SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended September 30, 1997
Commission File No. 0-18399
FOUNTAIN PHARMACEUTICALS, INC.
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(Exact name of registrant as specified in its charter)
Delaware 62-1386759
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
7279 Bryan Dairy Road, Largo, Florida 33777
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(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (813) 548-0900
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Securities registered pursuant to Section 12(b) of the Act:
Common Stock, par value $.001
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(Title of Class)
Securities registered pursuant to Section 12(g) of the Act:
None
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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 past 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.
(1) Yes X No
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(2) 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. [ ]
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Registrant's revenues for the year ended September 30, 1997:
$1,317,994
The aggregate market value of the Company's Common Stock held by
non-affiliates of the Registrant as of December 5, 1997 was approximately
$2,680,774, based upon the closing sales price of the Company's Common Stock as
of December 5, 1997 (see Footnote (1) below).
APPLICABLE ONLY TO REGISTRANTS INVOLVED
IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the Registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes X No
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APPLICABLE ONLY TO CORPORATE REGISTRANTS:
The number of shares outstanding of the Registrant's class of Common
Stock, par value $.001 per share, as of December 5, 1997, was 47,516,049.
The number of shares outstanding of the Registrant's Class B Common Stock,
par value $.001 per share, as of December 5, 1997, was 90,100.
DOCUMENTS INCORPORATED BY REFERENCE:
None
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Transitional Small Business Disclosure Format:
Yes No X
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______________________
(1) The information provided shall in no way be construed as an admission that
any person whose holdings are excluded from the figure is not an affiliate
or that any person whose holdings are included is an affiliate and any
such admission is hereby disclaimed. The information provided is included
solely for recordkeeping purposes of the Securities and Exchange
Commission.
2
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PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT
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When used in this Annual Report on Form 10-KSB, the words "may," "will,"
"expect," "anticipate," "continue," "estimate," "intend," and similar
expressions are intended to identify forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934 regarding events, conditions and financial
trends which may affect the Company's future plans of operations, business
strategy, operating results and financial position. Such statements are not
guarantees of future performance and are subject to risks and uncertainties and
actual results may differ materially from those included within the
forward-looking statements as a result of various factors. Such factors include,
among others: (i) the Company's ability to retain existing or obtain additional
licensees who act as distributors of its products; (ii) the Company's ability to
obtain additional patent protection for its encapsulation technology; and (iii)
other economic, competitive and governmental factors affecting the Company's
operations, market, products and services. Additional factors are described in
the Company's other public reports and filings with the Securities and Exchange
Commission. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date made. The Company
undertakes no obligation to publicly release the result of any revision of these
forward-looking statements to reflect events or circumstances after the date
they are made or to reflect the occurrence of unanticipated events.
3
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PART I
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ITEM 1
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BUSINESS
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BACKGROUND
The Company was organized during 1989 to develop and commercialize certain
proprietary compound encapsulation technologies. Following several years of
continued developmental efforts, the Company was able to secure patents on
several aspects of its technologies in the United States and Europe, initiate
certain marketing programs and develop strategic associations with several
pharmaceutical companies.
From inception through 1994, the Company remained in the development stage
while experiencing substantial losses. Its principal source of capital was
derived from a series of private financing transactions and an initial public
offering in 1990. Sales revenues during this period were insufficient to offset
the Company's operating costs and significant liabilities incurred by the
Company in its past development and marketing efforts. Unable to develop any
material sales revenues or secure additional proceeds from financing
transactions, during 1994 the Company had substantially curtailed operations and
by November 30, 1994, had filed for protection under Chapter 11 of the United
States Bankruptcy Code in the United States Bankruptcy Court for the Middle
District of Florida, Tampa Division.
While in bankruptcy, the Company was able to successfully reorganize its
operations and finances. It achieved significant reductions in overhead and
other costs of operations, while recognizing an increase in revenues and a
redirection of its marketing efforts to focus upon its licensing arrangements.
The Company's Plan of Reorganization, which was approved and became
effective on December 20, 1995 (the "Plan"), resulted in, among other things, a
substantial reduction in the Company's outstanding liabilities, an infusion of
capital by the Company's Chief Executive Officer through the purchase of newly
issued shares of the Company's Common Stock and the Company's emergence from the
bankruptcy proceedings. On July 25, 1996, the U.S. Bankruptcy Court issued a
final decree stating the Court no longer has jurisdiction over matters in
connection with the bankruptcy.
In July 1997, the Company completed a private placement of 2,000,000
newly-designated and issued shares of Series A Convertible Preferred Stock (the
"Preferred Stock") to Fountain Holdings, LLC ("Holdings"), a Wyoming limited
liability company, controlled by Joseph S. Schuchert, Jr. As a result of this
private placement (the "Private Placement"), the Company obtained additional
working capital of $2.5 million, which it intends to utilize to enhance the
expansion of the Company's sales and marketing program, as well as to further
the Company's research and development efforts. See "ITEM 6 - MANAGEMENT'S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION - Liquidity and Capital Resources."
4
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THE TECHNOLOGY AND ITS APPLICATIONS
The Company's base of proprietary technologies involves the creation of
compound encapsulation and delivery systems of subcellular size designated by
the Company as "Solvent Dilution MicroCarriers" ("SDMCs"). SDMCs are microscopic
man-made spheres that can be engineered to entrap pharmaceuticals or other
biologically active molecules.
These technologies are intended to enable the Company to create SDMC
formulations with defined biochemical and biological properties which are
designed to permit the production of stable delivery systems. The SDMCs are
intended to provide enhanced compound delivery through entrapment and
encapsulation of a wide variety of compounds or chemical formulations which are
designed to be released in a manner that should enhance localized delivery. Once
the contents of the SDMC are released, the constituent materials used to form
the micro-carriers are utilized by living cells and degraded. The SDMCs are
principally intended for use in connection with dermal applications,
solubilization of compounds, parenteral and oral formulations and non-
pressurized aerosol preparations.
Since inception, the Company's focus has been upon the creation of new
proprietary products through the application of its encapsulation technologies
to existing compounds, thereby in the process creating a new and enhanced
product which offers advantages over a non- encapsulated format. The Company has
also undertaken test encapsulations on products that are proprietary to other
companies with the goal of securing appropriate licensing or other joint venture
arrangements for such products.
The Company has developed a number of proprietary products utilizing its
SDMC technologies. These include non-regulated consumer goods and dermatologic
products consisting of sunscreens, lotions and moisturizers. These products have
been marketed by the Company under the Octazome(R), LyphaZome(R) and Daylong(R)
names and under other proprietary names of licensees.
The Company has also in the past pursued the development of other
non-regulated products for use in a variety of applications as well as other
proprietary products that are subject to FDA regulation, such as certain burn
care compounds, vaccines and topical steroids. The Company has previously
conducted human clinical testing of encapsulated silver sulfadiazine under
strictly established medical protocols. Due to the difficulty of the protocols
involved, however, insufficient numbers of patients have been tested so as to
permit the extraction of conclusive test results necessary to continue seeking
regulatory approval from the FDA. Due to the substantial time and expense
involved in developing regulated products such as silver sulfadiazine compounds,
these and other regulated products have not yet been fully developed and some
will remain a lower corporate priority. The Company intends to proceed with the
development of certain other regulated products utilizing funds obtained through
the Private Placement in July 1997. See "Background". The Company will continue
to pursue collaborative efforts with other companies to develop additional
regulated products.
5
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BUSINESS STRATEGY
The Company's initial focus was on the development of its own proprietary
health care products using SDMCs; however, in recognition of the material
expenses and delays associated with obtaining regulatory approvals for the
commercialization of regulated products, and at a time when the Company's
financial resources were very limited, the Company re-directed the principal
focus of its efforts and resources towards the development and marketing of less
regulated items including a full line of skin care products and sunscreens
utilizing the SDMC technology. With the infusion of additional capital in July
1997 (see "Background"), the Company plans to expand its effort to market
unregulated products and to readdress the development of certain regulated
products. Additionally, the Company will continue to pursue arrangements with
third parties whereby the Company can expand its markets and the costs of
marketing and distribution of its products are not borne by the Company.
Generally, in its licensing arrangements, the Company provides the raw materials
or finished product for distribution and sale by the third party licensee. The
licensee remains responsible for all marketing and sales efforts.
On a case by case basis in the United States, the Company will determine
its interest in collaborative arrangements with larger pharmaceutical companies
in the advancement of new regulated products through the approval process and
into the marketplace. In general, for international approvals and marketing, the
Company intends to rely on such larger organizations.
Currently, the Company principally licenses and supplies moisturizers and
sunscreen products through its licensing arrangements with pharmaceutical
companies. See "Sales and Marketing." The Company recommenced its research and
development efforts with the addition of a laboratory facility in the third
quarter of fiscal 1996, for which funds were made available in connection with
the implementation of the Plan, and for which additional funds are now available
as a result of the Private Placement. See "ITEM 6 - MANAGEMENT'S DISCUSSION AND
ANALYSIS OR PLAN OF OPERATION." While the Company's sales currently focus upon
its line of sunscreen and moisturizer products, management believes that
expansion of the Company's licensing arrangements and the scope of product
development activities may offer marketing opportunities for additional consumer
products. However, there can be no assurances to that effect.
SALES AND MARKETING
From inception through 1994, the Company had undertaken its marketing
activities principally through the efforts of management and independent sales
and marketing consultants who initiated sales efforts with certain retail
department stores, hospitals and health care institutions, retail pharmaceutical
chains and scientific organizations. However, over the past three years, in view
of the Company's limited financial resources, it has focused its marketing
efforts on the sale of products through licensing arrangements with certain
pharmaceutical companies. Management believes that these licensing arrangements
have offered significant marketing opportunities without imposing material
operating expenses upon the Company, and that these types of arrangements should
be expanded. Additionally, the Company now intends to participate directly in
markets where such efforts are deemed appropriate.
6
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The Company has three principal licensing arrangements with major European
licensees. Under such arrangements the Company realizes revenues from the sale
of products to the licensees who act as distributors and from royalties which
are earned as the result of subsequent sales of these products by such
licensees. Of its licensees, Spirig AG and Nycomed Pharma represent in the
aggregate more than 82% of the sales of the Company's products. The Nycomed
Pharma license covers markets in Norway, Denmark, Belgium, Holland and
Luxembourg. Spirig AG, the Company's licensee for Switzerland and Germany,
expanded its arrangements with the Company to include markets in Eastern Europe.
In January 1996, the Company entered into a long-term license and supply
agreement with Dermik Laboratories, Inc. As of November 1996, Dermik terminated
the agreement based on their interpretation of a technical provision of the
agreement. The Company is not in agreement with Dermik's interpretation, and on
November 25, 1997, the Company filed a complaint against Dermik. See "ITEM 3 -
LEGAL PROCEEDINGS". The Company is actively pursuing similar marketing
arrangements with other licensees, including several who had previously
expressed interest in the Company's products. The Company plans to focus upon
expanding into markets, which may include, but are not limited to, Asia and
South America.
GOVERNMENTAL REGULATIONS
The Company had undertaken the development of a number of products which
incorporate its SDMC technologies in regulated fields. These products remain in
various stages of development, from preliminary laboratory research,
pre-clinical testing to human clinical testing and will now be, with the
availability of new funds via the private placement noted above, reconsidered
for further developmental efforts by the Company, or with the collaboration of a
corporate sponsor or joint venture participant.
Regulation by governmental authorities in the United States and other
countries is a significant factor in the production and marketing of regulated
products. In order to clinically test, produce and market products for human
therapeutic use, mandatory procedures and safety standards established by the
FDA and comparable agencies in foreign countries must be followed. The procedure
for seeking and obtaining the required governmental approvals for a new product
in a regulated field involves many steps, including animal testing to determine
safety, efficacy and potential toxicity and, eventually, clinical testing on
humans which is likely to continue several years and involves the expenditure of
substantial resources.
Certain of the products previously developed or targeted for development
by the Company are largely unregulated and do not require any regulatory
approvals or filings with any regulatory agencies. This principally entails the
Company's moisturizer products. Certain other products of the Company which were
unregulated in the past such as its sunscreen products are now regulated as
over-the-counter drugs. These products are required to receive additional
testing for stability purposes and must consist of "approved materials." These
products are subject to stringent recordkeeping requirements. However, no filing
or pre-approval process with any regulatory agency must be complied with in
connection with these products.
7
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PATENTS AND PROPRIETARY TECHNOLOGY
The Company has obtained and is continuing to actively pursue patent
protection for certain component elements of its proprietary encapsulation
technologies, both in the United States and abroad.
The Company has obtained patents for its novel method for making
lipid-based carrier vehicles or "SDMCs": U.S. Patent 5,133,965 issued on July
28, 1992, and U.S. Patent 5,269,979 issued on December 14, 1993. These patents
relate to unique methodology for making relatively small-sized, homogenous
populations of lipid-based carrier vehicles. A shelf-stable precursor solution
containing a drug or other substance can be converted into the vehicles by
simple aerosolization or dilution with water. The precursor solution can also be
dried onto a surface, such as a bandage material, and rehydrated upon contact
with fluids at the wound site to deliver medicaments to the wound. Counterpart
patents have issued in Australia, Norway, Israel, Spain and EPC (European Patent
Convention). The European patent was validated in Austria, Belgium, France,
Great Britain, Germany, Italy, Luxembourg, Netherlands, Sweden, Switzerland-
Liechtenstein, and Singapore. The Company has counterpart applications on file
in Canada and Japan in which the Company is awaiting an official action by the
patent office.
The Company is pursuing additional patent coverage in the United States on
other aspects of its SDMC technology. This application relates to shelf-stable
precursor solutions. A patent application of the presently pending application
contained similar claims to those now being pursued which were rejected over
prior art, including the prior SDMC patents already owned by The Company. The
Company is awaiting the first Official Action from the PTO concerning the
pending application. If the claims are rejected, the Company will evaluate its
options for responding, including the possibility of submitting additional data.
Obtaining patents on the pending applications will add to the Company's
patent portfolio and will strengthen the Company's position with regard to
competitor's efforts to design around the Company's existing patents. Although
the Company continues to believe the pending applications contain patentable
claims, there is no assurance that the PTO will ultimately grant these claims.
Further, there are no assurances that the Company's issued patents will not be
designed around, infringed upon, or successfully challenged by others in
litigation. No assurance can be given that the Company will have sufficient
resources to either institute or defend any action by or against the Company
with respect to such patents. While the Company believes that the protection
afforded by a patent would be important to its business, the Company would
continue operations by relying upon trade-secrets, know-how and continuing
technological advancements in order to maintain its competitive position. Trade
secret protection, however, may be limited by foreign publication of the patent
application and by the issuance of the patents mentioned above.
There can be no assurance the patents the Company may obtain will afford
the Company commercially significant protection of its proprietary technology,
provide the Company with any significant competitive advantages, or that
challenges will not be instituted against the validity or enforceability of such
patents, or if instituted that any such challenges will not be successful. The
8
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cost of litigation to uphold the validity and prevent infringement of a patent
can be substantial. In addition, no assurance can be given that the Company will
have sufficient resources to either institute or defend any action, suit or
other proceeding by or against the Company with respect to any claimed
infringement of a patent or other proprietary rights. In the event that the
Company shall in the near future lose the protection afforded by a patent, such
event could have material adverse effect on the Company's operations. There can
be no assurance that the Company's technologies will not infringe patents or
other rights owned by others, license to which may not be available to the
Company.
COMPETITION
Competition for the development and sale of non-regulated pharmaceutical
and consumer goods products is intense. The Company and its licensees will be
competing against consumer goods and other companies that have substantial
resources and are well positioned to subsidize the cost of product development,
establish distribution channels, develop marketing plans and hire sales persons.
Notwithstanding that management believes that the Company's encapsulated
products provide benefits over existing products, there can be no assurances
that the Company's marketing and sales efforts, either directly or through
licensees, will be successful in light of such intense competition.
Competition in the drug delivery and microencapsulation industries is
based upon such factors as safety of products, competitive product advantages,
performance, ease of application, acceptance by ultimate consumers and health
care professionals, and the marketing and distribution of products. The
Company's competitive position will be based upon the development of alternative
approaches using new or improved formulations to accomplish desired results.
Existing alternatives to the Company's technologies include conventional
formulations for compounds, biodegradable polymeric systems and liposomes.
Application of the Company's technologies to certain products remains in an
early phase of development and no assurances can be given that any of the
Company's potential products will gain sufficient competitive advantages to
generate meaningful commercial demands.
The Company will be competing in an area in which there is potential for
extensive technological innovation in a relatively short period of time.
Competition will be based upon the Company's ability to commercialize
technological developments.
Other public and private companies are engaged directly or indirectly in
drug encapsulation and drug delivery research activities both for therapeutic
and consumer goods applications. Many of these companies have substantially
greater financial and technical resources than the Company. There can be no
assurances that the Company's competitors will not succeed in developing
products which are more effective or safer than those to be developed by the
Company, or that such competitors may obtain government approval in less time
than the Company.
9
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HUMAN RESOURCES
The Company conducts its operations and implements its business strategy
through the use of employees and consultants engaged as independent contractors.
Consultants are generally engaged to assist in scientific matters or in
connection with sales and marketing endeavors.
As of December 5, 1997, the Company employed seven (7) persons including
its chief executive officer, a director of finance and administration, a
technical director, warehouse and administrative personnel.
ITEM 2
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PROPERTIES
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The Company owns no real property. The Company leases approximately 6,000
square feet of office, laboratory and warehouse facilities located in Largo,
Florida. The lease provides for a monthly rental of $4,900 for a term of two
years, which commenced April 1, 1996, with an option for an additional one year
period. This facility is adequate for the Company's current and foreseeable
needs.
ITEM 3
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LEGAL PROCEEDINGS
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On November 25, 1997, the Company filed a complaint (Docket No.: November
Term 1997, No. 3611) in the Court of Common Pleas for Philadelphia County,
against Dermik Laboratories, Inc., alleging a breach and improper termination by
Dermik of the parties' contract to distribute Daylong(R) sunscreen products.
ITEM 4
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SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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None.
10
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PART II
ITEM 5
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MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
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A. Market Information
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The Company's Common Stock presently trades on the OTC Bulletin
Board under the symbol "FPHI". Until May 31, 1994, the Company's Units, Common
Stock, Class A Warrants and Class B Warrants were listed on the National
Association of Securities Dealers, Inc.
Automated Quotation System ("NASDAQ").
Effective May 31, 1994, the Company's securities were delisted from The
NASDAQ SmallCap Market(sm) because, as a result of declining equity and assets,
the Company no longer satisfied the quantitative listing standards required for
continued listing. During May 1995, the Company's Units, and Class A and Class B
Warrants expired.
The following table sets forth certain information with respect to the
high and low market prices of the Company's Common Stock for the fiscal years
ended September 30, 1996 and 1997, and for the first quarter of its fiscal year
ended September 30, 1998. No trading market exists for shares of the Company's
Class B Common Stock.
Fiscal 1996 HIGH LOW
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First Quarter .063 .016
Second Quarter .547 .188
Third Quarter .25 .188
Fourth Quarter .172 .109
Fiscal 1997 HIGH LOW
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First Quarter .20 .05
Second Quarter .17 .063
Third Quarter .25 .06
Fourth Quarter .40 .15
Fiscal 1998 HIGH LOW
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First Quarter .19 .12
(October 1-December 5, 1997)
The closing price of the Company's Common Stock on December 5, 1997 was
$.12.
The high and low prices (based on the average bid and ask prices) for the
Company's Common Stock, as reported by The NASDAQ SmallCap Market(sm) and the
OTC Bulletin Board, as applicable. Such prices are inter-dealer prices without
retail mark-ups, mark-downs or commissions and may not represent actual
transactions.
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B. Sales of Securities
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On July 17, 1997, the Company completed the sale of 2,000,000
newly-designated and issued shares of Series A Convertible Preferred Stock in a
private placement transaction. The Preferred Stock was sold for $2.5 million in
a private transaction to Fountain Holdings, LLC, a Wyoming limited liability
company, controlled by Joseph S. Schuchert, Jr., who joined the Board of
Directors of the Company in connection with such transaction. See "ITEM 11
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT- Voting Rights of
Preferred Stock."
C. Reverse Stock Split
-------------------
In order to facilitate the conversion of the Company's Preferred
Stock and to enhance the market price and liquidity of the Company's Common
Stock, the Company has undertaken a one for twenty reverse stock split,
specifically, a conversion of every twenty issued and outstanding shares into
one share of the same class of Common Stock (the "Reverse Stock Split"). As of
October 9, 1997, the Board of Directors of the Company adopted resolutions
authorizing the Reverse Stock Split. As of November 12, 1997, the Reverse Stock
Split was also duly authorized and approved by the holders of the majority of
the Common Stock and by all of the holders of the Company's Preferred Stock by
written consent in lieu of a special meeting. As of November 19, 1997, the
Company furnished an Information Statement to the holders of shares of Common
Stock and Class B Common Stock providing notice of the Reverse Stock Split to
such stockholders. The Company anticipates that the Reverse Stock Split will
become effective as of December 11, 1997, upon the amendment to the Company's
Restated Certificate of Incorporation which provides for such Reverse Stock
Split. However, there can be no assurances to that effect. See "ITEM 6 -
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION - Liquidity and
Capital Resources."
D. Holders
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Records of the Company's stock transfer agent indicate that as of
December 5, 1997, the Company had 436 record holders of its Class B Common Stock
and Common Stock. Since a significant number of the shares of the Company are
held by financial institutions in "street name," it is likely that the Company
has significantly more stockholders than indicated above. The Company estimates
that it has approximately 2,776 record holders, including such shares held in
"street name."
E. Dividends
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The Company has not paid any cash dividends, to date, and does not
anticipate or contemplate paying cash dividends in the foreseeable future. Under
the Plan, security holders may not receive any distribution or dividend until
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and unless all prior claims payable under the Plan are paid in full. To the
extent that the Company is permitted to pay dividends, it is the present
intention of management to utilize all available funds for working capital of
the Company.
ITEM 6
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MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
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Background
- ----------
The Company was organized during 1989 to develop and commercialize certain
proprietary compound encapsulation technologies. Following several years of
continued developmental efforts, the Company was able to secure patents on
several aspects of its technologies in the United States and Europe, initiate
certain marketing programs and develop strategic associations with several
pharmaceutical companies.
From inception through 1994, the Company remained in the development stage
while experiencing substantial losses. Its principal source of capital was
derived from a series of private financing transactions and an initial public
offering in 1990. Sales revenues during this period were insufficient to offset
the Company's operating costs and significant liabilities incurred by the
Company in its past development and marketing efforts. Unable to develop any
material sales revenues or secure additional proceeds from financing
transactions, during 1994 the Company had substantially curtailed operations and
by November 30, 1994, had filed for protection under Chapter 11 of the United
States Bankruptcy Code in the United States Bankruptcy Court for the Middle
District of Florida, Tampa Division.
While in bankruptcy, the Company was able to successfully reorganize its
operations and finances. It achieved significant reductions in overhead and
other costs of operations, while recognizing an increase in revenues and a
redirection of its marketing efforts to focus upon its licensing arrangements.
The Company's Plan of Reorganization, which was approved and became
effective on December 20, 1995 (the "Plan"), resulted in, among other things, a
substantial reduction in the Company's outstanding liabilities, an infusion of
capital by the Company's Chief Executive Officer through the purchase of newly
issued shares of the Company's Common Stock and the Company's emergence from the
bankruptcy proceedings. On July 25, 1996, the U.S. Bankruptcy Court issued a
final decree stating the Court no longer has jurisdiction over matters in
connection with the bankruptcy.
In July 1997, the Company completed a private placement of 2,000,000
newly-designated and issued shares of Series A Convertible Preferred Stock to
Fountain Holdings, LLC, a Wyoming limited liability company, controlled by
Joseph S. Schuchert, Jr. As a result of the Private Placement, the Company
obtained additional working capital of $2.5 million, which it intends to utilize
to enhance the expansion of the Company's sales and marketing program, as well
as to further the Company's research and development efforts.
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RESULTS OF OPERATIONS
During the fiscal year ended September 30, 1997, the Company realized a
net loss of $296,602 on revenues of $1,317,994, compared to net income of
$302,634 on revenues of $1,676,819 for the fiscal year ended September 30, 1996.
This decrease in net income was attributable primarily to decreased revenues
during fiscal 1997 and an extraordinary gain of $334,761 recorded during fiscal
1996 as a result of debt reduction pursuant to the Plan.
Revenues for fiscal 1997 of $1,317,994 represented a decrease of $358,825
or 21.4% from revenues of $1,676,819 during fiscal 1996. Such decreased revenues
were a result, primarily, of discontinued product lines and services, in
addition to the negative impact of adverse climatic conditions experienced
during the fiscal year 1997 in Europe, which due to the seasonal nature of its
principal product, a sunscreen, resulted in lower sales volume. Management also
anticipates that this seasonality of revenue will be reduced in time as the
Company's product line and geographic expansion continues.
During the fiscal year ended September 30, 1997, the Company incurred
operating expenses of $912,326, a 12.7% increase over operating expenses of
$809,629 for the prior year ending September 30, 1996. This increase in expenses
was primarily due to research and development expenses relating to new projects
and additional personnel.
LIQUIDITY AND CAPITAL RESOURCES
From inception through the quarter ended June 30, 1994, the Company's
principal sources of working capital were derived from a series of private
financing transactions and an initial public offering in 1990. As a result of
the Company's declining equity and assets, the Company's securities were
delisted from The NASDAQ SmallCap Market(sm) during May 1994 and the securities
have since traded on the less liquid market of the OTC Bulletin Board.
During the period from the quarter ended June 30, 1994 throughout the
bankruptcy proceedings, the Company's operations were funded primarily through
sales of products and from royalties. Under the terms of the Plan, the
liabilities of the Company were reduced by approximately 55% and the Company
obtained working capital of $250,000 as the result of the purchase by the
Company's Chief Executive Officer of 25,000,000 shares of the Company's Common
Stock at a purchase price of $.01 per share in December 1995.
Under the Plan, the Company was subject to $319,278 of pre-bankruptcy
liabilities to be paid under the Plan over a maximum of thirty-three months
which commenced February 1996. Presently, pre-bankruptcy liabilities amount to
$124,351. Payments pursuant to the Plan were current as of September 30, 1997,
and management expects all such required payments to be made on a timely basis.
As of September 30, 1997, the Company had working capital of $2,322,748,
an increase of $2,088,511 from the level of working capital of $234,237 as of
September 30, 1996. Such increase in working capital is primarily attributable
14
<PAGE>
to the sale of $2.5 million of Preferred Stock in July 1997. During Fiscal 1997,
the Company's other principal sources of working capital were derived from
revenues, a $100,000 line of credit with First Union National Bank of Florida,
and short term advances of $80,000 from the Company's Chief Executive Officer.
As of December 5, 1997, the Company had no outstanding balance under its line of
credit.
During July 1997, the Company completed a Private Placement of 2,000,000
shares of Series A Convertible Preferred Stock to Fountain Holdings, LLC. As a
result of the Private Placement, the Company obtained additional working capital
of $2.5 million, which management believes will enhance the expansion of the
Company's sales and marketing program, as well as to further the Company's
research and development efforts. The Preferred Stock is convertible at the
election of the holder, into approximately 25.3 million shares of the Company's
Common Stock, which currently represents approximately one-third of the
Company's outstanding stock on a post-conversion basis. Prior to conversion, the
holders of the Preferred Stock have the right to elect a majority of the
Company's Board of Directors and to vote as a class on all matters that require
a vote of stockholders. See "ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT - Voting Rights of Preferred Stock."
Historically, the Company's unexercised warrants had been a potential
source of capital for the Company. However, all previously existing Class A, B,
C and D warrants have expired. The 3,450,001 common stock warrants presently
vested and outstanding bear exercise prices ranging from $.04 to $.78. Given the
market price of the Company's Common Stock, it is feasible that some of these
warrants could be exercised, but there can be no assurance in this matter. Based
upon the Company's current capital structure, an exercise of all of the issued
and outstanding warrants, notwithstanding market conditions, would not be
possible since the number of warrants exceeds the number of shares that remain
authorized and available for issuance. However, in order to facilitate the
conversion of the Company's Preferred Stock and to enhance the market price and
liquidity of the Company's Common Stock, the Company has undertaken a one for
twenty reverse stock split, specifically, a conversion of every twenty issued
and outstanding shares into one share of the same class of Common Stock. As of
October 9, 1997, the Board of Directors of the Company adopted resolutions
authorizing the Reverse Stock Split. As of November 12, 1997, the Reverse Stock
Split was also duly authorized and approved by the holders of the majority of
the Common Stock and by all of the holders of the Company's Preferred Stock by
written consent in lieu of a special meeting. As of November 19, 1997, the
Company furnished an Information Statement to the holders of shares of Common
Stock and Class B Common Stock providing notice of the Reverse Stock Split to
such stockholders. The Company anticipates that the Reverse Stock Split will
become effective as of December 11, 1997, upon the amendment to the Company's
Restated Certificate of Incorporation which provides for such Reverse Stock
Split. However, there can be no assurances to that effect.
EFFECTS OF INFLATION
The Company does not expect inflation to materially effect its results of
operations, however, it does expect that its operating costs and the cost of
capital equipment to be acquired in the future may be subject to general
economic and inflationary pressures.
15
<PAGE>
ITEM 7
- ------
FINANCIAL STATEMENTS
--------------------
Financial statements are included under Item 13(A) and may be found at
pages F-1 through F-17.
ITEM 8
- ------
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
--------------------------------------------------------------------------
DISCLOSURE
----------
None.
16
<PAGE>
PART III
--------
ITEM 9
- ------
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
----------------------------------------------------
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
----------------------------------------------------------
A. Identification of Executive Officers and Directors
--------------------------------------------------
The following table sets forth certain information with respect to
each of the executive officers and directors of the Company. Ms. Carol Rae will
commence her service as a director as of December 11, 1997. Each of the
directors named below will serve until the next annual meeting of the
stockholders or until their successors are elected or appointed and qualified.
Name Age Position(s) Held
- ---- --- ----------------
John C. Walsh 57 President, Chief Executive Officer,
Chief Financial Officer and Chairman
James E. Fuchs 70 Vice Chairman, Secretary and Director
Joseph S. Schuchert, Jr. 67 Director
Dr. Christopher Brown 44 Director
Carol Rae 51 Director
B. Business Experience
-------------------
JOHN C. WALSH
John C. Walsh has been the President, Chief Executive Officer and a
director of the Company since 1992 and Chairman of the Board since 1994. From
1989 to 1992, Mr. Walsh was an investor in several private business interests.
Prior to 1989, Mr. Walsh held various positions with Merck & Co., Inc., a
leading international pharmaceutical company, for over twenty years. Among the
positions held, Mr. Walsh served as Senior Vice-President, Europe, with
responsibility for operations representing approximately 25% of Merck's
business, and as Vice-President, Latin-America with responsibility for regional
operations. He served as Managing Director of Merck, Sharpe & Dohme, Brazil and
Merck, Sharpe & Dohme, Venezuela, subsidiaries of Merck. He also has broad
experience in the financial management and accounting fields. Mr. Walsh holds a
bachelor of science degree from Villanova University and is a Certified Public
Accountant.
17
<PAGE>
JAMES E. FUCHS
Mr. Fuchs has been a member of the Company's Board of Directors since
November 1990 and assumed the office of Treasurer of the Company in April 1992.
Mr. Fuchs is Chairman and Chief Executive Officer of The Grenfox Group, Inc., a
company in the business of developing environmentally friendly products for the
ink and coatings market. He was Chairman and Chief Executive Officer of Fuchs,
Cuthrell & Co., Inc., an international human resources consulting firm
specializing in corporate executive outplacement and post-career planning from
1970 to 1994. Among the executive positions he has held are managerial and
account executive positions for the National Broadcasting Company; Vice
President and Senior Corporate Marketing Officer of Curtis Publishing Company;
Vice President, Marketing and Communications, and Director of Mutual
Broadcasting Systems; President and Director of Mutual Sports, Inc., and Senior
Vice President, Marketing, and a Director for a specialized executive consulting
firm. From 1982 through 1996, Mr. Fuchs was Chairman and, as of 1997, is now
Executive Director of the Silver Shields Foundation, which supports the
education of children and widows of New York/New Jersey area law enforcement
officers and firefighters that are killed in the line of duty. Mr. Fuchs is a
Yale graduate and a two-time U.S. Olympic medalist and gold medalist in the shot
put and discus in the first Pan American Games. He is a member of the Board of
Directors of the United States Olympic Committee.
JOSEPH S. SCHUCHERT, JR.
Mr. Schuchert has been a member of the Company's Board of Directors since
July 1997. He is Chairman, CEO and co-founder of Kelso & Company, Inc., one of
the oldest and most established firms specializing in private equity investing
and in leveraged acquisitions both as a principal and as financial advisor since
1971. Kelso makes equity investments on behalf of investment partnerships which
it manages; and, since 1980 has acquired more than 51 companies for more than
$10 billion of aggregate acquisition price. Prior to joining Kelso, Mr.
Schuchert specialized in corporate, securities and tax law before his
involvement in ESOP corporate finance techniques. Mr. Schuchert received a B.S.
in electrical engineering from Carnegie Mellon University and an L.L.B. from the
University of Pittsburgh Law School. Mr. Schuchert serves as a Trustee at
Carnegie Mellon University and is a member of the Board of Directors of American
Standard, Inc., Earle M. Jorgensen Company and the United States Chamber of
Commerce. Mr. Schuchert is active in and serves as a director of Four Winds
Ministries, Inc., a ministry which supports and directs homes for unwed mothers
and abused women, and a national Christian radio broadcast known as "Come Up
Higher."
DR. CHRISTOPHER BROWN
Dr. Brown has been a member of the Company's Board of Directors since July
1997. Dr. Brown is board certified in both internal medicine and infectious
diseases and currently practices internal medicine in Sheridan, Wyoming. Dr.
Brown also consults for Eaglestone Capital, a venture capital group, with
responsibilities including the evaluation of medical and biotechnology companies
with investment potential. Previously, Dr. Brown was employed at the National
Institutes of Health (NIH) in Bethesda, Maryland, for ten years, where he was
18
<PAGE>
involved in basic and clinical research in HIV immunology as well as neutrophil
biology. For three of the ten years, he directed the Diagnostic and Immunology
Research Laboratory in Kinshasa, Zaire. This laboratory was part of an
international HIV research project jointly funded and directed by NIH, CDC,
Institute of Tropical Medicine, Tufts University, and the Armed Forces Institute
of Pathology. His research has been published in peer-reviewed journals and his
work has been presented at a number of international meetings.
CAROL RAE
Ms. Rae will commence her service as a director of the Company as of
December 11, 1997. Ms. Rae is President and Chief Executive Officer of
Integrated Media and Marketing, LLC, a multi-media production and marketing
company based in Rapid City, South Dakota. Ms. Rae also serves as President of
MedVal Technologies International, Inc., a manufacturer of orthopedic splints
headquartered in Rapid City, South Dakota. Between 1989 and 1995, she was
President and Chief Executive Officer of Magnum Diamond Corporation of Rapid
City, South Dakota, a manufacturer of ophthalmic surgical instruments. Ms. Rae
currently serves as a Director for Homestake Mining Company, a gold mining
company based in San Francisco, California with operations throughout the world.
Ms. Rae also serves as a Director of VanKoevering Company of Des Moines, Iowa, a
manufacturer of interactive pianos. Ms. Rae has over twenty years experience in
the sales and marketing of emerging medical and computer technologies and has
held a variety of executive positions with such companies.
Board Committee
---------------
The Company has an Audit Committee of the Board of Directors which was
created at a meeting of the Board of Directors on October 9, 1997. The Committee
consists of Mr. Fuchs, Mr. Schuchert and, as of December 11, 1997, Ms. Rae. The
Audit Committee has held no meetings. The Audit Committee is the Company's
principal liaison with the Company's independent auditors and is primarily
responsible for the review of accounting procedures and methods employed in
connection with the Company's audit programs and related management policies.
The Board of Directors has no other committees.
Directors' Compensation
-----------------------
The Company has adopted a policy of granting fees of $500 per meeting to
each outside director who attends a regularly scheduled or special meeting of
its Board of Directors. In addition, the Company reimburses out-of-state
directors for their cost of travel and lodging to attend such meetings.
Involvement in Certain Legal Proceedings
----------------------------------------
None.
19
<PAGE>
Compliance with Section 16(a) of the Exchange Act
-------------------------------------------------
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
directors and certain officers of the Company, as well as persons who own more
than 10% of a registered class of the Company's equity securities ("Reporting
Persons"), to file reports with the Securities and Exchange Commission. The
Company believes that during Fiscal 1997, all Reporting Persons timely complied
with all filing requirements applicable to them, except for certain reports
which were subsequently filed with the Securities and Exchange Commission. These
reports include: (i) a Form 5 for each of Messrs. John Walsh and James Fuchs and
Dr. James Goddard; (ii) Forms 3 and 5 for Mr. James Vatell; and (iii) a Form 3
for each of Mr. Joseph Schuchert, Jr., and Dr. Christopher Brown.
ITEM 10
- -------
EXECUTIVE COMPENSATION
----------------------
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
=====================================================================================
Long Term
Annual Compensation Compensation
- -------------------------------------------------------------------------------------
Fiscal Year
Ended
Name and Principal Position September 30 Salary ($) Options/SARS (#)
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
John C. Walsh(1) 1997 $118,269 -0-
Chairman, Chief Executive Officer 1996 $137,308 -0-
and President 1995 $125,000 -0-
=====================================================================================
(1) Pursuant to the Company's Plan of Reorganization, Mr. Walsh is entitled to
receive aggregate payments of $21,615 payable commencing February 1996 and
ending August 1998 as accrued and unpaid salary and expenses. As of September
30, 1997, $15,210 of the $21,615 had been paid.
</TABLE>
20
<PAGE>
OPTION/SAR GRANTS TABLE
<TABLE>
<CAPTION>
Option/SAR Grants in the Last Fiscal Year
=========================================================================================
Individual Grants
- -----------------------------------------------------------------------------------------
% of Total
Options/SARs Exercise
Granted to or Base
Fiscal Options/SARs Employees in Price Expiration
Name Year Granted (#) Fiscal Year ($/Sh) Date
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
John C. Walsh 1997(1) -0- -0- -0- -0-
Chairman,
Chief Executive
Officer and President
=========================================================================================
(1) No options were granted during Fiscal Year 1997.
OPTION/SAR EXERCISES AND YEAR-END VALUE TABLE
=========================================================================================
Aggregated Options/SAR Exercises in Last Fiscal Year
and FY-End Option/SAR Value
- -----------------------------------------------------------------------------------------
Value of
Number of Unexercised
Unexercised In-the-Money
Options/SARs Options/SARs
at FY-End (#) at FY-End ($)
- -----------------------------------------------------------------------------------------
Shares Value
Fiscal Acquired on Realized Exercisable/ Exercisable/
Name Year Exercise (#) ($) Unexercisable Unexercisable
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
John C. Walsh 1997(1) -0- -0- (U)0/(E)-0- (E)$0/(U)-0-
Chairman, Chief
Executive Officer,
and President
=========================================================================================
(1) Mr. Walsh does not have any stock options.
</TABLE>
21
<PAGE>
GRANT OF WARRANTS TO A DIRECTOR
In December 1995, the Company granted warrants to purchase Common Stock to
Mr. Fuchs, as well as certain directors who have subsequently resigned from the
Board of Directors. Mr. Fuchs was granted 500,000 warrants, vesting pro rata
over three years, at an exercise price of $.04 per share, based upon the market
price of the Company's Common Stock (the "Warrants"). In exchange, the Company
canceled 350,000 outstanding warrants. In connection with the sale of Preferred
Stock on July 17, 1997, Mr. Fuchs' Warrants became fully vested. See "ITEM 11 -
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT."
22
<PAGE>
ITEM 11
- -------
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
The following table sets forth, as of December 5, 1997, information with
respect to the securities holdings of all persons which the Company, pursuant to
filings with the Securities and Exchange Commission, has reason to believe may
be deemed the beneficial owners of more than 5% of the Company's outstanding
Common Stock and Class B Common Stock. The following table indicates the
beneficial ownership of such individuals numerically calculated based upon the
total number of shares of Common Stock and Class B Common Stock outstanding and
alternatively calculated based upon the percentage voting power allocated to
such share ownership taking into account the disproportionate voting rights
attributed to the Class B Common Stock. Also set forth in the table is the
beneficial ownership of all shares of the Company's outstanding stock, as of
such date, of all officers and directors, individually and as a group.
<TABLE>
<CAPTION>
Amount of Percent of Percent of
Name and Address Beneficial Ownership(3) Beneficial Ownership Voting Power(2)
- ---------------- ----------------------- -------------------- ---------------
<S> <C> <C> <C>
John C. Walsh 25,022,000 52.6% 52.2%
7279 Bryan Dairy Road
Largo, FL 33777
James Fuchs 500,000(3) 1.0% 1.0%
565 Park Avenue
New York, NY 10021
Joseph S. Schuchert, Jr./ 25,328,074(4) 34.7% 34.7%(5)
Fountain Holdings, LLC
c/o Eaglestone Capital Services, Inc.
400 Oceangate, Suite 1125
Long Beach, CA 90802
Dr. Christopher Brown 244,366(6) *(7) *(7)
240 Keystone Road
Sheridan, WY 82801
Carol Rae(8) 0 0 0
13117 North Creekview Road
Rapid City, SD 57702
All Directors and Officers as a Group 51,094,440 69.6% 69.3%
(5 Persons)(8)
(1) Except as otherwise indicated, includes total number of shares outstanding and the number of
shares which each person has the right to acquire within 60 days through the exercise of warrants
or the conversion of Preferred Stock pursuant to Item 403 of Regulation S-B and Rule 13d-3(d)(1),
promulgated under the Securities Exchange Act of 1934. Also reflects 47,606,149 shares of the
Company's Common Stock (including Class B Common Stock) outstanding as of December 5, 1997.
23
<PAGE>
(2) This column takes into account the disproportionate voting rights granted to the holders of the
Class B Common Stock. Holders of Class B Common Stock are entitled to five (5) votes for every
share held.
(3) Prior to conversion, includes 500,000 shares of Common Stock issuable upon the exercise of common
stock purchase warrants at an exercise price of $.04 per share.
(4) Includes 25,283,024 shares of Common Stock and 45,050 shares of Class B Common Stock issuable
upon conversion of the Preferred Stock held by Holdings. Holdings is held 50% by Mr. Schuchert
and 50% by his spouse, Ms. Karalyn R. Schuchert. Mr. Schuchert is the managing member of
Holdings.
(5) Assumes the conversion of the Preferred Stock into shares of Common Stock and Class B Common
Stock. See "VOTING RIGHTS OF PREFERRED STOCK."
(6) Includes 27,270 shares of Common Stock held by Dr. Brown's spouse, Elizabeth G. Brown, and 63,921
shares of Common Stock held by Dr. Brown as custodian for his children.
(7) Represents less than one percent.
(8) Ms. Rae will commence her service as a director as of December 11, 1997.
</TABLE>
Voting Rights of Preferred Stock
--------------------------------
As of December 5, 1997, there are 2,000,000 shares of Preferred Stock,
$.001 par value per share, authorized and outstanding, all of which is held by
Holdings. Prior to the conversion of the Preferred Stock, the holders of the
Preferred Stock are entitled to the number of votes to be cast by the holders of
all of the then issued and outstanding Common Stock and Class B Common Stock
plus seven (7) votes in all elections of directors, which enables such holders
to elect a majority of the Board of Directors. In all other matters presented to
stockholders for a vote, whether required by applicable corporate law or
otherwise, the holders of Preferred Stock vote as a class and no vote of the
stockholders will be effective without the approval of the holders of a majority
of the shares of the Preferred Stock. In connection with the sale of the
Preferred Stock, Dr. Christopher Brown and Mr. Joseph S. Schuchert, Jr., were
appointed to the Board of Directors as nominees of Holdings. In addition, Ms.
Carol Rae will commence her service as director as of December 11, 1997, as a
nominee of Holdings. As of December 5, 1997, the shares of Preferred Stock are
convertible into approximately 25,283,024 shares of Common Stock and 45,050
shares of Class B Common Stock, which upon conversion would represent
approximately 34.7% of the outstanding Common Stock and Class B Common Stock.
24
<PAGE>
ITEM 12
- -------
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
Grant of Warrants to Directors
------------------------------
During December 1995, the Company issued Warrants to Mr. Fuchs. See
"ITEM 10 - EXECUTIVE COMPENSATION - Grant of Warrants to a Director."
Purchase of Securities
----------------------
On July 17, 1997, the Company completed the sale of 2,000,000
newly-designated and issued shares of Series A Convertible Preferred Stock in a
private transaction. The Preferred Stock was sold for $2.5 million in a private
transaction to Fountain Holdings, LLC, a Wyoming limited liability company
controlled by Mr. Joseph S. Schuchert, Jr. Mr. Schuchert joined the Company's
Board of Directors in connection with this transaction. The Preferred Stock was
sold pursuant to the terms of a Stock Purchase and Subscription Agreement dated
July 11, 1997 (the "Stock Purchase Agreement").
Under the terms of the Stock Purchase Agreement, the holders of the
Preferred Stock may convert their Preferred Stock into shares of the Company's
Common Stock and Class B Common Stock, representing one-half of the
approximately 50,656,149 issued and outstanding shares of stock as of July 17,
1997 (which included for that purpose 3,050,000 shares reserved for issuance
pursuant to certain outstanding common stock purchase warrants). The conversion
rate of the Preferred Stock is adjustable for certain events such as a
reclassification, reorganization, combination and stock-split.
Payment of Accrued Salary and Expenses
--------------------------------------
In accordance with the Plan, Mr. Walsh is entitled to receive from the
Company $21,615 payable commencing February 1996 and ending August 1998 as
unpaid salary and expenses that were accrued during the period from October 1994
through November 1994. As of September 30, 1997, $15,210 of the $21,615 had been
paid. See "ITEM 10 - EXECUTIVE COMPENSATION."
Line of Credit Guaranty
-----------------------
The line of credit obtained by the Company with First Union National Bank
of Florida on October 17, 1996, is secured by the Company's accounts receivable
and inventory, and is further secured by an unconditional guaranty by Mr. Walsh,
the Company's Chief Executive Officer. See "ITEM 6 - MANAGEMENT'S DISCUSSION AND
ANALYSIS OR PLAN OF OPERATION - Liquidity and Capital Resources."
25
<PAGE>
Officer Loans
-------------
During Fiscal 1997, the Company obtained funding from three short-term
loans in the total amount of $80,000 from the Company's President at an interest
rate of 10% per annum. As of December 5, 1997, $60,000 of the $80,000 had been
paid.
Directors' Fees
---------------
The Company has adopted a policy of granting fees and reimbursing expenses
of outside directors who attend regularly scheduled or special meetings of its
Board of Directors. See "ITEM 9 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT."
26
<PAGE>
ITEM 13
- -------
EXHIBITS, LIST AND REPORTS ON FORM 8-K
--------------------------------------
A. Financial Statements filed as part of this Report:
Page Reference
--------------
Report of Independent Auditors on Financial F-1
Statements of Fountain Pharmaceuticals, Inc.
Balance Sheet as of September 30, 1997 F-2
Statements of Operations for the years ended F-3
September 30, 1997 and 1996
Statements of Stockholders' Equity for the F-4
years ended September 30, 1997 and 1996
Statements of Cash Flows for the years ended F-5
September 30, 1997 and 1996
Notes to Financial Statements of Fountain F-6 thru F-17
Pharmaceuticals, Inc. for the years ended
September 30, 1997 and 1996
B. Financial Statement Schedules:
None.
C. The following Exhibits are filed as part of this Report:
Exhibit No. Description
- ----------- -----------
2.1 Amended Plan of Reorganization dated August 14, 1995 (Incorporated
by reference to the Company's Current Report on Form 8-K filed on
March 28, 1996 ("March 1996 Form 8-K"))
2.2 Amended Disclosure Statement dated August 14, 1995 (Incorporated by
reference to the March 1996 Form 8-K)
3.1 Certificate of Incorporation of the Registrant, filed March 23, 1989
(Incorporated by reference to Exhibit 3.1 of the Registration
Statement on Form S-1 filed on January 4, 1990, Registration Number
33-32824 (the "Form S-1"))
3.2 Certificate of Amendment of Certificate of Incorporation, filed
April 10, 1989 (Incorporated by reference to Exhibit 3.2 of the Form
S-1)
27
<PAGE>
3.3 Restated Certificate of Incorporation of the Registrant, filed
November 13, 1989 (Incorporated by reference to Exhibit 3.3 of the
Form S-1)
3.4 By-Laws of the Registrant (Incorporated by reference to Exhibit 3.4
of the Form S-1)
3.5 Certificate of Designation, Preference and Rights of Series A
Preferred Stock (Incorporated by reference to Exhibit 3.5 of the
Company's Current Report on Form 8-K filed on July 31, 1997 ("July
1997 Form 8-K"))
4.1 Copy of Specimen Stock Certificate (Incorporated by reference to
Exhibit 4.1 of the Form S-1)
4.2 Form of Warrant Agreement granted to James Goddard, Weldon Crow,
Francis Werner, James Fuchs and James Vatell (Incorporated by
reference to Exhibit 4.2 to the July 1997 Form 8-K)
4.3 Copy of Specimen Stock Certificate of Series A Preferred Stock
(Incorporated by reference to Exhibit 4.3 to the July 1997 Form 8-K)
4.4 Registration Rights Agreement between the Registrant and Fountain
Holdings, LLC, dated July 11, 1997 (Incorporated by reference to
Exhibit 4.4 to the July 1997 Form 8-K)
4.5 Registration Rights Agreement between the Registrant and John C.
Walsh dated July 11, 1997 (Incorporated by reference to Exhibit 4.5
to the July 1997 Form 8-K)
10.1 Transfer of Technology Agreement (Incorporated by reference to
Exhibit 10.3 of the Form S-1)
10.2 Stock Option Plan (Incorporated by reference to Exhibit 10.4 of the
Form S-1)
10.3 Loan Agreement by and between Registrant and First Union National
Bank of Florida dated October 17, 1996 (Incorporated by reference to
the Company's Annual Report on Form 10-KSB for the fiscal year ended
September 30, 1996)
10.4 Stock Purchase and Subscription Agreement between the Registrant and
Fountain Holdings, LLC, dated July 11, 1997 (Incorporated by
reference to Exhibit 10.4 to the July 1997 Form 8-K)
27 Financial Data Schedule (Edgar format only)
28
<PAGE>
D. Reports on Form 8-K
-------------------
The Company filed the following Current Report on Form 8-K during the last
quarter of the fiscal year ended September 30, 1997:
1. Current Report on Form 8-K filed with the Securities and Exchange
Commission on July 31, 1997, relating to Changes in Control of Registrant
and Sale of Securities.
29
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant certifies that it has reasonable grounds to believe that it meets all
the requirements of filing on Form 10-KSB, and has duly caused this Form 10-KSB
to be signed on its behalf by the undersigned, thereunto duly authorized on the
10th day of December, 1997.
FOUNTAIN PHARMACEUTICALS, INC.
Date: December 10, 1997 By: /s/ John C. Walsh
-------------------------- -----------------------------------
John C. Walsh, President
Chief Executive Officer
(Principal Executive and Accounting
Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Form 10-KSB has been signed by the following persons in the capacities and on
the dates indicated.
Directors Title Date
- --------- ----- ----
/s/ John C. Walsh President, Chief December 10, 1997
- ---------------------------- Executive Officer
John C. Walsh (Principal Executive
and Accounting Officer)
Chairman
/s/ James E. Fuchs Vice Chairman, December 10, 1997
- ---------------------------- Secretary, Director
James E. Fuchs
/s/ Joseph S. Schuchert, Jr. Director December 10, 1997
- ----------------------------
Joseph S. Schuchert, Jr.
/s/ Dr. Christopher Brown Director December 10, 1997
- ----------------------------
Dr. Christopher Brown
30
<PAGE>
Independent Auditors' Report
----------------------------
Board of Directors
Fountain Pharmaceuticals, Inc.
Largo, Florida
We have audited the accompanying balance sheet of Fountain Pharmaceuticals, Inc.
(the "Company"), as of September 30, 1997, and the related statements of
operations, stockholders' equity and cash flows for each of the years in the
two-year period then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly in all
material respects, the financial position of Fountain Pharmaceuticals, Inc., as
of September 30, 1997, and the results of its operations and its cash flows for
each of the years in the two-year period then ended in conformity with generally
accepted accounting principles.
AIDMAN, PISER & COMPANY, P.A.
November 5, 1997
Tampa, Florida
F-1
<PAGE>
FOUNTAIN PHARMACEUTICALS, INC.
BALANCE SHEET
SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
ASSETS (Note 5)
<S> <C>
Current assets:
Cash and cash equivalents $ 2,371,071
Accounts receivable (Note 2) 109,808
Inventories (Notes 3 and 4) 95,678
Prepaid expenses 31,360
------------
Total current assets 2,607,917
Furniture and equipment, less accumulated depreciation
of $254,699 9,360
Patent costs, less accumulated amortization
of $22,064 138,036
Other assets 6,595
------------
$ 2,761,908
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of (Note 4):
Liabilities not subject to compromise $ 29,469
Liabilities subject to compromise 92,298
Accounts payable and accrued expenses (Note 7) 123,402
Notes payable, officer (Note 7) 40,000
------------
Total current liabilities 285,169
Liabilities not subject to compromise,
non-current (Note 4) 2,584
------------
Commitment (Note 10)
Stockholders' equity (Note 6):
Preferred stock, par value $.001, 2,000,000 shares
authorized, issued and outstanding
(1.2 votes per share) 2,000
Common stock, par value $.001, 50,000,000
shares authorized; 47,516,049 issued and
outstanding (one vote per share) 47,516
Class B common stock; par value $.001, 5,000,000 shares
authorized; 90,100 shares issued and outstanding
(five votes per share) 90
Additional paid-in capital 17,011,224
Accumulated deficit (14,586,675)
------------
Total stockholders' equity 2,474,155
------------
$ 2,761,908
============
</TABLE>
See notes to financial statements.
F-2
<PAGE>
FOUNTAIN PHARMACEUTICALS, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED SEPTEMBER 30, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------- ------------
<S> <C> <C>
Revenue (Note 2) $ 1,317,994 $ 1,676,819
Cost of sales 689,169 854,210
------------- ------------
Gross profit 628,825 822,609
------------- ------------
Operating expenses:
Research and development 230,323 95,466
General and administrative 369,309 360,242
Selling 281,942 312,358
Depreciation and amortization 30,752 41,563
------------- ------------
912,326 809,629
------------- ------------
Income (loss) from operations ( 283,501) 12,980
------------- ------------
Other income (expenses):
Interest income 24,835 -
Interest expense ( 27,327) ( 20,680)
Other income (expense) ( 10,609) 4,635
Loss on disposal of equipment - ( 2,830)
Reorganization expenses (Note 1) - ( 26,232)
------------- -------------
( 13,101) ( 45,107)
------------- -------------
Loss before income taxes and extraordinary item ( 296,602) ( 32,127)
Income taxes (Note 9) - -
------------- ------------
Loss before extraordinary item ( 296,602) ( 32,127)
Extraordinary gain, net of $0 income taxes (Note 1) - 334,761
------------- ------------
Net income (loss) ($ 296,602) $ 302,634
============= ============
Earnings per share (Note 6):
Primary and fully diluted earnings per common share:
Income (loss) before extraordinary item ($ .01) $ -
Extraordinary gain - .01
------------- ------------
Net income (loss) ($ .01) $ .01
============= ============
Weighted average number of shares outstanding:
Primary 47,516,049 42,073,362
Fully diluted 54,424,114 42,263,361
</TABLE>
See notes to financial statements.
F-3
<PAGE>
FOUNTAIN PHARMACEUTICALS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (NOTE 6)
YEARS ENDED SEPTEMBER 30, 1997 AND 1996
<TABLE>
<CAPTION>
Class B
Common Stock Common Stock Preferred Stock Additional
-------------------- --------------- ------------------ Paid-in Accumulated
Shares Amount Shares Amount Shares Amount Capital Deficit Total
---------- ------- ------ ------ --------- ------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances,
October 1, 1995 22,516,049 $22,516 90,100 $90 -- $ -- $ 14,304,102 ($14,592,707) ($ 265,999)
Stock issued pursuant to
reorganization plan 25,000,000 25,000 -- -- -- -- 225,000 -- 250,000
Net income for the year -- -- -- -- -- -- -- 302,634 302,634
---------- ------- ------ ----- --------- ------ ------------ ------------ -----------
Balances,
September 30, 1996 47,516,049 47,516 90,100 90 -- -- 14,529,102 (14,290,073) 286,635
Issuance of preferred
stock -- -- -- -- 2,000,000 2,000 2,498,000 -- 2,500,000
Stock offering costs -- -- -- -- -- -- (39,278) -- (39,278)
Compensation costs
for vested warrants -- -- -- -- -- -- 23,400 -- 23,400
Net loss for
the year -- -- -- -- -- -- -- (296,602) (296,602)
---------- ------- ------ ----- --------- ------ ------------ ------------ -----------
Balances,
September 30, 1997 47,516,049 $47,516 90,100 $90 2,000,000 $2,000 $ 17,011,224 ($14,586,675) $ 2,474,155
========== ======= ====== ===== ========= ====== ============ ============ ===========
</TABLE>
See notes to financial statements.
F-4
<PAGE>
FOUNTAIN PHARMACEUTICALS, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ($ 296,602) $ 302,634
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Director compensation resulting from issuance of warrants 23,400 -
Extraordinary gain - ( 334,761)
Depreciation 22,563 38,321
Loss on disposal of assets - 2,831
Write-down of inventory - 68,535
Amortization 8,189 3,241
Increase (decrease) in cash due to changes in:
Accounts receivable 126,225 ( 168,793)
Inventories 9,188 9,545
Prepaid expenses 15,214 ( 23,397)
Other assets ( 345) ( 2,285)
Accounts payable and accrued expenses 15,312 7,585
------------- ------------
Net cash used in operating activities ( 76,856) ( 96,544)
------------- -------------
Cash flows from investing activities:
Deferred patent costs incurred ( 7,650) ( 55,717)
Acquisition of furniture and equipment - ( 7,671)
------------- -------------
Net cash used in investing activities ( 7,650) ( 63,388)
------------- -------------
Cash flows from financing activities:
Proceeds from:
Issuance of common stock - 250,000
Issuance of preferred stock 2,500,000 -
Stock offering costs incurred ( 39,278) -
Repayment of:
Amounts not subject to compromise ( 26,809) ( 16,814)
Amounts subject to compromise ( 84,983) ( 88,852)
Proceeds from officer loan 80,000 -
Repayment of officer loan ( 40,000) -
------------- ------------
Net cash provided by financing activities 2,388,930 144,334
------------- ------------
Increase (decrease) in cash and cash equivalents 2,304,424 ( 15,598)
Cash and cash equivalents,
at beginning of year 66,647 82,245
------------- ------------
Cash and cash equivalents,
at end of year $ 2,371,071 $ 66,647
============= ============
Supplemental schedule of cash flow information
----------------------------------------------
Interest paid was $23,017 and $20,680 for the years ended September 30, 1997 and 1996,
respectively.
</TABLE>
See notes to financial statements.
F-5
<PAGE>
FOUNTAIN PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1997 AND 1996
1. NATURE OF BUSINESS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES:
NATURE OF BUSINESS:
Fountain Pharmaceuticals, Inc. (the "Company"), incorporated in the State
of Delaware on March 23, 1989, was organized to develop and commercialize
certain proprietary compound encapsulation technologies for use in health
care, agricultural, veterinary and consumer market items using
technologies developed privately and assigned to the Company. These
technologies involve development of man-made spheres composed of soybean
lipids that are engineered to entrap pharmaceuticals or other
biologically active molecules within the membranes of the soybean lipids,
hence a compound delivery encapsulation system known as "Solvent Dilution
Micro Carriers" ("SDMC's"). The SDMCs are principally intended for use in
connection with dermal applications, solubilization of compounds,
parenteral and oral formulations and non-pressurized aerosol
preparations. Following several years of continued developmental efforts,
the Company was able to secure patents on several aspects of its
technologies in the United States and Europe, initiate certain marketing
programs and develop strategic associations with several pharmaceutical
companies.
The Company has developed a number of proprietary products utilizing its
SDMC technologies. These include non-regulated consumer goods and
dermatologic products consisting of sunscreens, lotions and moisturizers.
These products have been marketed by the Company under the Octazome(R),
LyphaZome(R) and Daylong(R) names and under other proprietary names of
licensees.
The principal source of the Company's current revenues are from sales of
these products to distributors and royalties which are earned as the
result of the subsequent sale of these products by the distributors.
CHAPTER 11 REORGANIZATION:
On November 30, 1994, the Company filed a voluntary petition for
reorganization under Chapter 11 of Title II of the United States Code
(the "Bankruptcy Code") in the United States Bankruptcy Court for the
Middle District of Florida, Tampa Division, (the "Bankruptcy Court"). The
Chapter 11 filing resulted primarily from historical losses incurred by
the Company and judgments entered against the Company associated with
default under a lease agreement and default of a settlement of a breach
of employment contract claim.
(Continued)
F-6
<PAGE>
1. NATURE OF BUSINESS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED):
CHAPTER 11 REORGANIZATION (CONTINUED):
The Reorganization Plan, as amended August 14, 1995, was confirmed on
November 20, 1995 and became effective on December 20, 1995 (the
"Effective Date"). Since confirmation and effectiveness of the
Reorganization Plan, the Company has resumed normal operations. On July
25, 1996 the U.S. Bankruptcy Court issued a final decree and therefore
the court no longer has jurisdiction over matters in connection with the
bankruptcy.
See Note 4 for essential terms of the plan relating to payment of
prepetition liabilities.
At the date of the Plan's effectiveness (December 20, 1995), the
difference between the net present value of the settled amount of
liabilities and the previously estimated allowed amounts were recorded as
a $334,761 extraordinary gain in the 1996 statement of operations. All
prepetition liabilities are classified in the accompanying September 30,
1997 balance sheet (current or long-term) based upon the terms of the
confirmed Reorganization Plan. Other reorganization costs of $26,232
(primarily legal fees) are also separately reported in the 1996 statement
of operations.
Under the terms of the reorganization plan Shareholders retained their
interest, without alteration, except as follows. Equity security holders
will receive no distribution or dividend until and unless all prior
claims are paid in full as provided above. Pursuant to the Plan, the
Company issued 25,000,000 shares of common stock for $.01 per share, the
rate at which the shares were trading as of the date the amended plan was
filed with the Bankruptcy Court, for a total of $250,000. These shares
were issued to an individual who is the President and majority
shareholder of the Company.
At the date of the effectiveness of the Plan and thereafter, the Company
continued to account for its assets at their historical cost basis (did
not adopt "Fresh Start" accounting).
A final decree was issued July 25, 1996 by the bankruptcy court,
discharging the Company from Chapter 11 reorganization.
(Continued)
F-7
<PAGE>
1. NATURE OF BUSINESS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED):
INVENTORIES:
Inventories are stated at the lower of cost or market. Cost is determined
generally on a first-in, first-out method.
FURNITURE AND EQUIPMENT:
Furniture and equipment are stated at cost. Depreciation is provided on
the straight-line method over the estimated useful lives of the assets.
PATENT COSTS:
Patent costs are deferred pending the outcome of patent applications
including the appeals process. Successful patent costs are amortized over
the legal life of the patent. Unsuccessful or abandoned patent costs are
charged to expense when determined to be worthless.
ADVERTISING COSTS:
The costs associated with producing and communicating advertising are
expensed in the period incurred. Advertising costs were $28,000 and
$44,000 during 1997 and 1996, respectively.
RESEARCH AND DEVELOPMENT:
Expenses for the design and development of the Company's products were
$230,323 and $95,466 during 1997 and 1996, respectively.
CASH AND CASH EQUIVALENTS:
For purposes of the statements of cash flows, cash and cash equivalents
are defined as all highly liquid unrestricted investments purchased with
an original maturity of three months or less. In addition, the Company
considers certain secured debt instruments, which can be liquidated upon
demand, to be cash equivalents.
(Continued)
F-8
<PAGE>
1. NATURE OF BUSINESS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED):
USE OF ESTIMATES:
Preparation of these financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at
the dates of the financial statements and the reported amounts of
revenues and expenses during the reported periods.
EMPLOYEE STOCK-BASED COMPENSATION:
The Company accounts for compensation costs associated with stock options
and warrants issued to employees under the provisions of Accounting
Principle Board Opinion No. 25 ("APB 25") whereby compensation is
recognized to the extent the market price of the underlying stock exceeds
exercise price of the option granted. During the year ended September 30,
1997 the Company adopted the disclosure provisions of Financial
Accounting Standard No. 123 Accounting for Stock-Based Compensation ("FAS
123"), which requires disclosure of compensation expense that would have
been recognized if the fair-value based method of determining
compensation had been used for all arrangements under which employees and
others receive shares of stock or equity instruments.
NET INCOME (LOSS) PER SHARE:
Net income/loss per share was computed based on the weighted average
number of shares outstanding during the periods presented.
Fully diluted earnings per share is considered to be the same as primary
earnings per share since the effect of certain potentially dilutive
securities is immaterial.
NEW ACCOUNTING PRONOUNCEMENTS:
In 1997, the Financial Accounting Standards Board (FASB) issued
Statements of Financial Accounting Standards (SFAS) No. 128 "EARNINGS PER
SHARE", SFAS No. 130, "REPORTING COMPREHENSIVE INCOME", and SFAS No. 131,
"DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION",
all of which will be effective for the Company's 1999 fiscal year.
(Continued)
F-9
<PAGE>
1. NATURE OF BUSINESS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED):
NEW ACCOUNTING PRONOUNCEMENTS (CONTINUED):
SFAS No. 128 simplifies the earnings per share calculations and makes
them comparable to international standards. SFAS 130 presents standards
for reporting and display of comprehensive income and its components
(revenues, expenses, gains and losses) including those currently required
to be accounted for as direct charges or credits to the statement of
stockholders' equity in a full set of general-purpose financial
statements. SFAS No. 131 requires that public companies report financial
and descriptive information about its reportable operating segments,
which are defined as those components that are evaluated regularly by the
chief operating officer in determining resource allocations and
performance assessments.
Adoption of SFAS No. 128 and No. 130 are not anticipated to have a
material impact on the company's financial statements. Management has not
yet determined the effects of adoption of SFAS No. 131 on items reported
in its financial statements.
2. MAJOR CUSTOMER INFORMATION, FAIR VALUE OF FINANCIAL INSTRUMENTS AND
CONCENTRATIONS OF CREDIT RISK:
MAJOR CUSTOMER INFORMATION:
During the years ended September 30, 1997 and 1996 the Company derived
revenues from two customers which individually exceeded 10 percent of
total revenues as follows:
1997 1996
---------- ----------
Customer 1 (European) $ 854,000 $ 857,000
Customer 2 (European) $ 219,000 $ 352,000
Total export sales were approximately as follows:
1997 1996
---------- ----------
Europe $1,109,000 $1,258,000
Asia 6,000 33,000
South America 40,000 25,000
---------- ----------
$1,155,000 $1,316,000
========== ==========
(Continued)
F-10
<PAGE>
2. MAJOR CUSTOMER INFORMATION, FAIR VALUE OF FINANCIAL INSTRUMENTS AND
AND CONCENTRATIONS OF CREDIT RISK (CONTINUED):
FAIR VALUE OF FINANCIAL INSTRUMENTS:
All financial instruments are held or issued for purposes other than
trading. The carrying amount of cash and cash equivalents, accounts
receivable, and accounts payable approximates fair value because of the
short maturity of those investments. The carrying value of liabilities
not subject to compromise approximates fair value based on the stated
rate of interest. The carrying value of liabilities subject to compromise
were discounted; therefore, the recorded values approximate fair value.
CONCENTRATIONS OF CREDIT RISK:
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of trade accounts
receivable and cash and cash equivalents. Cash and cash equivalents
include $2,000,000 in variable rate demand (par put) bonds, secured by a
$2,000,000 letter of credit from a reputable financial institution.
The Company sells its products principally to companies in the medical
field located primarily in Europe. Management assesses the financial
stability of each of its major customers prior to contract negotiations
and establishes credit limits for smaller customers to limit its risk.
The Company does not require collateral or other security to support
customer receivables. Because the Company sells a significant portion of
its products and maintains individually significant receivables balances
with major customers, if the financial condition and operations of these
customers deteriorate below critical levels, the Company's operating
results could be adversely affected.
Accounts receivable consist principally of receivables from one primary
customer.
3. INVENTORIES:
Inventories at September 30, 1997 consist of the following:
Raw materials $ 97,677
Finished goods 46,001
Less allowance for obsolescence ( 48,000)
------------
$ 95,678
===========
(Continued)
F-11
<PAGE>
4. CHAPTER 11 REORGANIZATION:
Essential terms of and liabilities associated with the reorganization
plan are as follows:
Liabilities not subject to compromise at September 30, 1997 consists of
a secured claim due to the former landlord. In November 1993, a
judgment in the amount of $100,567 was entered against the Company.
Pursuant to the Bankruptcy order, the claim, including interest at 9.5
percent, is payable in monthly installments over 33 months from the
effective date of the plan.
Liabilities subject to compromise consist of unsecured claims which
were paid at 50 percent of the allowed amounts of such claim, without
interest, in eleven quarterly installments:
5. NOTE PAYABLE, BANK:
On October 17, 1996 the Company obtained a $100,000 line of credit from a
bank to be used to fund working capital needs. There were no borrowings
against the line of credit at September 30, 1997. Borrowings will bear
interest at the prime rate plus 1/2% and will be secured by the Company's
assets and guaranteed by a related party. The Loan Agreement contains
certain provisions and covenants which, among other things, limit future
indebtedness and require the Company to maintain specified levels of net
worth and cash flow. The Company was either in compliance with, or had
obtained waivers for, such covenants at September 30, 1997.
6. STOCKHOLDERS' EQUITY:
ISSUANCE OF PREFERRED STOCK:
In July 1997, the Company issued 2,000,000 shares of voting convertible
participating preferred stock for $2.5 million. The shares of preferred
stock have voting rights equal to that of the Common and Class B Common
stock and also provide for specific voting rights with respect to
election of the Board of Directors. The Preferred stock has a liquidation
preference of $1.25 per share. The Preferred shares may be converted into
Common and Class B Common stock in amounts equal to 1/2 of the issued
Common and Class B Common shares plus 1/2 of the shares available for
redemption by Management Warrant holders.
(Continued)
F-12
<PAGE>
6. STOCKHOLDERS' EQUITY:
COMMON STOCK WARRANTS:
Common stock warrants issued, redeemed and outstanding during the years
ended September 30, 1997 and 1996 are as follows:
Number of
Description Warrants
--------------------------------------------------- ------------
Warrants issued and outstanding at October 1,
1995 (weighted average exercise price $1.18) 4,600,001
Less warrants expired in 1996 (exercise price $.82) ( 1,300,000)
Issued in 1996 to certain directors and employees,
exercise price, $.04, expire 2000 3,050,000
Less warrants canceled (exercise price $.78) ( 1,700,000)
------------
Warrants issued and outstanding at September 30,
1996 (weighted average exercise price $.68) 4,650,001
Less warrants expired in 1997 (weighted average
exercise price $2.27) ( 1,200,000)
------------
Warrants issued and outstanding at September 30,
1997 (weighted average exercise price $.13) 3,450,001
============
Common stock warrants which were issued to current or former officers,
directors, shareholders and employees ("Management Warrants"), all of
which are fully vested and currently exercisable, which remain
outstanding at September 30, 1997 consist of the following:
Exercise Expiration Remaining Number of
Issue Date Price Date Life Warrants
------------- -------- ------------- ---------- ----------
March 1993 $ .78 March 1998 6 Months 400,001
December 1995 $ .04 December 2000 2 1/4Years 3,050,000
---------
3,450,001
=========
(Continued)
F-13
<PAGE>
6. STOCKHOLDERS' EQUITY (CONTINUED):
COMMON STOCK WARRANTS (CONTINUED):
As discussed in Note 1, the Company adopted the disclosure provisions
only of FAS 123 during 1997. During December 1995, the Company issued
warrants to purchase 3,050,000 shares of common stock (152,500 after the
1 for 20 reverse stock split discussed in Note 11) to its existing
officers, directors and employees which were to vest over a three year
period commencing in July 1996. In 1997, the Company amended the warrant
agreements to provide for 100% vesting of these warrants if a major
change in capital structure or Board of Director control occurred. These
warrants, therefore, became 100% vested upon the issuance of the
preferred stock and subsequent change of control of the Board of
Directors in July 1997. The Company has recognized compensation expense
to directors of $23,400 in 1997 associated with 1,300,000 of these
warrants. The fair value of the balance of 1,750,000 of these warrants
which had been issued to employees in December 1995 aggregated
approximately $32,000 as determined using the "Black Scholes"
option-pricing model. Since these warrants became fully vested upon
issuance of preferred shares in July 1997, compensation cost of $28,875
would have been recognized in 1997 had the Company adopted the accounting
provisions of FAS 123. Proforma net income (loss) and earnings (loss) per
share would have been ($325,477) and ($0.01) respectively in 1997, and
$302,634 and $.01 in 1996, if the accounting provisions of FAS 123 had
been adopted.
The "Black Scholes" option-pricing model assumptions are as follows:
Underlying stock price at grant date $.047
Exercise price .04
Dividend yield 0%
Risk free interest rate 6%
Volatility 10%
STOCK OPTION AND RIGHTS PLAN:
The Company has adopted a stock option and rights plan (the "Plan")
covering 500,000 shares of the Company's common stock, pursuant to which
officers, directors, key employees and consultants of the Company are
eligible to receive qualified incentive as well as non-qualified stock
options and stock appreciation's rights ("SAR's"). Incentive stock
options granted under the Plan are exercisable up to 10 years from the
date of grant at an exercise price not less than the fair market value of
the common stock on the date of the grant.
(Continued)
F-14
<PAGE>
6. STOCKHOLDERS' EQUITY (CONTINUED):
STOCK OPTION AND RIGHTS PLAN (CONTINUED):
Notwithstanding, the term of an incentive stock option granted under the
Plan to a shareholder owning more than 10 percent of the voting rights
may not exceed five years, and the exercise price of an incentive stock
option granted to such shareholder may not be less than 110 percent of
the fair market value of the common stock on the date of the grant.
Certain stock options and SARs, which give holders participation in the
appreciation of the Company common stock, may be granted on terms
determined by the Board of Directors or a committee designated by the
Board. At September 30, 1997, no SARs had been granted.
7. RELATED PARTY TRANSACTIONS:
NOTES PAYABLE, OFFICER:
During 1997, the Company borrowed $80,000 from the President to fund
short term working capital needs. The notes payable are unsecured and
bear interest at 10%. The balance due on the notes at September 30, 1997
was $40,000 plus accrued interest of $1,817.
OTHER RELATED PARTY TRANSACTIONS:
During 1997, the President elected to defer payment of salary
approximating $32,000. These amounts, including accrued interest thereon
at 10 percent, are included in Accounts Payable and Accrued Expenses in
the accompanying balance sheet.
8. EMPLOYEE BENEFIT PLAN:
During 1993, the Company implemented a 401(k) profit sharing plan
covering substantially all employees. The plan does not provide for
employer contributions.
9. INCOME TAXES:
Deferred tax assets consist of the following at September 30, 1997:
Net operating loss carryover $ 616,000
Tax credit carryforwards 105,000
Obsolete inventory allowance 18,000
Other 22,000
Valuation allowance ( 761,000)
-------------
$ -
=============
(Continued)
F-15
<PAGE>
9. INCOME TAXES (CONTINUED):
Income tax (expense) benefit consists of the following:
1997 1996
---------- ----------
Current:
Federal $ - $ -
--------- ---------
Deferred:
Deferred 70,000 (387,000)
Benefit of net operating loss carryover (311,000) (168,000)
Loss of net operating loss and tax credit
carryovers resulting from change in
ownership (a) - (4,277,000)
Change in valuation allowance 241,000 4,832,000
--------- ----------
- -
--------- ----------
$ - $ -
========= ==========
(a) Under Section 382 and 383 of the Internal Revenue Code of 1986, if an
ownership change occurs with respect to a "loss corporation", as
defined, there are annual limitations on the amount of net operating
loss and research and development tax credit carryovers which are
available to the Company. The taxable income of a loss corporation
for any tax year ending after an ownership change may be offset by
pre-change loss carryovers only to the extent of the section 382 and
383 limitation for that year. The Reorganization, and the issuance of
common stock warrants in 1996 among other events, created an
ownership change in excess of fifty percent for income tax purposes;
therefore, the Company believes that the availability of the pre-
change net operating loss carryover ($12,700,000) and research and
development credit ($250,000) will be substantially limited in the
future and as such the Company has accounted for the loss of such
carryover. The post-change net operating loss carryover of $1,200,000
will expire in 2011.
Income tax expense associated with the extraordinary item, before and
after the benefit of net operating loss carryover, was $125,000 and $0,
respectively, in 1996.
The expected income tax benefit (expense) at the statutory tax rate
differed from income taxes in the accompanying statements of operations
as follows:
Percentage of income (loss)
before income taxes
---------------------------
1997 1996
------------ ------------
Statutory tax rate ( 34.0%) 34.0%
State tax ( 3.5%) 3.5%
Change in deferred tax asset
valuation allowance 37.5% ( 37.5%)
------------ ------------
Effective tax rate in accompanying
statement of operations 0% 0%
============ ============
(Continued)
F-16
<PAGE>
10. COMMITMENT:
The Company leases its office and warehouse facilities under a two-year,
non-cancelable operating lease for $4,900 per month. Rent expense under
all operating leases was approximately $58,000 and $52,000 for 1997 and
1996, respectively. The agreement provides for an option for one
additional year.
Obligations under the operating lease are as follows:
Year ending September 30,
1998 $ 58,800
1999 29,400
----------
$ 88,200
==========
11. SUBSEQUENT EVENT:
Subsequent to September 30, 1997, the Board of Directors declared a 1 for
20 reverse stock split of both Common stock and Class B Common stock. The
par values remain unchanged. This reverse stock split is expected to
become effective on December 11, 1997. The following proforma amounts
consider the effect of the reverse split as if it had been effective
during all periods presented in the accompanying financial statements:
1997 1996
------------- ------------
Primary and fully diluted earnings
per common share:
Loss before extraordinary item ( .12) ( .02)
Extraordinary gain - .16
------------- ------------
Net income (loss) ( .12) .14
============= ============
Weighted average shares outstanding:
Primary 2,375,802 2,103,668
Fully diluted 2,721,206 2,113,168
Management warrants outstanding (Note 6) 152,500 232,500
F-17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF FOUNTAIN PHARMACEUTICALS, INC. FOR YEAR ENDED SEPTEMBER
30, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1997
<CASH> 2,371
<SECURITIES> 0
<RECEIVABLES> 110
<ALLOWANCES> 0
<INVENTORY> 96
<CURRENT-ASSETS> 2,608
<PP&E> 264
<DEPRECIATION> 255
<TOTAL-ASSETS> 2,762
<CURRENT-LIABILITIES> 285
<BONDS> 0
0
2
<COMMON> 48
<OTHER-SE> 2,474
<TOTAL-LIABILITY-AND-EQUITY> 2,762
<SALES> 1,318
<TOTAL-REVENUES> 1,318
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<EPS-PRIMARY> (.01)
<EPS-DILUTED> (.01)
</TABLE>
