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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the Transition Period From _________ to _________
COMMISSION FILE NUMBER 0-21384
INTERACTIVE MEDICAL TECHNOLOGIES LTD.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-3367421
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1717 STEWART STREET, SANTA MONICA, CALIFORNIA 90404
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number including area code: (310) 586-5555
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 (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
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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. ___
For the year ended December 31, 1996, the Registrant's revenues were
approximately $802,162.
As of March 31, 1997, the aggregate market value of the shares of the
Registrant's common stock held by non-affiliates was approximately $5,510,745.
As of March 31, 1997, the Registrant had 45,922,873 shares of common stock
outstanding.
Documents Incorporated by Reference: NONE
Transitional Small Business Format. Yes No X
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ITEM 1. DESCRIPTION OF BUSINESS
The Company's mission is "to enrich the quality of health and the vitality
of life". Since commencing operations in 1986, Spheres Research Partners, and
later 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 to 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, although not proven in clinical studies, in theory prevents
the absorption of fat into the blood stream and tissue. The Company has pending,
as a result of its recent restructuring, the acquisition of a personal care
products company and a health food supplements company. The two companies are
being acquired on a contingent basis, subject to the achievement of performance
criteria.
Organization
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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., ("See/Shell", a
California corporation). In September of 1987 S/S formed E-Z TRAC, Inc., ("E-Z
Trac") as a wholly owned subsidiary. See/Shell 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 See/Shell 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 1/2% of S/S, and
became "INTERACTIVE MEDICAL TECHNOLOGIES, LTD.", (the "Company"). In 1987 IPI
completed a $150,000 private placement of its securities, however, 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. In May 1996, the Company made a proposal to acquire Pastels
International, Inc. ("Pastels") and in August 1996 Nutra Quest, Inc. ("Nutra
Quest"). Both proposals to acquire Pastels and Nutra Quest are for a
combination of cash and IMT stock and both agreements contain performance
criteria for the distribution of cash and stock. Both proposals can be
terminated by the Company if certain performance criteria are not met.
Operating History
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Although the Company was formed in Delaware in 1986, as Interactive
Principles, Incorporated, it did not commence meaningful operations until early
1990 when it changed its name to Interactive Medical Technologies. Ltd.. and
acquired See/Shell biotechnology, Inc. and E-Z Trac, Inc., its wholly owned
subsidiary, both formed by former officers and directors of the Company.
See/Shell had previously been engaged in the research, development and marketing
of diagnostic imaging products to detect restrictions and blockages in blood
flow. In connection with the blood flow research, See/Shell also developed a
unique technology for the selective entrapment or sequestration of dietary fat
from food in the gastrointestinal tract which in theory could prevent the fat
from absorption into the blood stream.
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These two areas formed the basis of the Company's business for the next
several years. Initially, the Company marketed a non-biodegradable, non-
radioactive, micron sized particle encased in oil ("Colored Microsphere") and
later developed a more sophisticated, biodegradable microsphere ("Contrast
Microsphere) composed in part of albumin, a human blood protein, and other, FDA
approved contrast agents. The Contrast Microsphere substantially improved the
speed, resolution, accuracy and resolution of diagnostic images of the
restrictions and blockages in blood flow and organs when viewed through x-ray or
other scanning technology. The Contract Microspheres however, cannot yet be
marketed for human use until the Company secures the approval of the FDA.
The Company also commenced the marketing of a weight loss product that was
based on the sequesterant technology developed during the prior blood flow
research. The product was sold initially to local doctors, consumers and small
distributors in the Southern California area. Thereafter. the Company elected to
discontinue all direct selling and sought to license the rights to an
established marketing company. In 1994, the Company appointed KCD. Inc.. as its
exclusive sales and marketing agent for the weight loss product. The
relationship between the Company and KCD spawned several lawsuits, settlement
agreements and revised settlement agreements and recently, in February. 1996, a
termination of the license agreement and the cessation of any marketing and sale
of this product by the Company. The Company's relationship with KCD and its
principals also resulted in several other litigations and investigations, one
instituted by the Securities & Exchange Commission dealing with the sale and
resale of the Company's common Stock by one of KCD's principals and another
action commenced by the Federal Trace Commission with regard to claims made by
KCD on behalf of the product. Both of these actions have been resolved. The
Company's new management team which assumed control of its affairs in mid-
1995, has, among other things, assessed the Company's past activities and has
elected to vigorously pursue the marketing, sale and development of the
Company's microsphere business while discontinuing the sale of its fat
sequesterant product.
Description of Services
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The Company offers several products and services, however its primary
emphasis will be directed toward the sale and marketing of the Colored
Microspheres and the related laboratory services, the continued pre-clinical
research of its Contrast Microsphere, the development of Pastels International,
Inc. ("Pastels") including the broadening of its product line of beauty and skin
care products and the launching of Nutra Quest Incorporated, ("Nutra Quest"), a
network marketing organization that will offer through various distributors, a
complete line of proprietary food, dietary supplements and health related
products. Nutra Quest, may in the future, become the exclusive marketing agent
for certain other selected products.
Due in large measure to recent clinical studies that have failed to
substantiate the efficacy of the Company's fat sequestration technology, the
Company has elected to cease all sales and marketing of this product until such
time as its efficacy can be confirmed. Revenues derived from licensing of this
product provided almost one-half of the Company's 1995 revenues. The Company
hopes to compensate for this short fall by increased sales of its microspheres,
positive development of both Pastels and Nutra Quest and the further reduction
of costs and expenses.
Although in 1993, the Company acquired Venus Management, Inc., whose assets
consisted primarily of two MRI systems, only one machine remains operational and
the lease revenue received by the Company is fully offset by the payments due
toward the balance of the purchase price of the machine. The second unit,
which was not operational, has been abandoned to the lien holder under a mutual
release of claims agreement. The Company is currently in discussions with the
lessee of the operational unit and
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the lien holder of the operational unit to transfer ownership to the leasee in
conjunction with a release of the Company's obligation to the lien holder.
Plan of Operation
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The Company intends to concentrate its efforts on the sale of its Colored
Microsphere and related laboratory and diagnostic services to a broad cross
section of pharmaceutical companies, universities, hospitals and others engaged
in blood flow and related research. The Company also intends to proceed toward a
filing with the FDA for an Investigational New Drug ("IND") seeking approval to
begin human testing of "Contrast Microspheres" in the detection of blood clots
in the lungs as well as other applications to detect heart, liver and brain
dysfunction and certain gastrointestinal blockages. The receipt of marketing
approval of its Contrast Microspheres will contribute substantially to the
Company's future potential revenue. There are, however, numerous problems that
are common in the IND procedure including delays in FDA responses, the necessity
for further testing and data compilation which may require additional clinical
trials and ultimately, the commencement of any marketing efforts. The requisite
clinical trials themselves are costly and when compounded with the anticipated
delays and the possibility of the need for further testing, the Company's
limited resources could prove to be inadequate to sustain this effort.
Accordingly, the Company has entered into an agreement with E-Z-EM, Inc., ("E-Z-
EM"), a leader in the sales and marketing of oral radiographic contrast agents,
pursuant to which E-Z-EM would fund and conduct pre-clinical and approved
clinical trials of its Contrast Microspheres for certain human application and
to develop and Market Products, applications and services relating to the
Company's Contrast Microspheres. Beginning in March, 1996, the Company and E-Z-
EM began pre-clinical studies utilizing the Contrast Microspheres in the
detection of blood clots in the lung. This research is presently being conducted
at Dartmouth Hitchcock Medical Center and at the University of Massachusetts
Medical Center. In connection with its agreement with E-Z-EM, the Company
retains the right to manufacture the Contrast Microspheres while granting to
E-Z-EM, the exclusive option to license and sub-license as well as the rights to
global sales and marketing of the product for a period of ten years or the life
of any patent issued in respect thereto, whichever is longer.
Implementation of New Strategic Plan
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On or about May, 1995, the Company's present management, Messrs. Westlund
and Benz, joined the Company as Chairman and President, respectively, with the
immediate mission to implement major changes in operations and the financial
structure of the Company. The plan that was devised by Westlund and Benz, who
together had previously assisted other companies in "turning around " their
operations, required a substantial reduction of expenses and cost of sales while
securing and stabilizing, if possible, the Company's primary revenue sources. In
connection with the above activities, the Company also sought to raise needed
working capital as well as more permanent funding. Thereafter, the Company would
seek to develop additional products and or make strategic acquisitions and seek
government grants or corporate sponsors to facilitate the development of its
Contrast Microspheres. Finally, the last objective was to put in place a
carefully conceived sales and marketing plan for its present and proposed
products and services.
On balance, the Company's management has achieved a majority of its short
term goals and has taken substantial steps toward transforming a debt and
litigation ridden company with a narrow product mix with traditional but
uninspired sales and marketing techniques, into a more efficient, litigation
free (only one minor action remains) entity, with substantially reduced
operating expenses and a major strategic partner who will both assist in and
provide funding for pre-clinical and FDA studies for use of the Contrast
Microsphere for human diagnostic imaging. Further, the Company has successfully
applied for and has
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received a grant of $100,000 from the National Institute of health ("NIH") to
continue research on the Contrast Microsphere with the potential of an
additional $750,000, depending on the results of trials now being conducted. The
Company pursuing acquisition of two companies, Pastels, which is engaged in the
creation, manufacture and sale of personal care and beauty products and Nutra
Quest, a distributor of an array of health food and nutritional supplements.
Moreover, the Company's plan has resulted in the aggressive commercialization of
its expanded product line by means of participation on the world wide web and
the commencement of direct marketing television and product infomercials,
network marketing and a program designed to recruit licensees, distributors and
sub-distributors for the Company's products and services. Finally, management
has undertaken the selective promotion of the Company by initiating numerous
contacts with members of the financial community, investment advisors and
consultants in an attempt to bring the Company's story to the investment
community. Through the efforts of its current management, the Company has,
within the past 15 months, attracted an additional $1,200,000 in convertible
debt and equity capital from investors. Although the Company has curtailed its
losses, it is nevertheless operating at a loss on a monthly basis and requires
further financing to continue its present level of operations and proposed
expansion. Notwithstanding these factors, the Company believes that with the
continuing implementation of its various marketing methods offering an expanded
and relevant product line, it can begin to achieve, in 1997, profitable
operations on an ongoing basis.
Colored Microsphere Products and Services
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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. Sales are made directly by
the Company or Triton Technologies, Inc., ("Triton"), its distributor. included
among the Company's repeat customers for its Colored Microspheres are the NIH,
New York and Columbia Universities, University of Southern California, Bristol
Myers/Squibb, Rorer, Sloan Kettering Institute and Walter Reed Army Hospital.
The raw materials necessary for the production of the Colored Microspheres which
are non-radioactive polystyrene spheres ranging in size from 1 to 25 microns,
are readily available from numerous sources. The Company then treats, sizes and
labels the microspheres in its laboratory based upon a proprietary trade secret
process. One of two classes of non-radioactive marker is attached to the
microsphere which gives it a distinctive signal when viewed through the
Company's flow cytometer imaging system. This 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 the flow cytometer or through other imaging
systems. The Company's non-radioactive technique, which has proven to be at
least as accurate and efficient as radioactive microspheres, eliminates the need
and additional cost required to dispose of the radioactive waste.
In connection with the manufacture and sale of its Colored Microspheres,
the Company created the Investigator Partner Service ("IPS") program that
combines a national reference service with an automated laboratory analysis
which includes the counting of the microspheres used in blood flow studies and
in studies to determine the feasibility of microsphere delivery of
pharmaceutical drugs. The IPS laboratory service has proven to be a successful
adjunct to its business such that the Company has had to increase its capacity
by developing an improved imaging analyzer. It did so using a Becton-Dickenson
flow cytometer and its own proprietary software which increase the speed and
sensitivity of the flow cytometer. This improved analyzer increased accuracy and
is capable of analyzing approximately 800 samples per week. The Company markets
these kits to the industry and after performing their respective blood flow and
other tests, return the data and tissue samples to the Company for analysis and
counting with the results provided
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to the customer within 3 days. The sale of Colored Microspheres and the IPS
service have proven to be a constant, consistent source of revenue to the
Company in the past and the Company anticipates an annual increase in this
segment of approximately 5-10% per year for the next several years.
Contrast Microspheres
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The Company's Contrast Microspheres are still in the development stage and
not yet in commercial production. However, the Company is currently producing
the Contrast Microspheres, composed in part of albumin, for pre-clinical testing
that is now being conducted at the Dartmouth Hitchcock Medical Center and the
University of Massachusetts. See "National Institute of Health" & "Marketing and
Distribution". The Company believes that a fertile market exists for the
application of its Contrast Microspheres in certain diagnostic procedures
utilizing x-ray, CAT scan, MRI and ultra sound equipment. These diagnostic
procedures when conducted with the Company's Contrast Microspheres offer vastly
improved imaging of organs such as the lungs, liver, heart and brain as well as
overall blood flow observation. Although the Company believes its Contrast
Microsphere technology to be superior to any presently existing imaging
techniques, their use in human diagnostic procedures requires FDA approval
which, at best, is costly and time consuming and consequently there can be no
assurance that the Company will have sufficient financial or personnel resources
or the necessary "staying power" to complete the FDA process and begin the
commercialization of this product for human use. See "Competition".
National Institute of Health
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In October, 1995, the Company submitted an application to the National
Institute of Health ("NIH") for a research grant for the further development of
its Contrast Microspheres for use in human diagnostic application. In January,
1996, the Company was advised that the medical and scientific review panel of
the NIH had favorably approved its application. Soon thereafter, formal approval
was granted and the Company received an initial $98,405 with the possibility of
an additional $750,000 to be provided based upon Phase One trial results. The
Company has completed the Phase One research and has submitted the results to
the NIH which the Company believes should justify the awarding of Phase Two
Funding in early 1998 (See "Research & Development"). There can, however, be no
assurance that any additional funding will be forthcoming from the NIH.
Research & Development
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The Company has consistently devoted a sizable portion of its available
funds and personnel toward research and development activities, especially in
the areas of blood flow research utilizing its proprietary and patented Colored
and Contrast Microsphere technology. Continuing research and development has
confirmed the efficacy of the Company's products in observing the
gastrointestinal tract in humans with the aid of various scanning devices to
detect blood clots in the lung, certain heart, liver and brain disorders. Much
of the research for the Contrast Microsphere has been, and is now being,
conducted at Dartmouth and the University of Massachusetts.
As a logical progression of this research and development, is the Company's
present intention to file an IND with the FDA in mid to late 1997, seeking
approval to begin human testing of the Contrast Microsphere for several human
diagnostic applications. The Company is confident that the quality and results
of its continuing research and development will result in receipt of marketing
approval by the FDA, however, this is often a long and costly procedure with the
necessity to conduct clinical trials and the like. To assure itself of
continuing financial support during this pre-clinical and thereafter in the IND
phase of
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trials, the Company has contracted with E-Z EM, a large sales and marketer of
oral radiographic contrast agents. E-Z EM is already assisting the Company by
providing a portion of the funding for the pre-clinical studies now being
conducted. In consideration for its various services including certain financial
obligations that it has assumed in the pre-clinical phase and future financial
commitments thereafter, the Company while retaining the manufacturing rights to
the Contrast Microspheres, has granted to E-Z EM, the exclusive option to
license and or sub-license, sell and market any and all products that may be
developed from their relationship. This exclusive option shall remain in effect
for the life of any patent that may issue by virtue of these activities or for a
period of 10 years through December 2005, whichever is longer.
Pastels International, Inc.
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On May 17, 1996, the Company made a proposal to acquire all of the assets,
subject to liabilities, of Pastels, a private California company that has
developed and now manufactures several beauty and skin care formulations sold
commercially under the names AloeBare/Tm/, a depilatory, and Skinnergy, an anti-
aging skin treatment. Skinnergy/Tm/, which is formulated to treat dry, scaly and
discolored skin, utilizes multi-fruit acids, infused botanicals and liposomes in
its proprietary formula. AloeBare, Pastels' personal hair removal system, is
formulated with natural botanical ingredients. Both of these products contain
alpha hydroxy acids which recently published, independent tests confirm have a
soothing, protective and restorative effect on the skin.
Under the proposal the Company will be obligated to pay Ms. Cecilia Lascu,
Pastels' founder and sole shareholder, a total of $250,000, of which $50,000 has
been paid through March 31, 1997, and warrants to purchase 500,000 shares of the
Company's common stock exercisable for a period of 5 years at $.15 per share,
subject to the achievement of certain performance criteria. The Company intends
to increase the total number of products offered by Pastels as well as to
broaden its current market. In this regard, the Company has funded an
infomercial describing and detailing the Pastel product line. The results of the
infomercial, while not overwhelming, were nevertheless encouraging and based
upon consumer input received, the Company will make certain changes in product
mix and presentation. Upon completion of the acquisition the Company will
operate Pastels as a wholly owned subsidiary and Ms. Lascu will remain as its
President and Chief Operating Officer.
Nutra Quest Incorporated
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The Company's other pending acquisition, Nutra Quest was formed by
Mr. Lawrence Sturchio who has had substantial prior experience in all aspects of
product distribution and marketing. The Company is obligated to pay a total of
$600,000 for all of Nutra Quest issued and outstanding shares, of which $200,000
is to be paid in cash over a period of 15 months, of which $70,000 has been paid
through March 31, 1997, subject to Nutra Quest achieving certain predetermined
levels of gross sales within specific time period, and the balance of $400,000
is payable in shares of the Company's common stock valued at $.15 per share. The
total number of shares payable to Nutra Quest is also subject to Nutra Quest
achieving set performance goals.
Nutra Quest has a broad line of proprietary products with specific emphasis
on nutritional alternatives to coffee, tea and soda, herbal supplements to more
efficiently process calories, mineral and enzyme supplements for use as
digestive aids, athletic performance products containing a blend of amino acids
and rice protein as well as a personalized profile to evaluate the health and
nutritional needs of each individual. The Company intends to operate Nutra Quest
as a wholly owned subsidiary and Mr. Sturchio will remain as the President and
Chief Operating Officer of Nutra Quest.
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Primary Products and Services
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Personal Care Products
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Pastels offers a line of skin care and personal hair removal products.
"Skinergy/Tm/", an affordable skin care system, offers a line of products
providing botanical "teas" rich in plant enzymes, hormones and emollients to
cleanse, moisturize, and protect. "Aloebare/Tm/" is a new personal hair removal
system formulated with natural botanical ingredients. Aloebare/Tm/ is available
in face and bikini strips, and the larger leg and body sizes. Aloebare/Tm/ also
comes with a unique premoistened towelette containing alpha hydrox to help blend
recently waxed skin tones, and aloe to help soothe irritation.
Nutritional Supplements
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Nutra Quest, Inc. offers a line of nutritional supplements that is being
marketed in a "Network Marketing" environment. The product line provides a
nutritional balance of the essential vitamins, minerals, proteins,
carbohydrates, essential fats and fiber addressing the need to increase the
body's metabolism.
Non-biodegradable Colored Microsphere Products for Animal Blood Flow Research
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The Company developed a patented 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
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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 the IPS program,
investigators (customers) buy E-Z Trac's colored microspheres, perform their
experiments, and send the tissue samples to EZ 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
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Trac has recently doubled its capacity, now being able process up to 1600
samples per week. The IPS program augments the sales of colored microspheres.
Biodegradable Contrast Microspheres for Human Diagnostic Imaging Applications
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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.
Sequesterant Products
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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.
There 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 remarketed in a
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responsible manner basing claims only on valid clinical data that potentially
significant revenues can be generated from a new sequesterant technology
product.
Magnetic Resonance Imaging Leasing Operations
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In 1993, the Company acquired Venus Management, Incorporated, ("VMI") a
company which was incorporated in New York on August 1, 1989 and whose principle
assets consisted of two MRI systems (the "Units") one of which was leased to an
MRI service provider who was operating the unit in New York state, while the
second unit was not assembled, or operational. The second unit has been returned
to the finance company which held the lien on this piece of equipment under a
mutual release of claims agreement between the Company and the finance company.
The Company is currently in discussions with the MRI service provider to take
title to the unit and assume the debt on the unit. The MRI service provider is
currently delinquent in its lease payments and is negotiating with the lien
holder on this piece of equipment to restructure and assume the obligation and
to obtain title to the equipment. The Company has provided a $63,450 loss for
the mutual release of claims associated with this piece of equipment. However,
if the parties are unable to resolve this matter, it is likely that the third
party finance company will institute an action against the Company, VMI and the
MRI service provider for the balance due plus other costs and relief.
Product Liability Insurance
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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 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
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<PAGE>
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.
The Company's products are marketed in the non radioactive products group as
"NuFLOW FLUORESCENT MICROSPHERES WITH PROCESSING SERVICE". Triton's web page
can be viewed at http://www.physiology.com. The Company and Triton believe the
world wide web offers a opportunity to target vast numbers of pre qualified
consumers at a very competitive cost. The Company believes that the world wide
web is a important information tool in scientific research communities.
Triton and the Company 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. The Company and Triton
will continue to market the colored microsphere products through trade show
exhibits and advertising in targeted journals. The Company 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. The Company also markets a supplemental reagent extraction kit.
Sales of colored microspheres and related products including IPS laboratory
services were $413,840 in 1996, increasing from $246,243 in 1995. 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 signed a broad based
agreement with E-Z EM, Inc., a recognized global leader in sales and marketing
of oral radiographic contrast agents. 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, E-Z Trac
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
-11-
<PAGE>
problems in connection with the Company's direct distribution to doctors,
consumers, and small local distributors and 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 and reputable marketing companies.
In 1994, the Company, through its Effective Health subsidiary entered into
a exclusive Licensing Agreement with KCD, Incorporated, a company which
represented to the Company that it had 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 royalties 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, KCD and other companies associated with the manufacture
and distribution of the sequesterant product have entered into a mutual release
of claims and dismissal of actions between the aforementioned parties, which
provides individual rights to both the Company and KCD to market and license the
fat sequesterant technology. The Company is not currently marketing or
licensing the fat sequesterant technology until additional testing is performed
to substantiate its efficacy.
Competition
- - -----------
The Company and its subsidiaries operate in a highly competitive marketing
and technology environment, and as noted above, the Company is entering into a
highly competitive consumer products environment with its pending acquisitions.
The Company competes primarily on the basis of product uniqueness by
establishing a point of difference usually based on technological content,
quality, service (where applicable), and reliability, as perceived by the user,
and to a lesser extent on the basis of price. The Company competes or will
compete, either directly or indirectly, with other companies in each of its
product categories many of whom are larger companies with substantially more
resources available, including greater financial resources, larger research and
development staffs, greater sales volume, and larger sales forces.
Although the Company believes that its colored and contrast microspheres
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.
-12-
<PAGE>
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 micro-bubble 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, NM 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.
3. Increase the throughput from existing imaging equipment such as
digital radiographs, CAT-scans, CAT-scans and MRI scans.
-13-
<PAGE>
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
recirculate 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 "micro-bubble"
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 pharmaceutical drugs the Food and Drug Administration ("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 sequesterant technology)
the Company has successfully competed against these larger companies by
establishing a consumer point of difference based on technology. The Company
does not currently plan to introduce new weight loss and nutritional products
other than those currently offered by Nutra Quest. There can be no assurance
that competing companies will not develop and market products which are similar
to those the Company intends to market before the Company can, or that the
Company's products will be successful.
Raw Materials, Suppliers, and Manufacturing
- - -------------------------------------------
Colored Microsphere Products
- - ----------------------------
The Company purchases raw microspheres in bulk from unaffiliated suppliers
which are then treated, sized, and labeled using the Company's trade secret
process. The processing is carried out at the Company's 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.
-14-
<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. The raw materials used to
manufacture the product are naturally occurring substances that are readily
available from multiple suppliers. In the past, the Company, or its then
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 1O% of the
Company's revenues which were $618,788 representing royalties payments from the
sales of products based on the sequesterant technology. The licensing agreement
with KCD has been terminated resulting in no licensing revenues from the
sequesterant technology in 1996. The Company does not expect to market or
license sequesterant technology during 1997 as there are no studies to
substantiate the efficacy of the technology. The Company has no current plans
for an efficacy study.
MRI lease revenues from the MRI service provider, Tri-County, represented
more than 1O% of the Company's total operating revenues for 1996, 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. Tri-
County is currently delinquent in its lease payments and is negotiating with the
lien holder on this piece of equipment to restructure and assume the obligation
and to obtain title to the equipment. The Company has provided a $63,450 loss
for the release of claims associated with this piece of equipment.
The Company's only cash flow from operations is from E-Z Trac sales of
products and services to over thirty different customers. The Company will be
dependent on investment capital to support the balance of its operations until
such time the Company has completed the pending acquisitions and introduces its
Nutra Quest line of health supplements, which is expected to occur late in the
second quarter 1997.
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
-15-
<PAGE>
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 1,600 samples per week with the two flow
cytometers currently in use. The Company can add 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, which
expires in 2003. Similar patents are held by the Company for Canada, Australia,
and Israel.
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. 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 which
expires in 2006.
Royalty Agreements
- - ------------------
The Company is required to pay inventors royalties equal to 6% of the
Company's sales of microsphere and sequesterant products to Dr. Shell, MD., and
Jackie See, MD., who developed the sequesterant technology, and Francis
Pizzulli, practicing attorney and partner of the Company's Founding
Predecessor, who acquired a 50% interest in Dr. See's royalty income.
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<PAGE>
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 with 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 based 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-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 to 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
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<PAGE>
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 development
of its contrast microspheres in human applications.
In March 1996, the NIH review board informed the Company that the NIH
medical revenue board had "informally" approved the Company's grant application
(See "Research and Development"). Soon thereafter, formal approval was granted
and the Company received an initial $98,405 with the possibility of an
additional $750,000 to be provided based upon Phase One trial results. Such
programs are extremely valuable to small companies, however these same programs
are also available to large companies with substantially more resources than 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.
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 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.
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Government Regulatory Proceedings
- - ---------------------------------
SEC Proceedings Relating to Matters Directly 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 whose 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 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 resales 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 per sons
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.
The SEC has disclosed that it is seeking permanent injunctive relief
against the Company. Previously, the Company sought to dissuade the SEC from
taking formal action against the Company, but believed that it is likely that
the SEC would seek permanent injunctive relief against the Company. The Company
is attempting to enter into a consent decree with the SEC in which the Company,
without admitting or denying any wrongdoing, would be enjoined from violating
the registration provisions of the federal securities laws in the future.
However, it also is possible that the SEC could seek to impose significant
monetary penalties on the Company or to require the Company to offer rescission
to the purchasers of some or all of the shares involved in the unregistered
transactions. Although the Company believes that it is not likely that these
additional forms of relief would be imposed upon the Company, any such
additional relief imposed could have a materially adverse effect upon the
Company. The Company
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<PAGE>
also is not in a position to predict what, if any, additional remedies the SEC
might seek against Dr. Shell. The Company and Dr. Shell are subject to a 1992
permanent injunction enjoing them form violating the federal securities laws.
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
counsel believes, on the basis of the facts currently known, that it is not
probable that the Company would have any material liability.
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 currently is marketed by KCD, a former 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.
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 related 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 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
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<PAGE>
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.
Future Contrast Microsphere Studies
- - -----------------------------------
The Company hopes to file an Investigational New Drug ("IND") with the FDA
in late 1997 or 1998 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 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 the 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
- - -----------------------
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<PAGE>
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 began in March 1996. The agreement reflects E-Z-EM's intention to
analyze the full impact of regulatory costs and expenses in preparation for
additional capital funding to conduct FDA approved clinical trials as an 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 has the exclusive option
to license, including the right to sub-license, all products developed under the
agreement, and subsequent patent if any, with rights to global sales and
marketing of the products and related services for the life of the patent or 10
years, whichever is longer. The Company believes the strategic partnering of
E-Z-EM and the Company will accelerate the development of contrast microspheres
for human applications and will substantially improve the possibility of these
products being commercialized. In March of 1996, the Company and E-Z-EM began
pre clinical animal studies of the contrast microspheres for the detection of
pulmonary emboli (lung blood clots) at Dartmouth Hitchcock Medical Center, and
at the University of Massachusetts Medical Center.
Research and Development Plan
- - -----------------------------
The Company spent $241,285 in 1996 as compared to $259,608 in 1995 on
research and development. The Company considers its research and development
programs as the foundation upon which everything else is to be built. 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.
During 1996, the colored and contrast microsphere programs will be funded
from grants such as the NIH grant (see below), and from strategic partners such
as E-Z-EM (see below), and to some extent from operating funds. The dietary and
food supplement programs, which are significantly less costly than the
microsphere programs, will be funded from operational 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 pre-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 research grant programs (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 at the Dartmouth
Hitchcock Medical Center, and the University of Massachusetts Medical Center
with E-Z-EM, the Company's contrast microsphere strategic partner.
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<PAGE>
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 nine employees of which seven are full time
employees, three of whom are engaged in management, marketing, administrative
and support activities, with the remaining four comprised of one secretarial,
and three technical, research and development and scientific staff engaged in
microsphere manufacturing and development. One part time employee is used in
general office and shipping activities. 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.
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.
ITEM 2. DESCRIPTION OF PROPERTY
In February 1992, the Company entered into a three-year lease for its
presently occupied premises from an unaffiliated third party for 4,400 square
feet of space in Los Angeles, California at $4,750 per month for the first year,
$5,200 per month for the second year and $5,700 per month for the third year,
with an option to extend for an additional two years at $6,000 per month. During
February 1995, the Company exercised this option. The Company is currently
negotiating a three year extension to this lease. These offices are used for
manufacturing and laboratory research and development. In October 1996, the
Company entered into a three year lease for a 9,000 square feet building for its
use as corporate offices of the Company and Nutra Quest. The lease obligation
for this facility is $7,112, November and December 1996, $7,593 for January and
February 1997, $8,169 for March and April 1997, $9,419 for May 1997 to March
1998, and $9,995 for April 1998 to September 1999. The Company believes these
facilities are adequate for its current needs.
ITEM 3. LEGAL PROCEEDINGS
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.
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Except as otherwise specifically indicated above, management believes that
the Company doesn't have any material liability for any lawsuits, settlements,
judgments or fees of defense counsel which have not been paid or accrued as of
December 31, 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 judgment could be awarded against the Company which could have a material
adverse effect upon the Company.
The Company currently has no firm commitments for material capital
expenditures, with any such future commitments being dependent upon the
availability of funds. The Company does not anticipate that future compliance
with existing environmental and occupational safety regulations will have a
significant impact on its capital expenditures or on its financial condition or
future operating results.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None
ITEM 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.
<TABLE>
<CAPTION>
Bid Prices
----------
Year Quarter High Low
---- ------- ---- ---
<S> <C> <C> <C>
1995 1/st/ 2 1/32 29/32
2/nd/ 1 13/32 1/4
3/rd/ 15/16 1/32
4/th/ .32 .01
1996 1/st/ .07 .15
2/nd/ .13 .28
3/rd/ .11 .145
4/th/ .09 .17
</TABLE>
To date, the Company has not declared or paid any cash dividends with
respect to its Common Stock, and the current policy of the Board of Directors is
to retain earnings, if any, to provide for the growth of the
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<PAGE>
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 525 stockholders of record as of March 31, 1997.
ITEM 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 has
also been 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 had 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. Until May 1995, the Company's
primary research has been to increase the early detection of restrictions or
blockages in human blood flow through significantly improved diagnostic imagery
using two different micron sized solid particles (microspheres) of which one is
a biodegradable mixture of blood protein and other contrast agents intended for
human applications, and the other a non biodegradable plastic styrene sphere
intended for animal blood flow research. The Company does not yet earn revenues
from human applications of microspheres, it does however, generate revenues from
the sales of colored microspheres products and services for animal blood flow
research. The Company also earned revenues from the licensing and royalties of
its sequesterant technology, which in 1995 accounted for approximately 72% of
the Company's total 1995 (cash flow) revenues. However, KCD's license was
terminated and no royalty revenues nor cash flow was generated during 1996.
Since the inception of 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 the reduction of operating expenses
approximately $1,251,000 (or 39%) for 1996 compared to 1995 and $1,101,000 (or
23%) for 1995 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 1997
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 end of
1995 from private placements, and the conversion of approximately $839,458 of
Company debt from a previous private placement. During 1996, management was able
to raise an additional $1,999,000 from the issuance of common stock and
convertible notes. However, there can be no assurances that private or other
capital will
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<PAGE>
continue to be available, or that revenues will increase to meet the Company's
cash needs, and there can be no assurance that a sufficient amount of the
Company's securities can or will be sold or that any warrants will be exercised
to fund any operating needs of the Company or its research and development
programs. (Even assuming all of the warrants outstanding as of December 31, 1996
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 that 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 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.
Results of Operations
Summary Table for 1995 Compared to 1996
---------------------------------------
<TABLE>
<CAPTION>
For the Year Ended December 31,
-------------------------------
1995 1996
---- ----
% of % of
$ Revenues $ Revenues
--- -------- --- --------
<S> <C> <C> <C> <C>
Revenues - Product & Services
Microspheres & Lab Services 246,643 28% 413,840 100%
Fat Sequesterant - License Fees & Royalties 618,787 72% 0 0%
--------- ----- -------- -----
865,430 100% 413,840 100%
Cost of Revenues - Product & Services
Microspheres & Lab Services 123,438 50% 132,068 32%
Fat Sequesterant - License Fees & Royalties 274,800 44% 0 N/A
--------- ----- -------- -----
398,238 46% 132,068 32%
--------- ----- -------- -----
Gross Margin - Product & Services $467,192 54% $281,772 68%
========= ===== ======== =====
Revenues - Lease Operations $319,072 100% $388,322 100%
Cost of Revenues - Lease Operations 481,357 151% 288,504 74%
--------- ----- -------- -----
Gross Margins - Lease Operations $(162,285) -51% $ 99,818 26%
========= ===== ======== =====
</TABLE>
Overall Performance
- - -------------------
Revenues from all products and services totaled $413,840, representing a
decrease of $451,590 (or 52%) from the year ended December 31, 1995. The
decrease in 1996 was due to the termination of the KCD royalty agreement which
represented 72% of revenues in 1995. Partially offsetting the loss of royalty
revenues was the improving performance of the Microsphere and Lab Services,
which included revenues of $98,095 from the Phase One Research Grant with the
NIH. Without the revenues associated with the NIH
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<PAGE>
grant Microsphere and Lab Services increased $69,102 or 28%. The increase was
the result of the first year of use of the automated analysis and counting
system based on a Beckton-Dickenson flow cytometer.
Overall, the Company reduced total operating expenses $1,251,162 (39%) for
1996 compared to 1995. Management has directed Company efforts and resources to
the introduction of the new personal care and nutrient supplement products.
Although significant strides have been made in reducing the costs of operations,
the acquisition of new product offerings and the development of marketing tools
for the launch of these products, while enhancing its existing operating units
production capabilities, until such time the new products are established in the
marketplace, the Company will continue to be dependent on private or
institutional investment capital to support the planned 1997 growth.
Results of Operations - 1996 Compared to 1995
For the year ended December 31, 1996, total operating expenses were
$1,949,444 compared to $3,200,606 for 1995. Total expenses for the year ended
December 31, 1996, included selling, general and administrative (SG&A) of
$1,287,587, cost of revenues for products and services of $132,068, cost of
revenues for lease operations of $288,504 and research and development of
$241,285, compared to $2,061,403 for SG&A, $398,238 for cost of revenues for
products and services, $481,357 cost of revenues for lease operations and
$259,608 for research and development, in 1995. This decrease, except for the
decrease in lease operations which resulted from the abandonment of the non-
operational MRI system at the end of 1995, directly reflects the full year
benefit of the cost 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 1996 to 32% from 46% for 1995, improving gross profit
margins approximately 14%. Decreases in cost of revenues for 1996 resulted from
increased sales of high margin microspheres to large volume customers.
Research and development expense decreased to $241,285 from $259,608 for
the year ended December 31, 1996 from 1995. 1996 reflected costs of $94,702
associated with the Phase One Research Grant from the NIH which was reimbursed
by the NIH. A proposal is being prepared for submittal to the NIH for Phase Two
Funding, which if received would provide $750,000 over a three year period.
SG&A expense decreased to $1,287,587 from $2,061,403 for 1996 from 1995,
amounting to an overall reduction of $773,816, or 38%, 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.
Interest expense for operations for 1996 was $20,048 compared to $368,526
for 1995, an decrease of $348,478. 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,
which were converted in 1995 and thereby reducing 1996 interest expense.
Interest expense for MRI lease operations decreased to $114,476 in 1996 from
$142,005 in 1995, as a result of the 1995 abandonment of one of the MRI systems
to the lien holder.
Interest income decreased to $17,273 for 1996 compared to $70,624 for 1995
due to 1995 interest earned on the then outstanding note receivable from a
shareholder and interest on delinquent royalties receivable.
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<PAGE>
During 1996 the Company has provided $734,744 for the operating losses from
the pending acquisitions of Pastels and Nutra Quest. To date, both companies
have not achieved the performance criteria that have been specified in the
acquisition proposals. If the Company and selling parties are unable to reach
agreement to complete the transactions, the relationships will be terminated and
in the case of Nutra Quest the Company will receive a note for the amounts
advanced, less salaries. The Company also provided a $63,450 loss for the
remaining equity and lease payments receivable associated with the remaining MRI
system. The Company is currently in discussions with the lessor and lien holder
of the MRI whereby the Company will provide title to the lessee with the lease
assumption, to be agreed to by the lien holder, of the outstanding debt. During
1995 provisions were made for settlements of an employee termination, an
arbitration award in connection with royalty matters and certain litigation
aggregating $554,757. 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.
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 1997, 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.
No provision was made for Federal income tax since the Company has incurred
significant net operating losses from inception. Through December 31, 1996, the
Company incurred net operating losses for tax purposes of approximately
$14,800,000 and approximately $18,624,000 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 2011. 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
On December 31, 1996, the Company had assets of $1,902,888 compared to
$2,439,606 on December 31, 1995. The Company had a total shareholders' deficit
of $(962,782) on December 31, 1996 compared to $(282,419) on December 31, 1995,
a decrease of $680,363 compared to a $1,323,046 decrease that resulted for the
year ended December 31, 1995. The decrease for the year ended December 31, 1996
was the result of a net loss of $2,066,727 offset by the issuance of stock for
note conversions and sale of stock totaling $1,386,365.
As of December 31, 1996, the Company's working capital position decreased
by $33,276 from a negative $1,242,016 at December 31, 1995 to a negative
$1,208,740 primarily as a result of increases in the current portion long term
debt resulting from the delinquent payments on the MRI system and the
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<PAGE>
increase in other accrued liabilities associated with the loss provision made on
the pending MRI system release of title and the settlement amounts due to Dr.
Shell. These increases were offset by decreases, as a result of payments of
Professional Services Payable and Royalties Payable. At December 31, 1996, the
Company's cash position had decreased to $192,421 from $374,128 as of December
31, 1995. During 1996, cash was provided by issuance of convertible notes of
$300,000, the issuance of callable convertible notes of $268,000, and private
placements of the Company's common stock and notes which converted to common
stock of $1,396,365, offset by payments on notes payable of $168,831.
Managements 1996 Plan of Operations
The Company has continuously lost money since its formation. As of December
31, 1996, the Company had an accumulated deficit of $17,464,873 and negative
working capital of $1,208,740. 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.
The cumulative 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.
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 $1,001,023, or 23% as compared to 1994 with an additional decrease
in operating expenses of $1,251,162, or 39%, comparing 1996 to 1995. 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 licensee's 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,
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<PAGE>
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, 1997)
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 the NIH research grant; 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; and, (5) began studying
the feasibility of adapting the colored microsphere products for commercial
pathology applications; and, (6) began development on a series of new products
in October 1995, which the Company announced completion of first stage
development of those products in March 1996; and, (7) signed an strategic
agreement with E-Z EM to develop contrast microspheres for commercial
applications; and, (8) applied for and received a research grant from the
National Institute of Health and, (9) developed investment banking
relationships; and (IO) have entered into acquisition agreements for two
consumer product companies. Additionally, the Company raised approximately
$3,163,000 from private placements from August 1995 to December 1996.
Research and Development Component of Management's 1997 Plan of Operations
The Company spent $ 241,285 in 1996 as compared to $259,608 in 1995 on
research and development. 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
fiends. 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 NM 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.
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<PAGE>
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 1997 research and
development program includes applying for grants in four potential human
diagnostic imaging applications which include, detection of lung blood clots
using CAT scanning, ultrasound contrast microspheres for detection of myocardial
perfusion, oral contrast microsphere for gastrointestinal tract visualization,
and an MRI contrast microsphere to replace x-ray contrast media in detecting
liver, heart or brain dysfunction, all of which are applications targeted toward
radiologists and other physicians doing body imaging, which is the non invasive
imaging of human organs from outside the body. The Company also intends to apply
for grants actual FDA clinical studies of pulmonary emboli application of
contrast microspheres. The Company's product development unit will coordinate
submission of applications, assignment of principle investigators, and manage
the individual programs from through the clinical study.
While the Company believes that the 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.
ITEM 7. FINANCIAL STATEMENTS
The following financial statements and schedules beginning after page XX
are filed as a part of the Form 10-KSB:
Report of Independent Public Accounts on the financial statments of
Interactive Medical Technologies Limited, and Subsidiaries.
Consolidated Balance Sheets for December 31, 1995 and 1996.
Consolidated Statement of Operations for the Years Ended December 31, 1995
and 1996.
Consolidated Statements of Shareholders' Deficit for the Years Ended 1995
and 1996.
Notes to Consolidated Financial Statements.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES.
None
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<PAGE>
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT, PROMOTERS AND CONTROL
PERSONS: COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Officers and Directors
- - ----------------------
The officers and directors of the Company are:
<TABLE>
<CAPTION>
Name Age Position Since
---- --- -------- -----
<S> <C> <C> <C>
Steven R. Westlund 50 Chairman of the Board & 1995
Chief Executive Officer
Peter T. Benz 36 President & Director 1995
William R. Neil 46 Vice President & Chief
Financial Officer 1996
</TABLE>
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 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.
PETER BENZ joined the Company as Chief Financial Officer and a director in 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. Mr. Benz is also the Chairman of
North American Health and Fitness, a Canadian corporation trading over the
counter. He graduated from the University of Notre Dame with a BS in Business
Administration in 1982.
WILLIAM R. NEIL has been the Vice President, Chief Financial Officer since
September, 1996. For approximately ten years prior thereto, Mr. Neil was
employed by Perceptronics, Inc., a public company initially as its corporate
controller and thereafter as Senior Vice President, Chief Financial Officer and
a Director. While at Perceptronics, Mr. Neil was responsible for compliance with
SEC financial and
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<PAGE>
reporting requirement as well as all aspects of the company's budget, planning
and accounting functions. He was also involved in the placement and maintaince
of credit facilities and bank working capital lines. From 1984 -1986, Mr. Neil
was the Vice President, Chief Financial Officer of Clifford Electronics, Inc.
Following his graduation from California State University, Northridge in 1973
with a Bachelor of Science degree in Business Administration and Accounting, he
became a Certified Public Accountant in the state of California and was employed
as a senior account by Arthur Andersen & Co. until 1978. From 1978-1984 he held
various auditing and accounting related positions at Aerojet General
Corporation, General Valve, a division of Aerojet and Max Factor and Company.
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.
ITEM 10. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth the compensation Steven Westlund, Chairman
of the Board and Chief Executive Officer, 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, the former Chief
Operating Officer and Secretary, of the Company (collectively, the "Named
Executive Officers). No other executive of the Company received more than
$1,000,000 total annual compensation during that period.
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
------------------------------------- ------------------------------
Name and Current Principle Other Annual Stock Underlying
Position Year Salary Bonus Compensation Awards Options/Saris (#)
-------- ---- ------- ----- ------------ ------ -----------------
<S> <C> <C> <C> <C> <C> <C>
Steven Westlund 1996 $131,076 - - - 3,000,000
Chairman of the Board 1995 $ 42,000 - - - -
& CEO 1994 - - - - -
Michael Grechko 1996 $ 54,000 - - - -
Former COO and Sec 1995 $ 72,000 - - - -
1994 $104,000 - - $208,630 -
Dr. William Shell 1996 - - - - -
Former Chief Science Officer 1995 $ 72,000 (1) - - - -
& CEO 1994 $150,000 - $6,000 (2) - -
William Pelzer 1996 - - - - -
Former Pres. & CEO 1995 - - - - -
1994 $240,000 (3) - $9,000 (3) - -
</TABLE>
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<PAGE>
There were no bonuses paid, long term incentive plan pay-outs or other
compensation provided during the periods reported.
(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). 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
1996. The following table contains information concerning stock options
unexercised at the end of fiscal year 1996 with respect to the Named Executive
Officers. No options have been exercised through March 31, 1997.
Year End Option Values
<TABLE>
<CAPTION>
Number of Unexercised
Number of Unexercised In the Money Option Shares
Option Shares at Year End at Year End
------------------------- --------------------------
Name Date Exercisable Unexercised Exercisable Unexercised
---- ---- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Steven Westlund Jan-96 3,000,000 3,000,000 $0 $0
Peter Benz Jan-96 2,000,000 2,000,000 $0 $0
John Osborne Jan-96 1,250,000 1,250,000 $0 $0
Michael Grechko Jan-96 1,000,000 1,000,000 $0 $0
William Shell Aug-95 750,000 750,000 $0 $0
William Pelzer 94 400,000 200,000 $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, 1996.
2. Represents options that were actually awarded January 6, 1996, which
become exercisable on June 20, 1996, and expire on June 20, 1999.
Employment Agreements and Directors' Compensation
Steven Westlund
In May 1995 (revised in January 1996), the Board of Directors approved a
compensation agreement with Steven R. Westlund, 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
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<PAGE>
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.
Mr. Westlund's current compensation is $11,833 per month. Although coverage is
available Mr. Westlund has elected not to partcipate under the Company's medical
coverage. 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 $0.15 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, President 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. Mr. Benz's current
compensation is $7,333 per month. Mr. Benz and his family have been provided
coverage under 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 $0.15
for a period of three years beginning June 1996 and ending June 1999.
Directors Compensation
Directors received no compensation for their services as such for the
fiscal year ended December 31, 1996. 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)
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Summary Table of Beneficial Ownership of Company's Common Stock
-35-
<PAGE>
The table below sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of February 28, 1997 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.
-36-
<PAGE>
<TABLE>
<CAPTION>
Name and Address of Number of Shares
Beneficial Owner Beneficially Owned Percentage
---------------- ------------------ ----------
<S> <C> <C>
Steven Westlund 3,000,000 (2) 6.13%
1717 Stewart Street
Santa Monica, CA 90404
Peter Benz 2,000,000 (2) 4.17%
1717 Stewart Street
Santa Monica, CA 90404
John Osborne (6) 1,250,000 (2) 2.65%
1717 Stewart Street
Santa Monica, CA 90404
Michael Grechko (6) 1,671,933 (3) 3.56%
1717 Stewart Street
Santa Monica, CA 90404
William Shell (6) 1,229,000 (4) 2.63%
1717 Stewart Street
Santa Monica, CA 90404
Directors and Officers as
a Group (Six Persons) 9,700,933 (5) 17.99%
</TABLE>
(1) Included for purposes of this calculation are shares of Common Stock
outstanding as of February 28, 1997, 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, 1997) held
by that person or group.
(2) Amounts are options that are currently exercisable
(3) Includes 1,000,000 options that are currently exercisable
(4) Includes 750,000 options that are currently exercisable and 11,000
shares in an Individual Retirement Account.
(5) Includes 8,400,000 options that are currently exercisable
(6) No longer a director and/or officer
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Officers and Directors
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
-37-
<PAGE>
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. As of December 31, 1996, this note was still outstanding.
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 was due on December 31, 1995 together with interest at the
rate of 8% per annum. At any time during the term of this note, the holder may
elect to take payment of the principal and accrued interest thereon in the form
of restricted shares of Company common stock at a price equal to that provided
in the Company's next private placement after the date of the note. Sam Shell
exercised his option to convert $25,000 of the principal amount of this note 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.
As of December 31, 1996, $25,000 was still outstanding.
ITEM 13. EXHIBITS, AND REPORTS ON FORM 8K
(a) Exhibits
3. Articles of Incorporation and bylaws 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 Peizer, Jr. dated
December 24, 1992. (4)
10.7 Agreement between William Peizer, 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
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<PAGE>
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 Td-County
Mobile MRI, L.P. (4)
10.14 Agreement dated August 27, 1992 by and between Dr. William Shell and
Clark M. Holcomb related to shares of the Company's Common Stock owned
by Dr. Shell. (4)
10.15 Agreement dated September 23, 1993 by and between Ladenburg, Thalmann
Co., Inc. and the Company. (4)
10.16 Consulting Agreement for Financial Public Relations dated as of
February 25, 1994 by and between the Company and Robert Bienstock and
Richard Washor. (4)
10.17 License Agreement, dated March 23, 1994 by and between EffecUve
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.
10.24 2/nd/ & Final Revised Proposal to Acquire Pastels International,
Incorporated
10.25 Revised Proposed Acquisition of Nutra Quest, Incorporated
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)
27. Financial Data Schedule (included only in EDGAR filing).
(1) Previously filed as an exhibit to the Company's registration
statement on Form S-1 8, file number 33-17548-NY, as amended on
August 7, 1990, and incorporated herein by reference.
(2) Previously filed as an exhibit to the Company's registration
statement on Form S-18, file number 33-17548-NY, as amended on
February 12, 1991, and incorporated herein by reference.
(3) Previously filed as an exhibit to the Company's registration
statement on Form S-1 8, file number 33-17548-NY, as amended on
June 24, 1991, and incorporated herein by reference.
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<PAGE>
(4) Previously filed as an exhibit to the Company's Registration Statement
on Form SB-2, file number 33-51684-NY, as amended on September 19,
1994, and incorporated herein by reference.
(5) Previously filed as an exhibit to the Company's Form 10-QSB filed for
the quarterly period ended September 30, 1996.
(b) Reports on Form 8-K:
None
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<PAGE>
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.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/Steven R. Westlund Chief Executive Officer April 11, 1997
- - --------------------- and Director
Steven R. Westlund
/s/Peter T. Benz President April 11,1997
- - --------------------- and Director
Peter T. Benz
/s/William R. Neil Vice President and April 11, 1997
- - --------------------- Chief Financial Officer
William R. Neil
</TABLE>
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<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
April 10, 1997
Board of Directors and Shareholders
Interactive Medical Technologies Ltd.
and Subsidiaries
Santa Monica, California
We have audited the consolidated balance sheet of Interactive Medical
Technologies Ltd. (a Delaware Corporation) and subsidiaries as of December 31,
1996, and 1995, and the related statements of operations, shareholders' deficit
and cash flows for the years 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.
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 principals 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, 1996 and 1995, and the results of its
operations and its cash flow for the years then ended in conformity with
generally accepted accounting principals.
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, because of
recurring losses, increasing difficulty in raising necessary additional capital.
As of December 31, 1996, the Company has an accumulated deficit of $17,464,873
and negative working capital of $1,208,740. The Company faces continuing
significant business risks, including but not limited to its ability to maintain
vendor and supplier relationships by making timely payments and overcoming
future and ongoing product development and distribution 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 these uncertainties.
/s/ Beckman & Associates
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<PAGE>
INTERACTIVE MEDICAL TECHNOLOGIES LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
------
<TABLE>
<C> <S>
For the Year Ended December 31,
1995 1996
---- ----
CURRENT ASSETS
Cash $ 374,128 192,422
Account receivables, net of allowance for
doubtful accounts of $20,516 in 1995 and
$0 in 1996 65,377 15,897
Lease receivables 79,241 226,448
Prepaid Expenses 1,725 --
---------- ---------
Total Current Assets 520,471 434,767
PROPERTY, EQUIPMENT AND LEASEHOLD
IMPROVEMENTS, at cost, net of accumulated
depreciation of $1,303,661 in 1995 and
$1,747,219 in 1996
Office Equipment 110,974 50,259
Leasehold improvements 145,860 101,038
Magnetic resonance imaging system 1,298,247 946,293
---------- ---------
Total property, equipment and
leasehold improvements, net 1,555,081 1,097,590
OTHER ASSETS
Patents, net of accumulated amortization
of $107,466 in 1995 and $131,554 in 1996 289,486 265,399
Investment in pending acquisitions (Note 5) - 70,000
Deposits and other assets 74,568 35,132
---------- ----------
TOTAL ASSETS $2,439,606 $1,902,888
========== ==========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements
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<PAGE>
INTERACTIVE MEDICAL TECHNOLOGIES LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' DEFICIT
-------------------------------------
<TABLE>
<CAPTION>
For the Year Ended December 31,
1995 1996
------------ --------------
<S> <C> <C>
CURRENT LIABILITIES
Loans payable $ 88,500 $ 78,330
Convertible notes payable 75,000 106,001
Current portion of note payable - MIR equipment 318,171 454,716
Accrued compensation and payroll taxes 206,106 145,065
Professional services payable 413,135 227,604
Trade payables and other accrued expenses 75,500 215,292
Royalties payable 535,518 238,186
Income taxes payable 3,946 7,946
Interest payable - note payable - MRI equipment 21,609 63,799
Interest payable - convertible note 16,542 27,116
Deferred rent 8,460 8,460
Other accrued liabilities - 70,992
------------ ------------
Total Current Liabilities 1,762,487 1,643,507
LONG TERM NOTES PAYABLE, net of current portion (Note 3)
Note Payable - MRI equipment 959,538 654,163
Convertible Notes - 300,000
Callable convertible notes - 268,000
------------ ------------
Total Liabilities 2,722,025 2,865,670
COMMITMENTS AND CONTINGENCIES (Note 4)
SHAREHOLDERS' DEFICIT
Common stock authorized 50,000,000 shares of $.001 par value;
issued and outstanding 32,282,082 in 1995 and 45,654,872 in
1996 32,282 45,655
Additional paid-in capital 15,083,445 16,456,437
Accumulated deficit (15,398,146) (17,464,873)
------------ ------------
Total Shareholders' Deficit (282,419) (962,781)
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $ 2,439,606 $ 1,902,888
============ ============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements
-44-
<PAGE>
INTERACTIVE MEDICAL TECHNOLOGIES LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Year Ended
December 31,
1995 1996
------------ --------------
<S> <C> <C>
REVENUES
Products and services $ 865,480 $ 413,840
Lesse rentals 319,072 388,322
------------ ------------
1,184,552 802,162
COST AND EXPENSES
Cost of revenues
Product and services 398,238 132,068
Lease operations 481,357 288,504
------------ ------------
879,595 420,572
Research and development 259,608 241,285
Selling, general and administrative expenses 2,061,403 1,287,587
------------ ------------
3,200,606 1,949,444
------------ ------------
Loss from operations (2,016,054) (1,147,282)
INTEREST EXPENSE AND OTHER
Interest expense - other 368,526 20,048
Interest expense - lease obligations 142,005 114,476
Interest income (70,624) (17,273)
Settlements and arbitration award 554,757 -
Loss provision on MRI equipment 964,286 63,450
Net losses on pending acquisitions - 734,744
------------ ------------
Total interest expense and other, net 1,958,950 915,445
------------ ------------
Loss before provision for state income taxes (3,975,004) (2,062,727)
PROVISION FOR STATE INCOME TAXES 3,575 4,000
------------ ------------
NET LOSS $ (3,978,579) $ (2,066,727)
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 20,495,000 39,608,832
============ ============
NET LOSS PER SHARE $ (0.19) $ (0.05)
============ ============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements
-45-
<PAGE>
INTERACTIVE MEDICAL TECHNOLOGIES, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
Common Stock Note Receivable
---------------------- and Prepaid
Shares Paid-in Consulting and Accumulated
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) $(11,419,587)
Warrants exercised 566,279 566 73,945
Warrants issued for services 68,500
Common stock issued for conversion of notes 6,328,000 6,328 768,672
Common stock issued in private placements 7,746,907 7,747 1,083,497
Common stock issued 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 0 (15,398,146)
Warrants exercised 50,000 50 4,950
Common stock issued in Arbitration settlement 300,000 300 44,700
Common stock issued for conversion of notes 2,251,095 2,251 201,699
Common stock issued in private placements 9,900,062 9,900 1,083,100
Common stock issued for service 150,000 150 17,850
Common stock issued for debt converted to equity 600,000 600 74,600
Common stock issued for debt restructure 100,800 101 11,995
Common stock issued for interest on convertible note 20,833 21 2,479
Adjustment in prepaid financing costs (68,382)
Net loss (2,066,727)
---------- ------- ----------- --------- ------------
BALANCE, December 31, 1996 45,654,872 $45,655 $16,456,437 $ 0 $(17,464,873)
========== ======= =========== ========= ============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements
-46-
<PAGE>
INTERACTIVE MEDICAL TECHNOLOGIES LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended
December 31,
1995 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ($3,978,579) ($2,066,727)
Adjustments to reconcile net loss to net
cash (used in) operating activities:
Research and development efforts
contributed as capital 30,000 -
Issuance of warrents 68,500 -
Depreciation and amortization 1,244,954 467,646
Loss provisions on MRI systems 964,286 63,450
Stock issued in settlement - 55,000
Stock issued for services - 18,000
Stock issued for services payable - 75,200
Stock issued for note restructure - 12,096
Stock issued for interest on note - 2,500
Decrease (increase) in:
Accounts receivable 45,210 49,480
Interest receivable 3,795 -
Notes receivable 60,186 -
Lease receivable 35,173 (147,207)
Inventory 11,200 -
Other (14,668) 41,161
Increase (decrease) in:
Due related parties and former shareholders 3,865 -
Professional fees and other payables 829,326 (265,671)
Deferred rent (3,840) -
Interest payable (9,404) 52,764
---------- -----------
Net cash used in operating activities (709,996) (1,642,308)
---------- -----------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
-47-
<PAGE>
INTERACTIVE MEDICAL TECHNOLOGIES LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
<TABLE>
<CAPTION>
For the Years Ended
December 31,
1995 1996
---- ----
<S> <C> <C>
CASH FLOWS USED IN INVESTING
ACTIVITIES
Investment in pending acquisitions - (70,000)
Expenditures for property, equipment and
leasehold improvements (22,928) (49,517)
Expenditures for patents (30,071) -
---------- ----------
Net cash used in investing activities (52,999) (119,517)
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on notes payable (50,000) (10,170)
Payments on long term note (195,293) (168,830)
Proceeds from exercise of warrants 74,511 5,000
Proceeds from loans payable 50,000 -
Proceeds from issuance of convertible notes - 771,950
Net proceeds from the sales of common stock 1,091,244 982,168
Additional capital contributions from shareholders 141,446 -
---------- ----------
Net cash provided by financing activities 1,111,908 1,580,118
NET INCREASE (DECREASE) IN CASH 348,913 (181,707)
CASH, beginning of period 25,215 374,128
---------- ----------
CASH, end of period $ 374,128 $ 192,421
========== ==========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
-48-
<PAGE>
INTERACTIVE MEDICAL TECHNOLOGIES, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996
NOTE 1. SIGNIFICANT RISK RESULTING FROM CONTINUING LOSSES
The Company has incurred net losses of $3,978,579 and $2,066,727
for the years ended December 31, 1995 and 1996, respectively. The continuing
losses are the result of unprofitable operations, unbalanced G&A expense (
excessive in light of the Company's unprofitable history), inability to
successfully commercialize and market products and in the past 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. The accumulative
effect of the continuing losses have adversely affected the liquidity of the
Company. Future losses will likely negatively impact the Company's ability
to raise future working capital.
As of December 31, 1996, the Company had an accumulated deficit of
$17,464,873 and negative working capital of $1,208,740. 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.
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.
MANAGEMENT'S PLAN OF OPERATIONS
The Company has continuously lost money since its formation. As of
December 31, 1996, the Company had an accumulated deficit of $17,464,873 and
negative working capital of $1,208,740. 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. The cumulative 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.
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 $1,208,740 or 34% as compared to 1994 with an
additional decrease in operating
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<PAGE>
expenses of $1,251,162, or 39%, comparing 1996 to 1995. 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, 1997)
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 the NIH research
grant; 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;
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 and, (9) developed
investment banking relationships; and (1O) have entered into acquisition
agreements for two consumer product companies which are pending.
Additionally, the Company raised approximately $3,163,000 from private
placements from August 1995 to December 1996.
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<PAGE>
Research and Development Component of Management's 1997 Plan of Operations
The Company spent $241,285 in 1996 as compared to $259,608 in 1995
on research and development. The Company considers its research and
development programs as the foundation upon which everything else is to be
built and has been assigned it the highest priority, second only to generating
immediate revenues. The Company intends to balance future research budgets
and activities between long term diagnostic imaging programs based on the
Company's colored and contrast microspheres, and less complex commercial
programs which can develop more immediate revenues such as the dietary and
food supplement products currently in development. During 1996, the colored
and contrast microsphere programs will be funded from grants such as the NIH
grant (see below), and from strategic partners such as E-Z-EM (see below), and
to some extent from operating funds. The dietary and food supplement
programs, which are significantly less costly than the microsphere programs,
will be funded from operational funds 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 NM 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 1997
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
for 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 throughout the clinical study.
While the Company believes that the effects of the plan have begun
to turn the Company away from its dependence on 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 1997, there
can be no assurance that the Company's plan will be successful, or that the
failure of one
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<PAGE>
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
PRESENTATION
Interactive Medical Technologies Ltd. (formerly Interactive
Principles Ltd.) (Interactive or the Company) was incorporated under the laws
of Delaware on June 2, 1986. Until it merged with See/Shell Biotechnology,
Inc. (See/Shell or S/S), it had no significant operations.
See/Shell was incorporated on August 17, 1987 and designs, develops
and markets certain types of biologic systems. The Company was inactive
until January 1, 1988. See/Shell has been a multifaceted food supplement,
clinical testing, diagnostic reagent and drug company. See/Shell's primary
efforts have been directed towards the development of its products.
The consolidated financial statements include the activity of
See/Shell and its subsidiary E-Z Trac, Inc. consolidated with Interactive
Medical Technologies Ltd. from January 17, 1990 when Interactive and
See/Shell merged as well as the Company's subsidiary Effective Health, from
its inception in May 1990. The merger is reflected 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 statements since that date.
All significant inter-company accounts and transactions have been
eliminated in consolidation. The preparation of financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect reported amounts of the assets
and liabilities, disclosure of contingent assets and liabilities at the date
of the financial statements, and revenues and expenses during the reporting
period.
Revenue Recognition - Products and Services
The Company markets its products and technology through
distributors, license agreements and Company personnel. Revenue from
products is recognized upon shipment and revenue from services is recognized
when the service has been performed. Revenue from products and services is
comprised of the following:
<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
Laboratory services $249,692 $413,840
Licensing fees and
royalties for fat sequesterant 618,788 -
-------- --------
$868,480 $413,840
======== ========
</TABLE>
For the year ended December 31, 1995, one customer accounted for
over 70% of Company revenues from products and services. For the year ended
December 31, 1996, two customers individually accounted for more 11% and 26%
for a total of 37% of revenues from product and services.
-52-
<PAGE>
Foreign revenues were approximately 7% and 11% of revenues from
products and services for the years ended December 31, 1995 and 1996,
respectively. The foreign revenues for the years ended December 31, 1995 and
1996 were from Japan.
Revenue Recognition - Lease Operations
Revenues from lease operations are recognized when earned and were
$319,072 for the year ended December 31, 1995 and $388,162 for the year ended
December 31, 1996.
Depreciation and Amortization
Depreciation is provided principally through the use of the
straight-line method over the estimated useful lives of the assets (primarily
three to five years for office equipment). Magnetic resonance imaging
systems are depreciated over seven years, once placed in service or
commencement of lease payments whichever occurs first. Amortization of
leasehold improvements is computed using the straight-line method over the
lesser of the asset life or the life of the respective lease.
The Company capitalizes expenditures that materially increase asset
lives and charges ordinary repairs and maintenance to operations as incurred.
When assets are sold or otherwise disposed of, the cost and related
accumulated depreciation and amortization are removed from the accounts and
any gain or loss is included in operations.
Capitalized Patent Costs
The Company capitalizes cost of perfecting patent rights for
certain products. Amortization of capitalized patent cost is provided on a
straight-line basis over 17 years or the average remaining life of the patent
Income Taxes
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 represent the future tax return
consequences of those differences. Which will either be taxable or deductible
when the assets and liabilities are recovered or settled. Deferred taxes are
also being recognized to the extent that are expected to provide future
benefits 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
During December 1996 the Company began the placement of Callable
Convertible Notes, with interest at the rate of 10% per annum, payable semi-
annually, and convertible into restricted common
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<PAGE>
shares three years from date of issue at $.125 per share. The notes are
callable by the Company after six months from date of issue at a premium of
103% of face value on or before December 31, 1997, 102% of face value on or
before December 31, 1998 and 101% of face value if called on or before
December 31, 1999. Upon closure of the offering the Company is to maintain a
$100,000 sinking fund until such time as it realizes positive cash flow from
operations of $10,000 per month for three consecutive months. As of December
31, 1996, no sinking fund had yet been established. The investment banking
firm managing the offering is entitled to commission of 10% of the offering,
2% for expenses, and warrants at $.125 per share for 80% of the comparable
number of shares to be converted from the offering. For the year ended
December 31, 1996 the Company had raised $268,000. Subsequent to December 31,
1996 an additional $300,000 notes have been placed.
The Company in September raised $100,000 in convertible notes due
in three years from date of issuance, with interest payable in restricted
common shares payable quarterly and are convertible at $.125 per common
share. The note holders also received 2,000,000 warrants to purchase common
shares at $.125 valid until September 1999.
The Company in October 1996 raised $200,000 in convertible notes
with a rate of 10% per annum and convertible, in whole or part, into Common
Shares at a price of $.125 per share, to be issued under the exemption
provided by Reg. S. The note holder also received 1,333,333 warrants to
purchase common shares at $.125 valid until October 1999.
The Company converted outstanding professional fees of $142,078
into 600,000 shares of restricted common stock and a note of $50,000 with
interest at 8% per annum, principal and interest of $5,185 payable monthly
for ten months beginning January 2, 1997 and without a stated principal
payment requirement. As of April 10, 1997 the Company is currently two months
delinquent in paying this obligation.
The Company's magnetic resonance imaging (MRI) systems (the
"Unit") currently is installed in a mobile van at an operating site in
Jefferson Valley, New York and has been in use since September 1992 and is
leased to Tri-County Mobil MRI, L.P. ("Tri-County"), whose general partner is
Diagnostics Resource Funding. This lease provides for monthly payments of
$37,926 to Venus Management, Inc. ("VMI") through August 1999 and $68,589 in
September 1999 (with such payments being guaranteed by Medical Funding of
America, Inc., "MFA"), and VMI is required to make monthly installment
payments (which includes interest at 10.5% per annum on the unpaid principal
balance) for the Unit to a third party finance company of $32,360 through
August 1999 and $68,589 in September 1999. As of December 31, 1996, the
balance of this debt aggregated $1,172,678 (including interest currently due
of $63,799) of which $518,515 is due within the next twelve months. This
lease provides for a purchase option at the expiration of the initial term of
such lease equal to the then fair market value of the Unit.
Tri-County was delinquent in making certain of its lease payments
to VMI under the terms of the lease agreement concerning the Unit, and MFA
failed to make these payments to VMI under its guarantee of Tri-County's
payments to VMI. Accordingly, VMI had not made certain payments due to the
third party finance company for the Unit. As a result, the third party
finance company has issued a notice of default to the Company. Tri-County is
currently in discussions with the third party finance company to restructure
the obligation, to assume the debt and to take title to the Unit. It is
expected that the third party finance company will accept the restructure and
the Company will release its title to the equipment in exchange for the
third party finance company releasing the
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<PAGE>
Company from its debt obligation. Accordingly, the Company has provided
$63,450 to write off the Company's net investment in this equipment,
including the lease receivable offset by the remaining debt and interest
payable. However, if the parties are unable to resolve this matter, it is
likely that the third party finance company will institute an action against
the Company, VMI and Tri-County for the balance due plus other costs and
relief.
At December 31, 1995 and 1996 the Company had outstanding warrants
to purchase 14,151,889 and 15,181,889 shares of the Company's common stock,
respectively, at prices ranging from $.10 and $4.00 per share. The warrants
expire at various dates through January 2002.
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.
In February 1996, 300,000 restricted common shares were issued for
an arbitration settlement. The restricted shares were valued at $55,000.
Note 4. Commitments and Contingencies
Legal Proceedings
SEC Proceedings
---------------
In July 1993, based on a concern the Company formed an independent
committee of its Board of Directors whose 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
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<PAGE>
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.
The SEC has disclosed that it is seeking permanent injunctive
relief against the Company. Previously, the Company sought to dissuade the
SEC from taking formal action against the Company, but believed that is
likely that the SEC would seek permanent injunctive relief against the
Company. The Company is attempting to enter into a consent decree with the
SEC in which in the Company, without admitting or denying any wrongdoing,
would be enjoined from violating the registration provisions of the federal
securities laws in the future. However, it also is possible that the SEC
could seek to impose significant monetary penalties on the Company or to
require the Company of offer rescission to the purchasers of some or all of
the shares involved in the unregistered transactions. Although the Company
believes that it is not likely that these additional forms of relief would be
imposed upon the Company, any such additional relief imposed could have a
materially adverse effect upon the Company. The Company also is not in a
position to predict what, if any, additional remedies the SEC might seek
against Dr. Shell. The Company and Dr. Shell are subject to a 1992 permanent
injunction enjoing them form violating the federal securities laws.
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 counsel believes, on the basis of the facts currently know, that it
is not probable that the Company would have any material liability.
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 currently is marketed by KCD, a former 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
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<PAGE>
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.
Other matters
-------------
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.
Except as otherwise specifically indicated above, management
believes that the Company doesn't have any material liability for any
lawsuits, settlements, judgments or fees of defense counsel which have not
been paid or accrued as of December 31, 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 judgment could be awarded against the Company which
could have a material adverse effect upon the Company.
Leases
During 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 Company is currently negotiating a three year extension to this lease.
These offices are used for manufacturing and laboratory research and
development. In anticipation of the acquisition Nutra Quest during October
1996, the Company entered into a three year lease for a 9,000 square feet
building for its use as corporate offices of the Company and Nutra Quest.
The lease obligation is for $7,112, November and December 1996, $7,593 for
January and February 1997, $8,169 for March and April 1997, $9,419 for May
1997 to March 1998, and $9,995 for April 1998 to September 1999.
Employment Contracts
Steven Westlund
In May 1995 (revised in January 1996), the Board of Directors
approved a compensation agreement with Steven R. Westlund, 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
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<PAGE>
Company's revenues exceed expenditures by an amount sufficient to increase
his salary, or at the choosing of the Board of Directors, his salary will
then be increased in increments based on the Company's ability to pay, up to
a maximum amount of $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 $.150 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, President, 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 $.150 for a period of
three years beginning June 1996 and ending June 1999.
Directors received no compensation for their services as such for
the fiscal year ended December 31, 1996. 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 Cornpany'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).
Note 5. Pending Acquisitions
On May 17, 1996, the Company made a proposal to acquire all of the
assets, subject to liabilities, of Pastels International, Inc., a private
California company that has developed and distributes several beauty and skin
care formulations sold commercially. Under the proposal, the Company would be
obligated to
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<PAGE>
pay Ms. Cecilia Lascu, Pastels' founder and sole shareholder, a total of
$250,000 and warrants to purchase 500,000 shares of the Company's common
stock exerciseable for a period of 5 years at $.15 per share, subject to the
achievement of certain performance criteria As of December 31, 1996, the
Company advanced $280,193 to Pastels. These advances have been expensed in
full. Subsequent to December 31, 1996, an additional $30,419 had been
advanced.
The Company has one other pending acquisition, Nutra Quest. The
Company is obligated to pay a total of $600,000 for all of Nutra Quest issued
and outstanding shares, of which $200,000 is to be paid in cash over a period
of 15 months, subject to Nutra Quest achieving certain predetermined levels
of gross sales within specific time period, and the balance of $400,000 is
payable in shares of the Company's common on stock valued at $.15 per share.
The total number of shares payable to Nutra is also subject to Nutra Quest
achieving set performance goals. As of December 31, 1996, $524,551 had been
advanced on the acquisition of which $70,000 has been capitalized, with the
balance being expensed. Subsequent to December 31, 1996, an additional
$510,295 had been advanced.
Note 6. Stock Option Plans
In May 1993, the Company's shareholders approved the adoption of
Stock Option Plans pursuant to which options covering a total of up to
1,500,000 shares of the Company's common stock may be granted to the
Company's officers, directors, employees and other persons providing services
to the Company. To date, the Company has granted options, at fair market
value as of the grant date (which range from $0.875 to $2.625 per share), to
officers, directors and employees covering 673,000 shares of common stock
under a plan that will be formally adopted by the Company's Board of
Directors pursuant to the foregoing shareholder authorization. None of the
issued options have been exercised as of December 31, 1996.
Any shares issued under these Plans are subject to an effective
registration statement with the Securities and Exchange Commission.
Note 7. Related Parties
In settlement of all litigation between the Company and Dr.
William Shell, the Company and Dr. Shell agreed to an amount due to Dr. Shell of
$50,000. $15,000 is currently payable with six additional quarterly payments of
$5,833 to settle in full.
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,
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<PAGE>
1995 together with interest at the, rate of 8% per annum. At any time during
the term of this note, the holder may elect to take payment of the principal
and accrued interest thereon in the form of restricted shares of Company
common stock at a price equal to that provided in the Company's next private
placement after the date of the note. Sam Shell exercised his option to
convert $25,000 of the principal amount of this note in July, 1995 and
received 138,889 restricted shares of the Company's common 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 wan-ants 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, as of December 31, 1996, $25,000 remains
unpaid.
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<PAGE>
Note 8. Statement 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 1995, a shareholder contributed research and development
efforts and the value assigned was accounted for as contribution to capital.
The Company paid interest of $139,923 and $60,151 in 1995 and
1996.
During 1995, the Company converted $89,459 of outstanding
liabilities into 467,775 restricted shares.
During 1996, common shares were issued in connection with
financial advisory and consulting services. The value of the common shares
of $18,000 for the year ended December 31, 1996, was charged to consulting
expense.
During the year ended December 31, 1996, common shares were issued
for interest expense under the terms of the convertible note. The fair
market value of the common shares on date of issuance of $2,500 charged to
interest expense.
In December 1994, the Company issued 300,000 warrants for financial
advisory and consulting services to be provided over a two year period. The
value of the warrants of $57,500 was charged to prepaid consulting fees as an
offset to equity. In February 1995 these warrants were modified and an
additional $68,500 was charged to prepaid consulting fees.
In September and October 1995, the Company issued 2,266,184 shares
of Company common stock in connection with conversion of $300,000 of
convertible notes.
In November 1995, the Company issued 6,328,000 shares of Company
common stock in connection with conversion of $825,000 of convertible notes.
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<PAGE>
Note 9. Unaudited Quarterly Results
Unaudited quarterly results of operations for each of the quarters in the
three years ended December 31, 1996:
<TABLE>
<CAPTION>
Quarter Ending
---------------------------------------------------
March 31 June 30 September 30 December 31
--------- --------- ------------ -----------
<S> <C> <C> <C> <C>
1996
- - ----
Revenues $ 258,904 $ 178,331 $ 297,533 $ 67,394
Gross Profit 148,933 63,007 158,905 10,745
Net loss (286,505) (312,535) (477,650) (990,038)
Net loss per share $ (0.01) $ (0.01) $ (0.01) $ (0.02)
1995
- - ----
Revenues $ 398,378 $ 390,738 $ 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 $ (0.04) $ (0.03) $ (0.03) $ (0.09)
</TABLE>
Note 11. Income Taxes.
The components of the income tax provisions charged to operations were:
<TABLE>
<CAPTION>
1995 1996
------ ------
<S> <C> <C>
Current
Federal $ - $ -
State 3,575 4,000
Deferred
Net Change in deferred tax asset - -
Net Change in deferred tax liability - -
------ ------
$3,575 $4,000
====== ======
</TABLE>
The following reconciles the federal statutory income tax rate to the
effective rate of the provision for income taxes:
<TABLE>
<CAPTION>
1995 1996
------ ------
<S> <C> <C>
Federal statutory rate 34.0% 34.0%
Increases (Decreases)
State tax, net of
Federal income tax benefit -0.1% -0.1%
Increases in value allowance -34.0% -34.0%
----- -----
-0.1% -0.1%
===== =====
</TABLE>
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<PAGE>
The principal components of deferred tax assets were:
<TABLE>
<CAPTION>
1995 1996
---------- -----------
<S> <C> <C>
Inventory capitalization $ 99,654 $ 99,654
Net operating loss carryforwards 5,084,336 5,597,704
Less: Value allowance (5,183,990) (5,697,358)
----------- -----------
$ - $ -
=========== ===========
</TABLE>
At December 31, 1996, the Company has available to offset future federal
and state income taxes, net operating loss caryforwards of $14,767,087 and
$6,203,164, respectively. These loss carryfordwards expire as follows:
<TABLE>
<CAPTION>
Years Ending December 31, Federal State
- - ------------------------- ------------- ----------
<S> <C> <C>
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 1,877,963
2006 777,716
2007 967,634
2008 3,214,821
2009 1,753,139
2010 3,815,323
2011 1,570,195
----------- ----------
$14,767,087 $6,203,164
=========== ==========
</TABLE>
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 offset
future taxable income each year, starting with the year of ownership change.
-63-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 192,422
<SECURITIES> 0
<RECEIVABLES> 242,345
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 434,767
<PP&E> 1,097,590
<DEPRECIATION> 1,747,219
<TOTAL-ASSETS> 1,902,888
<CURRENT-LIABILITIES> 1,954,192
<BONDS> 1,222,163
0
0
<COMMON> 45,655
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 1,902,888
<SALES> 802,162
<TOTAL-REVENUES> 802,162
<CGS> 420,572
<TOTAL-COSTS> 1,949,444
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 798,194
<INTEREST-EXPENSE> 117,251
<INCOME-PRETAX> (2,062,727)
<INCOME-TAX> 4,000
<INCOME-CONTINUING> (2,066,727)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,066,727)
<EPS-PRIMARY> (.05)
<EPS-DILUTED> (.05)
</TABLE>
