<PAGE>
FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended _JUNE 30, 1996
OR
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from _______________ to _______________
Commission file number 0-21384
INTERACTIVE MEDICAL TECHNOLOGIES LTD.
-------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3367421
- ------------------------------- -----------------------
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
2139 Pontius Avenue, Los Angeles, California 90025
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's Telephone number, including area code: (310) 312-9652
not applicable
- --------------------------------------------------------------------------------
(former, name, address and former fiscal year, if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
State the number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date.
Outstanding at
Class of Common Stock July 31, 1996
--------------------- -----------------
$.001 par value 45,849,240 shares
Transitional Small Business Disclosure Format Yes No X
---- ---
Number of sequentially numbered pages in the document: 31
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<PAGE>
FORM 10-QSB
Securities and Exchange Commission
Washington, D.C. 20549
INTERACTIVE MEDICAL TECHNOLOGIES LTD.
Index
PART I - FINANCIAL INFORMATION Page
----
Item 1. Consolidated Financial Statements
Condensed Consolidated Balance Sheets at
December 31, 1995 and June 30, 1996 (unaudited) 3
Condensed Consolidated Statements of Operations
for the three and six months ended June 30, 1995 (unaudited)
and 1996 (unaudited) 5
Condensed Consolidated Statements of Cash Flows
for the six ended June 30, 1995 (unaudited)
and 1996 (unaudited) 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. 16
Item 3. Legal Proceedings 22
PART II. - OTHER INFORMATION
Item 5. Other Information 29
Item 6. Exhibits and Reports on Form 8-K 29
Signatures 31
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<PAGE>
PART I. FINANCIAL INFORMATION
INTERACTIVE MEDICAL TECHNOLOGIES LTD AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND JUNE 30, 1996
<TABLE>
<CAPTION>
ASSETS
------
December 31, June 30,
1995 1996
------------ -----------
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash $ 374,128 $ 690,376
Accounts Receivable, net of allowance for doubtful
accounts of $20,516 in 1995 and $180,516 in 1996 65,377 37,601
Interest receivable, net of allowance for doubtful
accounts of $59,615 in 1995 and $55,615 in 1996 -- --
Notes receivable from shareholder, net of allowance
for doubtful accounts of $16,548 in 1995 and $141,548 -- --
in 1996
Leases receivable 79,241 177,727
Prepaid expenses -- 111,710
Due from related parties, net of allowance for
doubtful accounts of 109,593 in 1995 and 1996 1,725 1,725
--------- ---------
Total current assets 520,471 1,019,139
--------- ---------
PROPERTY, EQUIPMENT AND LEASEHOLD
IMPROVEMENTS, at cost, net of
accumulated depreciation and amortization of
$1,303,661 in 1995 and $1,533,876 in 1996
Office equipment 110,974 68,663
Leasehold improvements 145,860 125,021
Magnetic resonance imaging systems 1,298,24 1,153,995
--------- ---------
Property, equipment and leasehold
improvements, net 1,555,081 1,347,679
--------- ---------
OTHER ASSETS:
Patents, net of accumulated amortization
of $107,466 in 1995 and $119,510 in 1996 289,486 277,443
Deposits and other assets 74,568 74,568
--------- ---------
Total other assets 364,058 352,011
--------- ---------
TOTAL ASSETS $2,439,606 $2,718,829
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
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<PAGE>
INTERACTIVE MEDICAL TECHNOLOGIES LTD AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND JUNE 30, 1996
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
December 31, June 30,
1995 1996
------------ -----------
(unaudited)
<S> <C> <C>
CURRENT LIABILITIES
Loans Payable $ 88,500 $ 78,330
Convertible notes 75,000 252,379
Current portion long term note payable 318,171 423,537
Accrued compensation and payroll taxes 206,106 141,528
Professional services payable 413,135 274,756
Trade payables and other accrued expenses 75,500 44,143
Royalties payable 535,518 393,978
Income taxes payable 3,946 7,946
Deferred rent 8,460 5,640
Interest payable - long term note 21,609 60,226
Interest payable - convertible notes 16,542 16,542
----------- -----------
Total current liabilities 1,762,487 1,699,005
----------- -----------
LONG TERM NOTE PAYABLE,
net of current portion 959,538 796,466
----------- -----------
COMMITMENTS AND CONTINGENCIES (Notes 4 and 5)
SHAREHOLDERS' EQUITY:
Common stock, authorized 50,000,000 shares
of $.001 par value; issued and outstanding
32,282,082 in 1995 and 42,832,170 in 1996 32,282 42,832
Additional paid-in capital 15,083,445 16,177,713
Accumulated deficit (15,398,146) (15,997,187)
----------- -----------
Total shareholders' equity (282,419) 223,358
----------- -----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 2,439,606 $ 2,718,829
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements
-4-
<PAGE>
INTERACTIVE MEDICAL TECHNOLOGIES LTD AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1995 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
For the For the
Three Month Ended Six Month Ended
June 30 June 30
----------------------------------------------------------------
1995 1996 1995 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES
Products and services $195,959 $81,251 $480,558 $243,074
Lease rentals 113,779 97,080 227,558 194,161
----------- ----------- ----------- -----------
309,738 178,331 708,116 437,235
COST AND EXPENSES
Cost of Revenues
Product and services 58,209 43,198 105,730 81,043
Lease Operations 120,339 72,126 240,678 144,252
----------- ----------- ----------- -----------
178,548 115,324 346,408 225,295
Research and development 63,346 73,063 167,791 128,627
Selling, general and administrative expenses 419,742 275,351 1,127,781 621,899
----------- ----------- ----------- -----------
661,636 463,738 1,641,980 975,821
----------- ----------- ----------- -----------
Loss from operations (351,898) (285,407) (933,864) (538,586)
INTEREST EXPENSE AND OTHER
Interest expense - other 97,572 660 221,446 2,928
Interest expense - lease operations 33,307 29,238 68,691 60,226
Interest Income (22,637) (3,570) (43,031) (6,700)
----------- ----------- ----------- -----------
Total interest expense and other 108,242 26,328 247,106 56,454
----------- ----------- ----------- -----------
Loss before provision for state income (460,140) (311,735) (1,180,970) (595,040)
taxes
PROVISION FOR STATE INCOME TAXES 800 800 1,600 4,000
----------- ----------- ----------- -----------
NET LOSS ($460,940) ($312,535) ($1,182,570) ($599,040)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 17,622,938 37,610,579 17,444,023 34,994,682
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
NET LOSS PER SHARE $0.03 $0.01 $0.09 $0.02
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of
these condensed financial statements
-5-
<PAGE>
INTERACTIVE MEDICAL TECHNOLOGIES LTD
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
For the
Six Month Ended June 30
--------------------------------
1995 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss ($1,182,570) ($599,040)
Adjustments to reconcile net loss to net cash
(used in) operating activities:
Research and development efforts contributed as capital 30,000 --
Depreciation and amortization 559,248 242,258
Issuance of warrants 176,500 --
Warrants issued in form of compensation 137,025 --
Decrease (increase) in:
Accounts receivables (127,965) 27,776
Interest receivable (29,334) --
Lease receivable 40,735 (98,486)
Prepaid expenses (37,218) (111,710)
Increase (decrease) in:
Due to related parties and former shareholders 5,590 --
Accrued compensation -- (64,578)
Professional fees and other payables 559,572 (311,277)
Income taxes payable 1,600 4,000
Deferred rent (1,020) (2,820)
Interest payable 45,016 38,617
------------ ----------
NET CASH USED IN OPERATING ACTIVITIES 177,179 (875,260)
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property, equipment and leasehold
improvements (8,400) (22,813)
Expenditures for patents (18,633) --
Investment in KCD Incorporated (217,243) --
------------ ----------
NET CASH USED IN INVESTING ACTIVITIES (244,276) (22,813)
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock 100,000 1,104,818
Additional capital contribution from shareholder 9,542 --
Payments on long-term note (130,664) (57,706)
Proceeds from exercise of warrants, net 2,500 --
Proceeds from loans payable 118,500 177,379
Payments on loans payable -- (10,170)
------------ ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 99,878 1,214,321
------------ ----------
NET INCREASE IN CASH 32,781 316,248
CASH, beginning of period 25,215 374,128
CASH, end of period $57,996 $690,376
------------ ----------
------------ ----------
</TABLE>
The accompanying notes are an integral part of
these condensed consolidated financial statements
-6-
<PAGE>
INTERACTIVE MEDICAL TECHNOLOGIES LTD. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
June 30, 1996
1. SIGNIFICANT RISKS
During 1995 consolidated revenues of Interactive Medical Technologies
Ltd. (Interactive) and subsidiaries (the Company) were generated from
royalties from the sale of fat sequestrant, the sale of colored microspheres,
and labortory services, and lease revenues from magnetic resonance imaging
systems. The licensing agreement for the fat sequestrants, which accounted
for 49% of revenues in 1995, was terminated during the first quarter of 1996.
The Company has incurred net losses since its inception in 1986. This
includes losses of $3,084,495 and $3,978,579 for the years ended December 31,
1994 and 1995 and $312,535 and $599,040 for the three and six months ended June
30, 1996. Continuing losses have adversely affected the liquidity of the
Company, as well as the Company's ability to raise necessary additional capital.
As of June 30, 1996, the Company had an accumulated deficit of $15,997,187 and
negative working capital of $679,866. In addition, the Company is subject to
various business risks, including but not limited to its ability to maintain
vendor and supplier relationships by paying bills when due, and overcoming
future and ongoing product development and distribution issues. The Company and
its former management have been named in certain litigation. The Company is
subject to various claims, lawsuits, lawsuit settlements and judgments. The
Company's legal costs have been paid from available funds and unpaid amounts
have been accrued. There is no assurance such funds will continue to be
available, and the inability to pay judgments when due or fees of defense
counsel may result in settlement of the actions on unfavorable terms to the
Company.
Beginning in June 1995, new management implemented a plan of
restructure. Initial efforts were focused on reducing losses, settling the
accumulation of debt and lawsuits referred to above, and raising working
capital. By October, Management began shifting some of its resources to the
internal development of new dietary and food supplement products, development
of alternative financing for research projects, and the acquisition of
strategic consumer product companies.
The results of these efforts have produced a research grant from the
National Institute of Health (NIH) to help finance ongoing contrast
microsphere studies, a strategic partner agreement with E-Z EM which includes
a provision for funding advanced pre-clinical and FDA studies as well as
outlining a basic manufacturing and distribution understanding. Additionally,
the Company acquired two strategic consumer products companies, each with a
number of ready to market personal care and nutritional consumer products.
Those agreements also contain contingencies concerning preestablished
performance criteria based on gross product sales, which of not achieved by
the acquired companies allow for the Company to terminate the agreements and
convert the monies previously invested into promissory notes to be repaid by
those companies. During the balance of 1996 and well into 1997, management
intends to again redirect its focus to the sales and marketing of the
consumer products which were acquired or developed internally. The Company
expects to begin distribution, and sales and marketing during the third
calendar quarter.
-7-
<PAGE>
Even though operating losses have been substacially reduced from
previous years, management anticipates that the revenues from the sales of
existing microsphere products, laboratory services and MRI Leasing operations
will not be adequate to fund present scaled down commercial operations.
Management intends to raise additional working capital in an amount
sufficient to fund present commercial operations during the initial
distribution phase of the new consumer products.
Due to the above factors, losses are expected to continue at least for
the immediate future. In the event working capital is not available to the
Company, the Company would curtail all non commercial operations while
accelerating its efforts to license its contrast microsphere technologies.
The Company believes it has made great progress during the past year
and expects that revenues from new product sales will begin during the third
calendar quarter and continue to grow well into the future. The Company
intends to follow the plan implemented in June of 1995 including seeking
alternative sources to fund contrast microsphere studies. According to
current information, the costs of FDA clinical studies, which are subject to
the rules, regulations and approval of protocols by the FDA, the Companies
planned FDA studies could range between $3,000,000 and $10,000,000 over a
span of thirty months from the date started. Operating revenues are not
expected to be sufficient to provide all of these funds, therefor the Company
will seek assistance from its strategic partners, and by collecting advanced
royalty payments from other potential strategic partners, and to some extent
raise additional capital from the sale of securities.
The Company carries no direct product liability insurance, relying
instead on the coverage afforded by its distributors and the manufacturers from
whom it obtains products. These coverages directly protect the insured who pay
the premiums and only secondarily the Company. There is no assurance that such
coverages will adequately cover any claims which may be brought against the
Company. In addition, the Company does not have any general liability coverage.
-8-
<PAGE>
These factors raise substantial doubt that the Company may be able to
continue as a going concern. The financial statements do not include any
adjustment relating to the realization or classification of liabilities that
might be necessary should the Company be unable to continue as a going concern.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying condensed consolidated financial statement have been
prepared assuming that the Company will continue as a going concern. Certain
matters raise substantial doubt about the Company's ability to continue as a
going concern. As discussed in Note 1, the Company operates under extreme
liquidity constraints and, because of recurring losses, increasing difficulty in
raising necessary additional capital. Management's plan in regard to these
matters is described above. The financial statements do not include any
adjustments relating to the recoverability and classification of asset carrying
amounts or the amount and classification of liabilities that might result should
the Company be unable to continue as a going concern.
As more fully discussed in Note 4, the Company is subject to various
claims, lawsuits, lawsuit settlements and judgments.
In the opinion of the management of the Company, the accompanying
condensed unaudited financial statements contain all adjustments, consisting of
only normal recurring accruals, necessary to present fairly the financial
position at June 30, 1996, the results of its operations for the three and six
months ended June 30, 1996 and 1995 and the cash flows for the three months
ended March 31, 1996 and 1995. Certain information and footnote disclosures
normally included in financial statements that would have been prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to the rules and regulations of the Securities and Exchange
Commission, although managment of the Company believes that the disclosures in
these financial statements are adequate to make the information presented
therein not misleading. It is suggested that these condensed financial
statements and notes thereto be read in conjunction with the financial
statements and the notes thereto included in the Company's December 31, 1995
Form 10-KSB.
The results of operations for the three and six months ended June 30,
1996 are not necessarily indicative of the results of operations to be expected
for the full fiscal year ending December 31, 1996.
INCOME TAXES
Income taxes are provided for the tax effects of transactions reported
in the financial statements and consist of taxes currently due plus deferred
taxes related primarily to differences between the adjusted bases of fixed
assets and patents for financial and income tax reporting. The deferred tax
assets and liabilities represent the future tax return consequences of those
differences,
-9-
<PAGE>
which will either be taxable or deductible when the assets and liabilities are
recovered or settled. Deferred taxes also are recognized for operating losses
that are available to offset future federal income taxes.
LOSS PER SHARE
Loss per share is based upon weighted average number of common shares
outstanding during the periods.
3. CAPITAL TRANSACTIONS AND LONG TERM DEBT
There were privately held warrants outstanding as of June 30, 1996, to
purchase a total of 14,151,889 shares of the Company's common stock at purchase
prices per share ranging from $0.10 to $4.00. On June 30, 1996 1,461,000
publicly traded "B", "C", and "D" warrants expired.
One of the Company's two magnetic resonance imaging (MRI) systems (the
"Units") currently is installed in a mobile van at an operating site in
Jefferson Valley, New York and has been in use since September 1992 and is
leased to Tri-County Mobil MRI, L.P. ("Tri-County"), whose general partner is
Diagnostics Resource Funding. This lease provides for monthly payments of
$37,926 to Venus Management, Inc. ("VMI") through August 1999 and $68,589 in
September 1999 (with such payments being guaranteed by Medical Funding of
America, Inc., "MFA"), and VMI is required to make monthly installment payments
(which includes interest at 10.5% per annum on the unpaid principal balance) for
the first Unit to a third party finance company of $32,360 through August 1999
and $68,589 in September 1999. As of June 30, 1996, the balance of this debt
aggregated $1,280,229 (including interest currently due of $60,226) of which
$423,537 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 June 30, 1996, Tri-County was current in making the payments to
the finance company.
-10-
<PAGE>
The second of the two Units was never placed in service and was
abandoned in December 1995. See also (Note 4) regarding litigation with Johnson
& Johnson Finance Corp.
In October 1995, the shareholders of the Company approved amendments to
the Company's Certificate of Incorporation to provide for: (i) a reverse stock
split of not less than one share for every four old shares nor more than one
share for every eight old shares, with the specific exchange ratio to be
determined by the Board of Directors; (ii) an increase in the number of
authorized shares of common stock from 25,000,000 to 50,000,000.
4. CONTINGENCIES
LITIGATION
In April 1994, Rod Sherman and Computer Buddy sued Clark 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. During the quarter ended June 30,
1996 this matter settled went to in court, resulting in a favorable verdict,
to which there was no liability to the Company.
In April 1995, Johnson & Johnson Finance Corp. ("J&J Finance") brought
an action against MFA and VMI in connection with a loan made by J&J Finance
to MFA that was secured by a lien granted by MFA on the Resonex MRI unit
owned by VMI. After MFA defaulted on the foregoing loan, J&J Finance, in
June 1995, obtained a writ of attachment on the Resonex MRI unit and has
taken physical possession of that unit. Subsequent to June 30, 1996 the
Company received a proposal settlement agreement from J&J Finance containing
J&J Finance's agreement to a mutual dismissal of actions and a release of
claims.
The legal proceeding relating to licensing agreements, manufacturing
agreements, royalty agreements, and patents involving the Company and its
subsidiaries, Dynamic Products, Inc., D&F Industries, FATCO, KCD, Inc., and
Dr. Shell are in the process of consolidation for the purpose of global
settlement. Each of the companies have instructed their various legal counsel
to temporarily suspend legal proceedings in expectation of a global settlement.
Final global settlement is expected to be completed during the third calendar
quarter. The Company does not expect to incur any material liability as a
result of these settlements.
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. As part of the proposed settlement agreements the Company
agreed: 1) to pay Dr. See and Mr. Pizzulli starting in July 1995 a total of 3%
of the Company's net sales of products, and 30% 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 sequestrant
product; 2) to pay to Dr. See and Mr. Pizzulli on a monthly basis over time a
total of 3% of the Company's net sales of products, and 3% 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
sequestrant product of $46,789 through June 30, 1995, attorney fees of $126,604
incurred incident to the arbitration, and $124,431 in settlement of certain
contingent liability issues raised in the arbitration proceedings, and 3) to
transfer to Dr. See and Mr. Pizzulli 25,000 restricted shares of KCD
Incorporated common stock. Dr. See executed a formal agreement during September
1995.
In addition, Mr. Pizzulli's claim for damages he suffered as a result
of the Company's alleged failure to provide him with free trading shares of
the Company's common stock under Rule 144 is being finalized.
-11-
<PAGE>
In April 1995, David Eastman filed a complaint in the Superior Court
of the County of Orange, California against Clark Holcomb, Anita Kavanagh,
Dr. Shell and the Company. This action alleged fraud, negligent
misrepresentation, rescission and restitution, securities fraud and
conspiracy to defraud. The complaint sought damages in the amount of
$200,000 and punitive damages in an unspecified amount. Holcomb was alleged
to have been acting as an agent of the other defendants. It was 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
was also alleged that Holcomb misrepresented the financial condition of the
Company. The complaint sought damages in the amount of $200,000 as well as
unspecified punitive damages. The Company and Dr. Shell denied that Holcomb
was their agent. The matter was settled in full during its quarter ended June
30, 1996 for its nominal amount of $5,000.
In March 1995, Donald Seidel sued Clark Holcomb, Dr. Shell, George
Berger and the Company in the Superior Court for the County of Los Angeles,
which was served on the Company in May 1995. This action alleges breach of
contract, fraud, non-payment for services, conspiracy to defraud, unjust
enrichment and conversion. Plaintiff is seeking general and compensatory
damages of at least $692,000 and special and consequential damages of not less
than $170,000, together with exemplary and punitive damages. It is alleged that
the Company conspired to defraud plaintiff of his shares of Company stock and
deprive him of payment for services. The Company has denied these allegations.
In February 1996, the Rudolf Steiner Research Foundation filed a
complaint in the Unites States District Court for the Central District of
California against Clark Holcomb, Lawrence Gibson, Murray Bettingen, Inc. and
the Company. This action alleges civil RICO, violation of the Securities Act of
1933, violation of California Corporation Code, fraud, deceit and intentional
misrepresentation, negligent misrepresentation, conversion, constructive trust
and breach of contract. The complaint seeks damages of $201,333, rescission,
punitive and exemplary damages. The Company believes it has no obligation to
the Rudolf Steiner Research Foundation in connection with the matter.
The Seattle Regional Office of the Federal Trade Commission had advised
the Company that the staff believed that the Company's sequestration product,
which was licensed to KCD, Incorporated under the brand name SeQuesterTM, had
been improperly represented in advertising claims, and the same sequestrant
product previously marketed by the Company under the Lipitrol brand was also
improperly represented in advertising claims. The staff indicated that it was
prepared to recommend that a complaint be filed against the licensee, the
Company and certain individuals in connection with the foregoing. The Company
and the FTC staff have since agreed upon the terms of a proposed settlement in
this matter, pursuant to which the Company would consent to a permanent
injunction prohibiting it from misrepresentations relating to weight loss or
weight reduction products or services, or with respect to tests or studies
relating to such programs or services. In addition, the Company would pay
consumer redress to the FTC in an aggregate amount of $35,000 over a period of
twelve months. This proposed settlement, which has been accepted by the
Company, awaits final approval by the Federal Trade Commission.
-12-
<PAGE>
Except as otherwise specifically indicated above, management believes
that the Company does not have any material liability for any lawsuits,
settlements, judgments or fees of defense counsel which have not been paid or
accrued as of June 30, 1996. The Company will continue to vigorously defend
against these actions.
There can be no assurance that the Company will prevail in any of the
foregoing lawsuits. The Company may incur substantial expense in connection
with this litigation and any unfavorable settlement or judgment against the
Company in which the Company is a defendant could have a material adverse effect
upon the Company.
TRANSACTIONS IN COMPANY SECURITIES
In October 1995, the staff of the Securities and Exchange Commission
("SEC") advised the Company pursuant to certain private placements and resale of
unregistered Company shares, the Company was being investigated for alleged
violations of the federal securities laws. Subsequent to June 30, 1996, the
Company agreed to a consent decree with the SEC which, without admitting or
denying any wrongdoing, enjoins the Company from violating the registration
provisions of the federal securities law. The agreement is subject to final
approval by the SEC.
5. COMMITMENTS
PENDING ACQUISITIONS
During the quarter ended June 30, 1996, the Company entered into two
separate memorandums to acquire Pastels, International, Inc. ("Pastels") and
Nutra Quest, Incorporated. ("Nutra Quest") Subsequently, both memorandums
have been converted to operating agreements which contain certain
contingencies relating to Pastels and Nutra Quest achieving predetermined
gross sales amounts prior to the Company making payments related to the
purchase price. In the event these gross sales contingencies are not met,
the Company has the option to terminate the agreement(s) and convert any
monies advanced into a promissory note payable to the Company secured by
assets.
The Company acquired Pastels for $250,000 in cash, the assumption of
debt in an approximate amount of $90,000 (subject to an accounting and
Pastels gross sales achieving predetermined amounts within a specified time
periods) and warrants to purchase 500,000 shares of the Company's common
stock at $.15 per share. The Company acquired Nutra Quest for $600,000,
payable $200,000 in cash over a period of 15 months subject to Nutra Quest
gross sales achieving predetermined amount within specified time periods) in
fifteen separate installments, the balance payable in shares of the Company's
common stock, valued at $.15 per share which is also subject to similar
performance criteria. The founders and Presidents of both Pastel and Nutra
Quest have been retained by the Company under employment agreements.
Although not indentical both employment agreements contain provisions to
either purchase additional warrants of the Company common stock at prices
ranging from $.15 to $1.00, and to receive royalties ranging from 2% to 5% of
gross product sales form their existing or pending products. The value of the
employment agreements is in part subject to the performance of Pastels and
Nutra Quest gross sales.
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RESEARCH AND LICENSE AGREEMENTS
In January 1996, the Company entered into a broad based, long-term
agreement with E-Z-EM, Inc. ("E-Z-EM") for clinical testing of the Company's
contrast microspheres. Under the terms of the agreement, E-Z-EM will commence
clinical testing and provide funding for phase one animal studies. During phase
two, E-Z-EM will analyze the impact of regulatory costs and expenses in
preparation for capital funding to conduct FDA approved clinical trial (IND).
The agreement establishes the Company as the product manufacturer, which E-Z-EM
has an option for an exclusive license (including the right to sub-license) to
al products developed under the patent and the rights to global sales and
marketing of the products and related services for the life of the patent or 10
years, whichever is longer.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The Company commenced operations in 1990, when it acquired 82.5%
of See/Shell Biotechnology, Inc. ("S/S"), which was organized in 1987 and had
commenced operations in 1988. The Company's activities to date have consisted
primarily of planning, research and development, and marketing of its
microspheres and related products and services, performing clinical trials and
licensing of its fat sequestrant technology and development of its biodegradable
microspheres for human imaging applications, which the Company believes
represents its most significant long-term growth opportunity. On June 30, 1993,
the Company acquired Venus Management, Inc. ("VMI"), whose MRI leasing
operations are reflected in the Company's operating results since that date.
RESULTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 1995 COMPARED TO JUNE 30, 1996
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30 Ended June 30
---------------------- ----------------------
1995 1996 1995 1996
--------------- --------------- --------------- --------------
($ Thousands) Amount % Amount % Amount % Amount %
------ - ------ - ------ - ------ -
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues - Products and Services
Microspheres and laboratory services $74 38% $82 100% $140 29% $153 63%
Fat sequestrant 121 62% -- -- 341 71% 90 37%
------ ------ ----- ------ ------ ------ ------ ------
195 100% 82 100% 481 100% 243 100%
Cost of Revenues
Microspheres and laboratory services 46 62% 44 54% 81 58% 81 53%
Fat sequestrant 12 10% -- -- 25 -- -- --
------ ------ ----- ------ ------ ------ ------ ------
46 24% 44 54% 81 17% 81 33%
Gross Margin - Product and Services $149 76% $38 46% $400 83% $162 67%
------ ------ ----- ------ ------ ------ ------ ------
------ ------ ----- ------ ------ ------ ------ ------
Revenues - Lease Rentals $113 100% $97 100% $113 100% $194 100%
Cost of revenues - lease operations 120 106% 84 87% 120 106% 204 105%
------ ------ ----- ------ ------ ------ ------ ------
Gross margin - lease operations ($7) -6% $13 13% ($7) -6% ($10) -5%
------ ------ ----- ------ ------ ------ ------ ------
------ ------ ----- ------ ------ ------ ------ ------
</TABLE>
For the three and six months ended June 30, 1996, revenues from products
and services were $81,251 and $243,074, a decrease of 59% and 49%,
respectively, over comparable 1995 periods months. The decreases due to the
termination of the fat sequestrant license agreement with KCD during the first
three months of 1996. The Company has reserved all receivables from KCD as
uncollectible. The Company is currently developing an advanced fat sequestrant
product and is
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seeking new distributors for that product.
Revenues from microspheres and related laboratory services increased
$7,177 and $13,407 (or 9.7% and 9.6%) for the three and six months ended June
30, 1996, respectively, over 1995. The increases were due to completion of an
entirely new, more cost effective automated color microsphere counting system
employing flow cytometry technology through an OEM relationship.
While the Company to date has not encountered any significant
difficulties in connection with its sale of products in foreign markets, any
future developments such as significant increases in customs duties, export
quotas or other trade restrictions or large fluctuations in foreign currency
rates could have an adverse effect on the Company.
The overall cost of revenues for products and services as a percentage
of sales the three and six months ended June 30, 1996 of 1996 were 53% and 33%,
respectively, compared to 24% and 17% for 1995. Increases in cost of revenues as
a percentage of sales resulted primarily from decrease in royalties from KCD.
Research and development expense increased $9,717 for the three month
period ended June 30, 1996 from the comparable 1995 period due efforts discussed
below. The decease six month period ended June 30, 1996 of $39,164 from the
comparable 1995 was to a planned decrease in Dr. Shell's research support
services.
During 1994, the Company enhanced its production capability for contrast
microspheres for clinical trial purposes. The Company has identified four
specific imaging applications for its technology and initiated development on
two of them. These products include a contrast microsphere to CAT scan and
detect lung blood clots (pulmonary emboli), an ultrasound contrast microsphere
for detection of heart perfusion (myocardial perfusion), an MRI contrast
microsphere for abdominal visualization and a contrast microsphere to compete
with liquid x-ray contrast media. The Company anticipates that any increases in
research and development resources during 1996 will be devoted primarily to
these projects.
SG&A expense decreased to $275,351 from $419,742 for the second quarter
of 1996, from 1995, a reduction of 34%. For the six months ended June 30, 1996
SG&A expense decreased to $621,899 from $1,127,781 in 1995, a reduction of 45 %.
Results were 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 during 1995 due
primarily from matters related to the SEC investigation of Clark M. Holcomb's
activities. Included in 1995 are $220,420 of non-recurring financial consulting
and legal fees.
Interest expense for operations decreased 99% for the three and six
month periods ended June 30, 1996 from comparable 1995 periods. The 1995 periods
included non-cash expenditures for
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amortization of deferred financing costs incurred in connection with financial
advisory services and a private placement of convertible notes in November 1994
as well as accrued interest on such notes of $18,000 and $36,000 for the three
and six months ended June 30, 1995, respectively.
Interest income decreased to $3,570 for the second quarter of 1996
compared to $22,637 for 1995. For the six months ended June 30, 1996 interest
income decreased to $6,700 from $43,031 from the comparable 1995 six month
period. The decreases were due to interest earned on an outstanding note
receivable from a shareholder, an outstanding note receivable from the sale of
stock and delinquent royalties receivable.
No provision was made for Federal income tax since the Company has
incurred significant net operating losses from inception. Through December 31,
1994, the Company incurred net operating losses for tax purposes of
approximately $9,700,000 and approximately $11,420,000 for accounting purposes.
Differences between accounting and tax losses consist primarily of differences
in the accounting and tax treatment of depreciation, allowance for doubtful
accounts and research and development expenses. The net operating loss carry
forward may be used to reduce taxable income through the year 2008. The
Company's tax returns have not been audited by the Internal Revenue Service. The
carry forward amounts may therefore be subject to audit and adjustment. As a
result of the Tax Reform Act, the availability of net operating loss carry
forwards can be deferred, reduced or eliminated under certain circumstances. Net
operating losses in the State of California were not available for use during
1992 and the carry forward period has generally been reduced from fifteen years
to five years beginning in 1993.
LIQUIDITY AND CAPITAL RESOURCES
Since the inception of S/S, the Company has received capital for
operations and research from private investors, issuance of private party debt,
bank financing, and from licensing and product sales. Revenues have been
insufficient to cover operating expenses, research and development, costs of
litigation, construction costs, and patent development, which costs have been
unnecessarily well above the revenues from licensing and product sales. The
Company, therefore, has been dependent on private placements of securities, bank
debt, loans from private investors and the exercise of warrants in order to
sustain operations. To correct this imbalance management made significant cuts
and changes in the Company's operations resulting in reduced 1995 operating
expenses approximately $1,066,359 (or 34%) compared to 1994. However, until
such time as the Company can increase revenues the Company will continue to be
dependent on private or institutional investment capital to support a percentage
of the planned 1996 operations. Historically, the Company has been able to
generate private placement funds to provide capital for operations and growth.
During 1995, new management was responsible for approximately $965,348 received
by the Company from August through the balance of the year from private
placements, and the conversion of approximately $839,458 of Company debt from a
previous private placement. However, there can be no assurances that private or
other capital will continue to be available, or that revenues will increase to
meet the Company's cash needs, and there can be no assurance that a
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sufficient amount of the Company's securities can or will be sold or that any
warrants will be exercised to fund any operating needs of the Company or its
research and development programs. (Even assuming all of the warrants
outstanding as of December 31, 1995 with exercise prices at or below the current
market price of the common stock were to be exercised, the total gross proceeds
to the Company from such exercise would be insignificant).
The Company's consolidated financial statements have been prepared on
the assumption the Company will continue as a going concern. The Company has
suffered recurring losses from operations, has an accumulated deficit and has
negative working capital, and faces significant product development and
distribution issues that raise substantial doubt about its ability to continue
as a going concern. Management's plans in regard to these matters are described
below. The financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount of
liabilities that might result should the Company be unable to continued as a
going concern.
MANAGEMENT'S 1996 PLAN OF OPERATIONS
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 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 itself is only a partial solution, which was needed was a major
restructuring. What is needed is an overhaul. Management developed the
operational plan described below:
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,
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elimination of duplicate general and administrative costs; and,
3. secure existing revenue base by eliminating licensees default;
and
4. increase revenues from existing products; and,
5. develop new markets for existing products; and,
6. develop new products for existing and new markets; and,
7. develop strategic partners for distribution, sales and marketing,
research and development, commercialization of products; and
develop alternative research and development financing sources
such as U.S. government sponsored research grants; and,
8. develop investment banking and public relation alliances; and
9. make strategic acquisitions of consumer products companies.
RESULTS OF THE PLAN (As of August 10, 1996)
The plan described above was phased in June 1995. Since that time the
Company accomplished the majority of the goals set out in the plan including
(1) the Company made significant and lasting reductions in G&A, temporarily
halted all research and development, which it later resumed in order to
manufacture contrast microspheres for pre-clinical testing required as a
result of a strategic agreement signed with E-Z-EM; and, (2) reorganizing the
E-Z Trac subdivision to operate as a profit center; and (3) secured
sequetrant licensing revenues (temporarily, KCD defaulted again and was
terminated); and, (4) increased E-Z Trac revenues (KCD was terminated); and,
(5) began studying the feasibility of adapting the colored microsphere
products for commercial pathology applications; and (6) began development on
a series of new products in October 1995, which the Company announced
completion of first stage development of those products in March 1996; and
(7) signed a strategic agreement with E-Z-EM to develop contrast microspheres
for commercial applications; and, (8) applied for and received a research
grant from the National Institute of Health ("NIH"); and (9) began developing
investment banking relationships, however, no such relationship has been
established to date; and (10) have entered into tenanative agreements for the
acquisition of two consumer products companies. (11) completed television
advertisements (commercials) for AloeBare products, as well as establishing
an initial direct marketing distribution system, both in anticipation of the
distribution of approximately 20 products acquired through the acquisitions
or developed internally.
Additionally, the Company raised approximately $965,348 from private
placements from August 1995 to December 1995. From January 1, 1996 to June
30, 1996, the Company has raised $200,000 in one private placement, $500,000
commitment of a second private placement which closed in April, and received
a third private placement of $500,000 which closed in May with an option of a
second $500,00 to fund prior to December 31, 1996. The Company also received
a $100,000 grant funded by the National Institute of Health grant, with up to
$750,000 more conditioned on the success of phase one.
As of June 30, 1996, the Company's working capital position increased to
a negative $679,866 from a negative $1,242,016 at December 31, 1995, primarily
as a result of the working capital raised through the private placements that
occurred during the second quarter of 1996, this was offset by decreases in
accrued compensation and payroll taxes, professional services payable, trade
payables and other accrued expenses as well as increases in the allowance for
doubtful accounts and prepaid expenses associated with the proposed acquisitions
of the consumer products
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<PAGE>
companies. At June 30, 1996, the Company's cash position had increased to
$690,376 from $374,128 December 31, 1995.
At June 30, 1996, the Company had assets of $2,718,829 compared to
$2,439,606 on December 31, 1995. In addition, the Company had a total
shareholders' equity of $223,358 on June 30, 1996 compared to $(282,419) on
December 31, 1995, an increase of $505,777. The increase was the result of the
issuance of common stock valued at $1,104,818 offset by a net loss from
operations of $599,040. Payments on a long term note with a balance of
$1,280,229 (including interest currently due of $60,226) as of June 30, 1996 of
which $423,537 is due within the next twelve months had been assumed by the
Company as part of its acquisition of VMI; this note is secured by guaranteed
lease payments of an equivalent amount.
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<PAGE>
ITEM 3. LEGAL PROCEEDINGS
SEC AND SHAREHOLDER PROCEEDINGS RELATING TO MATTERS DIRECTLY BY EFFECTED BY OR
ARRANGED BY CLARK M. HOLCOMB
In July 1993, based on a concern the Company formed an independent
committee of its Board of Directors who's purpose was to determine whether
certain prior private placements of the Company's securities complied with all
of the registration requirements of federal and state securities laws. In
certain prior private placements of the Company's shares, a total of
approximately 2,506,982 shares of the Company's common stock was issued to a
smaller number of individuals. Those issuances were structured in reliance upon
the advice of the Company's then securities counsel, and the Company believes
that these issuances, standing alone, would have qualified for exemptions from
registration under federal and state securities laws. However, certain
subsequent resale's of these shares, commencing in June 1992, by the original
purchasers or their transferees to a total of approximately 330 investors raised
an issue as to whether a technical distribution occurred that might have
required either the original issuances or the resales to have been registered.
All of the foregoing resales were either directly effected or arranged for by
Clark M. Holcomb.
In October 1993, the Company filed a registration statement with the SEC
to register all of the foregoing 2,506,982 shares with the SEC. However, even
if the registration statement becomes effective so as to permit public resales
by the holders of the shares involved in the transactions described above, these
holders could have a right of rescission to recover the purchase price they paid
for their shares plus interest from the date of purchase against the persons
from whom they acquired the shares.
The Company believes (based in part upon the opinion of its current
special securities counsel) that these holders do not have a valid and
enforceable right to such rescission. However, subject to any applicable
statutes of limitation that might bar such future claims, these shareholders
could assert such claims, and the Company has not set aside any reserves to fund
any potential liabilities that it might incur in connection with any such future
potential claims, which could be material. Should the Company incur any such
liabilities, it might seek indemnification or contribution for such liabilities
from Mr. Holcomb or other third parties.
In October 1995, the staff of the SEC advised the Company that it was
considering recommending that the SEC file a civil injunctive action against the
Company and Dr. William Shell for alleged violations of the registration
provisions of the federal securities laws. The alleged violations appear to
relate to the sale by the Company of unregistered shares of its common stock
which involved a series of resales of these shares that were either directly
effected or were arranged for by Clark Holcomb. These transactions have been the
subject of an SEC investigation previously disclosed by the Company.
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<PAGE>
In April 1994, Rod Sherman and Computer Buddy sued Clark M. Holcomb
and the Company in Superior Court for the County of Los Angeles for breach of
an alleged oral contract pursuant to which Holcomb and the Company were to
pay Sherman a finder's fee for all shares of the Company's stock sold to
third parties introduced by Sherman to Holcomb or the Company of which
Sherman alleges that $58,000 remains owing to him. During the quarter ended
June 30, 1996 this matter went to court resulting in a favorable verdict, to
which there was no liability to the Company.
In March 1995, Donald Seidel sued Clark M. Holcomb, Dr. Shell, George
Berger and the Company in the Superior Court for the County of Los Angeles,
which was served on the Company in May 1995. This action alleges breach of
contract, fraud, non-payment for services, conspiracy to 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 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 Holcomb, Anita Kavanagh,
Dr. Shell and the Company. This action alleged 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 were directed at Holcomb and
Holcomb was alleged to have been acting as an agent of the other defendants.
It was 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
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also alleged that Holcomb misrepresented the financial condition of the
Company. The complaint sought damages in the amount of $200,000 as well as
unspecified punitive damages. The Company and Dr. Shell denied that Holcomb
was their agent. In February 1996, Eastman obtained a default judgement
against Holcomb in the amount of $200,000 in compensatory damages and $50,000
in punitive damages. During the quarter ended June 30, 1996, the Company
accepted a settlement of this matter for the nominal amount of $5,000.
In February 1996, the Rudolf Steiner Research Foundation filed a
complaint in the United States District Court for the Central District of
California against Clark M. Holcolm, Lawrence Gibson, Murray Bettingen,
Bettingen, Inc., and the Company. This action alleges civil RICO, violation of
the Securities Act of 1933, violation of California Corporation Code, fraud,
deceit and intentional misrepresentation, negligent misrepresentation,
conversion, constructive trust and breach of contract. The complaint seeks
damages of $201,333, rescission punitive and exemplary damages. The Company
believes it has no obligation to the Rudolf Steiner Research Foundation in
connection with the matter. The Company denies the allegations and intends to
vigorously contest the matter.
Subsequent to June 30, 1996, pursuant to the certain private
placements and resale of unregistered Company shares discussed above, the
Company agreed to into a consent decree with the SEC that, without admitting
or denying any wrongdoing, enjoins the Company from violating the
registration provisions of the federal securities law.
PROCEEDING RELATED TO LICENSING AGREEMENTS, MANUFACTURING AGREEMENTS, ROYALTY
AGREEMENTS, AND PATENT INFRINGEMENTS
In September 1993, Dr. Shell commenced an action against Dynamic
Products, Inc. ("Dynamic"), D&F Industries ("D&F") in his capacity as a 25%
shareholder of FATCO in the Orange County Superior Court of the State of
California seeking damages from these parties for their alleged breach of
contract and misappropriation of certain trade secrets of FATCO and the Company
relating to the first generation fat sequestrant product. Dr. Shell has asserted
in this action that Dynamic has sold the first generation fat sequestrant
product to Herbalife for resale in the United States without the required
payment of royalties to FATCO (which is obligated to pay Dr. Shell 25% of its
royalty income, which Dr. Shell then contributes to the Company) based on those
sales.
In October 1994, Dr. Shell filed a related lawsuit against FATCO in the
same court seeking the termination of a 1987 agreement between FATCO and Shell
licensing certain fat sequestrant technology of Dr. Shell to FATCO based upon
failure of FATCO to fully exploit the transferred technology for the benefit of
Shell, failure to fully exploit the products, knowingly permitting sales of
products made utilizing the technology transferred to continue even though no
royalties were being paid on those sales, refusing to pursue legal action to
collect the unpaid royalties and stopping the unauthorized sales, and by
entering into a renewal of an agreement with a distributor on the same
unfavorable terms which previously existed and which diverted monies which
should have
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been paid to FATCO to other entities owned and controlled by some of the
shareholders and members of the Board of Directors of FATCO. FATCO has filed a
cross-complaint in this action against Shell alleging breach of the licensing
agreement between Shell and FATCO.
In January 1996, FATCO filed a First Amended Cross-Complaint alleging
causes of action against Dr. Shell, the Company, EHI and KCD for breach of
contract, breach of fiduciary duty, interference with prospective economic
advantage, misappropriation of trade secrets, conversion, constructive trust,
accounting and permanent injunction. Each of these causes of action relate
to the action of the Company in entering into the License Agreement with KCD.
The Company has filed an answer denying all of the allegations contained in
the Cross-Complaint and intend to fully defend this matter. The basis of
this cross complaint appears to pertain to the license agreement between EHI
and KCD, Inc. which as of March 1, 1996 was canceled as a result of KCD's
failure to make royalty payments to the Company.
In March 1994, the Company and S/S sued Herbalife (settled with respect
to Herbalife) and D&F in Superior Court for the County of Orange, California for
fraud, breach of contract and conspiracy to misappropriate trade secrets. The
Company alleges in this lawsuit that S/S provided certain confidential
information and trade secrets to D&F, which misappropriated this information to
manufacture an advanced fat sequestrant product. The Company is seeking in this
lawsuit injunctive relief and damages in an unspecified amount from defendants.
This matter has been 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, declatory relief
and permanent injunction. The action is abased upon the failure of KCD to pay
the royalties due pursuant to the contract and their use of advertising claims
in connection with the sale of the licensed products which were in excess of
those which the Company authorized KCD to make. On April 8, 1996, KCD filed a
cross complaint against the Company, Effective Health, Dr. Shell and William
Pelzer alleging causes of action for breach of contract, breach of implied
conversion, rescission, good faith and fair dealing, negligence, intentional
misrepresentation, account and constructive. The Company denies all of the
claims and intends to fully defend this cross complaint.
The legal proceedings described above relating to Licensing
Agreements, Manufacturing Agreements, Royalty Agreements, and Patents
involving the Company and its subsidiaries, Dynamic Products, Inc., D&F
Industries, FATCO, KCD, Inc., and Dr. Shell are in the process of
consolidation for the purpose of global settlement. Each of the companies
have instructed their various legal counsel to temporarily suspend legal
proceedings in expectation of a global settlement. Certain key settlement
proposals are in final revision. Final global settlement is expected to be
completed during the third calendar quarter. The Company does not expect to
incur any material liability as a result of these settlements.
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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 proceeding relating to the payment of royalty's pursuant to the
existing Royalty Agreements between the Company and See. See had previously
transferred a 50% interest in his Royalty Agreements with the Company to
Pizzulli.
With respect to the formal settlement of the Royalty issues with See,
the Company has agreed to: 1) pay See, beginning in July 1995 a total of 1-1/2%
of the Company's net sales of products and 10% of the Company's receipt of
royalties from the Company's licensees under certain patents owned by the
Company covering colored microspheres, contrast microspheres and fat
sequestration products, 2) pay See, over time, the sum of $32,417 which
represents past due royalties for the period up to June 30, 1995, 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, 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
July 1995 a total of 1-1/2% of the net sales of the Company's products and 20%
job 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, 3) pay Pizzulli, over time, the sum
of $13,787 which represents past due royalties for the period up to June 30,
1995, 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 arbitration
pertaining to royalty issues initiated an 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, 2) pay Pizzulli the additional sum of
$75,000 on or before March 1, 1996, 3) pay Pizzulli, subject to certain
adjustments, the additional sum of $100,000 on or before March 1, 1997, 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, 5) transfer to Pizzulli 75,000 restricted shares of KCD common
stock, 6) transfer to Pizzulli 300,000 shares of the
-25-
<PAGE>
Company's restricted common stock. In addition the Company has agreed to file
FORM S-3, or other forms as maybe 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's common stock does not reach a specified price within an
eight month period of filing the 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 judgement 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 judgement 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 trial 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 owned by VMI. After MFA defaulted on the foregoing loan, J&J Finance, in
June 1995, obtained a writ of attachment on the Resonex MRI unit and has
taken physical possession of that unit. The Company's position was MFA had
no authority to secure the foregoing loan with VMI's MRI unit, since the loan
was made solely for the benefit of MFA, the lien was placed on the MRI unit
without VMI's knowledge or consent, and none of the loan proceeds were
received by VMI or the Company. Although the Company believes VMI was
entitled to recover the MRI unit from J&J Finance and that VMI should prevail
in its claims against MFA should J&J Finance be permitted to retain the MRI
unit, there would be no assurance that VMI will prevail against either party
or that VMI will be able to collect any judgement that it may obtain against
MFA. The Company also learned that the current fair market value of the
Resonex MRI unit is substantially below previous estimates and as such may
not be worth the cost of continuing litigation. As a result of all the
foregoing the Company has written off the net book value of the second unit
of $964,286 as of December 31, 1995.
Subsequent to June 30, 1996 the Company entered into a settlement
agreement with J&J Finance agreeing to a mutual dismissal of actions and a
release of claims.
FEDERAL TRADE COMMISSION PROCEEDINGS
The Seattle Regional Office of the Federal Trade Commission has advised
the Company that the staff believes that the Company's fat sequestrant product,
which currently is marketed by a licensee under the name "SeQuester," has been
improperly represented in advertising claims, and that the sequestrant product,
when previously marketed by the Company under the name "Lipitrol", also was
improperly represented in advertising claims. The staff has indicated that it is
prepared to recommend that a complaint be filed against the licensee, the
Company and certain individuals in connection with the foregoing.
as
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<PAGE>
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 amounts of
$35,000 over a period of twelve months. The Company's Board of Directors
voted to accept the proposal in March 1996, which now must be formally
approved by the FTC.
Except as otherwise specifically indicated above, management believes
that the Company doesn't have any material liability for any lawsuits,
settlements, judgements or fees of defense counsel which have not been paid or
accrued as of June 30, 1996.
While the ultimate outcome of these issues, if claims were asserted and
litigated, is complicated and not free from doubt, management with the advice of
legal counsel believes, on the basis of the facts currently known, that it is
not probable that the Company would have any material liability. However, there
can be no assurance that the Company will prevail in any of the above
proceedings. Also the Company may be required to continue to defend itself
resulting in substantial additional expense. In the event the Company is unable
to pay the defense costs associated with the foregoing an unfavorable settlement
or judgement could be awarded against the Company which could have a material
adverse effect upon the Company. Additionally, starting in June 1995, the
Company began taking the steps it considered necessary to insure that the
Company, its subsidiaries, employees, consultants and affiliated companies and
individuals are not involved in any activities, operations, or relationships
which are not solely for benefit of the Company.
There can be no assurance that the Company will prevail in any of the
foregoing lawsuits. The Company may incur substantial expense in connection
with this litigation and any unfavorable settlement or judgement against the
Company in which the Company is a defendant could have a material adverse effect
upon the Company.
In August 1992, the Company initiated a construction program, which was
completed during 1993, for its laboratory and office facility to augment and
improve product development and production capability. In December 1992, the
Company issued 500,000 restricted shares of the Company's Common Stock to Clark
Holcomb in exchange for his offer to fund $350,000 of the construction costs.
Costs of approximately $431,000 were expended by the Company, of which Mr.
Holcomb has reimbursed $225,000. As of March 31, 1996, the unpaid portion of
$265,000 has been assigned to Pizzulli as part of the settlement.
-27-
<PAGE>
The Company currently has no firm commitments for material capital
expenditures, with any such future commitments being dependent upon the
availability of funds. The Company does not anticipate that future compliance
with existing environmental and occupational safety regulations will have a
significant impact on its capital expenditures or on its financial condition or
future operating results.
EFFECT OF INFLATION
The Company does not believe that general inflation would have a
material effect on its operations.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS OF A VOTE TO SECURITY HOLDERS
On October 26, 1995, the shareholders of the Company approved amendments
to the Company's certificate of Incorporation to provide for: (i) a reverse
stock split of not less than one share for every four old shares nor more than
one share for every eight old shares, with the specific exchange ratio to be
determined by the Board of Directors; (ii) an increase in the number of
authorized shares of common stock from 25,000,000 to 50,000,000.
ITEM 5. OTHER INFORMATION
On July 6, 1995, the Company's common stock was deleted from the Nasdaq
Small-Cap Market. The Company then requested a hearing before the Nasdaq Hearing
Review Committee ("Committee"). On September 22, 1995, the Committee affirmed
its original delisting decision.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
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<PAGE>
(b)During the six months ended June 30, 1996, no Form 8-K were filed.
(27) Financial Data Schedule (included only in EDGAR filing).
-29-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
INTERACTIVE MEDICAL TECHNOLOGIES LTD.
-----------------------------------------
(Registrant)
Date: 8-12-96 By: /s/ STEVEN R.WESTLUND
------------------- ------------------------------------------
Steven Westlund
(Chief Executive Officer)
Date: 8-12-96 By: /s/ PETER T. BENZ
------------------- ------------------------------------------
Peter T. Benz
(President, Chief Financial Officer)
-30-
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