<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB
Mark One:
/X/ Annual Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the fiscal year ended DECEMBER 31, 1997; or
/ / Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from __________ to __________.
COMMISSION FILE NO. 0-25136
KINETIC VENTURES LTD.
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(Name of Small Business Issuer in its Charter)
Delaware 33-0464753
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(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
1095 West Pender Street - Suite 850 -
Vancouver, British Columbia, Canada V6E 2M6
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(Address of Principal Executive Offices) (Zip Code)
(604) 689-1428
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(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act:
Title of Each Class Name of Each Exchange on Which Registered
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None None
Securities Registered Pursuant to Section 12(g) of the Exchange Act:
COMMON STOCK, PAR VALUE $.001 PER SHARE
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(Title of Each Class)
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 twelve (12) months
(or for such shorter period that the Issuer was required to file such
reports), and (2) has been subject to such filing requirements for the past
90 days. /X/ Yes / / No
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B in this form, and no disclosure will be contained, to
the best of Issuer's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB, or any amendment
to this Form 10-KSB.
State Issuer's revenues for its most recent fiscal year: $345,450
State the aggregate market value of the voting stock held by
non-affiliates computed by reference to the price at which the stock was
sold, or the average bid and asked prices of such stock. Since September 23,
1997, no quotations for the Company's Common Stock have appeared in any
organized trading system.
The number of shares outstanding of each of the Issuer's classes of
common equity, as of MARCH 31, 1998, was 39,933,733.
DOCUMENTS INCORPORATED BY REFERENCE
None
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
CORPORATE BACKGROUND
Kinetic Ventures Ltd. (formerly known as Neuro Navigational Corporation)
(the "Company") was incorporated in the State of California, United States,
on May 20, 1991. On December 31, 1993, the Company was reincorporated in the
State of Delaware, United States. The Company's principal executive offices
are located at 1095 West Pender Street, Suite 850, Vancouver, British
Columbia, Canada V6E 2M6.
In May 1994, the Company completed an initial public offering in Canada
of 3,000,000 shares of Common Stock at US $2.00 per share and the
distribution of 1,833,333 shares of Common Stock to holders of previously
issued special warrants.
On November 13, 1995, the Company issued and sold to Ballard Medical
Products, a Utah corporation ("Ballard") 200,000 shares of Series A Preferred
Stock ("Preferred Stock") which, if converted, would have represented 19.5%
of the Company's capital stock for US$2 million pursuant to a Stock Purchase
and Option Agreement dated July 17, 1995 (the "Ballard Agreement"). Under
the Ballard Agreement, Ballard paid to the Company US$500,000 as
nonrefundable consideration for an option (the "Ballard Option") to acquire
all of the assets of the Company during the 24 month period following the
closing of the sale of the Preferred Stock. On November 13, 1995, at a
Special Meeting of Stockholders (the "Special Meeting") called for the
purpose, the stockholders of the Company approved the execution, delivery and
performance by the Company of the Ballard Agreement, including thereby
approval of, among other things, (i) the Company's grant to Ballard of the
Ballard Option to purchase and acquire all of the assets of the Company and
its subsidiary, Endovascular, Inc., (ii) in the event that Ballard exercised
the Ballard Option, the subsequent sale of all of such assets, and (iii) in
the event that Ballard exercised the Ballard Option, the amendment to the
Company's Certificate of Incorporation to change the corporate name to such
name as the Board of Directors may determine in its discretion. The
stockholder approval approved all matters provided under the Agreement,
including the issuance and sale of Preferred Stock to Ballard.
On February 28, 1997, the Company received notice of Ballard's exercise
of the Ballard Option and on March 20, 1997, the sale of substantially all
the Company's assets to Ballard was completed. The purchase price for the
assets was $4,245,422, plus an adjustment for prepaid rent of $2,233.
Deducted from the purchase price were the $500,000 consideration paid for the
option under the Option Agreement, $198,631 of liabilities assumed,
$3,671,471 principal and interest owing by the Company to Ballard and liquid
assets of $11,695, or a net purchase price deficiency of $134,142. The
Company's 200,000 shares of Series A Preferred Stock were
<PAGE>
redeemed for $2,281 and retired. The deficiency of $134,142 in the payment of
the purchase price was represented by a note payable to Ballard, which note
was assigned to a third party and paid subsequent to December 31, 1997.
Concurrently, pursuant to authorization granted by the stockholders at
the Special Meeting, the Company changed its name to Kinetic Ventures Ltd.
Also, effective March 20, 1997, all of the Company's executive officers and
Directors resigned except that Mr. Brian Bayley remained as a Director of the
Company and was elected its President and in addition, Mr. A. Murray
Sinclair, Jr. and Ms. Jennine Ballard were elected Directors.
As a consequence of the sale of all its assets, the Company no longer
has any material assets or business operations or liabilities. In December
1997, the Company issued 30,000,000 shares of Common Stock for an aggregate
purchase price of $211,275. The proceeds were used to repay current
liabilities and to be available to finance in part the Company's efforts to
enter into further business ventures. The Company may seek to raise
additional capital to finance further business ventures. The terms on which
such capital will be raised have not been established and there can be no
assurance that the Company's management will be successful in raising
additional capital or in locating or acquiring any further business ventures
or that any such ventures as are acquired will be successful.
PROPOSED BUSINESS PLANS
As of March 31, 1998, the Company has no active business operations.
Its management intends to attempt to seek to have the Company enter into
further business operations. Management is currently reviewing various
alternatives relating to further business activities for the Company, but no
specific business activities have been identified and no agreements or
agreements in principle have been entered into whereby the Company will again
be engaged in any business activities. In addition, management has made no
decision as to any specific industries or geographical areas where any such
future business activities may be undertaken. Although management believes
that its future business activities will be the result of the acquisition of
an existing business, there can be no assurance with respect thereto and the
Company may become engaged in such activities through other means.
Management may seek to raise additional capital to enable it to become
engaged in further business activities to finance an acquisition of an
existing business or it may effectuate the acquisition through a merger,
consolidation or other issuance of shares of the Company's Common Stock.
There can be no assurance that the Company will be successful in
effectuating the acquisition of any further business operations. In
addition, there can be no assurance that the terms of such acquisition may
not be dilutive to the Company's existing stockholders or that
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such terms will be advantageous to the Company. There can be no assurance
that the Company will be successful in its attempts to enter into any further
business activities.
Until such time as the Company is successful in entering into further
business activities, it should be expected that the Company will not realize
any material revenues.
ITEM 2. DESCRIPTION OF PROPERTIES
Since March 20, 1997, the Company's executive office has been located at
1095 West Pender Street, Suite 850, Vancouver, British Columbia, Canada V6E
2M6 on a month-to-month basis as a tenant-at-will of Quest Management Co.
See "Management" and "Common Stock Ownership of Certain Beneficial Owners and
Management."
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of the fiscal year
ended December 31, 1997, to a vote of security holders of the Company,
through the solicitation of proxies, or otherwise.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Through March 27, 1997, the Company's Common Stock was listed on the
Toronto Stock Exchange, at which time it was suspended due to the Company's
financial condition and subsequently delisted on September 23, 1997 at the
Company's request. Subsequent to March 26, 1997, the Company's Common Stock
was not quoted or traded on any organized trading system. The following
represents high and low closing sale prices by quarter as reported by the
Toronto Stock Exchange for each of the calendar quarters of 1996 and the
first calendar quarter of 1997, through March 27, 1997.
<TABLE>
<CAPTION>
YEAR QUARTER HIGH LOW
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(IN CANADIAN DOLLARS)
<S> <C> <C> <C>
1996 First $0.34 $0.19
Second $0.50 $0.25
Third $0.28 $0.18
Fourth $0.27 $0.16
1997 First (through $0.30 $0.18
March 27)
</TABLE>
As of December 31, 1997, there were 39,933,733 shares of the Company's
Common Stock issued and outstanding which were owned by approximately 200
holders of record.
The Company has never declared or paid any cash dividends on its capital
stock and does not anticipate paying cash dividends in the foreseeable future,
but intends to retain future earnings for reinvestment in its business. Any
future determination to pay cash dividends will be at the discretion of the
Board of Directors.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion should be read in conjunction with the
Consolidated Financial Statements and notes thereto appearing elsewhere in
this Form 10-KSB. In addition the Company desires to take advantage of the
"safe harbor" provisions of the Private Securities Litigation Reform Act of
1995. Specifically, the Company wishes to alert readers that the information
set forth in "Item 1. Description of Business - Proposed Business Plans,"
and elsewhere herein relating to the Company's intentions and efforts to
enter into further business activities are forward-looking statements.
Various factors, including the inability of management to identify, locate
and acquire in a timely manner future business activities, among other
matters discussed in this Report, may adversely affect the Company's ability
to remain in existence. Failure to locate further business activities could
lead to the dissolution of the Company.
Until the Company is successful in entering further business activities,
it can be expected that its revenues will be nominal.
SELECTED FINANCIAL DATA
The selected financial data set forth below have been derived from the
Company's consolidated financial statements which appear elsewhere herein.
The selected statement of operations data for the years ended December 31,
1997 and 1996 and the balance sheet information at those dates have been
derived from the Company's consolidated financial statements for those years
that have been audited by Raimondo Pettit Group, independent auditors. The
selected financial data should be read in conjunction with the Company's
consolidated financial statements and the notes thereto and Management's
Discussion and Analysis of Financial Condition and Results of Operations
included elsewhere herein. Operating results for any particular period are
not necessarily indicative of results for any future period.
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<TABLE>
<CAPTION>
SELECTED CONSOLIDATED STATEMENT OF OPERATIONS DATA:
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1997 1996 1995
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<S> <C> <C> <C>
Total Revenues $345,450 $2,103,246 $2,218,299
Cost of goods sold 253,973 1,417,399 1,726,345
Gross profit 91,477 685,847 491,954
Operating expenses 691,894 3,598,038 3,901,570
Interest income (expense), net (67,841) (162,657) (13,554)
Other income -
Ballard Agreement 1,810,619 -0- 500,000
Net income (loss) $1,129,608 $(3,059,333) $(2,892,799)
<CAPTION>
SELECTED CONSOLIDATED BALANCE SHEET DATA:
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AT DECEMBER 31,
---------------------------------
1997 1996
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<S> <C> <C>
Working capital (deficiency) $4,263 $(1,658,896)
Total assets $179,228 2,376,400
Current portion of long-term debt -0- 2,065
Long-term debt -0- 4,026
Convertible redeemable preferred stock -0- 1,867,795
Total stockholders' equity (deficit) $4,263 (3,202,134)
</TABLE>
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YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR ENDED DECEMBER 31, 1996
NET SALES. Net sales decreased to $345,450 for the year ended December
31, 1997 as compared to $2,103,246 for the year ended December 31, 1996, a
decrease of 84%. For the first quarter of the year, the decrease in sales
was attributable to a decrease in sales through an international distributor
and the uncertainty in the marketplace due to the impending sale of the
Company's assets. The sale was completed on March 20, 1997 which resulted in
there being no sales activity for the remainder of the year.
GROSS PROFIT. Gross Profit decreased to $91,477 for the year ended
December 31, 1997 as compared to $685,847 for the year ended December 31,
1996, a decrease of 87%. This decrease was due to lower sales volume.
RESEARCH AND DEVELOPMENT. Research and Development expenses represent
the Company's investment in the advancement of less invasive technology in
the fields of neuro and vascular surgery. These expenses decreased to
$69,327 for the year ended December 31, 1997 as compared to $977,450 for the
year ended December 31, 1996, a decrease of 93%. The level of these expenses
decreased through March 31, 1997 due to a decrease in personnel and related
benefit costs and reduced spending in expenses related to the Company's
vascular products, including clinical and regulatory submissions. No such
expenses were incurred subsequent to March 20, 1997.
SALES AND MARKETING EXPENSES. Sales and Marketing expenses were
$314,150 for the year ended December 31, 1997 as compared to $1,770,464 for
the year ended December 31, 1996, a decrease of 82%. This decrease was the
result of the discontinuance of these activities after the sale of the
Company's assets in March 1997.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses were $308,417 for the year ended December 31, 1997 as compared to
$850,124 for the year ended December 31, 1996, a decrease of 64%. The
decrease was due primarily to reduced insurance premiums for product
liability coverage and Directors and Officers liability insurance and the
sale of the business on March 20, 1997.
NET INCOME (LOSS). Net income was $1,129,608 for the year ended
December 31, 1997. Net loss was $3,059,333 for the year ended December 31,
1996, an increase of $4,188,941. The current year income is primarily
attributable to the gain on sale of the Company's assets.
LIQUIDITY AND CAPITAL RESOURCES. Working capital was $4,293 at December
31, 1997 as compared to working capital deficiency of $1,658,896 at December
31, 1996 or an increase of $1,663,189 arising out of the sale of the
Company's assets in March 1997. The Company's cash
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resources at both December 31, 1997 and March 31, 1998 were minimal. The
Company's independent auditors, in their report on the Company's financial
statements as of and for the year ended December 31, 1997, include an
explanatory paragraph with respect to the uncertainty as to the Company's
ability to continue as a going concern because of the Company's current
financial condition.
The Company had, at December 31, 1997, no commitments for any other
credit facilities, such as revolving loans or lines of credit that could
provide additional working capital.
ITEM 7. FINANCIAL STATEMENTS
The response to this Item is included in a separate section of this
Report. See Index to Financial Statements on page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Company's former independent accountants, Coopers & Lybrand L.L.P.
("Coopers") resigned from that capacity on November 8, 1996.
The report by Coopers on the financial statements of the Company dated
March 1, 1996, including consolidated balance sheets as of December 31, 1995
and 1994, and the related consolidated statements of operations, cash flows
and statement of stockholders' equity (deficit) for the years then ended did
not contain an adverse opinion or a disclaimer of opinion, and was not
qualified or modified as to uncertainty, audit scope or accounting principles
except that the report contained an explanatory paragraph with respect to
substantial doubt concerning the Company's ability to continue as a going
concern.
The former independent accountants resigned from their position on
November 8, 1996. The resignation was not presented to or considered by the
Board of Directors or any audit or similar committee of the Board and,
therefore, the decision was not recommended or approved by the Board or any
such committee.
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During the period covered by the financial statements through the date
of resignation of the former accountants, there were no disagreements with
the former accountants on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure.
A letter from the former independent accountants for the Company is
attached as an Exhibit to the Company's Form 10-QSB for the quarter ended
September 30, 1996.
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<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The directors and Executive Officers of the Company and their ages are
as follows:
NAME AGE POSITION
Brian Bayley 45 President and Director
A. Murray Sinclair, Jr. 36 Director
Jennine M. Ballard 47 Director
BRIAN BAYLEY has served as Director of the Company since February 1995
and was appointed President in March 1997. He is also President and director
of Quest Management Corp., a private management company. Previously, Mr.
Bayley held the positions of director, President, Chief Executive Officer,
Secretary and Vice-President, Corporate Administration of Quest Oil & Gas,
Inc. (formerly Quest Capital Corporation). Quest Oil & Gas, Inc. was a
publicly-traded oil and gas company whose shares traded on The Toronto Stock
Exchange. On April 22, 1997, substantially all the assets of Quest Oil &
Gas, Inc. were acquired by EnerMark Income Fund. Prior to that, he worked
with the Vancouver Stock Exchange and a private management company. Mr.
Bayley holds an MBA from Queen's University, Kingston, Ontario. Mr. Bayley
currently serves as Director of Arlington Ventures Ltd., Belvedere Resources,
Ltd., Brandale Food Services, Inc., Ella Resources, Inc., Gothic Energy
Corporation, Greystar Resources Ltd., Leigh Resource Corporation, Marchwell
Capital Corp., Neary Resources Corporation, Neutrino Resources, Inc., New
Candela Resources Ltd., Rhodelta Software, Inc., Roseland Resources, Ltd. and
Ventel, Inc.
MR. SINCLAIR was elected a director of the Company on March 21, 1997.
He is also President and a director of Quest Ventures Ltd., a private
merchant banking company. Previously he was Managing Director of Quest Oil &
Gas, Inc. (formerly Quest Capital Corporation). Quest Oil & Gas, Inc. was a
publicly-traded oil and gas company whose shares traded on The Toronto Stock
Exchange. Prior to that, he was President and director of Noramco Capital
Corp., a private investment company. Mr. Sinclair holds a B.Comm. from
Queen's University, Kingston, Ontario. Mr. Sinclair currently serves as
Director of Arlington Ventures
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Ltd., Belevedere Resources, Ltd., Brandale Food Services, Inc., Breakwater
Resources Ltd., Brimstone Gold Corp., Habanero Resources, Inc., Magnifoam
Technology, Inc., Marchwell Capital Corp., Neutrino Resources, Inc., Roseland
Resources, Ltd., RTO Enterprises, Inc., Santa Cruz Minerals,Inc., Sextant
Enterprise Corp. and Ventel, Inc.
MS. BALLARD was elected a Director of the Company on March 21, 1997.
She has, since April 1994, been employed as a consultant to publicly traded
companies on Canadian securities regulatory matters. From April 1991 to
April 1994, she was employed by Quest Capital Corporation (formerly known as
Noramco Mining Corporation) in a corporate administrative capacity.
There is no family relationship between any of the directors or
executive officers of the Company.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Under the securities laws of the United States, the Company's directors,
its officers, and any person holding more than ten percent of the Company's
Common Stock are required to report their initial ownership of the Company's
Common Stock and any subsequent changes in that ownership to the Securities
and Exchange Commission ("SEC"). Specific filing deadlines of these reports
have been established and the Company is required to disclose in this Annual
Report on Form 10-KSB any failure to file by these dates during the fiscal
year ended December 31, 1997.
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ITEM 10. EXECUTIVE COMPENSATION
MANAGEMENT COMPENSATION
The following table sets forth all compensation paid by the Company
during the fiscal year ended December 31, 1997 to the Chief Executive
Officers of the Company who served during any portion of that year. No other
executive officer total annual compensation in such year exceeded $100,000.
All dollar amounts are provided in U.S. dollars.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
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ANNUAL COMPENSATION
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SECURITIES
UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) OPTIONS/SARS (#)
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<S> <C> <C> <C> <C>
Brian Bayley, President and 1997 -0- -0- -0-
Chief Executive Officer (1)
William J. Worthen, President 1997 $ 37,159 -0- -0-
and Chief Executive 1996 $140,000 -0- -0-
Officer (2) 1995 $140,000 -0- -0-
</TABLE>
__________________
(1) Mr. Bayley was elected President and Chief Executive Officer of the Company
on March 20, 1997.
(2) Mr. Worth resigned as President and Chief Executive Officer of the Company
on March 20, 1997.
No options were granted or exercised during the year ended December 31,
1997.
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ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
COMMON STOCK OWNERSHIP
OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of March 31, 1998, the Company had issued and outstanding 39,933,733
shares of its Common Stock. The following table sets forth, as of the Record
Date, certain information regarding beneficial ownership of the Common Stock
by (i) those persons beneficially holding more than five percent of the
Company's Common Stock, (ii) the Company's directors who beneficially own
shares of the Common Stock and (iii) all of the Company's directors and
officers as a group.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENTAGE OF
BENEFICIALLY OUTSTANDING
NAME AND ADDRESS OF BENEFICIAL OWNER (1) OWNED (2) COMMON STOCK
- ------------------------------------------- ---------------- -------------
<S> <C> <C>
Brian Bayley (3) 1,261,571 3.1%
A. Murray Sinclair, Jr. (3) 1,261,571 3.1%
Benitz & Partners Limited (4)
94 Mount Street - First Floor 30,000,000 75.0%
London, England W1Y 5H5
All officers and directors as a group 1,261,571 3.1%
(2 persons)
</TABLE>
_________________
(1) Unless otherwise indicated, the address of such person is c/o the Company.
(2) For purposes of the above table, a person is considered to "beneficially
own" any shares with respect to which he or she exercises sole or shared
voting or investment power or of which he or she has the right to acquire
the beneficial ownership within 60 days following March 31, 1998.
(3) Consists of 1,261,571 shares of Common Stock owned by Quest Ventures, Ltd.
of which Mr. Sinclair is President and Mr. Bayley is a Director. Such
persons disclaim beneficial ownership of such shares.
(4) Benitz & Partners Ltd. is an investment dealer regulated in England by the
Securities and Futures Authority and holds the shares as a portfolio
manager trading as an agent for accounts fully managed by it.
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ESCROWED SHARES
In compliance with the requirements of the Securities Act (Ontario) and
the securities laws of certain other Provinces of Canada, and pursuant to an
agreement (the "Escrow Agreement") dated as of March 11, 1994 between
Montreal Trust Company of Canada (the "Escrow Agent"), Quest Oil & Gas Inc.
("Quest"), Inter-Tel Media, Inc. (formerly Medsana Medical Systems, Inc.)
("Connect") and the Company, 2,523,142 shares of Common Stock (the "Escrowed
Shares") owned directly or indirectly by Quest and Connect were deposited
with the Escrow Agent. The Escrow Agent released 10% of the Escrowed Shares
on December 24, 1994, 20% on December 24, 1995, 20% on December 24, 1996 and
will release 20% on December 24, 1997 and the remaining 30% on December 24,
1998. Under the Escrow Agreement, the Escrowed Shares may not be sold,
pledged as security or otherwise disposed of without the prior consent of the
applicable securities commissions and other regulatory authorities. Quest
and Connect have transferred beneficial ownership of such shares to Quest
Ventures Ltd.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On December 12, 1997, the Company sold 30,000,000 shares of Common Stock
to Benitz & Partners Limited for an aggregate purchase price of $211,275.
The proceeds were used by the Company to pay outstanding payables and for
general corporate purposes.
On November 13, 1995, the Company sold to Ballard 200,000 shares of
Preferred Stock which upon conversion represented 19.5% of the Company's
capital stock for US$2 million pursuant to the Ballard Agreement. Under the
Ballard Agreement, Ballard paid to the Company US$500,000 as nonrefundable
consideration for the Ballard Option to acquire all of the assets of the
Company during the 24 month period following the closing of the sale of the
Preferred Stock. On February 28, 1997, the Company received notice from a
wholly owned subsidiary of Ballard of Ballard's exercise of the Ballard
Option and on March 20, 1997, the sale of substantially all the Company's
assets to Ballard was completed. The purchase price for the assets was
$4,245,422, plus an adjustment for prepaid rent of $2,233. Deducted from the
purchase price were the $500,000 consideration paid for the option under the
Option Agreement, $198,631 of liabilities assumed, $3,671,471 principal and
interest owing by the Company to Ballard and liquid assets of $11,695, or a
net purchase price deficiency of $134,142. The Company's 200,000 shares of
Series A Preferred Stock were redeemed and retired. The deficiency of
$134,142 in the payment of the purchase price is represented by the Company's
promissory note due on demand which was assigned to a third party and paid
subsequent to December 31, 1997.
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The Company agreed to indemnify Ballard against certain losses in
connection with the transaction.
The Ballard Agreement also provided for a line of credit up to $500,000
commencing eight months after the closing of the sale of Preferred Stock to
finance operating expenses. The commencement date for this line of credit
anticipated an eight month period beginning in July 1995 when the Ballard
Agreement was signed. The Ballard Agreement was approved by shareholders in
November 1995, four months later. The Company began borrowings against this
credit facility in January 1996 and as of March 20, 1997 the Company has
borrowed $500,000 and an additional $3,040,000 in addition to the line of
credit for a total of $3,540,000.
Under the Ballard Agreement two nominees of Ballard served on the
Company's Board of Directors through March 20, 1997, and the Company's
conduct of its business was subject to certain restrictions, during the
option term. Mr. Harold Wolcott and Kenneth Sorenson joined the Board as
Ballard's nominees and resigned on March 20, 1997.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a)(1) CONSOLIDATED FINANCIAL STATEMENTS
The following consolidated financial statements are filed as part of this
report:
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Index to Consolidated Financial Statements F-1
Report of Raimondo Pettit Group F-2
Consolidated Balance Sheets at December 31, 1997 and 1996 F-3
Consolidated Statements of Operations for the years ended
December 31, 1997 and 1996 F-4
Consolidated Statements of Stockholders' Equity (Deficit)
for the years ended December 31, 1997 and 1996 F-5
Consolidated Statements of Cash Flows for the years ended
December 31,1997 and 1996 F-6-7
Notes to Consolidated Financial Statements F-8-17
</TABLE>
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(a)(2) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
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<S> <C>
3(i) Certificate of Incorporation of the Registrant, as
amended. (1)
3(ii) Bylaws of the Registrant, as amended. (1)
4.1 Specimen stock certificate of the Registrant. (1)
10.1 Restated 1993 Stock Incentive Plan. (1)
10.2 Restated Officers' Stock Warrant Plan. (1)
10.3 1994 Directors Stock Option Plan. (1)
10.4 1994 Stock Option Plan. (1)
10.5 1993 Stock Incentive Plan. (1)
10.6 Form of Indemnification Agreement between the Registrant
and its officers and directors. (1)
10.7 Stock Purchase and Option Agreement dated July 17, 1995
between the Registrant and Ballard Medical Products,
including all exhibits thereto. (2)
21.1 Subsidiaries of the Registrant. None
27 Financial Data Schedule.
</TABLE>
________________
(1) Filed as an Exhibit to Neuro Navigational Corporation Form 10-KSB
No 0-25136 dated September 30, 1994.
(2) Filed as Exhibit (exhibit number 2.1) to Neuro Navigational Corporation
Form 8-K dated July 17, 1995.
(b) REPORTS ON FORM 8-K
No Current Reports on Form 8-K were filed by the Company during the quarter
ended December 31, 1997.
-16
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Dated: April 13, 1998
KINETIC VENTURES LTD.
By: /s/ Brian Bayley
----------------------------
Brian Bayley, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
- --------- -------- ----
<S> <C> <C>
/s/ Brian Bayley
- -------------------------- President and Director April 13, 1998
Brian Bayley (principal executive,
financial and accounting
officer)
/s/ A. Murray Sinclair, Jr. Director April 13, 1998
- ----------------------------
A. Murray Sinclair, Jr.
/s/ Jennine M. Ballard Director April 13, 1998
- ----------------------------
Jennine M. Ballard
</TABLE>
-17-
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
KINETIC VENTURES LTD.
(FORMERLY KNOWN AS NEURO NAVIGATIONAL
CORPORATION)
YEARS ENDED DECEMBER 31, 1997 AND 1996
<PAGE>
KINETIC VENTURES LTD.
(FORMERLY KNOWN AS NEURO NAVIGATIONAL CORPORATION)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT F-2
FINANCIAL STATEMENTS
Consolidated Balance Sheet F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Changes in
Stockholders' Equity (Deficit) F-5
Consolidated Statements of Cash Flows F-6 to F-7
Notes to Consolidated Financial Statements F-8 to F-17
<PAGE>
[LETTERHEAD OF RAIMONDO PETTIT GROUP]
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Kinetic Ventures Ltd.
(formerly known as Neuro Navigational Corporation)
Vancouver, British Columbia, Canada
We have audited the accompanying consolidated balance sheet of Kinetic Ventures
Ltd. (formerly known as Neuro Navigational Corporation) as of December 31, 1997,
and the related consolidated statements of operations, changes in stockholders'
equity (deficit), and cash flows for the two years then ended. The financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Kinetic
Ventures Ltd. (formerly known as Neuro Navigational Corporation) as of December
31, 1997, and the consolidated results of their operations and their cash flows
for the two years then ended, in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared assuming
that the company will continue as a going concern. As discussed in Note 1 to
the consolidated financial statements, the Company has suffered recurring losses
from operations, has sold its revenue-producing operations and, at the date of
this report, has no liquidity resources. The Company's ability to continue as a
going concern is dependant upon its ability to raise additional capital or to
merge with a revenue producing venture partner. These matters raise substantial
doubt about the Company's ability to continue as a going concern. Management's
plans in regard to these matters are described in Note 1. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
RAIMONDO PETTIT GROUP
Torrance, California
March 17, 1998
F-2
<PAGE>
KINETIC VENTURES LTD.
(FORMERLY KNOWN AS NEURO NAVIGATIONAL CORPORATION)
CONSOLIDATED BALANCE SHEET
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31, 1997
- -------------------------------------------------------------------------------
<S> <C>
ASSETS
Cash and cash equivalents $ 179,228
- -------------------------------------------------------------------------------
Total current assets 179,228
- -------------------------------------------------------------------------------
TOTAL ASSETS $ 179,228
- -------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Note payable $ 139,000
Accounts payable and accrued expenses 13,412
Income tax payable 22,553
- -------------------------------------------------------------------------------
Total current liabilities 174,965
- -------------------------------------------------------------------------------
Total liabilities 174,965
- -------------------------------------------------------------------------------
COMMITMENTS (NOTES 4, 6 AND 7)
STOCKHOLDERS' EQUITY
Common stock, $0.001 par value, 40,000,000 shares
authorized, 39,933,733 issued and outstanding 39,934
Additional paid-in capital 15,895,073
Accumulated deficit (15,930,744)
- -------------------------------------------------------------------------------
Total stockholders' equity 4,263
- -------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 179,228
- -------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-3
<PAGE>
KINETIC VENTURES LTD.
(FORMERLY KNOWN AS NEURO NAVIGATIONAL CORPORATION)
CONSOLIDATED STATEMENTS OF OPERATIONS
- ---------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1997 1996
- ---------------------------------------------------------------------------
<S> <C> <C>
SALES $345,450 $ 2,103,246
COST OF SALES 253,973 1,417,399
- ---------------------------------------------------------------------------
GROSS PROFIT 91,477 685,847
- ---------------------------------------------------------------------------
OPERATING EXPENSES
Research and development 69,327 977,450
Sales and marketing 314,150 1,770,464
General and administrative 308,417 850,124
- ---------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 691,894 3,598,038
- ---------------------------------------------------------------------------
LOSS FROM OPERATIONS (600,417) (2,912,191)
OTHER INCOME (EXPENSE)
Interest expense, net (67,841) (162,657)
Gain on sale of assets 1,810,619 -
Other income, net 12,800 19,115
- ---------------------------------------------------------------------------
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES 1,155,161 (3,055,733)
PROVISION FOR INCOME TAXES 25,553 3,600
- ---------------------------------------------------------------------------
NET INCOME (LOSS) $1,129,608 $ (3,059,333)
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
INCOME (LOSS) PER SHARE
Basic and Diluted $0.10 $ (0.31)
Average common shares outstanding 11,183,733 9,933,733
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-4
<PAGE>
KINETIC VENTURES LTD.
(FORMERLY KNOWN AS NEURO NAVIGATIONAL CORPORATION)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
- ------------------------------------------------------------------------------------------------------
Total
Common Stock Additional Stockholders'
------------------- Paid-in Accumulated Equity
Shares Amount Capital Deficit (Deficit)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balances, January 1, 1996 9,933,733 $ 9,934 $13,848,284 $(14,001,019) $ (142,801)
Net loss for the year
ended December 31, 1996 (3,059,333) (3,059,333)
- ------------------------------------------------------------------------------------------------------
Balances, December 31, 1996 9,933,733 9,934 13,848,284 (17,060,352) (3,202,134)
Redemption of convertible
preferred stock 1,865,514 1,865,514
Issuance of common stock 30,000,000 30,000 181,275 211,275
NET INCOME FOR THE YEAR
ENDED DECEMBER 31, 1997 1,129,608 1,129,608
- ------------------------------------------------------------------------------------------------------
BALANCES, DECEMBER 31, 1997 39,933,733 $39,934 $15,895,073 $(15,930,744) $ 4,263
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-5
<PAGE>
KINETIC VENTURES LTD.
(FORMERLY KNOWN AS NEURO NAVIGATIONAL CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $1,129,608 $ (3,059,333)
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Gain on sale of assets (1,810,619) -
Depreciation and amortization 13,942 95,667
Changes in operating assets and liabilities:
Accounts receivable 182,982 11,647
Inventories 118,175 (248,788)
Prepaid expenses 11,695 22,019
Accounts payable and accrued expenses 39,317 (149,501)
- ------------------------------------------------------------------------------
Net cash used in operating activities (314,900) (3,328,289)
- ------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment - (104,863)
Net cash used in investing activities - (104,863)
- ------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable 179,930 3,260,000
Principal repayments of notes payable and
capital lease obligation - (1,759)
Redemption of convertible preferred stock (2,281) -
Proceeds from issuance of common stock 211,275 -
- ------------------------------------------------------------------------------
Net cash provided by financing activities 388,924 3,258,241
- ------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 74,024 (174,911)
Cash and cash equivalents, beginning of year 105,204 280,115
- ------------------------------------------------------------------------------
Cash and cash equivalents, end of year $179,228 $ 105,204
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
</TABLE>
F-6
<PAGE>
KINETIC VENTURES LTD.
(FORMERLY KNOWN AS NEURO NAVIGATIONAL CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
CASH PAID DURING THE YEAR FOR:
Interest $ - $ 1,141
Income taxes $ 1,600 $ 1,600
NON CASH INVESTING AND FINANCING ACTIVITIES:
Elimination of assets and liabilities
resulting from the exercise of the option
to acquire assets:
Accounts receivable $ 196,891 $ -
Inventories $1,406,175 $ -
Fixed assets $ 297,076 $ -
Other assets $ 52,117 $ -
Accounts payable and other accrued liabilities $ 225,549 $ -
Note payable and accrued interest to
Ballard applied against sales price $3,537,329 $ -
Convertible stock redemption recorded to
additional paid-in capital $1,865,514 $ -
- ------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
KINETIC VENTURES LTD.
(FORMERLY KNOWN AS NEURO NAVIGATIONAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
1. THE COMPANY
Kinetic Ventures Ltd. (formerly known as Neuro Navigational Corporation (the
"Company")) was incorporated in California on May 20, 1991, and
reincorporated in Delaware in December 1993, to develop, manufacture and
market disposable miniature medical devices and an integrated visualization
system designed for minimally invasive neurosurgery, primarily of the brain.
The Company was also developing products for vascular surgery.
During the year ended December 31, 1995, the Company sold $2 million in
convertible redeemable preferred stock to Ballard Medical Products
("Ballard") and entered into an option agreement (the "Option") to sell
Ballard substantially all of the assets of the Company (see Note 4). On
February 28, 1997, Ballard exercised its Option for a total purchase price of
$4.2 million. Ballard had also extended a line of credit that allowed the
Company to operate until March 20, 1997, when the sale of assets was
completed. Ballard also redeemed its convertible preferred stock for $2,281.
The sale of assets and related gain on sale of assets were accounted for as
follows:
<TABLE>
<S> <C>
Total purchase price: $ 4,247,655
Less net assets sold:
Accounts receivable (196,891)
Inventory (1,406,175)
Fixed assets (297,076)
Other assets (52,117)
Accounts payable, net of liabilities assumed 15,223
Gain previously recognized in 1995 (500,000)
----------------------------------------------------------------
Gain on sale of assets $ 1,810,619
----------------------------------------------------------------
----------------------------------------------------------------
</TABLE>
The sale proceeds were as follows:
<TABLE>
<S> <C>
Total purchase price $ 4,247,655
Option price applied (500,000)
Line of credit, liabilities assumed and liquid assets (3,881,655)
----------------------------------------------------------------
Excess of price paid over assets acquired (remaining Note
Payable to Ballard Medical Products) $ (134,000)
----------------------------------------------------------------
</TABLE>
F-8
<PAGE>
KINETIC VENTURES LTD.
(FORMERLY KNOWN AS NEURO NAVIGATIONAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
1. THE COMPANY (CONTINUED)
GOING CONCERN
As a consequence of the sale of all its assets, the Company no longer has any
material assets or business operations or liabilities other than the
outstanding note in the amount of approximately $139,000. In December 1997,
the Company issued 30,000,000 shares of common stock for an aggregate
purchase price of Canadian $300,000 (U.S. $211,275) or U.S. $0.007 per share.
The proceeds were used to repay current liabilities and to be available to
finance, in part, the Company's efforts to enter into further business
ventures. The Company may seek to raise additional capital to finance
further business ventures. The terms on which such capital will be raised
have not been established and there can be no assurance that the Company's
management will be successful in raising additional capital or in locating or
acquiring any further business ventures or that any such ventures acquired
will be successful.
Subsequent to the sale, the Company continues to exist as a public shell
corporation and the accompanying financial statements have been presented
assuming the Company will continue as a going concern. At December 31, 1997,
the Company had accumulated $15.9 million in losses and had no revenue producing
operations. At the date of this report, the Company has almost no liquidity and
its ability to continue as a going concern is dependent upon its ability to
raise additional capital or merge with a revenue producing venture partner.
These matters raise substantial doubt about the Company's ability to continue as
a going concern. No adjustments have been made in the accompanying financial
statements to provide for this uncertainty.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary, Endovascular, Inc., a California corporation.
All intercompany accounts and transactions have been eliminated in
consolidation.
The results of operations represent operations up to March 20, 1997, the date
of the disposition of the Company's assets. Such sales and related expenses
will not be recurring in the future.
CASH AND CASH EQUIVALENTS
The Company considers short-term investments which have maturities of three
months or less at the date of acquisition to be cash equivalents.
F-9
<PAGE>
KINETIC VENTURES LTD.
(FORMERLY KNOWN AS NEURO NAVIGATIONAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INVENTORIES
Up to March 20, 1997, the date of the sale of the Company's assets,
inventories were valued at the lower of cost or market. Cost was determined
principally by the first-in, first-out method.
PROPERTY AND EQUIPMENT
Property and equipment are capitalized at original cost and depreciated or
amortized on a straight-line basis over their estimated useful lives as
follows:
<TABLE>
<CAPTION>
Assets Useful Lives
---------------------------------------------------------------
<C> <C>
Office furniture 3-7 years
Equipment 5 years
Molds 10 years
Leasehold improvements Lesser of economic life or lease term
</TABLE>
Amortization on equipment under capital lease is calculated using the
straight-line method over the lesser of the term of the lease or the
estimated useful life of the equipment.
Maintenance and repairs are expensed as incurred while renewals or
betterments are capitalized. Upon the sale or retirement of property and
equipment, the accounts are relieved of the cost and the related accumulated
depreciation and amortization, and any resulting gain or loss is included in
operations.
RESEARCH AND DEVELOPMENT
Research and development costs, including the costs of filing for patents on
new products, are expensed as incurred.
MANAGEMENT'S ESTIMATES
The preparation of financial statements, in conformity with generally
accepted accounting principles, requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-10
<PAGE>
KINETIC VENTURES LTD.
(FORMERLY KNOWN AS NEURO NAVIGATIONAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The Company accounts for income taxes in accordance with the provisions of
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes," which requires the recognition of deferred tax liabilities and assets
for the expected future tax consequences of events that have been included in
the financial statements or tax returns. Under this method, deferred tax
liabilities and assets are determined based on the difference between the
financial statement and the tax basis of assets and liabilities using enacted
rates in effect for the year in which the differences are expected to reverse.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized.
STOCK OPTIONS
Statement of Financial Accounting Standards No. 123, "ACCOUNTING FOR
STOCK-BASED COMPENSATION," encourages, but does not require, companies to
record compensation cost for stock-based employee compensation plans at fair
value. The Company has chosen to continue to account for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES,"
and related interpretations. Accordingly, compensation cost for stock options
is measured as the excess, if any, of the quoted market price of the
Company's stock at the date of the grant over the amount an employee must pay
to acquire the stock.
NET LOSS PER COMMON SHARE
The Company computes its loss per share in accordance with Statement of
Financial Accounting Standards (SFAS) No. 128, "EARNINGS PER SHARE" ("EPS")
issued in February, 1997. SFAS No. 128 requires dual presentation of basic
EPS and diluted EPS on the face of the income statement for entities with
complex capital structures. Basic EPS is computed as net income divided by
the weighted average number of common shares outstanding for the period.
Diluted EPS reflects the potential dilution that could occur from common
shares issuable through stock options, warrants and other convertible
securities.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130, "REPORTING COMPREHENSIVE INCOME,"
and SFAS No. 131, "DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION." SFAS No. 130 requires that an enterprise report, by major
components and as a single total, the change in its net assets during the
period from nonowner sources; and SFAS No. 131 establishes annual and interim
reporting standards for an enterprise's operating segments and related
disclosures about its products,
F-11
<PAGE>
KINETIC VENTURES LTD.
(FORMERLY KNOWN AS NEURO NAVIGATIONAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
services, geographic areas and major customers. Adoption of these statements
will not impact the Company's financial position, results of operations or
cash flows and any effect will be limited to the form and content of its
disclosures. Both statements are effective for fiscal years beginning after
December 15, 1997, with earlier application permitted.
3. NOTE PAYABLE
As a result of the sale of assets on March 20, 1997 (see Note 1), the Company
incurred a liability to Ballard of $134,000, collateralized by substantially all
assets of the Company, non-interest bearing and due on demand. On July 3, 1997,
the note payable was assigned from Ballard to a third party. On January 14,
1998, the Company paid $139,000 to the third party in full satisfaction of the
assigned note and related legal fees from funds raised from the issuance of
stock (see Note 5).
4. SALE OF CONVERTIBLE REDEEMABLE PREFERRED STOCK; OPTION TO PURCHASE
COMPANY'S ASSETS AND LINE OF CREDIT
CONVERTIBLE REDEEMABLE PREFERRED STOCK
On July 17, 1995, the Company signed an agreement with Ballard (the
"Agreement") and sold to Ballard 200,000 shares of convertible redeemable
preferred stock, representing 19.5% of the Company's capital stock on an "as
diluted" basis, for $2,000,000 in cash.
Upon closing of the sale of assets on March 20, 1997, the preferred stock was
redeemed for $2,281, at a redemption price equal to 19.5% of the Company's
liquid assets, less retained liabilities, as defined in the Agreement.
OPTION TO ACQUIRE ASSETS
Under the Agreement, Ballard also paid to the Company $500,000 as nonrefundable
consideration for an option (the "Option") to acquire all of the assets of the
Company during the 24 month period following the closing of the sale of the
Preferred Stock (the "Option Term"). The $500,000 has been recorded as other
income in the 1995 consolidated statement of operations. The asset purchase
price is equal to twice the net sales of the Company for the twelve (12) full
calendar months immediately preceding the date of exercise. Under the
agreement, Ballard received credit for Option considera-
F-12
<PAGE>
KINETIC VENTURES LTD.
(FORMERLY KNOWN AS NEURO NAVIGATIONAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
4. SALE OF CONVERTIBLE REDEEMABLE PREFERRED STOCK; OPTION TO PURCHASE
COMPANY'S ASSETS AND LINE OF CREDIT (CONTINUED)
OPTION TO ACQUIRE ASSETS (CONTINUED)
tion paid, any liabilities assumed, loans made to the Company by Ballard and
the balance of any liquid assets retained by the Company at closing.
Under the Agreement, two nominees of Ballard served on the Company's Board of
Directors, and the Company's conduct of its business was subject to certain
restrictions during the Option Term. The Company agreed to indemnify Ballard
against certain losses in connection with any exercise of the Option. The
Option was exercised and the sale of assets completed on March 20, 1997 (see
Note 1).
THIRD PARTY SALE
In May 1996, Ballard indicated an interest in exercising the option and
selling the acquired assets to a third party (collectively a "Transaction")
and with the assistance of the Company, retained a financial advisor to
assist in arranging a Transaction.
The financial advisor fees amount to $500,000 and were to be entirely paid
by Ballard and recovered from the proceeds of the sale Transaction. However,
the Company is ultimately jointly and severally liable for the amount due.
The Company is unaware of the status of such fee payment; however, at the
date of these financial statements, no claim has been made to the Company.
Accordingly, no accrual was made in the accompanying financial statements for
this matter.
LINE OF CREDIT
As part of the Agreement, Ballard also agreed to provide to the Company a
line of credit up to $500,000 commencing eight months after the closing of
the Agreement to finance operating expenses. The line of credit had an
interest rate of 10% per annum and all outstanding principal and interest was
due on demand. The line of credit was collateralized by the Company's
inventories, accounts receivable and other tangible assets. At March 20,
1997, the Company had borrowed a total of approximately $3,671,000 (including
accrued interest), of which approximately $3,537,000 was applied to the
proceeds of the sale price (see Note 1).
F-13
<PAGE>
KINETIC VENTURES LTD.
(FORMERLY KNOWN AS NEURO NAVIGATIONAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
5. SALE OF COMMON STOCK
In December 1997, the Company issued 30,000,000 shares for Canadian $300,000
(U.S. $211,275) in cash or U.S. $0.007 per share.
6. STOCK OPTIONS
EMPLOYEE STOCK OPTION PLAN
The Company adopted the 1994 Employee Stock Option Plan (the "Employee Plan")
to grant nonqualified and incentive stock options to employees and
consultants up to 1,655,599 shares of the Company's common stock.
The exercise price of the shares under option shall equal the fair market
value of the common stock at the date of grant. The term of any stock option
may not exceed ten years from the date of grant. The options are exercisable
over ten years and vest in equal one-third annual increments beginning one
year from the date of grant over a three-year period. The options terminate
30 days after termination of employment.
DIRECTORS' STOCK OPTION PLAN
The Company adopted the 1994 Directors' Stock Option Plan (the "Directors'
Plan") to grant nonqualified stock options to directors up to 130,000 shares
of the Company's common stock.
The exercise price of the shares under option shall equal the fair market
value of the common stock at the date of grant. The term of any stock option
may not exceed five years from the date of grant. The options are
exercisable over five years and vest in equal one-third annual increments
beginning one year from the date of grant over a three-year period.
F-14
<PAGE>
KINETIC VENTURES LTD.
(FORMERLY KNOWN AS NEURO NAVIGATIONAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
6. STOCK OPTIONS (CONTINUED)
Director's Stock Option Plan (Continued)
- ----------------------------------------
A summary of the shares under the Employee Plan and the Directors' Plan are as
follows:
<TABLE>
<CAPTION>
Shares Under Exercise Price
Option Per Share
- --------------------------------------------------------------------------------
<S> <C> <C>
Options outstanding at December 31, 1995 1,227,606 $0.22 to $1.25
Granted 2,500 $0.21
Canceled (293,044) $0.22 to $0.30
- --------------------------------------------------------------------------------
Options outstanding at December 31, 1996 937,062 $0.21 to $1.25
Granted -
Canceled (937,062) $0.21 to $1.25
- --------------------------------------------------------------------------------
Options outstanding at December 31, 1997 0
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
All stock options were canceled upon the exercise of the Option (see Note 1) and
related termination of employment with the Company.
7. COMMITMENTS
The Company leased office space and equipment under the terms of
noncancelable operating lease agreements with lease terms through July 1999.
Total rent expense for the years ended December 31, 1997 and 1996 was $18,873
and $74,765, respectively. Leases were assumed by Ballard as part of the
exercise of the Option.
8. RELATED PARTY TRANSACTIONS
Subsequent to the sale of assets on March 20, 1997 (see Note 1), the
Company's management was replaced by a related party. The Company has no
management agreements with this related party and no costs of the affiliated
management company were allocated to the Company. During the year, the
related management company made operating advances of $27,286. Before
December 31, 1997, all advances were repaid.
F-15
<PAGE>
KINETIC VENTURES LTD.
(FORMERLY KNOWN AS NEURO NAVIGATIONAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
9. INCOME TAXES
The composition of the provision for income taxes for the years ended December
31 is as follows:
<TABLE>
<CAPTION>
1997 1996
--------------------------------------------------------------------
<S> <C> <C>
Current:
Federal $ 393,000 $ -
State 110,000 3,600
Change in valuation allowance to
reflect utilization of net operating
losses carried forward (477,447) -
--------------------------------------------------------------------
$ 25,553 $3,600
--------------------------------------------------------------------
--------------------------------------------------------------------
</TABLE>
Income taxes for the year ended December 31, 1997 resulted primarily from a
limitation on the use of net operating loss carryforwards against the gain on
the sale of assets (see Note 1) under the alternative minimum tax method.
The provision for income taxes differs from the amount that would result from
applying the federal statutory rate for the years ended December 31 as follows:
<TABLE>
<CAPTION>
1997 1996
--------------------------------------------------------------------
<S> <C> <C>
Statutory regular federal income tax rate 34.00% (34.00%)
State income taxes, net of federal benefit 9.52 .06
Valuation allowance (41.31) 33.94
Other - .10
--------------------------------------------------------------------
Effective Tax Rate 2.21% .10%
--------------------------------------------------------------------
--------------------------------------------------------------------
</TABLE>
At December 31, 1997, deferred income tax assets consist primarily of net
operating loss carryforwards of approximately $6,200,000 less a valuation
allowance of $6,200,000. The valuation allowance on deferred tax assets
decreased by $477,447 and increased by $1,388,868 during 1997 and 1996,
respectively.
F-16
<PAGE>
KINETIC VENTURES LTD.
(FORMERLY KNOWN AS NEURO NAVIGATIONAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
9. INCOME TAXES (CONTINUED)
At December 31, 1997, the Company had net operating loss carryforwards for
federal and state purposes of approximately $15,300,000 and $6,130,000,
respectively. These carryforwards begin to expire in 2006 and 1998,
respectively. In addition, the Company had research and experimentation
credit carryforwards for federal and state purposes of approximately $323,000
and $139,000, respectively. The federal credit carryforward expires
beginning in 2006. The utilization of net operating losses and credit
carryforwards may be limited under the provisions of Internal Revenue Code
Section 382 when a change of ownership occurs.
10. EARNINGS PER SHARE (EPS)
Earnings per share for the years ended December 31, were computed as follows:
<TABLE>
<CAPTION>
1997 1996
----------------------------------------------------------------
<S> <C> <C>
Net income (loss) 1,129,608 (3,059,333)
Weighted average common shares
outstanding 11,183,733 9,933,733
----------------------------------------------------------------
Basic and diluted EPS .10 (.31)
----------------------------------------------------------------
----------------------------------------------------------------
</TABLE>
In 1996, the "if converted" preferred stock and stock options were not included
in the denominator, since their inclusion would have been anti-dilutive. In
1997, the preferred stock was redeemed, the options canceled, and there are no
other common stock equivalents. As a result, basic and diluted EPS are the same
for both periods presented.
F-17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENTS OF OPERATIONS FOUND ON
PAGES 3 AND 4 OF THE COMPANY'S FORM 10-K FOR THE YEAR-TO-DATE, AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 179
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 179
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 179
<CURRENT-LIABILITIES> 175
<BONDS> 0
0
0
<COMMON> 40
<OTHER-SE> (36)
<TOTAL-LIABILITY-AND-EQUITY> 179
<SALES> 345
<TOTAL-REVENUES> 2,169
<CGS> 254
<TOTAL-COSTS> 314
<OTHER-EXPENSES> 378
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 68
<INCOME-PRETAX> 1,155
<INCOME-TAX> 26
<INCOME-CONTINUING> 1,129
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,129
<EPS-PRIMARY> 0.10
<EPS-DILUTED> 0.10
</TABLE>
