions in general and
administrative costs while centralizing administrative
operations, temporarily reduce spending on all research and
development programs not directed at producing immediate
revenues; and,
* reorganize all Company subsidiaries to operate as profit centers
by cost cutting, elimination of non essential operations, and by
the elimination of duplicate general and administrative costs;
and,
* secure existing revenue base by eliminating licensees default;
and,
* increase revenues from existing products; and,
* develop new markets for existing products; and,
* develop new products for existing and new markets; and,
* develop strategic partners for distribution, sales and marketing,
research and development, commercialization of products; and
develop alternative research and development financing sources
such as US Government sponsored research grants; and,
* develop investment banking and public relations alliances; and,
* make strategic acquisitions of consumer products companies.
Results of the Plan (as of April 10, 1996)
The plan described above was phased in beginning in June of 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 sequesterant 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 an strategic agreement
Page 46
<PAGE>
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) began developing investment banking
relationships, however, no such relationship has been established to date;
and (10) developed two potential consumer product companies as acquisition
candidates. Additionally, the Company raised approximately $965,348 from
private placements from August 1995 to December 1995. From January 1, 1996
to April 10, 1996, the Company has raised $200,000 in one private
placement, $150,000 of a $500,000 commitment of a second private placement
with the balance to fund in May, and received a commitment for third
private placement of $500,000 to close on April 28, 1996 with a option of a
second $500,000 to fund prior to December 31, 1996. The Company also
expects $100,000 to be funded from the National Institute of Health grant,
with $750,000 more conditioned on the success of phase one.
Research and Development Component of Management's 1996 Plan of Operations
The Company spent $ 259,608 in 1995 as compared to $429,393 in 1994 on
research and development. The decline in 1995 is the result of limited
operating capital only. The Company considers its research and development
programs as the foundation upon which everything else is to be built and
has been assigned it the highest priority, second only to generating
immediate revenues. The Company intends to balance future research budgets
and activities between long term diagnostic imaging programs based on the
Company's colored and contrast microspheres, and less complex commercial
programs which can develop more immediate revenues such as the dietary and
food supplement products currently in development. During 1996, the colored
and contrast microsphere programs will be funded from grants such as the
NIH grant (see below), and from strategic partners such as E-Z EM (see
below), and to some extend from operating funds. The dietary and food
supplement programs, which are significantly less costly than the
microsphere programs, will be funded from operational funds when possible.
The new product development group, which was established in October 1995,
and which will grow as needed, will act as project coordinator with the
responsibility of managing the Company's research and development programs,
including supervising clinical studies for both food supplement and
diagnostic programs, management of regulatory affairs including FDA and FTC
related matters, managing and coordinating the Company's new research grant
program (See Grant Programs below) in which the Company intends to apply
for simultaneous grants in four potential human diagnostic imaging
applications including detection of lung blood clots using CAT scanning,
ultrasound contrast microspheres for detection of myocardial perfusion,
oral contrast microsphere for gastrointestinal tract visualization, and an
MRI contrast microsphere to replace x-ray contrast media in detecting
liver, heart or brain dysfunction, all of which are applications targeted
toward radiologists and other physicians doing body imaging, which is the
non invasive imaging of human organs from outside the body. The research
group is also project coordinator for off site programs such as the current
contrast microsphere pre clinical program being conducted Dartmouth
Hitchcock Medical Center, and the University of Massachusetts Medical
Center with E-Z EM, the Company's contrast microsphere strategic partner.
Grant Program
The US government sponsors a number of programs intended to give
promising technologies and companies a competitive chance to get their
products or applications through the government regulatory process. Such
programs are extremely valuable to small companies. The Company's 1996
research and development program includes applying for grants in four
potential human diagnostic imaging applications which
Page 47
<PAGE>
include, detection of lung blood clots using CAT scanning, ultrasound
contrast microspheres for detection of myocardial perfusion, oral contrast
microsphere for gastrointestinal tract visualization, and an MRI contrast
microsphere to replace x-ray contrast media in detecting liver, heart or
brain dysfunction, all of which are applications targeted toward
radiologists and other physicians doing body imaging, which is the non
invasive imaging of human organs from outside the body. The Company also
intends to apply for grants actual FDA clinical studies of pulmonary emboli
application of contrast microspheres. The Company's product development
unit will coordinate submission of applications, assignment of principle
investigators, and manage the individual programs from through the clinical
study.
While the Company believes that the effects of the plan have begun to
turn the Company away from its dependence of investment capital to sustain
operations and toward developing its own business revenues, and the Company
believes that its is on schedule to release new products during 1996, there
can be no assurance that the Company's plan will be successful, or that the
failure of one or more components of the plan will not result in the
overall failure of the plan and ultimately the Company.
Page 48
<PAGE>
Item 7. Financial Statements
The following financial statement and schedules are filed as part of this
Form 10-KSB.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS INTERACTIVE MEDICAL TECHNOLOGIES,
LTD. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENT
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1994 AND 1995
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31,
1993, 1994 AND 1995
CONSOLIDATED STATEMENTS OF SHAREHOLDE INVESTMENT FOR THE YEARS ENDED
DECEMBER 31, 1993, 1994 AND 1995
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31,
1993, 1994 AND 1995
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FINANCIAL STATEMENTS SCHEDULES FOR THE YEARS ENDED DECEMBER 31, 1993, 1994,
AND 1995
NONE.
<PAGE>
8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES.
None
9. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT, PROMOTERS AND CONTROL
PERSONS: COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
Officers and Directors
The officers and directors of the Company are:
Name Age Position Since
------------------------------------------------------------------------
Steven R. Westlund 50 Chairman of the Board & 1995
Chief Executive Officer
Peter T. Benz 36 President/Chief Financial Officer 1995
& Director
Michael Grechko 52 Chief Operating Officer 1990
John Osborne 42 Director 1995
All directors hold office until the next annual meeting of
stockholders, and until their successors have been elected and qualified.
Officers serve at the discretion of the Board of Directors.
Steven R. Westlund
has been the Chief Executive Officer and a director of the Company
since May 1995. Mr. Westlund was Chairman of the Board and Chief Executive
Officer of Vitafort International Corporation from May 1993 through May
1995. Vitafort was a financially troubled public company engaged in
research and development of functional foods ( foods having bio/medical
value ) vitamin enriched beverages, and proprietary feeds for farm bred
salmon. Mr. Westlund restructured and converted Vitafort into an
operational company engaged in the manufacture, sales and marketing of fat
free foods. He was Chief Executive Officer of Lorenz/Germaine Incorporated
from January 1991 through May 1993, and Chairman of the Board and Chief
Executive Officer of Auto Giant from January 1991 through June 1992.
Mr. Westlund specializes in corporate restructuring and market development.
Mr. Westlund was elected Chairman of the Board by the Company's Board of
Directors in December 1995. (See subsequent events)
Peter T. Benz:
has been Chief Financial Officer and a director of the Company since
May 1995 and was elected President of the Company in December 1995.
Mr. Benz was a Senior Vice President and a Partner at Gilford Securities,
Inc., a New York based banking firm from 1989 through 1992. He was Chief
Operating Officer and a Director of Vitafort International Corporation, a
public company in the fat free food business from 1992 through 1994. From
1994 to date, Mr. Benz has been a private investor and an investment
banker. He graduated from the University of Notre Dame with a BS in
Business Administration in 1982.
John Osborne:
has been President and Chief Executive Officer of Intermarkt USA LLC,
an investment advisory firm specializing in advanced technology evaluation
and acquisition, interim management and corporate restructuring since 1994.
Intermarkt focuses on the funding of U.S. publicly traded corporations
through European institutional partnerships. From 1990 through 1994,
Mr. Osborne was President of
Page 49
<PAGE>
Osborne Associates, a venture capital and financial consulting firm, and
was a Partner in Osborne Applegate, a business consulting firm, from 1992
through 1994. For over 15 years, Mr. Osborne has held senior and executive
positions in financial services and investment corporations. He has
contributed to the growth of dozens of widely varied development state
companies utilizing a variety of strategies, including limited
partnerships, domestic and offshore private placements, convertible
offerings and bridge financing. Mr. Osborne earned a bachelors degree from
Hamilton College and a masters degree from Yale University. He became a
director of the Company in May 1995.
Michael Grechko
has been the Company's Secretary and Chief Operating Officer since
January 1990. In the past, he has held various marketing and business
development positions in the health care industry. More recently he was
Program Development Manager with a division of American Hospital Supply
(now Baxter International) from April 1983 through December 1987. He
joined S/S as Managing Director in January 1988 and still holds that
position. Mr. Grechko received a Masters of Science degree in electrical
engineering from the University of Pennsylvania in 1967.
Under the federal securities laws, the Company's directors, executive
officers, and any persons holding more than 10% of the Company's Common
Stock are required to report their ownership of the Company's Common Stock
and any changes in that ownership to the Securities and Exchange
Commission. Specific due dates for these reports have been established, and
the Company is required to report in this Form 10-KSB any failure to file
by these dates during 1995. The Company believes that all of these filing
requirements were satisfied by its directors, officers and
10% stockholders, except for Dr. William E. Shell who was delinquent in
filing a Form 4 which became due with respect to certain transactions in
the Company's stock.
In making these statements, the Company has relied upon a review of
Forms 3 and 4 and amendments thereto furnished to the Company pursuant to
Rule 16a-3 under the Securities Exchange Act of 1934 during fiscal year
1995 and the written representation of its incumbent directors and officers.
10. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth the compensation Dr. William E. Shell,
the former Chairman of the Board and Chief Scientific Officer, William
Pelzer, the former President and Chief Executive Officer, and Michael
Grechko, Chief Operating Officer and Secretary, of the Company
(collectively, the "Named Executive Officers"). No other executive of the
Company received more than $100,000 total annual compensation during that
period.
Page 50
<PAGE>
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
LTIP Other
Other Stock Underlying Pay Compe
Name And Current (1) Annual Awards Options/ outs nsation
Principle Position Year Salary Bonus Compensation ($) ($) Saris (#) ($) ($)
- ------------------ ---- ------ ----- ---------------- --- --------- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Michael Grechko 1995 $72,000
COO & Sec 1994 $104,000 $208,630
1993 $99,385 $217,188
Dr. William Shell 1995 $72,000(1)
Former Chief 1994 $150,000 (2)$6,000
Science Officer
1993 $150,000 $6,000
William Pelzer 1995
Former Pres./CEO 1994 (1)$240,000 $9,000
1993 $192,500 $8,250 $139,000
</TABLE>
1. Shell was compensated by the Company pursuant to a consulting
agreement and not as an employee of the Company.
2. Included in Dr. Shell's compensation is a $500.00 monthly automobile
allowance.
3. Represents the value at the time of issuance of phases of the
Company's common stock award based on certain performance criteria
being satisfied.
4. 15% of this amount has been accrued but not paid as of December 31,
1994. Mr. Pelzer's compensation includes a $750.00 monthly auto
allowance.
Stock Option Exercises and Option Values
None of the Named Executive Officers exercised any stock options during
1995. The following table contains information concerning stock options un
exercised at the end of fiscal year 1995 with respect to the Named Executive
Officers. No options have been exercised through June 30, 1995.
Fiscal Year -- End Option Values
<TABLE>
<CAPTION>
Number of Unexercised Number of Unexercised
Options Shares at In the Money Options
Fiscal Year-End at Fiscal Year-End (1)
Name Date Exercisable Unexercised Exercisable Unexercised
- ---- ---- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Steven Westlund Jan 96 3,000,000 (2) 3,000,000 (2) $ $
Peter Benz Jan 96 2,000,000 (2) 2,000,000 (2)
John Osborne Jan 96 2,000,000 (2) 2,000,000 (2)
Michael Grechko Jan 96 1,000,000 (2) 1,000,000 (2)
William Shell Aug. 95 750,000(3) 750,000(3)
William Pelzer 94 200,000 400,000 $0 $0
</TABLE>
1. Represents the amount by which the aggregate market price of the shares
of the Company's Common Stock subject to such options exceeded the
exercise prices of such options on December 31, 1995.
2. Represents options that were actually awarded January 6, 1996, which
become exercisable on June 20, 1996, and expire on June 20, 1999.
Page 51
<PAGE>
Employment Agreements and Directors' Compensation
Steven Westlund
In May 1995 (revised in January 1996), the Board of Directors approved
a compensation agreement with Steven R. Westlund, President, Chief
Executive Officer and Director. Pursuant to the agreement, Mr. Westlund's
salary is $6,000 per month from July 1995 until such time as the
Company's revenues exceed expenditures by an amount sufficient to
increase his salary, or at the choosing of the Board of Directors, his
salary will then be increased in increments based on the Company's
ability to pay, up to a maximum amount of $15,000 per month. As soon as
practicable Mr. Westlund will be added to the Company's medical insurance
and the Company will obtain directors and officers insurance.
Mr. Westlund employment agreement is three years. In partial
consideration for his services, Mr. Westlund was to receive warrants to
acquire up to 1.5 million shares of Common Stock, Exercisable for a
period of 5-years from date of issuance with vesting to occur over the
term of the agreement at exercise prices ranging from thirty to
fifty cents per share. In January 1996, the agreement was modified
as to the number warrants he was to receive which were increased from
1.5 million to 3 million with an exercise price of $.15 cents for a
period of three years beginning June 1996 and ending June 1999.
Peter T. Benz
In June 1995 (revised in January 1996), the Board of Directors
approved a compensation agreement with Peter Benz, Chief Financial
Officer and Director. Pursuant to the agreement, Mr. Benz salary is
$4,000 per month from July 1995 until such time as the Company's revenues
exceed expenditures by an amount sufficient to increase his salary, or at
the choosing of the Board of Directors, his salary will then be increased
in increments based on the Company's ability to pay, up to a maximum
amount of $10,000 per month. As soon as practicable Mr. Benz will be
added to the Company's medical insurance and the Company will obtain
directors and officers insurance. Mr. Benz employment agreement is
three years. In partial consideration for his services, Mr. Benz was to
receive warrants to acquire up to 750,000 shares of Common Stock,
Exercisable for a period of 3 years from date of issuance with vesting
to occur over the term of the agreement at exercise prices ranging from
thirty to fifty cents per share. In January 1996, the agreement was
modified as to the number warrants he was to receive which were increased
from 750,000 to 2 million with an exercise price of $.15 cents for a
period of three years beginning June 1996 and ending June 1999.
William Shell, MD.
In June 1995, the Board of Directors approved a compensation agreement
with Dr. Shell, MD, former Chairman of the Board and Chief Scientific
Officer. Dr. Shell's salary was to $6,000 per month from July 1995 until
such time as the Company's revenues exceed expenditures by an amount
sufficient to increase his salary, or at the choosing of the Board of
Directors, his salary will then be increased in increments based on the
Company's ability to pay, up to a maximum amount of $15,000 per month. In
partial consideration for his services, Dr. Shell was to receive warrants
to acquire up to 1.5 million shares of Common Stock, Exercisable for a
period of 3-years from date of issuance with vesting to occur over the
term of the agreement at exercise prices ranging from thirty to
fifty cents per share. In January 1996, the Company terminated
Dr. Shell's employment with the Company. As of the termination, 750,000
had vested with an exercise price of $.30 cents. The balance of the
options were canceled.
Page 52
<PAGE>
Michael Grechko
In January 1996, the Board of Directors approved a compensation
agreement with Michael Grechko, Chief Operating Officer. Pursuant to the
agreement, Mr. Grechko's salary is $6,000 per month beginning in January
1996. Mr. Grechko's employment agreement is three years. In partial
consideration for his services, Mr. Grechko will receive warrants to
acquire up to 1 million shares of Common Stock, Exercisable for a period
of 3 years from date of issuance with vesting to occur over the term of
the agreement at exercise prices of $.15 cents.
John Osborne
In June 1995 (revised in January 1996), the Board of Directors
approved a compensation agreement with John Osborne, a member of the
Board of Directors and Business Development consultant to the Company.
The Company agreed to pay Mr. Osborne $4,000 per month consulting fees.
Mr. Osborne's is responsible for developing potential acquisition
candidates for the Company as well as developing foreign markets for the
Company's products. In partial consideration for his services,
Mr. Osborne received warrants to acquire up to 1 million shares of
Common Stock, Exercisable for a period of 3 years beginning June 1996 and
ending June 1999 at exercise price of $15 cents.
William Pelzer
In December 1992, the Company entered into a three-year employment
agreement with William Pelzer as its President and Chief Executive
Officer. The agreement, which was effective as of February 1993,
provides for a base salary of $150,000 per year, increasing to
$180,000 per year upon the attainment of certain criteria that already
have been exceeded. The base salary has increased to $240,000 per year
effective July 1993 as the result of the capital paid into the Company
after December 15, 1992 exceeding $3,000,000. The base salary will
further increase to $300,000 per year in the event annual Company sales
exceed $5,000,000, capital paid into the Company after December 15, 1992
exceeds $4,000,000 or the Company's market capitalization equals or
exceeds $200,000,000. Pursuant to the terms of that agreement,
Mr. Pelzer's family trust was permitted to purchase 150,000 restricted
shares of Common Stock at $0.001 per share in February 1993 and an
additional 50,000 restricted shares of Common Stock at $0.001 per share
in June 1993 upon the satisfaction of certain of the foregoing criteria,
with the holder of such shares also receiving from the Company certain
registration rights with respect to those shares. Mr. Pelzer also has
been granted by the Company under this agreement options to purchase
600,000 shares of the Company's Common Stock at the market price at the
time of grant, vesting equally over a three-year period commencing in
1994, under a Company stock option plan described below. In connection
with the Company entering into the foregoing agreement, Clark M. Holcomb
agreed to make additional payments to Mr. Pelzer to bring his annual base
salary payments to $300,000 each year and to assign to Mr. Pelzer
100,000 shares of the Company's Common Stock owned by Mr. Holcomb.
However, to date Mr. Holcomb has failed to perform certain of his
obligations under this agreement. March 31, 1995, Mr. Pelzer notified the
Company of his intention to terminate his employment with the Company as
both chief executive officer and director effective April 13, 1995.
Mr. Pelzer's resignation cited both cause due to failure of consideration
under the terms of his December 24, 1992 employment agreement as well as
personal reasons. The Company is currently negotiating a settlement
agreement with Mr. Pelzer.
Page 53
<PAGE>
Directors Compensation
Directors received no compensation for their services as such for the
fiscal year ended December 31, 1995. The Company reimburses directors for
out-of-pocket expenses they incur on behalf of the Company.
Insurance
The Company offers health and disability insurance, reimbursement of
medical expenses, and other medical benefits to its full-time employees.
No retirement, pension, profit sharing, or other similar programs have
been adopted by the Company. However, benefits may be adopted in the
future, if they are authorized by the Board of Directors. In May 1993,
the Company's shareholders approved the adoption of Stock Option Plans
pursuant to which options covering a total of up to 1,500,000 shares of
the Company's Common Stock may be granted to the Company's officers,
directors, employees and other persons providing services to the Company.
No shares have been granted under such plan. (See "Certain Transactions"
for a description of the securities issued to the Company's officers and
directors in 1994)
11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Summary Table of Beneficial Ownership of Company's Common Stock
The table below sets forth certain information regarding the
beneficial ownership of the Company's Common Stock as of February 29,
1996 based on information available to the Company by (i) each person who
is known by the Company to own more than 5% of the outstanding Common
Stock based upon reports filed by such persons within the Securities and
Exchange Commission; (ii) each of the Company's directors; (iii) each of
the Named Executive Officers; and (iv) all officers and directors of the
Company as a group.
Number of Shares Percentage
Name and Address of Beneficial Owner Beneficially Owned of Class (1)
------------------------------------ ------------------ ------------
Dr. William E. Shell 929,000(2)(5) 2.87%
2139 Pontius Avenue
Los Angeles, CA 90025
Michael Grechko 672,433 2.0%
2139 Pontius Avenue
Los Angeles, CA 90025
Directors and Officers 1,601,443(4) 4.96%
as a Group (Six Persons)
Included for purposes of this calculation are shares of Common Stock
outstanding as of February 28, 1996, plus in the case of a particular
person or group the shares of Common Stock subject to currently
exercisable options and warrants (which are deemed to include options
and warrants exercisable within 60 days after February 28, 1996) held
by that person or group.
Includes 11,000 shares held in an Individual Retirement Account
entitled "William E. Shell, MD, IRA."
Includes 200,000 shares issuable upon exercise of warrants.
Includes shares issuable upon exercise of warrants.
No longer an Officer or Director
Page 54
<PAGE>
12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Officers and Directors
In April 1993 and in December 1994, the Company issued 312,500 and
242,593 unregistered shares of Common Stock to Michael Grechko (an
officer of the Company) at $0.001 per share under the terms of his prior
employment agreement with the Company.
During 1994 and 1995, Dr. Shell has provided certain research support
facilities and services to the Company at no charge. Dr. Shell has been
treating this as a contribution to capital and the Company has been
expensing the value of these facilities and services ($200,000 in 1994
and $30,000 in 1995).
In March 1995, Richard N. Shell guaranteed $20,000 of debt to an
unrelated third party on behalf of the Company. In April, 1995, the
Company entered into an agreement and issued a promissory note in the
principal amount of $25,000 with Richard N. Shell in consideration of
Richard Shell's loan to the Company of $25,000. The note is due on
December 31, 1995 together with interest at the rate of 8% per annum. At
any time during the term of this note, the holder may elect to take
payment of the principal and accrued interest thereon in the form of
restricted shares of the Company common stock at a price equal to that
provided in the Company's next private placement after the date of the
note.
In August 1995, a consulting company, wholly owned by Mr. Benz,
was paid a fee of $25,000 for consulting services rendered to the
Company. (See Executive Compensation)
Shareholder Loans
In February 1995, the Company entered into an agreement and issued a
promissory note in the principal amount of $50,000 with Sam Shell,
father of Dr. Shell and Richard N. Shell, in consideration of Sam
Shell's loan to the Company of $50,000. The note is due on December 31,
1995 together with interest at the rate of 8% per annum. At any time
during the term of this note, the holder may elect to take payment of
the principal and accrued interest thereon in the form of restricted
shares of Company common stock at a price equal to that provided in the
Company's next private placement after the date of the note. Sam Shell
exercised his option to convert $25,000 of the principal amount of this
note on July 3, 1995 and received 138,889 shares of the Company's common
stock, and warrants to acquire an additional 100,000 shares of the
Company's common stock.
Page 55
<PAGE>
13. EXHIBITS, AND REPORTS ON FORM 8K
(a) Exhibits
3 Articles of Incorporation and by-law's of the Company,
as amended. (1)
4.1 Form of Warrant Agreement between the Company and Jersey
Stock Transfer and Trust Company, including the Form of
Warrant (as modified). (4)
4.2 Form of Stock Purchase Warrant (issued with promissory
note). (2)
10.1 License Agreement between F.A.T. Co. Research, Inc. and
Dynamic Products, Inc. (1)
10.2 Agreements between F.A.T. Co. Research, Inc. and
Dr. Shell and Jackie See for Development and
Exploitation of Patented Invention. (1)
10.3 Consulting Agreements between See/Shell and Drs.
Dr. Shell and Jackie See. (1)
10.4 Original Equipment Manufacturing Agreement between
Olympus Corporation and E-Z Trac, Inc. (3)
10.5 Distribution Agreement between E-Z Trac Inc., and Triton
Technology, Inc. (3)
10.6 Employment Agreement between the Company and William
Pelzer, Jr. dated December 24, 1992. (4)
10.7 Agreement between William Pelzer, Jr. and Clark M.
Holcomb dated February 1, 1993. (4)
10.8 Exchange of Stock Agreement and Plan of Reorganization
among the Company, Venus Management, Inc. and the
stockholders of Venus Management, Inc. (4)
10.9 Co-Management Agreements dated June 30, 1993 between
Venus Management, Inc. and Medical Funding
of America, Inc. (4)
10.10 Agreement dated June 30, 1993 between Venus Management,
Inc. and Medical Funding of America, Inc. (4)
10.11 Letter dated August 20, 1993 between the Company and
Lewis, D'Amato, Brisbois & Bisgaard re Debt Conversion
Agreement. (4)
10.12 Letter agreement dated March 13, 1993 between the Company
and Clark M. Holcomb; Sale of Stock Agreement, dated
November 1, 1992 by and between the Company and
Clark M. Holcomb; and related Promissory Note from
Clark M. Holcomb to the Company. (4)
10.13 Agreement concerning MRI System, dated as of February 10,
1994 by and between Siemens Credit Corporation, Venus
Management, Inc., the Company, Medical Funding of
America, Inc. and Tri-County Mobile MRI, L.P. and
related Transfer of Interest Agreement, Corporate
Guaranty by the Company, Amendment to Promissory Note of
Medical Funding of America, Inc. payable to Siemens
Credit Corporation and Agreement concerning Lease Payment
between Venus Management, Inc. and Tri-County Mobile MRI,
L.P. (4)
Page 56
<PAGE>
10.14 Agreement dated August 27, 1992 by and between
Dr. William Shell and Clark M. Holcomb related to shares
of the Company's Common Stock owned by Dr. Shell. (4)
10.15 Agreement dated September 23, 1993 by and between
Ladenburg, Thalmann Co., Inc. and the Company. (4)
10.16 Consulting Agreement for Financial Public Relations dated
as of February 25, 1994 by and between the Company and
Robert Bienstock and Richard Washor. (4)
10.17 License Agreement, dated March 23, 1994 by and between
Effective Health, Inc. and KCD Incorporated. (4)
10.18 Professional Services Agreement, dated April 15, 1994 by
and between RAI Finanz, and the Company. (4)
10.19 Consulting Agreement and Stock Plan dated as of
August 25, 1994 by and between the Company and Hy
Ochberg. (4)
10.20 Memorandum of Understanding dated as of August 16, 1994
by and between the Company and Raifinanz (USA), Inc. (4)
10.21 Resonex Equipment Lease as of June 30, 1993 between Venus
Management Company and Medical Funding of America. (4)
10.22 Becton Dickenson Supply Agreement dated November 2, 1994.
10.23 Form 12b-25 dated March 30, 1995.
22.1 Subsidiaries of the Company & See/Shell Biotechnology,
Inc. (1)
22.1 Subsidiaries of the Company & E-Z Trac, Inc. Articles
of Incorporation, Amendments and
By-Laws. (1)
22.3 Subsidiaries of the Company & Effective Health, Inc.
Articles of Incorporation, Amendments and By-Laws. (1)
22.4 Subsidiaries of the Company & Venus Management, Inc.
Certificate of Incorporation, Amendments and By-Laws.
(Included in Exhibit 10.9.)
25 Subsidiaries of the Company. (4)
__________________________________
Previously filed as an exhibit to the Company's
registration statement on Form S-18, file
number 33-17548-NY, as amended on August 7, 1990, and
incorporated herein by reference.
Previously filed as an exhibit to the Company's
registration statement on Form S-18, file
number 33-17548-NY, as amended on February 12, 1991,
and incorporated herein by reference.
Previously filed as an exhibit to the Company's
registration statement on Form S-18, file
number 33-17548-NY, as amended on June 24, 1991, and
incorporated herein by reference.
Previously filed as an exhibit to the Company's
Registration Statement on Form SB-2, file
number 33-51684-NY, as amended on September 19, 1994, and
incorporated herein by reference.
(B) Reports on Form 8-K:
On March 14, 1995, the Company filed a report on Form 8-K
which reported under Item 5 of such form.
On June 21, 1995, the Company filed a report on Form 8-K
which reported under Item 5 of such form.
On July 5, 1995, the Company filed a report on Form 8-K
which reported under Items 5 and 7 of such form.
On August 4, 1995, the Company filed a report on Form 8-K
which reported under Item 5 of such form.
On August 21, 1995, the Company filed a report on
Form 8-K
Page 57
<PAGE>
which reported under Item 5 of such form.
On December 28, 1995, the Company filed a report on
Form 8-K which reported under Item 4 of such form.
(27)Financial Data Schedule (included only in EDGAR
filing).
Page 58
<PAGE>
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
INTERACTIVE MEDICAL TECHNOLOGIES LTD.
Dated: May 14, 1996 By: /s/ Peter T. Benz
Peter T. Benz,__________________________________
President, Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/Steven R. Westlund
_____________________________ Chief Executive Officer May 14, 1996
Steven R. Westlund and Director
/s/Peter T. Benz
_____________________________ President, Chief Financial May 14, 1996
Peter T. Benz Officer and Director
/s/Michael Grechko
_____________________________ Chief Accounting Officer May 14, 1996
Michael Grechko and Secretary
/s/John C. Osborne
_____________________________ Director May 14, 1996
John C. Osborne
<PAGE>
[BECKMAN HOLLANDER AND ASSOCIATES LETTERHEAD]
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
May 3, 1996
Board of Directors and Shareholders
Interactive Medical Technologies Ltd.
and Subsidiaries
Los Angeles, California
We have audited the consolidated balance sheet of Interactive Medical
Technologies Ltd. (a Delaware corporation) and subsidiaries as of December
31, 1995, and the related statements of operations, shareholders' equity and
cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audit. The
consolidated balance sheet of Interactive Medical Technologies Ltd. and
subsidiaries, as of December 31, 1994, and the consolidated statements of
operations, shareholders' equity and cash flows for the years ended December
31, 1994 and 1993 were audited by other auditors whose report, dated April
13, 1995, on those statements was unqualified.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, these consolidated financial statements present fairly, in
all material respects, the financial position of Interactive Medical
Technologies Ltd. and subsidiaries, as of December 31, 1995, and the results
of its operations and its cash flows for the year then ended in conformity
with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company and its subsidiaries will continue as a going
concern. The following matters raise substantial doubt about the Company's
ability to continue as a going concern. As discussed in Note 1 to the
financial statements, the Company operates under extreme liquidity
constraints and,
<PAGE>
because of recurring losses, increasing difficulty in raising necessary
additional capital. As of December 31, 1995, the Company has an accumulated
deficit of $15,398,146 and negative working capital of $1,242,016. The
Company faces continuing significant business risks, including but not
limited to its loss of a major customer as discussed in Note 9, its ability
to maintain vendor and supplier relationships by making timely payments, the
resolution of various claims and lawsuits (discussed in a following
paragraph), and overcoming future and ongoing product development and
distributions issues.
Management's plan in regard to these matters is also described in Note 1. The
financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
As more fully discussed in Note 4, the Company is subject to various claims,
lawsuits, lawsuit settlements and judgments. The Company's legal costs and
portions of judgments have been paid from the funds available and unpaid
amount have been accrued. However, there is no assurance such funds will
continue to be available, and the inability to pay judgments when due and fees
of defense counsel may result in settlement of the actions on unfavorable
terms to the Company.
Beckman Hollander and Associates
<PAGE>
INTERACTIVE MEDICAL TECHNOLOGIES LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - DECEMBER 31, 1994 AND 1995
ASSETS
<TABLE>
For the Year Ended December 31,
1994 1995
-------- ---------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 25,215 $ 374,128
Accounts receivable, net of allowance for doubtful
accounts of $170,000 in 1994 and $20,516 in 1995 110,587 65,377
Interest receivable, net of allowance for doubtful
accounts of $45,000 in 1994 and $59,615 in 1995 3,795 --
Notes receivable from shareholder, net of allowance
for doubtful accounts of $16,548 in 1995 60,186 --
Leases receivable 114,414 79,241
Inventory 11,200 -
Deferred financing cost 168,967 -
Due from related parties, net of allowance for
doubtful accounts of $109,593 in 1995 5,590 1,725
---------- ----------
Total current assets 499,954 505,877
---------- ----------
PROPERTY, EQUIPMENT AND LEASEHOLD
IMPROVEMENTS, at cost, net of
accumulated depreciation and amortization of
$1,021,857 in 1994 and $1,303,661 in 1995
Office equipment 166,357 110,974
Leasehold improvements 253,710 145,860
Magnetic resonance imaging systems 2,743,890 1,298,247
---------- ----------
Property, equipment and leasehold
improvements, net 3,163,957 1,555,081
---------- ----------
OTHER ASSETS:
Patents, net of accumulated amortization of
$84,371 in 1994 and $107,466 in 1995 282,510 289,486
Deposits and other assets 59,900 74,568
---------- ----------
Total other assets 342,410 364,054
---------- ----------
TOTAL ASSETS $4,006,321 $2,439,606
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of
these consolidated balance sheets.
F-1
<PAGE>
INTERACTIVE MEDICAL TECHNOLOGIES LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - DECEMBER 31, 1994 AND 1995
LIABILITIES AND SHAREHOLDERS' DEFICIT
For the Year Ended December 31,
1994 1995
--------- ---------
CURRENT LIABILITIES
Loans payable $ 34,437 88,500
Convertible notes 900,000 75,000
Current portion long term note payable 387,599 318,171
Accrued compensation and payroll taxes 68,512 206,106
Professional services payable 207,383 413,135
Trade payables and other accrued expenses 104,305 75,500
Royalties payable 100,000 535,518
Income taxes payable 3,200 3,946
Deferred revenue - -
Deferred rent 12,300 8,460
Unearned deposit 15,000 -
Interest payable - long term note 38,555 21,609
Interest payable - convertible notes 9,000 16,542
Total current liabilities 1,880,291 1,762,487
------------ -----------
LONG TERM NOTE PAYABLE,
net of current portion 1,085,403 959,538
------------ -----------
COMMITMENTS AND CONTINGENCIES (Note 4)
SHAREHOLDERS' DEFICIT:
Common stock, authorized 50,000,000 shares
of $.001 par value; issued and outstanding
17,173,121 in 1994 and 32,282,082 in 1995 17,173 32,282
Additional paid-in capital 12,828,395 15,083,445
Accumulated deficit (11,419,567) (15,398,146)
------------ -----------
1,426,001 (282,419)
------------ -----------
Prepaid consulting and financing cost (385,374)
------------ -----------
Total shareholders' deficit 1,040,627 (282,419)
------------ -----------
TOTAL LIABILITIES AND
SHAREHOLDERS' DEFICIT $4,006,321 $2,425,012
------------ -----------
------------ -----------
The accompanying notes are an integral part of
these consolidated balance sheets.
F-2
<PAGE>
INTERACTIVE MEDICAL TECHNOLOGIES LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
For the Year Ended December 31,
1993 1994 1995
-------- --------- --------
REVENUES
Products and services $441,300 $ 718,641 $865,480
Lease rentals 227,558 687,459 319,072
----------- ----------- -----------
668,858 1,406,100 1,184,552
----------- ----------- -----------
COST AND EXPENSES:
Cost of revenues
Products and services 221,229 263,118 398,238
Lease operations 144,250 481,356 481,357
----------- ----------- -----------
365,479 744,474 879,595
Research and development 317,274 429,393 259,608
Selling, general and
administrative expenses 2,870,351 3,127,762 2,061,403
----------- ----------- -----------
3,553,104 4,301,629 3,320,606
----------- ----------- -----------
Loss from operations (2,884,246) (2,895,529) (2,016,054)
----------- ----------- -----------
INTEREST EXPENSE AND OTHER:
Interest expense - other 100,364 72,748 368,526
Interest expense - lease obligations 89,820 143,750 142,005
Interest income (19,637) (31,350) (70,624)
Settlements and arbitration award - - 554,757
Abandonment of MRI equipment - - 964,286
----------- ----------- -----------
Total interest expense and other, net 170,547 185,148 1,958,950
----------- ----------- -----------
Loss before provision
for state income taxes (3,054,793) (3,080,677) (3,975,004)
PROVISION FOR STATE INCOME TAXES 2,400 3,818 3,575
----------- ----------- -----------
NET LOSS $(3,057,193) $(3,084,495) (3,978,579)
----------- ----------- -----------
----------- ----------- -----------
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 14,473,000 16,639,000 20,495,000
----------- ----------- -----------
----------- ----------- -----------
NET LOSS PER SHARE $ (.21) $ (.19) $ (.19)
----------- ----------- -----------
----------- ----------- -----------
The accompanying notes are an integral part
of these consolidated financial statements.
F-3
<PAGE>
INTERACTIVE MEDICAL TECHNOLOGIES LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' INVESTMENT (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
NOTES
COMMON STOCK RECEIVABLE AND
---------------------- ADDITIONAL PRE PAID
SHARES PAID IN CONSULTING AND ACCUMLATED
OUTSTANDING AMOUNT CAPITAL FINANCING COST DEFICIT
----------- -------- ------------ -------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1992 10,928,958 $ 10,928 $ 5,047,947 $(419,000) $ (5,277,879)
Issuance of common stock for cash in Private
Placement 500,000 500 321,500 -- --
Reduction of judgment paid by co-defendant -- -- (104,000) 104,000 --
Professional fees payable converted to equity 132,754 133 223,340 -- --
Issuance of common stock for compensation 522,500 523 369,945 -- --
Issuance of common stock for financial
consulting services 301,268 301 446,080 -- --
Debt payable converted to equity 326,948 327 273,775 -- --
Issuance of warrants -- -- 67,215 -- --
Issuance of common stock in connection with
acquisition of Company 1,000,000 1,000 1,563,151 -- --
Issuance of common stock to officer in
settlement of litigation 150,000 150 104,100
Issuance of common stock upon exercise of
warrants, net 2,051,450 2,052 2,137,850 -- --
Issuance of common stock in satisfaction of
judgment 283,000 283 190,129 -- --
Payments on note from shareholder to fund
construction -- -- -- 120,000 --
Additional capital contribution from
shareholder -- -- 232,884 -- --
Receivable from exercise of warrants -- -- -- (35,075) --
Net loss -- -- -- -- (3,057,193)
-------- ----- ------- ------- ----------
</TABLE>
CONTINUED
F-4
<PAGE>
CONTINUED
<TABLE>
<CAPTION>
NOTES
COMMON STOCK RECEIVABLE AND
---------------------- ADDITIONAL PRE PAID
SHARES PAID IN CONSULTING AND ACCUMLATED
OUTSTANDING AMOUNT CAPITAL FINANCING COST DEFICIT
----------- -------- ------------ -------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1993 16,196,878 $ 16,197 $ 10,873,916 $(230,075) $ (8,335,072)
Payments on note from shareholder to fund
construction -- -- -- 70,000 --
Sale of stock 32,000 32 60,128 -- --
Cash received from exercise of warrants -- -- -- 35,075 --
Issuance of warrants for services -- -- 33,150 -- --
Issuance of common stock upon exercise of
warrants, net 50,150 50 46,276 -- --
Issuance of common stock for financial
consulting services 55,500 55 104,284
Issuance of common stock for shareholder
services and cash 150,000 150 309,300 -- --
Issuance of common stock for legal services 36,000 36 67,644
Issuance of common stock for cash in Private
Placement 360,000 360 639,767
Issuance of warrants in connection with
Private Placements 23,125
Issuance of common stock for compensation 292,593 293 251,580 -- --
Issuance of warrants for shareholder services -- -- 57,500 -- --
Issuance of warrants for interest on note -- -- 9,750 -- --
Issuance of warrants for financial consulting
services -- -- 110,000 -- --
Additional capital contribution from
shareholder -- -- 241,975 -- --
Provision for uncollectible accounts on
balance of shareholder loan -- -- -- 125,000 --
Prepaid consulting and financing cost -- -- -- (385,374) --
Net loss -- -- -- -- (3,084,495)
------ ------ -------- -------- ----------
</TABLE>
CONTINUED
F-5
<PAGE>
CONTINUED
<TABLE>
<CAPTION>
NOTES
COMMON STOCK RECEIVABLE AND
---------------------- ADDITIONAL PRE PAID
SHARES PAID IN CONSULTING AND ACCUMLATED
OUTSTANDING AMOUNT CAPITAL FINANCING COST DEFICIT
----------- -------- ------------ -------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1994 17,173,121 $ 17,173 $ 12,828,395 $(385,374) $ (11,419,567)
Cash received from exercise of warrants 566,279 566 73,945
Issuance of warrants for services 68,500
Issuance of common stock upon conversion of
notes 6,328,000 6,328 768,672
Issuance of common stock for cash in Private
Placements 7,746,907 7,747 1,083,497
Issuance of common stock for debt converted
to equity 467,775 468 88,991
Additional capital contribution from
shareholder 171,446
Prepaid consulting and financing cost 385,374
Net loss (3,978,579)
----------- --------- ------------ --------- -------------
BALANCE, December 31, 1995 $32,282,082 $ 32,282 $ 15,083,446 $ $ (15,398,146)
----------- --------- ------------ --------- -------------
----------- --------- ------------ --------- -------------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
F-6
<PAGE>
INTERACTIVE MEDICAL TECHNOLOGIES LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
<TABLE>
For the Year Ended December 31,
1993 1994 1995
------------ ----------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss $(3,057,193) $(3,084,495) (3,978,579)
Adjustments to reconcile net loss to
net cash (used in)
operating activities:
Research and development
efforts contributed as capital 200,000 200,000 30,000
Issuance of warrants 67,215 58,150 68,500
Depreciation and amortization 306,538 795,606 1,244,954
Abandonment of MRI system - - 964,286
Provision for uncollectible accounts
on balance of shareholder loan - 125,000 -
Stock issued for compensation 370,468 251,873 -
Stock issued for financial
consulting and legal services 446,381 172,019 -
Stock issued below market price
recorded as interest expense 75,204 - -
Decrease (increase) in:
Accounts receivable 24,168 (84,322) 45,210
Interest receivable (18,992) 16,597 3,795
Notes receivable 25,717 24,283 60,186
Lease receivable (141,705) 27,291 35,173
Inventory 30,306 27,552 11,200
Other (24,188) (6,898) (14,668)
Increase (decrease) in:
Due related parties
and former shareholders (135,167) (5,590) 3,865
Professional fees and
other payables (175,065) 213,009 829,326
Deferred revenues 6,448 (6,448) -
Unearned deposit 15,000 - -
Income taxes payable (800) 800 -
Deferred rent 11,340 960 (3,840)
Interest payable 59,280 (11,725) (9,404)
---------- ---------- --------
Net cash used in
operating activities (1,915,045) (1,286,338) (709,996)
---------- ---------- --------
CONTINUED
</TABLE>
F-7
<PAGE>
CONTINUED
<TABLE>
For the Year Ended December 31,
1993 1994 1995
------ ------ ------
<S> <C> <C> <C>
CASH FLOWS FROM INVESTING
ACTIVITIES:
Expenditures for property,
equipment and leasehold improvements $ (239,659) $ (43,986) $(22,928)
Expenditures for patents (55,017) (61,721) (30,071)
---------- ---------- --------
Net cash used in
investing activities (294,676) (105,707) (52,999)
---------- ---------- --------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds (repayment) - bank line of credit (28,000)
Payments on notes payable (205,000) - (50,000)
Payments on long-term note (45,313) (287,030) (195,293)
Proceeds from exercise of warrants 2,104,827 81,401 74,511
Proceeds from loans payable - 34,437 50,000
Net proceeds from issuance
of convertible notes - 714,770 -
Net proceeds from sale of
common stock 322,000 715,287 1,091,244
Additional capital contribution
from shareholders 32,884 41,975 141,446
Proceeds from repayment of
shareholder loan - 70,000 -
---------- ---------- ---------
Net cash provided by
financing activities 2,181,398 1,370,840 1,111,908
---------- ---------- ---------
NET INCREASE
(DECREASE) IN CASH (28,323) (21,205) 348,913
CASH, beginning of period 74,743 46,420 25,215
---------- ---------- ---------
CASH, end of period $ 46,420 $ 25,215 $ 374,128
---------- ---------- ---------
---------- ---------- ---------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-8
<PAGE>
INTERACTIVE MEDICAL TECHNOLOGIES LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1993, 1994 AND 1995
NOTE 1. SIGNIFICANT RISK RESULTING FROM CONTINUING LOSSES
During 1993, 1994, and 1995 consolidated revenues of Interactive Medical
Technologies Ltd. and subsidiaries (collectively "the Company") were
generated from the sale and royalties from the sale of fat sequesterant, the
sale of colored microspheres. Beginning in July 1993, consolidated revenues
include lease revenues from magnetic resonance imaging systems.
The Company has incurred net losses of $3,057,193 and $3,084,495 for the
years ended December 31, 1993 and 1994 and $3,978,579 for the year ended
December 31, 1995. The continuing losses are the result of unprofitable
operations, excessive litigation and defense costs resulting from the
Company's previous business relationships and activities including repeated
regulatory agency investigations relating to possible securities violations
and false or misleading marketing claims for its dietary products, an
imbalanced G&A expense ( excessive in light of the Company's unprofitable
history), inability to successfully commercialize and market products. The
accu-mulative effect of the continuing losses have adversely affected the
liquidity of the Company, as well as the Company's ability to raise
necessary future working capital.
As of December 31, 1995, the Company had an accumulated deficit of
$15,398,146 and negative working capital of $1,256,610. In addition, the
Company remains subject to various business risks including but not limited
to its ability to maintain vendor and supplier relationships by paying bills
when due, and overcoming future and ongoing product development, distribution
and marketing issues. Also the Company and certain of its previous
man-agement, officers and directors have been named in various litigation,
along with the Company, resulting in the Company being the subject of
various claims, counter claims, lawsuits, counter law suits, settlements and
judg-ments, all placing a significant drain on the Company limited capital.
The Company's significant legal costs re-lating to the foregoing have been
paid from available funds including investment capital and has contributed
significantly to the acclimated deficit with unpaid legal fees being
accrued.
MANAGEMENT'S 1996 PLAN OF OPERATIONS
The Company has continuously lost money since its formation. As of
December 31, 1995, the Company had an accumulated deficit of $15,398,146 and
negative working capital of $1,256,610. To survive, the Company has depended
on capital from private investors, issuance of private party debt, and bank
financing to fund operations. Historically, the Company has been able to
generate funds from private placements to provide capital to help sustain
operations and for growth, including approximately $965,348 received by the
Company from August 1995 to December 1995., However, the accumulative effect
of the continuing losses became evident in April 1995 when inves-tors
withdrew a private placement commitment. In the future raising investment
capital to fund losses will become impossible unless the Company can reduce
expenses and increase revenues.
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
F-9
<PAGE>
and toward profitability. Management began by making significant cuts in the
Company's operational expense, the effect of which began in June 1995, and
resulted in an overall decrease of 1995 operating expenses of approximately
$1,066,359, or 34% as compared to 1994. However, that in it self is only a
Band-Aid. What is needed is an overhaul. Management developed the operational
plan described below:
Objectives of the Plan
1. make significant and lasting reductions in general and
administrative costs while centralizing administrative
operations, temporarily reduce spending on all research
and development programs not directed at producing
immediate revenues; and,
2. reorganize all Company subsidiaries to operate as profit
centers by cost cutting, elimination of non essential
operations, and by the elimination of duplicate general and
administrative costs; and,
3. secure existing revenue base by eliminating licensees
default; and,
4. increase revenues from existing products; and,
5. develop new markets for existing products; and,
6. develop new products for existing and new markets; and,
7. develop strategic partners for distribution, sales and
marketing, research and development, commercialization of
products; and develop alternative research and development
financing sources such as US Government sponsored research
grants; and,
8. develop investment banking and public relations
alliances; and,
9. make strategic acquisitions of consumer products companies.
Results of the Plan (as of April 10, 1996)
The plan described above was phased in beginning in June of 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, tempo-rarily
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
sequesterant 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 applica-tions; and, (6) began development
on a series of new products in October 1995, which the Company announced
com-pletion of first stage development of those products in March 1996; and,
(7) signed an 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
F-10
<PAGE>
Institute of Health ("NIH"); and, (9) began developing investment banking
relationships, however, no such relationship has been established to date;
and (10) developed two potential consumer product companies as acquisition
candidates. Additionally, the Company raised approximately $965,348 from
private place-ments from August 1995 to December 1995. From January 1, 1996
to April 10, 1996, the Company has raised $200,000 in one private placement,
$150,000 of a $500,000 commitment of a second private placement with the
balance to fund in May, and received a commitment for third private placement
of $500,000 to close on April 28, 1996 with a option of a second $500,000 to
fund prior to December 31, 1996. The Company also expects $100,000 to be
funded from the National Institute of Health grant, with $750,000 more
conditioned on the success of phase one.
Research and Development Component of Management's 1996 Plan of Operations
The Company spent $ 259,608 in 1995 as compared to $429,393 in 1994 on
research and development. The decline in 1995 is the result of limited
operating capital only. The Company considers its research and development
programs as the foundation upon which everything else is to be built and has
been assigned it the highest priority, second only to generating immediate
revenues. The Company intends to balance future research budgets and
activities between long term diagnostic imaging programs based on the
Company's colored and contrast microspheres, and less complex commercial
programs which can develop more immediate revenues such as the dietary and
food supple-ment products currently in development. During 1996, the colored
and contrast microsphere programs will be funded from grants such as the NIH
grant (see below), and from strategic partners such as E-Z EM (see below),
and to some extend from operating funds. The dietary and food supplement
programs, which are significantly less costly than the microsphere programs,
will be funded from operational funds when possible. The new product
development group, which was established in October 1995, and which will grow
as needed, will act as project coordinator with the responsibility of
managing the Company's research and development programs, including
supervising clinical studies for both food supplement and diagnostic
programs, management of regulatory affairs including FDA and FTC related
matters, managing and coordinating the Company's new research grant program
(See Grant Programs below) in which the Company intends to apply for
simultaneous grants in four potential human diagnostic imaging applications
including detection of lung blood clots using CAT scanning, ultrasound
contrast microspheres for detection of myocardial perfusion, oral contrast
microsphere for gastrointestinal tract visualization, and an MRI contrast
microsphere to replace x-ray contrast media in detecting liver, heart or
brain dysfunction, all of which are ap-plications targeted toward
radiologists and other physicians doing body imaging, which is the non
invasive imaging of human organs from outside the body. The research group is
also project coordinator for off site programs such as the current contrast
microsphere pre clinical program being conducted Dartmouth Hitchcock Medical
Center, and the University of Massachusetts Medical Center with E-Z EM, the
Company's contrast microsphere strategic partner.
Grant Program
The US government sponsors a number of programs intended to give
promising technologies and companies a com-petitive chance to get their
products or applications through the government regulatory process. Such
programs are extremely valuable to small companies. The Company's 1996
research and development program includes applying for grants in four
potential human diagnostic imaging applications which include, detection of
lung blood clots using CAT scanning, ultrasound contrast microspheres for
detection of myocardial perfusion, oral contrast microsphere for
gastrointestinal tract visualization, and an
F-11
<PAGE>
MRI contrast microsphere to replace x-ray contrast media in detecting liver,
heart or brain dysfunction, all of which are applications targeted toward
radiologists and other physicians doing body imaging, which is the non
invasive imaging of human organs from outside the body. The Company also
intends to apply for grants actual FDA clinical studies of pulmonary emboli
application of contrast microspheres. The Company's product development unit
will coordinate submission of applications, assignment of principle
investigators, and manage the individual programs from through the clinical
study.
While the Company believes that the effects of the plan have begun to turn
the Company away from its dependence of investment capital to sustain
operations and toward developing its own business revenues, and the Company
believes that its is on schedule to release new products during 1996, there
can be no assurance that the Company's plan will be successful, or that the
failure of one or more components of the plan will not result in the overall
failure of the plan and ultimately the Company.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BUSINESS AND BASIS OF
RESENTATION
Interactive Medical Technologies Ltd. (formerly Interactive Principles
Ltd.) (Interactive or the Company) was incorporated under the laws of
Delaware on June 2, 1986. Until it merged with See/Shell Biotechnology, Inc.
(See/Shell or S/S), it had no significant operations.
See/Shell was incorporated on August 17, 1987 and designs, develops and
markets certain types of biologic systems. The Company was inactive until
January 1, 1988. See/Shell has been a multifaceted food supplement,
clinical testing, diagnostic reagent and drug company. See/Shell's primary
efforts have been directed towards the development of its products.
The consolidated financial statements include the activity of See/Shell
and its subsidiary E-Z Trac, Inc. consolidated with Interactive Medical
Technologies Ltd. from January 17, 1990 when Interactive and See/Shell merged
as well as the Company's subsidiary Effective Health, from it's inception in
May 1990. The merger is re-flected as a re-capitalization of See/Shell and
the issuance of stock for cash for See/Shell. Effective June 30, 1993, the
Company acquired Venus Management, Inc. which has been included in the
consolidated financial state-ments since that date.
All significant inter-company accounts and transactions have been
eliminated in consolidation. The preparation of financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect reported amounts of the assets
and liabilities, disclosure of contingent assets and liabilities at the date
of the financial statements, and revenues and expenses during the reporting
period.
Revenue Recognition - Products and Services
The Company markets its products and technology through distributors,
license agreements and Company personnel. Revenue from products is
recognized upon shipment and revenue from services is recognized when the
service has been performed. Revenue from products and services is comprised
of the following:
F-12
<PAGE>
1993 1994 1995
-------- -------- --------
Sales of Colored Microspheres and IPS
Laboratory services $263,361 $210,815 $246,692
Sales of Flow Cytomter $ 35,000
Sales of fat Sequesterant $ $142,939 $3,645
Licensing fees and royalties fat sequesterant $504,181 $618,788
-------- -------- --------
$441,300 $718,641 $865,480
-------- -------- --------
-------- -------- --------
For the year ended December 31, 1993, three customers each accounted for
over 10% of Company revenues from products and services. Revenues from each
of these customers accounted for 19, 15 and 11% for the year ended December
31, 1993.
The Company's largest customer in 1993 (19% of revenues from products and
services) has ceased its opera-tions as a result of recent FTC regulatory
action unrelated to the Company's products. Related receivables have been
written off in 1993.
For the years ended December 31, 1994 and 1995, one customer accounted for
over 10% of Company revenues from products and services. Revenues from this
customer accounted for 70% in 1994 and 70% in 1995.
Foreign revenues were approximately 14, 5, and 7% of revenues from
products and services for the years ended December 31, 1993, 1994 and 1995.
Foreign revenues of 7, 3 and 5% of revenues from products and services were
from Japan for the years ended December 31, 1993, 1994, and 1995. During the
year ended December 31, 1993, 7% of revenues from products and services were
from Australia, Canada, England and Poland. During the year ended December
31, 1994, 2% of revenues from products and services were from Australia,
Canada, England and Poland. During the year ended December 31, 1995, 2% of
revenues from products and services were from Canada, New Zealand, Australia
and Europe.
Revenue Recognition - Lease Operations
Revenues from lease operations which commenced on June 30, 1993 are
recognized when earned and were $227,558 for the year ended December 31,
1993, $687,459 for the year ended December 31, 1994 (Note 3) and $319,072 for
the year ended December 31, 1995.
Inventory
Inventory consists of automated counting machines and components and fat
sequesterant product (finished goods). All are stated at the lower of cost
(first-in, first-out) or net realizable value. There was no inventory as of
December 31, 1995.
Depreciation and Amortization
Depreciation is provided principally through the use of the straight-line
method over the estimated useful lives of the assets (primarily three to five
years for office equipment). Magnetic resonance imaging systems are
depreciated over seven years, once placed in service or commencement of lease
payments whichever occurs first. Amortization of leasehold improvements is
computed using the straight-line method over the lesser of the asset life or
the life of the respective lease.
F-13
<PAGE>
The Company capitalizes expenditures that materially increase asset lives
and charges ordinary repairs and maintenance to operations as incurred. When
assets are sold or otherwise disposed of, the cost and related accumulated
depreciation and amortization are removed from the accounts and any gain or
loss is included in operations.
Capitalized Patent Costs
The Company capitalizes cost of perfecting patent rights for certain
products. Amortization of capitalized patent cost is provided on a
straight-line basis over 17 years or the average remaining life of the patent
Income Taxes
Income taxes are provided for the tax effects of the transactions reported
in the financial statements and consist of taxes currently due plus deferred
taxes related primarily to differences between the adjusted basis of fixed
assets and patents for financial and income tax reporting. The deferred tax
assets and liabilities repre-sent 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 are also being
recognized for operating losses that are available to offset future federal
income taxes.
Loss Per Share
Loss per share is based upon weighted average number of common shares
outstanding during the periods. Common share equivalents are not considered
as they would be anti-dilutive.
NOTE 3.CAPITAL TRANSACTIONS AND LONG TERM DEBT
The Company currently has public warrants outstanding as follows: 242,050
"B" warrants at $0.30 per share, 508,950 "C" warrants at $0.40 per share, and
710,000 "D" warrants at $0.50 per share. From January 1, 1993 through
December 31, 1995, 2,095,100 public warrants were exercised at $2,210,965
less transfer agent fees of $24,800. As of December 31, 1995, 1,461,000
publicly traded warrants may potentially be exercised, which would generate
approximately $631,195 additional gross proceeds if all of such warrants are
exercised. These warrants, are scheduled to expire June 30, 1996.
Exercise of the extended warrants is subject to an effective registration
statement with the Securities and Exchange Commission. Each class of the
extended warrants also will be redeemable at any time by the Company (either
separately or collectively) upon 30 days prior notice to the warrant holders
by the Company at $.01 for each un-exercised warrant. Each warrant entitles
the holder thereof the right to purchase one share of the Company's common
stock. In addition, there were other privately held warrants outstanding as
of December 31, 1995, to purchase a total of 14,151,889 shares of the
Company's common stock at purchase prices per share ranging from $.10 to
$4.00.
In February 1993, the Company issued 283,000 restricted shares to Francis
Pizzulli in satisfaction of an obligation towards a settlement judgment
(Note 4).
In February 1993, the Company issued 550,000 shares to Irwin Elson in
satisfaction of $200,000 of debt. This transaction was rescinded in April
1993 at which time the debt was converted to 263,000 restricted shares and
warrants to purchase 287,000 shares at $3.50 per
F-14
<PAGE>
share over a five-year period. In addition, the Company entered into a
consulting agreement with Irwin Elson for a total consideration of
$60,000.
In February 1993, the Company hired a new President/CEO. In connection
with his employment agreement, he was granted 150,000 restricted shares as a
signing bonus. During the first quarter of fiscal 1993, the shares were
issued and $104,250 was recorded as compensation. In the first quarter of
1993, 50,000 additional restricted shares were issued as performance
compensation and $34,750 was recorded as compensation expense (Note 4).
In March 1993, the Company issued 101,268 restricted shares to an
unaffiliated third party for financial consulting services and recorded
$70,381 as consulting fees.
In March 1993, the Company issued a total of 500,000 restricted shares to
Egger & Co., Gerlach & Co. and Rush & Co., European investment funds, for
$350,000. The funds were used for operating capital and construction costs.
In connection with obtaining these funds the Company also paid an 8 percent
commission to an unaffiliated party.
In April 1993, the Company issued 312,500 restricted shares to an officer
in connection with his employment agreement and recorded $217,188 as
compensation in satisfaction of amounts due in the first quarter of 1993
(Note 4).
In May 1993, Dr. Shell applied $44,064 of consulting fees due him from the
Company and executed a $60,186 promissory note to the Company representing
the value of 150,000 restricted shares of the Company's common stock issued
to the Kavanagh estate on his behalf in connection with the settlement of
certain litigation in which he was a defendant. The terms of the note
provided for interest at the rate of 6% per annum, or the maximum rate
permitted by law, whichever is lower, on the unpaid principal balance of such
note, with all unpaid principal and interest due and payable on May 24, 1994.
As of December 31, 1995, the balance of principal and interest of this note
was $20,478 and the Company has recorded a provision for doubtful accounts
for that amount. The Company and Dr. Shell currently are negotiating the
terms of his termination and repayment of the balance of this note.
In June 1993, 10,000 restricted shares were issued by the Company to an
unaffiliated third party for con-sulting services and the Company recorded
$14,280 as compensation expense.
In June 1993, the Company issued 57,754 restricted shares in exchange for
the settlement of $34,639 of accrued payables for professional fees. The
difference between fair market value of the shares on the date of issuance
and value of the debt extinguished of $47,834 was recorded as interest
expense.
In June 1993, the Company issued 63,948 restricted shares in exchange for
the settlement of $50,000 in notes payable plus accrued interest of $13,948.
The difference between fair market value of the shares on the date of
issuance and the debt extinguished of $27,370 was recorded as additional
interest expense.
In September 1993, the Company issued 75,000 restricted shares in
exchange for the settlement of $141,000 of accrued payables for
professional fees.
F-15
<PAGE>
In October 1993, the Company issued 200,000 warrants to purchase shares at
$2.75 per share over a five-year period and 100,000 warrants to purchase
shares at $3.00 per share over a five-year period in exchange for finan-cial
advisory services and recorded as the value of the warrants, $25,000 as
consulting fees. These warrants contain certain anti-dilute provisions and
registration rights.
In December 1993, the Company issued 200,000 restricted shares and
50,000 warrants to purchase restricted shares at $1.88 per share over a
three-year period to unaffiliated third parties for financial consulting
services and recorded as consulting fees $376,000 as the value of the shares
and $25,000 as the value of the warrants.
In February 1994, the Company issued 20,000 warrants to purchase
restricted shares at $1.88 per share over a three-year period to
unaffiliated third parties for financial consulting services and recorded
$10,000 as the value of the warrants, as consulting fees.
In March 1994, the Company issued 87,500 warrants to purchase
restricted shares at $4.00 per share over a five-year period to an
unaffiliated third party for financial advisory services and recorded $8,750
as the value of the warrants, as consulting fees.
In March 1994, the Company issued 55,500 shares of restricted stock to
an unaffiliated third party for financial advisory services and recorded
$104,340 as consulting fees and issued an additional 32,000 restricted
shares in exchange for $60,160.
In April 1994, the Company issued 36,000 restricted shares and 36,000
warrants to purchase restricted shares at $2.05 per share over a three-year
period to an attorney for legal services rendered. The Company recorded
$67,680 as the value of the shares and $14,400 as the value of the warrants
as legal fees.
In April 1994, the Company completed a private placement of its
securities to foreign investors in an offering under Regulation S in which
it raised net proceeds of approximately $640,000. In connection with the
completed offering, the Company issued 360,000 units. Each unit consists
of one share of restricted common stock at $2.00 per share, plus a warrant
to purchase one-half additional share of restricted common stock at $3.00
per share during a three-year period. The placement agent for the initial
closing received warrants to purchase 125,000 shares of the Company's
restricted common stock on the same terms as the Regulation S investors.
The Company recorded $15,250 as the value of the warrants as financing and
consulting fees.
In September 1994, the Company issued 150,000 shares of common stock to
an unaffiliated third party in consideration for shareholder services to
be provided over a two year period and $15,000 of cash consideration. The
Company recorded $309,450 as the value of the shares, and $294,450 as prepaid
consulting fees as an offset to equity.
In October 1994, the Company issued 2,500 warrants to purchase restricted
shares at $.01 per share over a three-year period to unaffiliated parties
for consideration of a short-term promissory note in the amount of $50,000.
The Company recorded $3,750 as the value of the warrants as interest expense.
These warrants were exercised in December 1994. In November 1994, the
Company issued 4,000 warrants to purchase restricted shares at $.01 per
share over a three year period to unaffiliated third parties for consider-
ation of extension of a short-term promissory
F-16
<PAGE>
note. The Company recorded $6,000 as the value of the warrants as interest
expense. These warrants were exercised in Dec. 1994.
In November 1994, the Company completed a private placement to foreign
investors in an offering under Regulation S of $900,000 one-year convertible
promissory notes in which it raised net proceeds of approximately $714,770.
The notes are convertible, commencing four months from issue date, into
Company common stock at $1.20 per share plus 90-day warrants to acquire
additional shares at $.01 per share in an amount equal to 40% of the shares
issued upon conversion. The convertible promissory notes accrue interest at
8% per annum which is payable quarterly. The placement agent received
warrants to purchase 157,500 shares of Company common stock at $2.00 per
share over a three year period valued at $7,875 which was recorded as
deferred financing costs.
In November 1995, $775,000 of these notes were converted into 6,328,000
shares of common stock, $50,000 of these notes were repaid and the balance
of $75,000 of these notes were extended to April 1996 under the original
terms and conditions.
In November 1994, the Company concluded agreements under which
Raifinanz AG, Zurich, Switzerland ("RAI"), will assist the Company in
securing strategic partnering agreements for its products and technologies
and will provide financial advisory services to the Company. This
agreement was terminated in November 1995. In connection with these
agreements, the Company issued 500,000 warrants to purchase shares issued
under Regulation S over a three-year period as follows:
Number Exercise Vesting
of Warrants Price Date Value
----------- ----- ---- -----
100,000 $ .01 Nov 94 $ 90,000
100,000 $ .88 Nov 94 $ 5,000
150,000 $ 2.00 **Nov 94 $ 7,000
150,000 *$Mkt Price
--------
5000,000 $ 110,000
-------- ---------
-------- ---------
*Exercise price equal to market price @ vesting
*25,000 Options to vest each month starting in November 1994
The value of these warrants of $110,000 was recorded as prepaid financing
cost as an offset to equity. 100,000 of these warrants were exercised in
January 1995. In December 1994, the Company issued 242,593 restricted
shares to an officer in connection with his employment agreement and
recorded $208,630 as compensation in satisfaction of amounts due in the first
quarter of 1994 (Note 4). In December 1994, the Company issued 300,000
warrants to an unaffiliated third party in consideration for financial
advisory services to be provided over a two year period as follows:
Number of Exercise Vesting
Warrants Price Date Value
-------- ----- ---- -----
50,000 $ .01 Dec 1994 $ 45,000
150,000 $ 1.00 Dec 1994 $ 7,500
50,000 $ 1.50 Jun 1995 $ 2,500
50,000 $ 2.00 Dec 1995 $ 2,500
------- ---------
F-17
<PAGE>
300,000 $ 7,500
------- ----------
------- ----------
The warrants have a term of three years from vesting date and contain
registration rights. The Company recorded $57,500 as the value of the
warrants, as prepaid consulting fees as an offset to equity. In February,
1995, these warrants were modified as follows:
Number of Exercise Vesting
Warrants Price Date Value
-------- ----- ---- ------
150,000 $ .01 Feb 95 $118,500
50,000 $ .75 Feb 95 $ 2,500
50,000 $ 1.00 Aug 95 $ 2,500
50,000 $ 1.50 Feb 96 $ 2,500
------- --------
300,000 $126,000
------- --------
------- --------
The Company recorded an additional $68,500 as the value of the
modification of the warrants, as prepaid consulting fees as an offset to
equity. 150,000 of these warrants were exercised in April 1995. Effective as
of May 15, 1995, these services were terminated, the remaining 150,000
warrants were canceled and the remaining balance of prepaid consulting
fees was written off.
In May 1995, the Company issued 555,555 shares of restricted stock and
400,000 warrants to purchase restricted shares at $.10 per share in
exchange for $100,000, to a current shareholder. These warrants contain
certain registration rights. During November 1995, 200,000 of these warrants
were exercised.
In May 1995, the Company issued 200,000 warrants to purchase restricted
shares at $.16 per share in lieu of compensation, to a current employee.
These warrants contain certain registration rights.
In May 1995, the Company authorized issuance of 5,200,000 warrants (of
which 1,560,000 immediately vested) to purchase restricted shares at
prices ranging from $.30 to $.50 per share, vesting over a 24-month period,
to current officers and directors. In January 1996, 3,950,000 of these
warrants were canceled and an additional 8,000,000 warrants were issued at
$0.15 per share which vest in June 1996 and contain registration rights.
In June 1995, the Company issued 500,000 warrants to purchase
restricted shares at $0.50 in connection with private placements of
Company securities.
In August 1995, the Company completed a private placement of its
securities to foreign investors in an offering under Regulation S in
which it raised net proceeds of approximately $140,348. In connection with
the completed offering, the Company issued 725,168 shares of restricted
stock at prices ranging from $0.36 to $0.42 per share, plus 725,168
warrants to purchase additional shares of restricted common stock at $0.50
per share during a two-year period. During August 1995, 116,279 of these
warrants were exercised.
In August 1995, the Company completed a private placement of 10%
convertible subordinated notes to foreign investors in the aggregate
amount of $300,000 which were due to mature on December 31, 1995. In order to
fulfill the Company's obligation to deliver shares of the Company's common
stock upon conversion of the notes, an aggregate of 2,000,000 shares were
issued under Regulation S and were being held in escrow. During September
1995, $100,000 of these notes were converted into 549,448 shares of
Company common
F-18
<PAGE>
stock. In October 1995, an additional $200,000 of these notes were converted
into 1,716,736 shares of Company common stock.
In October 1995, the Company entered into a third party advisory and
consulting agreement, effective as of May 1995. In consideration of the
consulting services to be provided by consultant to the Company under this
agreement, and for services previously rendered to the Company, the
Company issued to consultant an aggregate of 1,000,000 warrants, which
shall become exercisable as follows: 600,000 warrants shall be immediately
exercisable; an additional 50,000 warrants shall become exercisable every
three months from the date of this agreement until the second anniversary
of the date of this agreement. Each warrant shall be exercisable to purchase
one share of common stock of the Company at a purchase price of $0.35 per
share. Each warrant shall be exercisable for a period of two years from
the date of issue. These warrants contain demand registration rights. In
January 1996, the exercise price of these warrants was modified to $0.15.
In October and November 1995, the Company issued 328,886 restricted
shares in exchange for settlement of $64,458 of accrued payables and
professional fees.
In November 1995, the Company completed a private placement of its
securities to foreign investors in an offering under Regulation S in which
it raised proceeds of approximately $525,000 and issued 4,200,000 shares of
restricted stock.
In November 1995, the Company issued 50,000 warrants to purchase
restricted shares at $0.30 per share in lieu of compensation, to a
consultant. These warrants contain registration rights. In connection with a
$150,000 debt offering in 1991 (which was re-paid in March 1993), the
Company had outstanding 150,000 basic warrants and 150,000 incentive
warrants all exercisable at $1.00 per share. The lenders subsequently
extended the original repayment schedule to March 1993 at the request of
the Company, in exchange for which exercise prices were modified to range
from $.30 to $1.00 per share and each of the outstanding basic and incentive
warrant agreements were increased to 225,000 warrants.
The basic warrants expire on the later of December 31, 1995 or 12
months after the effective date of the registration of stock underlying
the warrants. The incentive warrants expire 90 days after the effective date
of the registration of stock underlying the warrants. If all such underlying
stock is registered and the warrants subsequently exercised, additional gross
proceeds of approximately $310,000 would be available to the Company.
Exercise of the basic and incentive warrants is subject to an effective
registration statement with the Securities and Exchange Commission. The basic
and incentive warrants contain certain anti-dilute provisions.
Pursuant to an Exchange of Stock Agreement and Plan of Reorganization
dated as of May 6, 1993, effective on June 30, 1993, the Company acquired
all of the outstanding capital stock of Venus Management, Inc. ("VMI") from
Associated Funding, Inc. and Diagnostics Resource Funding, Inc. (the then
sole stockholders of VMI) for an aggregate consideration of 1,000,000
restricted Company shares. The assets of VMI consist of two magnetic
resonance imaging (MRI) systems (the "Units"). (See Commitments and
Contingencies - Litigation Below )
One of the Company's two magnetic resonance imaging (MRI) systems (the
"Units") currently is installed in a mobile van at an operating site in
Jefferson Valley, New York and has been in use since September 1992 and is
leased to Tri-County Mobil MRI, L.P.
F-19
<PAGE>
("Tri-County"), whose general partner is Diagnostics Resource Funding.
This lease provides for monthly payments of $37,926 to Venus Management,
Inc. ("VMI") through August 1999 and $68,589 in September 1999 (with such
payments being guaranteed by Medical Funding of America, Inc., "MFA"), and
VMI is required to make monthly installment payments (which includes
interest at 10.5% per annum on the unpaid principal balance) for the first
Unit to a third party finance company of $32,360 through August 1999 and
$68,589 in September 1999. As of December 31, 1995, the balance of this
debt aggregated $1,299,318 (including interest currently due of $21,609)
of which $339,780 is due within the next twelve months. This lease provides
for a purchase option at the expiration of the initial term of such lease
equal to the then fair market value of the first Unit.
Tri-County was delinquent in making certain of its lease payments to
VMI under the terms of the lease agreement concerning the first Unit, and
MFA failed to make these payments to VMI under its guarantee of Tri-County's
payments to VMI. Accordingly, VMI had not made certain payments due to the
third party finance company for the first Unit. As a result, the third
party finance company commenced a lawsuit against MFA and the Company in
which it sought repayment in full of MFA's note to that company (the debt
service on which was to be serviced by VMI) and return of the first Unit
to that company. The finance company subsequently dismissed its lawsuit
without prejudice. Should Tri-County fail to make its future lease payments
to VMI and should VMI be unable to make its future required payments to
the finance company (i) VMI could lose ownership and possession of the first
Unit and (ii) the entire remaining balance of the MFA note would become
immediately payable, with VMI and the Company being liable, together with
MFA, for any deficiency in repayment of the note.
As of March 15, 1996, Tri-County was delinquent in making the December
1995, January and February 1996 lease payments and MFA and VMI failed to
make these payments under their guarantee to the finance company which has
issued a notice of default.
The second of the two Units was never placed in service. MFA had leased
the second Unit from VMI under a five-year lease. The payments under this
lease were to commence as of January 27, 1994. No payments were ever made
under this lease. The lease provided for monthly payments of $30,030.
Although VMI has commenced litigation against MFA for payment of
delinquent lease payments, there can be no assurance that MFA will be able to
make any of those required lease payments to VMI.
Receivables of $270,270 related to a portion of these lease payments
were written off during 1994 and none were accrued for 1995 (Note 4).
Depreciation on the second Unit commenced during the first quarter of 1994.
This lease provides for a purchase option at the expiration of the initial
term of such lease equal to the then fair market value of the second Unit,
but not to exceed fifteen percent (15%) of the original capitalized cost
($1,35-0,000), payable during the year following the expiration of the
initial term of such lease in twelve equal monthly payments. This second
machine was abandoned in December 1995.
In October 1995, the shareholders of the Company approved amendments to
the Company's certificate of Incorporation to provide for: (i) a reverse
stock split of not less than one for every four, nor more than one for
every eight shares of the Company's, with the specific exchange ratio to be
determined by the Board of Directors; (ii) an increase in the number of
authorized shares of common stock from 25,000,000 to 50,000,000.
NOTE 4. COMMITMENTS AND CONTINGENCIES (LEGAL PROCEEDINGS)
F-20
<PAGE>
SEC Proceedings
In 1990, the Securities and Exchange Commission's New York Regional and
Enforcement staff commenced an inquiry into possible securities violations
of the registration, anti-fraud, notice and reporting provisions under
various provisions of the federal securities laws that may have occurred
between July 1989 through January 1990 resulting from the actions of the
Company and certain members of its management during that period. As part of
a settlement agreement, the Company, Dr. William Shell, and Philip Dascher,
the Company's former President, neither admitted nor denied any violations,
and without any findings of fact consented in August 1992 to the entry of a
judgment for a permanent injunction enjoining them from violations of various
provisions of the federal securities laws. The settlement included a
rescission offer that was made by the Company to 17 individuals who had
previously exercised warrants to purchase the Company's common stock at a
time when a current registration statement was not in effect. None of the
individuals, however, elected to exercise this right of rescission.
SEC and Shareholder Proceedings Relating to Matters Directly by Effected by
or Arranged by Clark M. Holcomb
In July 1993, based on a concern the Company formed an independent
committee of its Board of Directors who's purpose was to determine whether
certain prior private placements of the Company's securities complied with
all of the registration requirements of federal and state securities laws. In
certain prior private placements of the Company's shares, a total of
approximately 2,506,982 shares of the Company's Common Stock was issued to a
small number of individuals. Those issuance's were structured in reliance
upon the advice of the Company's then securities counsel, and the Company
believes that these issuance's, standing alone, would have qualified for
exemptions from registration under federal and state securities laws.
However, certain subsequent resale's of these shares, commencing in June
1992, by the original purchasers or their transferees to a total of
approximately 330 investors raised an issue as to whether a technical
distribution occurred that might have required either the original issuance's
or the resale's to have been registered. All of the foregoing resale's were
either directly effected or arranged for by Clark M. Holcomb.
In October 1993, the Company filed a registration statement with the SEC
to register all of the foregoing 2,506,982 shares with the SEC. However, even
if the registration statement becomes effective so as to permit public
resale's by the holders of the shares involved in the transactions described
above, these holders could have a right of rescission to recover the purchase
price they paid for their shares plus interest from the date of purchase
against the persons from whom they acquired the shares.
The Company believes (based in part upon the opinion of its current
special securities counsel) that these holders do not have a valid and
enforceable right to such rescission. However, subject to any applicable
statutes of limitation that might bar such future claims, these shareholders
could assert such claims, and the Company has not set aside any reserves to
fund any potential liabilities that it might incur in connection with any
such future potential claims, which could be material. Should the Company
incur any such liabilities, it might seek indemnification or contribution for
such liabilities from Mr. Holcomb, or other third parties.
In October 1995, the staff of the SEC advised the Company that it was
considering recommending that the SEC file a civil injunctive action against
the Company and Dr.
F-21
<PAGE>
William Shell for alleged violations of the registration provisions of the
federal securities laws. The alleged violations appear to relate to the sale
by the Company of unregistered shares of its common stock which involved a
series of resale's of these shares that were either directly effected or
were arranged for by Clark M. Holcomb. These transactions have been the
subject of an SEC investigation previously disclosed by the Company.
In April 1994, Rod Sherman and Computer Buddy sued Clark M. Holcomb and
the Company in Superior Court for the County of Los Angeles for breach of an
alleged oral contract pursuant to which Holcomb and the Company were to pay
Sherman a finder's fee for all shares of the Company's stock sold to third
alleges that $58,000 remains owing to him. Sherman is seeking this amount in
his lawsuit although the Company believes that it has no obligation or
liability to Sherman in connection with this matter. A trial date has
currently been scheduled for May 1996. The Company denies the allegations and
intends to vigorously contest the matter.
In March 1995, Donald Seidel sued Clark M. Holcomb, Dr. Shell, George
Berger and the Company in the Superior Court for the County of Los Angeles,
which was served on the Company in May 1995. This action alleges breach of
contract, fraud, nonpayment for services, conspiracy to defraud, unjust
enrichment and conversion. Plaintiff is seeking general and compensatory
damages of at least $692,000 and special and consequential damages of not
less than $170,000, together with exemplary and punitive damages. It is
alleged that the Company conspired to defraud plaintiff of his shares of
Company stock and deprive him of payment for services. The Company denies
these allegations and intends to vigorously contest the matter.
In April 1995, Richard Willman and Nancy Holling sued Clark M. Holcomb,
KCD Incorporated, Dr. Shell and the Company in Superior Court for the County
of Ventura for rescission, breach of contract, breach of fiduciary duty,
fraud, negligent misrepresentation, constructive trust and negligence all
regarding the sales in July 1993 and September 1993 by Holcomb to Holling and
Wilman of Company stock. Willman and Holling allege general damages of
$107,250 and $4,275 respectively plus interest, as well as punitive damages
in an amount to be proven at time of trial. In July 1995, the Company
executed a Settlement Agreement with Nancy Holling. There was no money
demanded and none paid in connection with this settlement. The Company
believes it has no obligation to Willman or Holling in connection with this
matter. The Company denies the allegations and intends to contest the matter.
A trial date was scheduled for April 1996 with respect to Wilman, .however,
in a mandatory settlement conference in March 1996, Clark M. Holcomb and the
Company entered into a settlement with Willman, in which Holcomb agreed to
pay Willman $100,000 in cash and to deliver to Willman 50,000 shares of
restricted KCD common stock. In addition, Holcomb had previously delivered to
Willman 40,000 shares of the Company's common stock which Willman will be
permitted to retain as part of the settlement. The Company agreed to pay
$5,000 in full settlement of this claim rather than go through the expense
and time required to defend the action in trial. In July 1995, the Company
executed a Settlement Agreement with Nancy Holling. There was no money
demanded and none paid in connection with this settlement. The Company
believes it has no obligation to Wilman or Holling in connection with this
matter.
In April 1995, David Eastman filed a complaint in the Superior Court of
the County of Orange, California against Clark M. Holcomb, Anita Kavanagh,
Dr. Shell and the Company. This action alleges fraud, negligent
misrepresentation, rescission and restitution, securities fraud and
conspiracy to defraud. This action was served on Dr. Shell and the
F-22
<PAGE>
Company in July 1995. The only allegations of wrong doing are directed at
Holcomb and Holcomb is alleged to have been acting as an agent of the other
defendants. It is alleged that Holcomb represented that although the shares
purchased by the plaintiff contained a legend, they would be free trading in
sixty to ninety days. It is also alleged that Holcomb misrepresented the
financial condition of the Company. The complaint seeks damages in the amount
of $200,000 as well as unspecified punitive damages. The Company and Dr.
Shell deny that Holcomb was their agent. A trial date has currently been
scheduled for May 1996. The Company denies the allegations and intends to
vigorously contest the matter. In February 1996, Eastman obtained a default
judgment against Holcomb in the amount of $200,000 in compensatory damages
and $50,000 in punitive damages.
In February 1996, the Rudolf Steiner Research Foundation filed a complaint
in the United States District Court for the Central District of California
against Clark M. Holcomb, Lawrence Gibson, Murray Bettingen, Bettingen,
Inc., and the Company. This action alleges civil RICO, violation of the
Securities Act of 1933, violation of California Corporation Code, fraud,
deceit and intentional misrepresentation, negligent misrepresentation,
conversion, constructive trust and breach of contract. The complaint seeks
damages of $201,333, rescission, punitive and exemplary damages. The Company
believes it has no obligation to the Rudolf Steiner Research Foundation in
connection with the matter. The Company denies the allegations and intends to
vigorously contest the matter.
The Company is negotiating with the SEC regarding a potential settlement
of any SEC claims against the Company with respect to the above
transactions. The Company anticipates that the settlement would require the
Company to consent to a permanent injunction, without admitting or denying
any liability, that would bar the Company from and future violations of the
registration requirements of the federal securities laws. The Company
believes that such a settlement would not have a materially adverse effect on
the Company or its operations. However, there can be no assurance that a
settlement as described above ( or a settlement with any other terms )
will ultimately be reached with the SEC. The Company and Dr. Shell are
subject to a 1992 permanent injunction enjoining them from violating the
federal securities laws.
Proceedings Related to Licensing Agreements, Manufacturing Agreements,
Royalty Agreements, and Patent Infringements
In September 1993, Dr. Shell commenced an action against Dynamic Products,
Inc. ("Dynamic"), D&F Industries ("D&F") in his capacity as a 25% shareholder
of FATCO in the Orange County Superior Court of the State of California
seeking damages from these parties for their alleged breach of contract and
misappropriation of certain trade secrets of FATCO and the Company relating
to the first generation fat sequesterant product. Dr. Shell has asserted in
this action that Dynamic has sold the first generation fat sequesterant
product to Herbalife for resale in the United States without the required
payment of royalties to FATCO (which is obligated to pay Dr. Shell 25% of its
royalty income, which Dr. Shell then contributes to the Company) based on
those sales.
In October 1994, Dr. Shell filed a related lawsuit against FATCO in the
same court seeking the termination of a 1987 agreement between FATCO and
Shell licensing certain fat sequesterant technology of Dr. Shell to FATCO
based upon failure of FATCO to fully exploit the transferred technology for
the benefit of Shell, failure to fully exploit the products, knowingly
permitting sales of products made utilizing the technology transferred to
continue even though no royalties were being paid on those sales, refusing
to pursue legal action to collect the unpaid royalties and stopping the
unauthorized sales, and by entering
F-23
<PAGE>
into a renewal of an agreement with a distributor on the same unfavorable
terms which previously existed and which diverted moneys which should have
been paid to FATCO to other entities owned and controlled by some of the
shareholders and members of the Board of Directors of FATCO. FATCO has filed
a cross-complaint in this action against Shell alleging breach of the
licensing agreement between Shell and FATCO.
In January 1996, FATCO filed a First Amended Cross-Complaint alleging
causes of action against Dr. Shell, the Company, EHI and KCD for Breach of
Contract, Breach of Fiduciary Duty, Interference with Prospective Economic
Advantage, Misappropriation of Trade Secrets, Conversion, Constructive Trust,
Accounting and Permanent Injunction. Each of these causes of action relate
to the action of the Company in entering into the License Agreement with KCD
and were in response to an action by William Shell against FATCO. The Company
has filed an answer denying all of the allegations contained in the
Cross-Complaint and intend to fully defend this matter. The basis of this
cross complaint appears to pertain to the license agreement between EHI and
KCD, Inc., which as of March 1, 1996 was canceled as a result of KCD's
failure to make royalty payments to the Company. (See Item 4. Legal
Proceedings, below).
In March 1994, the Company and S/S sued Herbalife (settled with respect to
Herbalife) and D&F in Superior Court for the County of Orange, California for
fraud, breach of contract and conspiracy to misappropriate trade secrets. The
Company alleges in this lawsuit that S/S provided certain confidential
information and trade secrets to D&F, which misappropriated this information
to manufacture an advanced fat sequesterant product. The Company is seeking
in this lawsuit injunctive relief and damages in an unspecified amount from
defendants. This matter has been consolidated for trial with the action
against Dynamic Products, Inc. and the action against the officers and
Directors of Dynamic Products, Inc. and D&F Industries, Inc.
In January 1995, Dr. Shell, on behalf of FATCO, filed another action in
the Orange County Superior Court of the State of California substantially
similar to the action filed by Dr. Shell in 1993 against Dynamic Products,
Inc. This newly filed action names certain individual shareholders and
directors of FATCO, Dynamic and D&F Industries as well as Herbalife
International Inc. ("Herbalife"). In March 1995, this action and the lawsuit
against eHrbalife described below were settled with respect to Herbalife and
its directors, with neither party making any payments to the other in
connection with this settlement.
In March 1996, the Company, on behalf of its subsidiary EHI, filed an
action against KCD in Los Angeles County Superior Court. This action alleges
causes of action against KCD for Breach of the Amended License, Declaratory
Relief and Permanent Injunction. The action is based upon the failure of KCD
to pay the royalties due pursuant to the contract and their use of
advertising claims in connection with the sale of the licensed products which
were in excess of those which the Company authorized KCD to make (See April
8, 1996 KCD Cross Complaint). On April 8, 1996, KCD filed a cross complaint
against the Company, Effective Health, William Shell and William Pelzer
alleging causes of action for Breach of Contract, Breach of Implied
Conversion, Rescission, Good Faith and Fair Dealing, Negligence, Intentional
Misrepresentation, Accounting and Constructive. The Company denies all of the
claims and intends to fully defend this cross complaint.
In August 1995, the Company, Dr. Jackie See and Francis Pizzulli entered
into preliminary settlement agreements regarding the pending arbitration
proceedings before the Judicial Arbitration and Mediation Service, Inc., in
Santa Monica, California. Subse-
F-24
<PAGE>
quently, the Company, Dr. Jackie See and Francis Pizzulli entered into a
formal settlement agreement relating to the above arbitration proceedings,
Both See and Pizzulli had initiated arbitration proceedings relating to the
payment of royalty's pursuant to the existing Royalty Agreements between the
Company and See. See had previously transferred a 50% interest in his Royalty
Agreements with the Company to Pizzulli.
With respect to the formal settlement of the Royalty issues with See, the
Company has agreed to: (1) Pay See, beginning in July 1995 a total of 1.5% of
the Company's net sales of products and 10% of the Company's receipt of
royalties from the Company's licensees under certain patents owned by the
Company covering colored microspheres, contrast microspheres and fat
sequestration products; and, (2) pay See, over time, the sum of $32,417 which
represents past due royalties for the period up to June 30, 1995; and, (3)
pay See, over time, the sum of $33,062 which represents the award of attorney
fees and costs to See in connection with the arbitration; and, (4) pay See,
over time, the sum of $65,731 of which $35,227 is subject to adjustment based
upon an accounting and $30,504 of which was conditioned upon receipt of
royalties from the Company's sequesterant licensee; and, (5) transfer 10,000
restricted shares of KCD common stock to See.
With respect to the formal settlement of the Royalty issues executed in
January 1996 with Pizzulli, the Company has agreed to (1) pay Pizzulli,
starting in July 1995 a total of 1.5% of the net sales of the Company's
products and 20% of the Company's receipt of royalties from the Company's
licensees under certain patents owned by the Company covering colored
microspheres, contrast microspheres and fat sequestration products; and, (2)
pay Pizzulli over time the sum of $93, 542 which represents the award of
attorneys fees and costs to Pizzulli in connection with the arbitration;
and, (3) pay Pizzulli over time the sum of $ 13,787 which represents past due
royalties or the period up to June 30, 1995; and, (4) pay Pizzulli over time
the sum of $72, 244 of which $37,177 is subject to adjustment based upon an
accounting and $ 35,067 of which was conditioned upon receipt of royalties
from the Company's licensee; and, (5) transfer 15,000 restricted shares of
KCD common stock to Pizzulli.
Pizzulli, in addition to the arbitration pertaining to royalty issues
initiated a arbitration proceeding pertaining to the timing of the sale of
his restricted shares of the Company's stock. A formal settlement of the
claim was entered into in January 1996. With respect to the formal settlement
the Company agreed to (1) pay Pizzulli the sum of $25,000 on the execution
of the agreement; and, (2) pay Pizzulli the additional sum of $75,000 on or
before March 1, 1996; and, (3) pay Pizzulli, subject to certain adjustments,
the additional sum of $100,000 on or before March 1, 1997; and, (4) assign to
Pizzulli all of the Company's interest in and to the Promissory Note dated
May 13, 1993 in the face amount of $ 265,000 payable to the Company by Clark
M. Holcomb; and, (5) transfer to Pizzulli 75,000 restricted shares of KCD
common stock; and, (6) transfer to Pizzulli 70,000 free trading shares of the
Company's common stock; and, (7) transfer to Pizzulli 300,000 shares of the
Company's restricted common stock. In addition the Company has agreed to
file FORM S-3, or other forms as may be appropriate to register the shares
of the Company's common stock being transferred to Pizzulli. There are also
provisions in the settlement which would require the Company to issue
additional shares of its restricted common stock to Pizzulli in the event
that either the registration of the 300,000 restricted shares is unreasonably
delayed and/or the price of the Company' common stock does not reach a
specified price within an eight month period of filing the of FORM S-3.
Proceedings Related to MRI Lease Operations
F-25
<PAGE>
In August 1994, VMI sued MFA in Supreme Court for the County of New York,
New York, for breach of contract and accounts due. VMI alleges in this
lawsuit that MFA breached an equipment lease agreement for VMI's second MRI
unit, the Resonex Machine, by failure to make lease payments due January 27,
1994, and thereafter in the sum of $210,210 as well as interest thereon. VMI
is seeking in this lawsuit a judgment against MFA in the sum of $210,210
plus interest thereon with costs, attorney's fees and disbursements and other
relief. VMI will also seek a judgment for all unpaid lease payments
subsequent to August 1994 which total an additional $510,510 through
December 31, 1995. However, the Company has not been successful in serving
the notice on MFA principles including Jerald Brauzer, nor has a trail date
been set.
In April, 1995, Johnson & Johnson Finance Corp. ("J&J Finance") brought an
action against MFA and VMI in connection with a loan made by J&J Finance to
MFA that was secured by a lien granted by MFA on the Resonex MRI unit which
at the time was owned by VMI. After MFA defaulted on the foregoing loan, J&J
Finance, in June 1995, obtained a writ of attachment on the Resonex MRI unit
and has taken physical possession of that unit. The Company's position is
MFA had no authority to secure the foregoing loan with VMI's MRI unit since
the loan was made solely for the benefit of MFA, the lien was placed on the
MRI unit without VMI's knowledge or consent, and none of the loan proceeds
were received by VMI or the Company. VMI, and the Company are in settlement
discussions with J&J that would require the Company and VMI to forfeit their
interest in the MRI unit in exchange for J&J releasing VMI and the Company
from any damages. Although the Company believes VMI is entitled to recover
the MRI unit from J&J Finance and that VMI should prevail in its claims
against MFA should J&J Finance. There can be no assurance that VMI will
prevail against either party or that VMI will be able to collect any judgment
that it may obtain against MFA. The Company also recently learned that the
current fair market value of the Resonex MRI unit is substantially below
previous estimates and as such may not be worth the cost of continuing
litigation. As a result of all the foregoing the Company has written off the
net book value of the second unit of $964,286 as of December 31, 1995.
Federal Trade Commission Proceedings
The Seattle Regional Office of the Federal Trade Commission has advised
the Company that the staff believes that the Company's fat sequesterant
product, which was marketed by KCD licensee under the name "SeQuester," has
been improperly represented in advertising claims, and that the sequesterant
product, when previously marketed by the Company under the name "Lipitrol",
also was improperly represented in advertising claims. The staff has
indicated that it is prepared to recommend that a complaint be filed against
the licensee, the Company and certain individuals in connection with the
foregoing. The Company presently is discussing this matter with the FTC staff
with the objective of settling the matter. There is no assurance that a
settlement will be reached or as to the impact on the Company of any
settlement, although it is presently believed that any settlement may impact
the claims utilized in the marketing of the sequesterant product and is
likely to involve the payment of a fine or other financial penalty by the
Company. The Company and the FTC staff have agreed upon the terms of a
proposed settlement in this matter, pursuant to which the Company would
consent to a permanent injunction prohibiting it from making
misrepresentations relating to weight loss or weight reduction products or
services, or with respect to tests or studies relating to such programs or
services. In addition, the Company would pay consumer redress to the FTC in
an aggregate amount of $35,000 over a period of twelve months. The Company's
Board of Directors voted to accept the proposal in March 1996, which now must
be formally approved by the FTC.
F-26
<PAGE>
Except as otherwise specifically indicated above, management believes that
the Company does not have any material liability for any law suits,
settlements, judgments or fees of defense counsel which have not been paid or
accrued as of December 31, 1995 and intends to vigorously defend against
these actions.
While the ultimate outcome of these issues, if claims were asserted and
litigated, is complicated and not free from doubt, management with the advice
of legal counsel believes, on the basis of the facts currently known, that it
is not probable that the Company would have any material liability. However,
there can be no assurance that the Company will prevail in any of the above
proceedings. Also the Company may be required to continue to defend itself
resulting in substantial additional expense. In the event the Company is
unable to pay the defense costs associated with the foregoing a unfavorable
settlement or judgment could be awarded against the Company which could have
a material adverse effect upon the Company. Additionally, starting in June
1995, the Company began taking the steps it considered necessary to insure
that the Company, its subsidiaries, employees, consultants and affiliated
companies and individuals are not involved in any activities, operations, or
relationships which are not solely for the benefit of the Company.
License Agreements
In March 1994, the Company entered into a license agreement for the
Company's fat sequesterant technology in the United States and Canada with
KCD, a recently formed distribution organization having access to the major
domestic retail pharmacy and health food chains. KCD was seriously delinquent
in making royalty payments to the Company. In May 1995, the Company and KCD
entered into an amended license agreement. Under the terms of the amended
agreement, one-half ($217,243) of past due royalties and interest
(aggregating $434,487) as of April 1, 1995 is scheduled to be paid in twelve
equal monthly installments of $18,104 plus monthly payment of interest at
1.5% per month on the outstanding balance beginning July 1, 1995. The
remaining one-half ($217,243) of past due royalties and interest was
satisfied by KCD's issuance to the Company of 100,000 shares of KCD
restricted common stock. The amended agreement generally provides for a
royalty equal to 6% of gross sales (less freight and shipping) of licensed
products payable monthly within thirty days. Through December 31, 1995, the
Company has received from KCD licensing fees and royalties of $811,068
100,000 KCD restricted common shares ($217,243), and has earned additional
royalties of $138,620. KCD has advised the Company that during the period
April 1994 through December 31, 1995, net sales of the product covered under
the license have approximated $8,500,000 at wholesale value. The license
agreement also provides for initial licensing fees from KCD of $100,000 (paid
between March and May 1994) and minimum total royalty payments to the
Company to keep the agreement in effect over the first three years of the
agreement of at least $1,258,000. Over the balance of the term of the
agreement (which runs until at least 2014), KCD shall be required, in order
to keep the agreement in effect, to pay minimum royalties in accordance with
a formula but in no event less than $436,000 per year. (See subsequent
Events)
Although the Company believes that it is entitled to terminate the license
agreement providing FATCO with the right to exclusively manufacture and
market the fat sequesterant product under the Company's patent as a result
of certain breaches of the agreement by FATCO (and Dr. Shell has filed a
lawsuit as the licensor of record to terminate his license agreement with
FATCO), FATCO could assert that its agreement with the Company is still
in effect and that the provisions of the Company's agreement permitting KCD
to manufacture the fat sequesterant product violate the terms of FATCO's
agreement with the Company. Should FATCO successfully assert that its
agreement with the Company is still
F-27
<PAGE>
in effect, the Company believes that it would nonetheless be permitted to
license the marketing of the fat sequesterant technology to KCD in the event
KCD would be willing to license the marketing (but not the manufacture) of
this product. KCD is an affiliate of Clark Holcomb.
In February 1995, the Company entered into an agreement with a large
European nutritional food company for a new formulation of the Company's fat
sequesterant technology. Under the terms of the agreement, human clinical
studies of the Company's fat (lipid) sequesterant technology were conducted
to evaluate its applicability as a food supplement, medical food, functional
food, and/or food additive to aid in weight control. In November 1995, the
Swiss company declined its option to exercise its exclusive rights to
purchase, manufacture, use and sell this technology in Europe and other
markets
Leases
The Company leased its office facility during 1991 under an operating
lease on a month to month basis. In January 1992, the Company signed a 5
month lease at $4,000 per month through June 1992. In February 1992, the
Company signed a three year lease, in the same location, for the period July
1992 through June 1995 at $4,750 per month in the first year, $5,200 per
month in the second year and $5,700 per month in the third year. The lease
has an option to extend for an additional two years at $6,000 per month.
During February 1995, the Company exercised this option. Total rental
expense related to this facility lease was approximately $71,490, $66,860
and $61,002 for the years ended December 31, 1993, 1994 and 1995.
Employment Contracts
Steven Westlund
In May 1995 (revised in January 1996), the Board of Directors approved a
compensation agreement with Steven R. Westlund, President, Chief Executive
Officer and Director. Pursuant to the agreement, Mr. Westlund's salary is
$6,000 per month from July 1995 until such time as the Company's revenues
exceed expenditures by an amount sufficient to increase his salary, or at
the choosing of the Board of Directors, his salary will then be increased in
increments based on the Company's ability to pay, up to a maximum amount of
$15,000 per month. As soon as practicable Mr. Westlund will be added to the
Company's medical insurance and the Company will obtain directors and
officers insurance. Mr. Westlund employment agreement is three years. In
partial consideration for his services, Mr. Westlund was to receive warrants
to acquire up to 1.5 million shares of Common Stock, Exercisable for a
period of 5-years from date of issuance with vesting to occur over the term
of the agreement at exercise prices ranging from thirty to fifty cents per
share. In January 1996, the agreement was modified as to the number warrants
he was to receive which were increased from 1.5 million to 3 million with an
exercise price of $.15 CENTS for a period of three years beginning June 1996
and ending June 1999.
Peter Benz
In June 1995 (revised in January 1996), the Board of Directors approved a
compensation agreement with Peter Benz, Chief Financial Officer and Director.
Pursuant to the agreement, Mr. Benz salary is $4,000 per month from July 1995
until such time as the Company's revenues exceed expenditures by an amount
sufficient to increase his salary, or at the choosing of the Board of
Directors, his salary will then be increased in increments
F-28
<PAGE>
based on the Company's ability to pay, up to a maximum amount of $10,000 per
month. As soon as practicable Mr. Benz will be added to the Company's medical
insurance and the Company will obtain directors and officers insurance. Mr.
Benz employment agreement is three years. In partial consideration for his
services, Mr. Benz was to receive warrants to acquire up to 750,000 shares of
Common Stock, Exercisable for a period of 3 years from date of issuance with
vesting to occur over the term of the agreement at exercise prices ranging
from thirty to fifty cents per share. In January 1996, the agreement was
modified as to the number warrants he was to receive which were increased
from 750,000 to 2 million with an exercise price of $.15 CENTS for a period
of three years beginning June 1996 and ending June 1999.
William Shell
In June 1995, the Board of Directors approved a compensation agreement
with William Shell, MD, former Chairman of the Board and Chief Scientific
Officer. Dr. Shell's salary was to $6,000 per month from July 1995 until such
time as the Company's revenues exceed expenditures by an amount sufficient to
increase his salary, or at the choosing of the Board of Directors, his salary
will then be increased in increments based on the Company's ability to pay,
up to a maximum amount of $15,000 per month. In partial consideration for his
services, Dr. Shell was to receive warrants to acquire up to 1.5 million
shares of Common Stock, Exercisable for a period of 3-years from date of
issuance with vesting to occur over the term of the agreement at exercise
prices ranging from thirty to fifty cents per share. In January 1996, the
Company terminated Dr. Shell's employment with the Company. As of the
termination, 750,000 had vested with an exercise price of $.30 CENTS. The
balance of the options were canceled.
Michael Grechko
In January 1996, the Board of Directors approved a compensation agreement
with Michael Grechko, Chief Operating Officer. Pursuant to the agreement, Mr.
Grechko's salary is $6,000 per month beginning in January 1996. Mr.
Grechko's employment agreement is three years. In partial consideration for
his services, Mr. Grechko will receive warrants to acquire up to 1 million
shares of Common Stock, Exercisable for a period of 3 years from date of
issuance with vesting to occur over the term of the agreement at exercise
prices of $.15 CENTS.
John Osborne
In June 1995 (revised in January 1996), the Board of Directors approved a
compensation agreement with John Osborne, a member of the Board of Directors
and Business Development consultant to the Company. The Company agreed to pay
Mr. Osborne $4,000 per month consulting fees. Mr. Osborne's is responsible
for developing potential acquisition candidates for the Company as well as
developing foreign markets for the Company's products. In partial
consideration for his services, Mr. Osborne received warrants to acquire up
to 1 million shares of Common Stock, Exercisable for a period of 3 years
beginning June 1996 and ending June 1999 at exercise price of $15 CENTS.
In December 1992, the Company entered into a three-year employment
agreement with William Pelzer as its President and Chief Executive Officer.
The agreement, which was effective as of February 1993, provides for a base
salary of $150,000 per year, increasing to $180,000 per year upon the
attainment of certain criteria that already have been exceeded.
F-29
<PAGE>
William Pelzer
The base salary has increased to $240,000 per year effective July 1993 as
the result of the capital paid into the Company after December 15, 1992
exceeding $3,000,000.
The base salary will further increase to $300,000 per year in the event
annual Company sales exceed $5,000,000, capital paid into the Company after
December 15, 1992 exceeds $4,000,000 or the Company's market capitalization
equals or exceeds $200,000,000. Pursuant to the terms of that agreement, Mr.
Pelzer's family trust was permitted to purchase 150,000 restricted shares of
Common Stock at $0.001 per share in February 1993 and an additional 50,000
restricted shares of Common Stock at $0.001 per share in June 1993 upon the
satisfaction of certain of the foregoing criteria, with the holder of such
shares also receiving from the Company certain registration rights with
respect to those shares. Mr. Pelzer also has been granted by the Company
under this agreement options to purchase 600,000 shares of the Company's
Common Stock at the market price at the time of grant, vesting equally over
a three-year period commencing in 1994, under a Company stock option plan
described below. In connection with the Company entering into the foregoing
agreement, Clark M. Holcomb agreed to make additional payments to Mr. Pelzer
to bring his annual base salary payments to $300,000 each year and to assign
to Mr. Pelzer 100,000 shares of the Company's Common Stock owned by Mr.
Holcomb. However, to date Mr. Holcomb has failed to perform certain of his
obligations under this agreement. March 31, 1995, Mr. Pelzer notified the
Company of his intention to terminate his employment with the Company as both
chief executive officer and director effective April 13, 1995. Mr. Pelzer's
resignation cited both cause due to failure of consideration under the terms
of his December 24, 1992 employment agreement as well as personal reasons.
The Company is currently negotiating a settlement agreement with Mr. Pelzer.
Directors received no compensation for their services as such for the
fiscal year ended December 31, 1995. The Company reimburses directors for
out-of-pocket expenses they incur on behalf of the Company.
The Company offers health and disability insurance, reimbursement of
medical expenses, and other medical benefits to its full-time employees. No
retirement, pension, profit sharing, or other similar programs have been
adopted by the Company. However, benefits may be adopted in the future, if
they are authorized by the Board of Directors. In May 1993, the Company's
shareholders approved the adoption of Stock Option Plans pursuant to which
options covering a total of up to 1,500,000 shares of the Company's Common
Stock may be granted to the Company's officers, directors, employees and
other persons providing services to the Company. No shares have been granted
under such plan. (See "Certain Transactions" for a description of the
securities issued to the Company's officers and directors in 1994).
On March 31, 1995, Mr. William Pelzer notified the Company of his
intention to terminate his employment with the Company as both chief
executive officer and director effective April 13, 1995. Mr. Pelzer's
resignation cited both cause due to failure of consideration under the terms
of his December 24, 1992 employment agreement as well as personal reasons.
The Company is negotiating a settlement with Mr. Pelzer.
NOTE 5. STOCK OPTION PLANS
In May 1993, the Company's shareholders approved the adoption of Stock
Option Plans pursuant to which options covering a total of up to 1,500,000
shares of the Com-
F-30
<PAGE>
pany's common stock may be granted to the Company's officers, directors,
employees and other persons providing services to the Company. To date, the
Company has granted options, at fair market value as of the grant date
(which range from $0.875 to $2.625 per share), to officers, directors and
employees covering 673,000 shares of common stock under a plan that will be
formally adopted by the Company's Board of Directors pursuant to the
foregoing shareholder authorization. None of the issued options have been
exercised as of December 31, 1995.
Any shares issued under these Plans are subject to an effective registration
statement with the Securities and Exchange Commission.
NOTE 6. RELATED PARTIES
Receivables due from Dr. Shell were $5,590 and $1,725 at December 31, 1994
and 1995 respectively. The receivable due from Dr. Shell at December 31,
1995 is net of a provision for doubtful accounts of $109,593. The Company and
Dr. Shell currently are negotiating the terms of his termination and
repayment of this receivable.
Dr. Shell contributed research support services which were accounted for
as a contribution to capital with an offsetting charge to research and
development expense in the Company's statement of operations. These services
were performed by Dr. Shell (who also operates a medical practice which
performs traditional clinical medicine) at his own facility, and primarily
involved usage of imaging equipment and computers, along with salaries for
research personnel. The equipment included computers, digital imaging
equipment to analyze x-ray and ultrasound images, and a full color flow
Doppler echocardiographic imaging device with digital acquisition capability.
The personnel included a research nurse and data analyst who devoted their
full time to research. Utilization of the resources of this facility for
Company projects ranged from 25% to 75% during 1993, 1994, and up to 50% for
a portion of 1995, which management believes is a reasonable allocation, and
the value assigned to the time and use of facilities and computer equipment
by Dr. Shell was $200,000 for each of the years 1993, 1994 and $30,000 for
1995. The Company has terminated Dr. Shell's services.
FATCO is a company formed by Drs. See, Shell and others to research and
develop a product formulation to reduce and bind dietary fat intake into the
blood resulting in weight control. FATCO owns two license agreements
concerning market rights of the fat sequesterant product from which it
receives royalties. Dr. Shell acquired 25 percent of the issued and
outstanding FATCO stock. Dr. Shell has assigned any FATCO income due him to
the Company and reduces his fees under a consulting agreement with the
Company by the amount of FATCO income he might receive directly. Total
royalties offset against consulting fees and applied as contributed capital
from Dr. Shell in 1993, 1994 and 1995 were $32,884, $41,975 and $141,446.
(Note 4)
In February 1995, the Company entered into an agreement and issued a
promissory note in the principal amount of $50,000 with Sam Shell, father of
Dr. Shell and Richard N. Shell, in consideration of Sam Shell's loan to the
Company of $50,000. The note was due on December 31, 1995 together with
interest at the rate of 8% per annum.
At any time during the term of this note, the holder may elect to take
payment of the principal and accrued interest thereon in the form of
restricted shares of Company common stock at a price equal to that provided
in the Company's next private placement after the date of the note. Sam Shell
exercised his option to convert $25,000 of the principal amount
F-31
<PAGE>
of this note in July, 1995 and received 138,889 restricted shares of the
Company's common stock, and warrants to acquire an additional 100,000
restricted shares of the Company's common stock at $.10 per share. In
January 1995, the Company and Sam Shell agreed to exercise 50,000 warrants to
purchase 50,000 shares of restricted common stock and to repay the balance of
the note plus accrued interest in installments through April 15, 1996.
In March 1995, Richard N. Shell guaranteed $20,000 of debt to an unrelated
third party on behalf of the Company. In April, 1995, the Company entered
into an agreement and issued a promissory note in the principal amount of
$25,000 with Richard N. Shell in consideration of Richard Shell's loan to the
Company of $25,000. The note was due on December 31, 1995 together with
interest at the rate of 8% per annum. At any time during the term of this
note, the holder may elect to take payment of the principal and accrued
interest thereon in the form of restricted shares of the Company common
stock at a price equal to that provided in the Company's next private
placement after the date of the note. In January 1995, the Company and
Richard Shell agreed to convert the $25,000 note into 200,000 shares of
restricted common stock. Additional related party disclosures are at Notes 3
and 4.
NOTE 7. STATEMENTS OF CASH FLOWS
The Company prepares its statements of cash flows using the indirect
method as defined under the Financial Accounting Standard No. 95. Cash
equivalents include cash in banks and short-term money market funds with
original maturaties of less than three months.
During 1993, 1994 and 1995, a shareholder contributed research and
development efforts and the value assigned was accounted for as contribution
to capital.
The Company paid interest of $54,695, $169,036, and $139,923 in 1993,
1994 and 1995.
During 1993, the Company purchased all of the outstanding stock of VMI in
exchange for 1,000,000 restricted shares. The value of the assets acquired
totaled $3,369,496 and debt assumed aggregated $1,805,346. There was no cash
acquired in this transaction.
During 1993, the Company converted $422,371 of outstanding liabilities
into 459,702 restricted shares. During 1995, the Company converted $89,459
of outstanding liabilities into 467,775 restricted shares.
During 1993, Improtech relinquished 50,000 shares of Company common stock
in satisfaction and forgiveness of a $50,000 note from Improtech plus accrued
interest of $5,046.
During 1993 and 1994, warrants were issued in connection with financial
advisory and consulting services. The value of the warrants of $67,215 for
the year ended December 31, 1993, $18,750 for the year ended December 31,
1994 was charged to consulting expense.
During the year ended December 31, 1994, 36,000 warrants were issued for
legal services rendered. The value of the warrants of $14,400 was charged to
legal expense.
During the year ended December 31, 1994, warrants were issued for interest
expense on a short term note. The fair market value of the warrants of dates
of grant of $9,750 was charged to interest expense.
F-32
<PAGE>
During the year ended December 31, 1994, warrants were issued in
connection with a private placement of Company shares. The value of the
warrants of $15,250 was charged to consulting expense.
During the year ended December 31, 1994, 157,500 warrants were issued in
connection with a private placement of $900,000 of convertible notes and
expenses of $185,230 were incurred. The value of the warrants of $7,875 and
expenses of $185,230 were charged to deferred financing costs. During the
year ended December 31, 1994, $24,138 was amortized to interest expense.
During the year ended December 31, 1994, 500,000 warrants were issued for
financial advisory services to be provided over a six-month period. The value
of the warrants of $110,000 was charged to prepaid financing cost as an
offset to equity. During the year ended December 31, 1994, $27,501 was
amortized to interest expense.
In September 1994, the Company issued 150,000 shares of common stock for
shareholder services to be provided over a two year period and $15,000 of
cash. The Company recorded $309,450 as the value of the shares and $294,450
as prepaid consulting fees as an offset to equity. During the year ended
December 31, 1994, $49,075 was amortized to consulting expense.
In December 1994, the Company issued 300,000 warrants for financial
advisory and consulting services to be provided over a two year period. The
value of the warrants of $57,500 was charged to prepaid consulting fees as an
offset to equity. In February 1995 these warrants were modified and an
additional $68,500 was charged to pre-paid consulting fees.
In September and October 1995, the Company issued 2,266,184 shares of
Company common stock in connection with conversion of $300,000 of convertible
notes.
In November 1995, the Company issued 6,328,000 shares of Company common
stock in connection with conversion of $825,000 of convertible notes.
NOTE 8. UNAUDITED QUARTERLY RESULTS
Unaudited quarterly results of operations for each of the quarters in
the three years ended December 31, 1995.
<TABLE>
Fiscal 1995 (By Quarter) First Second Third Fourth
<S> <C> <C> <C> <C>
Revenues $ 398,378 $ 309,738 $350,906 $ 125,530
Gross profit $ 230,518 $ 131,190 $138,404 $ (203,318)
Net loss $(721,630) $(460,940) $509,102) $(2,286,907)
Net loss per share $ (.04) $ (.03) $ (.03) $ (.09)
Fiscal 1994
Revenues $ 277,055 $ 303,064 $484,224 $ 341,757
</TABLE>
F-33
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Gross profit $ 122,275 $ 142,194 $ 335,895 $ 61,262
Net loss $(682,095) $(846,968) $(431,982) $(1,123,450)
Net loss per share $ (.04) $ (.05) $ (.03) $ (.07)
Fiscal 1993
Revenues $ 182,206 $ 113,954 $ 190,302 $ 182,396
Gross profit $ 89,608 $ 46,014 $ 102,469 $ 65,288
Net loss $(780,383) $(731,728) $ 543,537) $(1,001,545)
Net loss per share $ (.07) $ (.05) $ (.03) $ (.06)
</TABLE>
NOTE 9. SUBSEQUENT TO YEAR END.
Subsequent to year end, the Company terminated its License Agreement with
KCD. KCD licensed the Company's seques-tration technology which represented
approximately 48% of the Company's 1995 sales. Should the Company not be able
to replace the licensee or fail to license other products currently in
development, this loss of a significant customer could have a significant
negative effect on the Company's ability to continue as a going concern.
NOTE 10. INCOME TAXES.
The components of the income tax provisions charged to operations were:
Current
Federal 3575
State 3575
Deferred
Net Change in deferred tax asset 0
Net Change in deferred tax liability 0
3575
The following reconciles the federal statutory income tax rate
to the effective rate of the provision for income tax:
Federal statutory rate 34%
Increases (Decreases)
State tax, net of
Federal income tax benefit (0.1%)
Increases in value allowance (34%)
------------
(0.1%)
------------
------------
The principle components of deferred tax assets were:
Inventory capitalization $99,654
------------
------------
Net operating loss carryforwards 5084336
------------
------------
Less: Value allowance (5,183,990)
------------
$ 0
------------
------------
At December 31, 1995, the Company has available to offset
future federal and state income taxes, net operating loss
caryforwards of
F-34
<PAGE>
$13,196,622 and $6,426,349, respectively. These loss
carryfordwards expire as follows:
Years Ending December 31, Federal State
------------------------- ------- ------
1996 223,185
1997 1,811,522
1998 1,607,410
1999 876,570
2000 1,907,662
2001
2002 16,140
2003 327,786
2004 446,370
2005 1,877,693
2006 777,716
2007 967,634
2008 3,214,821
2009 1,753,139
2010 3,815,323
----------
Total $13,196,323 $6,426,349
----------- ----------
----------- ----------
U.S. tax rules impose limitations on the use of net operating losses
following certain changes in ownership. If such a change were to occur, the
limitation could reduce the amount of these benefits that would be available
to off-set future taxable income each year, starting with the year of
ownership change.
F-35
