U.S. 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 Commission File Number: 0-18109
December 31, 1999
Exact name of small business issuer as specified in its charter
BCAM INTERNATIONAL, INC.
State or other jurisdiction of IRS Employer
incorporation or organization: Identification No.: 13-3228375
New York
Address of principal executive offices:
1800 Walt Whitman Road,
Melville, New York 11747
(516) 752-3550
Securities registered under Section Name of each exchange on which
registered: 12(b) of the Exchange Act: The Over the Counter Bulletin Board
Common Stock, $.01 par value
Securities registered under Section 12(g) of the Exchange Act:
--------------------------------------------------------------
Common Stock, $.01 par value
Check whether the registrant (1) filed all reports to be filed by Section 13 or
15 (d) of the Exchange Act 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. Yes |X| No |_|
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of the 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 [ ].
Registrant's revenues for its most recent fiscal year were approximately
$44,000.
The aggregate market value of the registrant's common stock held by
non-affiliates as of April 6, 2000, was approximately $5,116,210 based on the
average closing price of such stock on April 6, 2000, as reported by the Over
the Counter Bulletin Board.
The number of shares outstanding of the registrant's common stock as of April
11, 2000, was 40,680,153.
DOCUMENTS INCORPORATED BY REFERENCE: None
Transitional Small Business Disclosure Format (check one): Yes |_|; No |X|
<PAGE>
PART I
ITEM 1. BUSINESS
Introduction
BCAM International, Inc., ("BCAM") a New York corporation, is a medical
technology company that will supply a cost effective system of cell and tissue
analysis to provide physicians and other health care professionals a method for
the early detection of cancer. We will produce revenues through direct sales to
medical providers, corporations and other groups who can benefit from our
products. Additional revenue sources include a fee for services paid by
laboratories for marketing efforts related to our system. In addition, we are
exploring business combinations that will provide:
o Additional technology
o Prospective Customers
o Distribution Channels
Our Background
On September 23, 1999, BCAM, through its wholly-owned subsidiary, LungCheck
Health, Inc., a Delaware corporation, pursuant to an Agreement and Plan of
Merger dated September 15, 1999, acquired LungCheck, Inc., a Delaware
corporation, in a statutory merger of LungCheck, Inc. into LungCheck Health,
Inc. ("LungCheck")
Immediately prior to the Merger, we transferred to ISTX, Inc., a Delaware
corporation, which was then a 90% owned subsidiary, and our prior business, all
of our then technology holdings, including:
o intelligence surface technology
o microvalve technology
o all of our licensing agreements with Textron and Reebok
In consideration of the technology transfer and assignment, ISTX agreed to
assume substantially all of our trade debt upon which we agreed to pay ISTX Two
Hundred Twenty Five Thousand ($225,000) Dollars immediately after the Merger,
which transfer was made.
In addition to the foregoing, immediately prior to the Merger, BCAM
transferred its 90% interest in ISTX to its stockholders of record on September
22, 1999 by way of a declared stock dividend on the basis of one share of ISTX
for one share of BCAM common stock held of record on September 22, 1999.
Certificates of ISTX common stock issuable as a result will not be delivered
until ISTX has filed a registration statement with the Securities and Exchange
Commission pursuant to the Securities Exchange Act of 1934, and ISTX has
prepared a disclosure statement to accompany the delivery of the certificates
representing the shares.
The terms of the Plan of Merger provided that each outstanding share of
LungCheck common stock, par value $.001, immediately prior to the Merger was
converted into 0.0032958 of a share of BCAM Series B convertible acquisition
preferred stock, par value $.01 per share, and that each share of LungCheck
preferred stock, par value $.001 per share was converted into 0.098884 of a
share of BCAM Series A convertible acquisition preferred stock, par value $.01
per share. After the completion of the exchange and upon conversion of the BCAM
Series A and B preferred stock into common stock of BCAM, the shareholders of
LungCheck became the holders of approximately 80% of the total issued and
outstanding common stock of BCAM. Therefore, as a result of the Merger,
effective control of the Company passed to the former shareholders of LungCheck.
Michael Strauss, Chairman, Chief Executive Officer and President of BCAM, will
continue in that capacity.
Since BCAM had no business operations immediately prior to the Merger, and
since the security holders of LungCheck own approximately 80% of the equity of
the combined Companies upon conversion of the BCAM Series A and B convertible
acquisition preferred stock, the transaction is being treated as a "purchase
business combination" and a "reverse acquisition" for accounting purposes in
which BCAM is the legal acquirer, LungCheck is the accounting acquirer and the
assets and liabilities of LungCheck and BCAM will be recorded at their
historical carrying values as of the date of consummation.
As a result of the ISTX Transaction and Merger, the Company had virtually
no business operations, making the business of LungCheck the sole business of
the Company.
Our Company
Our company is engaged in the development and sale of clinical testing
applications and automated laboratory systems that together allow for the early
detection, diagnosis, characterization, treatment and monitoring of significant
human diseases. The Company is currently focused on developing clinical testing
applications for lung cancer and has already fully developed and begun marketing
its first clinical application called LungCheck(R) to targeted healthcare
providers who treat people that are `at-risk' for lung disease.
The Company plans to fully develop laboratory systems that provide highly
sensitive (using genetic and molecular marker technology) testing capabilities
through automated screening technology and to simultaneously develop numerous
clinical applications that test for cancer or other serious medical conditions
and are able to be run on the Company's laboratory systems. The Company will
market the use of its testing applications to medical providers who in turn will
order the tests that are then run on the laboratory systems that the Company
provides to certain large reference and hospital laboratories. The Company
believes that the placement of its systems coupled with the increased
utilization of its testing applications by providers will result in significant
recurring revenue to the laboratories that use its systems as well as to the
Company and the physicians that collect specimens for testing. The Company plans
to charge the laboratory on a per-test or per-user basis and it is contemplated
that the Company will place its systems and receive on-going leasing revenue
from these systems as well as from fees associated with its proprietary testing
kits.
Management has spent the last several months assembling key intellectual
property assets that represent a significant foundation upon which we will build
a series of high-value products for the early detection of lung cancer. The
technologies and systems being developed will be broadly enabling and can be
readily applied to other diseases and will establish barriers that will secure
our competitive position.
We are well positioned with a number of strategic assets already in place
including:
o Intellectual Property. Covering instrumentation and methods for automated
cell and tissue image analysis.
o Products.
- - Sputum Cytology plus TrendCytogram(R);
- - Sputum Collection Device;
- - Cell Analyzer;
- - Cell Differential Counter
o Instrument Platforms.
- - Computer-Aided Microscopes;
- - DNA Stains;
- - Preparation Devices;
- - DNA Analyzer;
o Software. Image Analysis Software
o Databases. Specimen Database
We will utilize our internal research and development group, as well as
licenses and strategic alliances to gain access to other technologies, assays,
and molecular markers that will add significant value to the systems thereby
preserving its competitive advantage.
Some of these licenses and strategic alliances include:
o AccuMed International, Inc. a public company founded in 1987, has agreed to
license their intellectual property patent portfolio and core expertise
(i.e., scientific and technical know-how) for use in the field of lung
cancer. Included are AccuMed's computer-aided (AcCell, TracCell) and
quantitative (Savant) optical microscopy; automated electronic imaging and
screening systems; analytical instruments and algorithms for cell and
tissue image analysis and methods to measure intracellular malignancy
associated changes. Our vision is to build an integrated system that will
enable the early detection of lung cancer. We believe that our existing
technology added to the AccuMed technology will provide a strong foundation
by which to further build a strong leadership position in the marketplace.
o We have partnered with EMSI, a leading provider of paramedical testing
services as well as Wellness and Occupational Health Screening Programs to
Fortune 500 Companies. Our LungCheck(R) product and service will be
represented as part of EMSI's portfolio of products and included within the
programs that it sells to its corporate clients and other occupational
health programs, as a single source solution for "Wellness". We believe
that EMSI's reputation as a quality provider of services will only enhance
the reputation of our product over time and will provide pre-qualified
sales opportunities.
o Last year, we developed a partnership with a highly credentialed pathology
laboratory, Schumann Cytology Laboratories (SCL) who is providing
laboratory services for the current LungCheck Test. We anticipate expanding
its network of laboratory partners in order to position us for the increase
in testing volume that is expected to result from the new sales and
marketing efforts. These partnerships will provide a mechanism for
laboratory cost containment and as well as a network of referral sources
around the world that will use our screening technologies.
Products and Services
The Company will continue to market its LungCheck(R) test for use as a
`stratifying' and monitoring tool for those who are engaged in "high-risk"
activities but are not classified as being "at-risk. The Company also plans to
engage in the development of a fully integrated sputum cytology diagnostic
system that will initially incorporate proprietary technologies licensed from
AccuMed and eventually followed by assays to evaluate the expression of
molecular markers. The system will also incorporate proprietary technologies in
sample collection and image analysis to produce a system with the requisite
sensitivity and specificity to qualify for use as a population-based screen. The
Company anticipates that it will conduct clinical trials on an on-going basis
starting in Year 2 in order to demonstrate clinical value and ensure rapid
regulatory approval. The Company will also develop a series of tests that will
be launched in 2003 that will be targeted to patients who have been diagnosed
with lung cancer. These products will run on the Company's proprietary automated
platform technology and will utilize quantitative histology technologies
licensed from strategic partners to characterize the tumor at the molecular
level and monitoring patients for therapeutic efficacy and disease progression.
LungCheck(TM) System
Management believes that this product will add specific value in terms of
individuals who may be reclassified as being "at-risk" due to their duration and
intensity of exposure to harmful breathing contaminants. The product may also be
used to monitor the pulmonary health in individuals who take specific action to
reduce their exposure (e.g. smoking cessation, use of protective equipment, or
other changes that decrease the level of exposure).
o Patented Collection Device. In order to initiate the test, the patient or
physician collects a specimen either in the physician's office or over
three consecutive mornings at home. The specimen container is then mailed
to the Company's laboratory for processing, evaluation and interpretation.
This proprietary container has several important attributes: (i) it is easy
to use; (ii) it is designed for typical mail delivery; and (iii) it can be
administered at home.
o Database. The Company has compiled a proprietary database and archive
system that consists of approximately 30,000 slides and 15,000 patient lung
pathology cases; complete with highly valuable demographic and medical data
on each patient. This clinical archive serves as the basis for the
proprietary algorithms that can be used to produce the Company's unique
pathology report.
o Algorithm. The Company has developed rules for analysis whereby (7)
categories of cells are measured per case and are compared to the patient
information that is contained in the comprehensive database of slides. The
computer algorithm enables bench marked results for each category of cells
for each patient that receives the LungCheck(TM) test. Further, the test
enables a baseline for monitoring a patient's subsequent exposure.
o TrendCytogram(TM). Following review by a Pathologist, the results are
displayed on the Company's proprietary pathology report called the
TrendCytogram(TM). This report provides physicians with:
- - A range of patient classifications from "negative" to carcinoma
- - A graphic, quantitative representation of the level of (8) components found
in the patient's sputum
- - A monitoring tool that will allow comparisons with up to four previous test
results, thereby enabling the recognition of trends
- - Pathologist commentary on the test results
- - Convenient inclusion of important historical and demographic patient data
- - Digitized images of suspicious and/or definitively diseased cells
Next Generations - Enhanced Sputum Cytology and Population-based Screening
Systems The Company intends to leverage the proprietary technologies acquired
from AccuMed International and other partners to develop its next generations of
cell and tissue analytical systems. The Company anticipates that the tests
developed for these systems will meet the sensitivity and specificity
requirements necessary for use in a population-based screen. The Company
believes that its systems will contribute to a reduction in disease-specific
morbidity and mortality and the cost of healthcare while significantly improving
the patient's quality of life. The high value of the information provided by the
Company's systems will drive acceptance by physicians, patients and third-party
payers, reimbursement levels, and the generation of significant revenues.
o Automation of the LungCheck(TM)Test - Enhanced Sputum Cytology. The
Company's current LungCheck(TM)test will be fully leveraged through
integration with technology provided by AccuMed, which has automated
microscopy platforms and intelligent cellular analysis systems that can be
used for sputum analysis. Further improvements in sensitivity and
specificity are expected through enhancements provided by the AccuMed
systems that utilize proprietary DNA stains to examine nuclear content and
other Malignant Associated Changes (MAC). The automated LungCheck(R)test
will be used as a `tool' for the surveillance of populations who are
exposed to agents that can potentially damage the lung. Management believes
that additional regulatory approval will not be required as the Micro21 has
already receive several 510K clearances and the product will be labeled for
`Research Use Only' and will be only one of several tools used to assist
physicians in assessing the pulmonary health of their patients. This
product is expected to be operational and in place in select laboratories
within six (6) to twelve (12) months.
o Second-Generation Automated Platform Technology: The Company intends to
utilize advancements in sample collection and processing in conjunction
with highly specific molecular markers to develop diagnostic systems and
tests that are cost-effective and will allow the early detection of lung
cancer. Clinical research at major medical centers throughout the world
will be used to demonstrate that the tests have sufficient sensitivity and
specificity to justify their use as population-based screens. The Company's
advanced diagnostic system will be based on the AccuMed AcCell-Savant
platform that is currently being utilized by various major medical
facilities around the world for cell and tissue analysis including sputum.
Management expects that this product will require regulatory approval in
order to be utilized as a fully integrated and standalone diagnostic system
within the clinical laboratory. Key market opportunities for the systems
exist in the US, Western Europe and Japan with significant upside derived
from markets in Eastern Europe and China. AccuMed has already conducted a
large field study demonstrating the efficacy of the current Savant
technology that Management believes will facilitate the approval process.
Management anticipates initiating worldwide clinical trials beginning in
year 2 of operations. Furthermore, additional tests can be added to the
system that will enable characterization of tumors based on the expression
of specific molecular markers. Once this data is linked to the outcome of
patients treated with specific therapeutic modalities, it should be
possible to utilize the information to select the optimal and most
cost-effective treatment for the lung cancer patient. Based on the quality
of the information provided by the systems, Management anticipates broad
acceptance by healthcare providers, patients, and third-party payers. The
Company also believes that its should also be possible to develop
additional high-value tests for the system:
SYSTEM DESCRIPTION: AUTOMATED SCREENING TECHNOLOGIES:
o TracCell(R)Slide Mapping System. As part of its licensing agreement with
AccuMed, the Company has access to AccuMed's computerized slide mapping
technology. The FDA has granted its approval for use of the TracCell(R)
System for pap smears prepared using Cytyc's ThinPrep(R)liquid-based slide
preparation system (LBSP). A similar LBSP system will be used for the
preparation of sputum slides. The TracCell(R)stand-alone slide preprocessor
produces electronic "maps" of slide-based cytological samples. These maps
are designed to reduce the time required to review a sample and associated
labor costs. By processing slides with a TracCell before the cytologist
screens the slides at an AcCell review station, the cytologist can save
time by being automatically routed past "empty" fields-of-view. An indirect
benefit of the TracCell tool is that screeners can spend more time
analyzing difficult-to-interpret cells or regions-of-interest without
sacrificing overall productivity.
o AcCell-Savant. The Company will also gain access to AccuMed's cell and
sample analysis instrument platform. The AcCell-Savant, an integrated cell
analysis platform incorporating several core technologies including DNA
cytochemistry, computer-assisted microscopy, electronic imaging, digital
image processing and analysis, and medical informatics. These technologies
facilitate the direct measurement of cellular changes (e.g., "MAC" or
Malignant-Associated Changes) associated with early disease progression.
Analyses can be performed, with the production-oriented AcCell-Savant with
greater sensitively, accuracy, and reproducibly than is possible by the
human eye-brain combination alone. The AcCell technology utilizes
specialized photodetectors and electro-mechanical precision, to selectively
focus on the most informative cell population using image processing and
analysis algorithms, and statistical methods. The AcCell-Savant can also
quantitate the DNA content of each cell and determine how the DNA is
arranged within normal and abnormal cell nuclei. The instrument also has
the capacity evaluate the levels of expression of multiple molecular
markers simultaneously. When taken together, these features can be used to
objectively classify patient samples with increased sensitivity and
specificity allowing earlier and more specific diagnoses. The AcCell-Savant
is designed to enable the Pathologist to more rapidly and effectively
identify patients who should be followed more closely and could benefit
from early intervention. Furthermore, for patients who have no evidence of
disease, use of the Company System should significantly reduce the need for
more costly and invasive testing where no benefit would be derived.
o Follow-on System Enhancements. Management will consider licensing
additional proprietary technology to augment the capabilities of its test
including:
- - Molecular markers,
- - Staining technologies,
- - Sputum induction technologies,
- - Cell preservation reagents,
- - Automated slide preparation technologies and
- - Disease management software that complement and increase the value
of the existing system
The Markets
According to the World Health Organization (WHO), lung cancer has become
the most common fatal malignancy in both men and women with an estimated 1.0
million new cases each year. In the U.S. alone, the National Cancer reports that
there are approximately 180,000 new cases of lung cancer and each year 160,000
people die of the disease accounting for 25% of all cancer-related deaths. In
the U.S., overall 1-year survival for patients with lung cancer is 40%, however,
only 14% live 5 years. In other parts of the world, 5-year survival is only 5%.
The high mortality of lung cancer can be attributed to the fact the most
patients (85%) are diagnosed with advanced disease when treatment options are
limited and the disease is likely to have metastasized. Even if a patient is
diagnosed early and is presumably cured by surgery, they remain at significant
risk, as there is a high probability that they will develop a second malignancy.
Lung cancer can be categorized into two general histologic types;
small-cell (SCLC) which accounts for 25-35% of lung cancer, and non-small cell
(NSCLC) which accounts for the remaining 65-75% of cases. In most cases, SCLC is
disseminated at the time of diagnosis and while generally responsive to
chemotherapy and radiation, only 10% of patients remain disease-free for two
years and only 10% of patients will live for five years. In NSCLC, 85% of
patients are diagnosed with late stage disease where 5-year survival is between
2-30%. This is in sharp contrast to patients who are diagnosed early, where
5-year survival can exceed 75% (Table 1). While it is true that a number of new
chemotherapeutic agents have been introduced into clinical practice for the
treatment of advanced lung cancer, to date, none have yielded a significant
improvement in long-term survival. Thus, for the lung cancer patient, early
detection and treatment provides the best chance of achieving significant
improvements in long-term survival.
Smoking and Lung Cancer
Lung cancer is probably the most preventable of all malignancies with greater
than 90% occurring in smokers and former smokers. Recent estimates suggest that
there are approximately 54 MM smokers and former smokers in the US and perhaps
as many as 128MM in the Western Europe and Japan. While only 15% of smokers will
eventually develop lung cancer, the relative risk of a smoker dying from the
disease is 20 times that seen in nonsmokers.
The likelihood of developing lung cancer appears to be a function of the number
of cigarettes smoked and the number of years as a smoker as measured in
"pack-years". Most experts agree, that an individual with greater than
30-pack-years is at significant risk for developing lung cancer. Many people
believe that by quitting smoking they will reduce, if not eliminate, their risk
of developing lung cancer. While quitting generally reduces the risk of
developing lung cancer, tobacco-induced damage to the lung occurs early and
persists long after an individual stops smoking. Thus, former smokers continue
to be at significantly greater risk of developing lung cancer than nonsmokers
and recent estimates suggest that 52% of lung cancers occur in former smokers.
According to the National Cancer Institute, the direct medical costs attributed
to lung cancer will exceed $5 billion with additional costs related to increased
morbidity and mortality.
Individuals at-risk for developing lung cancer fall into three (3) distinct
categories:
o 'High-Risk' Populations. Groups of individuals who are exposed to
carcinogens because they engage in high-risk activities (e.g. smoking,
occupational exposure).
o 'At-Risk' Individuals. Those individuals who are a-symptomatic but, because
of their history of exposure, are defined as being "at-risk".
o Patients with Cancer. Those who, for one reason or another, are suspected
of having lung cancer.
For the first group, a cost-effective test that would monitor damage to the
lung, identify individuals who are at-risk, or support programs that seek to
reduce exposure would provide significant benefit. Since early detection
provides the best opportunity for reducing the morbidity, mortality, and cost of
lung cancer, individuals who are "at-risk" for developing lung cancer would
benefit from the availability of an annual screening test that could identify
patients with early stage disease. We believe this market to be estimated in
excess of 182 million tests per year in the U.S, Western Europe and Japan. For
those who are suspected of having lung cancer, the availability of a test that
could better characterize the disease and monitor the effects of therapy would
allow patients to receive the most effective therapy.
For a lung cancer-screening program to be successful and gain acceptance by
patients, physicians, and third party payers, a screening test must be developed
that:
o Has implied benefit (changes outcome)
o Is widely available and be able to be carried out in the framework
of general health care
o Is relatively noninvasive leading to adequate compliance
o Has high sensitivity
o Has reasonable specificity
o Has reasonable predictive value
o Has a relatively low cost, and
o Is covered by insurance
Even though a number of tests exist that can detect lung cancer, to date, no
single test or combination of tests has successfully met these criteria.
Our Target Markets
According to the American Cancer Society, lung cancer is the leading
cancer-related cause of death among men and women in the United States; killing
more people annually than prostate and breast cancer combined. Likewise, the
increase in cigarette smoking has been particularly dramatic in developing
countries resulting in similar prevalence of lung cancer and has been associated
with substantial mortality and economic costs. Considering this, there clearly
exists a significant worldwide market for our services in early detection and
prevention. By the close of 1997, approximately two million deaths occurred
worldwide from lung cancer, with cigarette smoking being directly responsible
for almost 90% of these cases. Unfortunately, most lung cancer cases are
detected utilizing conventional diagnostic methods - methods that often diagnose
the disease when it has already progressed to Stage III or IV, when
survivability rates are less than 87% over five years.
Estimates of the population who are "at risk" for lung cancer are
approximately 180,000,000 in the US, Western Europe and Japan. Patients are
considered to be "at-risk" by virtue of the fact that they exhibit one or more
of the following :
o have previously been treated for lung cancer and are at high risk for
recurrence;
o have in excess of a 30-pack-year smoking history;
o are former smokers who, although they have stopped smoking remain at
significant risk for developing lung cancer;
o can be classified at being "at risk" due to factors relating to family
history, environmental exposure to mutagens and carcinogens, or other
occupational risks; and
o exhibit chronic obstructive pulmonary disease (COPD), emphysema, chronic
bronchitis, or asthma.
Another market includes those patients who have been diagnosed with lung
cancer. These patients could benefit through the characterization of their
disease by the selection of a therapeutic regime that would be most likely to
produce a cure. In addition, these patients could be monitored to determine the
positive results of a particular therapy. We estimate that worldwide,
approximately 1,000,000 patients would fall into this category.
Screening patients with lung cancer and those at risk due to the use of
tobacco products is only one of several areas where our technology has
significant market potential. Monitoring those at risk due to occupational
exposures or those with a family history of pulmonary disease and cancer are
equally viable and critical to our continued success. Accordingly, we have
identified the following market segments:
Marketing
Our strategy is to deliver its products and services to "high-risk"
populations, individuals who are "at-risk" for developing lung cancer as well as
to lung cancer patients. Given the sheer size and complexity of reaching these
groups, we have developed an innovative approach to marketing the products.
o Web-Based Information and Support. We will use the Internet to provide a
broad spectrum of educational and promotional materials to patients and
healthcare providers. Patients will be provided with information regarding
lung cancer, the effects of smoking, and the benefits of early detection.
We will provide Pathologists with teaching sets that will facilitate their
interpretation of sputum samples in conjunction with our cell analysis
systems. Pathologists will also be able to post slides on our website in
order to solicit consultation from other Pathologists. The site will also
provide functional links between the Company's sales and Customer Support
Network to ensure that the systems are operating properly and the system
reagents and supplies are readily available.
o Enlisting Primary Care Physicians. Our goal is to assist the physician in
providing quality care and to help them build their practice and derive
additional revenues. To reach the broadest number of physicians, we will
conduct regional seminars and attend scientific meetings where it will
document the benefits of early detection and treatment and to demonstrate
how our tests will be used in to context of their practice. Physicians who
wish to participate in screening programs will be provided with training in
sample collection and processing. Physicians will also be able to establish
an account that will allow them to order collection devices and educational
materials over the Internet. Participating physicians will generate revenue
for their practice through reimbursements for sample collection and
mark-ups for the collection kit that the Company manufactures.
o Placement of Our Systems. Success of this business model is dependent upon
gaining acceptance by Pathologist and Laboratory Directors in the medical
centers that are capable of high volume testing. As in the case of the
Primary Care Physician, we will provide seminars and will utilize opinion
leaders to train Pathologists on the use and interpretation of data
generated by the system. Additional training and support will be made
available through our website. We also plan to establish partnerships with
pulmonary health testing companies and large regional and commercial
laboratories and pulmonary medicine `centers of excellence'. We intend to
provide the screening system either free of charge or on a limited cost
schedule to medical centers that will provide revenues on a `per-use'
basis.
o Marketing Support. We will support the placement of our products with
customer services' online technical and system diagnostics that will be
used by our technical support groups to maximize operational efficiency.
System acceptance will also be driven by an aggressive education, training
and marketing campaign via our Website.
Sources of Revenue
o Traditional Laboratory Test Reimbursement. Medicare and most other third
party payers provide reimbursement for sputum cytology testing. For the
current generation LungCheck product, the Company contracts with outside
laboratories where a Pathologist analyzes the sample. These pathology
laboratories are paid a fair-market value for these services. We will
derive revenues through arrangements with laboratories covering services
related to marketing the test; use of the proprietary collection container;
use of the TrendCytogram; along with access to our proprietary algorithms
and other intellectual property.
o `Per-User' Screening Fees. We are contemplating commercializing our
automated cell and tissue analysis systems for lung cancer screening, by
placing units in large regional labs and medical centers of excellence
throughout the US, Western Europe and Japan. Manufacturing and placement of
units will follow from the projected volume of testing that is expected in
the marketplace. This program will be either be funded entirely by the
Company or subsidized by an equipment lender/distributor that will enable
placement of units at limited or no cost to the medical institution
conducting the test. Judgments as to placement of units will be made on
criteria of which medical institutions can support the investment by
generating a positive return within a reasonable timeframe.
o System Leasing Fees. The Company will place its automated systems in large
reference and hospital laboratories and will charge leasing fees either to
a third party leasing company or to the laboratory that uses its systems.
The Company contemplates that leasing revenue will represent recurring
revenue to the Company.
o Fees for Testing Kits. The Company will charge physicians modest fees
associated with the use of its testing kits that aid in the collection of
specimens. Physicians in turn are reimbursed at a higher amount by third
party payors for these specimen collections.
COMPETITION
We believe that the Company's products must compete on the basis of
functionality, cost-effectiveness, product features and effectiveness of the
product in standard medical practice.
The Company's technology and products could face competition from both
private and public companies including Bayer Diagnostics, Morphometrix,
ChromaVision, TriPath Imaging, Applied Imaging, Roche Diagnostics, Beckman
Dickenson, Compucyte and Abbot Diagnostics, that have developed or may be
developing competing or alternative systems. Our existing and potential
competitors possess substantially greater financial, marketing, sales,
distribution and technical resources, and more experience in research and
development, clinical trials, regulatory matters, manufacturing and marketing.
GOVERNMENTAL REGULATION
As long as the Company's sputum tests are prescribed by a physician, FDA
approval is not required for its distribution and use. Further, if the report is
returned to the prescribing physician for review, our reporting format called
the TrendCytogram(TM) is not a product subject to FDA regulation. If Management
decides to sell the Company's products without doctor prescription, approval by
the FDA for the specimen collection containers will be required. It is our
intention to evaluate seeking such approval. LungCheck slides and patient
reports are retained seven years in accordance with regulatory guidelines.
With regard to emerging regulations regarding patient consent, we can use
the information and slides from previous patient cases without obtaining consent
retroactively, as long as the patient's name and/or other identifying factors
are not revealed. For future specimens, we will request patient's consent to use
their test results for research purposes on an uncompensated basis.
Since we do not make the final diagnosis with respect to a patient's
condition, but rather only provide tools by which physicians make clinical
judgments, we are not deemed to be in the practice of medicine. All of the
allowed comments on the Company's reports have been carefully reviewed to ensure
that:
o a final diagnosis is not communicated by the Company, and
o that predictions as to the patient's future health are not communicated.
Each state also may have regulations that may impact operations but to our
knowledge, we are in compliance with all applicable state regulations.
PATENTS AND TRADEMARKS
We have purchased all of the intellectual property and accompanying assets
relating to the LungCheck(R) Test. The intellectual property includes a patent
on the specimen collection container (U.S. Patent No. 4,915,225, issued on April
10, 1990 for "Transportable Specimen Container Including Removable Centrifuge
Tube"), a registered trademark on the name "LungCheck" (U.S. Trademark/Service
Mark Registration No. 1,433,430, for the mark "LungCheck), a registered
trademark on the "TrendCytogram" (U.S. Trademark No. 1,530,848, for the mark
"TrendCytogram(TM)"), and a copyright on the software that produces the
reporting form, molds to make the plastic specimen collection container and all
related data and slide archives related to the development of LungCheck, and a
trademark application for the name "LungCheck" with the accompanying logo
(Serial No. 75-111,859, based on a prior trademark U.S. Trademark No.
1,565,728). As part of the License Agreement signed with AccuMed International
during March of 2000, the Company gained exclusive world-wide rights to more
than 50 separate technology patents, as well as numerous other trademarks and
intellectual property within the field of lung cancer.
RESEARCH AND DEVELOPMENT
In order to maintain this technological lead, investments in emerging
technologies will be necessary; such investments could be in the form of direct
purchases or in participation in academic or commercial scientific studies,
where the costs are shared with other parties. We will concentrate on three
centers of interest:
o the development of biological, genetic or molecular "markers", which are
substances which, when mixed with patient sputum, highlight to the
pathologist cells which have abnormalities for further analysis;
o the development of equipment that automates the analysis of sputum cells
through sophisticated image analysis techniques; this is referred to
"automated microscopy" and like the markers described above, improve
accuracy and reduce pathology analysis time; and
o the further development of "tele-pathology" and web-enabled data systems
which allow human pathological analysis at a location different from the
patient specimen; this will have the effect of allowing the Company to
assist many laboratories and medical providers to carry out testing
analyses via on-line data transmission techniques.
EMPLOYEES
As of April 14, 2000 we employed three full-time employees. None of our
employees are represented by a labor union, and we consider our relationship
with out employees to be good.
RISK FACTORS
Going Concern. Our report of independent public accountants on our 1999
consolidated financial statements is modified for a going concern uncertainty
due to our substantial working capital deficiencies and lack of significant
revenues on a sustained basis from the LungCheck(R) Sputum Cytology Test. In
addition, the report of our independent public accountants on our 1999 financial
statements contains an explanatory paragraph as to whether we are a going
concern.
Need for additional capital. If we fail to generate revenues in the amounts
we have projected, or receive those revenues later than we have projected, we
will need to obtain additional financing to fund our operations; if we are
unable to obtain this financing we may need to delay our research programs and
scale back, or even cease, our operations.
If we need to seek additional financing, we may seek to raise funds through
public or private financings, collaborative relationships or other arrangements.
Presently, we do not have any commitments for additional funds. If we raise
additional funds by selling common stock and/or securities convertible into
common stock, the then-existing stockholders may experience a substantial
decrease in the value of their investment in our common stock.
Operating Losses. We expect to continue to experience operating losses
through December 31, 2001 and may never become profitable, which could cause us
to cease our operations.
Absence of Operating History. We have had no significant operating history
since inception. We have been engaged almost exclusively in sales and marketing
activities and raising capital. Our viability, profitability and growth depend
upon successful completion of marketing and commercialization of the Company's
laboratory testing systems and clinical applications including the LungCheck(R)
Test. There can be no assurance that we will be successful in implementing our
strategy.
Lack of Revenue; Accumulated Deficit; No Assurance of Revenue Generation.
Since inception, we have not generated any significant revenue. We have no
significant firm orders for the laboratory systems or clinical applications,
including the LungCheck(R) Test. Therefore, there can be no assurance that we
will be able to meet our anticipated sales schedules or that we will be able to
compete successfully in the marketplace and/or generate significant revenue.
Because we anticipate incurring significant costs in connection with marketing
of the laboratory systems and clinical applications, there can be no assurance
that we will achieve sufficient revenues to offset anticipated operating costs.
As of December 31, 1999, our accumulated deficit was ($8,976,000). If we are
unable to generate revenues from operations sufficient to offset our losses, we
will have to arrange for additional financing to continue operations and there
can be no assurances that such financing will be available on acceptable terms
or at all.
Uncertainty of Market Acceptance; Lack of Marketing Experience. We believe
that the laboratory systems and clinical applications that have been developed
and that will be developed in the future represent significant advancements and
cost benefits over currently existing early detection and monitoring
technologies. Nonetheless, our prospect for success will therefore depend on its
ability to market successfully the entire product line that includes the current
LungCheck(R) Test. Marketing and sales will be significantly affected by our
ability to develop relationships with established companies that sell directly
to the appropriate physicians and institutions, the ability to establish
strategic alliances in the fields of pulmonary medicine, laboratory medicine and
oncology. The demand and market acceptance of the Company's products is subject
to a high level of uncertainty. We currently have limited financial, personnel
and other resources to undertake the extensive marketing activities that will be
necessary to market the Company's technology and current products. There can be
no assurance that any of our potential customers will enter into any
economically significant arrangements with us. There can be no assurance that
our marketing efforts will be successful.
Reimbursement by Medicare and Third-party Payors. In both domestic and
foreign markets, sales of the Company's products and clinical applications will
depend in part on the availability of reimbursement from third-party payors such
as government health administration authorities (Medicare/Medicaid in the United
States), private health insurers and other organizations. Domestically,
third-party payors are increasingly challenging the price, cost effectiveness
and necessity of medical products and services. Significant uncertainty exists
as to the reimbursement status of a newly approved health care product. There
can be no assurance that the Company's products will be considered cost
effective and medically necessary, or that adequate third-party reimbursement
will be available to enable us to maintain price levels sufficient to realize an
appropriate return on its investments in product development. If for any reason
we are not adequately reimbursed under insurance reimbursement programs, its
ability to sell the Company's products may be materially adversely affected.
Product Liability and Insurance. We may be exposed to potential product
liability claims by consumers. Therefore, marketing the Company's products will
entail a certain risk of product liability. We have obtained and currently
maintain product liability insurance coverage. Although we maintain such
insurance, there can be no assurance that any such insurance will be sufficient
to cover all possible liabilities. Inability to maintain insurance at an
acceptable cost or to otherwise protect against potential product liability
could prevent or inhibit the commercialization of the Company's products. In
addition, a product liability claim or recall could have a material adverse
effect on our business or financial condition.
Dependence on Key Personnel. Our success is largely dependent on Michael
Strauss, the Chairman, CEO and President. The loss of his services would have a
material adverse effect on our ability to maximize the use of the LungCheck or
to develop related technologies to enhance it. We are also dependent on our
ability to hire and retain additional qualified executive, scientific and
marketing personnel. There can be no assurance that we will be able to hire or
retain such necessary personnel.
Patents and Proprietary Information. There is no assurance that any patents
will afford commercially significant protection of our technology or that we
will have adequate resources to enforce our patents. In addition, patent
disputes are common in the medical industry, and the assertion of a claim of
infringements, regardless of the outcome, could significantly inhibit our
ability to market successfully. Because of our developmental stage, claims that
the Company's technologies infringe on the proprietary rights of others are more
likely to be asserted after commencement of significant commercial sales.
Competitors in the United States, who may have greater resources and have
substantial investments in competing technologies, may have applied for or
obtained, or may in the future apply for and obtain, patents that will prevent,
limit or interfere with our ability to make and sell the Company's products. We
have not conducted an independent review of patents issued to third parties.
Although we believe that the Company's technology does not infringe the patents
or other proprietary rights of third parties, there can be no assurance that
other third parties will not assert infringement claims or that such claims will
not be successful. There can also be no assurance that competitors will not
infringe upon our patents. Even successful defense and prosecution of patent
suits are both costly and time consuming. An adverse outcome in the defense of a
patent suit could cause significant liabilities to third parties, require
disputed rights to be licensed from third parties or require us to cease selling
our products. We have completed protective registration of these trademarks and
patents in Mexico and are in the process of completing these registrations in
Columbia. It is our intention to complete such registrations in each country
where we conduct significant operations.
Listing. If the common stock cannot be listed on the Nasdaq SmallCap
Market, trading, if any, in the common stock would be conducted on the
non-Nasdaq over-the-counter market in the so-called "pink sheets" or the NASD's
"Electronic Bulletin Board." Consequently, the liquidity of our common stock
could be impaired. This might result in a reduction in the number of shares be
bought and sold, as well as delays in the timing of transactions. It might also
lead to reduction in security analyst coverage, and lower prices for the common
stock than might otherwise be attained. Consequently, it might be more difficult
for investors to dispose of, or to obtain accurate quotations as to the market
value of our common stock.
Market Price. The market price of our common stock, like that of many other
medical products and high technology companies, has in the past been, and is
likely in the future to continue to be, highly volatile. Factors effecting
potential volatility including: announcements of mergers, acquisitions or
dispositions of assets; fluctuations in operating results; announcements of
technological innovations or new commercial products by us or our competitors;
announcements of private placements of securities; operating losses; economic
and other external factors.
No Dividends. We have paid no cash dividends to date. Payment of dividends
on the Common Stock is within the discretion of the Board of Directors and will
depend upon our earnings, capital requirements and financial condition, as well
as other relevant factors. We do not currently intend to declare any dividends
on our Common Stock in the foreseeable future. Currently, we plan to retain any
earnings for development of its business operations.
Special Required Preferred Stock Directors' Approval. So long as at least
one-third our Series A Convertible Preferred Stock is outstanding, we cannot,
without the affirmative vote of a majority of the Required Preferred Stock
Directors (which Directors constitute a minority of the Board of Directors), (i)
pay certain cash dividends; (ii) dispose of substantially all of the assets;
(iii) incur indebtedness in excess of thirty percent of capital; (iv) issue or
purchase certain securities; (v) engage in certain transactions with an
affiliate; (vi) amend its organizational documents to alter the number of
Directors required; (vii) appoint, reappoint, or change the auditors; (viii)
adopt certain employee incentive plans; or (ix) engage in unrelated business.
We must devote significant resources toward attracting users in order to
grow our business.
Recognition and positive perception of our brand names in the specialty
medical products industries and in general are important to our success. We
intend to significantly expand our advertising and publicity efforts in the near
future. However, we may not achieve our desired goal or increasing the awareness
of our brand names. In addition, as part of our brand building efforts, we
intend to undertake a number of promotional programs that will result in
increased marketing expenses and these programs may not be successful.
We have a significant amount of debt that we may be unable to service or
repay.
If we do not have sufficient cash to repay our debts as they become due, we
may be unable to refinance our debt on reasonable terms or at all. If we cannot
meet out debt obligations from the cash generated by our business, we may not be
able to develop and sell new products, respond to changing business or economic
conditions adequately, make acquisitions or otherwise fund our business.
You should not rely on forward-looking statements because they are
inherently uncertain.
We use such words as "anticipates," "believes," "plans," "expects,"
"future," "intends," and similar expressions to identify these forward-looking
statements. There are also forward-looking statements attributed to certain
third parties relating to their estimates regarding growth of the number of Web
users and e-commerce. You should not place undue reliance on these
forward-looking statements. Our actual results could differ materially from
those anticipated in these forward-looking statements for many reasons,
including the risks faced by us described above and elsewhere.
Officers and directors and their affiliates will continue to have
substantial control over us.
Our executive officers and directors and their affiliates beneficially own
approximately 31% of the outstanding shares of our common stock. As a result,
our officers, directors and their affiliates will have the ability to influence
the election of our board of directors and the outcome of corporate actions
requiring stockholder approval. This concentration of ownership may have the
effect of delaying or preventing a change in control.
We expect the price of our common stock to continue to be volatile.
The market price of our common stock has fluctuated significantly recently
and may continue to fluctuate significantly in response to a number of factors,
some which are beyond our control, including:
o quarterly variations in our operating results;
o changes in estimates of our financial performance by securities analysts;
o announcements by us of significant contracts, acquisitions, strategic
partnerships, joint ventures or capital commitments;
o loss of a major customer, supplier or strategic partner, or failure to
complete a sale of our technology and products to a significant customer;
o additions or departures of any of our key personnel;
o future sales of our common stock; and
o stock market price and volume fluctuations, which are particularly common
among highly volatile securities of medical technology companies.
We have limited operating history and might face difficulties encountered
by early stage companies in new and rapidly evolving markets.
We have limited operating history upon which to base an evaluation of our
business and prospects. In assessing our prospects, you must consider the risks
and difficulties frequently encountered by early stage companies in new and
rapidly evolving markets, particularly companies in the business-to-business
market. These risks include our ability to:
o manage rapidly changing and expanding operations;
o maintain our current, and develop new, strategic partnerships;
o reliably process transactions;
o establish and increase awareness of our brand and strengthen customer
loyalty;
o implement and successfully execute our business and marketing strategy;
o provide superior customer service;
o respond effectively to competitive pressures and developments;
o continue to develop and enhance our technology and systems; and
o attract, retain and motivate qualified personnel.
Our business model is unproven.
The potential profitability of our business model is unproven, and, to be
successful, we must, among other things, develop and market products and
services that achieve broad market acceptance by its users. Our model has been
developed recently, and, as a result, is relatively unproven. Our business,
financial condition, results of operations and prospects might be materially and
adversely affected if customers and suppliers become dissatisfied with out
products and services. Accordingly, our business model might not be successful
or sustain revenue growth or generate significant profits.
Customers might not accept our products.
If we do not attract and retain a large number of customers to use our
products, our business and operating results will be negatively affected.
Specific factors that could prevent widespread acceptance of our solution, and
our ability to generate or grow revenues, include:
o pricing that does not meet customer expectations;
o delays in responding to customer inquiries or in deliveries to customers;
o difficulties in returning or exchanging orders;
o inaccurate deliveries of products; and
o technical difficulties.
We face risks associated with acquisitions.
We have acquired, and expect in the future to acquire businesses,
technologies, services or products that we believe are a strategic fit with our
business. The process of integrating an acquired business, technology, service
or product might result in unforeseen operating difficulties and expenditures
and may absorb significant management attention that would otherwise be
available for ongoing development of our business. In addition, the anticipated
benefits of any acquisition might not be realized. Future acquisitions could
result in potentially dilutive issuances of equity securities, the incurrence of
debt, contingent liabilities and/or amortization expenses related to goodwill.
We might not be able to determine or design the features and functionality
that our customers require or prefer.
Our success depends upon our ability to accurately determine the features
and functionality tat our customers require or prefer in an e-commerce solution,
and our ability to successfully design and implement solutions that include
these features and functionality. If we are unable to determine or design in the
features and functionality that customers require or prefer in an e-commerce
solution, our business will be negatively affected. We cannot be certain that
the features and functionality that we plan to offer will satisfy the
requirements or preferences of our current or potential customers.
We depend on our business partnership with others.
The usefulness of our product will be dependent upon the number and quality
of our relationships with other partners. To the extent that we establish
relationships with customers and suppliers, we anticipate that many of such
relationships will be nonexclusive or terminable at will. Consequently, these
partners might transfer their business to our competitors quickly and at
relatively low costs. Our success will depend on our ability to convince
customers and suppliers of the benefits of our solutions and on our ability to
retain, broaden and diversify our future base of customers. If we are unable to
attract and retain a large number of customers, our business, financial
condition, results of operations and prospects will be materially and adversely
affected.
We might not be able to establish and strengthen our brand.
We believe that establishing and strengthening our brand is critical to
achieving widespread acceptance of our products and services, particularly
because of the early stage of the online market for our products and services.
Promoting and positioning our brand will depend largely on the success of our
marketing efforts and our ability to provide consistent, high-quality customer
experiences. We will need to spend a lot of money to promote our brand, both on
marketing and on customer service. Our brand promotion activities might not be
successful or result in enough increased revenues to offset the expenses
incurred.
Our markets are competitive.
Our markets are intensely competitive. In our marketplace, competitive
pressures are likely to result in price reduction, reduced margins, and possible
reduced market share, any one of which factors could seriously harm our
business. Such competitors might be able to spend more aggressively on marketing
and advertising for their brands. The business-to-business marketplace is highly
competitive and several companies are positioned to emerge as competitors in
this marketplace. Many of our competitors and potential competitors have longer
operating histories, significantly greater financial, technical, marketing and
other resources than us, significantly greater name recognition and a larger
installed base of potential customers, and have extensive knowledge of our
industry. Such competitors might be able to spend more aggressively on marketing
and advertising for their brands, products and services. They also might adopt
more aggressive pricing policies and make more attractive offers to employees.
In addition, current and potential competitors may establish cooperative
relationships among themselves or with third parties to increase the ability of
their products to address customer needs. Accordingly, it is possible that new
competitors or alliances among competitors might emerge and rapidly acquire
significant market share. We also expect that competition will increase as a
result of industry consolidations.
We depend on third parties to provide reliable software, systems and
related services to us.
We currently license from third parties certain technologies and
information incorporated into our products and services. As we continue to
introduce new services that incorporate new technologies and information, we
might be required to license additional technology and information from others.
These third-party technology and information licenses might not continue to be
available to us on commercially reasonable terms, if any all. Additionally,
third parties form which we currently license technology and information might
not be able to defend their proprietary rights successfully against claims of
infringement. Any failure to obtain any of these technology and information
licenses could result in delays or reductions in the introduction of new
features, functions, products or services. It could also negatively affect the
performance of our existing products and services until equivalent technology or
information can be identified, obtained and integrated.
We plan to rely substantially upon third-party service providers to help us
build, maintain and house key components of our products and systems. These
services might not be available in a timely manner or at commercially reasonable
terms, if at all. Any failure to obtain the necessary services to enable us to
build, maintain and house our products and systems, could have a material
adverse effect on our business, financial condition, results of operations and
prospects.
Several of the third-parties upon whom we depend have a limited operating
history, have relatively immature technology and are themselves dependent on
reliable delivery of services from others. As a result, our ability to deliver
various services to our users might be adversely affected by the failure of
these third parties to provide reliable software, systems and related services
to us.
We need to expand our direct sales operations if we are to increase market
awareness and sales of our products and services.
We need to substantially expand our direct sales operations if we are to
increase market awareness and sales of our products and services. If we fail to
increase our direct sales capabilities, our business, financial conditions and
results of operations would be materially adversely affected. Competition for
qualified sales personnel is intense, and we might not be able to hire the kind
and number of sales personnel we are targeting. New hires often require
extensive training and typically take several months to achieve productivity.
Government regulation and legal uncertainties could add costs to doing
business on the Internet.
There are currently few laws or regulations that specifically regulate
medical diagnostic products and companies. However, laws and regulations might
be adopted in the future that address issues such as user privacy, pricing,
taxes and the characteristics and quality o products and services. Any new laws
or regulations relating to the Internet could adversely affect our business.
Our projected financial information is based on assumptions that might not
be accurate.
The operating and financial information contained in our projected
financial data have been prepared by management and reflect its current
estimates of our future performance. The projected results are dependent on the
successful implementation of management's growth strategies and are based on
assumptions and events over which we have only partial or no control. The
assumptions underlying such projected information require the exercise of
judgment, and the projections are subject to uncertainty due to the effects that
economic, business, competitive, legislative, political or other changes might
have on future events. Changes in the facts or circumstances underlying such
assumptions could materially affect the projections. To the extent that assumed
events do not materialize, actual results might vary substantially from the
projected results. As a result, we might not achieve the operating or financial
results set forth in our financial projections.
Our products and services may contain defects, which could result in the
rejection of our products and damage to our reputation, as well as lost
revenues, diverted development resources and increased service costs and
warranty claims.
Products and services as sophisticated as ours are likely to contain
undetected errors or defects, especially when first introduced or when new
models or versions are released. Our products may not be free from errors or
defects after commercial shipments have begun, which could result in the
rejection of our products, damage to our reputation, lost revenues, diverted
development resources and increased customer service and support costs and
warranty claims. Any of these results could harm our business.
Our future results could be harmed by economic, political, regulatory and
other risks associated with international sales and operations.
Since we intend to sell our products worldwide, our business is subject to
risks associated with doing business internationally. We anticipate that revenue
from international operations will represent an increasing portion of our total
revenue. Accordingly, our future results could be harmed by a variety of
factors, including:
o changes in foreign currency exchange rates;
o changes in a specific country's or region's political or economic
conditions, particularly in emerging markets;
o trade protection measures and import or export licensing requirements;
o potentially negative consequences from changes in tax laws;
o difficulty in managing widespread sales and manufacturing operations; and
o less effective protection of intellectual property.
We may not be able to acquire or maintain easily identifiable Web addresses
or prevent third parties from acquiring Web addresses similar to ours.
We may not be able to prevent third parties from acquiring Web addresses
that are similar to our addresses, which could materially adversely affect our
business, financial condition and operating results. The acquisition and
maintenance of the website addresses generally is regulated by governmental
agencies and their designees.
OUR BUSINESS MAY FACE ADDITIONAL RISKS AND UNCERTAINTIES NOT PRESENTLY KNOWN TO
US WHICH COULD CAUSE OUR BUSINESS TO SUFFER.
In addition to the risks specifically identified in this Risk Factors
section or elsewhere in this filing\, we may face additional risks and
uncertainties not presently known to us or that we currently deem immaterial
which ultimately may impair our business, results of operations and financial
condition.
ITEM 2. PROPERTY
Since 1990, we have leased office space at 1800 Walt Whitman Road,
Melville, New York. Our lease, as amended, expires on March 31, 2001. The
current annualized lease rate for this space is approximately $75,000, which is
subject to annual increases. The facility contains approximately 4,200 square
feet of office space.
ITEM 3. LEGAL PROCEEDINGS
On or about February 22, 1999, a shareholder derivative action was filed in
United States District Court for the Eastern District of New York in connection
with certain transactions culminating in the sale to Impleo, LLC of our interest
in a then subsidiary Drew Shoe Corp. The complaint names all of our current
directors and several former members of the Board as defendants as well as
Impleo, LLC and certain related entities and individuals. The allegations
contained in the complaint challenge the Defendants' actions in connection with
certain transactions, including but not limited to, (i) the April 14, 1998
restructuring of certain convertible notes; (ii) the October 1998 sale of 56.7%
of Drew to Impleo, LLC; and (iii) the proposed sale to Impleo, LLC of our
remaining 33.3% interest in the Drew. In addition to seeking recovery for
certain allegedly wrongful acts on the part of the Defendants, the complaint
seeks, among other things, to enjoin or set aside any shareholder vote in
connection with a proxy statement filed with the SEC on or about February 1,
1999 pursuant to which we received shareholder approval to sell our remaining
33.3% interest in Drew and to block or rescind the sale of any interests in Drew
to Impleo, LLC. The Company and the plaintiff have reached a settlement and a
settlement hearing is scheduled for June 16, 2000 to confirm and approve the
settlement.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS
Our Common Stock was quoted primarily on the NASDAQ SmallCap Market under
the symbol BCAM until October 15, 1998. Subsequent to October 15, 1998, we have
been traded primarily on the Over the Counter Bulletin Board ("OTC Bulletin
Board"). The Common Stock has also been traded on the Boston Stock Exchange
under the symbol BAM. In November 1998, the Boston Stock Exchange advised us
that it would commence a process of delisting the Common Stock from the Boston
Stock Exchange.
The following table sets forth the high and low closing bid quotations for
the Common Stock as reported by the OTC Bulletin Board through April 6, 2000.
The OTC Bulletin Board quotations reflect inter-dealer prices without retail
markup, markdown or commission and do not necessarily represent actual
transactions.
OTC Bulletin Board
_______ High Bid Low Bid
-------- -------
First Quarter $.23 $.09
Second Quarter $.20 $.06
Third Quarter $.18 $.06
Fourth Quarter $.09 $.01
Holders
There were approximately 320 record holders of our Common Stock as of April 6,
2000.
We have paid no cash dividends on its Common Stock since its inception and does
not anticipate paying cash dividends on its Common Stock in the foreseeable
future.
Recent Sales of Unregistered Securities
On or about September 23, 1999 and January 12, 2000 , we have, pursuant to
exemption from registration under the Securities Act of 1933, Section 4(2), as
amended, offered and sold a total of 103,330 shares of Series C Preferred Stock
and a total of 103,330 Warrants for a total of $310,000.
Between February 1, 2000 and March 1, 2000 we have, pursuant to exemption
from registration under the Securities Act of 1933, Section 4(2), as amended,
offered and sold a total of 120,000 shares of Series D Preferred Stock and a
total of 30,000,000 warrants for a total of $1,200,000.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THIS REPORT AND THE
FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANINGS OF
SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934. SUCH STATEMENTS INVOLVE RISKS AND UNCERTAINTIES AND THE
COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED HEREIN.
FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT
LIMITED TO, THOSE DISCUSSED BELOW IN FACTORS THAT MAY AFFECT FUTURE RESULTS.
Overview:
BCAM International, Inc. and Subsidiaries (the "Company") has been primarily a
technology pioneer in the field of Intelligent Surface Technology blending
biomechanics and ergonomics with innovative electronic systems and software. On
September 23, 1999, the Company completed a merger and recapitalization and
acquired LungCheck, Inc. ("LungCheck") (see Item 1, Description of Business).
Since BCAM had no business operations immediately prior to the merger, the
business of LungCheck is now the sole business of the Company. The merger has
been treated as a "purchase business combination" and a "reverse acquisition"
for accounting purposes in which BCAM is the legal acquirer and LungCheck is the
accounting acquirer.
Since the merger, the Company has been engaged in the development and the sale
of clinical testing applications and automated laboratory systems that together
allow for the early detection, diagnosis, characterization, treatment and
monitoring of significant human diseases. The Company is currently focused on
developing clinical testing applications for lung cancer and has already fully
developed and begun marketing its first clinical application called
LungCheck(R), a quantitative sputum cytology test, to targeted healthcare
providers who treat people that are `at-risk' for lung disease.
The Company plans to fully develop laboratory systems that provide highly
sensitive (using genetic and molecular marker technology) testing capabilities
through automated screening technology and to simultaneously develop numerous
clinical applications that test for cancer or other serious medical conditions
and are able to be run on the Company's laboratory systems. The Company will
market the use of its testing applications to medical providers who in turn will
order the tests that are then run on the laboratory systems that the Company
provides to certain large reference and hospital laboratories. The Company
believes that the placement of its systems coupled with the increased
utilization of its testing applications by providers will result in significant
recurring revenue to the laboratories that use its systems as well as to the
Company and possibly to the physicians that collect specimens for testing. The
Company plans to charge the laboratory on a per-test or per-user basis and it is
contemplated that the Company will place its systems and receive on-going
leasing revenue from these systems as well as from fees associated with the sale
of its proprietary testing kits.
Management will create market awareness of the Company's products by educating
physicians about the use of the Company's applications and by initially
marketing to the `high-risk' breathing environments and groups of individuals
that include industrial workers and people who smoke. Management also plans to
actively explore entering into business combinations with other entities to
expand the Company's product line to include other synergistic early detection
tools that are of particular medical significance. To date, sales of the
Company's products have not been significant due to the fact that the Company
has been actively developing its product line and completing its management
infrastructure.
Results of Operations
Results of operations for the years ended December 31, 1999 and 1998 were
impacted by limitations on resources, primarily financial, which inhibited
marketing activities. In particular, the Company was in negotiations to raise
additional capital from approximately June 1998 through December 1999. In
September 1999 it consummated a series of transactions resulting in a
recapitalization and merger. Through September 1999, the Company was
periodically advanced funds by a major stockholder, a portion of which was
converted into capital stock in connection with the recapitalization.
Revenues decreased from $94,000 to $44,000 for the years ended December 31, 1998
and 1999. This decrease arose from two research programs that were conducted on
behalf of organizations in 1998 that were absent in 1999, and the decline in
revenues from a significant multi-specialty clinic. In addition, the Company's
limited cash resources did not allow for aggressive marketing and sales
activities.
Costs of revenues declined from $346,000 to $50,000 for the years ended December
31, 1998 and 1999 due to the closing, in March 1999, of the Company's laboratory
facility. In conjunction with the laboratory's closure, the Company entered into
an agreement whereby a medical provider of laboratory services is processing
LungCheck(R) tests and reporting on their results, thereby reducing the high
fixed costs of lab personnel and other lab expenditures.
Selling, general and administrative expenses increased from $1,900,000 to
$3,174,000 for the years ended December 31, 1998 and 1999. This increase is
mainly due to consulting and compensation charges related to the issuance of
stock options, offset by reductions in certain medical, sales and marketing
expenses.
LIQUIDITY AND CAPITAL RESOURCES
As indicated in the accompanying consolidated financial statements, as of
December 31, 1999, the Company had not generated any significant revenues from
the LungCheck(R) technology that is its principal asset, and its operations have
generated losses and cash flow deficiencies from its inception on January 30,
1997. Although the losses reflect substantial noncash charges resulting from the
issuance of shares of preferred and common stock, stock options and warrants to
pay for service, compensation and interest expense, the Company had a
substantial working capital deficiency and was in violation of certain of the
covenants in its loan agreement as of December 31, 1999. Management expects that
such losses and cash flow deficiencies will continue through at least December
31, 2001 while the Company continues to develop its technology and the markets
for its services. Such matters raise substantial doubts about the Company's
ability to continue as a going concern and realize the carrying value of its
technology and other assets unless the Company is able to obtain additional
financing and, ultimately, increase revenues and generate sufficient profits and
cash flows to sustain its operations.
From January 1 through April 4, 2000, the Company raised $1,510,000, net of
expenses of $163,000, through two private placements. The Company anticipates
that, in addition, it will need to raise approximately $3,000,000 to satisfy its
cash requirements (including the requirements under the new license agreement
described below) through December 31, 2000. On February 1, 2000, the Company
signed an Investment Advisory Agreement with Burnham Securities, Inc., an
investment banking institution, to assist the Company in raising capital over
the next 12 months and to advise it with respect to certain business
combinations. To date, the Company has received indications of interest for
certain amounts and it believes that the remaining capital will be forthcoming
within the next 30 to 60 days.
The Company signed a multi-year patent and technology license agreement with
AccuMed International, Inc. ("AccuMed") on April 4, 2000. This agreement enables
the Company to gain exclusive use of AccuMed automated and quantitative
microscope technologies, products and patent rights in the field of early lung
cancer detection, and will speed the Company's efforts to become the industry
leader. The agreement requires a license fee of $1,000,000 payable in various
installments through December 1, 2000, royalty fees based on specified terms and
$1,000,000 in cash or shares of the Company's common stock on the first
anniversary of the agreement.
Management is continuing its efforts to obtain additional debt and/or equity
financing for the Company from financial institutions, other private investors
and potential strategic partnerships. However, there can be no assurance that
the additional financing will be available to the Company when needed, on
commercially reasonable terms, or at all, which could have a material adverse
effect on the Company's long-term viability, and thus, as to the continuance of
the Company.
ITEM 7. FINANCIAL STATEMENTS
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
NONE
Part III
The information required by Part III of this Form 10-KSB is incorporated by
reference to the Registrant's definitive proxy statement that was filed with the
Commission on March 23, 2000.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
NONE
AVAILABLE INFORMATION
Registrant will furnish any exhibits listed but not contained herein to any
beneficial owner of its securities upon receipt of a written request from such
person. Requests should be directed to Shareholder Relations Department, BCAM
International, Inc., 1800 Walt Whitman Road, Melville, New York 11747.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
has caused this report to be signed on its behalf by the undersigned, thereto
duly authorized.
BCAM International, Inc.
By: /s/ Michael Strauss
-----------------------
Michael Strauss
Chairman of the Board of Directors
Chief Executive Officer
(Principal Executive Officer)
Date: April 14, 2000
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
/s/ Michael Strauss
- -----------------------
Michael Strauss Chairman of the Board April 14, 2000
of Directors and
Chief Executive Officer
(Principal Executive Officer)
/s/ Joel L. Gold
- ---------------- Director April 14, 2000
Joel L. Gold
/s/ Mark L. Plaumann
- -------------------- Director April 14, 2000
Mark L. Plaumann
BCAM INTERNATIONAL, INC. AND SUBSIDIARIES
I N D E X
---------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-2
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999 F-3
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999 AND 1998 F-4
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
YEARS ENDED DECEMBER 31, 1999 AND 1998 F-5/6
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999 AND 1998 F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-8/26
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To the Board of Directors and Stockholders
BCAM International, Inc.
We have audited the accompanying consolidated balance sheet of BCAM
INTERNATIONAL, INC. AND SUBSIDIARIES as of December 31, 1999, and the related
consolidated statements of operations, stockholders' equity (deficiency) and
cash flows for the years ended December 31, 1999 and 1998. 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of BCAM International,
Inc. and Subsidiaries as of December 31, 1999, and their results of operations
and cash flows for the years ended December 31, 1999 and 1998, in conformity
with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As further discussed in Note
2 to the consolidated financial statements, the Company has not generated any
significant revenues on a sustained basis from the LungCheck(R) technology that
is its principal operating asset, and its operations have generated losses and
cash flow deficiencies from its inception. As of December 31, 1999, the Company
had a substantial working capital deficiency, and it was in violation of certain
of the covenants in its loan agreements. Such matters raise substantial doubt
about the Company's ability to continue as a going concern and realize the
carrying value of the LungCheck(R) technology. Management's plans concerning
these matters are also described in Note 2. The consolidated financial
statements do not include any adjustments that might result from the outcome of
these uncertainties.
Roseland, New Jersey
April 4, 2000
F-2
<PAGE>
BCAM INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999
ASSETS
------
<TABLE>
<CAPTION>
Current assets:
<S> <C>
Cash $ 68,000
Accounts receivable, less allowance for contractual discounts
and doubtful accounts of $15,000 18,000
Other current assets 47,000
-------------
Total current assets 133,000
Equipment, net of accumulated depreciation of $7,000 21,000
Technology costs, net of accumulated amortization of $336,000 841,000
Debt issuance costs, net of accumulated amortization of $212,000 1,970,000
-------------
Total $ 2,965,000
============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Notes payable (including obligations in default) $ 945,000
Payments received for preferred stock prior to issuance 220,000
Accounts payable 291,000
Accrued expenses 142,000
-------------
Total current liabilities 1,598,000
Note payable 350,000
Other liabilities 70,000
-------------
Total liabilities 2,018,000
-------------
Commitments and contingencies
Stockholders' equity:
Preferred stock; 2,000,000 shares authorized:
Series A Acquisition Convertible Preferred Stock, par value $.01 per
share; 750,000 shares authorized; 262,884 shares issued and
outstanding; liquidation preference $4,521,605
($17.20 per share) 3,000
Series B Acquisition Convertible Preferred Stock, par value $.01
per share; 750,000 shares authorized; 81,743 shares
issued and outstanding 1,000
Common stock, par value $.01 per share; 65,000,000 shares
authorized; 40,680,153 shares issued 407,000
Additional paid-in capital 13,229,000
Unearned compensation (2,818,000)
Accumulated deficit (8,976,000)
Less treasury stock - 763,182 shares of common stock at cost (899,000)
------------
Total stockholders' equity 947,000
------------
Total $ 2,965,000
============
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
BCAM INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Net revenues $ 44,000 $ 94,000
------------- -------------
Operating expenses:
Cost of revenues 50,000 346,000
Selling, general and administrative expenses 3,174,000 1,900,000
------------ ------------
Totals 3,224,000 2,246,000
------------ ------------
Loss from operations (3,180,000) (2,152,000)
------------ ------------
Interest expense (1,188,000) (249,000)
Interest income 36,000
------------ ------------
Totals (1,188,000) (213,000)
------------ ------------
Net loss $(4,368,000) $(2,365,000)
=========== ===========
Basic net loss per common share $(.08) $(.16)
===== =====
Basic weighted average number of common shares outstanding 55,630,146 14,831,100
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
BCAM INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
Series A Series B
Acquisition Acquisition Series A
Convertible Convertible Convertible Stock Sub-
Preferred Preferred Preferred Common Stock scriptions
Stock Stock Stock Shares Amount Receivable
----- ----- ----- ------ ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1998 ..... $3,000 3,000,000 $3,000 $(100,000)
Proceeds from payments of
subscriptions receivable .. 100,000
Proceeds from sale of
113,722 shares of Series
A convertible preferred
stock and warrants to
purchase common stock
through private placement
in March and April 1998 ...
Costs related to private
placement .................
Net loss .....................
----- --------- ----- --------
Balance, December 31, 1998 ... 3,000 3,000,000 3,000 -
Issuance of shares to note-
holder for deferral of
monthly principal payments 231,846
Effects of reverse acquisition
and other concurrent
transactions:
Conversion of senior
subordinated secured
promissory notes into
common stock, net of
unamortized debt issuance
costs of $56,000 ........ 8,333,333 8,000
Conversion of note payable
to stockholder and re-
lated accrued interest
into common stock ....... 4,792,324 5,000
Conversion of advances pay-
able to stockholder ..... 850,476 1,000
Proceeds from issuance of
common stock through pri-
vate placement .......... 5,400,000 5,000
Issuance of common stock
to consultants .......... 1,239,167 1,000
Issuance of common stock
and warrants to note-
holder for consent to
reverse acquisition ..... 905,845 1,000
</TABLE>
F-5
<PAGE>
<TABLE>
<CAPTION>
Additional Unearned Accum-
Paid-in Compen- ulated Treasury Stock
Capital sation Deficit Shares Amount Total
------- ------ ------- ------ ------ -----
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1998 ..... $ 3,226,000 $(2,243,000) $889,000
Proceeds from payments of
subscriptions receivable .. 100,000
Proceeds from sale of
113,722 shares of Series
A convertible preferred
stock and warrants to
purchase common stock
through private placement
in March and April 1998 ... 193,000 193,000
Costs related to private
placement ................. (41,000) (41,000)
Net loss ..................... (2,365,000) (2,365,000)
---------- --------- ---------
Balance, December 31, 1998 ... 3,378,000 (4,608,000) (1,224,000)
Issuance of shares to note-
holder for deferral of
monthly principal payments 35,000 35,000
Effects of reverse acquisition
and other concurrent
transactions:
Conversion of senior
subordinated secured
promissory notes into
common stock, net of
unamortized debt issuance
costs of $56,000 ........ 1,186,000 1,194,000
Conversion of note payable
to stockholder and re-
lated accrued interest
into common stock ....... 714,000 719,000
Conversion of advances pay-
able to stockholder ..... 126,000 127,000
Proceeds from issuance of
common stock through pri-
vate placement .......... 805,000 810,000
Issuance of common stock
to consultants .......... 179,000 180,000
Issuance of common stock
and warrants to note-
holder for consent to
reverse acquisition ..... 2,043,000 2,044,000
</TABLE>
F-5 (Continued)
<PAGE>
BCAM INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
Series A Series B
Acquisition Acquisition Series A
Convertible Convertible Convertible Stock Sub-
Preferred Preferred Preferred Common Stock scriptions
Stock Stock Stock Shares Amount Receivable
----- ----- ----- ------ ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Effects of reverse acquisition
and other concurrent
transactions (concluded):
Net issuances of preferred
stock (including issu-
ance of 262,884 shares
of Series A and 81,581
shares of Series B
Acquisition Preferred
Stock and repurchase
of 2,658,511 shares of
Series A Convertible
Preferred Stock) and
common stock in
connection with business
combination, net of re-
lated expenses of
$190,000 $3,000 $1,000 $(3,000) 15,927,162 $383,000
Issuance of 162 shares of
Series B preferred stock
to noteholder as fee for de-
ferral of monthly principal
payments
Issuance of stock options to
consultants
Issuance of stock options to
employees
Amortization of unearned com-
pensation
Net loss
------ ------ ---------- ---------- -------- -------
Balance, December 31, 1999 $3,000 $1,000 $ - 40,680,153 $407,000 $ -
====== ====== ========== ========== ======== =======
</TABLE>
F-6
<PAGE>
<TABLE>
<CAPTION>
Additional Unearned Accum-
Paid-in Compen- ulated Treasury Stock
Capital sation Deficit Shares Amount Total
------- ------ ------- ------ ------ -----
<S> <C> <C> <C> <C> <C> <C>
Effects of reverse acquisition
and other concurrent
transactions (concluded):
Net issuances of preferred
stock (including issu-
ance of 262,884 shares
of Series A and 81,581
shares of Series B
Acquisition Preferred
Stock and repurchase
of 2,658,511 shares of
Series A Convertible
Preferred Stock) and
common stock in
connection with business
combination, net of re-
lated expenses of
$190,000 $ 325,000 763,182 $(899,000) $(190,000)
Issuance of 162 shares of
Series B preferred stock
to noteholder as fee for de-
ferral of monthly principal
payments 7,000 7,000
Issuance of stock options to
consultants 1,056,000 1,056,000
Issuance of stock options to
employees 3,375,000 $(2,966,000) 409,000
Amortization of unearned com-
pensation 148,000 148,000
Net loss $(4,368,000) (4,368,000)
----------- ----------- ----------- ------- --------- -----------
Balance, December 31, 1999 $13,229,000 $(2,818,000) $(8,976,000) 763,182 $(899,000) $ 947,000
=========== =========== =========== ======= ========= ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-6 (Continued)
<PAGE>
BCAM INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Operating activities:
Net loss $(4,368,000) $(2,365,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation of equipment 14,000 20,000
Write-off of equipment 34,000
Amortization of technology costs 168,000 168,000
Amortization of debt issuance costs and debt discount 192,000 33,000
Amortization of unearned compensation 148,000
Deferred interest expense 35,000 96,000
Service, compensation and interest expense
paid through issuance of preferred and
common stock and stock options 2,610,000
Provision for bad debts (41,000) 21,000
Changes in operating assets and liabilities:
Accounts receivable 50,000 (33,000)
Other current assets (46,000) 35,000
Accounts payable 241,000 14,000
Accrued expenses (184,000) (8,000)
Liability under agreement for purchase of technology (1,025,000)
------------ ------------
Net cash used in operating activities (1,147,000) (3,044,000)
------------ ------------
Investing activities - purchases of equipment (50,000)
------------
Financing activities:
Proceeds from issuances of notes payable 445,000 100,000
Repayments of notes payable (14,000) (72,000)
Debt issuance and conversion costs (45,000) (13,000)
Repayments of capital lease obligations (11,000) (13,000)
Payments received for preferred stock prior to issuance 220,000
Proceeds from issuances of preferred and common stock,
net of expenses of $41,000 in 1998 810,000 152,000
Proceeds from stock subscriptions 100,000
Costs related to reverse acquisition and other concurrent
transactions (190,000)
------------ -------------
Net cash provided by financing activities 1,215,000 254,000
------------ -------------
Net increase (decrease) in cash 68,000 (2,840,000)
Cash, beginning of year - 2,840,000
------------ -------------
Cash, end of year $ 68,000 $ -
============ ============
Supplemental disclosures of cash flow data:
Interest paid $ 124,000 $ 120,000
============= =============
</TABLE>
See Notes to Consolidated Financial Statements.
F-7
<PAGE>
BCAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Business and reverse acquisition and basis of presentation:
Business and reverse acquisition:
BCAM International, Inc., which was organized in 1984 in the State of
New York, and its subsidiaries ("BCAM") had been primarily a software,
technology and consulting company specializing in providing ergonomic
solutions (human factors engineering) to individuals, corporations and
governments. BCAM's revenues had historically been derived primarily
from ergonomic consulting services. Through a series of transactions
effective as of September 22, 1999: (i) BCAM transferred all of its
technology holdings, assigned all of its licensing agreements and
transferred $225,000 to ISTX, Inc. ("ISTX"), its 90%-owned subsidiary;
(ii) ISTX agreed to assume substantially all of BCAM's liabilities;
and (iii) BCAM spun off its 90% interest in ISTX through the payment
of a dividend whereby it issued one share of ISTX common stock for
each share of common stock of BCAM held of record on September 22,
1999 (the "Spinoff"). As a result of the Spinoff, BCAM had virtually
no business operations on September 23, 1999, the time of the exchange
of shares based on a merger agreement, further described below, that
had been executed on an earlier date.
LungCheck Inc. ("LungCheck") was incorporated on January 30, 1997 in
the State of Delaware for the purpose of acquiring, enhancing and
marketing LungCheck(R) technology. The technology is used to provide a
specialized sputum cytology laboratory service. The service includes a
quantitative assessment of the pulmonary health of lung cells based on
a comprehensive review of different cellular and noncellular
indicators, as well as the early identification of cancer and other
abnormal cells in the fluids found in the lungs known as sputum. The
results of the assessment are included in a cytology report which is
produced from a database and specialized software containing
comparative pulmonary health information.
As of September 23, 1999, BCAM had, effectively, 40,680,153 shares of
common stock outstanding, with a par value of $.01 per share,
including 13,125,000 shares issued, effectively, on that date in
connection with the settlement of rights held by certain purchasers of
its common shares through a private placement in April 1998 (see Note
7).
As of September 23, 1999, LungCheck had 2,658,511 shares of Series A
Convertible Preferred Stock outstanding (the "Old Series A Stock"),
with a par value of $.001 per share and, effectively, 24,752,991
shares of common stock outstanding, with a par value of $.001 per
share, including shares issued, effectively, as of that date as
follows: (i) 8,333,333 shares issued in connection with the conversion
of senior subordinated secured promissory notes in the principal
amount of $1,250,000; (ii) 4,792,324 shares issued in connection with
the conversion of a note payable and its liability for accrued
interest thereon aggregating $719,000; (iii) 850,476 shares issued in
connection with the conversion of advances payable to a stockholder;
(iv) 5,400,000 shares sold through a private placement from which it
received net proceeds of $810,000; (v) 905,845 shares issued to a
noteholder in consideration for consenting to the merger; and (vi)
1,239,167 shares issued to consultants for services in connection with
the conversions and sales of shares described above and of the
exchange of shares described below.
F-8
<PAGE>
BCAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Business and reverse acquisition and basis of presentation (continued):
Business and reverse acquisition (concluded):
As of September 23, 1999, BCAM was authorized to issue 2,000,000
shares of preferred stock. On September 23, 1999, BCAM became
authorized to issue up to 1,500,000 shares of preferred stock as
acquisition preferred stock with a par value of $.01 per share of
which up to 750,000 shares were designated as Series A Acquisition
Convertible Preferred Stock (the "Series A Stock") and 750,000 shares
were designated as Series B Acquisition Convertible Preferred Stock
(the "Series B Stock"). As further explained in Note 6, each share of
Series A Stock is convertible into 150 shares of common stock, subject
to certain conditions, and has a preference in liquidation of $17.20
per share, and each share of Series B Stock is convertible into 1,500
shares of common stock, but has no preference in liquidation. In
addition, the holders of Series A Stock and Series B Stock are
entitled to cast that number of votes equal to the number of shares of
common stock into which a share of Series A Stock and a share of
Series B Stock is convertible on each matter submitted to BCAM's
stockholders for voting.
On September 23, 1999, the merger agreement became effective and BCAM
became obligated to issue 262,884 shares of Series A Stock to the
holders of LungCheck's Old Series A Stock and 81,581 shares of Series
B Stock to the holders of LungCheck's 24,752,991 shares of common
stock that, effectively, were then outstanding (the "Merger"). As a
result of the Merger, (i) LungCheck became a wholly-owned subsidiary
of BCAM; and (ii) BCAM had the equivalent of 202,727,378 voting shares
outstanding, of which 162,047,225 shares, or approximately 80%, were
held by the owners of the preferred and common stock of LungCheck
prior to the Merger and 40,680,153 shares, or approximately 20%, were
held by the owners of the common stock of BCAM prior to the Merger.
Since BCAM had no business operations immediately prior to the Merger
as a result of the Spinoff described above, and since the former
stockholders of LungCheck owned 80% of the voting stock of BCAM, the
Merger has been treated effective as of September 23, 1999 as a
"purchase business combination" and a "reverse acquisition" for
accounting purposes in which BCAM was the legal acquirer and LungCheck
was the accounting acquirer. As a result, the assets and liabilities
of the accounting acquirer, LungCheck, continued to be recorded at
their historical carrying values as of September 23, 1999; however,
common stock and additional paid-in capital were adjusted as of
September 23, 1999 to reflect the $.01 per share par value of the
shares of the legal acquirer, BCAM. In addition, the accompanying
consolidated financial statements for the periods prior to September
23, 1999 are comprised, effectively, of the historical financial
statements of LungCheck.
As used herein, the "Company" refers to LungCheck prior to the Merger
and LungCheck together with BCAM subsequent to the Merger.
F-9
<PAGE>
BCAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Business and reverse acquisition and basis of presentation (continued):
Basis of presentation:
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. The
Company has not generated significant revenues on a sustained basis
from the LungCheck(R) technology that is its principal operating
asset, and its operations have generated losses and cash flow
deficiencies from its inception on January 30, 1997. Although the
losses reflect substantial noncash charges resulting from the issuance
of shares of preferred and common stock, stock options and warrants to
pay for service, compensation and interest expense, the Company had a
substantial working capital deficiency and was in violation of certain
of its covenants in its loan agreement as of December 31, 1999.
Management expects that such losses and cash flow deficiencies will
continue through at least December 31, 2001 while the Company
continues to develop its technology and the markets for its services.
Such matters raise substantial doubts about the Company's ability to
continue as a going concern and realize the carrying value of its
technology and other assets unless the Company is able to obtain
additional financing and, ultimately, increase revenues and generate
sufficient profits and cash flows to sustain its operations.
From its inception through December 31, 1999, the Company obtained
financing primarily from loans from InterEquity Capital Partners
("InterEquity"), a small business investment company; loans from
stockholders and other related parties; the private placement of
convertible bridge notes (which were subsequently converted into
preferred and common stock) and secured promissory notes; and the
private placement of units of shares of preferred stock and warrants
to purchase preferred and common stock.
During the period from January 1 through April 4, 2000, the Company
raised $1,510,000, net of expenses, through two private placements and
entered into a patent and license agreement for certain technology
whereby it will be required to pay a license fee of $1,000,000 in
various installments through December 1, 2000 (see Note 11). In
addition to the $1,510,000 already raised in 2000, management
anticipates that the Company will need to raise approximately
$3,000,000 to satisfy its cash requirements through December 31, 2000.
Management is continuing its efforts to obtain additional debt and/or
equity financing for the Company from financial institutions, other
private investors and potential strategic partnerships. On February 1,
2000, the Company entered into an agreement with an investment banking
institution which will act as its investment advisor with respect to
its efforts to raise capital. However, there is no assurance that the
Company will be able to obtain the financing it will require for its
operations through the remainder of the year ending December 31, 2000.
During the year ended December 31, 1999, the Company consummated the
Merger and management began to reorganize the Company's operations.
The Company has engaged a consulting firm specializing in medical
sales and marketing strategies to prepare a business plan and explore
strategic alternatives which include, among other things, potential
business combinations, strategic alliances and other potential sources
of financing. Cash payments for expenses have been reduced through the
outsourcing of certain laboratory, sales and marketing positions. The
Company has also reduced expenses by eliminating certain internal
personnel costs and other costs of services through an agreement
whereby a medical diagnostic company is processing LungCheck(R) tests
and reporting on their results.
In addition, management believes the Company has developed a more
viable marketing strategy. This strategy focuses on providing
healthcare professionals with systems that allow for the early
detection, diagnosis, treatment and monitoring of significant human
diseases utilizing advances in molecular diagnostics coupled with
automatic quantitative screening technologies. The Company plans to
direct its initial focus towards developing products for the early
detection and characterization of lung cancer with the goal of
improving disease management and patient outcomes.
F-10
<PAGE>
BCAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Business and reverse acquisition and basis of presentation (concluded):
Basis of presentation (concluded):
In order to implement its new marketing strategy and enable the
Company to become commercially successful, the Company has commenced
negotiations with several parties which, if successful, would add key
technologies for development of the aforementioned laboratory systems.
Management cannot assure that the Company will be able to develop a
successful marketing strategy or obtain the financing needed to
develop commercially successful operations through any other means.
The accompanying consolidated financial statements do not include any
adjustments related to the recoverability and classification of assets
or the amounts and classification of liabilities that might be
necessary should the Company be unable to continue its operations as a
going concern.
F-11
<PAGE>
BCAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Summary of significant accounting policies:
Principles of consolidation:
As a result of accounting for the Merger as a purchase business
combination and a reverse acquisition (see Note 1), the accompanying
consolidated financial statements include the accounts of LungCheck as
of December 31, 1999 and for the years ended December 31, 1999 and
1998 and the accounts of BCAM and its wholly-owned subsidiaries as of
December 31, 1999 and for the period from its acquisition on September
23, 1999 to December 31, 1999. All significant intercompany accounts
and transactions have been eliminated in consolidation.
Use of estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect certain reported amounts and disclosures.
Accordingly, actual results could differ from those estimates.
Revenue recognition:
Revenues are recognized upon the completion of the cytology report.
Equipment:
Equipment is stated at cost, net of accumulated depreciation.
Depreciation is computed using the straight-line method over the
estimated useful lives of the related assets which range from five to
seven years.
Technology costs:
Technology costs are capitalized and are amortized
using the straight-line method over an estimated useful life of seven
years.
Debt issuance costs:
Debt issuance costs are deferred and amortized to interest expense
over the term of the related loan using the interest method.
Impairment of long-lived assets:
The Company has adopted the provisions of Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of" ("SFAS
121"). Under SFAS 121, impairment losses on long-lived assets, such as
equipment and technology costs, are recognized when events or changes
in circumstances indicate that the undiscounted cash flows estimated
to be generated by such assets are less than their carrying value and,
accordingly, all or a portion of such carrying value may not be
recoverable. Impairment losses are then measured by comparing the fair
value of the assets to their carrying amounts.
Advertising:
The Company expenses the cost of advertising and promotions as
incurred. Advertising costs charged to operations were immaterial in
1999 and 1998.
F-12
<PAGE>
BCAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Summary of significant accounting policies (continued):
Stock options:
In accordance with the provisions of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"),
the Company will only recognize compensation costs as a result of the
issuance of stock options to employees based on the excess, if any, of
the fair value of the underlying stock at the date of grant or award
(or at an appropriate subsequent measurement date) over the amount the
employee must pay to acquire the stock. Therefore, the Company will
not be required to recognize compensation expense as a result of any
grants to employees at an exercise price that is equal to or greater
than fair value. The Company will also make pro forma disclosures, in
accordance with the provisions of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"), of net income or loss as if a fair value based method of
accounting for stock options had been applied instead if such amounts
differ materially from the historical amounts.
Income taxes:
The Company accounts for income taxes pursuant to the asset and
liability method which requires deferred income tax assets and
liabilities to be computed annually for temporary differences between
the financial statement and tax bases of assets and liabilities that
will result in taxable or deductible amounts in the future based on
enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation
allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized. The income tax provision
or credit is the tax payable or refundable for the period plus or
minus the change during the period in deferred tax assets and
liabilities.
Net earnings (loss) per common share:
The Company presents "basic" earnings (loss) per common share and, if
applicable, "diluted" earnings per common share pursuant to the
provisions of Statement of Financial Accounting Standards No. 128,
"Earnings per Share". Basic earnings (loss) per common share is
calculated by dividing net income or loss applicable to common stock
(net income or loss adjusted for preferred dividend requirements, if
any) by the weighted average number of common shares outstanding
during each period. The calculation of diluted earnings per common
share is similar to that of basic earnings per common share, except
that the denominator is increased to include the number of additional
common shares that would have been outstanding if all potentially
dilutive common shares, such as those issuable upon the exercise of
stock options and warrants and the conversion of preferred stock, were
issued during the period.
F-13
<PAGE>
BCAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Summary of significant accounting policies (concluded):
Net earnings (loss) per common share (concluded):
As explained in Note 1, the 24,752,991 shares of common stock issued
by LungCheck (the accounting acquirer in the reverse acquisition)
prior to or concurrent with the Merger on September 23, 1999 were
converted into 81,581 shares of Series B Stock at a conversion ratio
of .0032958 shares of Series B Stock for each share of LungCheck
common stock that had been outstanding. As explained in Note 6, the
shares of Series B Stock do not have any liquidation preference and
have rights to dividends that are equivalent to those of a share of
common stock of BCAM (the legal acquirer in the reverse acquisition).
In addition, each share of Series B Stock is convertible into 1,500
shares of BCAM common stock. Accordingly, the Company has computed the
weighted average number of common shares outstanding for the years
ended December 31, 1999 and 1998 as if a share of LungCheck common
stock outstanding prior to the Merger was equivalent to 4.9437 shares
of BCAM common stock and a share of Series B Stock outstanding
subsequent to the Merger was equivalent to 1,500 common shares. The
shares held by the common stockholders of BCAM prior to the Merger
have been included in the computation of the weighted average number
of common shares outstanding for the year ended December 31, 1999 from
September 23, 1999, the effective date of the Merger.
No diluted per share amounts have been presented in the accompanying
consolidated statements of operations because the assumed effects of
the exercise of options and warrants outstanding at December 31, 1999
and 1998, the assumed exercise of the Series A Stock outstanding at
December 31, 1999 and the Old Series A Stock outstanding at December
31, 1998 would have been anti-dilutive.
Recent accounting pronouncements:
The Financial Accounting Standards Board and the Accounting Standards
Executive Committee of the American Institute of Certified Public
Accountants had issued certain accounting pronouncements as of
December 31, 1999 that will become effective in subsequent periods;
however, management of the Company does not believe that any of those
pronouncements would have significantly affected the Company's
financial accounting measurements or disclosures had they been in
effect during 1999 and 1998.
Note 3 - Equipment:
Equipment consisted of the following at December 31, 1999:
Furniture and fixtures $ 4,000
Computer equipment 24,000
--------
28,000
Less accumulated depreciation 7,000
--------
Total $21,000
========
F-14
<PAGE>
BCAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Note 4 - Long-term debt:
Long-term debt was comprised of the following at December 31, 1999:
<S> <C>
Note originally payable to InterEquity in monthly installments of
$24,057 including interest at 12% through December 31, 2002; net of
unamortized discount of $14,634; secured by a first lien on
substantially all of the Company's assets. The Company was in
violation of certain loan covenants as of December 31, 1999 and, as a
result, payments totaling $625,000 originally due in years subsequent
to December 31, 1999 have been reclassified as current liabilities (A) $ 913,000
Note payable to LungCheck Ltd. for the purchase of technology with
interest at 10%; payable on December 30, 2002; secured by the
Company's technology (B) 350,000
Other 32,000
---------
1,295,000
Less current portion 945,000
---------
Long-term debt $ 350,000
==========
</TABLE>
(A) On January 15, 1999, the loan agreement was amended to allow the
Company to defer any monthly principal payment due in 1999 by issuing
a specified number of shares of Series B stock (or common shares prior
to the Merger) based on the principal amount deferred. The Company
issued the equivalent of a total of 926 Series B shares (including 764
shares of Series B stock issued upon the conversion of 231,846 shares
of LungCheck common stock as a result of the Merger) with an aggregate
fair value of $42,000 as deferral fees in 1999. Effective as of
September 23, 1999, the Company issued shares of common stock and
warrants to purchase common stock to InterEquity, and reduced the
exercise price of warrants issued to InterEquity at the inception of
the loan, to obtain InterEquity's consent to the Merger (see Note 7).
In addition, the Company is obligated to issue additional warrants for
the purchase of common stock to InterEquity if it has not consummated
an initial public offering as of a specified date (see Note 9).
(B) The rights to payments and the interests in the pledged assets are
subordinated to the rights of InterEquity. LungCheck Ltd. is owned by
a stockholder of the Company.
Interest expense on loans from related parties totaled approximately
$830,000 and $96,000 for the year ended December 31, 1999 and 1998,
respectively.
Management believes that the fair value of the Company's note payable to
InterEquity does not differ materially from their aggregate carrying value
at December 31, 1999 because the note is a short-term obligation with terms
that were recently renegotiated. Because of the relationship between the
Company and its related parties, management believes that there is no
practical method that can be used to determine the fair values of notes and
loans payable to related parties.
F-15
<PAGE>
BCAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5 - Income taxes:
As of December 31, 1999, the Company had net operating loss
carryforwards of approximately $7,493,000 available to reduce future
Federal taxable income which, if not used, will expire at various
dates through 2019. The Company had no other material temporary
differences as of that date. Due to the uncertainties related to,
among other things, the extent and timing of its future taxable
income, the Company offset the deferred tax assets attributable to the
potential benefits of approximately $2,548,000 from the utilization of
those net operating loss carryforwards by an equivalent valuation
allowance as of December 31, 1999.
The Company had also offset the potential benefits of $2,548,000 and
$2,000,000 from net operating loss carryforwards by equivalent
valuation allowances as of December 31, 1999 and 1998, respectively.
As a result of the increases in the valuation allowance of $566,000
and $656,000 during the years ended December 31, 1999 and 1998,
respectively, there are no credits for income taxes reflected in the
accompanying consolidated statements of operations to offset pre-tax
losses.
Note 6 - Preferred stock:
As of December 31, 1999, the Company was authorized to issue up to
2,000,000 shares of preferred stock, of which 750,000 had been
authorized for issuance as Series A Stock and 750,000 had been
authorized for issuance as Series B Stock. A total of 262,884 shares
of Series A Stock and 81,743 shares of Series B Stock were
outstanding. Subsequent to December 31, 1999, shares of two new series
of preferred stock were authorized and sold by the Company through
private placements (see Note 12).
Each share of Series A Stock has a par value of $.01 per share and a
preference in liquidation of (i) $17.20 per share plus (ii) all
declared but unpaid dividends, or if greater, a portion of the
remaining assets of the Company which are distributable to the holders
of the common stock equal to an amount which would have been
distributed if the Series A Stock had been converted into common stock
immediately prior to the date of such liquidation. Each share of
Series A Stock is convertible into 150 shares of common stock, subject
to certain conditions. Each share of Series B Stock has a par value of
$.01 per share, no preference in liquidation and is automatically
convertible into 1,500 shares of common stock immediately after the
Company effectuates a 1-for-15 reverse split of its common stock. In
addition, the holders of Series A Stock and Series B Stock are
entitled (i) to cast that number of votes equal to the number of
shares of common stock into which a share of Series A Stock and a
share of Series B Stock is convertible on each matter submitted to the
Company's stockholders for voting and (ii) to dividends (whether in
cash or property or securities, other than dividends which are paid or
intended to be paid in connection with distributions of the Company's
assets upon the voluntary or involuntary liquidation, dissolution or
winding up of the Company) when declared by the Company's Board of
Directors on the common stock, on an as converted basis, and before
any payment is made to the holders of the common stock.
F-16
<PAGE>
BCAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7 - Stockholders' equity (deficiency):
Prior to September 23, 1999, BCAM had 27,555,153 shares of common
stock outstanding. During 1998, BCAM sold shares of common stock and
warrants through a private placement that was exempt from registration
under the Securities Act of 1933 (the "Act"). However, the number of
shares of common stock sold was subject to "repricing adjustments"
based on the market value of the shares at specified dates. Effective
as of September 23, 1999, the stockholders of BCAM that had purchased
shares through the private placement received a total of 13,125,000
shares of common stock pursuant to agreements that canceled its
obligations with respect to the issuance of any additional shares as a
result of repricing adjustments. Accordingly, as explained in Note 1,
the stockholders of BCAM owned 40,680,153 shares of common stock prior
to the Merger. Such shares represent 100% of the Company's common
shares outstanding as of December 31, 1999 and approximately 20% of
the Company's outstanding voting shares.
Prior to September 23, 1999, LungCheck had 3,231,846 shares of common
stock outstanding that were converted into 10,652 shares of Series B
Stock upon consummation of the Merger. Effective as of September 23,
1999, LungCheck issued 21,521,145 shares of common stock, which were
converted into 70,929 shares of Series B Stock, as a result of the
Merger and the purchase business combination (see Note 1) in
connection with repayments of notes, repayments of advances from a
stockholder, sales for cash through a private placement, a payment to
obtain a consent to the Merger and payments for various consulting and
other services as more fully described below.
Effective as of September 23, 1999, LungCheck issued 8,333,333 shares
of common stock, which were converted into 27,465 shares of Series B
Stock, to repay senior subordinated secured promissory notes that were
payable to certain of its stockholders and directors in the aggregate
principal amount of $1,250,000, including subordinated notes in the
aggregate principal amount of $1,000,000 that had been sold through a
private placement in January 1999 that was exempt from registration
under the Act. The Company had received net proceeds of $400,000 from
that sale. The discount on the notes of $600,000 (60%) was amortized
to expense over the period from the date of issuance to September 23,
1999. The Company also charged the remaining deferred issuance costs
related to these notes of approximately $56,000 to additional paid-in
capital in connection with the conversion. LungCheck also issued
4,792,324 shares of common stock, which were converted into 15,795
shares of Series B Stock, to repay the principal balance of $613,000
of, and the related accrued interest of $106,000 on, a 10% note that
had been payable to a stockholder. LungCheck also issued 850,476
shares of common stock, which were converted into 2,803 shares of
Series B Stock, to repay advances of $127,000 that had been payable to
a stockholder (see Note 10). The issuances of the shares as repayments
of notes, advances and accrued interest were noncash transactions that
are not reflected in the accompanying 1999 consolidated statement of
cash flows.
F-17
<PAGE>
BCAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7 - Stockholders' equity (deficiency) (continued):
Effective as of September 23, 1999, LungCheck sold 5,400,000 shares of
common stock, which were converted into 17,797 shares of Series B
Stock, through a private placement that was exempt from registration
under the Act and received total cash proceeds of $810,000.
Effective as of September 23, 1999, LungCheck issued 905,845 shares of
common stock, which were converted into 2,985 shares of Series B
Stock, to obtain a consent from InterEquity to the Merger (see Note
4). The shares issued had an approximate fair value of $582,000, which
has been included in debt issuance costs and is being amortized over
the remaining term of the note. LungCheck also issued 1,239,167 shares
of common stock, which were converted into 4,084 shares of Series B
Stock, to consultants for services in connection with the conversions
of the notes and the sales of shares described above and certain other
transactions related to the Merger. The shares issued had an
approximate fair value of $180,000 which was charged to selling,
general and administrative expenses in 1999.
The Company incurred total costs of $1,866,000 related to professional
and consulting fees and other related expenses in connection with the
Merger and the purchase business combination comprised of cash
payments of $190,000 and payments through grants of stock options with
a fair value of approximately $1,676,000 (see Note 8). The Company
allocated $810,000 of the total costs as a charge to additional
paid-in capital, which was the amount of the net cash proceeds the
Company received from the private placement of the equivalent of
17,797 shares of Series B Stock sold in connection with the Merger
described above. The remaining portion of the costs attributed to the
options of $1,056,000 was charged to operating expenses and additional
paid-in capital was increased by an equivalent amount.
During 1999, the Company also issued the equivalent of a total of 926
Series B shares as fees for the deferral of payments to a noteholder
(see Note 4).
On December 30, 1997, LungCheck issued warrants to purchase the
equivalent of 7,098,336 shares of common stock that were initially
exercisable through December 29, 2002 at $.11 per share as part of the
consideration for the loan from InterEquity (all numbers of common
shares and per share exercise prices related to warrants issued by
LungCheck and/or BCAM set forth below have been converted to post-
Merger equivalent amounts). In addition to issuing the equivalent of
2,985 shares of Series B Stock described above, effective as of
September 23, 1999, LungCheck reduced the exercise price of the
warrants issued in 1997 from $.11 to $.05 and issued new warrants to
purchase 5,100,000 shares of common stock exercisable at $.05 per
share through September 23, 2004 to obtain a consent from InterEquity
to the Merger. The adjustments to the exercise price and the new
warrants issued had an approximate fair value of $1,462,000, which has
been included in debt issuance costs and is being amortized over the
remaining term of the note. These were noncash transactions that are
not reflected in the accompanying 1999 consolidated statement of cash
flows.
F-18
<PAGE>
BCAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7 - Stockholders' equity (deficiency) (concluded):
During March and April 1998, the Company sold the equivalent of 11,245
shares of Series A Stock and 1,023,660 warrants to purchase shares of
common stock pursuant to a private placement of units of shares and
warrants exempt from registration under the Act. Each warrant is
exercisable for the purchase of one share of common stock at $.11 per
share through March 22, 2003. The Company received proceeds from this
private placement of $152,000, net of related costs and expenses of
$41,000. In connection with the private placement, the Company also
issued 8,070,000 warrants to purchase shares of common stock as an
additional fee for the services of the placement agent. Each warrant
is exercisable for the purchase of one share of common stock at $.11
per share through December 31, 2002.
The number of common shares reserved for issuance upon exercise, the
exercise prices and the expiration dates of all of the Company's
outstanding warrants as of December 31, 1999 are summarized in the
table below:
<TABLE>
<CAPTION>
Shares Subject
to Warrants Exercise Price Expiration Date
----------- -------------- ---------------
<S> <C> <C>
11,236,500 $.06 August 14, 2002
15,973,932 .11 December 29, 2002
7,098,336 .05 December 29, 2002
8,070,000 .11 December 31, 2002
1,023,636 .11 March 22, 2003
5,100,000 .05 September 15, 2004
</TABLE>
Note 8 - Stock options:
LungCheck and BCAM have granted options for the purchase of shares of
common stock to key executives, other employees, directors and
consultants and other nonemployees. The table that follows summarizes
the status of the shares of the Company's common stock that are
subject to issuance upon the exercise of stock options outstanding as
of December 31, 1999 and 1998 and changes in outstanding options
during the years then ended. Since the Merger was treated effective as
of September 23, 1999 as a "purchase business combination" and a
"reverse acquisition" for accounting purposes in which BCAM was the
legal acquirer and LungCheck was the accounting acquirer, the options
and the related changes reflected in the table prior to September 23,
1999 are those granted by LungCheck. All options granted by BCAM prior
to and outstanding as of September 23, 1999 are reflected separately
as options attributable to the Merger. In addition, all numbers of
common shares and per share exercise prices related to options granted
by either LungCheck or BCAM set forth below have been converted to
post-Merger equivalent amounts.
F-19
<PAGE>
BCAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8 - Stock options (continued):
<TABLE>
<CAPTION>
1999 1998
---- ----
Shares Weighted Shares Weighted
or Price Average or Price Average
Per Share Exercise Price Per Share Exercise Price
--------- -------------- --------- --------------
<S> <C> <C> <C> <C>
Outstanding, at beginning of
year 9,622,877 $ .08 6,022,877 $.06
Granted 49,296,378 .03 3,600,000 .11
Options attributable to Merger 4,286,375 1.01
Canceled (3,756,180) .10
----------- -----------
Outstanding, at end of year 59,449,450 .10 9,622,877 .08
========== =========
Options exercisable at end of year 36,183,385 5,467,864
========== =========
Weighted average fair value
of options granted during
the year .13 .08
=== ===
</TABLE>
The Company granted options to purchase 4,286,188 shares of common
stock for services provided by employees during 1999 at an exercise
price of $.03 per share which was less than the fair market value of
the shares on the dates of the respective grants. Accordingly, the
Company charged $409,000 to compensation expense and additional
paid-in capital in 1999 based on the number of shares subject to the
options granted and the excess of the fair market value over the
exercise price for each share.
The Company also granted options to purchase 29,662,200 shares of
common stock to an executive officer during 1999 pursuant to an
employment agreement that expires on September 15, 2003 (see Note 9).
The options were granted at an exercise price of $.03 per share which
was less than the fair market value of the shares on the date of
grant. Accordingly, the Company charged $2,966,000 to unearned
compensation and additional paid-in capital in 1999 based on the
number of shares that are subject to the options and the excess of the
fair market value over the exercise price for each share. The unearned
compensation is being amortized on a straight-line basis over the term
of the employment contract. A total of $148,000 of the unearned
compensation was amortized in 1999 and the balance is shown separately
as a reduction of stockholders' equity in the accompanying
consolidated balance sheet as of December 31, 1999.
The Company also granted options to purchase 13,347,990 shares of
common stock at an exercise price of $.03 per share to consultants and
other nonemployees during 1999 as part of consideration for services
in connection with the Merger and the reverse acquisition. The Company
valued the costs of the services at $1,676,000 based on the estimated
fair value of the options determined using methods required by SFAS
123. A portion of the total costs was charged to additional paid-in
capital and the remainder was charged to operating expenses, as
further explained in Note 7.
F-20
<PAGE>
BCAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8 - Stock options (concluded):
The following table summarizes information about fixed stock options
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------- -------------------
Weighted
Average
Years of Weighted Weighted
Number Remaining Average Number Average
Exercise Price Outstanding Contract Life Exercise Price Exercisable Exercise Price
-------------- ----------- ------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
$.0002- .07 54,863,075 4.38 $ .03 32,609,010 $.03
.08- .23 1,100,000 4.14 .14 1,100,000 .14
.75-1.69 3,486,375 6.67 1.10 2,474,375 .93
----------- -----------
$.0002-$1.69 59,449,450 4.51 .10 36,183,385 .10
============ ========== ==== === ========== ===
</TABLE>
Since the Company has elected to continue to use the provisions of APB
25 in accounting for stock options granted to employees, no earned or
unearned compensation cost was recognized in the accompanying
consolidated financial statements for stock options granted to
employees at exercise prices that were equal to or greater than the
fair market value of the Company's common stock on the date of grant.
The pro forma amounts computed as if the Company had elected to
recognize compensation cost for options granted to employees based on
the estimated fair value of the options at the date of grant, computed
as described below, and the related historical amounts reported in the
accompanying consolidated statements of operations follow:
<TABLE>
<CAPTION>
1999 1998
--------------- ---------------
<S> <C> <C>
Net loss - as reported $(4,368,000) $(2,365,000)
=========== ===========
Net loss - pro forma $(5,313,000) $(2,545,000)
=========== ===========
Basic loss per share - as reported $(.08) $(.16)
===== =====
Basic loss per share - pro forma $(.10) $(.17)
===== =====
</TABLE>
The fair value of each option granted was estimated as of the date of
grant using the "Black-Scholes" method in 1999 and the "minimum value"
method in 1998 pursuant to SFAS 123, with the following
weighted-average assumptions:
1999 1998
---- ----
Expected volatility 105% 0%
Risk-free interest rate 4.65% 5.85%
Expected years of option life 5 5
Expected dividends 0% 0%
F-21
<PAGE>
BCAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9 - Commitments and contingencies:
Operating leases:
The Company leases its facilities under an operating lease that
expires in March 2001. The lease requires the payment of minimum
annual rentals plus real estate taxes, insurance, utilities and
maintenance costs. Rent expense totaled approximately $62,000 and
$94,000 for the years ended December 31, 1999 and 1998, respectively.
The Company was originally leasing one of its facilities from one of
its stockholders. In April 1999, the stockholder sold the premises and
assigned the lease to the new, unrelated owner.
Future minimum rental payments under the noncancelable operating lease
aggregated $104,500 at December 31, 1999, of which approximately
$83,500 is payable in 2000 and $21,000 is payable in 2001.
Employment agreement:
The Company has an employment agreement with its Chairman, President
and Chief Executive Officer that expires in September 2003. Future
minimum payments under the employment agreement aggregated $814,000 at
December 31, 1999, of which approximately $185,000 is payable in 2000,
$210,000 is payable in 2001, $235,000 is payable in 2002 and $184,000
is payable in 2003. In addition, the employment agreement requires the
Company to pay the officer 299% of his then base salary should there
be a change in control of the Company. Should the officer be
terminated without cause, the agreement requires the Company to pay
the officer one year's salary.
Commitment to issue warrants:
If the Company has not completed an initial public offering of its
common stock, or a majority of its common stock has not been acquired,
at a price of at least $5.00 per share, and the loan from InterEquity
(see Note 4) has not been repaid at any time prior to January 1, 2002,
the Company will be required to issue warrants to purchase up to
1,730,295 shares of its common stock to InterEquity as follows:
247,185 warrants on January 1, 2000, 494,370 warrants on January 1,
2001 and 988,740 warrants on January 1, 2002. Each warrant will be
exercisable for the purchase of one share of common stock at $.45 per
share for a period of five years from the date of issuance.
Concentrations of credit risk:
The Company maintains its cash in bank deposit accounts the balances
of which, at times, may exceed Federal insurance limits. Exposure to
credit risk is reduced by placing such deposits with major financial
institutions and monitoring their credit ratings.
F-22
<PAGE>
BCAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9 - Commitments and contingencies (continued):
Litigation:
On or about February 22, 1999, a purported stockholder derivative
action was filed in United States District Court for the Eastern
District of New York in connection with certain transactions prior to
the Merger culminating in the sale by BCAM of its interest in one of
its former subsidiaries, Drew Shoe Corporation ("Drew") to Impleo, LLC
("Impleo"). The complaint named all of BCAM's then current directors
and several former directors as defendants (the "BCAM Defendants") as
well as Impleo and certain related entities and individuals
(collectively, the "Defendants"). The complaint alleged violations of
the Federal securities laws and state law and challenged the
Defendants' actions in connection with certain transactions including
but not limited to (i) the April 14, 1998 restructuring of certain
convertible notes; (ii) the October 1998 sale of a 56.7% interest in
Drew to Impleo and (iii) the sale of BCAM's remaining 33.3% interest
in Drew to Impleo on March 4, 1999. In addition to seeking recovery on
behalf of BCAM for certain allegedly wrongful acts on the part of the
Defendants, the complaint sought, among other things, to enjoin or set
aside any stockholder vote in connection with a proxy statement filed
with the Securities and Exchange Commission on or about February 1,
1999 (pursuant to which BCAM received approval of over 66.7% of its
stockholders to sell its remaining 33.3% interest in Drew) and to
block or rescind the sale of any interests in Drew to Impleo. BCAM's
directors denied the allegations concerning any allegedly wrongful
actions.
In May 1999, the Defendants filed motions to dismiss the complaint.
Instead of responding to these motions, plaintiff filed and served an
amended complaint in July 1999. The amended complaint dropped certain
parties as Defendants and raised several new allegations, including,
but not limited to, the alleged failure to make adequate disclosure of
the advice rendered by a consultant to BCAM and the alleged failure to
seek separate stockholder approval for the October 1998 sale. The
Company and its directors denied that they engaged in wrongful conduct
and on September 13, 1999 the Defendants served motions to dismiss the
amended complaint.
After further motions, the parties agreed to settle the case and, on
February 19, 2000, executed a settlement agreement which requires
court approval. The principal terms of the settlement require the BCAM
Defendants to pay $229,500 plus legal fees not to exceed $85,000, and
the remaining Defendants to pay $25,000 plus legal fees not to exceed
$7,500. The Company's insurer has agreed to pay the obligations of the
BCAM Defendants arising from the settlement.
F-23
<PAGE>
BCAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9 - Commitments and contingencies (concluded):
Litigation (concluded):
In connection with the Merger described above, BCAM's liabilities as
of September 23, 1999 were assumed by ISTX (see Note 1). However, the
assumption of such liabilities was completed "with recourse." As a
result, if ISTX should default on the liabilities of BCAM it assumed,
the Company would be liable for payment. As of December 31, 1999, the
Company was contingently liable for liabilities assumed by ISTX of
approximately $492,000. Management cannot determine what amount, if
any, the Company may have to pay, and the Company had not accrued any
liability for payments, in connection with this matter.
Note 10- Other related party transactions:
At December 31, 1999, accounts payable included $152,000 that arose
during 1999 from noninterest bearing advances from a stockholder. The
amount payable to the stockholder has no specific due date. In
addition, the stockholder had, effectively, made other advances to the
Company by paying consulting fees of $127,000 on its behalf during
1999 which were repaid through the issuance of the equivalent of 2,803
shares of Series B Stock in connection with the Merger (see Note 7).
During 1998, the Company was charged fees totaling approximately
$198,000 by a stockholder for pathology services.
Note 11- Subsequent events:
Private placements of shares of new series of preferred stock:
Subsequent to December 31, 1999, the Company became authorized to
issue up to 120,000 shares of Series C Convertible Preferred Stock
(the "Series C Stock") and 150,000 shares of Series D Convertible
Preferred Stock (the "Series D Stock"). Each share of Series C Stock
has a par value of $.01 per share and a preference in liquidation of
(i) $100 per share plus (ii) all declared but unpaid dividends, or if
greater, a portion of the remaining assets of the Company which are
distributable to the holders of the common stock equal to an amount
which would have been distributed if the Series C Stock had been
converted into common stock immediately prior to the date of such
liquidation. Each share of Series C Stock is convertible into 3,333.4
shares of common stock, subject to certain conditions. Each share of
Series D Stock has a par value of $.01 per share and a preference in
liquidation of (i) $10 per share plus (ii) all declared but unpaid
dividends, or if greater, a portion of the remaining assets of the
Company which are distributable to the holders of the common stock
equal to an amount which would have been distributed if the Series D
Stock had been converted into common stock immediately prior to the
date of such liquidation. Each share of Series D Stock is convertible
into 250 shares of common stock, subject to certain conditions.
F-24
<PAGE>
BCAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11- Subsequent events (continued):
Private placements of shares of new series of preferred stock (concluded):
In addition, the holders of Series C Stock are entitled to cast that
number of votes equal to the number of shares of common stock into
which a share of Series C Stock is convertible on each matter
submitted to the Company's stockholders for voting. The holders of
Series D Stock have no voting rights. The holders of Series C Stock
and Series D Stock are entitled to dividends (whether in cash or
property or securities, other than dividends which are paid or
intended to be paid in connection with distributions of the Company's
assets upon the voluntary or involuntary liquidation, dissolution or
winding up of the Company) when declared by the Company's Board of
Directors on the common stock, on an as converted basis, and before
any payment is made to the holders of the common stock.
During January 2000, the Company sold 103,330 shares of Series C Stock
and 103,330 warrants to purchase shares of common stock pursuant to a
private placement exempt from registration under the Act. Each warrant
is exercisable for the purchase of one share of common stock at $.33
per share through January 12, 2005. The Company received proceeds from
this private placement of $310,000, net of related costs and expenses
of $31,000. Proceeds of $220,000 received prior to December 31, 1999
are reflected as payments received for preferred stock prior to
issuance in the accompanying consolidated balance sheet as of December
31, 1999.
During February and March 2000, the Company sold 120,000 shares of
Series D Stock and 30,000,000 warrants to purchase shares of common
stock pursuant to a private placement exempt from registration under
the Act. Each warrant is exercisable for the purchase of one share of
common stock at $.08 per share through March 2005. The Company
received proceeds from this private placement of $1,200,000, net of
related costs and expenses of $132,000.
License agreement:
On April 4, 2000, the Company entered into a patent and license
agreement with AccuMed International, Inc. ("AccuMed") for AccuMed's
technology in the field of morphological, cytochemical, cytogenetic
and quantitative sputum cytology which is used in laboratory analyses
for early lung cancer detection, screening, diagnosis, prognosis or
therapeutic monitoring. The Company will be required to pay AccuMed a
license fee of $1,000,000 in various installments through December 1,
2000; royalty fees based on specified terms; and either $1,000,000 in
cash, or shares of the Company's common stock with an equivalent
value, on the first anniversary of the agreement based on an election
made by AccuMed. The agreement will expire on April 4, 2020 except
under certain conditions.
F-25
<PAGE>
BCAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11- Subsequent events (concluded):
Investment in debentures:
On March 31, 2000, the Company purchased secured claims against
Intelligent Medical Imaging, Inc. ("IMI") with a principal balance of
$500,000 from one of IMI's creditors for $370,000. IMI is a
manufacturer of automated microscopy systems used worldwide in
hospitals and large clinical laboratories that filed for Chapter 11
Bankruptcy Protection in November 1999.
Consulting agreements:
The Company has entered into an agreement that became effective on
January 1, 2000 pursuant to which a consultant will provide it with
business development and management advisory services. The agreement
requires the Company to pay the consultant from $21,000 to $25,000 per
month from January 1, 2000 through February 1, 2001 and grant stock
options to the consultant. In addition, the consultant will receive
certain fees upon the consummation of certain mergers and
acquisitions.
On January 31, 2000, the Company entered into an agreement pursuant to
which an investment banker will provide it with financial advisory
services. The agreement requires the Company to pay the investment
banker $5,000 per month through January 31, 2001, with 50% payable in
cash and 50% payable in shares of common stock of the Company with an
equivalent fair value. In addition, the investment banker will receive
certain fees upon the consummation of certain mergers and
acquisitions. The investment banker will also receive warrants to
purchase 1,000,000 shares of the Company's common stock that will be
exercisable over a five year period at an exercise price that will be
determined based on the selling price of the Company's common stock
consummated through a future private placement.
Matters subject to stockholder approval:
At the next annual meeting, the Company's stockholders will be asked
to approve, among other matters: (i) a change in the Company's name to
CellMetrics, Inc.; (ii) an increase in the number of authorized shares
of the Company's preferred stock from 2,000,000 shares to 5,000,000
shares; (iii) an increase in the number of authorized shares of the
Company's common stock from 65,000,000 shares to 200,000,000 shares;
and (iv) a 1 for 15 reverse split of the Company's common stock.
* * *
F-26
