UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-KSB/A
Amendment No. 1
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to __________
Commission File Number 0-26790
INNOVUS CORPORATION
(Name of small business issuer as specified in its charter)
Delaware 87-0461856
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4600 Campus Drive
Newport Beach, CA 92660
(Address of principal executive offices)
Issuer's telephone number, including area code: (801) 474-9200
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$0.001 par value
Check whether the issuer (1) has filed all reports required 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 there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. |_|
The issuer's revenues for the fiscal year ended December 31, 1997 were
$317,653.
As of April 13, 1998, 7,633,135 of the issuer's common shares were
issued and outstanding, approximately 6,668,685 of which were held by
non-affiliates. As of April 13, 1998, the aggregate market value of shares held
by non-affiliates was approximately $2,300,696 based upon the closing bid and
asked quotation on the OTC Bulletin Board.
DOCUMENTS INCORPORATED BY REFERENCE
<PAGE>
Certain portions of the documents of the issuer listed below have been
incorporated by reference into the indicated parts of the Form 10-KSB: None.
Transitional Small Business Disclosure Format: Yes_____ No X
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PART I
ITEM 1. BUSINESS
Innovus Corporation (the "Company") has been engaged in the sale of
multimedia authoring and presentation software, INNOVUS Multimedia, with related
templates and media packages.
Sales of Innovus Multimedia and related products during 1997 were
minimal, despite the Company's efforts to re-focus the target market and
re-price the software. Due to lack of resources, the Company ceased active
marketing of the software to the retail market channel at the end of the third
quarter, and ceased substantially all other active marketing during the fourth
quarter. The Company does not currently have the financial resources to actively
market its software or to develop new software.
Following the end of the fiscal year, the Company signed a letter of
intent with Intermark Corporation ("Intermark"), a company engaged in electronic
software distribution. If the terms of a definitive agreement can be negotiated,
the letter of intent contemplates that the Company would acquire Intermark and
Intermark's former shareholders and management would assume control of the
Company. There is no assurance that Intermark will distribute the INNOVUS
Multimedia software along with its other third party software products or that
the proposed transaction with Intermark will occur.
SUBSEQUENT EVENTS
Subsequent to the filing of the original Form 10-KSB, Tech Data, the
Company's principal software distributor, notified the Company that it was
returning all software inventory on hand to the Company. Substantially all of
the inventory represented returns of unsold merchandise from retail stores. Tech
Data had previously agreed to sell the software inventory at a discount and to
apply the proceeds towards amounts the Company owed to Tech Data. The Company
believes that Tech Data's return of the inventory indicates Tech Data's
assessment that the current version of the software is not readily marketable in
today's market. As a result of this and other factors, the Company determined to
fully amortize capitalized software development costs. Even if the Intermark
transaction is consummated, it is unlikely that the Company will expend
substantial resources to market the INNOVUS Multimedia software.
As indicated below, during 1997 the Company discussed the sale of the
software source code to other software vendors and to consulting companies for
in-house use. All of such discussions have terminated without any agreement for
the sale of the source code.
The following discussion of the Company's business is qualified in its
entirety by these subsequent events.
Company Strategy
In the fourth quarter of 1996 Innovus management, in an effort to boost
flat sales and to reposition the Innovus products outside of the professional
authoring software niche, dramatically lowered the unit price of the software
and re-targeted the technology to the business power user as well as the
developer.
New packaging, a new corporate image, and an advertising campaign
designed to explain the benefits of multimedia authoring technology to the
business professional began late in 1996. In addition to the multimedia
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developer, sales and marketing professionals with needs for high-powered
presentations, and departmental users with the requirement of an affordable
computer-based training tool were addressed.
Initial retail placement was obtained in the first quarter of 1997 and
sell-through was encouraging, with restocking orders occurring regularly into
early second quarter. Broader penetration of the retail channel was slower than
planned due in part to contractual disputes with a manufacturer's rep firm hired
to accomplish this task.
Continuing reductions in personnel were made throughout the fourth
quarter of 1996 and the first quarter of 1997 as all non-essential functions
were outsourced. All production, fulfillment, order entry, and call center
operations were contracted to third party firms.
In the second quarter of 1997 Innovus' largest retail customer returned
to the distributor all inventory due to Innovus' inability to fund ongoing
required advertising and merchandising programs.
Concurrently, Innovus management was attempting to execute a
two-pronged development strategy. It was believed that major changes in the
fundamental design of the Innovus technology were necessary to achieve
significant success in the rapidly changing authoring marketplace. A
comprehensive and final version of its core product, Innovus Authoring, was
under development. This version would result in a modular technology which could
be configured into products in a variety of ways to suit a number of potential
target markets. A line of multimedia utility software, which would allow
customers of typical desktop business applications to successfully augment such
applications with very easy to use yet powerful multimedia capabilities, was
envisioned and slated for initial shipment in early fourth quarter, 1997. The
ultimate goal was to replace the monolithic authoring software with a series of
single purpose utility products priced in the $39 - $79 range. The second leg of
the development strategy was to localize the existing authoring products for
foreign markets such as Japan and Germany. Market data indicated that the
low-end multimedia authoring market in Europe and Asia was growing at a
significantly greater rate than that in the US.
Localization contracts were secured, and a marketing program geared for
an early fourth quarter re-launch of Innovus Authoring and Presentations, the
launch of the first of the multimedia utility products, and the launch of the
Japanese and German versions of Innovus Authoring was under way.
The low level of sales meant that this initiative could not be financed
from operations. Attempts to obtain the needed financial resources for this
initiative were unsuccessful. In the third quarter the localization projects and
the marketing program were halted. Further cuts in personnel and operating
expenses were made resulting in the cessation of development activities. All of
the key software engineers had left the Company as of the fourth quarter of
1997. All Innovus executives took significant cuts in salary at this time, or
stopped receiving any compensation.
A potentially significant marketing relationship with IBM, based on
Innovus Authoring support of the IBM DB2 database product, was nullified by the
inability of Innovus to deliver the required new version 3.0 of the Innovus
Authoring product.
Innovus management focused on the possibility of selling the technology
or other assets of the Company to other software vendors, and had such
discussions with several interested companies without conclusive results in
1997.
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The Innovus Product Line
The following software products were being offered by the Company as of
April, 1997:
INNOVUS Multimedia v.2.21 Authoring
INNOVUS Multimedia v.2.21 Presentations
Web_Candy Vol 1 for PC
Web_Candy Vol 1 for Mac
Web_Candy 3D for PC
Web_Candy 3D for Mac
NotesMaster CBT
Company Bulletin Board Application Template Electronic Catalog
Application Template Employee/Visitor Sign in/out Application
Template Pay & Benefits Application Template Safety & Security
Application Template Conduct & Responsibility Application
Template Our Company Application Template Customer Service
Application Template
Using the Company's products, anyone with basic Microsoft Windows
skills can:
o Design the flow, layout, and timing of information.
o Connect the project to existing databases or create new data
sources, combine video, sound, graphics, and text, add quiz
and survey questions, and incorporate other applications.
o Deploy the project across a network or package it for a
single workstation.
o Measure how and by whom the applications are being used.
o Maintain the system and update changing information.
Marketing and Sales
During 1997, the Company refocused its sales activities to a channel
support model. In 1997 Innovus sales shifted to wholesale distributors and
retail customers who purchased from those distributors. International
distribution agreements were signed in Korea, Taiwan, Australia and Great
Britain.
In early 1997 the Company utilized magazine, catalog and Internet
advertising, as well as point of sale displays, to market its software. Other
than limited catalog exposure, the Company is not currently actively marketing
the software.
Customers and End Users
Innovus sells primarily to wholesale distributors, although revenue is
recognized only upon sell-through to end-user customers. During 1997, Tech Data
was Innovus' largest customer, accounting for approximately 30% of sales, and no
other distributor accounted for more than 10% of sales.
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Competition
The markets for the Company's products are highly competitive and are
characterized by pressures to reduce prices, incorporate new features and
accelerate the release of new product versions. A number of companies currently
offer products that compete directly or indirectly with one or more aspects of
the Company's products. Competitors could develop a product which competes with
all aspects of the Company's products. Most current and potential competitors
are larger, better established, and have greater financial resources than the
Company. Such competitors may have the ability to more aggressively market and
price their products than the Company. The Company has not been able to
successfully compete in these markets and there is no assurance that the Company
will be able to do so in the future.
There are currently four categories of software products which compete
with one or more significant aspects of the Company's software:
Web page design tools such as Microsoft Front Page and Netscape Gold
are strong media and text document managers and work well in extended
network environments. The increasing power of these tools, and the
increasingly widespread acceptance of web-based architecture, place
them at a competitive advantage to the Company's software.
Visual development environments such as Visual Basic, Delphi, and
PowerBuilder are capable corporate tools which integrate well in
network solutions. These are highly technical development tools
generally requiring skilled programmers and protracted development
schedules to create and maintain business applications. These products
have limited native media support capability, but through the use of
readily available components offer an alternative to Innovus
technology.
Multimedia authoring tools such as IconAuthor, AuthorWare, and MFactory
can create and manage sophisticated media presentations and program
logic. They demand a high level graphics artist or technical user and
have limited business functionality or scalable network deployment
capabilities.
Computer based training tools such as CBT Express, Toolbook and Quest
are useful project development programs for training and testing
activities which provide much of the presentation logic for
instructional applications. While some of these tools offer media
support, they are generally lacking in scalable network capabilities,
database support, extensibility, and business functionality.
Management believes that desktop- or network-based software in these
categories, such as the Company's software, are at a distinct competitive
disadvantage to web-based software designed for deployment over the Internet or
an intranet. Converting the Company's software to a web-based model would
require extensive development beyond the Company's current financial
capabilities.
Proprietary Rights
The Company regards certain features of its products as proprietary and
relies on a combination of copyright, trademark and trade secret laws,
confidentiality procedures and contractual provisions to protect its proprietary
information. The Company holds no patents applicable to its business and has no
patent applications pending. The Company seeks to protect its products and
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related documentation and other written materials under trade secret and
copyright laws (as described below) which afford only limited protection. The
Company seeks to protect its product names under trademark and unfair
competition laws. Despite the Company's efforts to protect its proprietary
rights, unauthorized parties may attempt to copy aspects of the Company's
products or obtain and use information that the Company regards as proprietary.
The Company's software is protected by copyright laws, and each
end-user is granted a license to use either a single copy or an open network
access to the software. The Company has received copyright protection on its
various development tools, application templates and run time programs.
Copyrighted code includes three DOS based product versions, five Windows 3.x
version products, three Windows 95 version products and three Windows NT product
versions. Copyrights cover authoring and development products, report
generators, media drivers, peripheral drivers, various program executables, and
configuration and install programs. All of these copyrights relate to the
Company's development programs and vertical applications. The Company may also
attempt to obtain limited patent protection for the architecture of its
products, but has not yet determined if its products contain any patentable
inventions. Innovus has filed for trademark registration for certain of its
product and feature names.
Employees
In addition to its Chairman and CEO, who are available on a part-time
basis only, the Company had three full time employees as of April 9, 1998. Of
the total employees, 2 are engaged in management and administration and 1 in
sales and marketing. The Company believes its relationship with its employees to
be good.
Company History
The Company was incorporated in 1988 as a Delaware corporation. Innovus
Multimedia, Inc., the predecessor to the Company's operating subsidiary, was
founded in 1987, and acted as a value added reseller of multimedia hardware and
software in the form of stand alone kiosks until 1993. Subsequently, new
management joined the Company, and the Company de-emphasized its multimedia
kiosk business, and focussed on business oriented multimedia software
development. As part of this transition, the Company hired new software
developers, marketing personnel, and others, and secured the equity financing
for research and development necessary to complete its first version of its
Windows software.
In September of 1994, as part of Innovus' transition to a business
oriented multimedia software developer, and to enhance its capital raising
ability, Innovus was acquired by the Company in a reverse acquisition.
The Company commercially released its core software product in March of
1996, and since that time has released several templates that complement that
software.
ITEM 2. DESCRIPTION OF PROPERTY
In the fourth quarter of 1997, the Company sold the building in which
its executive offices were previously located. The sale netted the Company
enough to satisfy the first mortgage on the building and a $150,000 second
mortgage placed on the building in 1997.
At April 13, 1998, the Company's executive offices were located in
approximately 1800 square feet of office space rented from a third party in
Draper, Utah, a suburb of Salt Lake City, Utah. The Company's rental agreement
expires on April 30, 1998. The Company's monthly rent is $2,400. If the
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Intermark transaction is consummated, the Company anticipates relocating its
executive offices to Intermark's facilities. If the Intermark transaction is not
consummated and if the Company remains in business, the Company anticipates
renting its current office space or comparable space on a month to month basis.
See "Management's Discussion and Analysis or Plan of Operation". The Company
subsequently terminated the office space lease agreement, moved its remaining
business operation to Intermark's offices in Orange County, California and moved
its executive offices to 2060 East 2100 South, Salt Lake City, Utah. The Company
is renting, on a month to month basis, a single office in this building which it
previously owned.
ITEM 3. LEGAL PROCEEDINGS.
The Company is a defendant in a number of collection actions filed by
its creditors. The following litigation involves claims, exclusive of interest
and costs, exceeding 10% of the Company's current assets at December 31, 1997:
On September 20, 1997 Multiling International, Inc. filed a complaint
against the Company in the Third Judicial District Court of Salt Lake County,
Utah. The complaint alleges that the Company owes Multiling $30,432.77 plus
interest and costs for services rendered. The company has filed an answer
denying that amounts were owed or that services had been performed. The Company
intends to vigorously defend this action.
On November 26, 1997 Programmer's Paradise filed a complaint against
Innovus in the Third Judicial District Court of Salt Lake County, Utah. The
complaint alleged that Innovus owed Programmer's Paradise $15,887.80 plus
interest and costs. On January 21, 1998, a judgment was entered against Innovus
in the amount of $16,500.43. The plaintiff has informally agreed to accept
product in full or partial satisfaction of the judgment, but no formal agreement
to this effect has been entered into.
On December 30, 1997 Tenneco Packaging filed a complaint against
Innovus in the Third Judicial District Court of Salt Lake County, Utah. The
complaint alleges that Innovus owes Tenneco $12,331.88 plus interest and costs.
The Company has had preliminary settlement negotiations with the plaintiff. If
no settlement can be reached, the Company will defend this action.
On February 3, 1998 Blenheim Group USA, Inc. filed a Complaint against
Innovus in the Municipal Court of the San Francisco Judicial District, State of
California. The complaint alleges that Innovus owes $19,800 for exhibit space
booked but not used in the 1997 PC Expo exhibition. The Company has had
preliminary settlement negotiations with the plaintiff. If no settlement can be
reached, the Company will defend this action.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the security holders during the
fourth quarter of the calendar year ending December 31, 1997.
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PART II
ITEM 5. MARKET FOR COMMON SHARES AND RELATED SHAREHOLDER MATTERS
From November, 1995 to November, 1997, the Company's Common Stock was
listed on the Nasdaq SmallCap market. In November, 1997, the Company was
de-listed from Nasdaq. The Common Stock is currently quoted on the OTC Bulletin
Board.
On April 13, 1998, the closing bid and asked quotations for the Common
Stock on the OTC Bulletin Board were $0.31 and $0.38, respectively. As of April
13, 1998 there were 169 holders of record of the Common Stock. The following
table reflects the high and low closing bid quotations reported by the OTC
Bulletin Board subsequent to November, 1997, as well as high and low last sales
prices reported by Nasdaq for prior periods. Such prices represent inter-dealer
quotations, do not include markups, markdowns, or commissions and may not
reflect actual transactions.
High Low
---- ---
Year Ending December 31, 1996
- -----------------------------
January 1 to March 31, 1996 $10.75 $7.50
April 1 to June 30, 1996 $13.75 $9.38
July 1 to September 30, 1996 $11.50 $5.13
October 1 to December 31, 1996 $6.25 $3.25
Year Ending December 31, 1997
- -----------------------------
January 1 to March 31, 1997 $4.50 $2.25
April 1 to June 30, 1997 $3.50 $2.13
July 1 to September 30, 1997 $2.69 $0.50
October 1 to December 31, 1997 $0.75 $0.16
The Company has not paid any cash dividends since its inception. The
Company's revolving loan agreements currently prohibit it from declaring any
dividends without the written permission of the lender. The Company is
prohibited from paying dividends on its Common Stock while it has an outstanding
series of Preferred Stock. The Company currently intends to retain future
earnings in the operation and expansion of its business and does not expect to
pay any cash dividends in the foreseeable future.
Sale of Unregistered Shares
During the fourth quarter of 1997, the Company issued the following
shares without registration under the Securities Act of 1933:
During the quarter, the Company issued approximately 184,069 common
shares on conversion of previously outstanding Series C Preferred Stock. The
shares were issued to a single accredited investor in exchange for outstanding
securities of the Company. The Company believes such issuance was exempt
pursuant to Sections 3(a)(9), 4(2) and 4(6) of the Securities Act of 1933.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following Selected Financial Data should be read in conjunction
with the financial statements and notes thereto bound elsewhere herein.
<TABLE>
<CAPTION>
Year ended December 31
Statement of
operations data 1997 1996 1995 1994
- --------------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $317,653 $597,567 $189,380 $193,848
Costs of products and
services sold 254,227 302,571 123,701 234,234
Amortization 1,918,407 796,673 315,464 __
Product development -- 1,185,525 1,340,415 444,855
Selling and marketing
expense 1,243,102 3,988,987 1,417,396 425,403
General and
administrative 916,770 1,279,542 719,862 537,860
Net (loss) $(5,394,936) $(7,791,146) $(3,735,351) $(1,554,213)
Net (loss) per share $(0.92) $(1.59) $(0.98) $(0.60)
<CAPTION>
At December 31
Balance sheet data 1997 1996 1995 1994
- ------------------ ---- ---- ---- ----
<S> <C> <C> <C> <C>
Current assets $120,849 $1,161,735 $2,466,060 $387,370
Software development
costs (net) 0 809,824 886,153 408,384
Current liabilities 1,184,494 1,124,592 473,460 1,521,294
Long term liabilities (net) 0 728,555 722,785 180,961
Stockholders' equity
(deficit) $(1,006,455) $1,490,029 $3,553,885 $(658,474)
</TABLE>
General
The following discussion should be read in conjunction with the
financial statements and notes thereto found elsewhere herein. The financial
statements have been prepared on the basis of the Company being a going concern.
The Company has had continued losses, and currently has a substantial
accumulated deficit and lack of financial resources. There may be substantial
doubt regarding the Company's ability to continue as a going concern. The
financial statements do not include any adjustments that might result from the
outcome of such uncertainty.
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This Form 10-KSB/A contains financial statements which have been
revised from the unaudited financial statements included in the original 10-KSB
filing. The principal revision is to reflect managements' determination that
software development costs should be fully amortized. As explained under
"Subsequent Events" in Item 1 above, the Company's principal software
distributor has returned all inventory to the Company and it is not likely that
any additional INNOVUS Multimedia software could be sold through such
distributor in the future, Although management believes the software is
potentially valuable, the Company's lack of financial resources at December 31,
1997 made it unlikely that the Company would be able to realize such value. The
amended financial statements also reflect various other reclassifications and
adjustments made upon audit.
Results of Operations
Commencing in July 1993, Innovus began hiring additional staff and
otherwise incurring additional expense to begin full scale software development.
Sales of the first commercial version of the software through VARs began in the
fourth quarter of 1995 and general commercial sales began in March, 1996. In
November, 1996, the Company re-positioned its software towards individual
business users, significantly lowering the price of the core software. Although
this resulted in increased sales in the first quarter of 1997, sales declined
precipitously though the year. In 1997 the Company issued various application
templates and media collections. The Company also began development of the next
planned major revision to its core software. Due to lagging sales and lack of
resources, the Company ceased development and marketing activities in late 1997.
Accordingly, results of operations for 1997 may not be directly comparable to
prior periods when the software was being developed, and may not be indicative
of the results of future operations.
Year ended December 31, 1997 compared to year ended December 31, 1996
Net sales for 1997 were $317,653, 86% of which occurred in the first
quarter. Net sales for 1996 were $597,567. 1996 sales include approximately
$316,032 of sales from customized programming or content production. In 1997,
the Company determined not to continue offering the customized programming or
content production. Although some sales of INNOVUS Multimedia and related
products continue ($24,418 in the fourth quarter of 1997) the Company does not
expect significant sales unless the Company is able to aggressively promote the
software. Even if the Company were able to promote the software, the market
shift to web-based software would likely restrict sales of the software unless
large scale revisions were made. The large scale distribution of demonstration
versions of the software to users of IBM's DB2 database software did not result
in significant sales of software. The Company did not have the resources to
complete development of the Version 3.0 software which would more fully
integrate with DB2. In addition, the Company's website was incorrectly listed in
the materials accompanying the demonstration software.
As described under "Liquidity and Capital Resources" below, if the
Company does not implement a new business plan to generate revenues or raise
additional capital, the Company's viability as a going concern is in question.
Other than the proposed agreement with Intermark, the Company does not currently
have any plans which it believes are likely to generate significant revenue.
The costs of products and services sold in the year ended December 31,
1997 was $254,227 or 77% of sales, compared to $302,571 or 51% of sales in 1996.
The gross margins for 1997 and 1996 may not be directly comparable due to the
change in the nature of the revenue stream and the build-up of staffing in 1997
in anticipation of increased sales.
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Selling and marketing expenses for 1997 were $1,243,102 compared to
$3,988,987 in 1996. The decrease reflects exhaustion of the Company's resources
available for marketing and the Company's decision in the third quarter to
reduce marketing in unproductive channels. The Company is currently dependent on
"word of mouth" referrals and catalog sales for its current minimal sales.
Product development costs were $0 in 1997 compared to $1,185,525 in
1996. Capitalized software development costs incurred were $1,108,583 in 1997
compared to $720,344 in 1996. In the light of the low level of product sales and
lack of financial resources, the Company stopped development on Version 3.0 of
the software during 1997.
In the year ended December 31, 1997, $1,918,407 of capitalized software
development costs were amortized, compared to $796,673 of such expenses in 1996.
The Company increased the amortization to reflect the lower expected future
value of the software. Management believes that the software still has economic
value, but realizing such value will require substantial marketing and possibly
additional development. During the fourth quarter of 1997 and the first quarter
of 1998, management believed that marketing and development resources could be
provided by a sale of the software source code which was then being negotiated
or by a transaction such as the Intermark transaction. Due to the inability of
the Company to find a buyer for the source code despite discussions with a
number of potential buyers and uncertainties regarding Intermark's ability to
immediately fund substantial marketing, management subsequently determined that
fully amortizing the software as of December 31, 1997 was appropriate.
General and administrative expenses were $916,770 for the year ended
December 31, 1997 compared to $1,279,542 for 1996.
The Company is deemed to have incurred $1,187,643 in 1997 in interest
expense in connection with warrants issued as part of bridge financing from
affiliates and others and in connection with the second mortgage. The Company
had incurred $773,350 of similar expenses in 1996. The warrants are exercisable
at the fair market value of the underlying common stock at the date of issuance,
but a value was assigned to the warrants using a modified Black-Scholes method.
The Company sustained a net loss of $5,394,936 in 1997. Although this
is lower than the net loss of $7,791,146 for 1996, the Company does not have the
resources to sustain such a loss. The loss per common share was $0.92 and $1.59
for 1997 and 1996, respectively. The weighted number of shares used in
calculating the loss per common share does not include the potential issuance of
common shares on conversion of outstanding preferred stock, as such conversions
are considered anti-dilutive.
As explained in "Liquidity and Capital Resources" below, the Company
does not have the ability to sustain additional losses, even at the reduced
levels of the fourth quarter of 1997. There can be no assurance that the Company
will be able to develop or implement a business plan which will allow it to
continue as a going concern. If the Intermark transaction is consummated, which
is less than certain, there is no assurance that the combined entity will be
profitable or able to attract new capital. If the Intermark transaction is not
consummated, the Company does have any firm plans to attract additional capital.
In order to prepare this filing, in 1998 the Company privately issued debentures
secured by substantially all of the assets of the Company. Without the Intermark
transaction or an alternative business plan, the Company will not be able to pay
the debentures when they come due.
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Liquidity and Capital Resources
At December 31, 1997 the Company had $91,690 of cash and cash
equivalents and a deficit in working capital (current liabilities in excess of
current assets) of $1,063,645. The Company has been relying upon short-term
borrowings from affiliates and others, as well as increases in accounts payable
owed to vendors and a second mortgage on the Company's building, to provide the
means to maintain minimal operations. Approximately $470,000 of such short-term
debt has been converted to equity and the second mortgage was repaid upon sale
of the building. Management's efforts to obtain additional equity financing have
been unsuccessful. The Company does not have any firm commitments for additional
equity financing. Management believes that the market overhang caused by
variable conversion features of certain series of the Company's preferred stock,
coupled with the risks inherent in restructuring the Company's business, have
discouraged new investment. Management does not believe that the Company will be
able to obtain new financing unless the preferred stock structure is revised and
a new business acquired.
The Company estimates that it is currently using approximately $20,000
more cash each month than is generated by operations. Without additional
financing, the Company does not foresee operations improving significantly
enough to eliminate the negative cash flow.
If the Company cannot obtain additional capital, management will
continue to pursue other means to continue in business. In such event, however,
it is possible that the Company may have little alternative but to sell or
liquidate its business operations or product line to satisfy its creditors.
During 1997, the Company borrowed $405,000 from affiliates and other
individuals pursuant to bridge financing. These amounts were secured by a second
priority interest in substantially all assets of the Company. In September, 1997
the holders of the bridge financing and the holders of an additional $65,000 of
unsecured debt, agreed to convert the debt into common stock.
There is doubt whether the Company can continue as a going concern.
There can be no assurance that additional financing will be available to the
Company or that operating results will improve as management currently
anticipates.
The Company's common stock was de-listed from the NASDAQ SmallCap
Market in November, 1997. The Company believes that its status as a non-Nasdaq
company will further hamper the Company's ability to raise capital.
The Company does not anticipate material expenditures to bring its
accounting and financial systems into compliance with the "Year 2000" problem.
The Company bases this assessment on the relative age of its systems and the
small number of transactions it conducts. The Company has not conducted a formal
study of its systems or the systems of its vendors and distributors to
definitively determine whether the systems are fully Year 2000 compliant. The
Company believes its software is Year 2000 compliant (assuming that it is not
used to process non-compliant data), but the Company has not had the software
certified as compliant.
The Company is conducting due diligence into the Intermark transaction
and is in the process of negotiating a definitive agreement. There can be no
assurance that a definitive agreement will be negotiated or consummated.
- 13 -
<PAGE>
Forward Looking Statements.
This report contains both historical statements of fact and forward
looking statements. Statements regarding the Company's expectations as to future
sales of its products, future revenue and cash flow, future developments of the
Intermark transaction, plans to continue as a going concern and certain other
information presented in this report constitute forward looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995. When
used in this Form 10-KSB or other filings by the Company with the Securities and
Exchange Commission, in the Company's press releases or other public or
shareholder communications, or in oral statements made with the approval of an
authorized officer of the Company's executive officers, the words or phrases
"would be," "will allow," "intends to," "will likely result," "are expected to,"
"will continue," "is anticipated," "estimate," "project," or similar expressions
are intended to identify forward-looking statements. Although the Company
believes that its expectations with respect thereto are based on reasonable
assumptions within the bounds of its knowledge of its business and operations,
there can be no assurance that actual results will not differ materially from
its expectations. In addition to matters affecting the economy and the Company's
industry generally, factors which could cause actual results to differ from
expectations include the following:
Inability to complete the Intermark transaction on favorable terms
Continued lack of market acceptance of other Company products
Inability to obtain additional capital
Inability to devise a viable business plan
Product and technological obsolescence
Competition
The Company does not undertake, and specifically disclaims any
obligation, to update any forward looking statements to reflect occurrences or
unanticipated events or circumstances after the date of such statements.
ITEM 7. FINANCIAL STATEMENTS
Financial statements are filed as part of this report on pages F-1
through F-21.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL STATEMENT DISCLOSURE.
Information required by this Item has been "previously reported" (as
defined in Rule 12b-2) in the Company's Form 8-K dated June 1, 1998. Such Form
8-K reported change in independent auditors from Grant Thornton LLP to Hansen
Barnett & Maxwell.
- 14 -
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Executive Officers and Directors
Set forth below is information regarding (i) the directors of the
Company as of April 15, 1998, who will serve until the next annual meeting of
shareholders or until their successors are elected or appointed and qualified,
and (ii) the executive officers of the Company as of April 15, 1998, who are
elected to serve at the discretion of the Board of Directors. If the Intermark
transaction is consummated, all of the current directors and officers are
expected to resign and be replaced by nominees of Intermark.
The Company's executive officers and directors are as follows:
Name Age Position
David M. Mock 45 Chairman, Chief Financial Officer, Secretary,
Treasurer and Director
Terry R. Haas 48 President, Chief Executive Officer and Director
Bill Kesselring 32 Chief Operating Officer*
Michael L. Debloois 57 Director*
Brenda Lowe Cornell 39 Director
Richard M. Cott 31 Director
* Resigned subsequent to December 31, 1997.
David M. Mock. Mr. Mock joined the Company in 1993 and held the
position of Chief Executive Officer from 1995 to 1996. Mr. Mock is only
available to the Company on a part-time, as needed basis. From 1993 to 1995 Mr.
Mock was an executive officer and director of MicroQue Corporation, a closely
held company that designed products for MacIntosh computers. From 1985 until
June 1993, Mr. Mock also served as an officer and director of Vystar Group,
Inc., a publicly held corporation with investments in different high technology
companies. In June 1993, Vystar and its partially owned subsidiary, Megahertz
Corporation, a manufacturer of PCMCIA modems for portable computers, of which
Mr. Mock also served as a director, reorganized with Megahertz being the
surviving entity. He also serves as a consultant to other Utah based high
technology companies. Mr. Mock has his bachelors degree in accounting and has
completed the requirements for a degree in finance at the University of Utah.
Terry R. Haas. Mr. Haas joined the Company on a part-time basis as
Director of Sales in 1995, became Executive Vice President Sales & Marketing
commencing June 1, 1996 and was appointed as President and Chief Executive
Officer in August, 1996. Mr. Haas is currently only available to the Company on
a part-time, as needed basis. Prior to joining Innovus, Mr. Haas was Vice
President Channel Sales and Marketing at Novell, Inc. from 1994 until May, 1996.
From 1986 to 1992 he also held a variety of other sales and marketing positions
at Novell. During 1992 and 1993 he worked for Digital Equipment Corp., Lotus,
- 15 -
<PAGE>
Xerox, and other high technology firms as a sales and marketing consultant. Mr.
Haas has a bachelor of science degree from Western Michigan University and an
M.B.A. in finance from DePaul University.
Michael L. Debloois. Mr. DeBloois was director of customer relations
and sales for the Company's services business from 1996 to 1997. Mr. DeBloois
resigned as a director in June, 1998. Mr. DeBloois currently is a partner in
Multimedia Group, which provides substantially the same services previously
offered by the Company's services business. From 1987 to 1992, Mr. DeBloois was
President of MIKEN Corporation, a professional education consulting company with
corporate clients throughout the United States. He has been a professor of
Instructional Design and Technology at both Florida State and Utah State
Universities before establishing his own consulting company in 1989, which he
operated until joining the Company. Mr. DeBloois has been published in dozens of
computer industry and education journals. He has a B.A. from Utah State
University, M.A. from the University of Utah and an Ed.D. from the University of
Massachusetts, Amherst.
Brenda Lowe Cornell. Ms. Cornell has been a director of the Company
since its acquisition of Innovus and was Vice-President of Customer Support
until leaving to pursue personal interests in January, 1997. Ms. Cornell was
previously Media Director for International Connections, a video and laser disc
production company, managing all computer-based media production and program
design.
Richard M. Cott. Mr. Cott became a director of the Company in 1997.
Since October, 1992, Mr. Cott has held a number of finance related positions
with The Free Methodist Foundation, a 501(c)3 foundation. His current positions
with The Free Methodist Foundation include Executive Vice President, Chief
Financial Officer and Treasurer. Mr. Cott has been an adjunct professor in
management and organizational development in the graduate program of Spring
Arbor College since 1994. From May to October 1992 Mr. Cott was a registered
representative with The Prudential. From October 1984 through May 1990 Mr. Cott
was with the United States Air Force, culminating as a Captain and A-10 fighter
pilot. Mr. Cott holds a B.A. in business administration and political science
from Hope College and an M.B.A. from Webster University.
Significant Employees
Bill Kesselring. Mr. Kesselring joined the Company in October 1996. In
1998, Mr. Kesselring left the Company to become an employee of Intermark. He is
responsible for the Company's product development, customer support, and
information systems. Prior to joining the Company, Mr. Kesselring managed the
consulting firm, Kesselring and Associates, working with such clients as Next
Software, Novell Inc., and Microsoft. He has worked for Novell Inc. and
Dataquest Inc., and was a board member of Component Integration Laboratories.
Committees of the Board of Directors
The Board of Directors of the Company has voted to establish two
committees, the Compensation Committee, and the Audit Committee. Neither
committee met during 1996 and all activities of the respective committees were
undertaken by the Board as a whole.
Compliance with Section 16(a) of the Exchange Act.
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
- 16 -
<PAGE>
and the National Association of Securities Dealers. Officers, directors and
greater than ten-percent shareholders are required by Securities and Exchange
Commission regulations to furnish the Company with copies of all Section 16(a)
forms they file. Based solely on a review of the copies of such forms furnished
to the Company between January 1, 1997 and December 31, 1997, on year-end
reports furnished to the Company after December 31, 1997 and on representations
that no other reports were required, the Company has determined that during the
last fiscal year all applicable 16(a) filing requirements were met except as
follows:
David Mock and a family corporation controlled by him sold shares at a
loss in December, 1997. These sales should have been reported on a Form 4 filed
by January 10, 1998.
ITEM 10. EXECUTIVE COMPENSATION.
The following table sets forth the aggregate cash compensation paid by
the Company for services rendered during the last three years to the Company's
Chief Executive Officer as of December 31, 1997 and to each of the Company's
other executive officers whose annual salary and bonus exceeded $100,000.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION
Annual Compensation Long Term Compensation
Year Other Annual
Name and Ended Salary Bonus Compensation Options/SARs
Principal Position 12/31 ($) ($)(1) ($) (#)
- ------------------ ----- --- ------ --- ---
<S> <C> <C>
Terry R. Haas(1) 1997 $151,484
President/CEO 1996 $84,345
1995 $0
</TABLE>
(1) The Company had agreed to compensate Mr. Haas with a base salary of
a $185,000 per year through March 31, 1999 with a one time cash bonus of $50,000
in April, 1997 and such future incentives as may be determined by the Board.
Upon a termination following a change in control, Mr. Haas would be entitled to
one year's base salary as severance pay. The terms of compensation have not been
reduced to a written agreement. During the fourth quarter of 1997, Mr. Haas
verbally agreed to waive the change of control severance package and ongoing
salary provided that he only devotes part-time to the Company.
Stock Options Granted in Last Fiscal Year
Information concerning 1997 grants to named executive officers is
reflected in the table below. The amounts shown for each of the named executive
officers as potential realizable values are based on arbitrarily assumed
annualized rates of stock price appreciation of five percent and ten percent
over the full terms of the options. These potential realizable values are based
solely on arbitrarily assumed rates of price appreciation required by applicable
SEC regulations. Actual gains, if any, on option exercises and common
stockholdings are dependent on the future performance of the Company and overall
stock market conditions. There can be no assurance that the potential realizable
values shown in this table will be achieved.
- 17 -
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================================
Individual Grants Potential Realizable Value at Assumed
Annual Rates of Stock Price
Appreciation
for Option Term
- ------------------------------------------------------------------------------------------------------------------------------------
% of Total
Options Options Exercise price Expiration Date (5%) (10%)
Name Granted (#) Granted to ($) ($)
Employees in
1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Terry Haas 200,000 100 $2.50 2002 $138,141 $305,255
====================================================================================================================================
</TABLE>
Section 401(k) Plan
During 1997, the Company maintained a deferred compensation plan
pursuant to Section 401(k) of the Internal Revenue Code of 1986, as amended (the
"Plan"). Participation in the Plan is available to all employees 21 years and
older. The Company may, at its option, make contributions to the Plan equal to a
percentage of voluntary contributions made by participants or it may make a
contribution equal to a percentage of the salary of all participants. The
Company has not made contributions to the Plan. The Plan was terminated in 1998.
Stock Option Plan
The Company has adopted the Innovus Corporation Omnibus Stock Option
Plan (the "Option Plan") to assist the Company in securing and retaining key
employees and directors. The Option Plan provides that options to purchase a
maximum of 1,327,500 shares of Common Stock may be granted to (i) directors, and
(ii) officers (whether or not a director) or key employees of the Company
("Eligible Employees"). The Option Plan will terminate on September 6, 2004,
unless sooner terminated by the Board of Directors.
The Option Plan is administered by a committee (the "Option Committee")
currently consisting of the Board of Directors. The total number of options
granted in any year to Eligible Employees, the number and selection of Eligible
Employees to receive options, the number of options granted to each and the
other terms and provisions of such options are wholly within the discretion of
the Option Committee, subject to the limitations set forth in the Option Plan.
The option exercise price for options granted under the Plan may not be less
than 100% of the fair market value of the underlying common stock on the date
the option is granted. Options granted under the Option Plan expire upon the
earlier of an expiration date fixed by the Option Committee or five years from
the date of grant.
As of December 31, 1997, options to purchase 107,500 shares of Common
Stock were outstanding under the Plan. Following the Company's downsizing,
substantial numbers of previously granted options were forfeited as a result of
employee terminations.
Compensation of Directors
The Company's non-employee Directors are not currently compensated for
attendance at Board of Director meetings. Non-employee directors have been
granted, on an ad hoc basis, stock options upon being appointed to the Board.
The Company may adopt a formal director compensation plan in the future. All of
the Directors are reimbursed for their expenses for each Board and committee
meeting attended.
- 18 -
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth information regarding Common Stock of
the Company beneficially owned as of April 13, 1998 by: (i) each person known by
the Company to beneficially own 5% or more of the outstanding Common Stock, (ii)
by each director and director nominee, and (iii) by all officers and directors
as a group.
=============================================================================
Name of Officers and Directors
and Names and Addresses of Amount of Common
Principal Stockholders Shares* Percentage
- -----------------------------------------------------------------------------
David M. Mock(1) 1,136,600 13.9%
2060 East 2100 South
Salt Lake City, UT 84109
- -----------------------------------------------------------------------------
Terry Haas(2) 321,094 4.0%
2060 East 2100 South
Salt Lake City, UT 84109
- -----------------------------------------------------------------------------
Brenda Lowe Cornell 294,870 3.9%
2060 East 2100 South
Salt Lake City, UT 84109
- -----------------------------------------------------------------------------
Michael DeBloois 5,000 0.1%
2060 East 2100 South
Salt Lake City, UT 84109
- -----------------------------------------------------------------------------
Richard M. Cott(3) 50,000 0.7%
3471 Henderson Road
Spring Arbor, MI 49283
- -----------------------------------------------------------------------------
All Directors and Executive 1,857,564 21.5%
Officers (5 persons)
=============================================================================
- ----------------------------
* Assumes exercise of all exercisable options held by listed security
holders which can be acquired within 60 days from April 13, 1998.
(1) Includes shares held by a family corporation and a charitable
foundation over which Mr. Mock holds voting control. Mr. Mock disclaims
beneficial ownership of shares held by charitable foundation. Includes
options held by Mr. Mock or his affiliates which will entitle them to
purchase 567,500 shares.
(2) Includes options held by Mr. Haas which will entitle him to purchase
321,094 shares.
(3) Does not include 23,000 shares of Series F Preferred Stock (convertible
into approximately 1,717,500 shares of common stock) and warrants to
purchase 115,000 shares of common stock held by accounts associated
with The Free Methodist Foundation. Mr. Cott disclaims beneficial
ownership of such shares.
The stockholders listed have sole voting and investment power, except as
otherwise noted.
- 19 -
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
In June, 1997 the Company entered into bridge financing arrangements
with Mr. Mock and unrelated parties whereby the Company borrowed $235,000 from
Mr. Mock and $170,000 from the third parties. The bridge financing had a stated
interest rate of 10% per annum. In connection with the financing, Mr. Mock and
the other lenders were issued warrants to purchase 405,000 shares at $3.00 per
share; provided that half of the warrants would not vest if the loans were
repaid within 45 days. The Company recognized approximately $526,500 of interest
expense representing the estimated fair value of the warrants. Borrowings under
the bridge financing were secured by substantially all of the assets of the
Company, subject to the senior security interest of the Bank. The balance of the
loans owing to Mr. Mock in November, 1997 was used to purchase stock in the
Company as described below. The terms of the bridge financing from Mr.
Mock and from the third parties were identical.
In August and September, 1997, the Company borrowed an additional
$65,000 from Mr. Mock on an unsecured basis.
In September, 1997 the Company made a private placement of 1,220,000
shares of common stock and warrants to purchase 305,000 shares of common stock.
The Company received consideration of $610,000 for issuance of the stock and
warrants. The exercise price of the warrants was $0.75 per share. Mr. Mock
applied the $470,000 balance of the bridge financing and unsecured loan owed to
him to the purchase of 940,000 shares and 235,000 warrants in such placement.
The remaining $140,000 of the placement was sold to third parties.
Mr. Mock and a family corporation controlled by him have from time to
time advanced funds to the Company. Mr. Mock or the corporation have converted
$120,750 of such debt into Common Stock at a price of $2.25 per share. In 1994,
the family corporation also converted $200,000 of debt into 13,333 shares of
Preferred Stock at $15.00 per share. The prices for such conversions were equal
to the prices being paid by third parties for restricted stock at or about the
time of the conversions. The balance of the debt bore interest at 9% per annum.
The outstanding debt to Mr. Mock in the amount of $715,600, was repaid in 1995.
In September, 1996 the Company entered into bridge financing
arrangements with Mr. Mock and unrelated parties whereby the Company borrowed
$625,000 at prime plus 1% per annum. Borrowings under the bridge financing are
secured by substantially all of the assets of the Company, subject to the senior
security interest of the Bank. Warrants to purchase up to 312,500 shares at
$5.50 per share were issued to the lenders in connection with the bridge
financing.
Mr. DeBloois is a partner in the Multimedia Group. The Multimedia Group
provides substantially the same services as were previously offered by the
Company's services business. The Multimedia Group has agreed to complete work
which the services business had in process when it was discontinued in January,
1997 and to provide similar support to the Company's customers in the future.
The Multimedia Group is utilizing a portion of the Company's facilities and
equipment, for which it has agreed to pay a fair rental value. The exact terms
of the rental and the other arrangements between the Company and the Multimedia
Group are being negotiated.
In 1997 accounts associated with The Free Methodist Foundation
purchased 23,000 shares of Series F Preferred Stock (convertible into at least
575,000 shares of common stock) and warrants to purchase 115,000 shares of
- 20 -
<PAGE>
common stock. Mr. Cott is Chief Financial Officer of The Free Methodist
Foundation. Such shares and warrants were purchased prior to Mr. Cott joining
the Company's Board of Directors.
PART IV
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTAL SCHEDULES
Page No.
Title of Documents
Report of Hansen, Barnett & Maxwell, Independent Certified Public
Accountants, on the December 31, 1997 Financial Statements..............F-1
Report of Grant Thornton LLP, Independent Certified Public Accountants,
on the December 31, 1996 and 1995 Financial Statements..................F-2
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1997 and 1996..........F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1997, 1996 and 1995....................................F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the
Years Ended December 31, 1995, 1996 and 1997........................F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995....................................F-7
Notes to Consolidated Financial Statements.................................F-8
Financial Statement Schedules:
All schedules are omitted because they are not applicable or the required
information is shown in the financial statements or the notes thereto.
(b) Reports on Form 8-K
The Company did not file any Current Reports on Form 8-K during the fourth
quarter of its fiscal year ended December 31, 1997.
(c) Exhibits
The following documents are included as exhibits to this report.
Exhibits Exhibit Description Page or Location
3.1 Articles of Amendment *
3.2 By-laws **
- 21 -
<PAGE>
3.3 Certificate of Designation - Series C Preferred Stock ***
3.4 Certificate of Increase to the Certificate of Designation ***
- Series C Preferred Stock
3.5 Certificate of Designation - Series D Preferred Stock ***
3.6 Certificate of Correction to Certificate of Designation - ***
Series D Preferred Stock
3.7 Certificate of Designation - Series E Preferred Stock ***
3.8 Certificate of Designation - Series F Preferred Stock ***
3.9 Certificate of Designation - Series G Preferred Stock ***
10.3 Employment Agreement - David Mock *
11.1 Computation of Earnings per Share
21.1 Subsidiaries of the Registrant *
27.1 Financial Data Schedule
* Incorporated by reference to the Company's Form 10-K for the year
ended December 31, 1994
** Incorporated by reference to the Company's Registration Statement,
File No. 33-33136-D
*** Incorporated by reference to the Company's Form 10-K for the year
ended December 31, 1996.
- 22 -
<PAGE>
INNOVUS CORPORATION
AND SUBSIDIARY
REPORTS OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
AND
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
HANSEN, BARNETT & MAXWELL
A Professional Corporation
CERTIFIED PUBLIC ACCOUNTANTS
<PAGE>
INNOVUS CORPORATION AND SUBSIDIARY
TABLE OF CONTENTS
PAGE
Reports of Independent Certified Public Accountants:
Hansen, Barnett & Maxwell F-1
Grant Thornton LLP F-2
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31,
1997 and 1996 F-3
Consolidated Statements of Operations for the
Years Ended December 31, 1997, 1996 and 1995 F-4
Consolidated Statements of Stockholders' Equity
(Deficit) for the Years Ended December 31, 1995,
1996 and 1997 F-5
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1997, 1996 and 1995 F-6
Notes to Consolidated Financial Statements F-7
<PAGE>
[LETTERHEAD]
HANSEN, BARNETT & MAXWELL
A Professional Corporation
CERTIFIED PUBLIC ACCOUNTANTS
(801) 532-2200
Member of AICPA Division of Firms Fax (801) 532-7944
Member of SECPS 345 East 300 South, Suite 200
Member of Summit International Assoc Salt Lake City,
Utah 84111-2693
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders and the Board of Directors
Innovus Corporation
We have audited the accompanying consolidated balance sheet of Innovus
Corporation and Subsidiary as of December 31, 1997 and the related consolidated
statements of operations, stockholders' equity (deficit) and cash flows for the
year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Innovus Corporation
and Subsidiary as of December 31, 1997, and the results of their operations and
their cash flows for the year then ended in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As shown in the financial statements,
the Company has incurred substantial and recurring losses from operations and
negative cash flows from operations. At December 31, 197, the Company has
negative working capital and a capital deficiency. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are described in Note 2 to the
accompanying financial statements. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ Hansen, Barnett & Maxwell
HANSEN, BARNETT & MAXWELL
Salt Lake City, Utah
June 30, 1998
F-1
<PAGE>
REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Innovus Corporation
We have audited the accompanying consolidated balance sheet of Innovus
Corporation and Subsidiary as of December 31, 1996, and the related consolidated
statements of operations, stockholders' equity and cash flows for the years
ended December 31, 1996 and 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financials 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 audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Innovus
Corporation and Subsidiary as of December 31, 1996, and the consolidated results
of their operations and their consolidated cash flows for the years ended
December 31, 1996 and 1995, in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As shown in the financial statements,
the Company has incurred substantial operating losses during 1996 and 1995. In
addition, cash flows from operations have been negative for 1996 and 1995 which
have resulted in low levels of working capital. These factors raise substantial
doubt about the Company's ability to continue as a going concern. Management's
plans in regard to these matters are described in Note 2. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
GRANT THORNTON LLP
Salt Lake City, Utah
March 7, 1997
F-2
<PAGE>
INNOVUS CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
1997 1996
--------- ----------
ASSETS
Current Assets
Cash and cash equivalents $ 91,690 $ 886,122
Accounts receivable, net - 116,761
Inventories - 39,003
Prepaid expenses 29,159 119,849
---------- ----------
Total Current Assets 120,849 1,161,735
---------- ----------
Property and Equipment, net 57,190 1,341,175
Other Assets
Software development costs, net - 809,824
Other - 30,442
----------- ----------
Total Assets $ 178,039 $3,343,176
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities
Accounts payable $ 811,333 $ 716,068
Accrued compensation 21,598 216,805
Accrued liabilities 3,025 126,022
Current maturities of notes payable 28,098 28,477
Current maturities of capital lease obligations 1,912 37,220
Preferred dividends payable 318,528 -
------------ ----------
Total Current Liabilities 1,184,494 1,124,592
Long-Term Notes Payable, Less current maturities - 671,564
Capital Lease Obligations, less current
maturities - 56,991
------------ ----------
Total Liabilities 1,184,494 1,853,147
------------ ----------
Commitments
Stockholders' Equity
Preferred stock - $0.001 par value; 1,000,000
shares authorized; 77,358 shares and 87,100
shares issued and outstanding, respectively;
liquidation preference of $3,867,823 at
December 31, 1997 77 87
Common stock - $0.001 par value; 15,000,000
shares authorized; 7,633,135 shares and
5,052,811 shares issued and outstanding,
respectively 7,633 5,053
Additional paid-in capital 18,245,808 14,996,682
Deferred compensation - (14,486)
Accumulated deficit (19,259,973) (13,497,307)
---------- -----------
Total Stockholders' Equity (Deficit) (1,006,455) 1,490,029
----------- -----------
Total Liabilities and Stockholders' Equity
(Deficit) $ 178,039 $ 3,343,176
=========== ===========
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
INNOVUS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
----------- ----------- -----------
Net Sales $ 317,653 $ 597,567 $ 189,380
----------- ----------- -----------
Costs and Operating Expenses
Costs of products and services sold 245,227 302,571 123,701
Amortization of software development
costs 1,918,407 796,673 315,464
Product development - 1,185,525 1,340,415
Selling and marketing 1,243,102 3,988,987 1,417,396
General and administrative 916,770 1,279,542 719,862
----------- ----------- -----------
Total Costs and Operating
Expenses 4,323,506 7,553,298 3,916,838
----------- ----------- -----------
Operating Loss (4,005,853) (6,955,731) (3,727,458)
----------- ----------- -----------
Other Income (Expense)
Loss on asset disposition (151,228) - -
Interest expense (1,275,855) (870,610) (94,242)
Other income 38,000 35,195 86,349
----------- ------------ -----------
Other Expense, Net (1,389,083) (835,415) (7,893)
----------- ------------ -----------
Net Loss (5,394,936) (7,791,146) (3,735,351)
Preferred Dividends 367,730 - -
----------- ------------ -----------
Loss Applicable to Common Shares $(5,762,666) $(7,791,146) $(3,735,351)
=========== =========== ===========
Basic and Diluted Loss Per Common
Share $ (0.92) $ (1.59) $ (0.98)
=========== =========== ===========
Weighted number of shares of common
stock used in per share calculation 6,272,769 4,913,091 3,794,276
=========== ============ ===========
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
INNOVUS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996, AND 1997
<TABLE>
<CAPTION>
Total
Preferred Stock Common Stock Additional Stockholders'
--------------- ------------------ Paid-In Accumulated Equity
Shares Amount Shares Amount Capital Other Deficit (Deficit)
------- ------ --------- ------- ----------- --------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance - December 31, 1994 64,000 $ 64 2,918,972 $ 2,919 $1,439,603 $(130,250) $ (1,970,810) $ (658,474)
Issuance of preferred stock for cash,
net of offering costs of $17,923 and
finders fees of $108,147 56,000 56 - - 1,049,874 - - 1,049,930
Issuance for cash - - 163,833 164 571,586 - - 571,750
Conversion of debt and accrued
interest into common stock - - 78,932 79 191,148 - - 191,227
Conversion of preferred stock into
common stock (120,000) (120) 720,000 720 (600) - - -
Issuance for cash in initial public
offering, net of offering costs of
$100,804 and finders fees of $222,090 - - 692,000 692 5,904,414 - - 5,905,106
Issuance upon exercise of sock options - - 192,300 192 49,255 - - 49,447
Surrendering of shares - - (75,000) (75) 75 - - -
Collection of receivable from
stockholders - - - - - 130,250 - 130,250
Compensation related to grant of stock
options - - - - 50,000 - - 50,000
Net loss for the year - - - - - - (3,735,351) (3,735,351)
------- ------ --------- ------- ----------- --------- ------------ -----------
Balance - December 31, 1995 - - 4,691,037 4,691 9,255,355 - (5,706,161) 3,553,885
Deferred compensation from grant of
stock options - - - - 23,437 (23,437) - -
Exercise of stock warrants and options,
including conversion of $18,452 of
debt, net of stock surrendered - - 361,774 362 95,088 - - 95,450
Issuance of preferred stock in private
placement offerings, net of offering
costs of $376,727 87,100 87 - - 3,958,186 - - 3,958,273
Amortization of deferred compensation - - - - - 8,951 - 8,951
Issuance of warrants for debt and
consulting expenses - - - - 1,664,616 - - 1,664,616
Net loss for the year - - - - - - (7,791,146) (7,791,146)
------- ------ --------- ------- ----------- --------- ------------ -----------
Balance - December 31, 1996 87,100 87 5,052,811 5,053 14,996,682 (14,486) (13,497,307) 1,490,029
Conversion of debt and accrued
interest into common stock and
warrants - - 940,000 940 478,994 - - 479,934
Conversion of preferred stock and
$49,202 of accrued dividends into
common stock (49,742) (50) 1,242,131 1,242 48,010 - - 49,202
Issuance for cash and warrants - - 287,500 287 139,713 - - 140,000
Issuance of preferred stock in private
placement offerings, net of offering
costs of $39,636 and finders fee of
$140,000 40,000 40 - - 1,820,324 - - 1,820,364
Exercise of warrants and options - - 110,693 111 40,585 - - 40,696
Issuance of warrants for debt - - - - 721,500 - - 721,500
Amortization of deferred compensation - - - - - 14,486 - 14,486
Dividends on preferred shares - - - - - - (367,730) (367,730)
Net loss for the year - - - - - - (5,394,936) (5,394,936)
------- ------ --------- ------- ----------- --------- ------------ -----------
Balance - December 31, 1997 77,358 $ 77 7,633,135 $ 7,633 $18,245,808 $ - $(19,259,973) $(1,006,455)
======= ====== ========= ======= =========== ========= ============ ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
INNOVUS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net loss $(5,394,936) $(7,791,146) $(3,735,351)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 2,148,727 972,310 433,487
Expenses for issued warrants 1,187,643 1,032,276 -
Loss on asset disposition 151,228 - -
Changes in assets and liabilities:
Accounts receivable 116,761 (56,995) (51,944)
Inventories 39,003 (39,003) 27,360
Accounts payable and accrued expenses (213,005) 652,041 75,993
Other 149,230 (31,186) 10,495
----------- ----------- -----------
Net Cash Used in Operating Activities (1,815,349) (5,261,703) (3,239,960)
----------- ----------- -----------
Cash Flows From Investing Activities
Acquisition of property and equipment (13,921) (90,725) (506,654)
Proceeds from asset disposition 867,782 - -
Increase in software development costs (1,108,583) (720,344) (793,233)
----------- ----------- -----------
Net Cash Used in Investing Activities (254,722) (811,069) (1,299,887)
----------- ----------- -----------
Cash Flows From Financing Activities
Proceeds from borrowing 620,000 1,470,300 -
Payments to reduce long-term debt and capital
lease obligations (1,345,421) (1,075,430) (1,146,068)
Net proceeds from issuance of preferred and
common stock 2,001,060 4,201,468 7,576,233
Collection of receivable from stockholder - - 130,250
----------- ----------- -----------
Net Cash Provided by Financing Activities 1,275,639 4,596,338 6,560,415
----------- ----------- -----------
Net Increase (Decrease) in Cash and Cash
Equivalents (794,432) (1,476,434) 2,020,568
Cash and Cash Equivalents at Beginning of Year 886,122 2,362,556 341,988
----------- ----------- -----------
Cash and Cash Equivalents at End of Year $ 91,690 $ 886,122 $ 2,362,556
=========== =========== ===========
Supplemental Cash Flow Information - Note 11
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
INNOVUS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND CONSOLIDATION - The accompanying consolidated financial
statements contain the accounts of Innovus Corporation, a Delaware corporation,
and its wholly-owned subsidiary, Innovus Multimedia, Inc. (collectively referred
to herein as "the Company"). Intercompany accounts and transactions have been
eliminated in consolidation.
On May 8, 1998, the Company entered into an Agreement and Plan of Share Exchange
(the "Agreement") with Intermark Corporation ("Intermark"). Under the terms of
the Agreement, the shareholders of Intermark are to exchange all of the
outstanding capital stock of Intermark for common stock of the Company equal to
75% of the common stock of the Company outstanding immediately after the
closing. Completion of the Agreement is conditioned upon certain events
occurring including the holders of Intermark securities executing the Agreement.
If the Agreement is consummated, there would be a change in control of the
Company. In connection with the Agreement, the Board of Directors has approved a
1-for-10 reverse stock split pending shareholder approval. The Company's
financial statements will be restated upon shareholder approval.
TERMINATION OF BUSINESS ACTIVITIES - The Company's operations have been as a
provider of software development tools designed for building modifiable media-
intensive business information management systems. These tools provided links
for customers to databases through open data base connectivity, object linking
and embedding technology. Prior to 1996, a significant portion of the Company's
sales were for multimedia interactive kiosk systems. The systems were primarily
sold to United States government agencies. Sales and support of kiosk systems
were terminated in 1996. During 1997, the Company disposed of substantially all
of its inventory and property and equipment, concluded its software development
activity and fully amortized the remaining cost of capitalized software
products. During 1998, the Company terminated its remaining sales and marketing
activities. As a result, the Company does not have any significant assets or
continuing operations. Management's recent activities have been to restructure
the Company in preparation for completing the agreement with Intermark.
USE OF ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect reported amounts of assets, liabilities, revenues
and expenses during the reporting period. Estimates also affect the disclosure
of contingent assets and liabilities at the date of the financial statements.
Actual results could differ from these estimates. An estimate which was subject
to significant accounting sensitivity and which was affected by expected future
gross revenues was the realization of capitalized software development costs.
Management believes the estimates used in determining the carrying value of
capitalized software development costs as of the respective balance sheet dates
were reasonable.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The estimated fair value of financial
instruments is not presented because, in Management's opinion, there is no
material difference between carrying amounts and estimated fair values of
financial instruments as presented in the accompanying consolidated balance
sheets.
CASH AND CASH EQUIVALENTS - All highly-liquid debt instruments purchased with
maturities of three months or less have been considered cash equivalents.
INVENTORIES - Inventories consisted of packaged software products and individual
component units awaiting assembly as packaged software. Inventory was valued at
F-7
<PAGE>
the lower of cost or market with cost being determined using the first-in,
first-out method. The cost of remaining inventories was recognized in operations
during the year ended December 31, 1997 due to uncertainty regarding its market
value.
DEPRECIATION AND AMORTIZATION - Property and equipment are reported at cost.
Depreciation and amortization are provided in amounts sufficient to relate the
cost of depreciable assets to operations over their estimated service lives.
Leased properties under capital leases were amortized over the shorter of the
lives of the respective leases or over the service lives of the assets. The
straight-line method of depreciation is followed for financial reporting
purposes and accelerated methods are used for income tax purposes. Losses on
assets dispositions are included in results of operations.
SOFTWARE DEVELOPMENT COSTS - Costs incurred in creating computer software
products were charged to operations as research and development expense prior to
the development of a detailed program design or a working model. After the
detailed program design or working model was established, costs of producing
product masters were capitalized as software development costs.
Costs of maintenance and customer support were recognized as expense when the
related revenue was recognized or when those costs were incurred, whichever
occurred first. Amortization of capitalized costs relating to each software
product began when that product was released for sale to customers. Amortization
was computed using the greater of (a) the ratio that current revenues from the
software bear to current and estimated future revenues from the software or (b)
the straight-line method over the remaining estimated economic life of the
software, which was one to two years. Unamortized costs were carried at the
lower of cost or net realizable value. Due to uncertainty regarding realization
of capitalized software costs, those costs were fully recognized as amortization
of software development costs during 1997.
INCOME TAXES - The Company utilizes the liability method of accounting for
income taxes. Under the liability method, deferred tax assets and liabilities
are determined based on differences between financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse. An
allowance against deferred tax assets is recorded when it is more likely than
not that such tax benefits will not be realized.
COMMON STOCK - During March 1995, the Company completed a reverse split of its
common stock on a 1-for-2 basis. The accompanying financial statements have been
restated to reflect this stock split for all periods presented.
REVENUE RECOGNITION - The Company recognized revenues on the majority of its
product sales and services at the time of product delivery or the rendering of
services. Occasionally, the Company entered into long-term contracts under which
services were delivered over the term of the contract. Revenue under long-term
contracts were recognized on the percentage-of-completion method.
PRODUCT DEVELOPMENT EXPENSE - Product development expense includes all expenses
related to future releases and enhancements of products, including research,
development, porting of software to new operating systems and platforms,
documentation and development of training programs, less allowable capitalized
software development costs. Research and development costs incurred under
contracts with others were recognized as cost of products and services sold as
incurred.
BASIC AND DILUTED LOSS PER COMMON SHARE - In the fourth quarter 1997, the
Company adopted Statement of Financial Accounting Standards (SFAS) No. 128,
Earnings Per Share. Under SFAS 128, loss per common share is computed by
dividing net loss available to common stockholders by the weighted-average
number of common shares outstanding during the period. Diluted loss per share
F-8
<PAGE>
reflects the potential dilution which could occur if all contracts to issue
common stock were exercised or converted into common stock or resulted in the
issuance of common stock. In the Company's present position, diluted loss per
share is the same as basic loss per share because, as more fully discussed in
Notes 8 and 10, 2,646,563 common stock warrants and options and 77,358 shares of
preferred stock were outstanding at December 31, 1997 which would decrease the
loss per share and have been excluded from the calculation. The effect of the
new standard on prior years was immaterial; accordingly, prior periods have not
been restated.
NEW ACCOUNTING STANDARDS - The Financial Accounting Standard Board issued SFAS
No. 130, Reporting Comprehensive Income and SFAS No. 131, Disclosures About
Segments of an Enterprise and Related Information in 1997. These statements,
which are effective for fiscal years beginning after December 15, 1997, expand
or modify disclosures and will have no impact on the Company's consolidated
financial position, results of operations or cash flows.
The Company adopted SFAS No. 128 Earnings Per Share and SFAS No. 129 Disclosures
of Information About Capital Structure in 1997. In accordance with SFAS Nos. 128
and 129, both basic loss per share and diluted net loss per share as well as
rights and liquidation preferences of debt and equity securities have been
presented in the accompanying consolidated financial statements.
RECLASSIFICATIONS - Certain reclassifications have been made to the 1996 and
1995 consolidated financial statements to conform with the 1997 presentation.
NOTE 2-REALIZATION OF ASSETS
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplates continuation of the
Company as a going concern. However, the Company has sustained substantial
operating losses during recent years, which has resulted in an accumulated
deficit of $19,259,973 as of December 31, 1997. The Company has used the
proceeds from issuance of equity securities and from debt financing to fund its
recurring losses. Given the losses, the discontinuation of sales and marketing
of its software products and the lack of operating working capital, it is not
presently known whether the Company can continue to satisfy its obligations in
the future and there is substantial doubt about the Company's ability to
continue as a going concern.
The financial statements do not include any adjustments relating to the
recoverablity and classification of recorded assets or amounts and
classifications of liabilities that might be necessary should the Company be
unable to continue. On May 8, 1998, as discussed in Note 1, the Company entered
into an agreement with Intermark whereby Management plans to transfer control of
the Company to management and the shareholders of Intermark. There is no
assurance the reorganization with Intermark will result in profitable
operations, obtaining sufficient financing or the ability to continue as a going
concern.
NOTE 3-PROPERTY AND EQUIPMENT
Property and equipment and estimated useful lives consisted of the following at
December 31:
Years 1997 1996
----- --------- ----------
Building 40 $ - $ 422,231
Computer and office equipment 5 - 7 87,809 907,499
Furniture and fixtures 5 - 7 25,227 115,859
--------- ----------
Total Building and Equipment 113,036 1,445,589
Less: Accumulated depreciation and
amortization (55,846) (478,845)
--------- ----------
Net Building and Equipment 57,190 966,744
Land - - 374,431
--------- ----------
Property and Equipment, Net $ 57,190 $1,341,175
========= ==========
F-9
<PAGE>
Depreciation expense, including amortization expense related to equipment
recorded under capital leases, was $215,834, $166,686 and $118,023 for the years
ended December 31, 1997, 1996 and 1995, respectively. The gross amount of
equipment recorded under capital leases at December 31, 1997 and 1996 was
$13,321 and $119,083, respectively, with related accumulated amortization of
$7,327 and $15,460 at December 31, 1997 and 1996, respectively. The loss from
disposal of a significant portion of property and equipment was included in
other income (expense) during the year ended December 31, 1997.
NOTE 4-SOFTWARE DEVELOPMENT COSTS
1997 1996
---------- ----------
Balance at beginning of year $ 809,824 $ 886,153
Additions during year 1,108,583 720,344
Amortization (1,918,407) (796,673)
---------- ----------
Balance at End of Year $ - $ 809,824
========== ==========
Accumulated amortization totaled $3,030,544 and $1,112,137 at December 31, 1997
and 1996, respectively.
Through March 31, 1998, Management was of the opinion that the Company's
software products would be accepted by the market in commercial quantities but
the lack of sufficient resources to market the software products had delayed
determination of their acceptance by the market. However, due to customers
recently returning software products after evaluation and due to other
rejections of the software, Management has determined to not pursue marketing
the software products further. Accordingly, the carrying value of the software
has been reduced to zero at December 31, 1997 by recognizing an additional
$775,568 of amortization during the year ended December 31, 1997.
NOTE 5-LONG AND SHORT-TERM OBLIGATIONS
NOTES PAYABLE - Notes payable are summarized as follows:
1997 1996
---------- ----------
Note payable under a seller financed mortgage
collateralized by building and land; paid upon
sale of building and land in October 1997 $ - $ 682,934
Notes payable under bridge financing agreements,
net of unamortized discount - (21,143)
Promissory note payable to a finance company 28,098 38,250
---------- ----------
Total Notes Payable 28,098 700,041
Less current maturities, net 28,098 28,477
---------- ----------
Long-Term Notes Payable $ - $ 671,564
========== ==========
In June 1997, the Company entered into bridge financing agreements which
authorized the Company to borrow up to $500,000 from certain individual lenders
which were related parties. The lenders received, for each $1.00 loaned to the
Company, a warrant to purchase one share of common stock of the Company
exercisable at $3.00 per share. The agreements were subordinate to the security
interest of a bank in substantially all of the assets of the Company. In June
and July, the Company borrowed $405,000 under these bridge financing agreements,
F-10
<PAGE>
and warrants to purchase 405,000 common shares exercisable at $3.00 per share
were issued to the lenders. The warrants were exercisable over a three-year
period. The estimated fair value of the warrants on the dates awarded
approximated $526,500 which was recognized as interest expense. The agreements
bore interest at 10% in addition to the amortization of the warrants' fair value
resulting in an effective interest rate of 132%. The loans were converted to
common stock during 1997.
In 1997, the Company borrowed $65,000 from an officer and director which amount
was unsecured and was surrendered to the Company in payment of stock
subscriptions. In August 1997, the Company borrowed $150,000 against its
interest in its building and land, in the form of a second mortgage. Interest
was paid by issuing 150,000 warrants to purchase common stock at $1.75 per
share. The warrants are exercisable for three years. The estimated fair value of
the warrants on the date of grant approximated $195,000. This amount has been
amortized as interest expense over the life of the loan. This note was paid upon
the sale of the building and land in October 1997.
In September 1996, the Company entered into bridge financing agreements, which
authorized the Company to borrow up to $625,000, from certain unrelated and
related parties and stockholders. The agreements bear interest at prime plus 1%
in addition to the amortization of the warrants' fair value (Note 10), resulting
in an effective interest rate of 704% at December 31, 1996. The agreements are
subordinate to the security interest of the bank, as explained below in Note 5,
in substantially all of the assets of Company. The payments are due July 1997.
Under the terms of the agreements, if the Company repays any principal portion
of the notes prior to March 31, 1997, the Company is entitled to reborrow such
repayment amounts. If the holders of the notes decline to loan the Company the
amounts requested, the holders of the notes forfeit the right to exercise one
half of the detachable warrants they hold as discussed in Note 10. The financing
was accomplished by issuing detachable warrants for the purchase of 312,500
shares of common stock with an exercise price of $5.50 per share. The estimated
fair value of the warrants on the date of grant approximated $1,239,000. This
amount is being amortized as interest expense over the life of the agreements.
The unamortized portion at December 31, 1996 approximates $466,000 and is
included as an offset to the related debt in the 1996 balance sheet. At December
31, 1996, the Company has drawn $445,000, when not including the $466,000
offset, under these financing agreements of which $345,000 was from unrelated
lenders and $100,000 was from an officer and director of the Company.
LINE-OF-CREDIT - In May 1996, the Company entered into a revolving line-of-
credit loan agreement with a bank with a maximum amount available of $500,000,
with an additional $1,000,000 available subject to qualifying collateral.
Interest was computed at prime plus 1.5% (9.75% at December 31, 1996), payable
monthly, with maturity in May 1997 and collateralized by substantially all of
the Company's assets, including its inventory, accounts receivable and
technology. The Company issued warrants for the bank to purchase 4,688 shares of
common stock in connection with the agreement. The agreement contains certain
restrictive covenants including, but not limited to, a requirement that the
Company declare no dividends while the line-of credit is outstanding. During
1997, the bank would not allow the Company to draw on the line-of-credit due to
the Company's deteriorating financial position. At December 31, 1997 and 1996,
the Company had no amounts outstanding on the line-of-credit.
CAPITAL LEASES - The Company has equipment under capital lease obligations. The
following is a schedule by years of future minimum lease payments under capital
leases as of December 31, 1997 together with the present value of the net
minimum lease payments:
Year Ending December 31, 1998 $ 3,017
Less amount representing interest 1,105
----------
Present value of net minimum lease payments $ 1,912
==========
F-11
<PAGE>
NOTE 6-401(K) PROFIT SHARING PLAN
The Company maintains a compensation plan pursuant to Section 401(k) of the
Internal Revenue Code (the Plan). Participation in the Plan is available to all
employees 21 years of age and older. The Company may, at its option, make
contributions to the Plan equal to a percentage of voluntary contributions made
by participants or it may make a contribution equal to a percentage of the
salary of all participants. The Company made no contributions to the Plan during
1997, 1996 and 1995.
NOTE 7-INCOME TAXES
The major components of the net deferred tax asset as of December 31, 1997 and
1996 were as follows:
1997 1996
------------ -----------
Depreciation $ (30,203) $ (56,679)
Software development costs 419,997 719,857
Accrued expenses - 56,399
Deferred compensation 9,186 19,501
Operating loss carry forwards 6,907,405 4,561,166
Valuation allowance (7,306,385) (5,300,244)
------------ -----------
Net Deferred Tax Asset $ - $ -
============ ===========
The Company had operating loss carry forwards at December 31, 1997 of
$18,565,150 which expire in the years 2005 through 2012, if unused. Under
federal tax law, certain potential changes in ownership of the Company, which
may not be within the Company's control, may operate to restrict future
utilization of these carry forwards.
The components of the provision for income taxes were immaterial for all periods
presented. The following is a reconciliation of the income tax at the federal
statutory tax rate of 34% with the provision for income taxes for the years
ended December 31, 1997, 1996 and 1995.
1997 1996 1995
----------- ----------- -----------
Income tax benefit at statutory
rate $(1,834,278) $(2,648,990) $(1,270,019)
Change in deferred tax asset
valuation allowance 2,006,141 2,924,579 1,391,536
Nondeductible expenses 6,170 15,081 17,812
State taxes, net of federal
benefit (178,033) (290,670) (139,329)
----------- ----------- -----------
Provision for Income Taxes $ - $ - $ -
=========== =========== ===========
NOTE 8-PREFERRED STOCK
There are 1,000,000 shares of preferred stock, par value $0.001 per share,
authorized of which 100,000 and 12,000 shares have been designated as Series A
and Series E preferred stock, respectively, with no shares outstanding. In
addition, 55,000 shares have been designated Series C preferred stock with
23,858 shares outstanding, 20,100 shares have been designated Series D preferred
stock with 1,500 shares outstanding, 40,000 shares have been designated as
Series F preferred stock, 40,000 of which are outstanding and 12,000 shares have
been designated as Series G Preferred stock all of which are outstanding.
F-12
<PAGE>
The Series C, D, F and G preferred stock have a stated value of $50 per share.
The holders of the Series C and D preferred stock are entitled to dividends
computed at an annual rate of 5% of the stated value, or $2.50 per share per
annum. The holders of the Series F and G preferred stock are entitled to
dividends computed at an annual rate of 10% of the stated value, or $5.00 per
share per annum. The dividends are cumulative and are payable at the time of
conversion or redemption (unless earlier declared and paid) in cash or shares of
common stock. annual preferred dividend requirements as of December 31, 1997
were $323,395. The preferred stockholders have no voting rights and a
liquidation preference equal to the stated value of the preferred stock plus
accrued but unpaid dividends.
In 1997, the Company issued 40,000 shares of Series F convertible preferred
stock and warrants to acquire 200,000 shares of common stock in private
placement offerings for $2,000,000. The offering costs and finders fee totaled
$179,636 which resulted in net proceeds of $1,820,324. In addition, 12,000
shares of Series E convertible preferred stock were exchanged for 12,000 shares
of Series G convertible preferred stock.
In 1996, the Company issued in private placement offerings 55,000 shares of
Series C convertible preferred stock for $2,750,000 and 12,000 shares of Series
E convertible preferred stock for $600,000. As discussed in Note 9, total
offering costs were $165,442 which resulted in net proceeds of $3,184,558
including the conversion of the 20,100 shares of Series D preferred stock. The
Company issued a total of 87,100 shares of preferred stock for net proceeds of
$4,124,470 after offering costs of $210,530.
The Series C preferred stock is convertible into shares of common stock at the
option of the preferred stockholders commencing December 17, 1996. The Company
may call for conversion of the preferred stock into common stock after September
30, 1997 if a registration statement has been declared effective. The conversion
ratio shall be the issue price of $50 divided by the lesser of $5.45 per share
or 75% of the average per share market value of the common stock for five
trading days immediately preceding the conversion date.
The Series D preferred shares have a liquidation preference which is senior to
the common stock but junior to the Series C preferred. The holders of the Series
D preferred shares may convert into shares of common stock at the rate of one
common share for each $4 originally invested, or approximately 12.5 common
shares per share of Series D preferred stock. The Company is entitled to require
conversion of the Series D preferred stock after one year from the original
issuance date.
The Series F preferred stock is convertible from time to time by the holders
thereof based upon the original purchase price of $50 per share, plus accrued
dividends thereon, divided by $2 per share of common stock. Dividends on any
Series F preferred stock converted during the first year following original
issuance accrue at 10% per annum. Dividends on any Series F preferred stock
which is converted following the first year following original issuance accrue
at 15% per annum for the first year and 5% per annum thereafter. All dividends
on the Series F preferred stock are payable, in cash or common stock, only at
the time of conversion. If the market price for the common stock is not at least
$3 per share on February 15, 1998, the conversion rate for all Series F
preferred stock then still outstanding will be adjusted so that each preferred
share (including accrued dividends) will be convertible into common stock having
a market value equal to 150% of the original purchase price of $50.
The Series G preferred stock is convertible from time to time by the holders
thereof based upon the original purchase price of $50 per share, plus accrued
dividends thereon, divided by $2.25 per share of common stock. Dividends on any
Series G preferred stock converted during the first year following original
issuance accrue at 10% per annum. Dividends on any Series G preferred stock
which is converted following the first year following original issuance accrue
at 15% per annum for the first year and 5% per annum thereafter. All dividends
on the Series G preferred stock are payable, in cash or common stock, only at
the time of conversion.
F-13
<PAGE>
During the year ended December 31, 1997, preferred stockholders converted 31,142
shares of Series C and 18,600 shares of Series D preferred stock into 1,208,880
shares of common stock in several transactions at an average price of $2.06 per
share. Also, $49,202 in dividends associated with Series C and Series D
preferred stock were converted into 33,251 shares of common stock.
NOTE 9-COMMON STOCK
During 1997, common stock purchase warrants and options were exercised resulting
in the Company issuing 110,693 shares of common stock for cash proceeds of
$40,696.
During 1997, the Company received subscriptions for the issuance of 1,220,000
shares of common stock and warrants to purchase up to 305,000 shares of common
stock from an affiliate and others. The subscription price was $2.00 for each
unit consisting of four shares of common stock and one warrant. The warrants are
exercisable at $0.75 per share.
The Company had realized $470,000 of the stock subscriptions, from the
conversion of $405,000 outstanding bridge loans and $65,000 the conversion of
the unsecured debt. The remaining $140,000 of the subscription proceeds were
received by the Company in cash. An additional 7,500 common shares were issued
for $9,934 of accrued interest relating to the converted debt.
During 1996, common stock purchase warrants and options were exercised resulting
in the Company issuing 305,974 shares of common stock for cash proceeds of
$95,450, plus the cancellation of debt owed to an option holder in the amount of
$18,452 relating to the exercise of options of 72,644 shares. Included in these
proceeds was the conversion of $18,452 of notes payable as payment upon the
exercise of options for 72,644 shares.
In June 1996, the Company issued 134,000 shares of common stock for $985,000
less offering costs of $45,088 for net proceeds of $939,912. In connection with
the Series C preferred stock private placement offering discussed above, the
holder of these 134,000 shares of common stock converted them into 20,100 shares
of Series D convertible preferred stock.
In October 1996, options for 107,500 shares of common stock were exercised for
$27,305, which was paid by a principal shareholder surrendering 18,200 shares of
common stock valued at approximately $1.50 per share. This shareholder also
surrendered 33,500 shares of common stock for which the Company made no payment.
NOTE 10-STOCK OPTIONS AND WARRANTS
In August 1994, the Company adopted the Omnibus Stock Option Plan (the Plan),
which authorized incentive and non-qualified stock options to be granted to
employees of the Company. Reserved for issuance under the Plan are 1,327,500
shares of common stock. The Company may also grant other non-qualified options
and warrants outside of the Plan. Incentive stock options must be granted with
an exercise price at least equal to the market value of the common stock on the
date of grant unless otherwise approved by the Company's Board of Directors. The
options generally become exercisable over a period of three years. In the event
of a dissolution or liquidation of the Company, any options outstanding under
the Plan will terminate.
1995 GRANTS: During 1995, the Company authorized and granted 400,000 warrants
and 25,000 stock options for a total of 425,000 shares of common stock. The
warrants were granted in connection with a consulting agreement and were
exercisable at $7 per share, which was greater than the market value of the
common stock on the date granted. The warrants became exercisable in February
1995 and expire on February 15, 2000 if not exercised. In September 1996, the
warrants were repriced to the quoted market value of the underlying stock of $5
per share.
F-14
<PAGE>
The stock options for 25,000 shares were granted in connection with the signing
of a letter of commitment for future employment by a prospective key employee.
In March 1996, additional options were granted for another 75,000 shares in
connection with the inception of the employment. All 100,000 options are
exercisable at $7.50 per share. The options vest immediately for those granted
in December 1995 with the options granted in March 1996 vesting over three
years. Compensation relating to these options was $50,000 for the options
granted in December 1995 and was recognized as an expense in 1995. Compensation
relating to the options granted in March 1996 was $23,437 which has been
deferred and is being recognized over the vesting period.
1996 GRANTS: During 1996, the Company authorized and granted 417,188 warrants
and 325,000 stock options (inclusive of the stock options for 75,000 shares
discussed above) for the right to acquire a total of 742,188 shares of common
stock. Included were warrants for 312,500 shares of common stock which were
issued in connection with the issuance of $625,000 of notes to related parties
and other lenders. The warrants are exercisable at $5.50 per share which was the
market value of the common stock on the date the warrants were issued. The
warrants are exercisable through September 2002, however, warrants for 156,250
shares are exercisable only if the lenders allow the Company to reborrow through
March 31, 1997, any amounts that the Company prepays under the terms of the
notes as explained in Note 5.
Warrants for 100,000 shares of common stock were issued to individuals for
consulting services. The estimated fair value of the warrants on the dates of
grant approximated $425,000. Of this amount, approximately $167,000 was netted
against the proceeds received on the issuance of preferred stock during 1996.
The remaining $258,000 was recorded as a general and administrative expense in
the 1996 statement of operations. The warrants are exercisable at prices ranging
from $4.25 to $5.75 per share and are exercisable through November 2001.
Warrants for 4,688 shares of common stock were issued in connection with the
line-of-credit discussed in Note 5. The warrants are exercisable at $8 per share
and were exercisable on date of grant and expire in May 2001.
Options for 250,000 shares of common stock were granted to the president and two
outside directors. These options were repriced in September 1996 from $8 per
share to the quoted market value of $5 on the date repriced.
1997 Grants: During 1997, the Company authorized and granted 1,110,000 warrants
and 200,000 stock options for the right to acquire a total of 1,310,000 shares
of common stock. Warrants to acquire 200,000 shares of common stock were issued
in connection with the issuance of 40,000 shares of Series F preferred stock for
$2,000,000.
Warrants for 405,000 shares of common stock and $405,000 of convertible debt
were issued for $405,000. The warrants are exercisable at $3.00 per share.
Warrants for 305,000 shares of common stock and 1,220,000 shares of common stock
were issued as a unit upon conversion of debt and for cash. The warrants are
exercisable at $0.75 per share. Warrants for 150,000 shares of common stock were
issued in payment of interest on $150,000 loaned to the Company. The warrants
are exercisable at $1.75 per share. The exercise prices of these warrants were
equal to or greater than the market value of the common stock on the dates the
warrants were issued. During 1997, warrants for 193,125 common shares were
repriced from an exercise price of $5.50 per share to $2.50 per share.
F-15
<PAGE>
Warrants for 50,000 shares of common stock were granted to an officer and
director. The warrants are exercisable at $2.50 per share which was equal to or
greater than the market value of the common stock on the date the warrants were
issued. During 1997, the Company granted to an officer/director an option to
purchase 200,000 common shares at $2.50 per share. The option vests 50%
immediately, an additional 25% at the end of year one and the final 25% at the
end of year two. The options expire in five years. The exercise price of $2.50
was the fair market value of the underlying stock on the date granted.
The following is a summary of the activity relating to non-qualified warrants
and options through December 31, 1997:
Weighted
Average
Stock Exercise Exercise
Warrants Options Price Price
---------- ------- ------------ --------
Outstanding at January 1, 1995 163,215 505,113 $0.25 - 3.50 $ 0.40
Granted 400,000 25,000 7.00 - 7.50 7.03
Exercised (89,465) (116,156) 0.25 - 1.75 0.29
Canceled or expired - - - -
--------- ------- ------------ --------
Outstanding at December 31, 1995 473,750 413,957 0.25 - 7.50 3.57
Granted 417,188 325,000 2.50 - 8.00 4.11
Exercised - (253,332) 0.25 0.25
Canceled or expired - (73,750) 0.25 0.25
--------- ------- ------------ --------
Outstanding at December 31, 1996 890,938 411,875 0.25 - 8.00 4.28
Granted 1,110,000 200,000 0.75 - 3.00 2.39
Exercised (61,166) - 0.25 0.25
Canceled or expired (12,584) - 0.25 0.25
--------- ------- ------------ --------
Outstanding at December 31, 1997 1,927,188 611,875 $0.25 - 8.00 $ 3.40
========= ======= ============ ========
The following table summarizes information concerning non-qualified outstanding
and exercisable stock and options at December 31, 1997:
Weighted-Average
Remaining
Contractual
Range of Number Life Weighted-Average
Exercise Prices Outstanding (Years) Exercise Price
----------------- ------------- -------- ----------------
$0.25 - $0.75 341,875 2.67 $0.74
1.75 - 2.50 581,250 3.81 2.30
3.00 - 4.00 605,000 2.95 3.33
4.25 - 5.51 1,006,250 3.14 4.96
8.00 4,688 3.39 8.00
-------------
2,539,063
==============
F-16
<PAGE>
Range of Number Weighted-Average
Exercise Prices Exercisable Exercise Price
------------------ ------------ ------------------
$0.25 - $0.75 314,219 $0.75
1.75 - 2.50 481,250 2.25
3.00 - 4.00 605,000 3.33
4.25 - 5.51 856,250 4.98
8.00 4,688 8.00
------------
2,261,407
============
SUBSEQUENT EVENT - During 1998, many of the warrant agreements were
renegotiated. As a result 428,438 of the warrants were canceled.
During 1998, 1,248,750 warrants were repriced, as follows: 817,500 of the
warrants that were initially exercisable at $0.75 to $5.50 were repriced to
being exercisable at $0.15 per common share and 431,250 of the warrants that
were initially exercisable at $0.75 to $5.50 were repriced to being exercisable
at $0.20 per warrant.
QUALIFIED OPTIONS -During 1995, the Company granted options under the Plan to
purchase 653,112 shares of common stock with exercise prices equal to the market
value of the common stock on the dates granted.
During 1996, options for 198,500 shares were granted under the Plan which are
exercisable through December 2001. The following is a summary of the activity
relating to qualified options under the Plan through December 31, 1997:
Weighted
Average
Stock Exercise Exercise
Options Price Price
------------ --------------- --------
Outstanding at January 1, 1995 771,425 $ 0.25 - 0.51 $0.36
Granted 653,112 3.00 - 10.25 4.56
Exercised (2,385) 0.51 0.51
Canceled or expired (52,156) 0.51 - 3.00 1.85
-----------
Outstanding at
December 31, 1995 1,369,996 0.25 - 10.25 2.31
Granted 198,500 5.50 - 13.00 6.23
Exercised (160,142) 0.25 - 3.00 0.37
Canceled or expired (614,063) 0.25 - 13.00 1.98
------------
Outstanding at
December 31, 1996 794,291 3.00 - 4.25 2.67
Granted - - -
Exercised (49,527) 0.51 0.51
Canceled or expired (637,264) 0.51 - 4.25 2.59
------------
Outstanding at December 31, 1997 107,500 3.00 - 4.25 4.13
============
Exercisable at December 31, 1997 50,834 3.00 - 4.25 4.13
===========
F-17
<PAGE>
The following table summarizes information concerning qualified outstanding and
exercisable stock options at December 31, 1997:
Weighted-Average
Remaining
Number Contractual Life Weighted-Average
Exercise Prices Outstanding (Years) Exercise Price
--------------- ------------- ----------------- -----------------
$3.00 10,000 2.01 $ 3.00
4.25 97,500 3.50 4.25
-----------
107,500
-----------
Number Weighted-Average
Exercise Prices Exercisable Exercise Price
----------------- ------------ -----------------
$3.00 5,000 $ 3.00
4.25 45,834 4.25
-----------
50,834
===========
Fair Value of Options and Warrants Granted and Pro Forma Loss - The Company has
adopted only the disclosure provisions of Financial Accounting Standard No. 123
"Accounting for Stock-Based Compensation" (SFAS 123). Therefore, the Company
accounts for stock based compensation under Accounting Principles Board Opinion
No. 25. Had compensation cost for the stock based compensation been determined
based upon the fair value of the awards at the grant dates consistent with the
methodology prescribed by SFAS 123, the Company's net loss as well as basic and
diluted loss per share would have been increased to the following pro forma
amounts:
1997 1996 1995
------------ ------------ -----------
Net Loss
As reported $(5,394,936) $(7,791,146) $(3,735,351)
Pro forma (5,863,243) (8,824,279) (5,227,807)
Basic and Diluted Loss Per Share
As reported $ (0.86) $ (1.59) $ (0.98)
Pro forma (0.94) (1.80) (1.38)
These pro forma amounts may not be representative of future disclosures because
they do not take into effect pro forma compensation cost related to grants made
before 1995. The fair value of these options and warrants were estimated at the
date of grant using the modified Black-Scholes American option-pricing model
with the following weighted-average assumptions for 1997, 1996 and 1995:
expected volatility of 72.1%, 67.17% and 65.89%, respectively; risk-free
interest rate of 6.20%, 6.10% and 6.10%, respectively; and expected life of 5.0,
4.2 and 4.2 years, respectively. The weighted-average fair value of options and
warrants granted was $1.61, $3.88 and $2.49 in 1997, 1996 and 1995,
respectively.
Option pricing models require the input of highly subjective assumptions
including the expected stock price volatility. Also, the Company's employee
stock options and warrants have characteristics significantly different from
those of traded options and warrants, and changes in the subjective input
assumptions can materially affect the fair value estimate. Management believes
the best input assumptions available were used to value the options and warrants
and the resulting values are reasonable.
F-18
<PAGE>
NOTE 11--SUPPLEMENTAL CASH FLOWS INFORMATION
Non-Cash Stock and Payables Activities - During 1997, interest expense in the
amount of $721,500 was recognized in connection with warrants issued with debt,
$49,202 of dividends on Series C and Series D preferred stock was paid with
33,251 shares of common stock and $470,000 of bridge loans and $9,934 of accrued
interest were converted into common stock. During 1997, $367,730 of dividends
were accrued on preferred shares. Of this amount, $49,202 was settled when the
preferred shares were converted to common shares.
In 1996, 72,644 shares of common stock were issued upon exercise of options for
which the option holder canceled debt owed by the Company in the amount of
$18,452.
In 1995, note holders voluntarily converted debt owed to them in the amount of
$148,250 into 69,382 shares of common stock at an average of $2.14 per share.
The conversion ratio was based on the fair value of common stock on the date of
the conversion. In addition, $42,975 of notes payable to an unrelated party were
converted into 9,550 shares of common stock at $4.50 per share and $15,619 of
accrued and unpaid interest was added to the principal amount of notes payable.
Property and Equipment and Payables Activities - During 1997, the Company sold
its building and land. In connection with the sale of the building, the buyers
assumed capital leases for telephone equipment in the building totaling $63,062.
During 1996, capital leases for computer and office equipment were executed for
$56,336.
In 1995, the Company purchased the building it had previously leased in the
amount of $796,663. $696,313 was financed by a note payable and the remaining
$100,350 was paid in cash. Also during 1995, the Company leased office equipment
in the amount of $47,408 which was financed by a capital lease. In addition,
during 1995 the Company returned office equipment for payment of a $6,547
capital lease.
Notes Payable Activities - During 1997, the Company financed life insurance for
officers by issuing a note payable in the amount of $28,098.
Warrants Issued With Debt and To Consultants - During 1996, the Company issued
debt with detachable warrants. The unamortized portion of the costs of warrants
of approximately $466,000 is shown as a reduction of the related debt.
Also during 1996, warrants were issued to consultants who assisted in raising
capital through the issuance of preferred stock. The estimated fair value of the
warrants were offset against the proceeds received.
Cash Paid For Interest - Cash flows from operating activities included interest
paid of $92,799, $91,038 and $147,039 for the years ended December 31, 1997,
1996 and 1995, respectively.
NOTE 12-EMPLOYMENT AGREEMENT
The Company has entered into an employment agreement expiring in 1999 with a key
employee. The agreement is renewed automatically for an additional one year
period unless either party gives written notice of non-renewal not less than
ninety days prior to the expiration. The agreement provides for a base payment
of $185,000 per year. The agreement also provides that the employee will receive
stock options to purchase up to 100,000 shares of common stock and can earn
bonuses based upon performance.
F-19
<PAGE>
NOTE 13 - COMMITMENTS AND CONTINGENCIES
The Company is a defendant in a number of collection actions filed by its
creditors. The largest of which is with Multiling International who contends the
Company owes them $30,433 for interest and costs for services rendered. Amounts
which Management deem are owed to such creditors, including amounts subsequently
paid in settlement of the claims and actions, have been accrued in the
accompanying consolidated financial statements at December 31, 1997.
NOTE 14-SUBSEQUENT EVENTS
In January 1998, the Company entered into agreements with two unrelated parties.
Under the terms of the agreements, the Company granted to the unrelated parties
certain rights and licenses relating to the Company's software products know as
"Licensed Works." The unrelated parties accepted a non-exclusive, world-wide,
non-transferable, perpetual, irrevocable license. For a period of three years
and five years from the effective date, the unrelated parties are to not
reproduce, license, rent, lease, or otherwise distribute source code of the
Licensed Works or "Derivative Works." They shall not incorporate the Licensed
Works or Derivative Works into a third party product and shall not sub-license
any of the rights granted to them to third parties. In consideration of the
licenses granted to the unrelated parties, the Company is to receive $35,000 of
licensing fees and a 2% royalty on gross product revenue of the Licensed Works
and Derivative Works from one of the agreements and $20,000 of licensing fees
and a royalty equal to 75% of the gross sales of Licensed Works and Derivative
in conjunction with the other agreement.
During April 1998, in anticipation of seeking a company with which to merge, the
Company offered to exchange common stock with the holders of Series C, D, F and
G Preferred Stock. The terms of conversion varied for each series of preferred
stock. As of the end of May, a substantial portion of the preferred shares had
been returned to the Company and exchanged for shares of common stock.
On May 6, 1998, the Company entered into a lease cancellation agreement relating
to office space. As part of the agreement of release from the lease, the Company
was obligated to pay to the landlord $12,076.
On May 8, 1998, the Company entered into an Agreement and Plan of Share Exchange
with Intermark Corporation. Under the terms of the agreement, the exchanging
security holders are to deliver and exchange all of the outstanding capital
stock of Intermark for capital stock of the Company having voting power equal to
75% of the capital stock outstanding. The stock issued to the exchanging
security holders will be comprised of a limited number of authorized and
unissued shares of the Company's common stock and the remainder will be composed
of authorized and unissued shares of new preferred stock called Series H
Convertible preferred Stock which will be convertible into common stock and have
voting rights equivalent to the number shares of common stock which would be
issuable upon conversion. The Company's Board of Directors also authorized and
agreed to recommend the Company's stockholders approve a 1-for-10 reverse stock
split of its common stock.
F-20
<PAGE>
SIGNATURE
In accordance with Section 13 or 15(d) of the Exchange Act, the Company
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
INNOVUS CORPORATION
Dated: July 31, 1998 By /s/ Terry R. Haas
---------------------------
Terry R. Haas, President
24
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 91,690
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 120,849
<PP&E> 57,190
<DEPRECIATION> 0
<TOTAL-ASSETS> 178,039
<CURRENT-LIABILITIES> 1,184,494
<BONDS> 0
0
77
<COMMON> 7,633
<OTHER-SE> 18,245,808
<TOTAL-LIABILITY-AND-EQUITY> 178,039
<SALES> 317,653
<TOTAL-REVENUES> 317,653
<CGS> 245,227
<TOTAL-COSTS> 4,323,506
<OTHER-EXPENSES> 1,389,083
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,275,855
<INCOME-PRETAX> (5,394,936)
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<INCOME-CONTINUING> (5,762,666)
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<CHANGES> 0
<NET-INCOME> (5,762,666)
<EPS-PRIMARY> (0.92)
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