<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(MARK ONE)
X QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
- ------- EXCHANGE ACT OF 1934
For the quarterly period ended August 31, 1996
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to ____________
COMMISSION FILE NUMBER 0-20866
WILSHIRE TECHNOLOGIES, INC.
(Exact name of small business issuer as specified in its charter)
<TABLE>
<CAPTION>
CALIFORNIA 33-0433823
<S> <C>
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
</TABLE>
5441 AVENIDA ENCINAS, STE. A
CARLSBAD, CALIFORNIA 92008
(Address of principal executive offices)
(619) 929-7200
(Issuer's telephone number)
Check whether the issuer (1) 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
--- ---
The number of shares outstanding of the registrant's only class of
Common Stock, no par value, was 12,931,885 on September 30, 1996.
Transitional Small Business Disclosure Format. Yes No X
--- ---
<PAGE> 2
WILSHIRE TECHNOLOGIES, INC.
INDEX TO FORM 10-QSB
<TABLE>
<CAPTION>
PART 1 - FINANCIAL INFORMATION PAGE
<S> <C>
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of
August 31, 1996 and November 30, 1995 3
Condensed Consolidated Statements of Operations
for the Quarter Ended August 31, 1996 and
August 31, 1995 5
Condensed Consolidated Statements of Operations
for the Nine Months Ended August 31, 1996 and
August 31, 1995 6
Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended August 31, 1996 and
August 31, 1995 7
Notes to Condensed Consolidated Financial Statements 8
Item 2 Management's Discussion and Analysis
or Plan of Operation 12
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
</TABLE>
2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
WILSHIRE TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
August 31, November 30,
1996 1995
---------- ------------
(Unaudited) (Note)
<S> <C> <C>
ASSETS
Current assets:
Cash $ 253,000 $ 18,000
Accounts receivable trade, less allowance for doubtful
accounts of $6,000 and $49,000 at August 31,
1996 and November 30, 1995, respectively 360,000 675,000
Inventories (Note 2) 895,000 1,085,000
Current portion of note receivable from the sale
of discontinued business (Note 7) 173,000 --
Other current assets 180,000 259,000
---------- ----------
Total current assets 1,861,000 2,037,000
Property and equipment, less accumulated depreciation
of $685,000 and $903,000 at August 31, 1996 and
November 30, 1995, respectively 671,000 931,000
Note Receivable from Advanced Materials, Inc.,
net of $750,000 deferred gain (Note 3) -- 1,000,000
Note Receivable from the sale of discontinued business
less current portion (Note 7) 340,000 --
License agreements (Note 5) -- 259,000
Goodwill, less accumulated amortization of $400,000
and $350,000 at August 31, 1996 and November 30,
1995, respectively 471,000 763,000
Other assets 103,000 310,000
---------- ----------
$3,446,000 $5,300,000
========== ==========
</TABLE>
Note: The condensed consolidated balance sheet at November 30, 1995 has
been derived from the audited financial statements at that date but
does not include all of the information and footnotes required by
generally accepted accounting principles for complete financial
statements.
See accompanying notes.
3
<PAGE> 4
WILSHIRE TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
August 31, November 30,
1996 1995
---------- ------------
(Unaudited) (Note)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
Current liabilities:
Accounts payable $ 302,000 $ 915,000
Accrued expenses 622,000 1,030,000
Interest Payable -- 989,000
Line of Credit (Note 4) 1,000,000 --
Current portion of long-term debt (Note 4) -- 2,000
------------ ------------
Total current liabilities 1,924,000 2,936,000
Long-term debt, less current portion (Note 4) -- 7,637,000
Shareholders' equity (net capital deficiency)
Preferred stock, no par value, 2,000,000 shares authorized
and none issued and outstanding -- --
Common stock, no par value, 50,000,000 shares
authorized; 12,931,885 shares and 4,490,455 shares
issued and outstanding at August 31, 1996 and
November 30, 1995, respectively 25,850,000 17,071,000
Common stock warrants 275,000 418,000
Deficit (24,603,000) (22,762,000)
------------ ------------
Total shareholders' equity (net capital deficiency) 1,522,000 (5,273,000)
------------ ------------
$ 3,446,000 $ 5,300,000
============ ============
</TABLE>
Note: The condensed consolidated balance sheet at November 30, 1995 has
been derived from the audited financial statements at that date but
does not include all of the information and footnotes required by
generally accepted accounting principles for complete financial
statements.
See accompanying notes.
4
<PAGE> 5
WILSHIRE TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
August 31,
------------------
1996 1995
---- ----
<S> <C> <C>
Continuing operations:
Net sales $ 712,000 $ 684,000
Cost of sales 639,000 566,000
------------ ------------
Gross profit 73,000 118,000
Operating expenses:
Marketing and selling 146,000 116,000
General and administrative 526,000 438,000
Research and development 138,000 --
Loss from joint venture (Note 6) -- 189,000
------------ ------------
Total operating expenses 810,000 743,000
------------ ------------
Loss from operations (737,000) (625,000)
Other expense (2,000) (1,000)
Interest income (expense), net (27,000) (206,000)
------------ ------------
Loss before provision
for state income taxes (766,000) (832,000)
Provision for state income taxes - current -- --
------------ ------------
Loss from continuing operations $ (766,000) $ (832,000)
Gain from discontinued operations (Note 7) 33,000 --
------------ ------------
Net loss $ (733,000) $ (832,000)
============ ============
Weighted average shares outstanding 12,931,885 4,490,455
============ ============
Loss per share:
Loss from continuing operations $ (0.06) $ (0.19)
Gain from discontined operations -- --
------------ ------------
Net loss per share $ (0.06) $ (0.19)
============ ============
</TABLE>
See accompanying notes.
5
<PAGE> 6
WILSHIRE TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended August 31,
----------------------------
1996 1995
---- ----
<S> <C> <C>
Continuing operations:
Net sales $ 2,434,000 $ 2,377,000
Cost of sales 2,112,000 1,635,000
------------ ------------
Gross profit 322,000 742,000
Operating expenses:
Marketing and selling 428,000 373,000
General and administrative 1,461,000 1,345,000
Research and development 394,000 339,000
Loss from joint venture (Note 6) -- 316,000
------------ ------------
Total operating expenses 2,283,000 2,373,000
------------ ------------
Loss from operations (1,961,000) (1,631,000)
Other income (Note 3) 190,000 --
Interest income (expense), net (96,000) (598,000)
------------ ------------
Loss before provision
for state income taxes (1,867,000) (2,229,000)
Provision for state income taxes - current 1,000 1,000
------------ ------------
Loss from continuing operations $ (1,868,000) $ (2,230,000)
Gain from discontinued operations (Note 7) 27,000 --
------------ ------------
Net loss $ (1,841,000) $ (2,230,000)
============ ============
Weighted average shares outstanding 11,826,825 4,490,455
============ ============
Loss per share:
Loss from continuing operations $ (0.16) $ (0.50)
Gain from discontined operations -- --
------------ ------------
Net loss per share $ (0.16) $ (0.50)
============ ============
</TABLE>
See accompanying notes.
6
<PAGE> 7
WILSHIRE TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended August 31,
----------------------------
1996 1995
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(1,841,000) $(2,668,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 261,000 464,000
Provision for loss on accounts receivable (23,000) (51,000)
Loss on sale of property and equipment -- 5,000
Gain on sale of discontinued operations (27,000) --
Gain on settlement of note receivable (190,000) --
Net change in operating assets and liabilities:
(Increase) decrease in accounts receivable 16,000 98,000
(Increase) decrease in inventories (122,000) (117,000)
Decrease in other current assets 408,000 12,000
Decrease in accounts payable and
accrued expenses (761,000) (346,000)
Increase in interest payable 108,000 639,000
Decrease in amounts due to joint venture -- 55,000
----------- -----------
Net cash used in operating activities (2,171,000) (1,909,000)
----------- -----------
INVESTING ACTIVITIES
Purchase of equipment (104,000) (8,000)
Proceeds from sale of property and equipment -- 5,000
Decrease in other assets 320,000 35,000
----------- -----------
Net cash provided by (used in) investing activities 216,000 32,000
----------- -----------
FINANCING ACTIVITIES
Proceeds from line of credit and long-term debt 1,000,000 1,875,000
Proceeds from settlement of note receivable 1,190,000 --
Payments on notes payable and long-term debt -- (25,000)
----------- -----------
Net cash provided by financing activities 2,190,000 1,850,000
----------- -----------
NET INCREASE (DECREASE) IN CASH 235,000 (27,000)
CASH - BEGINNING OF PERIOD 18,000 75,000
----------- -----------
CASH - END OF PERIOD $ 253,000 $ 48,000
=========== ===========
</TABLE>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
In January, 1996, the Company completed an Exchange Agreement with Trilon
Dominion Partners,LLC pursuant to which the Company exchanged long-term debt and
accrued interest for common stock (Note 4). In June, 1996, the Company completed
the sale of certain assets of the Medical Products division (Note 6).
See accompanying notes.
7
<PAGE> 8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Wilshire Technologies, Inc. (the "Company") develops, manufactures and markets
engineered polymer products for industrial clean room use. The Company, based in
Carlsbad, California, operates through two divisions - - Wilshire Contamination
Control ("WCC"), and Wilshire Gloves ("WGL"). The Company has divested the
Medical Products and Transdermal Products divisions, and will focus primarily on
products used in industrial clean rooms, such as gloves and contamination
control products.
The consolidated financial statements include the accounts of the Company's two
divisions. Significant intercompany amounts and transactions have been
eliminated.
BASIS OF PRESENTATION
The accompanying condensed consolidated unaudited financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB for quarterly
reports under Section 13 or 15(d) of the Securities Exchange Act of 1934.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the quarter ended August 31, 1996 are not necessarily
indicative of the results that may be expected for the fiscal year ending
November 30, 1996. For further information, refer to the financial statements
and footnotes thereto included in the Company's annual report on Form 10-KSB for
the fiscal year ended November 30, 1995.
The Company's financial statements have been presented on a going concern basis,
which contemplates the realization of assets and satisfaction of liabilities in
the normal course of business. The Company has incurred substantial losses since
its inception in 1990, including a loss of $1,841,000 for the nine months ended
August 31, 1996. In addition, there exist unsettled claims related to the breast
implant litigation (see Note 5).
In March 1996, the Board of Directors authorized management to proceed with the
sale of the assets of the Medical Products division which was completed on June
30, 1996, pursuant to a Purchase of Assets and Assumption of Sublease Agreement
with Acacia Laboratories of Texas, Inc., (See Note 7). The disposition of this
business has been accounted for as a discontinued operation. Accordingly, the
financial statements of all prior periods have been restated to exclude the
results of the Medical Products division from the results of continuing
operations.
In addition, management is attempting to raise additional capital to fund its
ongoing operations. While management believes it will be successful, there are
no assurances that sufficient funds will be available to meet the Company's
requirements to fund operations through fiscal year 1997. The ultimate outcome
of this uncertainty cannot be determined and the accompanying consolidated
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amounts
and classification of liabilities that may result from the outcome of this
uncertainty.
8
<PAGE> 9
2. FINANCIAL STATEMENT INFORMATION
Inventories consist of the following:
<TABLE>
<CAPTION>
AUGUST 31, NOVEMBER 30,
1996 1995
---------- ----------
<S> <C> <C>
Raw materials $ 342,000 $ 411,000
Work in process 261,000 159,000
Finished goods 292,000 515,000
========== ==========
$ 895,000 $1,085,000
========== ==========
</TABLE>
3. NOTE RECEIVABLE
Pursuant to an Asset Purchase Agreement dated August 4, 1992 (the
"Divestiture"), the Company sold the assets of its foam products division to
Wilshire Advanced Materials, Inc. ("Advanced Materials"), assigned its Carson,
California and Dallas, Texas facilities to Advanced Materials, and subleased a
portion of the Dallas and Carson facilities back from Advanced Materials. In
connection with this purchase, Advanced Materials issued to the Company a
secured subordinated promissory note in the amount of $1.0 million requiring
quarterly payments of interest at prime plus 2% per annum with the principal due
in full on December 3, 1997.
Pursuant to a second Asset Purchase Agreement dated November 23, 1993, the
Company sold its OEM medical division to Advanced Materials for a purchase price
of approximately $2.3 million, of which approximately $1.6 million was payable
shortly following the transfer of the division and $750,000 was represented by
an amendment and restatement of the existing secured subordinated promissory
note to increase the principal amount from $1.0 million to $1.75 million. The
amended note of $1.75 million was originally shown in the balance sheet net of
the $750,000 deferred gain on the transaction.
On July 3, 1996, pursuant to a Release Agreement, Advanced Materials, Inc. paid
the Company $1,190,000 in full and final payment of all remaining principal and
interest on the amended and restated secured subordinated promissory note dated
November 23, 1993. Accordingly, the Company released $190,000 of the reserve
against the note to state the note at its net realizable value which is included
in other income in the accompanying Statement of Operations.
4. LONG-TERM DEBT
On January 5, 1996, the Company and Trilon Dominion entered an Exchange
Agreement to exchange the note payable dated May 13, 1994, the note payable
dated November 18, 1994 including the five amendments, and the accrued interest
on these notes, all of which totaled approximately $8.8 million, for 8,441,430
shares of common stock valued at $1.04 per share. In addition, Trilon Dominion
surrendered the warrants dated May 13, 1994 and November 18, 1994, entitling it
to purchase 1,507,398 shares (after dilution adjustments) of the Company's
common stock.
Also, on January 5, 1996, the Company and Trilon Dominion entered into a Credit
Agreement (the "Agreement") for a credit line of $1 million secured by the
Company's assets. Under the terms of the Agreement, the principal is due on June
30, 1996 and the interest is payable monthly at a rate of prime plus 3.75%. In
connection with the loan, the Company issued Trilon Dominion a five-year warrant
that entitles Trilon Dominion to purchase 100,000 shares of the Company's
authorized but unissued common stock at an exercise price of $0.75 per share,
subject to adjustment to protect against dilution. The warrant is exercisable
immediately and expires on January 5, 2001. Also, under the terms of the
Agreement, the Company issued Trilon Dominion a second five-year warrant which
only becomes exercisable if the Company does not pay Trilon Dominion the
principal and interest due on June 30, 1996. The second warrant entitles Trilon
Dominion to
9
<PAGE> 10
purchase 25,000 shares of the Company's authorized but unissued common stock at
an exercise price equal to the closing price on June 30, 1996, which was $1.75
per share and it expires on January 5, 2001. The holder of each of such
five-year warrants may, without payment to the Company, convert the warrant in
whole or in part into shares of the Company's common stock having a market value
equal to the difference between (x) the market value per share of common stock
multiplied by the number of warrants that are converted and (y) the warrant
exercise price, multiplied by the number of warrants that are converted.
Pursuant to the Agreement, the Company used part of the proceeds of the credit
line to repay the $400,000 borrowed from Trilon Dominion under the sixth
amendment to the November 18, 1994 Credit Agreement, plus the interest accrued
on that amount.
On June 30, 1996, the Company and Trilon Dominion entered into an Amendment to
the Agreement ("First Amendment") whereby the termination date was changed from
June 30, 1996, to December 31, 1996.
On September 30, 1996, the Company and Trilon Dominion entered into a Second
Amendment to the Agreement ("Second Amendment") whereby the amount of the credit
line was increased from $1,000,000 to $2,000,000 and the termination date was
extended from December 31,1996 to June 30, 1997. Pursuant to the Second
Amendment, the Company can draw on the additional credit line upon achievement
of certain milestones. In addition, two warrants were issued in connection with
the Second Amendment. The first warrant entitles Trilon Dominion to purchase
100,000 shares of the Company's authorized but unissued common stock at an
exercise price of $1.3125 per share, subject to adjustment to protect against
dilution. The warrant is exercisable immediately and expires on September 30,
2001. Also, under the terms of the Agreement, the Company issued Trilon Dominion
a second five-year warrant which only becomes exercisable if the Company does
not pay Trilon Dominion the principal and interest due on June 30, 1997. The
second warrant entitles Trilon Dominion to purchase 25,000 shares of the
Company's authorized but unissued common stock at an exercise price equal to the
closing price on June 30, 1997, and it expires on September 30, 2001. The holder
of each of such five-year warrants may, without payment to the Company, convert
the warrant in whole or in part into shares of the Company's common stock having
a market value equal to the difference between (x) the market value per share of
common stock multiplied by the number of warrants that are converted and (y) the
warrant exercise price, multiplied by the number of warrants that are converted.
5. COMMITMENTS AND CONTINGENCIES
BREAST IMPLANT LITIGATION AND SHAREHOLDER LAWSUITS AND SEC INVESTIGATION
During the first nine months of 1996, there have been no significant
developments in the Breast Implant Litigation or the Shareholder Lawsuit. For
information regarding these legal proceedings, refer to the information
contained in the Company's Annual Report on Form 10-KSB for the Fiscal Year
Ended November 30, 1995, under Note 6 to the Financial Statements included
therein.
On September 24, 1996, the Securities and Exchange Commission ("SEC") entered an
order pursuant to Section 21C of the Securities Exchange Act ordering the
Company to cease and desist from committing or causing violation of certain
antifraud, reporting, record-keeping, and internal control provisions of the
Securities Exchange Act. The Company consented to the Order without admitting or
denying the SEC's findings.
10
<PAGE> 11
LICENSE AGREEMENTS AND RELOCATION COSTS
In 1993, the Company entered into two ten year worldwide License Agreements for
a proprietary polyurethane material with Innovative Technologies, Ltd., ("IT") a
company based in the United Kingdom.
On April 18, 1996, the Company completed two additional Agreements with IT
related to the License Agreements noted above. Pursuant to these Agreements, the
Company transferred certain rights under the License Agreements back to IT, and
IT canceled $642,000 in minimum royalties which the Company had accrued under
the License Agreements. As a consequence of these additional Agreements, the
Company has written off the net book value of the License Agreements and has
deferred the gain against $450,000 of estimated relocation costs of the
developmental glove plant which will be relocated from the IT facility in the
United Kingdom.
6. INVESTMENT IN JOINT VENTURE
On February 17, 1993 the Company and Intelligent Pharmaceuticals Corporation
("IPC") entered into an agreement forming Wilshire Transdermal Products, a 50/50
joint venture (the "JV"). The JV was established primarily to develop and
commercialize, on a worldwide basis, over-the-counter transdermal products in
the non-prescriptive market. In May, 1995, the JV received an approval from the
Mexican Ministry of Health for its first transdermal product, TrimPatch(TM).
TrimPatch(TM) is an appetite suppressant delivered through a transdermal patch
that has been in development for more than two years.
On October 31, 1995, the Company entered a buy-out agreement with IPC, whereby
the Company purchased all of IPC's interest in the joint venture. The purchase
price is equal to the amount of documented costs paid by IPC on behalf of the
joint venture, not to exceed $1,250,000. The total price would have been paid as
a percentage of TrimPatch(TM) sales and such payments charged against the
results of operations. Through August 31, 1996, there have been no sales of
TrimPatch(TM).
On September 30, 1996, the Company completed an Agreement of Purchase and Sale
of TrimPatch(TM) Business and Assets with IPC whereby IPC purchased from the
Company certain assets of its transdermal products business related to
TrimPatch(TM). The sale price of $3,130,000 will be paid out based on future
sales of TrimPatch(TM). The assets sold include all equipment, inventory,
patents, trademarks, trade names, and regulatory approvals used in the
TrimPatch(TM) business, which Wilshire previously has expensed in its financial
statements. If Intelligent Pharmaceuticals Corporation cannot sell the existing
inventory, the sale price will be adjusted to $1,868,000. Wilshire will
recognize the revenue from the sale over the period the proceeds are received.
7. DISCONTINUED OPERATIONS
On June 30, 1996, pursuant to a Purchase of Assets and Assumption of Sublease
Agreement, the Company sold certain assets of the Wilshire Medical Products
division ("WMP") to Acacia Laboratories of Texas, Inc. ("Acacia"), a
wholly-owned subsidiary of Acacia Laboratories, Inc., a California corporation,
that does business under the name of Horizon Medical, Inc. The assets sold
consisted of equipment, inventory, accounts receivable, patents, trademarks,
trade names, and regulatory approvals used in the Medical Products business. The
purchase price of $1,082,000 consisted of $200,000 cash at closing, $342,000 in
accounts receivable to be collected by the Company, and $540,000 in a secured,
fully amortized, 36 month promissory note in favor of the Company, bearing
interest at the rate of 5% per annum.
11
<PAGE> 12
Sales of WMP for the third quarter and nine months ended August 31, 1996, and
1995 were as follows:
<TABLE>
<CAPTION>
Three Months Ended August 31, Nine Months Ended August 31,
----------------------------- ----------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales $-- $346,000 $888,000 $1,062,000
</TABLE>
The effect on the results of operations from the sale of the WMP division was as
follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
August 31, 1996 August 31, 1996
------------------ -----------------
<S> <C> <C>
Income from operations of discontinued $ -- $ 18,000
business
Loss on disposal of discontinued $ -- $(24,000)
business, net of estimated operating
results of $67,000 during phase-out
period
Gain from reversal of excess accrued
expenses related to disposal of
discontinued business $33,000 $33,000
------- --------
Total $33,000 $ 27,000
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
RESULTS OF OPERATIONS
NET SALES
Wilshire Contamination Control and Wilshire Gloves market their products
directly to end users through an internal sales force utilizing outside
distributors. Revenue for all sales is recognized when title transfers,
generally when products are shipped. Wilshire Transdermal Products did not
record sales in 1995, or the first nine months of 1996.
Quarter
Net Sales increased by $28,000 (4.1%) to $712,000 in the third quarter of 1996
from $684,000 in the third quarter of 1995, due to increased sales of gloves and
contamination control products.
Nine Months
Net Sales increased by $57,000 (2.4%) to $2,434,000 in the first nine months of
1996 from $2,377,000 in the first nine months of 1995, due to increased
shipments of gloves and contamination control products.
GROSS PROFIT
Quarter
Gross profit decreased by $45,000 to $73,000 in the third quarter of 1996 from
$118,000 in the third quarter of 1995 primarily due to the costs of the
developmental glove plant. Gross profit margin as a percent of sales decreased
to 10.3% in the third quarter of 1996 from 17.3% in the third quarter of 1995.
Excluding the impact of the glove sales and the related cost of sales on gross
profit, the gross profit margin as a percent of sales decreased to 25.3% in the
third quarter of 1996 from 36.9% in the third quarter of 1995.
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Nine Months
Gross profit decreased $420,000 to $322,000 in the first nine months of 1996
from $742,000 in the first nine months of 1995, reflecting the costs of the
developmental glove plant. Gross profit margin as a percent of sales decreased
to 13.2% in the first nine months of 1996 from 31.2% in the first nine months of
1995. Excluding the impact of the glove sales and cost of sales on gross profit,
the gross profit margin as a percent of sales decreased to 32.7% in the first
nine months of 1996 from 36.9% in the first nine months of 1995.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses include additional costs related to
the Company's marketing activities and administrative costs (such as executive
and office salaries, related payroll expenses, investor relations, professional
fees, supplies and utilities).
Quarter
Selling, general and administrative expenses increased $118,000 (21.3%) to
$672,000 in the third quarter of 1996 from $554,000 in the third quarter of 1995
primarily due to lower expenses in 1995 related to the reduction in the
provision for bad debts, and higher salary expenses in 1996 related to the glove
business.
Nine Months
Selling, general and administrative expenses increased $171,000 (10.0%) to
$1,889,000 in the first nine months of 1996 from $1,718,000 in the first nine
months of 1995, primarily due to the accrual of relocation costs related to the
move of the developmental glove plant from the U.K. (See Note 5), and higher
trademark amortization expense.
RESEARCH AND DEVELOPMENT
Quarter
Research and development expenses were $138,000 in the third quarter of 1996.
There were no expenses reported in the third quarter of 1995 primarily due to
the reclassification of certain glove manufacturing costs from research and
development to cost of sales in 1995. As a percentage of sales, research and
development expenses were 19.4% in the third quarter of 1996.
Nine Months
Research and development expenses increased $55,000 ((16.2%) to $394,000 in the
first nine months of 1996 from $339,000 in the first nine months of 1995
primarily due to increased project expense.
OTHER INCOME (EXPENSE), NET
The other income in the and first nine months of 1996 was related to the gain
from the payment of the note receivable by Advanced Materials, Inc. (See Note
3).
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INTEREST INCOME (EXPENSE), NET
The Company reported lower interest expense in the third quarter of 1996 and in
the first nine months of 1996 versus the same periods of 1995 due to reduced
debt outstanding. The interest expense was related primarily to the note
payable and line of credit due to Trilon Dominion Partners, LLC. (see Note 4).
INCOME TAXES
For the quarters ended August 31, 1996 and 1995, the Company sustained losses
for both financial reporting and income tax purposes. A tax provision of $1,000
related to state income taxes was recorded in the financial statements for 1996
and 1995.
LIQUIDITY AND CAPITAL RESOURCES
Management assesses the Company's liquidity by its ability to generate cash to
fund its operations. Significant factors in the management of liquidity are:
funds generated by operations; levels of accounts receivable, inventories,
accounts payable and capital expenditures; adequate lines of credit; and
financial flexibility to attract long-term capital on satisfactory terms.
During 1995 and the first nine months of 1996, the Company has not generated
sufficient cash from operations to fund its working capital requirements. Net
cash used in operating activities was $2,171,000 in the first nine months of
1996 versus $1,909,000 in the first nine months of 1995. The increase in the
cash used in operating activities was primarily due to payments of accounts
payable.
Net cash provided by investing activities was $216,000 in the first nine months
of 1996, versus net cash provided by investing activities of $32,000 in the
first nine months of 1995.
Net cash provided by financing activities was $2,190,000 in the first nine
months of 1996 versus $1,850,000 in the first nine months of 1995. The debt
financing in 1996 was obtained from Trilon Dominion Partners, LLC and the debt
financing in 1995 was obtained from Dominion Capital, Inc. The proceeds from the
settlement of the note receivable is described in note 3 to the financial
statements.
On January 5, 1996, the Company and Trilon Dominion entered an Exchange
Agreement to exchange the note payable dated May 13, 1994, the note payable
dated November 18, 1994 including the five amendments, and the accrued interest
on these notes, all of which totaled approximately $8.8 million, for 8,441,430
shares of common stock valued at $1.04 per share. In addition, Trilon Dominion
surrendered the warrants dated May 13, 1994 and November 18, 1994, entitling it
to purchase 1,507,398 shares (after dilution adjustments) of the Company's
common stock.
Also, on January 5, 1996, the Company and Trilon Dominion entered into a Credit
Agreement (the "Agreement") for a credit line of $1 million secured by the
Company's assets. Under the terms of the Agreement, the principal is due on June
30, 1996 and the interest is payable monthly at a rate of prime plus 3.75%. In
connection with the loan, the Company issued Trilon Dominion a five-year warrant
that entitles Trilon Dominion to purchase 100,000 shares of the Company's
authorized but unissued common stock at an exercise price of $0.75 per share,
subject to adjustment to protect against dilution. The warrant is exercisable
immediately and expires on January 5, 2001. Also, under the terms of the
Agreement, the Company issued Trilon Dominion a second five-year warrant which
only becomes exercisable if the Company does not pay Trilon Dominion the
principal and interest due on June 30, 1996. The second warrant entitles Trilon
Dominion to purchase 25,000 shares of the Company's authorized but unissued
common stock at an exercise price equal to the closing price on June 30, 1996,
and it expires on January 5, 2001.
14
<PAGE> 15
Pursuant to the Agreement, the Company used part of the proceeds of the credit
line to repay the $400,000 borrowed from Trilon Dominion under the sixth
amendment to the November 18, 1994 Credit Agreement, plus the interest accrued
on that amount. Also, the Company used an additional $400,000 of the credit line
in January 1996 to pay past due accounts payable, and the final $200,000
available under the credit line in February 1996 to fund working capital
requirements.
On June 30, 1996, the Company and Trilon Dominion entered into an Amendment to
the Agreement whereby the termination date was changed from June 30, 1996, to
December 31, 1996.
On July 3, 1996, pursuant to a Release Agreement, Advanced Materials, Inc., paid
the Company $1,190,000 in full and final payment of all remaining principal and
interest on the amended and restated secured subordinated promissory note dated
November 23, 1993.
On June 30, 1996, pursuant to a Purchase of Assets and Assumption of Sublease
Agreement, the Company sold certain assets of the Wilshire Medical Products
division ("WMP") to Acacia Laboratories of Texas, Inc. The purchase price of
$1,082,000 consisted of $200,000 cash at closing, $342,000 in accounts
receivable to be collected by the Company, and $540,000 in a secured, fully
amortized, 36 month promissory note in favor of the Company, bearing interest at
the rate of 5% per annum.
On September 30, 1996, the Company and Trilon Dominion entered into a Second
Amendment to the Agreement ("Second Amendment") whereby the amount of the credit
line was increased from $1,000,000 to $2,000,000 and the termination date was
extended from December 31,1996 to June 30, 1997. Pursuant to the Second
Amendment, the Company can draw on the additional credit line upon achievement
of certain milestones. In addition, two warrants were issued in connection with
the Second Amendment. The first warrant entitles Trilon Dominion to purchase
100,000 shares of the Company's authorized but unissued common stock at an
exercise price of $1.3125 per share, subject to adjustment to protect against
dilution. The warrant is exercisable immediately and expires on September 30,
2001. Also, under the terms of the Agreement, the Company issued Trilon Dominion
a second five-year warrant which only becomes exercisable if the Company does
not pay Trilon Dominion the principal and interest due on June 30, 1997. The
second warrant entitles Trilon Dominion to purchase 25,000 shares of the
Company's authorized but unissued common stock at an exercise price equal to the
closing price on June 30, 1997, and it expires on September 30, 2001. The holder
of each of such five-year warrants may, without payment to the Company, convert
the warrant in whole or in part into shares of the Company's common stock having
a market value equal to the difference between (x) the market value per share of
common stock multiplied by the number of warrants that are converted and (y) the
warrant exercise price, multiplied by the number of warrants that are converted.
In addition to completing the above mentioned transactions, management is
attempting to raise additional capital to fund its ongoing operations. While
management believes it will be successful, there are no assurances that
sufficient funds will be available to meet the Company's requirements to fund
operations through fiscal year 1997. The ultimate outcome of this uncertainty
cannot be determined.
15
<PAGE> 16
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS:
For information regarding legal proceedings, refer to the information
contained in the Company's annual report on Form 10-KSB for the
fiscal year ended November 30, 1995 under the heading, "Legal
Proceedings" and Note 5 to the financial statements herein.
ITEM 2. CHANGES IN SECURITIES:
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES:
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
None
ITEM 5. OTHER INFORMATION:
On September 24, 1996, the Securities and Exchange Commission ("SEC")
entered an order pursuant to Section 21C of the Securities Exchange
Act ordering the Company to cease and desist from committing or
causing violation of certain antifraud, reporting, record-keeping,
and internal control provisions of the Securities Exchange Act. The
Company consented to the order without admitting or denying the SEC's
findings.
On September 30, 1996, the Company completed an Agreement of Purchase
and Sale of TrimPatch(TM) Business and Assets with IPC whereby IPC
purchased from the Company certain assets of its transdermal products
business related to TrimPatch(TM). The sale price of $3,130,000 will
be paid out based on future sales of TrimPatch(TM). The assets sold
include all equipment, inventory, patents, trademarks, trade names,
and regulatory approvals used in the TrimPatch(TM) business, which
Wilshire previously has expensed in its financial statements. If
Intelligent Pharmaceuticals Corporation cannot sell the existing
inventory, the sale price will be adjusted to $1,868,000. Wilshire
will recognize the revenue from the sale over the period the proceeds
are received.
On September 30, 1996, the Company and Trilon Dominion entered into a
Second Amendment to the Agreement ("Second Amendment") whereby the
amount of the credit line was increased from $1,000,000 to $2,000,000
and the termination date was extended from December 31,1996 to June
30, 1997. Pursuant to the Second Amendment, the Company can draw on
the additional credit line upon achievement of certain milestones. In
addition, two warrants were issued in connection with the Second
Amendment. The first warrant entitles Trilon Dominion to purchase
100,000 shares of the Company's authorized but unissued common stock
at an exercise price of $1.3125 per share, subject to adjustment to
protect against dilution. The warrant is exercisable immediately and
expires on September 30, 2001. Also, under the terms of the
Agreement, the Company issued Trilon Dominion a second five-year
warrant which only becomes exercisable if the Company does not pay
Trilon Dominion the principal and interest due on June 30, 1997. The
second warrant entitles Trilon Dominion to purchase 25,000 shares of
the Company's authorized but unissued common stock at an exercise
price equal to the closing price on June 30, 1997, and it expires on
September 30, 2001. The holder of each of such five-year warrants
may, without payment to the Company, convert the warrant in whole or
in part into shares of the
16
<PAGE> 17
Company's common stock having a market value equal to the difference
between (x) the market value per share of common stock multiplied by
the number of warrants that are converted and (y) the warrant
exercise price, multiplied by the number of warrants that are
converted.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
10.83 Addendum Agreement dated July 26, 1996 to the Manufacturing
and Supply Agreement dated April 11, 1996 between Advanced
Barrier Technologies, Inc. and the Registrant.
10.84 Bailment Agreement dated September 6, 1996 between Coastline
de Mexico S.A. de C.V., Advanced Barrier Technologies, Inc.
and the Registrant.
10.85 Offer of Settlement of Wilshire Technologies, Inc. dated
August 5, 1996 to the U.S. Securities and Exchange
Commission.
10.86 Order Instituting Proceedings Pursuant to Section 21C of the
Securities Exchange Act of 1934, Making Findings and
Imposing a Cease and Desist Order, dated September 24, 1996
entered by the U.S. Securities and Exchange Commission
against the Registrant.
10.87 Agreement of Purchase and Sale of TrimPatch(TM) Business and
Assets dated September 30, 1996 between Intelligent
Pharmaceuticals Corporation and the Registrant.
(b) REPORTS ON FORM 8-K:
The Registrant filed a report on Form 8-K on August 15, 1996,
which described the resignation of the Company's Chief Executive
Officer, the appointment of a new Chief Executive Officer, the
resignation of a director of the Company, and the election of a
new director of the Company.
17
<PAGE> 18
SIGNATURES
In accordance with requirements of the Securities Exchange Act, the registrant
has caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
WILSHIRE TECHNOLOGIES, INC.
Dated: October 11, 1996 By: James W. Klingler
---------------------
James W. Klingler
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
18
<PAGE> 19
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Sequentially
Number Description Numbered Page
- ------ ----------- -------------
<S> <C> <C>
10.83 Addendum Agreement dated July 26, 1996 to the Manufacturing and
Supply Agreement dated April 11, 1996 between Advanced Barrier
Technologies, Inc. and the Registrant.
10.84 Bailment Agreement dated September 6, 1996 between Coastline de
Mexico S.A. de C.V., Advanced Barrier Technologies, Inc. and the
Registrant.
10.85 Offer of Settlement of Wilshire Technologies, Inc. dated August
5, 1996 to the U.S. Securities and Exchange Commission.
10.86 Order Instituting Proceedings Pursuant to Section 21C of the
Securities Exchange Act of 1934, Making Findings and
Imposing a Cease and Desist Order, dated September 24, 1996
entered by the U.S. Securities and Exchange Commission
against the Registrant.
10.87 Agreement of Purchase and Sale of TrimPatch(TM)Business and Assets
dated September 30, 1996 between Intelligent Pharmaceuticals
Corporation and the Registrant.
10.88 Second Amendment dated September 30, 1996 to Credit
Agreement and Grid Promissory Note dated January 5, 1996,
between Trilon Dominion Partners, LLC, and the Registrant.
</TABLE>
21
<PAGE> 1
EXHIBIT 10.83
ADDENDUM TO THE MANUFACTURING AND SUPPLY AGREEMENT
DATED APRIL 11, 1996
This Addendum Agreement ("the Addendum Agreement") to the Manufacturing and
Supply Agreement ("the Master Agreement") is made effective on the 26th day of
July, 1996 ("Effective Date") by and between Wilshire Technologies, Inc.
("WTI"), a California corporation with a place of business at 5441 Avenida
Encinas, Suite A, Carlsbad, California 92008 and Advanced Barrier Technologies,
Inc. ("ABT"), a California corporation with a place of business at 3709 Hillview
Way, Oceanside, California, 92056.
RECITALS
WHEREAS, WTI, a manufacturer and supplier of polyurethane, breathable gloves
used for specialized applications in the electronics industry, and ABT, a
manufacturer with a production facility in Tijuana, Mexico, entered into the
Master Agreement dated April 11, 1996;
NOW THEREFORE, the parties hereto agree to amend certain sections of the Master
Agreement which are hereby superseded by the amended sections as follows:
1.3 WTI Equipment shall mean the special production equipment listed on
Exhibit A of the Master Agreement and the R & D Equipment listed on Exhibit D of
the Addendum Agreement attached hereto, owned by WTI and installed at the
Tijuana Facility for the purpose of manufacturing the Product.
3.1 WTI shall procure the WTI Equipment at its expense. WTI will pay
the WTI Equipment suppliers directly per the terms agreed between such suppliers
and WTI. WTI will maintain a petty cash fund for purchases of small parts needed
to install the WTI Equipment. WTI will pay ABT to install the WTI Equipment in
the Tijuana Facility in accordance with the terms of payment for Phase 1 in
Exhibit C of the Master Agreement and in Exhibit E to this Addendum Agreement.
All title and ownership in the WTI Equipment shall be retained by WTI, and ABT
shall not permit any lien or third party claim to be asserted with respect to
the WTI Equipment. Further, ABT shall cooperate with WTI to ensure that all WTI
Equipment is clearly and conspicuously labeled "Property of Wilshire
Technologies, Inc."
4.2 The sole and exclusive compensation payable by WTI to ABT for the
Manufacturing Services will be as listed on Exhibit C to the Master Agreement
and Exhibit E to this Addendum Agreement.
1
<PAGE> 2
IN WITNESS WHEREOF, the parties hereto have caused this Addendum
Agreement to the Master Agreement to be executed by their duly authorized
representatives.
WILSHIRE TECHNOLOGIES, INC. ADVANCED BARRIER TECHNOLOGIES, INC.
By: /s/ Stephen P. Scibelli, Jr. By: /s/Ralph M. Sias
------------------------------ ---------------------------
Stephen P. Scibelli, Jr. Ralph M. Sias
Title: President & CEO Title: President
------------------------------ ---------------------------
Date: 7/25/96 Date: 7/25/96
------------------------------ ---------------------------
2
<PAGE> 3
ADDENDUM TO THE MANUFACTURING AND SUPPLY AGREEMENT
DATED APRIL 11, 1996
EXHIBIT D
WTI R & D Equipment
3
<PAGE> 4
ADDENDUM TO THE MANUFACTURING AND SUPPLY AGREEMENT
DATED APRIL 11, 1996
EXHIBIT E
MANUFACTURING SERVICES PAYMENTS
FOR THE WTI R & D EQUIPMENT
PHASE 1 - PREPARATION OF FACILITY AND INSTALLATION OF EQUIPMENT
Term: From the Effective Date of this Addendum Agreement until the date
that the WTI R & D Equipment has operated for one Shift. A "Shift"
is defined as 48 hours per week.
Payments: WTI will pay ABT $45,000. upon signing of this Addendum Agreement as
reimbursement for the labor and materials costs related to
installation in the Tijuana Facility, according to WTI
specifications, of the following:
(1) Electrical wiring and transformers (5) Air Compression
(2) Ventilation ducts (6) Air Conditioning
(3) R/O Water Treatment (7) Plumbing
(4) Hydraulics (8) Building Modifications
In return for receiving the full payment in advance, ABT will use
its best efforts to complete the improvements described above by
September 15, 1996.
To eliminate duplication in the facility preparation costs for the
production plant, the following items in Exhibit C of the Master
Agreement will be reduced by approximately $20,000: (1) Air
Compression, (2) Hydraulics, and (3) Building Modifications
WTI will pay $500 per day, per person, plus travel expenses, for up
to two people to assist in the equipment removal and preparation for
shipment in England.
PHASE 2 - PRODUCTION
Term: From the date that the WTI R & D Equipment operates for one Shift
until this Addendum Agreement is terminated. A "Shift" is defined as
48 hours per week. A "Unit" is defined as one glove.
Payments: WTI will pay ABT $7,500. per month for the use of approximately
10,000 square feet in ABT's Tijuana Facility, plus $0.10 per Unit of
the Product produced by the WTI R & D Equipment. ABT shall pay all
rent, insurance, and taxes, and provide at its expense all skilled
personnel and related utilities as provided in the Master Agreement.
At the conclusion of each production week, ABT shall forward its
invoice for such manufacturing service fees to WTI via fax. WTI
shall pay such invoices on a net 30 day basis from the date of such
invoice.
4
<PAGE> 1
EXHIBIT 10.84
BAILMENT AGREEMENT
BAILMENT AGREEMENT ENTERED INTO BY AND BETWEEN WILSHIRE TECHNOLOGIES, INC.
(HEREINAFTER REFERRED TO AS "BAILOR"), COASTLINE DE MEXICO SA DE CV (HEREINAFTER
REFERRED TO AS "BAILEE"), AND ADVANCED BARRIER TECHNOLOGIES, INC. (HEREINAFTER
REFERRED TO AS "ABT"), EXECUTED BY AND BETWEEN MR. JAMES W. KLINGLER IN
REPRESENTATION OF THE "BAILOR", MR. LARRY ANGIONE IN REPRESENTATION OF THE
"BAILEE", AND MR. RALPH SIAS IN REPRESENTATION OF ABT, PURSUANT TO THE FOLLOWING
RECITALS AND CLAUSES:
R E C I T A L S
I. BAILOR states:
a) That it is a corporation organized and existing under the Laws
of the State of California, with its principal place of
business located at 5441 Avenida Encinas, Suite A, Carlsbad,
California.
b) That it is the owner of the machinery and equipment subject
matter of this Agreement.
c) That it is willing to grant in commodatum to BAILEE the
possession of the machinery, tools, equipment and components
listed in EXHIBIT "A" which is attached to this Agreement,
(HEREINAFTER REFERRED TO AS THE "EQUIPMENT").
II. BAILEE states:
a) That it is a company organized and existing under the laws of
Mexico, with its principal place of business located at
Avenida Ferocarril Km. 14.5, Bodega 9-10, Centro Industrial
Limon Los Pinos, Tijuana, Baja California, Mexico.
<PAGE> 2
b) That it is a company devoted to providing Maquiladora
services, and that on October 26, 1995, its parent company
executed a SHELTER AGREEMENT with Advanced Barrier
Technologies, Inc. for the manufacture of certain products in
Mexico.
c) That it wishes to have in commodatum the Equipment referred to
above in order to fulfill the purposes mentioned hereinafter.
IN CONSIDERATION OF THE FOREGOING,
THE PARTIES AGREE ON THE FOLLOWING:
C L A U S E S
FIRST.- PURPOSE OF THE AGREEMENT
BAILOR gratuitously grants to BAILEE the use of the Equipment
referred to in EXHIBIT "A" of this Agreement, for the exclusive purpose of
complying with its obligations under the SHELTER AGREEMENT executed by BAILEE's
parent company and Advanced Barrier Technologies, Inc. on October 26, 1995.
Title and ownership of the Equipment shall at all times remain vested in BAILOR.
SECOND.- DELIVERY OF EQUIPMENT
BAILOR shall deliver the Equipment to BAILEE in commodatum, at
the times agreed to by the parties. BAILEE hereby expressly acknowledges receipt
of the Equipment listed in EXHIBIT "A". The parties may from time to time amend
the list attached as EXHIBIT "A" so that it may include Equipment which may be
delivered to BAILEE in the future by agreement of the parties. These will be
complete with all their parts, additions and accessories in operating condition.
2
<PAGE> 3
BAILOR will deliver the Equipment at Coastline de Mexico SA de
CV, C/O Miles & Joffroy, 2675 Customhouse Court, Suite A, San Diego, California,
92173, United States of America and the BAILEE shall import the Equipment into
Mexico under the temporary importation regime under BAILEE's Maquiladora
Program. Any item added to the Equipment delivered to the BAILEE in the terms
and conditions herein established shall continue to be imported on a temporary
basis and must be used in the domicile located at Avenida Ferocarril Km. 14.5,
Bodega 9-10, Centro Industrial Limon Los Pinos, Tijuana, Baja California,
Mexico.
BAILEE shall comply with all legal provisions applicable to
the temporary importation of the Equipment and shall provide all the
administrative services necessary to carry out the importation of the Equipment
into Mexico. BAILEE shall appear as the importer of record of the Equipment in
all the paperwork and documents used for such importation into Mexico, however,
it is expressly agreed that BAILOR is and shall continue to be the owner of the
Equipment, thus the commercial invoice to be utilized to import the Equipment
into Mexico shall have a provision stating the following:
"This commercial invoice is issued exclusively for customs purposes in
order to import into Mexico the goods covered by same and therefore does
not transfer the ownership of the goods. In addition, the issuer
reserves itself title over such goods."
BAILEE shall keep in the domicile designated in Recital II a)
herein the permits, licenses and official documentation pertaining to the
importation into Mexico of the Equipment.
BAILOR shall assume the costs of all duties, fees, expenses
and customs brokers' fees, Mexican and American, incurred in importing,
exporting and transporting the Equipment in Mexico pursuant to the terms and
conditions set forth herein.
3
<PAGE> 4
THIRD.- MAINTENANCE EXPENSES
The necessary expenses for the use, maintenance, repair and
preservation of the Equipment hereby given in commodatum will be the exclusive
responsibility of ABT.
FOURTH.- LOCATION OF MACHINERY
BAILEE shall maintain the Equipment at its current domicile
and may not remove it from said location without the prior written consent of
BAILOR.
FIFTH.- NO DISPOSITION OR ENCUMBRANCES
BAILEE shall not sell, assign its rights hereunder, or in any
manner encumber, pledge, or otherwise cause a lien on the Equipment. BAILEE
further agrees to protect the Equipment from any and all third party claims and
for such purposes agrees and undertakes to file this Agreement for registration
with the Public Registry of Property of Tijuana, Baja California, Mexico, within
the thirty (30) days following its date of execution.
SIXTH.- USE OF EQUIPMENT
BAILEE promises to use the Equipment only and exclusively for
the purposes for which it was built, and will gear its operations to the
capabilities thereof.
SEVENTH.- PRESERVATION OF EQUIPMENT
ABT covenants and agrees to diligently preserve and maintain
the Equipment in the state in which it is received.
4
<PAGE> 5
EIGHTH.- LOSS OF EQUIPMENT
BAILEE shall be liable towards BAILOR for the total or partial
loss of the Equipment, as well as for the deterioration suffered thereby, except
for the deterioration deriving from its normal use, even when such is a result
of fortuitous cause or force majeure, until the Equipment is returned to BAILOR
pursuant to the terms of this Agreement.
NINTH.- INSURANCE
BAILEE, at BAILOR's cost and expense, must contract with an
authorized company, insurance for an amount not less than the replacement value,
as indicated by BAILOR, covering the Equipment that is the object of this
Agreement, and must name BAILOR as the beneficiary of such insurance.
TENTH.- RETURN OF EQUIPMENT
BAILEE shall cease using and immediately return the Equipment
to BAILOR when BAILOR so requests it, since no specific duration for the
commodatum has been agreed upon and hereunder. Therefore, pursuant to article
2385 of the Civil Code for the State of Baja California, BAILOR has the right to
demand the return of the Equipment at any time, in which case this agreement
will terminate.
ELEVENTH.- DISCLAIMER OF LIABILITY
BAILOR does not assume any responsibility or commitment
towards BAILEE, or towards any third party, with respect to their personal
property or to their persons, resulting from the possession or use of the
Equipment or from the lack of skill in using them, nor for any other reason
whatsoever. BAILEE agrees to indemnify and hold BAILOR harmless with respect to
any such responsibility, liability or commitment.
5
<PAGE> 6
TWELFTH.- INSPECTION
BAILOR reserves unto itself the right to inspect the Equipment
at any time whatsoever, for the purpose of verifying the correct use and
operation thereof.
THIRTEENTH.- COMPLIANCE WITH LAWS
BAILEE covenants, at its cost, to comply with all laws,
regulations and other legal provisions applicable to the Equipment and to notify
BAILOR immediately, in writing, of any claim, demand, litigation, or any other
lien, that might affect the Equipment.
FOURTEENTH.- EXPENSES
All expenses related to the use, operation, security measures,
maintenance and operation of the Equipment will be borne by ABT.
FIFTEENTH.- RECOVERY OF EQUIPMENT
BAILOR will have the right to recover the Equipment at any
time and BAILEE covenants to return it upon request by the BAILOR. All expenses
such as transportation will be the exclusive responsibility of BAILOR. BAILEE
will provide BAILOR full cooperation in dismantling, removing and exporting the
Equipment at any time before, during or after termination of this Agreement.
SIXTEENTH.- TERM
Unless earlier terminated pursuant to Clause Tenth hereof,
this Agreement will terminate immediately upon receipt by BAILEE of written
notice from BAILOR.
6
<PAGE> 7
SEVENTEENTH.- ARBITRATION
Any and all controversies or disputes between the parties
arising under this Agreement shall be submitted to an arbitrator for final and
binding resolution in accordance with the International Arbitration Rules of the
American Arbitration Association. The site of the arbitration shall be at San
Diego, California and the law of the State of California shall be applied by the
arbitrators.
This agreement is executed in triplicate, in Carlsbad,
California, on September 6, 1996.
<TABLE>
BAILOR BAILEE
<S> <C>
/s/ James W. Klingler /s/ Larry Angione
- -------------------------------------------- -------------------------------------------------
By: Wilshire Technologies, Inc. By: Coastline de Mexico SA de CV
Name: James W. Klingler Name: Larry Angione
ABT
/s/ Ralph Sias
- --------------------------------------------
By: Advanced Barrier Technologies, Inc.
Name: Ralph Sias
WITNESS WITNESS
Wilshire Technologies, Inc. Coastline de Mexico SA de CV
/s/ [Signature Illegible]
- -------------------------------------------- --------------------------------------------
WITNESS
Advanced Barrier Technologies, Inc.
/s/ [Signature Illegible]
- --------------------------------------------
</TABLE>
7
<PAGE> 1
EXHIBIT 10.85
UNITED STATES OF AMERICA
Before the
SECURITIES AND EXCHANGE COMMISSION
ADMINISTRATIVE PROCEEDING
File No. 3-
In the Matter of
OFFER OF SETTLEMENT OF
Wilshire Technologies, Inc. WILSHIRE TECHNOLOGIES, INC.
Respondent.
I.
Wilshire Technologies, Inc. ("Wilshire" or "Respondent"), pursuant to
Rule 240 of the Rules of Practice of the Securities and Exchange Commission
("Commission") [17 C.F.R. Section 201.240], submits this Offer of Settlement
("Offer") in settlement of administrative proceedings instituted pursuant to
Section 21C of the Securities Exchange Act of 1934 ("Exchange Act").
II.
Respondent submits this Offer only for the purpose of settling these
proceedings with the express understanding that the Offer will not be used in
any way in said proceedings unless the Offer is accepted by the Commission as
hereinafter set forth. If the Offer is not accepted by the Commission, the Offer
is withdrawn without prejudice to Respondent, and neither the Offer nor any part
of it shall become part of the record or be referred to in this or any other
proceeding.
III.
Respondent acknowledges that it has read, understands, and agrees to
comply with the policy of the Commission, set forth in 17 C.F.R. Section
202.5(e), not to permit a respondent to consent to an order that imposes a
sanction while denying any allegation or finding in the order. Respondent agrees
not to take any action or make any public statement denying, directly or
indirectly, any allegation or finding in the order. Respondent further agrees
not to take any action or make any public statement which creates, or tends to
create, the impression that the order is without factual basis. Nothing in this
paragraph affects Respondent's testimonial obligations or its right to take
legal positions in other non-Commission litigation or proceedings.
<PAGE> 2
IV.
Solely for the purpose of these proceedings and any other proceedings
brought by or on behalf of the Commission or in which the Commission is a party,
and without admitting or denying the findings set forth below and contained in
the Commission's Order Instituting Proceedings Pursuant to Section 21C of the
Securities Exchange Act of 1934, Making Findings and Imposing a Cease-and-Desist
Order except that Respondent admits the jurisdiction of the Commission over it
and over the subject matter of these proceedings, Wilshire hereby consents to
the entry of an Order by the Commission that Wilshire cease and desist from
committing or causing any violations and any future violation of Sections 10(b),
13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 10b-5, 12b-20
and l3a-13 thereunder, and containing the following findings:(1)
A. The Respondent
Wilshire Technologies, Inc. ("Wilshire"), incorporated in California in
1990, has its principal place of business in Carlsbad, California. Wilshire's
common stock is registered with the Commission pursuant to Section 12(g) of the
Exchange Act and is traded on the American Stock Exchange.
B. The Facts
1. Background
During fiscal years 1993 and 1994, Wilshire developed, manufactured and
marketed medical, clean room and transdermal (through the skin) drug delivery
products. During fiscal 1993, Wilshire introduced two new products, a
transdermal appetite suppressant called "Trimpatch" that had not completed
testing and a clean room product known as the pipe plug. Wilshire intended to
sell the TrimPatch product in foreign countries and knew in early 1993 that it
needed to obtain foreign government approvals before it could do so. Wilshire
never obtained such approvals.
As stated below, from at least the second quarter of fiscal year 1993
through the first quarter of fiscal 1994, Wilshire materially overstated its
earnings in press releases and periodic financial reports filed with the
Commission. Wilshire overstated its financial statements primarily by improperly
recognizing approximately $2.7 million of revenue from conditional sales of its
TrimPatch and pipe plug products.(2) In addition, Wilshire materially
__________________
(1) The findings herein are made pursuant to the Respondent's Offer and
are not binding on any other person or entity named as a respondent in this or
any other proceeding.
(2) Generally Accepted Accounting Principles ("GAAP") require that
revenue be recognized when merchandise is exchanged for cash or claims to cash
and when goods are delivered. Financial Accounting Standards Board Statement of
Concepts
2
<PAGE> 3
overstated its earnings by improperly recognizing a $1.7 million gain from a
related party asset sale and a $1 million vendor claim. Wilshire also issued
false press releases concerning its earnings, business prospects and ability to
meet analysts' expectations.
2. Wilshire Materially Overstated Its Second Quarter 1993
Revenues and Earnings
On May 28, 1993, the last business day of Wilshire's second quarter,
Wilshire improperly recognized $216,000 of revenue from a conditional sale of
TrimPatch. In a July 2, 1993 press release and in a Form 10-QSB filed with the
Commission on July 15, 1993, Wilshire reported second quarter revenue of over
$2.5 million and pre-tax earnings of $413,000. As a result of improperly
recognizing revenue on this conditional sale of TrimPatch, Wilshire overstated
its second quarter revenue by $216,000, or 9%, and pre-tax income by
approximately $131,000, or 47%.
3. Wilshire Materially Overstated Its Third Quarter 1993 Revenues
and Earnings and Issued False Press Releases
In a press release dated September 10, 1993, and in its third quarter
1993 Form 10-QSB filed with the Commission on September 27, 1993, Wilshire
reported quarterly pre-tax earnings of $468,000 and revenues of almost $3.1
million. As a result of improperly recognizing a combined $1.34 million in
revenue from conditional sales of TrimPatch and pipe plugs, Wilshire overstated
its reported third quarter revenue by over 77%. Without recognition of revenue
from these purported sales, Wilshire would have incurred a pre-tax loss for its
third quarter of about $373,000, approximately $840,000 less than the reported
pre-tax income of $468,000.
Wilshire also misrepresented in its September 10, 1993 press release
that: Wilshire had "shipped" 2.7 million units of TrimPatch to a distributor in
Mexico; Wilshire had a "contractual backlog" of 23 million TrimPatch units to be
shipped over the following 12 months; and Wilshire expected "additional"
approvals for the TrimPatch in the next 30 days. Each of these representations
was false. In fact, Wilshire had not "shipped" 2.7 million units of TrimPatch to
a distributor but had received only a conditional order for 2.7 million
TrimPatch units. Wilshire also had only a sales forecast, but no signed
contracts, for 23 million TrimPatch units and, therefore, did not have a
"contractual backlog." Finally, no country had approved the TrimPatch for sale,
let alone the "additional" countries referred to in the release.
__________________
No. 5 Paragraph 83 a & b. GAAP also requires that revenue should not be
recognized when the buyer's obligation to the seller is contingent on
resale of the product. Financial Accounting Standards Board Statement
of Opinion No. 48. In this case, Wilshire's sales were conditional, and
Wilshire, therefore, had no claim to cash, had not delivered the goods
and should not have recognized revenue from such sales.
3
<PAGE> 4
4. Wilshire Materially Overstated Its Fourth Quarter 1993 and
Fiscal 1993 Revenues and Earnings and Issued False Press
Releases
On November 12, 1993, just 18 days before the fiscal year end, Wilshire
issued a press release stating that "We [Wilshire] believe that the analysts'
estimate of $.55 and $1.80 [earnings per share] for fiscal [years] 1993 and 1994
are still reasonable." This statement was false and misleading. This statement
of earnings per share was based, in part, on the earnings for the second and
third fiscal quarters of 1993, which Wilshire had materially overstated. At the
time Wilshire issued this statement, Wilshire's second and third quarter
reported earnings were overstated because it had improperly included the
conditional TrimPatch and pipe plug sales described above.
Then on December 22, 1993, Wilshire issued another press release that
contained the following false material statements: Wilshire had received
approval from the government of Mexico to sell the TrimPatch freely throughout
Latin America; and Wilshire had received approval and registered to sell the
TrimPatch in Hong Kong and Taiwan. In fact, Wilshire had not received any
approvals to sell the TrimPatch and had not registered to sell the TrimPatch in
Hong Kong and Taiwan.
Finally, on January 21, 1994, Wilshire issued a press release that
reported fourth quarter fiscal 1993 pre-tax earnings of almost $1.1 million and
pre-tax earnings for fiscal 1993 of over $2.1 million on revenues of $11
million. Wilshire fraudulently overstated its fourth quarter 1993 pre-tax
earnings in this release by over $6 million; Wilshire had, in fact, incurred a
fourth quarter pre-tax loss of over $4.9 million. Similarly, Wilshire overstated
its fiscal 1993 pre-tax earnings by $6.6 million, as Wilshire had, in fact,
incurred a pre-tax loss of $4.5 million for fiscal 1993. Wilshire falsely
inflated its earnings in this release by, among other things, improperly
recording in the last week of Wilshire's fiscal 1993 four transactions: a $1.7
million gain from Wilshire's sale of an operating unit to a party related to
Wilshire, reported over the objections of its auditors; $604,800 in revenue from
another conditional sale of TrimPatch; $1 million from a claim against a
supplier, which claim was disputed by the supplier and, in any event, was
uncollectable; and $1 million in revenue from another conditional sale of pipe
plugs.
C. Wilshire Violated the Federal Securities Laws
1. Violations of the Antifraud Provisions: Section 10(b) of the
Exchange Act and Rule lOb-5 Thereunder
Wilshire violated Section 10(b) of the Exchange Act and Rule 10b-5
thereunder by preparing, publicly disseminating and filing with the Commission
materially false and misleading financial statements and preparing and publicly
issuing materially false and misleading press releases regarding Wilshire's
business and earnings prospects. Section 10(b) of the Exchange Act and Rule
lOb-5 thereunder make it unlawful for any person, directly or indirectly, in
connection with the purchase or sale of a security, to make an
4
<PAGE> 5
untrue statement of material fact, omit to state a material fact, use any
device, scheme or artifice to defraud, or engage in any act, practice or course
of business which operates or would operate as a fraud or deceit upon any
person. The "in connection with" requirement may be satisfied with a showing
that the respondent's acts resulted in the issuer making a public announcement
or filing a report with the Commission that could reasonably be expected to have
caused investors to trade in the issuer's securities. See SEC v. Savoy Indus.,
Inc., 587 F.2d 1149, 1171 (D.C. Cir. 1978), cert. denied, 440 U.S. 913 (1979).
The respondent must also have acted with scienter, which includes recklessness.
Ernst & Ernst v. Hochfelder, 425 U.S. 185, 194 (1976); Hollinger v. Titan
Capital Corp., 914 F.2d 1564, 1569 (9th Cir. 1990) (en banc), cert. denied, 499
U.S. 976 (1991). Misrepresentations or omissions will be deemed material if
there is a substantial likelihood that a reasonable investor would consider the
information important in making an investment decision. See Basic Inc. v.
Levinson, 485 U.S. 224, 231 32 (1988); TSC Indus., Inc. v. Northway, Inc., 426
U.S. 438, 449 (1976).
As discussed, Wilshire disseminated financial statements that
overstated its fiscal 1993 second quarter, third quarter, fourth quarter and
year-end revenue and pre-tax income by improperly recognizing revenue on
conditional sales of TrimPatch and pipe plugs. In its fourth quarter and
year-end financial statements, Wilshire also overstated its pre-tax income by
improperly recognizing the sale of an operating unit and a claim against a
supplier. Wilshire also issued press releases that misrepresented the approval
status of its TrimPatch product and misrepresented its ability to meet earnings
expectations for fiscal 1993.
Wilshire's misrepresentations were material. Wilshire overstated its
second quarter 1993 pre-tax income by about 47% and reported substantial pre-tax
income for its third and fourth quarters of 1993 and its fiscal 1993 when it had
actually incurred substantial pre-tax losses in those periods. Wilshire also
acted with scienter.(3) Through its officers and a director, Wilshire improperly
recorded revenue and earnings, in some instances reporting such revenue and
income against the specific warnings of its auditor.
2. Violations of the Reporting Provisions: Section 13(a) of the
Exchange Act and Rules 12b-20 and 13a-13 Thereunder
Section 13(a) of the Exchange Act and Rule 13a-13 thereunder require
issuers with securities registered pursuant to Section 12 of the Exchange Act,
such as Wilshire, to file with the Commission quarterly reports on Form 10-QSB.
Inherent in these provisions is the requirement that such filings be accurate;
therefore, an issuer violates these provisions when it files a Form 10-QSB that
contains materially false or misleading information. SEC v. Falstaff Brewing
Corp., 629 F.2d 62, 72 (D.C. Cir. 1980); Savoy Indus., Inc., 587 F.2d at 1165.
Rule 12b-20 under the Exchange Act similarly requires that these reports contain
any
__________________
(3) The scienter of Wilshire's officers is imputed to Wilshire. SEC v.
Manor Nursing Centers, Inc., 458 F.2d 1082, 1089 n.3 (2d Cir.
1972).
5
<PAGE> 6
material information necessary to make the required statements made in the
reports not misleading.
Wilshire violated these provisions when it reported materially false
earnings and pre-tax income in its Forms 10-QSB filed with the Commission for
its second and third quarters of fiscal 1993. Wilshire overstated its fiscal
1993 second and third quarter revenues reported in Forms 1O-QSB by 9% and 77%,
respectively. Wilshire also overstated its reported fiscal 1993 second and third
quarter pre-tax income by approximately $131,000 and $840,000, respectively.
3. Violations of the Books and Records Provisions: Section
13(b)(2)(A) of the Exchange Act
Section 13(b)(2)(A) of the Exchange Act requires every issuer that has
securities registered pursuant to Section 12 of the Exchange Act, such as
Wilshire, to "make and keep books, records, and accounts, which in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the
assets of the issuer."
Wilshire violated the books and records provisions of Section
13(b)(2)(A) of the Exchange Act. Wilshire maintained books and records
containing accounting entries and documents by which Wilshire fraudulently
supported its overstated revenue and earnings. Specifically, Wilshire recorded
accounting entries that fraudulently recorded conditional sales, the sale of a
division to a related party and an unsettled claim.
4. Internal Control Violations: Section 13(b)(2)(B) of the
Exchange Act
The internal control provisions of Section 13(b)(2)(B) of the Exchange
Act require issuers with securities registered under Section 12 of the Exchange
Act, such as Wilshire, to devise and maintain a system of internal accounting
controls sufficient to reasonably assure, among other things, that transactions
are recorded as necessary to permit preparation of financial statements in
conformity with GAAP.
Wilshire's internal control system was materially inadequate to ensure
that Wilshire's transactions were recorded in its books and records and reported
in its financial statements in conformity with GAAP. Specifically, Wilshire had
inadequate internal controls to assure that Wilshire properly recorded
conditional sales, the sale of a division to a related party and an unsettled
claim.
D. CONCLUSION
Based on the foregoing, the Commission finds that Wilshire violated
Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules
l0b-5, 12b-20 and 13a-13 thereunder.
6
<PAGE> 7
V.
For purposes of this Offer, Respondent Wilshire hereby:
A. Acknowledges that the Commission may institute a cease-and-desist
administrative proceeding pursuant to Section 21C of the Exchange Act;
B Acknowledges its waiver of those rights specified in Rule 240(c)(4)
and (5) [17 C.F.R. Section 201.240 (4) and (5)].
VI.
Stephen P. Scibelli, Jr. states that he has, on behalf of Wilshire,
read this Offer and that this Offer is given voluntarily and that no tender,
offer, promise or threat of any nature whatsoever relating to this or any other
action or proceeding, civil or criminal, has been made by the Commission, or any
member, officer, agent, or representative thereof, to induce him to make this
Offer. The entire proposal to settle this administrative proceeding is contained
in this Offer.
DATED: 8-5-96 /s/ Stephen P. Scibelli
-----------------------------
Stephen P. Scibelli, Jr.
President
Wilshire Technologies, Inc.
MELANIE A. DOOLEY
Comm. # 985881
NOTARY PUBLIC - CALIFORNIA
San Diego County
My Comm. Expires Feb. 28, 1997
On August 5, 1996, before me, personally appeared Stephen P. Scibelli,
Jr., proved to me on the basis of satisfactory evidence to be the person whose
name is subscribed to the within instrument and acknowledged to me that he
executes the same in his authorized capacity, and that by his signature on the
instrument the person or the entity upon behalf of which the person acted
executed the instrument. Witness my hand and official seal.
DATED: 8-5-96 /s/ Melanie A. Dooley
-----------------------------
Notary Public
7
<PAGE> 8
CORPORATE RESOLUTION
The undersigned, the Secretary of Wilshire Technologies, Inc. certifies
that the following resolutions were duly enacted at a meeting of the Board of
Directors of Wilshire Technologies, Inc. held on August 8, 1996:
RESOLVED, that Stephen P. Scibelli, Jr., be and hereby is
authorized and directed on behalf of Wilshire Technologies,
Inc., to make, execute and deliver the attached Offer of
Settlement of Wilshire Technologies, Inc. with respect to
cease-and-desist administrative proceedings that may be
instituted pursuant to Section 21C of the Securities Exchange
Act of 1934, and if accepted by the commission on the terms
and conditions therein, to accept service of the Order
Instituting Proceedings pursuant to Section 21C of the
Securities Exchange Act of 1934, Making Findings and Imposing
a Cease-and-Desist Order.
RESOLVED, further, that Stephen P. Scibelli, Jr., be and
hereby is authorized to execute and deliver such additional
agreements and documents and to take such further actions as
may be necessary and appropriate to carry out the settlement
agreement and the transactions contemplated thereby.
Wilshire Technologies, Inc.
Dated: August 8, 1996 /s/ James W. Klingler
--------------------------------------
By: James W. Klingler
----------------------------------
Its: Chief Financial Officer/Secretary
---------------------------------
<PAGE> 1
EXHIBIT 10.86
UNITED STATES OF AMERICA
Before the
SECURITIES AND EXCHANGE COMMISSION
SECURITIES EXCHANGE ACT OF 1934
Release No. 37719 / September 24, 1996
ACCOUNTING AND AUDITING ENFORCEMENT
Release No. 821 / September 24, 1996
ADMINISTRATIVE PROCEEDING
File No. 3-9095
In the Matter of ORDER INSTITUTING PROCEEDINGS
PURSUANT TO SECTION 21C OF THE
Wilshire Technologies, Inc. SECURITIES EXCHANGE ACT OF 1934,
MAKING FINDINGS AND IMPOSING A
Respondent. CEASE-AND-DESIST ORDER
I.
The Securities and Exchange Commission (the "Commission") deems it
appropriate that public administrative proceedings be instituted pursuant to
Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") against
Wilshire Technologies, Inc. ("Wilshire"). Accordingly, IT IS HEREBY ORDERED that
said proceedings be, and hereby are, instituted.
In anticipation of the institution of these administrative proceedings
Wilshire has submitted an Offer of Settlement, which the Commission has
determined to accept. Solely for the purposes of these proceedings and any other
proceedings brought by or on behalf of the Commission or in which the Commission
is a party, and without admitting or denying the findings herein, except that
Wilshire admits the jurisdiction of the Commission over it and over the subject
matter of these proceedings, Wilshire consents to the entry of this Order
Instituting Proceedings Pursuant to Section 21C of the Securities Exchange Act
of 1934, Making Findings and Imposing a Cease-and-Desist Order ("Order") and to
the entry of the findings and imposition of the sanctions as set forth below.
<PAGE> 2
III. FINDINGS
On the basis of this Order and of the Offer of Settlement of Wilshire,
the Commission makes the following findings:(1)
A. The Respondent
Wilshire Technologies, Inc. ("Wilshire"), incorporated in California in
1990, has its principal place of business in Carlsbad, California. Wilshire's
common stock is registered with the Commission pursuant to Section 12(g) of the
Exchange Act and is traded on the American Stock Exchange.
B. The Facts
1. Background
During fiscal years 1993 and 1994, Wilshire developed, manufactured and
marketed medical, clean room and transdermal (through the skin) drug delivery
products. During fiscal 1993, Wilshire introduced two new products, a
transdermal appetite suppressant called "Trimpatch" that had not completed
testing and a clean room product known as the pipe plug. Wilshire intended to
sell the TrimPatch product in foreign countries and knew in early 1993 that it
needed to obtain foreign government approvals before it could do so. Wilshire
never obtained such approvals.
As stated below, from at least the second quarter of fiscal year 1993
through January 1994, Wilshire materially overstated its earnings in press
releases and periodic financial reports filed with the Commission. Wilshire
overstated its financial statements primarily by improperly recognizing
approximately $2.7 million of revenue from conditional sales of its TrimPatch
and pipe plug products.(2) In addition, Wilshire materially
- ---------------
(1) The findings herein are made pursuant to the Respondent's Offer of
Settlement and are not binding on any other person or entity named as a
respondent in this or any other proceeding.
(2) Generally Accepted Accounting Principles ("GAAP") require that revenue
be recognized when merchandise is exchanged for cash or claims to cash
and when goods are delivered. Financial Accounting Standards Board
Statement of Concepts No. 5 Paragraph 83 a & b. GAAP also requires that
revenue should not be recognized when the buyer's obligation to the
seller is contingent on resale of the product. Financial Accounting
Standards Board Statement No. 48. In this case, Wilshire's sales were
conditional, and Wilshire, therefore, had no claim to cash, had not
delivered the goods and should not have recognized revenue from such
sales.
2
<PAGE> 3
overstated its earnings by improperly recognizing a $1.7 million gain from a
related party asset sale and a $1 million vendor claim. Wilshire also issued
false press releases concerning its earnings, business prospects and ability to
meet analysts' expectations.
2. Wilshire Materially Overstated its Second Quarter 1993
Revenues and Earnings
On May 28, 1993, the last business day of Wilshire's second quarter,
Wilshire improperly recognized $216,000 of revenue from a conditional sale of
TrimPatch. In a July 2, 1993 press release and in a Form 10-QSB filed with the
Commission on July 15, 1993, Wilshire reported second quarter revenue of over
$2.5 million and pre-tax earnings of $413,000. As a result of improperly
recognizing revenue on this conditional sale of TrimPatch, Wilshire overstated
its second quarter revenue by $216,000, or 9%, and pre-tax income by
approximately $131,000, or 47%.
3. Wilshire Materially Overstated Its Third Quarter 1993 Revenues
and Earnings and Issued False Press Releases
In a press release dated September 10, 1993, and in its third quarter
1993 Form 10-QSB filed with the Commission on September 27, 1993, Wilshire
reported quarterly pre-tax earnings of $468,000 and revenues of almost $3.1
million. As a result of improperly recognizing a combined $1.34 million in
revenue from conditional sales of TrimPatch and pipe plugs, Wilshire overstated
its reported third quarter revenue by over 77%. Without recognition of revenue
from these purported sales, Wilshire would have incurred a pre-tax loss for its
third quarter of about $373,000, approximately $840,000 less than the reported
pre-tax income of $468,000.
Wilshire also misrepresented in its September 10, 1993 press release
that: Wilshire had "shipped" 2.7 million units of TrimPatch to a distributor in
Mexico; Wilshire had a "contractual backlog" of 23 million TrimPatch units to be
shipped over the following 12 months; and Wilshire expected "additional
approvals for the TrimPatch in the next 30 days. Each of these representations
was false. In fact, Wilshire had not "shipped" 2.7 million units of TrimPatch to
a distributor but had received only a conditional order for 2.7 million
TrimPatch units. Wilshire also had only a sales forecast, but no signed
contracts, for 23 million TrimPatch units and, therefore, did not have a
"contractual backlog." Finally, no country had approved the TrimPatch for sale,
let alone the "additional" countries referred to in the release.
4. Wilshire Materially Overstated Its Fourth Quarter 1993 and
Fiscal 1993 Revenues and Earnings and Issued False Press
Releases
3
<PAGE> 4
On November 12, 1993, just 18 days before the fiscal year end, Wilshire
issued a press release stating that "We [Wilshire] believe that the analysts'
estimate of $.55 and $1.80 [earnings per share] for fiscal [years] 1993 and 1994
are still reasonable." This statement was false and misleading. This statement
of earnings per share was based, in part, on the earnings for the second and
third fiscal quarters of 1993, which Wilshire had materially overstated. At the
time Wilshire issued this statement, Wilshire's second and third quarter
reported earnings were overstated because it had improperly included the
conditional TrimPatch and pipe plug sales described above.
Then on December 22, 1993, Wilshire issued another press release that
contained the following false material statements: Wilshire had received
approval from the government of Mexico to sell the TrimPatch freely throughout
Latin America; and Wilshire had received approval and registered to sell the
TrimPatch in Hong Kong and Taiwan. In fact, Wilshire had not received any
approvals to sell the TrimPatch and had not registered to sell the TrimPatch in
Hong Kong and Taiwan.
Finally, on January 21, 1994, Wilshire issued a press release that
reported fourth quarter fiscal 1993 pre-tax earnings of almost $1.1 million and
pre-tax earnings for fiscal 1993 of over $2.1 million on revenues of $11
million. Wilshire fraudulently overstated its fourth quarter 1993 pre-tax
earnings in this release by over $6 million; Wilshire had, in fact, incurred a
fourth quarter pre-tax loss of over $4.9 million. Similarly, Wilshire overstated
its fiscal 1993 pre-tax earnings by $6.6 million, as Wilshire had, in fact,
incurred a pre-tax loss of $4.5 million for fiscal 1993. Wilshire falsely
inflated its earnings in this release by, among other things, improperly
recording in the last week of Wilshire's fiscal 1993 four transactions: a $1.7
million gain from Wilshire's sale of an operating unit to a party related to
Wilshire, reported over the objections of its auditors; $604,800 in revenue from
another conditional sale of TrimPatch; $1 million from a claim against a
supplier, which claim was disputed by the supplier and, in any event, was
uncollectible; and $1 million in revenue from another conditional sale of pipe
plugs.
C. Wilshire Violated the Federal Securities Laws
1. Violations of the Antifraud Provisions: Section 10(b) of the
Exchange Act and Rule 10b-5 Thereunder
Wilshire violated Section 10(b) of the Exchange Act and Rule 10b-5
thereunder by preparing, publicly disseminating and filing with the Commission
materially false and misleading financial statements and preparing and publicly
issuing materially false and misleading press releases regarding Wilshire's
business and
4
<PAGE> 5
earnings prospects. Section 10(b) of the Exchange Act and Rule 10b-5 thereunder
make it unlawful for any person, directly or indirectly, in connection with the
purchase or sale of a security, to make an untrue statement of material fact,
omit to state a material fact, use any device, scheme or artifice to defraud, or
engage in any act, practice or course of business which operates or would
operate as a fraud or deceit upon any person. The "in connection with"
requirement may be satisfied with a showing that the respondent's acts resulted
in the issuer making a public announcement or filing a report with the
Commission that could reasonably be expected to have caused investors to trade
in the issuer's securities. See SEC v. Savoy Indus., Inc., 587 F.2d 1149, 1171
(D.C. Cir. 1978), cert. denied, 440 U.S. 913 (1979). The respondent must also
have acted with scienter, which includes recklessness. Ernst & Ernst v.
Hochfelder, 425 U.S. 185, 194 (1976); Hollinger v. Titan Capital Corp., 914 F.2d
1564, 1569 (9th Cir. 1990) (en banc), cert. denied, 499 U.S. 976 (1991).
Misrepresentations or omissions will be deemed material if there is a
substantial likelihood that a reasonable investor would consider the information
important in making an investment decision. See Basic Inc. v. Levinson, 485 U.S.
224, 231 32 (1988); TSC Indus., Inc. V. Northway, Inc., 426 U.S. 438, 449
(1976).
As discussed, Wilshire disseminated financial statements that
overstated its fiscal 1993 second quarter, third quarter, fourth quarter and
year-end revenue and pre-tax income by improperly recognizing revenue on
conditional sales of TrimPatch and pipe plugs. In its announced fourth quarter
and year-end financial statements that were attached to its January 21, 1994
press release, Wilshire also overstated its pre-tax income by improperly
recognizing the sale of an operating unit and a claim against a supplier.
Wilshire also issued press releases that misrepresented the approval status of
its TrimPatch product and misrepresented its ability to meet earnings
expectations for fiscal 1993.
Wilshire's misrepresentations were material. Wilshire overstated its
second quarter 1993 pre-tax income by about 47% and reported substantial pre-tax
income for its third and fourth quarters of 1993 and its fiscal 1993 when it had
actually incurred substantial pre-tax losses in those periods. Wilshire also
acted with scienter.(3) Through its officers and a director, Wilshire improperly
recorded revenue and earnings, in some instances reporting such revenue and
income against the specific warnings of its auditor.
- ---------------
(3) The scienter of Wilshire's officers is imputed to Wilshire. SEC v.
Manor Nursing Centers, Inc., 458 F.2d 1082, 1089 n.3 (2d Cir. 1972).
5
<PAGE> 6
2. Violations of the Reporting Provisions: Section 13(a) of the
Exchange Act and Rules 12b-20 and 13a-13 Thereunder
Section 13(a) of the Exchange Act and Rule 13a-13 thereunder require
issuers with securities registered pursuant to Section 12 of the Exchange Act,
such as Wilshire, to file with the Commission quarterly reports on Form 10-QSB.
Inherent in these provisions is the requirement that such filings be accurate;
therefore, an issuer violates these provisions when it files a Form 10-QSB that
contains materially false or misleading information. SEC v. Falstaff Brewing
Corp., 629 F.2d 62, 72 (D.C. Cir. 1980); Savoy Indus., Inc., 587 F-2d at 1165.
Rule 12b-20 under the Exchange Act similarly requires that these reports contain
any material information necessary to make the required statements made in the
reports not misleading.
Wilshire violated these provisions when it reported materially false
earnings and pre-tax income in its Forms 10-QSB filed with the Commission for
its second and third quarters of fiscal 1993. Wilshire overstated its fiscal
1993 second and third quarter revenues reported in Forms 10-QSB by 9% and 77%,
respectively. Wilshire also overstated its reported fiscal 1993 second and third
quarter pre-tax income by approximately $131,000 and $840,000, respectively.
3. Violations of the Books and Records Provisions: Section
13(b)(2)(A) of the Exchange Act
Section 13(b)(2)(A) of the Exchange Act requires every issuer that has
securities registered pursuant to Section 12 of the Exchange Act, such as
Wilshire, to "make and keep books, records, and accounts, which in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the
assets of the issuer."
Wilshire violated the books and records provisions of Section
13(b)(2)(A) of the Exchange Act. Wilshire maintained books and records
containing accounting entries and documents by which Wilshire fraudulently
supported its overstated revenue and earnings. Specifically, Wilshire recorded
accounting entries that fraudulently recorded conditional sales, the sale of a
division to a related party and an unsettled claim.
4. Internal Control Violations: Section 13(b)(2)(B) of the
Exchange Act
The internal control provisions of Section 13(b)(2)(B) of the Exchange
Act require issuers with securities registered under Section 12 of the Exchange
Act, such as Wilshire, to devise and maintain a system of internal accounting
controls sufficient to reasonably assure, among other things, that transactions
are
6
<PAGE> 7
recorded as necessary to permit preparation of financial statements in
conformity with GAAP.
Wilshire's internal control system was materially inadequate to ensure
that Wilshire's transactions were recorded in its books and records and reported
in its financial statements in conformity with GAAP. Specifically, Wilshire had
inadequate internal controls to assure that Wilshire properly recorded
conditional sales, the sale of a division to a related party and an unsettled
claim.
D. CONCLUSION
Based on the foregoing, the Commission finds that Wilshire violated
Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules
10b-5, 12b-20 and 13a-13 thereunder.
IV.
Based on the foregoing, the Commission deems it appropriate to accept
the Offer of Settlement of Wilshire and accordingly,
IT IS HEREBY ORDERED, pursuant to Section 21C of the Exchange Act, that
Wilshire cease and desist from committing or causing any violations and any
future violations of Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the
Exchange Act and Rules 10b-5, 12b-20 and 13a-13 thereunder.
By the Commission.
Jonathan G. Katz
Secretary
/s/ Margaret H, McFarland
By: Margaret H, McFarland
Deputy Secretary
7
<PAGE> 8
SERVICE LIST
Rule 141 of the Commission's Rules of Practice provides that the
Secretary, or any other duly authorized officer of the Commission, shall serve a
copy of the Order Instituting Proceeding Pursuant to Section 21C of the
Securities Exchange Act of 1934, Making Finding and Imposing a Cease-and-Desist
Order on each person named as a party in the order and their legal agent.
The attached Order Instituting Proceedings Pursuant to Section 21C of
the Securities Exchange Act of 1934, Making Findings and Imposing a
Cease-and-Desist Order, has been sent to the following parties and other persons
entitled to notice:
Securities and Exchange Commission
Division of Enforcement
Branch of Regional Office Assistance
Mail Stop 4-8B
Attn: Laurie Stewart
450 Fifth Street, N.W.
Washington, D.C. 20549
The Honorable Brenda P. Murray
Chief, Administrative Law Judge
Securities and Exchange Commission
Mail Stop 11-6
450 Fifth Street, N.W.
Washington, D.C. 20549
Kelly Bowers, Esq.
Roger D. Boudreau
Securities and Exchange Commission
5670 Wilshire Blvd., 11th Floor
Los Angeles, CA 90036
Wilshire Technologies, Inc.
5441 Avenida Encinatas, Suite A
Carlsbad, CA 92008
Robert S. Stern
Attorney at Law
Morrison & Foerster
555 West Fifth Street, Suite 3500
Los Angeles, CA 92101
<PAGE> 1
EXHIBIT 10.87
AGREEMENT OF PURCHASE AND SALE
OF TRIMPATCH BUSINESS AND ASSETS
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
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<S> <C>
RECITALS ................................................................. 1
AGREEMENT ................................................................ 2
1. PURCHASE AND SALE OF TRIMPATCH ASSETS
AND BUSINESS .................................................. 2
2. OBLIGATIONS OF IPC ............................................ 2
2.1 Purchase Price .......................................... 2
2.2 Manner and Source of Payment of
Purchase Price .......................................... 2
2.3 Grant of Options ........................................ 4
2.4 Payment of Taxes ........................................ 5
3. OBLIGATIONS OF WTI ............................................ 5
3.1 Use of TrimPatch Name or Logo ........................... 5
3.2 Assistance .............................................. 5
3.3 Files, Books and Records ................................ 5
3.4 Noncompetition Agreement ................................ 6
3.5 Termination of Maquiladora Contract ..................... 7
3.6 Termination of Rudolf Miles & Sons
Warehouse Lease ......................................... 7
4. RIGHTS AND OBLIGATIONS OF WTI AND OF IPC ...................... 7
4.1 Further Cooperation ..................................... 7
4.2 Expenses ................................................ 8
4.3 Indemnification ......................................... 8
4.4 Business Activities ..................................... 8
4.5 TrimPatch Agreements .................................... 8
4.6 Employment of Dr. Eric Luo .............................. 9
</TABLE>
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<PAGE> 3
<TABLE>
<CAPTION>
PAGE NO.
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<S> <C>
5. REPRESENTATIONS AND WARRANTIES ......................... 9
5.1 Organization, etc. ............................... 9
5.2 Authorization; No Conflict ....................... 9
5.3 Non Contravention ................................ 10
5.4 Necessary Approvals and Consents ................. 10
5.5 Validity and Binding Nature ...................... 10
5.6 Litigation ....................................... 10
6. EVENTS OF DEFAULT AND THEIR EFFECT ..................... 11
6.1 Non-Payment ...................................... 11
6.2 Effect of Event of Default ....................... 12
7. RESOLUTION OF DISPUTES ................................. 13
7.1 Negotiation ...................................... 13
7.2 Submission to Mediation .......................... 13
7.3 Selection of Mediator ............................ 13
7.4 Mediation; Arbitration ........................... 13
8. OTHER MATTERS .......................................... 14
8.1 Notices .......................................... 14
8.2 Governing Law .................................... 14
8.3 Severability ..................................... 15
8.4 Gender ........................................... 15
8.5 Counterparts ..................................... 15
8.6 Attorneys' Fees .................................. 15
8.7 Assignment and Delegation ........................ 15
8.8 No Third Party Beneficiary Intended .............. 16
</TABLE>
- ii -
<PAGE> 4
<TABLE>
<CAPTION>
PAGE NO.
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<S> <C>
8.9 Modification ................................... 16
8.10 Entire Agreement ............................... 16
8.11 Time of the Essence ............................ 16
8.12 Waiver ......................................... 17
SCHEDULES
1. Assets .........................................
5.6 Litigation, etc. ...............................
</TABLE>
- iii -
<PAGE> 5
AGREEMENT OF PURCHASE AND SALE OF
TRIMPATCH BUSINESS AND ASSETS
This Agreement is made and entered into as of October 1, 1996 by and
between WILSHIRE TECHNOLOGIES, INC., a California corporation ("WTI") and
INTELLIGENT PHARMACEUTICALS CORPORATION, a California corporation ("IPC").
R E C I T A L S
A. The parties heretofore entered into a Joint Venture Agreement dated
as of February 17, 1993 for the development, marketing and sale of transdermal
patches ("TrimPatch(TM)") for human weight loss.
B. The Joint Venture was dissolved on November 1, 1995 pursuant to an
Agreement of Purchase and Sale of Joint Venture Interest and Terminating Joint
Venture (the "Termination Agreement"). At that time WTI acquired all of IPC's
and the Joint Venture's interests in the assets relating to the TrimPatch(TM)
business (the "TrimPatch Assets") and assumed certain of the Joint Venture's
debts and liabilities.
C. WTI desires to sell the TrimPatch Assets and business to IPC which
desires to purchase these from WTI.
D. The execution and delivery of this Agreement by WTI and of the
transactions contemplated thereby have been approved by WTI's Board of Directors
on August 28, 1996.
E. The execution and delivery of this Agreement by IPC and of the
transactions contemplated thereby have been approved by IPC's Board of Directors
on September 30, 1996.
<PAGE> 6
AGREEMENT
1. PURCHASE AND SALE OF TRIMPATCH ASSETS AND BUSINESS.
On October 1, 1996 (the "Closing Date"), WTI shall sell, assign and
transfer to IPC and IPC will purchase from WTI all of WTI's right, title and
interest in the TrimPatch Assets and business detailed on Schedule 1.
2. OBLIGATIONS OF IPC.
2.1 Purchase Price. In full payment for such assets and
business, IPC shall pay WTI the Purchase Price, which is $3,130,000 or, if
applicable, the $1,868,000 referred to in Section 2.2(b). The Purchase Price is
supported by invoices or other documents (collectively "Documents"), in form
acceptable for audit. At IPC's request, to be made before December 31, 1996, WTI
will make the Documents available to IPC or its accounting firm, for
verification that the Documents support the Purchase Price.
2.2 Manner and Source of Payment of Purchase Price. Schedule 1
shows the Trimpatch inventory (the "Existing Inventory") to be sold by WTI to
IPC on the Closing Date. The cash received by IPC from sales of Existing
Inventory is herein referred to as "EI Cash".
- 2 -
<PAGE> 7
2.2(a) IPC will pay WTI within twenty days
after receipt by IPC of any EI cash
(i) 100% of the first $250,000 of EI
Cash; plus
(ii) 50% of the next $500,000 of EI Cash; plus
(iii) 30% of the remaining EI Cash until the
aggregate of the payments made by IPC to WTI
pursuant to Sections 2.2(a)(i), (ii) and
(iii) equal the Purchase Price.
2.2(b) If the sale or other disposition of all Existing
Inventory produces cash in an amount less than the Purchase Price, then IPC will
pay the shortfall by paying WTI within twenty days after receipt by IPC, 10% of
all cash receipts from all other TrimPatch sales.
If the Existing Inventory can not be sold for any
reason and is destroyed, the $3,130,000 original purchase price will be reduced
by $1,262,000 to $1,868,000.
2.2(c) To enable WTI to monitor compliance with IPC's
obligations under Section 2.2 (a) and Section 2.2 (b), but for no other
purpose, IPC hereby grants WTI or its authorized representatives access, on
reasonable notice, to IPC's records concerning TrimPatch sales.
2.2(d) In the event of the sale of substantially all of IPC's
assets, or a merger or other reorganization where IPC is not the surviving
entity, or the sale
- 3 -
<PAGE> 8
or transfer of the TrimPatch(TM) Business, any remaining unpaid balance of the
Purchase Price shall be expressly assumed by the transferee with the approval of
WTI under Section 8.7 or, failing such approval and assumption, shall be paid to
WTI in full at the closing of the transaction whereby the sale, reorganization,
or other transfer is consummated.
2.3 Grant of Options.
a. Upon Default in Payment of Purchase Price. In the event
IPC defaults in making any of the payments provided for in Section 2.2(a) or
2.2(b) and such default continues for sixty days, WTI shall have the right and
option to purchase from IPC and IPC shall be obligated to sell to WTI all
assets, whether tangible or intangible, necessary to enable WTI to engage in the
TrimPatch Business, including but not limited to, a license to make, use and
sell TrimPatch and to use the TrimPatch name and logo.
Within twenty days after the expiration of the
above-mentioned sixty day period WTI must notify IPC in writing if it desires to
exercise such right and option, at a price to be negotiated at that time in good
faith by WTI and IPC.
The sale of the assets and business to WTI pursuant to
this Section 2.3(a) shall extinguish all further obligations of IPC under
Sections 2.1 and 2.2.
b. Upon Discontinuance of TrimPatch Business. If for any
reason IPC is unable or unwilling to continue in the TrimPatch Business, IPC
shall so notify WTI.
- 4 -
<PAGE> 9
Within twenty days after receipt of such notice, WTI
must notify IPC in writing if it desires to acquire the assets referred to in
Section 2.3(a) at a price to be negotiated at that time in good faith by WTI and
IPC. The sale of the assets and business to WTI pursuant to this Section 2.3(b)
shall extinguish all further obligations of IPC under Sections 2.1 and 2.2.
2.4 Payment of Taxes. IPC shall pay all sales, use and
transfer taxes arising from the sale of the TrimPatch Assets and business
pursuant to Section 1 of this Agreement.
3. OBLIGATIONS OF WTI.
3.1 Use of TrimPatch Name or Logo. WTI hereby specifically releases
all claims, if any, of ownership in the name, trademark or service mark
"TrimPatch(TM)" and in the TrimPatch(TM) logo and acknowledges that after the
Closing Date WTI has no right to use such logo, name or mark or any variations
thereof for any purpose.
3.2 Assistance. WTI will attend one meeting per customer or
distributor to introduce IPC's personnel to all TrimPatch customers and
distributors with whom WTI had dealings before the Closing Date and will assist
IPC in establishing or continuing business relations with such parties. WTI
shall bear its own costs for the first meeting with each customer or
distributor. All other costs of WTI for additional assistance shall be
reimbursed to WTI by IPC.
3.3 Files, Books and Records. Except for files, books and records
covered by the attorney/client privilege or
-5-
<PAGE> 10
related to the SEC investigation of WTI and its officers, or not related to the
Joint Venture, WTI shall deliver to IPC on or before the Closing Date
copies of all WTI files, books, records and other documents that are in
WTI's possession or under its control, including, but not limited to,
customer lists, marketing data, applications for government approvals,
and contracts and other agreements entered into by WTI, either in its
own name or in the name of the Joint Venture,
under which WTI has continuing obligations or rights or which otherwise relate
to the TrimPatch Business.
3.4 Noncompetition Agreement. For the period commencing October 1,
1996 and ending one year after the Purchase Price has been paid in full, WTI
shall not directly or indirectly engage in TrimPatch Business in any state,
province or other political subdivision of the United States or any other
country in which IPC is conducting such business. Without limiting the
generality of the foregoing, "to engage in TrimPatch Business" includes to be or
become or agree to be or become, interested in or associated with, in any
capacity (whether as partner, shareholder, owner, officer, director, employee,
principal, agent, creditor, trustee, consultant, co-venturer or otherwise) , any
individual, corporation, firm, association, partnership, joint venture or other
business entity, engaged in the transdermal appetite suppressant business;
provided, however, that without IPC's permission, WTI may own, solely as an
investment, up to one (1%) percent of any class
I
-6-
<PAGE> 11
of securities of any publicly held corporation traded on any national securities
exchange or on the automated quotation system in the United States of America,
and with IPC's prior permission, which shall not unreasonably be withheld, may
own in excess of 1%.
3.5 Termination of Maquiladora Contract. At no cost to IPC, WTI will
terminate its Maquiladora contract in Juarez, Mexico, and transfer the equipment
and remaining inventory at that location to the Rudolf Miles & Sons warehouse in
El Paso, Texas.
3.6 Termination of Rudolf Miles & Sons Warehouse Lease. WTI will
cancel the Lease at the Rudolf Miles & Sons warehouse in El Paso, Texas
effective October 31, 1996 and will pay the rental through that date. If IPC
wishes to occupy the premises after such date, it shall be IPC's obligation to
make its own arrangements with the landlord.
4. RIGHTS AND OBLIGATIONS OF WTI AND OF IPC.
4.1 Further Cooperation. Each party hereto agrees to use all
reasonable efforts to take promptly all actions and to do promptly all things
necessary, proper or advisable to consummate and make effective the transactions
contemplated by this Agreement, including using efforts to effect all necessary
registrations, applications and filings (including, without limitation, filings
in the Patent and Trademark Office of the United States) and obtaining any
required contractual consents. However, neither party shall be required to cause
or attempt to cause any third party to take any action which it would not
otherwise be obligated to take.
-7-
<PAGE> 12
4.2 Expenses. Each party will bear all expenses incurred by it in
connection with this Agreement and the transactions contemplated hereby.
4.3 Indemnification. Each party shall indemnify, defend and hold
harmless the other party and its shareholders, officers, directors, successors
and assigns from and against any and all claims, demands, actions, losses,
obligations, liabilities, damages, settlements, payments, costs and expenses,
including reasonable attorneys' fees, which arise out of, result from, or are in
any way connected with (1) any failure of the representations and warranties of
such party contained in this Agreement to be true and correct in any material
respect as of the date of this Agreement; or (2) any failure by such party to
perform any of its covenants and agreements under this Agreement in any material
respect. Notwithstanding the foregoing, these indemnity provisions shall not
apply in any situation in which the party to be indemnified agreed to or
approved an act or failure to act that is the basis of a claim by a party not a
party to this Agreement.
4.4 Business Activities. Except as provided in Section 3.4, each
party may engage in any business activity of any kind in any location and at any
time, and may do so without first offering a business opportunity to the other
party.
4.5 TrimPatch Agreements. Each party represents and warrants to the
other that to the best of such party's knowledge, Schedule 1 shows all
distribution and sales agreements that relate to TrimPatch that are in effect on
the Closing Date. At IPC's request, to be made within twenty days after the
Closing
- 8 -
<PAGE> 13
Date, WTI will specifically assign to IPC WTI's interests in any or all such
agreements.
IPC hereby unconditionally assumes all of WTI's obligations
under all distribution and sales agreements that relate to TrimPatch, including,
but not limited to, those listed on page 3 of Schedule 1.
4.6 Employment of Dr. Eric Luo. Upon the signing of this Agreement,
IPC may offer employment to Dr. Ching-Wang (Eric) Luo, who previously was an
employee of the Joint Venture and currently is an employee of WTI.
If Dr. Luo does not accept IPC's employment offer, if any, WTI
will make Dr. Luo available to render consulting services to IPC while employed
by WTI, for a total of up to 80 hours during the six month period ending March
31, 1997, at a fee, to be paid by IPC to WTI, to be mutually agreed upon.
5. REPRESENTATIONS AND WARRANTIES.
Each party warrants to the other party that:
5.1 Organization, etc. Each is a corporation duly formed, validly
existing and in good standing under the laws of the State of California, with
all requisite power and authority to own, operate and lease its properties and
to carry on its business as it is now being conducted.
5.2 Authorization; No Conflict. The execution and delivery of this
Agreement and the performance of its obligations under this Agreement are within
its powers, and have been duly authorized by all necessary corporate action.
- 9 -
<PAGE> 14
5.3 Non Contravention. Neither the execution and delivery of this
Agreement, nor the consummation by it of the transactions contemplated hereby,
will violate, breach or constitute a default under any of its governing
documents, or any other agreement or instrument or any judgment, order,
injunction, or decree by which it is bound, to which it is a party, or to which
its assets are subject.
5.4 Necessary Approvals and Consents. Except as disclosed in this
Agreement, no authorization, consent, permit or license or approval of, or
declaration, registration or filing with, any person (including, but not limited
to, any governmental or regulatory authority or agency) is necessary in
connection with the execution, delivery and performance by it of this Agreement.
5.5 Validity and Binding Nature. This Agreement is a legal, valid
and binding obligation of it and enforceable against it in accordance with its
terms, subject to bankruptcy, insolvency, moratorium, reorganization and like
laws affecting creditors' rights generally and to the discretion of courts
before which any proceeding may be brought to enforce equitable remedies.
5.6 Litigation. Except as shown in Schedule 5.6, no litigation
(including, without limitation, derivative actions), arbitration proceedings or
governmental proceedings are, to its knowledge, pending or threatened which
would, if adversely determined, materially and adversely affect the TrimPatch
Assets or business.
- 10 -
<PAGE> 15
6. EVENTS OF DEFAULT AND THEIR EFFECT.
6. 1 Each of the following shall constitute an Event of Default
under this Agreement:
a. Non-Payment. Default in the payment when due of any amounts
payable by IPC to WTI hereunder and failure to make such payment for ten days
after written notice thereof by WTI to IPC.
b. Bankruptcy, Insolvency. etc. IPC becomes insolvent or
generally fails to pay, or admits in writing its inability to pay, debts as they
become due; or IPC applies for, consents to, or acquiesces in the appointment
of, a trustee, receiver or other custodian for it or any of its property, or
makes a general assignment for the benefit of creditors; or, in the absence of
such application, consent or acquiescence, a trustee, receiver or other
custodian is appointed for it or for a substantial part of its property and is
not discharged within 60 days; or any bankruptcy, reorganization, debt
arrangement, or other case or proceeding under any bankruptcy or insolvency law,
or any dissolution or liquidation proceeding, is commenced in respect to it, and
if such case or proceeding is not commenced by IPC, is consented to or
acquiesced in by IPC or remains for 30 days undismissed; or IPC takes any
corporate action to authorize, or in furtherance of, any of the foregoing.
-11-
<PAGE> 16
c. Non-Compliance with Covenants. Failure by either party to
comply with or to perform any provision of this Agreement, and continuance of
such failure for 30 days after written notice thereof to the other party.
d. Breach of Warranties. Any warranty (all of which shall
survive the execution and delivery of this Agreement) made by either party in
this Agreement is breached or is false or misleading in any material respect, or
any schedule, certificate, financial statement, report, notice, or other
writing furnished by either party to the other pursuant to this Agreement, is
false or misleading in any material respect on the date as of which the facts
therein set forth are stated or certified.
6.2 Effect of Event of Default. In the case of any Event of Default
with respect to IPC, WTI shall have such legal and equitable remedies as may be
available under California law, subject to the dispute resolution provisions in
Article 7 of this Agreement. In the case of an Event of Default under Section
6.1, (a) WTI (i) shall also have the option to purchase described in Section
2.3(a) of this Agreement and (ii) shall be relieved from its obligations under
Section 3.4.
In the case of any Event of Default with respect to WTI, IPC
shall have such legal and equitable remedies as may be available under
California law, subject to the dispute resolution provisions in Article 7 of
this Agreement.
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<PAGE> 17
7. RESOLUTION OF DISPUTES.
If a dispute arises between the parties concerning this Agreement, the
parties shall use the following procedure prior to pursuing other available
remedies:
7.1 Negotiation. A meeting or meetings shall be held promptly
between the parties, or their representatives with decision-making authority
regarding the dispute, to negotiate in good faith a resolution of the dispute.
7.2 Submission to Mediation. If within 20 days after the first such
meeting the parties have not succeeded in negotiating a resolution of the
dispute, they shall submit the dispute to mediation and shall bear equally the
costs of mediation.
7.3 Selection of Mediator. The parties shall appoint a mutually
acceptable mediator, seeking assistance from the American Arbitration
Association if they have been unable to agree upon such appointment within 15
days from the conclusion of the negotiation period.
7.4 Mediation; Arbitration. The parties agree to participate in
good faith in the mediation and negotiations related thereto for a period of 15
days. If the parties are not successful in resolving the dispute through the
mediation, any remaining unresolved controversy or claim arising out of or
relating to this Agreement, or the performance or breach thereof, shall be
settled by arbitration in accordance with the Commercial Arbitration Rules of
the American Arbitration Association, conducted in San Diego, California.
Judgment upon the award rendered by the arbitrator(s) may be entered in any
court having jurisdiction thereof.
- 13 -
<PAGE> 18
8. OTHER MATTERS.
8.1 Notices. All notices, demands, requests or other communications
provided for or permitted to be given pursuant to this Agreement shall be in
writing and shall be delivered by hand by express courier, or mailed by
registered, certified or express mail, postage prepaid, return receipt
requested, and addressed as follows:
If to Intelligent
Pharmaceuticals: Intelligent Pharmaceuticals
Corporation
11770 Bernardo Plaza Court
Suite 305
San Diego, CA. 92128
Attn: Mr. David J. Beach
With a copy to: Donald P. LaRocque
Attorney at Law
11770 Bernardo Plaza Court
Suite 350
San Diego, CA. 92128
If to Wilshire: Wilshire Technologies, Inc.
5441 Avenida Encinas, Suite A
Carlsbad, CA. 92008
Attn: Mr. William J. Hopke
By giving to the other party at least ten days written notice
thereof, each party and its respective successors and assigns shall have the
right, from time to time and at any time during the term of this Agreement, to
specify any other address within the United States of America.
8.2 Governing Law. This Agreement and the obligations of the parties
hereunder shall be interpreted, construed and enforced in accordance with the
laws of the State of California without giving effect to principles of conflicts
of law.
- 14 -
<PAGE> 19
8.3 Severability. If any provision of this Agreement or the
application thereof to any person or circumstance shall be invalid or
unenforceable to any extent, the remainder of this Agreement and the application
of such provisions to any other person or circumstance shall not be affected
thereby and shall be enforced to the greatest extent permitted by law.
8.4 Gender. All personal pronouns used in this Agreement, whether
used in the masculine, feminine or neuter gender, shall include all other
genders; the singular shall include the plural and vice versa. Titles of
Articles and Sections are for convenience only and neither limit nor amplify the
provisions of the Agreement itself.
8.5 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original and all of which
together shall comprise but a single instrument.
8.6 Attorneys' Fees. If any action is brought to enforce or
interpret this Agreement, or if this agreement is submitted to arbitration, the
prevailing party shall be entitled to recover its costs and reasonable
attorneys' fees incurred in connection with such action.
8.7 Assignment and Delegation. Neither party to this Agreement may
assign any of its rights or delegate any of its duties under this Agreement
without the prior written consent of the other party, which consent shall not
unreasonably be withheld.
- 15 -
<PAGE> 20
8.8 No Third Party Beneficiary Intended. This Agreement is made
solely for the benefit of the parties and their respective successors and
assigns, and no other person or entity shall have or acquire any right by virtue
of this Agreement.
8.9 Modification. This Agreement may be supplemented, amended, or
modified only by the mutual agreement of the parties. No supplement, amendment
or modification shall be binding unless it is in writing and signed by both
parties.
8.10 Entire Agreement. This Agreement and all schedules thereto
constitute the final, complete and exclusive statement of the terms of the
agreement between the parties pertaining to the subject matter of this Agreement
and supersede all prior and contemporaneous understandings or agreements of the
parties, including the Termination Agreement, except for Article 7 and Sections
2.6, 4.3 and 8.1 of the Termination Agreement, which shall remain in full force
and effect. No party has been induced to enter into this Agreement by, nor is
either party relying on, any representation or warranty outside those expressly
set forth in this Agreement.
8.11 Time of the Essence. Time is of the essence in respect to all
provisions of this Agreement that specify a time for performance; the foregoing
shall however not be construed to limit or deprive a party of the benefits of
any grace period allowed in this Agreement.
- 16 -
<PAGE> 21
8.12 Waiver. No waiver of a breach or of a failure to comply with
any condition, or of any right or remedy contained in or granted by this
Agreement shall be effective unless it is in writing and signed by the party
waiving the breach, failure, right or remedy. No waiver of any breach, failure,
right, or remedy shall be deemed a waiver of any other breach, failure, right,
or remedy, whether or not similar, nor shall any waiver constitute a continuing
waiver unless the writing so specifies.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
INTELLIGENT PHARMACEUTICALS
CORPORATION
a California corporation
By /s/ David J. Beach
---------------------------
David J. Beach
Chairman and Chief
Executive Officer
WILSHIRE TECHNOLOGIES, INC.
a California corporation
By
---------------------------
William J. Hopke
Chairman and Chief
Executive Officer
- 17 -
<PAGE> 22
8.12 Waiver. No waiver of a breach or of a failure to comply with
any condition, or of any right or remedy contained in or granted by this
Agreement shall be effective unless it is in writing and signed by the party
waiving the breach, failure, right or remedy. No waiver of any breach, failure,
right, or remedy shall be deemed a waiver of any other breach, failure, right,
or remedy, whether or not similar, nor shall any waiver constitute a continuing
waiver unless the writing so specifies.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
INTELLIGENT PHARMACEUTICALS
CORPORATION
a California corporation
By
--------------------------
David J. Beach
Chairman and Chief
Executive Officer
WILSHIRE TECHNOLOGIES, INC.
a California corporation
By /s/ William J. Hopke
--------------------------
Wi1liam J Hopke
Chairman and Chief
Executive Officer
- 17 -
<PAGE> 23
SCHEDULE 1
TRIMPATCH ASSETS SOLD BY.
WTI TO IPC
A. The inventory shown on page 2 of this Schedule.
B. The following equipment:
(1) Rotary Press;
(6) Band Sealers; and
(1) Box Sealer.
C. All Patents and Trademarks of the TrimPatch Business Issued or
Applied for, including all rights to use the name TrimPatch and all
rights to any inventions filed or issued on the TrimPatch Business.
D. All Ministry of Health Registrations of the TrimPatch Business
Issued or Applied For.
E. All TrimPatch packaging, including inserts and revisions.
F. All sales, promotion, advertising and marketing materials, and
manuals, for TrimPatch.
G. In-vitro and in-vivo studies for TrimPatch.
H. WTI's interest in the distribution and sales agreements detailed on
page 3 of this Schedule 1.
I. WTI's right, expiring October 31, 1996, to occupy approximately 200
square feet of space in premises leased in the Rudolf Miles & Sons
warehouse in El Paso, Texas.
S-1
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED FORM 10-QSB FOR THE PERIOD ENDED AUGUST 31, 1996, AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-QSB AND THE ACCOMPANYING NOTES
THERETO.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> NOV-30-1996
<PERIOD-START> DEC-01-1995
<PERIOD-END> AUG-31-1996
<EXCHANGE-RATE> 1
<CASH> 253
<SECURITIES> 0
<RECEIVABLES> 366
<ALLOWANCES> 6
<INVENTORY> 895
<CURRENT-ASSETS> 1,861
<PP&E> 1,356
<DEPRECIATION> 685
<TOTAL-ASSETS> 3,446
<CURRENT-LIABILITIES> 1,924
<BONDS> 0
0
0
<COMMON> 25,850
<OTHER-SE> (24,328)
<TOTAL-LIABILITY-AND-EQUITY> 3,446
<SALES> 2,434
<TOTAL-REVENUES> 2,434
<CGS> 2,112
<TOTAL-COSTS> 4,395
<OTHER-EXPENSES> (190)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 96
<INCOME-PRETAX> (1,867)
<INCOME-TAX> 1
<INCOME-CONTINUING> (1,868)
<DISCONTINUED> 27
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,841)
<EPS-PRIMARY> (0.16)
<EPS-DILUTED> (0.16)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED FORM 10-QSB FOR THE PERIOD ENDED AUGUST 31, 1995, AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-QSB AND THE ACCOMPANYING NOTES
THERETO.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> NOV-30-1995
<PERIOD-START> DEC-01-1994
<PERIOD-END> AUG-31-1995
<EXCHANGE-RATE> 1
<CASH> 48
<SECURITIES> 0
<RECEIVABLES> 524
<ALLOWANCES> 93
<INVENTORY> 1,452
<CURRENT-ASSETS> 2,190
<PP&E> 1,847
<DEPRECIATION> 817
<TOTAL-ASSETS> 5,613
<CURRENT-LIABILITIES> 2,659
<BONDS> 7,295
0
0
<COMMON> 17,071
<OTHER-SE> (21,412)
<TOTAL-LIABILITY-AND-EQUITY> 5,613
<SALES> 2,377
<TOTAL-REVENUES> 2,377
<CGS> 1,635
<TOTAL-COSTS> 4,008
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 598
<INCOME-PRETAX> (2,229)
<INCOME-TAX> 1
<INCOME-CONTINUING> (2,230)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,230)
<EPS-PRIMARY> (0.50)
<EPS-DILUTED> (0.50)
</TABLE>
