UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-KSB
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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
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(Name of small business issuer as specified in its charter)
Delaware 87-0461856
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
392 E. 12300 South, Suite J
Draper, UT 84020
(Address of principal executive offices)
Issuer's telephone number, including area code: (801) 576-9333
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
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Certain portions of the documents of the issuer listed below have been
incorporated by reference into the indicated parts of the Form 10-KSB:
Notice of Annual Meeting of Shareholders and Proxy Statement
anticipated to be filed within 120 days after December 31,
1997 . . . . . . . Part III, Items 9-12
Transitional Small Business Disclosure Format: Yes_____ No X
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PART I
ITEM 1. BUSINESS
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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. It is anticipated that Intermark would distribute the INNOVUS
Multimedia software as well as third party software products. There is no
assurance that the proposed transaction with Intermark will occur.
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
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
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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.
The Innovus Product Line
The following software products are 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
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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.
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.
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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
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.
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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.
The Company's executive offices are currently 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 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".
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.
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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 judgement 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.
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
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Year Ending December 31, 1996
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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
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Year Ending December 31, 1997
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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 184,100 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. The
figures for 1997 are derived from financial statements which have not been
audited, and are subject to adjustment upon audit.
<TABLE>
<CAPTION>
Year ended December 31
-----------------------------------------------------------------------------
Statement of 1997 1996 1995 1994
- ------------ ---- ---- ---- ----
operations data
- ---------------
<S> <C> <C> <C> <C>
Revenues $317,653 $597,567 $189,380 $193,848
Costs of products and
services sold 238,810 302,571 123,701 234,234
Amortization 1,142,838 796,673 315,464 --
Product development -- 1,185,525 1,340,415 444,855
Selling and marketing
expense 1,211,238 3,988,987 1,417,396 425,403
General and
administrative 876,977 1,279,542 719,862 537,860
Net (loss) $(4,541,292) $(7,791,146) $(3,735,351) $(1,554,213)
Net (loss) per share $(0.78) $(1.59) $(0.98) $(0.60)
<CAPTION>
At December 31
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Balance sheet data 1997 1996 1995 1994
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<S> <C> <C> <C> <C>
Current assets $128,751 $1,161,735 $2,466,060 $387,370
Software development
costs 775,568 809,824 886,153 408,384
Current liabilities 773,071 1,124,592 473,460 1,521,294
Long term liabilities (net) 30,011 728,555 722,785 180,961
Stockholders' equity
(deficit) $183,717 $1,490,029 $3,553,885 $(658,474)
</TABLE>
General
As of April 15, 1998, the extended filing deadline for this Form
10-KSB, the Company had not completed the audit of its financial statements for
the year ended December 31, 1997. The financial statements filed with this Form
10-KSB have not been audited and omit substantially all footnote disclosure. The
financial statements are subject to adjustments on audit (which management
believes will consist of normally occurring adjustments and possible adjustments
to capitalized software).
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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.
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 reflect be
indicative of the results of future operations.
Year ended December 31, 1997 compared to year ended December 31, 1996
Amounts stated for 1997 are derived from unaudited financial statements
and are subject to adjustment. See the heading "General" in this Item.
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 $238,810 or 75% 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 $1,211,238 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. In the light of the low level of product sales, the Company stopped
development on Version 3.0 of the software. In the year ended December 31, 1997,
$1,142,838 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.
General and administrative expenses were $876,977 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 an din 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 $4,541,292 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 $0.78 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.
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 $673,479. 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
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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.
At December 31, 1997, the Company had long term liabilities of $30,011.
This reflects the sale of the Company's building, relieving the Company from the
first and second mortgages, as well as the sale of telephone equipment subject
to a lease obligation.
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.
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
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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
Unaudited financial statements are filed as part of this report on
pages F-1 through F-4.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL STATEMENT DISCLOSURE.
Not applicable.
- 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 current directors of
the Company, who will serve until the next annual meeting of shareholders or
until their successors are elected or appointed and qualified, and (ii) the
current executive officers of the Company, who are elected to serve at the
discretion of the Board of Directors.
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 35 Director
Information regarding the Company's directors and executive officers in
the Company's Proxy Statement to be filed within 120 days after December 31,
1997, with the Securities and Exchange Commission relating to the Company's
Annual Meeting of Shareholders and is incorporated herein by reference thereto.
ITEM 10. EXECUTIVE COMPENSATION.
Information regarding the compensation of the Company's executives
appears under the section "Management Compensation" in the Company's Proxy
Statement to be filed within 120 days after December 31, 1997, with the
Securities and Exchange Commission relating to the Company's Annual Meeting of
Shareholders and is incorporated herein by reference thereto.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information regarding the stock ownership of management and certain
beneficial owners appears under the section "Security Ownership of Certain
Beneficial Owners and Management" in the Company's Proxy Statement to be filed
within 120 days after December 31, 1997, with the Securities and Exchange
Commission relating to the company's Annual Meeting of Shareholders and is
incorporated herein by reference thereto.
- 15 -
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information regarding the transactions and relationships between the
Company and certain affiliates appears under the section "Management" and
"Certain Transactions" in the Company's Proxy Statement to be filed within 120
days after December 31, 1997, with the Securities and Exchange Commission
relating to the Company's Annual Meeting of Shareholders and is incorporated
herein by reference thereto.
- 16 -
<PAGE>
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
Consolidated Unaudited Balance Sheets at December 31, 1997 and 1996....... F-1
Consolidated Unaudited Statements of Operations for the Years
Ended December 31, 1997 and 1996 ...................................... F-2
Consolidated Unaudited Statements of Cash Flows for the Years
Ended December 31, 1997 and 1996 ...................................... F-3
Notes to Consolidated Unaudited Financial Statements...................... F-4
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 **
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
- 17 -
<PAGE>
* 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.
- 18 -
<PAGE>
<TABLE>
<CAPTION>
Innovus Corporation and Subsidiary
CONSOLIDATED BALANCE SHEETS - UNAUDITED
December 31,
ASSETS
1997 1996
---- ----
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents $ 91,690 $ 886,122
Accounts receivable, net 1,494 116,761
Inventories 6,418 39,003
Prepaid expenses 29,159 119,849
---------- ----------
Total current assets 128,761 1,161,735
PROPERTY AND EQUIPMENT, net 57,190 1,341,175
OTHER ASSETS
Software development costs, net 775,568 809,824
Other 7,280 30,442
---------- ----------
$ 968,799 $3,343,176
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 748,448 $ 716,068
Accrued compensation 21,113 216,805
Accrued liabilities 3,510 126,022
Current maturities of long-term debt 28,099 28,477
Current maturities of capital lease obligations 1,912 37,220
---------- ----------
Total Current liabilities 803,082 1,124,592
LONG-TERN DEBT, less current maturities - 671,564
CAPITAL LEASE OBLIGATIONS, less current maturities - 56,991
---------- ----------
Total liabilities 803,082 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 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 (18,087,801) (13,497,307)
---------- ----------
Total stockholders' equity 165,717 1,490,029
---------- ----------
$ 968,799 $3,343,176
========== ==========
</TABLE>
F-1
<PAGE>
<TABLE>
<CAPTION>
Innovus Corporation and Subsidiary
CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
Year ended December 31,
1997 1996
---- ----
<S> <C> <C>
Net sales $ 317,653 $ 597,567
----------- ----------
Costs and operating expenses
Costs of products and services sold 238,810 302,571
Amortization of software development costs 1,142,838 796,673
Product development - 1,185,525
Selling and marketing 1,211,238 3,988,987
General and administrative 876,977 1,279,542
----------- ----------
3,469,863 7,553,298
----------- ----------
Operating loss (3,152,210) (6,955,731)
----------- ----------
Other income (expense)
Interest income 15,153 35,195
Interest expense for warrants issued with debt (1,187,643) (773,350)
Interest expense, other (65,364) (97,260)
Loss on disposition of equipment (151,228) -
----------- ----------
(1,389,082) (835,415)
----------- ----------
Net loss $(4,541,292) $(7,791,146)
=========== ===========
Loss per common share $ (0.72) $ (1.59)
=========== ===========
Weighted number of shares of common stock
used in per share calculation 6,272,769 4,913,091
=========== ===========
</TABLE>
F-2
<PAGE>
<TABLE>
<CAPTION>
Innovus Corporation and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
Year ended December 31,
1997 1996
---- ----
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities
<S> <C> <C>
Net loss $ (4,541,292) $ (7,791,146)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 1,373,159 972,310
Loss on disposition of assets 151,228 -
Expenses for issued warrants 1,187,643 1,032,276
Changes In assets and liabilities
Accounts receivable 115,267 (56,995)
Inventories 32,585 (39,003)
Accounts payable and accrued expenses (275,890) 652,041
Prepaid expenses and other 113,852 (31,186)
------------ ------------
Total adjustments 2,697,844 2,529,443
------------ ------------
Net cash used in
operating activities (1,843,448) (5,261,703)
------------ ------------
Cash flows from investing activities
Acquisition of property and equipment (13,921) (90,725)
Proceeds from disposition of property and
equipment 930,844 -
Increase in software development costs (1,108,583) (720,344)
------------ ------------
Net cash used in
investing activities (191,660) (811,069)
------------ ------------
Cash flows from financing activities
Proceeds from borrowings 618,000 1,470,300
Payments to reduce long-term debt
and capital lease obligations (1,378,384) (1,075,430)
Net proceeds from issuance of preferred
and common stock2,001,060 2,001,060 4,201,468
Collection of receivable from stockholder - -
------------ ------------
Net cash provided by
financing activities 1,240,676 4,596,338
------------ ------------
Net increase (decrease) in cash and cash equivalents (794,432) (1,476,434)
Cash and cash equivalents at beginning of year 886,122 2,362,556
------------ ------------
Cash and cash equivalents at end of year $ 91,690 $ 886,122
============ ============
</TABLE>
F-3
<PAGE>
Note A - Unaudited Financial Statements
The accompanying financial statements are unaudited. In the opinion of
management, the accompanying unaudited financial statements contain all
necessary adjustments necessary for a fair presentation of financial position
and the result of operations except as disclosed herein.
On an ongoing basis, management reviews the amortization and capitalization of
intangible assets and necessary adjustments to carrying values, if any, are
recorded. Management is currently evaluating the carrying value of software
development costs for impairment purposes. Adjustments may be necessary and such
adjustments may be material.
The Company has omitted or condensed footnotes and other disclosure normally
included in financial statements.
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.
F-4
<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: April 15 , 1998 By /s/ Terry R. Haas
-------------------------
Terry R. Haas, President
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the Company and in the capacities and on
the dates indicated.
Signature Title Date
/s/ Terry R. Haas Chief Executive Officer April 15, 1998
- ------------------------ President and Director
Terry R. Haas
/s/ David Mock Chairman and Director April 15, 1998
- ------------------------ Principal Financial Officer
David Mock
/s/ Brenda Lowe Cornell Director April 15, 1998
- ------------------------
Brenda Lowe Cornell
Director April , 1998
- ------------------------
Michael DeBloois
Director April , 1998
- ------------------------
Richard M. Cott
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 91,690
<SECURITIES> 0
<RECEIVABLES> 1,494
<ALLOWANCES> 0
<INVENTORY> 6,418
<CURRENT-ASSETS> 128,761
<PP&E> 113,036
<DEPRECIATION> 55,846
<TOTAL-ASSETS> 969,799
<CURRENT-LIABILITIES> 748,447
<BONDS> 0
0
77
<COMMON> 7,633
<OTHER-SE> 18,245,808
<TOTAL-LIABILITY-AND-EQUITY> 968,799
<SALES> 317,653
<TOTAL-REVENUES> 317,653
<CGS> 182,008
<TOTAL-COSTS> 1,381,648
<OTHER-EXPENSES> 2,088,215
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,253,007
<INCOME-PRETAX> (4,541,292)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,152,210)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,541,292)
<EPS-PRIMARY> (0.72)
<EPS-DILUTED> (0.72)
</TABLE>
