<PAGE>
FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 1997
--------------------
OR
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from _______________ to _______________
Commission file number 0-21384
--------
INTERACTIVE MEDICAL TECHNOLOGIES LTD.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3367421
- ------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
1717 Stewart Street, Santa Monica, California 90404
--------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's Telephone number, including area code: (310) 586-5532
--------------
Not Applicable
----------------------------------------------------------------------------
(former, name, address and former fiscal year, if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
State the number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date.
Outstanding at
Class of Common Stock June 30, 1997
--------------------- -------------
$.001 par value 54,986,841 shares
Transitional Small Business Disclosure Format Yes No X
--- ---
Number of sequentially numbered pages in the document: 21
___
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<PAGE>
FORM 10-QSB
Securities and Exchange Commission
Washington, D.C. 20549
INTERACTIVE MEDICAL TECHNOLOGIES LTD.
Index
<TABLE>
PART I - FINANCIAL INFORMATION Page
----
<S> <C>
Item 1. Consolidated Financial Statements
Condensed Consolidated Balance Sheets at
December 31, 1996 and June 30, 1997 (unaudited) 3
Condensed Consolidated Statements of Operations
for the three and six months ended June 30, 1996 (unaudited)
and 1997 (unaudited) 5
Condensed Consolidated Statements of Cash Flows
for the six months ended June 30, 1996 (unaudited)
and 1997 (unaudited) 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. 14
Item 3. Legal Proceedings 17
PART II. - OTHER INFORMATION
Item 4. Submission of Matters of a Vote to Security Holders 20
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
</TABLE>
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<PAGE>
PART I. FINANCIAL INFORMATION
-----------------------------
INTERACTIVE MEDICAL TECHNOLOGIES LTD. AND SUBSIDARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, 1996 and June 30, 1997
<TABLE>
<CAPTION>
ASSETS
------
December 31, June 30,
1996 1997
------------ ----------
(unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash $ 192,421 59,463
Accounts receivables 15,897 28,145
Lease receivables 226,448 317,039
Prepaid expense 248
---------- ---------
Total Current Assets 434,766 404,895
PROPERTY, EQUIPMENT AND LEASEHOLD
IMPROVEMENTS, at cost, net of accumulated
Depreciation of $1,747,219 in 1996 and $2,025,429
In 1997
Total property, equipment and leasehold
Improvements, net 1,097,590 873,292
OTHER ASSETS
Patents, net of accumulated amortization of $131,554
In 1996 and $143,597 in 1997 265,399 253,355
Investment in pending acquisitions (Note 4) 70,000 436,912
Deposits and other assets 35,133 30,264
---------- ---------
TOTAL ASSETS $1,902,888 1,998,718
---------- ---------
</TABLE>
See the accompanying notes to these consolidated statements
-3-
<PAGE>
INTERACTIVE MEDICAL TECHNOLOGIES LTD. AND SUBSIDARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND JUNE 30, 1997
LIABILITIES AND SHAREHOLDERS' DEFICIT
-------------------------------------
<TABLE>
<CAPTION>
December 31, June 30,
1996 1997
------------ ------------
(unaudited)
<S> <C> <C>
CURRENT LIABILITIES
Loans payable $ 78,330 78,330
Convertible note payable 106,001 309,945
Current portion of notes payable - MRI equipment 454,716 454,716
Accrued compensation and payroll taxes 145,065 153,464
Professional services and other accrued expenses 227,604 221,779
Trade payables and other accrued expenses 215,292 227,224
Royalties payable 238,186 195,050
Reg S convertible notes - 244,720
Income taxes payable 7,946 8,746
Interest payable - note payable - MRI equipment 63,799 87,502
Interest payable - convertible note 27,116 87,265
Deferred rent 8,460 8,460
Other accrued liabilities 70,992 184,565
----------- -----------
Total Current Liabilities 1,643,507 2,261,766
LONG TERM NOTES PAYABLE, net of current portion (Note 3)
Note payable - MRI equipment 654,162 654,162
Convertible notes 568,000 1,018,109
----------- -----------
Total Liabilities 2,865,669 3,934,037
COMMITMENT AND CONTINGENCIES (Note 5)
SHAREHOLDERS' DEFICIT
Common stock, authorized 100,000,000 shares
of $.001 par value; issued and outstanding
54,986,841 in 1997 and 50,654,872 in 1996 45,655 50,655
Additional paid-in-capital 16,456,437 16,901,437
Accumulated deficit (17,464,873) (18,897,411)
----------- -----------
Total Shareholders' Deficit (962,781) (1,945,320)
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS; DEFICIT $ 1,902,888 1,998,718
----------- -----------
</TABLE>
See the accompanying notes to these consolidated statements
-4-
<PAGE>
INTERACTIVE MEDICAL TECHNOLOGIES LTD. AND SUBSIDARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED
JUNE 30, 1996 and 1997
(unaudited)
<TABLE>
<CAPTION>
For the For the
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1996 1997 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES
Products and Services $ 81,251 $ 73,801 $ 243,074 $ 143,386
Lease Rentals 97,080 - 194,161 90,590
---------- --------- ---------- -----------
178,331 73,801 437,235 233,976
COSTS and EXPENSES
Cost of Revenues
Product and Services 43,198 15,056 81,043 51,983
Lease 72,126 72,126 144,252 144,252
---------- --------- ---------- -----------
115,324 87,182 225,295 196,235
Research and development 73,065 18,000 128,627 80,339
Selling, general and administrative 275,351 286,220 621,899 570,151
---------- --------- ---------- -----------
Total Expenses 463,738 391,402 975,821 846,725
---------- --------- ---------- -----------
Loss from Operations (285,407) (317,601) (538,586) (612,749)
INTEREST EXPENSE and OTHER
Interest expense - other 660 36,585 2,928 61,016
Interest expense - lease operations 29,238 - 60,226 23,703
Interest Income (3,570) (94) (6,700) (331)
Net Losses on pending acquisition 200,000 734,601
---------- --------- ---------- -----------
Total interest expense and other 26,328 236,491 56,454 818,989
---------- --------- ---------- -----------
Loss before provision for state
Income tax (311,735) (554,092) (595,040) (1,431,738)
Provision for state income taxes 800 - 4,000 800
NET LOSS (312,735) (554,082) (595,040) (1,432,538)
---------- --------- ---------- -----------
Weighted average shares outstanding 37,610,579 47,086,400 34,994,682 47,620,610
---------- ---------- ---------- ----------
Net loss per share $ 0.01 $ 0.01 $ 0.02 $ 0.03
---------- ---------- ---------- ----------
</TABLE>
See the accompanying notes to these consolidated statements
-5-
<PAGE>
INTERACTIVE MEDICAL TECHNOLOGIES LTD. AND SUBSIDARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1996 and 1997
(unaudited)
<TABLE>
<CAPTION>
For the
Six Months Ended June 30,
-------------------------
1996 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $ (599,040) $(1,432,538)
Adjustments to reconcile net loss to
net cash (used in) operating activities:
Depreciation and amortization 242,258 239,115
Decrease (increase) in:
Accounts receivable 27,776 (12,248)
Lease receivable (98,486) (90,591)
Prepaid expenses (111,710) (248)
Increase (decrease) in:
Professional fees and other payables (311,277) 76,544
Accrued compensation (64,578) 8,399
Deferred Rent (2,820) -
Income taxes payable 4,000 800
Interest payable 38,617 83,852
---------- -----------
Net cash used in operating activities (875,260) $(1,126,915)
---------- -----------
CASH FLOWS USED IN INVESTING ACTIVTIES
Investment in Nutra Quest - (366,912)
Expenditures for property, equipment and
Leasehold improvements (22,813) (2,773)
---------- -----------
Net cash used in investing activities (22,813) (369,685)
CASH FLOWS FROM FINANCING ACTIVITES
Decrease in Deposits - 4,868
Payments on notes payable (10,170) -
Payments on long term note (57,706) -
Proceeds from Reg S convertible note subscription - 244,720
Proceeds from loans payable 177,379 -
Proceeds from issuance of convertible notes - 664,053
Proceeds from issuance of common stock 1,104,818 450,000
---------- -----------
Net cash provided by financing activities 1,214,321 1,363,641
---------- -----------
NET INCREASE (DECREASE) IN CASH 316,248 (132,959)
---------- -----------
CASH, beginning of period 374,128 192,421
---------- -----------
CASH, end of period $ 690,376 $ 59,463
---------- -----------
</TABLE>
See the accompanying notes to these consolidated statements
-6-
<PAGE>
INTERACTIVE MEDICAL TECHNOLOGIES LTD. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
June 30, 1997
1. Significant Risks
-----------------
The Company has incurred net losses of $3,978,579 and $2,066,727 for the
years ended December 31, 1995 and 1996, respectively and an additional loss of
$534,082 and $1,431,738 for the three and six months ended June 30, 1997. The
continuing losses are the result of unprofitable operations, excessive general
and administrative expense and start up costs associated with the pending
acquisition of two consumer product companies (Nutra Quest was acquired in July
1997, Pastels was aborted). 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 June 30, 1997, the Company had an accumulated deficit of $18,897,411
and negative working capital of $1,856,871. 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 condensed 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, 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. 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.
Beginning in June 1995, new management implemented a plan of restructure.
Initial efforts were focused on reducing losses, settling the accumulation of
debt and lawsuits and raising working capital. By October 1995, Management began
shifting some of its resources to the internal development of new dietary and
food supplement products, development of alternative financing for research
projects and the acquisition of strategic consumer product companies.
The results of these efforts have produced a research grant for the
National Institute of Health (NIH) to help finance ongoing contrast microshpere
studies, a strategic partner agreement which includes a provision for funding
advanced pre-clinical and FDA studies as well as outlining a basic manufacturing
and distribution understanding. Additionally, the Company has pending the
acquisition of two consumer products companies, each with a number of ready to
market personal care and nutritional consumer products. The acquisition of the
personal care product line company did not go through as a result of to the
personal care company not meeting certain key criteria
-7-
<PAGE>
necessary for the acquisition to be successful. The nutritional products company
(Nutra Quest, Inc.) acquisition was completed in July 1997, with the Company
funding its initial distribution phase. The funding advanced during this start
up phase was provided under a "Proposed Acquisition" agreement.
Even though operating losses have been substantially reduced from previous
years, Management anticipates that the revenues from the sales of existing
microsphere products, laboratory services and nutritional products operations
during its initial phases of distribution will not be adequate to fund present
scaled down commercial operations. Management intends to raise additional
working capital to fund present commercial operations during the initial
distribution phase of the new consumer products.
Due to the above factors, losses are expected to continue at least for the
immediate future. In the event working capital is not available to the Company,
the Company would curtail all non commercial operations while accelerating the
distribution and sale of nutritional products and its efforts to license its
contrast microsphere technologies.
The Company carries no direct product liability insurance, relying instead
on the coverage afforded by its distributors and the manufacturers from whom it
obtains products. These coverages directly protect the insured whom pay the
premiums and only secondarily the Company. There is no assurance that such
coverages will adequately cover any claims that may be brought against the
Company. In addition, the Company does not have any general liability coverage.
2. Summary of Significant Accounting Policies
------------------------------------------
Basis of Presentation
---------------------
The accompanying condensed consolidated financial statements have been
prepared assuming that the Company will continue as a going concern. Certain
matters raise substantial doubt about the Company's ability to continue as a
going concern. As discussed in Note 1, the Company operates under extreme
liquidity constraints and, because of recurring losses, increasing difficulty in
raising necessary additional capital. Management's plan in regard to these
matters is described above. The financial statements do not include any
adjustments relating to the recoverability and classification of asset carrying
amounts or the amount and classification of liabilities that might result should
the Company be unable to continue as a going concern.
In the opinion of the management the accompanying consolidated financial
statements contain all adjustments necessary (consisting of only normal
recurring accruals) to present fairly the financial position at June 30, 1997,
the results of its operations for three and six months ended June 30, 1996 and
1997 and the cash flows for six months ended June 30, 1996 and 1997. Certain
information and footnote disclosures normally included in financial statements
that would have been prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the rules and regulations
of the Securities and Exchange Commission, although management of the Company
believes that the disclosures in these financial statements are adequate
-8-
<PAGE>
to make the information presented therein not misleading. It is suggested that
these condensed financial statements and notes thereto be read in conjunction
with the financial statements and the notes thereto included in the Company's
December 31, 1996 Form 10-KSB.
The results of operations for the three and six months ended June 30, 1997
are not necessarily indicative of the results of operations to be expected for
the full fiscal year ending December 31, 1997.
Income Taxes
------------
Income taxes are provided for the tax effects of transactions reported in
the financial statements and consist of state income taxes currently due. No
federal income taxes are due as a result of the Company's net operating loss
carryforward.
Loss Per Share
--------------
Loss per share is based upon weighted average number of common shares
outstanding during the periods.
3. Capital Transactions and Long Term Debt
---------------------------------------
The Company's magnetic resonance imaging (MRI) system (the "Unit")
currently is installed in a mobile van at an operating site in Jefferson Valley,
New York and has been in use since September 1992 and is leased to Tri-County
Mobil MRI, L.P. ("Tri-County"), whose general partner is Diagnostics Resource
Funding. This lease provides for monthly payments of $37,926 to Venus
Management, Inc. ("VMI") through August 1999 and $68,589 in September 1999 (with
such payments being guaranteed by Medical Funding of America, Inc., "MFA"), and
VMI is required to make monthly installment payments (which includes interest at
10.5% per annum on the unpaid principal balance) for the Unit to a third party
finance company of $32,360 through August 1999 and $68,589 in September 1999. As
of June 30, 1997, the balance of this debt aggregated $1,196,380 (including
interest currently due of $87,502) of which $541,150 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
-9-
<PAGE>
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. At this time it is uncertain that the third party finance company will
accept the restructure. Accordingly, the Company, as of December 31, 1996, had
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.
During the quarter ended March 31, 1997, a subscription was placed for
5,000,000 common shares at $.09 per share and warrants to purchase an additional
3,000,000 at $.09 per share. The shares were issued under the transaction
exemption afforded by Regulation S.
During the quarter ended March 31, 1997, the Company placed $117,211
Convertible Debentures due 365 days from date of subscription, bearing interest
at 10% per annum and convertible (including accrued interest) at any time by the
buyer into Company's common stock at a conversion price to be calculated by
applying a 35% discount to the market price based upon the average bid price of
the Company's common stock for the 5 day period immediately prior to conversion,
with a floor of $.08 and a ceiling of $.14 per share, in reliance upon the
transaction exemption afforded by Regulation S.
During the quarter ended June 30, 1997, the Company placed $240,000
Convertible Debentures due 365 days and $250,000 Convertible Debentures due
three years from date of subscription, bearing interest at 10% per annum and
convertible (including accrued interest) at any time by the buyer into Company's
common stock at a conversion price to be calculated by applying a 35% discount
to the market price based upon the average bid price of the Company's common
stock for the 5 day period immediately prior to conversion, with a floor of $.08
and a ceiling of $.14 per share, in reliance upon the transaction exemption
afforded by Regulation S.
In April 1997, as a result of a Special Shareholder Meeting, the Company's
Certificate of Incorporation was amended to increase the number of authorized
shares of common stock from 50,000,000 to 100,000,000.
-10-
<PAGE>
4. 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 was obligated to
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. It was decided not to proceed with
the proposed acquisition. As of June 30, 1997, the Company had advanced $272,437
to Pastels. These advances have been expensed in full.
The Company has one other pending acquisition for Nutra Quest Inc. The
Company was obligated to pay a total of $600,000 for all of Nutra Quest issued
and outstanding shares, of which $200,000 was 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 was payable
in shares of the Company's common stock valued at $.15 per share. The total
number of shares payable to Nutra Quest was also subject to Nutra Quest
achieving set performance goals. The acquisition was completed in July 1997. As
of March 31, 1997, $1,038,733 had been advanced on the acquisition of which
$80,000 has been capitalized, $454,551 was expensed for the year ended December
31, 1996 and $504,182 was expensed during the three months ended March 31, 1997.
During the three months ended June 30, 1997 an additional $556,912 was advanced
to Nutra Quest, of which $200,000 was expensed and $356,912 was capitalized.
5. Contingencies
-------------
SEC Proceedings
---------------
In July 1993 the Company formed an independent committee of its Board of
Directors 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, 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.
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<PAGE>
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 filing 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 related 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 which
was previously disclosed by the Company.
The SEC disclosed in 1995 that it was seeking permanent injunctive relief
against the Company concerning the above matters. The Company entered 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. This consent agreement
was accepted by the SEC in June, 1997. No monetary penalties were assessed
against Interactive.
Federal Trade Commission Proceedings
------------------------------------
The Seattle Regional Office of the Federal Trade Commission had advised the
Company that the staff believed that the Company's fat sequesterant product,
which was marketed by KCD, a former licensee, under the name "SeQuester," had
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. (Note, this product is no
longer marketed). The FTC indicated that it was prepared to recommend that a
complaint be filed against the licensee, the Company and certain individuals in
connection with the foregoing. Subsequently the Company and the FTC agreed upon
a proposed settlement in this matter in 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 was formally approved by the FTC on June 16, 1997.
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,
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<PAGE>
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
June 30, 1997.
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
-13-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The Company is currently funding the startup phase of Nutra Quest, Inc., a
network marketing company acquired in 1996. This acquisition, which was
finalized in July 1997, represents a significant opportunity for future growth
in both revenues and income. In April 1997, Nutra Quest began distribution of
its "Royal Hawaiian Noni", a natural fruit used for restoring and regenerating
the body. The Noni fruit, which is based on Morinda Citrifolia, has a 2000 year
history of use with Tahitian and Hawaiian people. Nutra Quest, Inc. is beginning
to experience sales growth, and a break-even level of sales is expected in the
fourth quarter of 1997. The Company has funded Nutra Quest Inc. under a
"Proposal to Acquire". As of June 30, 1997 the Company has funded a total of
$1,589,182.
RESULTS OF OPERATIONS
Three and Six Months Ended June 30, 1996 Compared to June 30, 1997
<TABLE>
<CAPTION>
For the For the
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1996 1997 1996 1997
---- ----- ---- ----
<S> <C> <C> <C> <C>
(Thousands)
Revenues - Products and Services
Microspheres & Lab Services $82 $74 $153 $143
Fat Sequestration - License Fees
and Royalties - - 90 -
--- ---- ---- ----
82 74 243 143
Cost of Revenues
Microspheres & Lab Services 44 15 81 52
Fat Sequestration License Fees
And Royalties - - - -
--- ---- ---- ----
44 15 81 52
Gross Margin Product & Services 38 59 162 138
--- ---- ---- ----
Revenues - Lease Operations 97 - 194 90
Cost of Revenues - Lease operations 84 72 204 144
--- ---- ---- ----
Gross margin - lease operations $13 $(72) $(10) $(54)
--- ---- ---- ----
</TABLE>
For the three and six months ended June 30, 1997, revenues from products and
services were approximately $74,000 and $143,000, a decrease of 9.7% and 41.1%,
respectively, over the same periods in 1996. The decrease was due to the
termination of the fat sequestrant license agreement
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<PAGE>
with KCD which during the first three months of 1996 had generated approximately
$90,000 in license revenues.
Revenues from product and services decreased approximately $8,000 or 9.7%
and $10,000 or 6.5% from prior year for the three months and six months
respectively ending June 30, 1997. The decrease in the quarter as well as the
six months ended June 30, 1997 was due to a temporary shortage of product to
ship to customers.
The overall cost of revenues for products and services as a percentage of
sales for the three and six months ended June 30, 1997 were 20.3% and 36.4%
respectively, compared to 53.6% and 33.3% for 1996. The decrease in the cost of
revenues for the three month period ended June 30, 1997 compared to the same
period prior year is a result of a reduction in repair costs to the Company's
flow cytometer. The increase in cost of revenues as a percentage of sales for
the six months ended June 30, 1997 resulted primarily from absence of license
revenues from KCD.
Research and development expense decreased approximately $55,065 or 75.4%
for the three month period ended June 30, 1997 from the comparable 1996 period
due reductions in personnel. The decrease in the six month period ended June 30,
1997 of $48,288 from the comparable period in 1996 was a result of the
expenditure reduction in personnel that was discussed above.
SG&A expense increased to $286,200 from $275,351 or 3.9% over prior year
for the three months ended June 30, 1997. This increase is due to fees incurred
in securing capital. For the six months ended June 30, 1997, SG&A decreased to
$570,151 from $621,899 in 1996, a reduction of 8.3%. The decrease was a result
of restructuring and down sizing of operations which includes reductions in
accounting fees, salaries, wages, selling and marketing expenses, and
shareholder expenses.
Interest expense for operations for the three month period ended June 30,
1997 was $36,585 compared to $60 for the comparable three month period prior
year. The increase for the six month period ended June 30, 1997 was $58,088 from
the comparable 1996 period. The increase resulted from interest due on
convertible notes which were issued during the six month period ending June 30,
1997.
Interest income decreased to approximately $94 for the second quarter of
1997 compared to $3,570 for 1996. For the six months ended June 30, 1997
interest income decreased to $331 from $6,700 from the comparable 1996 six month
period. The decreases were due to interest earned on an outstanding note
receivable from a shareholder and an outstanding note receivable from the sale
of stock.
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
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<PAGE>
operating losses for tax purposes of approximately $14,767,000. 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
- -------------------------------
The Company has received capital for operations and research from private
investors, through issuance of private party debt, bank financing and from
licensing and product sales. Currently, revenues generated from licensing and
product sales have been insufficient to cover operating expenses, research and
development, costs of litigation, construction costs and patent development
costs. As a result, in order to sustain operations, the Company has been
dependent on private placements of securities, bank debt, loans from private
investors and the exercise of warrants. To correct this imbalance, management
has made cuts and changes in the Company's operations in an effort to reduce
operating expense. 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 large percentage of the planned 1997 operations.
Historically, the Company has been able to generate private placement funds to
provide capital for operations and growth. During 1995 and 1996, new management
was responsible for approximately $2,500,000 in private placements of debt and
equity. Subsequent to December 31, 1996, an additional $1,358,773 has been
raised. However, there can be no assurances that private or other capital will
continue to be available, or that revenues will increase to meet the Company's
cash needs. Additionally, 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 June
30, 1997 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).
As of June 30, 1997, the Company's working capital position declined to a
negative $1,856,871 from a negative $1,208,741 at December 31, 1996 primarily as
a result of funding pending acquisitions and the note on the MRI equipment
totaling $989,381. At June 30, 1997, the Company's cash position had decreased
to $59,463 from $192,421 at December 31, 1996.
At June 30, 1997, the Company had assets of $1,988,718 compared to
$1,902,888 on December 31, 1996. In addition, the Company had a total
shareholders' deficit of $1,945,320 on June 30, 1997 compared to $962,781 on
December 31, 1996, an increase of $982,539. The increase was the result of a net
loss from operations of $1,432,538, which included losses of $734,601
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<PAGE>
resulting from the funding of pending acquisitions offset by $450,000 from the
issuance of common stock under Regulation S. Payments on a long term note with a
balance of $1,162,679 (including interest currently due of $42,494) as of June
30, 1997 of which $403,144 is due within the next twelve months had been assumed
by the Company as part of its acquisition of VMI, this note is secured by
guaranteed lease payments of an equivalent amount.
ITEM 3. LEGAL PROCEEDINGS
SEC Proceedings
---------------
In July 1993 the Company formed an independent committee of its Board of
Directors 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, a total of
approximately 2,506,982 shares of the Company's common stock was issued to a
smaller number of individuals. Those issuances were structured in reliance upon
the advice of the Company's then securities counsel, and the Company believes
that these issuances, standing alone, would have qualified for exemptions from
registration under federal and state securities laws. However, certain
subsequent resale's of these shares, commencing in June 1992, by the original
purchasers or their transferees, to a total of approximately 330 investors,
raised an issue as to whether a technical distribution occurred that might have
required either the original issuances or the resales to have been registered.
All of the foregoing resales were either directly effected or arranged for by
Clark M. Holcomb.
In October 1993, the Company filed a registration statement with the SEC to
register all of the foregoing 2,506,982 shares with the SEC. However, even if
the registration statement becomes effective so as to permit public resales by
the holders of the shares involved in the transactions described above, these
holders could have a right of rescission to recover the purchase price they paid
for their shares plus interest from the date of purchase against the persons
from whom they acquired the shares.
The Company believes (based in part upon the opinion of its current special
securities counsel) that these holders do not have a valid and enforceable right
to such rescission. However, subject to any applicable statutes of limitation
that might bar such future claims, these shareholders could assert such claims,
and the Company has not set aside any reserves to fund any potential liabilities
that it might incur in connection with any such future potential claims, which
could be material. Should the Company incur any such liabilities, it might seek
indemnification or contribution for such liabilities from Mr. Holcomb or other
third parties.
In October 1995, the staff of the SEC advised the Company that it was
considering filing 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 related 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 which
was previously disclosed by the Company.
The SEC disclosed in 1995 that it was seeking permanent injunctive relief
against the Company
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<PAGE>
concerning the above matters. The Company entered 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. This consent agreement was accepted by the SEC in June,
1997. No monetary penalties were assessed against Interactive.
Federal Trade Commission Proceedings
------------------------------------
The Seattle Regional Office of the Federal Trade Commission had advised the
Company that the staff believed that the Company's fat sequesterant product,
which was marketed by KCD, a former licensee, under the name "SeQuester," had
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 FTC indicated that it was
prepared to recommend that a complaint be filed against the licensee, the
Company and certain individuals in connection with the foregoing. Subsequently
the Company and the FTC agreed upon a proposed settlement in this matter in
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 was be formally
approved by the FTC on June 16, 1997.
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
June 30, 1997.
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
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<PAGE>
The Company currently has no firm commitments for material capital
expenditures, with any such future commitments being dependent upon the
availability of funds. The Company does not anticipate that future compliance
with existing environmental and occupational safety regulations will have a
significant impact on its capital expenditures or on its financial condition or
future operating results.
-19-
<PAGE>
PART II. OTHER INFORMATION
---------------------------
ITEM 4. SUBMISSION OF MATTERS OF A VOTE TO SECURITY HOLDERS
During April 1997, a Special Shareholder Meeting was held at which the
shareholders of the Company approved amendments to the Company's certificate of
Incorporation to provide for an increase in the number of authorized shares of
common stock from 50,000,000 to 100,000,000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
(a) Exhibits
27 Financial Data Schedule
(b) The Company filed the following Reports on form 8-K:
1. Form 8-K dated March 17, 1997, reporting Common Stock and
Convertible debentures Issuance.
2. Form 8-K dated July 21, 1997, reporting pursuant to an Acquisition
Agreement between the Company and Nutra Quest, Inc., a Nevada
Corporation, the Company purchased from Nutra Quest all its issued
and outstanding shares of common stock.
-20-
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
INTERACTIVE MEDICAL TECHNOLOGIES LTD.
--------------------------------------
(Registrant)
Date: August 19, 1997 By: /s/ STEVEN R. WESTLUND
---------------------------- ---------------------------
Steven Westlund
(Chief Executive Officer)
Date: August 19, 1997 By: /s/ PETER T. BENZ
---------------------------- ---------------------------
Peter T. Benz
(President)
Date: August 19, 1997 By: /s/ OWEN M. NACCARATO
---------------------------- ---------------------------
Owen M. Naccarato
(Chief Financial Officer)
-21-
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<PERIOD-START> APR-01-1997 JAN-01-1997
<PERIOD-END> JUN-30-1997 JUN-30-1997
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