<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934. [Fee Required]
For the fiscal year ended February 29, 1996
/ / TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934. [No Fee Required]
For the transition period from to
------------------------ ----------------------
Commission file number 1-12836
---------------------------------------------------------
PHARMA PATCH PUBLIC LIMITED COMPANY
(Name of small business issuer in its charter)
<TABLE>
<S> <C>
Ireland Not Applicable
- ---------------------------------- ----------------------------------------
(State of incorporation or organization) (I.R.S Employer Identification No.)
</TABLE>
15/16 Fitzwilliam Place, Dublin 2, Ireland None
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
011-353-1-662-5222
- -------------------------------------------------------------------------------
(Issuer's telephone number, including area code)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
ORDINARY SHARES, PAR VALUE IRL .01
- -------------------------------------------------------------------------------
Title of Class
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the preceding 12 months, and
(2) has been subject to such filing requirements for the past 90 days.
/ /YES /x/NO
As of May 15, 1996, 16,915,211 ordinary shares were outstanding and the
aggregate market value of the common shares (based upon the average bid and
asked prices on such date) of the Registrant held by nonaffiliates was
approximately $8,457,605.
Check if there is no disclosure of delinquent filers in response to item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part Ill of this Form 10-KSB or any
amendment to this Form 10-KSB / /
For the fiscal year ended February 29, 1996 there were no revenues from
continuing operations.
Documents incorporated by reference: None.
<PAGE> 2
PHARMA PATCH PUBLIC LIMITED COMPANY
FORM 10-KSB
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Item 1. Description of Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Item 2. Description of Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . . 28
Item 5. Market for Common Equity and Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . 28
Item 6. Management's Discussion and Analysis or Plan of Operations . . . . . . . . . . . . . . . . . . . 28
Item 7. Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act . . . . . . . . . . . . . . . . . . . . . . . 30
Item 10. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Item 11. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . . . . . . 36
Item 12. Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . . . . . . . 37
Item 13. Exhibits List and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
</TABLE>
2
<PAGE> 3
ITEM 1. DESCRIPTION OF BUSINESS
BUSINESS OF THE COMPANY
The Company had no revenues from continuing operations and has
accumulated a deficit as of February 29, 1996 of $6,249,628 after giving effect
to the sale of assets described below. The Company made a significant shift in
its business direction in recent months through the sale of substantially all
of its operating assets and subsequently through the acquisition of a majority
interest in a laser vision company. The Company does expect to continue to
incur operating losses until such time, if ever, as it derives revenues from
operations. There is no assurance that the Company will ever operate
profitably.
On November 1, 1995, the Company sold substantially all of its assets,
including the operations and technology acquired from Flora, Inc. on June 30,
1994, to Technical Chemicals and Products, Inc. ("TCPI") in exchange for
786,214 shares of TCPI common stock ("Shares") with a fair value of $11,919,000
after net closing adjustments of $81,000 and the satisfaction by TCPI of a
$5,000,000 promissory note previously issued by the Company. As a result of
the consummation of this transaction, the Company then owned approximately 9.9%
of TCPI's outstanding common shares. In April 1996, the Company sold 210,000
TCPI shares pursuant to the underwritten TCPI public offering described in the
next paragraph and received net proceeds of $2,928,697.
On January 16, 1996, the Company entered into a Supplemental Agreement
("Supplemental Agreement") with TCPI which amends certain provisions of the
Asset Purchase Agreement dated as of November 1, 1995 ("Asset Purchase
Agreement") between the Company and TCPI and addressing certain additional
matters. TCPI has filed a Registration Statement on Form S-1 ("S-1") with the
Securities and Exchange Commission with respect to the sale of 1,800,000 TCPI
common shares ("Offering"). Pursuant to the terms of the Supplemental
Agreement, the Company agreed to execute a lock-up letter with the
representative of the Underwriters providing that it would not sell or
otherwise dispose of any of its shares of Common Stock for a period to expire
180 days following the closing date of the Offering. As consideration for the
execution of this lock-up agreement, TCPI agreed (i) to terminate an existing
lock-up agreement covering Common Stock owned by the Company, executed in
connection with the Asset Purchase Agreement; (ii) effective as of the closing
date of the Offering, to terminate the voting trust agreements, shareholders'
agreement and irrevocable proxy, executed in connection with the Asset Purchase
Agreement which, among other things, limited the Company's ability to vote or
dispose of its shares of Common Stock; (iii) allow the Company to offer for
sale 100,000 shares of this Common Stock in the Offering (plus up to an
additional 110,000 if the Underwriters' over-allotment option is exercised);
(iv) effective as of the closing date of the Offering, issue to the Company a
two-year warrant to purchase 100,000 shares of Common Stock at an exercise
price equal to the per share Offering price; and (v) to file a registration
statement on Form S-3 to register all of the remaining shares of Common Stock
owned by the Company after the Offering. All 210,000 shares were sold in the
Offering which closed on April 30, 1996.
On March 31, 1996, the Company acquired a controlling interest in
Vista Technologies, Inc. ("Vista"), a publicly traded company. Vista also
received equity financing from the Company in a series of transactions. The
Company purchased 200,000 Vista shares for $500,000 cash and received 2,060,000
Vista shares and 500,000 Vista Class C Warrants in exchange for a loan to Vista
of $750,000 repayable in six months and 200,000 restricted shares of TCPI
common stock owned by the Company. See "Certain Transactions." Vista provides
photorefractive keratectomy and other laser vision correction facilities and
services to the health care industry.
The mailing address and telephone number of the Company's principal
executive offices are 15/16 Fitzwilliam Place, Dublin 2, Ireland and
011-353-1-668-7144, respectively.
3
<PAGE> 4
BUSINESS OF VISTA
INTRODUCTION
Vista is engaged primarily in providing advanced laser vision
correction ("LVC") equipment and support services for use by licensed health
care professionals. Through its subsidiary corporations, Vista provides
excimer lasers, related equipment and other services (collectively "LVC
Services") at outpatient surgical centers for ophthalmologists to perform
refractive surgical procedures for correction of vision disorders. Vista's
majority owned subsidiaries in Europe, acquired in 1994, currently operate five
refractive surgical outpatient clinics, three in Italy and two in Sweden. To
date, Vista's operations in Europe have not been profitable. See "European
Operating Subsidiaries".
Since June 1995, Vista has been developing a program to organize and
sponsor additional companies to provide laser equipment and LVC Services in the
United States and Canada through regional joint venture enterprises. A key
part of Vista's strategy for expansion in the United States and Canada is to
develop independent regional companies that will be independently financed and
engage the services of skilled and prominent ophthalmologists experienced in a
variety of LVC treatments, procedures and post-operative care. These
professionals will be engaged by Vista and/or its regional subsidiaries to
establish medical and operational standards relating to LVC Services, to train
other ophthalmologists in advanced LVC procedures, and to establish advisory
boards consisting of credentialed and prominent ophthalmologists ("Mds") and
optometrists ("Ods") with similar skills and experience. Vista believes that
its regional joint venture subsidiaries in North America will be capable of
supporting a full range of LVC procedures because of their anticipated access
to physicians skilled in advanced methods and one or more planned locations in
Canada offering certain LVC services not currently available in the United
States. See "Program to Expand by Sponsoring Regional Joint Venture Companies
in North America".
Advanced LVC equipment supplied by various manufacturers has been
commercially available in recent years for use in foreign countries, including
various countries in Europe and Canada, among others. In October 1995, the
U.S. Food and Drug Administration ("FDA") granted approval to Summit
Technology Inc. ("Summit") for commercial use in the United States of Summit's
excimer laser system for photorefractive keratectomy ("PRK") treatment of
myopia (nearsightedness). The FDA subsequently granted approval to VISX
Incorporated ("VISX") for similar PRK equipment in early 1996. Other LVC
procedures employed in Canada and other foreign countries include excimer
lasers for laser assisted in situ keratomileusis ("LASIK") and photo-
therapeutic keratectomy ("PTK") procedures and holmium lasers for laser
thermalkeratoplasty ("LTK") and laser sclerostomy ("LS") procedures. See
"Laser Vision Correction Systems" and "Status of FDA Pre-Market Approval of
LVC Excimer Systems".
Generally speaking, PRK is useful in correcting the vast majority of
myopia cases; LASIK is useful for treatment of hyperopia (farsightedness),
astigmatism and extreme myopia; LTK is prescribed for instances of mild
hyperopia and astigmatism; LS is used for treatment of symptoms of glaucoma;
and PTK procedures treat certain corneal pathologies. All of these LVC
procedures are normally performed on an outpatient basis and require from 15 to
30 minutes. Depending upon the severity of the patient's pre-treatment vision
disorder, improved vision resulting from LVC procedures either eliminates or
significantly reduces the patient's need to wear eyeglasses or contact lenses.
Vista's existing European subsidiaries and planned joint venture enterprises in
the United States focus primarily on PRK treatment to correct myopia. Joint
venture operations planned for Canada are expected to offer a wider variety of
LVC services, including LASIK and an advanced proprietary method of PRK
developed by Dr. Donald G. Johnson called the Johnson transepilthelial
multi-zone, multi-pass PRK procedure ("TMM PRK").
4
<PAGE> 5
From May 1994 through March 1995, Vista made significant investments
in Medical Development Resources, Inc. ("MDRI") and its subsidiaries. MDRI was
engaged in research and development of a proprietary process for the production
of scalpels and other cutting instruments from natural obsidian and/or an
obsidian formulation, and also owns operating subsidiaries involved in the
design, manufacture and marketing of precision surgical instruments for
ophthalmology and neurosurgery. In July 1995, Vista terminated and rescinded
all of its executory agreements with MDRI and certain of its stockholders and
creditors, and Vista's investment of approximately $5,643,000 in MDRI as of
March 31, 1995 was written-off.
Vista was incorporated under the laws of Nevada on June 15, 1992 under
the name "Mercury Acquisitions, Inc." and its corporate name was changed to
Vista Technologies Inc. in February 1994. Vista's principal office is located
at 1250 Oakmead Parkway, Suite 210, Sunnyvale, CA 92086, telephone number
(408) 524-2939.
BACKGROUND -- VISION DISORDERS AND CORRECTIVE TREATMENT
The human eye is a complex organ that functions much like a camera,
with a lens in front and a light sensitive screen, the retina, in the rear.
Images enter the human eye through the cornea, a transparent domed window at
the front of the eye. In a properly functioning eye, the cornea bends
(refracts) incoming images, causing the images to focus on the retina. The
inability of the cornea to properly refract incoming images results in blurred
vision and is called a refractive disorder.
Myopia (nearsightedness), hyperopia (farsightedness) and astigmatism
are three of the most common refractive disorders. In a nearsighted (myopic)
eye, images are focused in front of the retina. In a farsighted (hyperopic)
eye, images are focused behind the retina. In an astigmatic eye, images are
not focused at any one single point. Conventional methods of correcting
refractive disorders are by prescription of eyeglasses and contact lenses.
Over the last 15 years, refractive vision disorders have also been treated by
several surgical techniques, such as radial keratotomy ("RK") in which small
incisions approximately 400 to 450 microns deep in a radial configuration are
made around the periphery of the cornea.
Corneal pathologies, which include certain diseases, injuries and
conditions of the cornea, also can result in impaired vision, discomfort or
blindness. Such pathologies include corneal opacities, irregular corneal
surfaces and abnormal tissue growths on the cornea. Another pathological
condition of the eye is glaucoma, a disease characterized by a sustained
elevation of intraocular pressure which, if untreated, may result in blindness.
LASER VISION CORRECTION SYSTEMS
Lasers have been used routinely for a variety of medical purposes
since the 1960s. Lasers emit photons of light into a highly intense beam of
energy that is delivered to targeted tissue by means of optical mirrors or
fiber optics. The degree of absorption by the tissue varies with the choice of
wavelength and is an important variable in the application of laser technology
in treating various tissues. Surgical lasers emit light in a continuous stream
or in a series of very short duration "pulses", thus interacting with tissue
through heat or shock waves, respectively. Several factors, including the
wavelength of the laser and the frequency and duration of the exposure or
pulse, determine the amount of energy which interacts with the targeted tissue
and, thus, the amount of damage to the tissue.
Laser technology has been accepted in the ophthalmic community for the
treatment of certain eye disorders. In general, ophthalmic lasers are used to
coagulate, cut or ablate (remove) targeted tissue. As examples, the argon
laser is used for treatment of leaking blood vessels on the retina and retinal
detachments. Nd:YAG (Neodymium: Yttrium Alminum Garnet) pulsed lasers are used
to clear clouded posterior capsules and, to a lesser extent, for relief of
elevated pressure in the eye.
5
<PAGE> 6
EXCIMER LVC SYSTEMS
Excimer (argon fluoride) lasers were first developed in the late
1980s, and are incorporated in a fully integrated ophthalmic surgical
workstation for use by ophthalmologists to perform procedures to treat
refractive and other ophthalmic disorders. The excimer laser system delivers
pulses of ultraviolet laser light to ablate (remove) submicron layers of tissue
from the surface of the cornea in a computer-assisted, predetermined pattern to
reshape the cornea. Most of the laser light generated by the excimer system is
absorbed by the removed corneal tissue during a procedure. As a result, the
laser light does not penetrate interior portions of the eye and does not create
substantial amounts of heat in the surrounding tissue. These attributes make
the excimer laser system well suited to corneal surgery.
PRK. Photorefractive keratectomy ("PRK") is a procedure
performed with a excimer laser system to treat primarily nearsightedness, and
also farsightedness and astigmatism. When performing PRK with the excimer
laser, the ophthalmologist determines the exact correction required (which is
measured by the same type of examination used to prescribe eyeglasses or
contact lenses) and programs the correction into the system's computer. The
ophthalmologist removes the thin surface layer of the cornea (the epithelium)
and positions the patient for the laser procedure. The average PRK procedure
consists of approximately 150 laser pulses, each of which lasts several
billionths of a second over a period ranging for 15 to 40 seconds. Cumulative
exposure to the laser light is less than one second. The entire procedure,
including patient preparation and post-operative dressing, generally lasts no
more than thirty minutes. The goal of PRK is to eliminate or to reduce a
person's reliance on corrective eyewear.
Following the PRK procedure, the ophthalmologist may prescribe topical
pharmaceuticals to promote corneal healing and to alleviate discomfort. A
series of patient follow up visits is scheduled with the ophthalmologist ("MD")
or an optometrist ("OD") to monitor the corneal healing process, to verify that
there are no complications and to test the correction achieved by the PRK
procedure. Patients undergoing PRK generally experience discomfort for
approximately 24 hours, and blurred vision for approximately 48 to 72 hours
after the procedure. Although most patients experience improvement in
uncorrected vision within a few days of the procedure, it generally takes from
two to six months for the correction to stabilize and for the full benefit of
the procedure to be realized. An individual typically has one eye treated in a
session, with the second eye treated three to six months thereafter. Vista
anticipates, however, that a significant percentage of patients at certain
locations planned for Canada by its North American Regional Joint Ventures may
be eligible for bilateral treatment in which both eyes are treated
simultaneously based upon procedures developed by medical consultants to Vista.
Although a patient usually experiences a substantial improvement in
clarity of vision within a few days following the PRK procedure, it generally
takes from two to six months for the full benefit of the procedure to occur.
The PRK procedure is used today primarily to correct the vision of patients
with myopia (or nearsightedness) ranging from -1.5 to up to -7.00 diopters,
although the PRK procedure has also been performed in foreign countries on
higher diopter nearsighted and, occasionally, farsighted and astigmatic
patients. Approximately 90% of all myopic patients are nearsighted up to -6.00
diopters and use of the PRK procedure to correct the vision of nearsighted
patients of up to -6.00 diopters therefore has received the greatest degree of
testing.
As noted above, the FDA has granted pre-market approval for commercial
use in the United States of excimer laser systems for PRK treatment of myopia
to two suppliers in October 1995 and March 1996.
LASIK Laser assisted in situ keratomileusis ("LASIK") is a
procedure performed with an excimer laser system to treat extreme cases of
myopia. LASIK, although a more unusual and delicate surgical procedure than
PRK, offers advantages in that the epithelium is not touched by the laser and
therefore promotes quicker healing. Glare and central islands are practically
non-existent after LASIK since ablation occurs in the stroma layer (under the
epithelium); by the creation of a corneal flap, subsequent retouches are
facilitated with
6
<PAGE> 7
minimal recovery time. To date, the FDA has not established standards for
clinical testing of LASIK systems, and Vista is uncertain whether LASIK
procedures can be utilized commercially in the United States.
PTK Phototherapeutic keratectomy ("PTK") is a procedure
performed with the excimer system to treat corneal pathologies. In this
procedure, submicron layers of tissue are ablated from the surface of the
cornea in order to remove diseased, scarred or sight-inhibiting tissue. The
goal of PTK is not necessarily to cure the corneal pathology, but rather to
alleviate the symptoms associated with the pathology. The FDA in February 1995
granted pre-market approval to an excimer laser system developed by Summit to
perform PTK procedures and on October 2, 1995, the FDA granted pre-market to
two excimer laser systems manufactured by VISX for PTK procedures, the VISX
20/20B and "Star" excimer lasers.
OTHER Excimer lasers may also be used to treat glaucoma by a
procedure known as Partial Excimer Traheculectomy ("PET"). The PET procedure
involves the use of the excimer laser to create a penetrating filter through
the scleral tissue (the tough, fibrous tissue covering all of the eye except
the cornea), which causes the permeation of fluids from within the eye, thus
reducing pressure levels. Vista believes that one laser manufacturer has
received an Investigational Device Exemption from the FDA to conduct clinical
trials for the PET procedure in the United States.
HOLINIUM LVC SYSTEMS
LTK Another recently developed LVC technology is the holmium
laser system. The holmium system delivers high intensity pulses of infrared
light to an eye by means of a fiber optic cable and a single-use, hand-held
probe that directly contacts the eye at the exact spots chosen by the
ophthalmologist. Vista is aware of two manufacturers that have developed
holmium laser systems. Summit has reported it is engaged in FDA clinical
trials seeking approval to sell its holmium system to perform laser thermal
keratoplasty ("LTK"), a refractive procedure performed to treat farsightedness
and astigmatism in which peripheral corneal tissue is thermally shrunk, causing
the central portion of the cornea to steepen.
LS Laser Sclerostomy ("LS") is a surgical procedure performed
with the holmium system to treat the symptoms of glaucoma by making an opening
in the front chamber of the eye. Summit has received FDA pre-market approval
to sell its holmium system in the U.S. for treatment of glaucoma.
OTHER LVC SYSTEMS. Vista is aware of three companies that
have reportedly developed solid state lasers, ophthalmic laser surgical systems
that apply a beam of high intensity light to remove tissue from the inside, as
opposed to the surface of, the cornea. These solid state lasers are designed
to ablate tissue inside the cornea without violating the cornea's surface by
computer guiding the laser beam to the inner corneal tissue and vaporizing the
targeted tissue.
EUROPEAN OPERATING SUBSIDIARIES
From February to May 1994, Vista negotiated and completed the
acquisition of interests in certain foreign subsidiaries operating PRK
outpatient surgical centers in Europe. These transactions involved the
acquisition of controlling equity interests in European operating companies
providing excimer laser equipment and VC support services to ophthalmologists
at out-patient surgical centers for correcting vision disorders through PRK
procedures. At the time these acquisitions were completed by June 1994,
Vista's European subsidiaries operated four refractive surgical centers, one in
England, one in Sweden and two in Italy. The center in England was
subsequently closed in June 1995 and two new centers have been opened since
these acquisitions were accomplished, one in Italy and one in Sweden. Due
primarily to the limited operating history of these European PRK surgical
centers, Vista's operations in Europe have not yet been profitable.
7
<PAGE> 8
As of March 31, 1995, Vista owned approximately 69.87% of the equity
interest in Vista Vision S.p.A. ("Vista-Italy"), which operates three PRK
surgical centers in Italy. Through a Dutch holding company, Vista owns 100% of
the equity interest in Vista Vision Scandinavia AB ("Vista-Sweden"), which
operated one PRK surgical center in Sweden at March 31, 1995 and opened a
second center in August 1995. Through a United Kingdom holding company, Vista
also owned 50% of the equity interest in a PRK surgical center in London,
England. In June 1995, Vista determined to close the operations of the joint
venture subsidiary located in England due to its unprofitable history, a change
in business strategy of its joint venture partner and extremely competitive
market conditions in London. Vista's European LVC Services are operated under
the trade name Vista Vision(TM).
Each of the Vista Vision LVC centers in Italy operates one VISX
excimer laser, and Vista-Italy's locations include a Milan center originally
opened in February 1992, a Pisa clinic established in March 1993 and a Rome
center started in January 1995. The Milan center was relocated during 1995.
The Vista Vision LVC centers in Sweden each operate one excimer laser, and
include a center in Stockholm purchased from a third party in June 1994 plus a
center in Malmoe opened in August 1995.
The following chart summarizes certain information as to the number of
PRK surgical procedures performed at Vista's European centers for the periods
indicated.
<TABLE>
<CAPTION>
Fiscal Year ended March 31,
--------------------------- Nine Months Ended
1995 1994 December 31, 1995
-------- -------- -----------------
<S> <C> <C> <C>
Milan, Italy (a) . . . . . . . . . . . . 466 239 451
Pisa, Italy (b) . . . . . . . . . . . . 404 213 339
Rome, Italy (c) . . . . . . . . . . . . 41 (c) 227
Stockholm, Sweden (d) . . . . . . . . . 524 420 341
Malmoe, Sweden (e) . . . . . . . . . . . (e) (e) 51
------- ---- ------
Total . . . . . . . . . . . . . 1,435 972 1,409
------- ----
</TABLE>
---------------------------------------
(a) Opened in February 1992; relocated during 1995.
(b) Opened in March 1993.
(c) Opened in January 1995.
(d) Includes procedures performed for periods prior to purchase by
Vista Technologies in June 1994.
(e) Opened in August 1995.
Vista's European surgical centers typically receive a fee or a
percentage of the surgeon's fee for each surgical procedure performed.
Professional fees for PRK procedures range from approximately $1,500 to $2,000
per procedure with a single eye constituting one procedure. A primary
consideration in Vista's determination to close its center in London, England
was an overcrowding of that market resulting in certain competitors offering
procedures at prices significantly below these levels. Health insurance
providers in North America generally consider these procedures to be elective
surgery and do not provide reimbursement. In other countries, reimbursement
programs vary by country and region, and reimbursement is not generally
available for European locations at which Vista operates.
By providing ophthalmologists with training, technical and marketing
support, as well as access to equipment that is too expensive for most
individual surgeons, Vista plans to capitalize on its early participation in
LVC technology which has recently attracted increasing interest of
ophthalmologists and the general public in the United States. Excimer lasers
currently cost between approximately $500,000 each, which generally includes a
one year warranty on all parts except the optics (mirror and glass components)
that carry a 30-day warranty. Annual maintenance and service fees are
estimated at to range from $45,000 to $60,000 per year, but these estimates may
vary with usage. Due to the equipment cost, Vista believes that most
ophthalmologists interested in
8
<PAGE> 9
LVC surgery will not be able or willing to purchase a laser, seek financing for
the purchase and/or arrange for required maintenance of the laser equipment.
PROGRAM TO EXPAND BY SPONSORING REGIONAL JOINT VENTURE COMPANIES IN NORTH
AMERICA
With FDA pre-market approval granted in late 1995 of PRK equipment to
treat myopia, Vista's long-term business strategy in North America is to pursue
LVC Services by organizing and sponsoring independently financed regional
enterprises in which Vista will obtain a significant equity interest and
fee-based consulting arrangements (the "Regional Joint Ventures"). Vista will
seek affiliations for its each of its Regional Joint Venture subsidiaries with
experienced LVC eye care professionals, and these regional enterprises will
seek third-party financing with Vista's assistance to provide equipment and
other LVC support services to vision care professionals. There can be no
assurance Vista will be successful in attaining these goals or that it will
become a significant factor in the industry.
As presently planned, in the typical enterprise Vista will subscribe
to a preferred stock issue of the Regional Joint Venture enterprise in exchange
for shares of Vista common stock. An unaffiliated third party entity named
Refractive Services-800, Inc. and local Mds will be invited to provide equity
seed capital in cash for other classes of the Regional Joint Venture's
securities. Refractive Services-800, Inc. is a foreign corporation formed for
the purposes of investing seed capital in Regional Joint Ventures and is not
affiliated with Vista or any of its officers and directors. Agreements with
one or more health care professionals will be negotiated for terms relating to
use of the Regional Joint Venture company's equipment and LVC Services,
conditioned upon additional financing in the form of a private placement of
securities and/or a subsequent initial public offering. Notwithstanding
agreements with professionals, however, governmental regulations prohibit
commitments that would obligate a professional to use to services of any given
enterprise.
Vista intends to enter into long-term consulting agreements to provide
certain administrative and management services to each of its Regional Joint
Ventures, which will be licensed by Vista to operate under the name and style
of "Vista Laser Centers" of the particular region. Vista has filed trademark
applications in the United States and Canada to register the service mark
"Vista Laser Centers"(TM). To date, Vista has incorporated five Regional Joint
Venture corporations under the laws of Nevada which are in various stages of
negotiating and documenting agreements and obtaining commitments for
preliminary financing.
Refractive Services-800, Inc. has organized a wholly-owned subsidiary
in the United States named Refractive Services 800 Corp. ("RS-800") to offer
the use of 800 and 900 telephone numbers for telemarketing purposes at the
election of these Regional Joint Ventures. Vista has obtained an option to
purchase from Refractive Services-800, Inc. all of the capital stock in RS-800
for the cost of its investment in RS-800 plus $25,000, exercisable at any time
on or prior to December 31, 1998.
VISTA LASER CENTERS OF MICHIGAN, INC.
Vista's first Regional Joint Venture in North America, Vista Laser
Centers of Michigan, Inc. ("VLC of Michigan"), has filed a registration
statement with the Securities and Exchange Commission for a proposed initial
public offering of $4,000,000. In November 1995, Vista issued 200,000 shares
of its common stock in exchange for 200,000 shares of 5% Series B convertible
preferred stock in VLC of Michigan. Due to the absence of an actively traded
market for Vista's common stock, the Company's investment in VLC of Michigan
has been recorded on Vista's financial statements at December 31, 1995 at a
cost equal to the lowest price at which Vista shares were otherwise authorized
for issuance by its Board during the quarter ended December 31, 1995, i.e.
$0.50 per Vista common share, for a total investment cost of $100,000.
VLC of Michigan is a development stage enterprise organized on June
30, 1995, with an initial cash capitalization through April 30, 1996 of $
156,000 contributed by third parties, to establish, own and manage laser vision
correction centers in Southern Ontario and Michigan. To date, the activities
of VLC of Michigan have
9
<PAGE> 10
consisted primarily of market research, seeking affiliations and negotiating
agreements with experienced vision care professionals in the United States and
Canada, and negotiating to acquire equipment for establishing a laser vision
correction center in Windsor, Ontario after an initial public offering of its
securities has been completed. VLC of Michigan plans an initial public
offering of its 10% Series A convertible preferred stock and will not be able
to commence active business operations until and unless funding from the
planned initial public offering has been obtained.
Vista's equity interest in VLC of Michigan represents approximately
61% of VLC of Michigan's currently outstanding voting stock and is convertible
into 200,000 shares of VLC of Michigan common stock, or approximately 31% of
VLC of Michigan's existing equity on a fully diluted basis. Vista has granted
a irrevocable proxy to vote 180,000 of Vista's Series B preferred shares in VLC
of Michigan to the Chief Executive Officer of VLC of Michigan for the term of
his employment by VLC of Michigan, but not to exceed a maximum of five years
following its initial public offering. If the planned public offering by VLC
of Michigan is successful, Vista's interest in VLC of Michigan after a public
offering of approximately $4 million would be reduced to approximately 21.5% of
the voting capital stock and approximately 13.8% of the common equity in VLC of
Michigan on a fully diluted basis.
Vista has entered into a Consulting Services Agreement to provide
certain consulting services to VLC of Michigan. In exchange for such services,
Vista will receive 5% of LVC of Michigan's revenues attributable to charges to
health care professionals for the use of LVC equipment and support services,
less a credit to LVC of Michigan of $5,000 per month. The Consulting Services
Agreement is for a term of ten years from the date of an initial public
offering by LVC of Michigan, and is automatically renewed thereafter for
periods of five years unless either party provides six months' prior notice of
an intent not to extend the term.
RS-800 has granted Vista of Michigan the right to use certain 800 and
900 area code telephone numbers, including among others 800-WE-DO-PRK, for its
marketing and public education programs. If Vista of Michigan elects to use
those telephone numbers, RS-800 will receive 2 1/2% of the revenues generated
only as a direct result of responses to telemarketing activities of Vista of
Michigan by use of the licensed 800 and 900 telephone numbers.
Three current directors of Vista, Dr. J. Charles Casebeer, Dr. Donald
G. Johnson and Jac. J. Lam, have been elected to the VLC of Michigan board of
directors. Vista has agreed that three additional persons nominated by Dr.
Fouad Tayfour, who is not currently affiliated with Vista, have been or will be
elected to the VLC of Michigan board of directors. Drs. Casebeer and Johnson
have agreed to serve as consultants to VLC of Michigan upon the completion of
its initial public offering. The consulting agreement between VLC of Michigan
and Dr. Casebeer provides that Dr. Casebeer will provide consulting and
training services to VLC of Michigan and has agreed to serve as the Chairman of
its Board of Directors. Dr. Casebeer will receive compensation for his
consulting and training services from VLC of Michigan at the rate of $60,000
per annum payable monthly (except that the first year's fees will be payable in
advance upon completion of the VLC of Michigan initial public offering), plus
additional compensation based upon the number of ophthalmologists and
optometrists that enter credentialing and training programs sponsored by VLC of
Michigan.
Pursuant to a commitment made under his consulting agreement dated as
of November 15, 1995, VLC of Michigan sold to Dr. Johnson 5,000 shares of VLC
of Michigan common stock at a cash price of $5,000 and 45,000 VLC of Michigan
Class A common stock purchase warrants stock at a cash price of $4,500. On
November 15, 1995, VLC of Michigan also sold to Dr. Casebeer 5,000 shares of
VLC of Michigan common stock at a cash price of $5,000 and 45,000 VLC of
Michigan Class A common stock purchase warrants stock at a cash price of
$4,500. Each VLC of Michigan Class A warrant represents the right to purchase
one share of its common stock at an exercise price of $1.00 per share until the
Class A warrants expire on the fourth anniversary of the initial public
offering by VLC of Michigan.
10
<PAGE> 11
There can be no assurance that VLC of Michigan will successfully
complete its proposed initial public offering of securities necessary for VLC
of Michigan to become an operating company.
OTHER RELATIONSHIPS WITH PROFESSIONALS
The TMM PRK procedure was developed by Dr. Donald G. Johnson of
Vancouver, British Columbia, one of the world's leading PRK surgeons. Dr.
Johnson is a director and stockholder of Vista of Michigan and has agreed to
render part-time consulting services to VLC of Michigan and Vista. Dr. Johnson
developed TMM PRK procedures with VISX equipment and as of December 31, 1995
has successfully treated approximately 7,400 eyes with excimer laser
procedures. TMM PRK provides for a much smoother ablation zone, thus
substantially reducing glare and central islands, which are side effects
sometimes encountered in standard PRK procedures. The epithelium (a layer of
cells comprising the outer surface of the cornea) is removed in the TMM PRK
procedure by use of the laser, thus avoiding direct contact with the eye by the
physician or instruments. Vista believes that the TMM PRK method promotes
faster post-operation regrowth during the period when risk of pain and
infection risk is highest.
Dr. J. Charles Casebeer is a leading educator and trainer in the LASIK
procedure and has previously served other companies as a consultant in the
LASIK field. Dr. Casebeer is a director and stockholder of Vista of Michigan
and has entered into a Consulting Agreement with Vista of Michigan. He is
expected to continue his efforts in LASIK procedures and to assist in managing
programs for training Mds and Ods in the use and performance of LVC procedures
and in recommending standards to establish a program of credentialing and
training Mds and Ods in various aspects relating to LVC procedures and patient
treatment. Dr. Casebeer's professional corporation will receive from VLC of
Michigan compensation at the rate of $60,000 per annum plus additional
compensation for each MD and OD that enters a credentialing program established
by Vista of Michigan.
Dr. Casebeer and Dr. Johnson are expected to promote advanced LVC
methods for both Vista and for various Vista Laser Centers companies that have
been, or may be formed in the future, to service various North American
geographic markets.
Vista is not involved in the research, development or manufacture of
refractive laser systems, and will be dependent on unrelated manufacturers for
its supply of refractive lasers to Regional Joint Venture companies. Vista
believes that there are four U.S. companies that have conducted or are
conducting clinical trials with excimer lasers for refractive surgery: in
addition to Summit and VISX, these include Chiron Corp. and LaserSight
Incorporated. Summit and VISX have recently received pre-market approval or
conditional pre-market approval to commercially sell excimer lasers for PRK
procedures in the United States.
STATUS OF FDA PRE-MARKET APPROVAL OF LVC EXCIMER SYSTEMS
Excimer laser systems are regulated as medical devices by the United
States Food and Drug Administration ("FDA") and require pre-market clearance or
pre-market approval (referred to as a "PMA") by the FDA prior to commercial
sale and use in the U.S. Medical devices in the U.S. are classified into one
of three classes on the basis of the controls deemed necessary by the FDA to
reasonably ensure safety and effectiveness. Class III devices, which include
medical lasers, generally are those which must receive PMA by the FDA to ensure
their safety and effectiveness and include, among other devices, new devices
which have been found not to be "substantially equivalent" to existing legally
marketed devices.
A PMA application must be supported by valid scientific evidence which
typically includes extensive preclinical and clinical trial data to demonstrate
the safety and effectiveness of the device. If human clinical trials of a
device are required, and the device presents a "significant risk," the sponsor
of the trial (usually the manufacturer or distributor of the device) will have
to file an Investigational Device Exemption ("IDE") application prior to
commencing human clinical trials. The IDE application must be supported by
data, typically
11
<PAGE> 12
including results of animal and laboratory testing. If the IDE application is
approved, human clinical trials may begin at a specific number of
investigational sites with a specific number of patients, as approved by the
FDA.
A PMA application must contain the results of clinical trials, the
results of all relevant bench tests, laboratory and animal studies, a complete
description of the device and its components, a detailed description of
methods, facilities and controls used to manufacture the device and certain
other information. Upon receipt of a PMA application, the FDA makes a
threshold determination as to whether the application is sufficiently complete
to permit a substantive review. If the FDA determines that the PMA application
is sufficiently complete to permit a substantive review, the FDA will accept
the application for filing. FDA review of a PMA generally takes one to two
years from the date the PMA is accepted for filing, but may take significantly
longer. The review time is often significantly extended by the FDA asking for
more information, including additional clinical trials for clarification of
information provided in the submission. There are devices for which FDA
approval has been sought which have never been approved for marketing in the
U.S.
If the FDA's evaluation of both the PMA application and manufacturer's
facilities are favorable, the FDA will either issue an approval letter or an
Approvable Letter, which usually contains a number of conditions which must be
met in order to obtain final approval of the PMA. When conditions have been
fulfilled to the satisfaction of the FDA, it will issue a PMA approval letter,
authorizing commercial distribution of the device for certain applications. If
the FDA's evaluation is not favorable, the FDA will deny approval of the PMA
application or issue a "not approvable letter". The FDA may approve a device
for some procedures but not others, or for certain classes of patients and not
others. Modifications to a device that is an approved PMA also may require
approval by the FDA of PMA supplements or new PMAs.
PMA STATUS OF LVC SYSTEMS
In late October 1995, Summit received PMA from the FDA for use of
Summit's excimer laser system to treat nearsightedness using PRK. Vista has
been advised that this PMA specifies a six millimeter ablation zone for myopic
corrections between -1.5 and -7.0 diopters. Summit has further indicated that
its PMA requires the initiation of post-market studies and surveillance. Data
generated by the post-market studies will be reviewed by the FDA in determining
whether future restrictions on device labeling or use are warranted.
In March 1996, VISX received pre-market approval from the FDA for use
of VISX's excimer laser system to treat nearsightedness using PRK.
Vista believes that the FDA has not published guidelines for clinical
trials of excimer laser systems to perform procedures other than PRK and PTK,
and Summit has indicated it is working with the FDA to design appropriate
trials for such procedures on a case by case basis. Because the FDA has not
published guidelines with respect to clinical trials for other PRK procedures,
it is not known whether or to what extent the FDA may require further clinical
trials of TMM PRK or LASIK procedures or whether the use of TMM PRK or LASIK
will be permitted in the United States. TMM PRK and LASIK are currently
permitted in Canada.
SAFETY AND EFFICACY
The first PRK procedure for the treatment of nearsightedness using an
excimer laser system was performed in 1989, and the first PTK procedure for the
treatment of a corneal pathology using an excimer system was performed in 1988.
A large majority of PRK and PTK procedures to date have been performed only
since 1990. PRK to correct myopia is currently being performed in at least 35
countries outside the U.S.
Concerns with respect to the safety and efficacy of LVC excimer laser
systems for refractive surgery include predictability and stability of results
and potential complications, such as modest decreases in best corrected vision
and side effects from PRK, PTK, LASIK and LTK. Other possible effects include
postoperative pain; corneal haze during healing (an increase in the light
scattering properties of the cornea); glare/halos
12
<PAGE> 13
(undesirable visual sensations produced by bright lights); decrease in contrast
sensitivity (diminished vision in low light); temporary increases in
intraocular pressure in reaction to post procedure medication; modest
fluctuations in astigmatism and modest decreases in best corrected vision
(i.e., with eyeglasses); unintended over or under corrections; instability,
reversal or regression of effect; corneal scars (blemishing marks left on the
cornea); corneal ulcers (inflammatory lesions resulting in loss of corneal
tissue); and corneal healing disorders (compromised or weakened immune system
or connective tissue disease which causes poor healing).
Summit has reported that two year follow-up data accumulated by Summit
during its Phase III PRK clinical trials indicate all of the individuals
undergoing PRK experienced an improvement in visual acuity without corrective
eyewear. Prior to PRK, 95% of the eyes in this group were 20/200 or worse. Of
the eyes treated, approximately 91% improved to 20/40 or better, the legal
requirement to obtain a driver's license in most states without corrective
eyewear, while the remaining 9% experienced improved vision without corrective
eyewear, but still required corrective eyewear to achieve 20/40 vision or
better.
MARKET POTENTIAL FOR LVC SERVICES
It is estimated that in excess of 100 million people in the U.S., and
a much larger number worldwide, use eyeglasses or contact lenses to correct
common vision disorders, with over 60 million of these individuals suffering
from nearsightedness. U.S. consumers spent as estimated $13.8 billion in
eyeglass and contact lens purchases in 1993. While excimer laser procedures
can treat people who are farsighted or are astigmatic, both the existing
technology and application for regulatory approvals for those uses are in an
earlier stage than for use of excimer lasers for treatment for nearsightedness.
Refractive disorders generally are corrected with conventional methods
such as eyeglasses and contact lenses. Today there exist alternative
treatments for permanently reshaping the cornea to relieve nearsightedness,
farsightedness and astigmatism. One technique for corneal reshaping involves
manual scalpel incisions on the surface of the cornea, known as radial
keratotomy or "RK". RK is used today primarily to correct nearsightedness, but
is known to have potential limitations. RK is known to (i) weaken the cornea,
(ii) present the potential for infection and (iii) produce inconsistent visual
correction results. However, RK procedures are generally substantially less
expensive than LVC procedures.
Vista believes that the market potential for alternative refractive
care utilizing excimer laser systems is commercially significant. Many
eyeglass or contact lens wearers are potential candidates for laser refractive
surgery. Vista believes that approximately 22 million people in the United
States are contact lens wearers. Vista further believes that contact lens
wearers, and those who may like to wear contact lenses, would be particularly
receptive to PRK procedures because they have made the decision to use an
alternative to eyeglasses to correct their refractive disorders.
GOVERNMENTAL REGULATION
Vista's subsidiaries are subject to extensive rules and regulations,
both in the United States and foreign countries at the federal, provincial,
state and local level, affecting the health care industry and the delivery of
health care. These include laws and regulations prohibiting the practice of
medicine and optometry by persons not licensed to practice medicine or
optometry, prohibiting the unlawful rebate or unlawful division of fees and
limiting the manner in which prospective patients may be solicited. Other
regulatory requirements, such as regulations concerning the use of excimer
laser systems, also apply to these operations.
Numerous laws and regulations affect the manner in which Vista's
subsidiaries may establish or administer the use of LVC equipment and other LVC
Services, which vary significantly from jurisdiction to jurisdiction. In some
instances these laws and regulations are ambiguous, and sometimes regulators
fail to provide adequate guidelines. Vista believes that its operating
subsidiaries have adopted strategies that enables each of them to offer and
administer LVC Services in compliance with applicable regulatory requirements
in their areas of
13
<PAGE> 14
operations. However, federal, state and provincial regulatory attention may
continue to be directed to the practice of medicine, and any changes in
applicable law or regulations, or in governmental agency and judicial
interpretations of such laws and regulations, could cause one or more of these
strategies currently in compliance with applicable laws to cease to comply.
Current state and provincial regulatory requirements and restrictions
that relate to corporate entities involved in the ownership and operation of
healthcare facilities include prohibitions against: the corporate practice of
medicine except by an entity owned by healthcare professionals and/or wherein
the professionals exercise control over medical judgments; patient referrals by
healthcare professionals (including ophthalmologists and optometrists) to a
facility owned or compensated by such referring professional (either generally,
or sometimes by defining such payments as "kick backs"); and "fee splitting"
between healthcare professionals and corporate entities. Other laws in both
the United States and foreign countries specifically regulate the nature and
compensation provisions of employment or management relationships that
healthcare professionals may have with a corporate-owned facility, may affect
the form of business entity to be utilized, may limit payments either to the
entity or to healthcare professionals to the "fair market value" of their
contributions, or affect the manner of marketing the service performed at the
healthcare facility. Additional regulations in some jurisdictions also now
affect, or in the future may affect, the administration and use of LVC
Services, including requirements for certificates of need and/or other
licensing and registration of medical equipment.
The use of excimer lasers and other medical equipment is also subject
to numerous government laws and regulations relating to such matters as safe
working conditions, environmental protection, fire hazard control and disposal
of potentially hazardous substances. There can be no assurance that the
Company's operating subsidiaries will not be required to incur significant
costs to comply with such laws and regulations in the future.
INSURANCE AND INDEMNIFICATION
Use of laser systems by health care professionals using laser
equipment and other LVC Services may give rise to claims against Vista by
persons alleging injury. Vista's subsidiaries generally do not currently have
malpractice liability insurance due to limited capital resources. Vista or its
subsidiaries may not be able to purchase medical malpractice insurance and may
not be able to purchase other insurance at reasonable rates to protect Vista
and its subsidiaries against claims arising from the medical practice of health
care providers using LVC equipment and services.
Vista believes that claims alleging defects in laser systems will be
covered by manufacturers' warranties and the manufacturer's product liability
insurance, and that Vista could take advantage of such insurance by adding such
suppliers to potential lawsuits against Vista. There can be no assurance that
laser suppliers will carry product liability insurance or that any such
insurance will be adequate to protect Vista.
Generally speaking, the policy of Vista's operating subsidiaries are
to require that ophthalmologists who perform laser procedures by use of Vista's
LVC equipment maintain their own professional liability insurance. At a future
date, Vista intends to explore the availability and cost of obtaining umbrella
coverage with respect to any malpractice claims relating to procedures
performed by use of its equipment and LVC Services and of obtaining errors and
omissions coverage with respect to Vista's staff. There can be no assurance
that Vista will be able to retain adequate liability insurance at reasonable
rates, or that insurance or indemnification provided by health care providers
will be adequate to cover claims asserted against Vista, in which event Vista's
business may be materially adversely affected.
PROPRIETARY RIGHTS
Vista has no licenses, patents, registered trademarks or registered
copyrights except that it has filed trademark applications in the United States
and Canada for the service mark "Vista Laser Centers".
14
<PAGE> 15
COMPETITION
The vision care industry is extremely competitive and includes
numerous companies that are substantially larger than Vista and have greater
financial, marketing and technical resources. Competitive factors which may
affect market acceptance or revenues include regulatory requirements,
performance, pricing, convenience and ease of use, success relative to
alternative treatments and patient and general market acceptance.
Vista competes with other surgical and non surgical forms of
treatments for refractive disorders, including eyeglasses, contact lenses,
manual refractive surgery (such as RK), corneal transplants and possibly new
technologies under development. Eyeglass and contact lens use is expected to
continue to be the most popular methods of treating refractive vision disorders
for the foreseeable future due to low immediate cost and the avoidance of
surgery. Notwithstanding certain limitations and possible disadvantages, RK
surgical procedures are generally less expensive than LVC procedures and may
remain competitive as an alternative to eyeglasses and contact lenses as a
result of cost considerations. Vista also competes with other businesses
formed since 1990 offering LVC facilities and support services in Europe,
Canada and the United States. These businesses are pursuing a variety of
strategies such as marketing directly to consumers through optical chains or
affiliating their LVC services with hospitals and physician group practices.
Vista is also likely to compete with hospitals, hospital affiliated group
entities, group practices and private ophthalmologists that may elect to
purchase refractive laser systems.
Manufacturers of excimer lasers may be primary competitors, either
directly through marketing subsidiaries or indirectly through strategic
partnerships with third parties. Summit is reportedly engaged in developing a
network of refractive laser surgery clinics through a marketing subsidiary
named Refractive Centers International, Inc. Other companies that compete or
have announced an intent to compete in the U.S. market for laser vision
correction include, among others, Laser Vision Centers, Inc. (which has
previously operated PRK centers in Europe and Canada), the Beacon Eye Institute
Inc. (a subsidiary of Hawker-Siddeley Canada Inc.), Vision International, Inc.,
(which operates PRK clinics in Mexico, Finland and Argentina), LaserSight
Centers, Inc. and Sight Resource Corporation.
EMPLOYEES
Vista's European subsidiaries employ 5 persons at Vista-Italy and 5
persons at Vista-Sweden. Vista's employs two persons at its corporate
headquarters, including its President, and Vista plans to hire a third person
at its corporate office to manage administrative affairs.
Vista's principal office is located at 1250 Oakmead Parkway, Suite
210, Sunnyvale, CA 92086. Vista and its subsidiaries do not own any real
property. The following table summarizes information as to facilities utilized
by Vista and its subsidiaries:
<TABLE>
<CAPTION>
Lease Expiration
Location Use Date and Size
-------- --- -----------------
<S> <C> <C>
UNITED STATES FACILITIES:
VISTA TECHNOLOGIES INC.
Sunnyvale, CA Corporate office Month to Month;
266 square feet
EUROPEAN FACILITIES:
VISTA VISION SPA
Milan Center PRK Surgical center January 1997;
Milan, Italy 430 square feet
</TABLE>
15
<PAGE> 16
<TABLE>
<S> <C> <C>
Pisa Center: PRK Surgical center February 1999;
Pisa, Italy 480 square feet
(renewed every 3 years unless notice
given 6 months in
advance)
Rome Center: PRK Surgical center November 2000
Rome, Italy 1,600 square feet
VISTA VISION SCANDINAVIA AB
Klara Clinic PRK Surgical center Sept 30, 1996; 280 square feet
Stockholm, Sweden (renewed unless notice given 9
months in advance)
Malmoe, Sweden PRK Surgical center May 15, 1998
[Space controlled by joint
venture partner, the Gustav
Adolf clinic] (renewed every
3 years unless notice given 12
months in advance)
</TABLE>
AGREEMENTS BETWEEN VISTA AND THE COMPANY
On March 1, 1996, the Company entered into a Stock Purchase Agreement
with Vista (the "Stock Purchase Agreement") providing for 200,000 newly issued
shares of Vista's Common Stock to be sold to the Company for a cash price of
$500,000 or $2.50 per share.
On March 1, 1996, the Company also entered into another Agreement with
Vista (the "Exchange Agreement"). Under the Exchange Agreement, Vista agreed to
deliver 2,060,000 newly issued shares of Vista's Common Stock plus 500,000 Class
C Common Stock purchase warrants ("Class C Warrants") to the Company at an
agreed value of $5,150,000, or $2.50 per share of Common Stock (assuming no
value is allocated to the Class C Warrants). In exchange, Vista will receive
from the Company (i) an interest-free note due in six months in the principal
amount of $750,000 and (ii) 200,000 restricted shares of common stock in
Technical Chemicals and Products, Inc. ("TCPI"). As additional consideration for
these transactions, the Exchange Agreement grants the Company an option
exercisable at any time on or before September 30, 1996 to purchase up to an
additional 250,000 newly issued shares of Vista's Common Stock at an option
exercise price of $2.50 per share in cash (the "Six Month Option").
The 500,000 Class C Warrants issuable to the Company under the
Exchange Agreement each represent the right to purchase one (1) share of
Vista's Common Stock during the month of February 1997 and/or the month of
February 1998, and expire thereafter to the extent not exercised. In each
instance, the exercise price per share will be determined by the average of the
quoted closing prices for the Vista Common Stock in the over-the-counter market
during the month of January immediately preceding the date the Class C Warrants
or any portion thereof are exercised, except that the Class C Warrant exercise
price per share will not in any event exceed $10.00 per share of Common Stock.
The exercise price and number of shares issuable on exercise of Class C
Warrants are subject to adjustment in certain events to prevent dilution in the
event of any subsequent stock split, stock dividend, reclassification or
recapitalization affecting the outstanding Common Stock as a class.
The TCPI shares were acquired by the Company when it sold substantially
all of its operating assets to TCPI for an aggregate of 786,214 TCPI shares plus
the satisfaction of Company debt of $5,000,000 by TCPI. The $750,000 note
issued to Vista under the Exchange Agreement was paid by the Company from the
proceeds of the sale of TCPI shares by the Company which occurred in April 1996.
16
<PAGE> 17
Effective as of March 1, 1996, and pursuant to a Share Exchange
Agreement (the "Share Exchange Agreement"), three stockholders of Vista,
Therapeutic Patch Research N.V. ("TPR"), Saliva Research Limited ("SRL") and
Westcliff Partners Inc. ("WPI"), agreed to transfer an aggregate of shares of
Vista's outstanding Common Stock currently owned by TPR, SRL and WPI to the
Company in exchange for an aggregate of 4,500,000 newly issued ordinary shares
of the Company in a privately-negotiated transaction.
All of the transactions contemplated by the Stock Purchase Agreement,
the Exchange Agreement and the Share Exchange Agreement were consummated prior
to March 31, 1996.
Based upon information available to the Company,(1) Vista has
approximately 6,706,104 shares of Common Stock currently outstanding, including
the 2,260,000 shares of Common Stock issued by Vista to the Company as
described above. As a result of the closing of the agreements described above,
the Company owned directly 3,160,000 of the then outstanding Vista Common
Stock, representing approximately 61.3% of the total Vista Common Stock
outstanding. The Company intends to maintain its direct ownership of the
voting capital stock in Vista so that the Company has the ability to control
the election of directors and to influence the management and policies of
Vista.
Under the Exchange Agreement, Vista has agreed to enter into a
registration rights agreement upon closing that agreement. The registration
rights agreement will grant the Company certain "piggy-back" registration
rights in the event Vista files registration statements covering offerings of
its securities under the Securities Act of 1933. In addition, the Company will
have the right on three occasions after March 31, 1997 to demand that all or a
portion of Vista's Common Stock held by the Company as a result of the Stock
Purchase Agreement, the Exchange Agreement and issuable upon exercise of Class
C Warrants and/or the Six Month Option be registered for the account of the
Company under the Securities Act of 1933. Any such registration of Vista
Common Stock for the account of the Company will be at the expense of the
Company.
Murray D. Watson, has served since July 1993 as Chairman of the Board,
Chief Executive Officer and a director of the Company. He has been also a
director of Vista since January 31, 1994. On February 16, 1996, Mr. Watson was
elected Vice Chairman of the Board of Vista and Kenneth G. Howling, Vice
President and Chief Financial Officer of the Company, was elected Treasurer and
Chief Financial Officer of Vista. In each case, their election as Vista
officers was subject to a condition that definitive agreements for the
contemplated transactions between Vista and the Company be executed, which
events occurred on March 1, 1996.
CHANGES IN OFFICERS AND DIRECTORS
Robert L. Ferrara resigned as Vista's Chief Financial Officer on April
14, 1995; Drago A. Cerchiari (elected as Vista's President and Chief Executive
Officer on January 15, 1995) resigned as Vista's President and Chief Executive
Officer on June 1, 1995; and G. Lennart Perlhagen resigned as Vista's Chairman
on June 1, 1995 and as a director of Vista on July 4, 1995.
Pending the selection of permanent replacements, on June 9, 1995 Vista
elected Jac. J. Lam as a director and the acting President and Chief Executive
Officer of Vista, and elected Theodore J. Mayer as the acting Treasurer and
Chief Financial Officer of Vista. Both of these individuals devoted part-time
services to Vista in these capacities. On February 16, 1996, Mr. Lam and Mr.
Mayer were replaced as executive officers of Vista.
- --------------------
1. Based upon 2,650,104 shares of Vista's Common Stock outstanding, as
reported in the Vista's Quarterly Report on Form 10-QSB for the period ended
December 31, 1995, as adjusted for (i) the redemption of 4,000 redeemable
shares pursuant to the exercise of a put option on February 1, 1996, (ii)
Vista's commitment to issue an additional 1,700,000 shares to four Vista Laser
Centers in formation, (iii) the 2,260,000 shares issued to the Company by Vista
described in the text above, and (iv) 100,000 sold in a private placement.
17
<PAGE> 18
Mr. Malcolm J. Rowe, a director of Vista since January 31, 1994, died
on February 14, 1996. This temporarily left Vista's Board of Directors at two
persons, Jac. J. Lam and Murray D. Watson.
At a meeting of the Board of Directors on February 16, 1996, the
number of directors to constitute the full Board was expanded to a total of
five members, and three new Board members were elected. The new Board members
elected on February 16, 1996 include Dr. J. Charles Casebeer, Dr. Donald G.
Johnson and Thomas A. Schultz.
Vista also elected new executive officers on February 16, 1996. Dr.
Donald G. Johnson was elected as Chairman of the Board and Thomas A. Schultz
was elected as Vista's President and Chief Executive Officer. Murray D.
Watson, a director of Vista since January 31, 1994, was elected Vice Chairman
of the Board, and Kenneth G. Howling was elected Treasurer and Chief Financial
Officer.
The following set forth certain information as to the current officers
and directors of Vista after giving effect to the above changes:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Donald G. Johnson, M.D. 56 Chairman of the Board; Director
Murray D. Watson 52 Vice Chairman of the Board; Director
Thomas A. Schultz 45 President and Chief Executive Officer; Director
J. Charles Casebeer, M.D. 57 Director
Jac. J. Lam 46 Director
Kenneth G. Howling 38 Treasurer and Chief Financial Officer
William M. Curtis 55 Secretary
</TABLE>
Dr. Donald G. Johnson was elected Chairman of the Board and a director
of Vista on February 16, 1996. Dr. Johnson is an ophthalmologist actively
practicing in Canada; as of December 31, 1995 he had successfully treated
approximately 7,400 eyes with excimer laser procedures. Dr. Johnson also
developed the proprietary Johnson transepilthelial multi-zone, multi-pass PRK
procedure ("TMM PRK") which provides for a much smoother ablation zone, thus
substantially reducing glare and central islands, which are side effects
sometimes encountered in standard PRK procedures.
Dr. Johnson received his M.D. degree from the University of Western
Ontario, served his internship at Toronto Western Hospital, his general surgery
residency at Shaughnessy Hospital, Vancouver, British Columbia, and his
ophthalmology residency at the University of British Columbia. His post
graduate accomplishments include certifications in the United States for radial
keratotomy (1984), epikeratophakia (1986), advanced corneal transplantation
(1987), small incision cataract and advanced phacoemulsification (1990) and
excimer laser PRK and PTK (1990) and certification in Germany for non freeze
B.S.K. method of lamellar keratoplasty (1988).
Dr. Johnson has practiced in New Westminster, British Columbia
continuously since 1969, first participating in a group practice for general
ophthalmology from 1969 to 1981, then as a solo practitioner from 1981 to 1985.
After having performed the first RK procedure in British Columbia on July 4,
1985, he established the London Place Eye Centre in New Westminster as an
outpatient medical and surgical eye center in November 1985 where he still
practices. London Place Eye Centre was the first non-hospital surgical center
to be certified in British Columbia in 1989. Dr. Johnson operated a secondary
consultant office in Langley, British Columbia from 1972 to 1988, and from 1970
to the present serves as Director and Chief Consultant of Ophthalmology Clinics
for the Yukon Territory. He was the first person in British Columbia to
perform an epikeratophakia procedure (1987), to implant a bifocal intraocular
lens (1989), to utilize excimer laser surgery (1990), and to correct hyperopia
with a holmium laser (1994). Since 1992, when he performed eye surgery on the
first United States ophthalmologist to receive excimer laser treatment, Dr.
Johnson's excimer laser patients have included 14 physicians. Dr. Johnson has
received special awards as a Medical Advisor to Bausch & Lomb, Cooper Vision
and CIBA Pharmaceuticals. He has published 16 articles and conducted 11
clinical investigation studies in the
18
<PAGE> 19
field of ophthalmology, including clinical investigations of the VISX 20/20 and
Nidek BC-5000 excimer lasers and the Sunrise holmium laser. Dr. Johnson has
been affiliated with St. Mary's Hospital, Royal Columbian Hospital and Surrey
Memorial Hospital since 1969 and Whitehorse General Hospital since 1970. He is
a member or fellow of various professional societies, associations and special
committees including, among others, the College of Physicians and Surgeons
(Canada), the Canadian Ophthalmological Society, the American Academy of
Ophthalmology and the International Society of Refractive Keratoplasty.
Dr. J. Charles Casebeer was elected a director of Vista and its
Chairman of the Board on October 16, 1995. Dr. Casebeer is an ophthalmologist
actively practicing in the United States and his experience since 1983 includes
over 10,000 refractive procedures and the education of more than 3,200 Mds
worldwide in various refractive procedures ranging from radial keratotomy
("RK") to PRK and laser assisted in situ keratomileusis ("LASIK").
Dr. Casebeer received his B.A. degree from Harvard University, his
Doctor of Medicine degree from the University of Southern California School of
Medicine, served his internship at the Medical College of Virginia, his
residency in ophthalmology at Stanford University Medical Center, and currently
holds professional licenses in the States of Arizona, California and Utah.
From 1965 to 1968, Dr. Casebeer served as a Medical Officer in the United
States Air Force. He received his Ophthalmology Board Certification from the
American Board of Ophthalmology in 1972 and was certified for cataract/implant
surgery by the American Board of Eye Surgery in 1990.
Dr. Casebeer has been engaged in private practice from 1971 to the
present time, including associations with the Northern Arizona Bye Clinic, Ltd.
Outpatient Surgery Center, Flagstaff, Arizona from 1971 to July 1994, where he
served as President and Medical Director; Northern Arizona Eye Clinic, Ltd.,
Scottsdale, Arizona from 1992 to May 1994; the J. Charles Casebeer
Laser/Refractive Surgery Center Ltd., Scottsdale, Arizona from May 1994 to
August 1994; and Casebeer Eye Centers, Ltd., Scottsdale, Arizona from August
1994 to the present. His experience in keratorefractive surgery dates from
1983 to the present, and includes more than 6,000 cases. From 1987 to the
present, Dr. Casebeer has served as a Course Director in RK technique and
practice development and in automated lamellar keratoplasty ("ALK") at numerous
courses and symposiums throughout the United States, Europe, Africa, South
America, Australia and Asia. Since 1992, he has been a Clinical Professor for
the University of Utah Department of Ophthalmology, and he held a hospital
appointment with the Flagstaff Medical Center, Flagstaff, Arizona, where he
served as Staff President in 1977. Dr. Casebeer has lectured extensively
throughout the United States and the world since 1989 at over 150 seminars,
courses and symposiums on various refractive surgery topics including, among
others, RK, ALK and LASIK procedures. He has authored four books or book
chapters on refractive surgery, has 16 articles published in peer-reviewed
medical journals, and since July 1993 has authored a monthly ocular surgery
news column entitled "The Comprehensive Refractive Surgeon" in Ocular Surgery
News. Dr. Casebeer received the United States Air Force Commendation Medal in
1966 and the Citizen's Public Medal of Valor from the Arizona Department of
Public Safety in 1991.
Thomas A. Schultz was elected a director, President and Chief
Executive Officer of Vista on February 16, 1996. Mr. Schultz was a director
and employee of Chrystallume, Inc., from 1986 to January 16, 1996 and served as
its Chairman of the Board and Chief Executive Officer from April 15, 1993 until
October 15, 1995. Chrystallume, a publicly-held company, produces diamond film
for electronic and industrial applications. From 1983 to 1986, Mr. Schultz
served as Corporate Vice President of Dole Food Co. (formerly Castle and
Cooke, Inc.), a consumer foods company. From 1979 to 1983, he was a staff
member of Booz, Allen & Hamilton, an international business consulting firm.
Mr. Schultz holds a B.E.S. degree in Operations Research from John Hopkins
University and an M.B.A. from Harvard Business School. Mr. Schultz has been
nominated to serve on the Board of Directors of Synergistic Holdings Corp.
(formerly named Dickinson Holding Corp.), a publicly-held company.
19
<PAGE> 20
Jac. J. Lam was elected a director, President and Chief Executive
Officer of Vista on June 9, 1995. Mr. Lam, a resident and citizen of The
Netherlands, has served since 1979 as President and the Managing Director of
Multibreen B.V., a company founded and owned by Mr. Lam. Multibreen B.V.
specializes in temporary assignments providing services in the fields of
interim management, mergers and acquisitions, international tax advice, and
financial and corporate services; it also manages portfolio investments for a
wide range of clients. Mr. Lam is a chartered accountant and a member of the
Association of Chartered Accountants, whose career in professional advisory
services includes tax, audit, financial advisory and administration services.
Prior to founding Multibreen B.V. in 1979, he served as a senior auditor with
the accounting firm of Dijker & Doornbos in 1969 and 1970 and with Price
Waterhouse from 1971 to 1973. Mr. Lam was the Director of Finance, European
Operations, for Oriflame International Corporation in 1974, a Swedish company
active in the field of health care and cosmetic products. In 1975, he
co-founded Scheffers Boulnois & Partners B.V., a firm specializing in
international auditing, accounting and tax consulting services, which grew from
three partners to a staff of 65 employees at the time Mr. Lam sold his interest
in 1979. Mr. Lam is fluent in four languages and has written several papers
and is a frequent speaker for the English Business Club in the Netherlands.
Murray D. Watson. Mr. Watson was elected a director of Vista on
January 31, 1994 and Vice Chairman of the Board on February 16, 1996. He has
served as Chairman of the Board, Chief Executive Officer and a director of the
Company, since July 1993 and as a director of Technical & Chemical Products,
Inc., a publicly-traded company, since November 1995. The Company was engaged
in the research and development of both advanced transdermal drug delivery
systems and advanced skin penetration enhancers, a business recently sold by
the Company in late 1995 to Technical & Chemical Products, Inc. Prior to July
1993, Mr. Watson had been the President and Chief Operating Officer of the
Company's predecessor, Medipro Sciences Limited, from November 1987. Mr.
Watson has over 25 years of experience in the international health care
industry, including Vice President, Picker International, Inc.; President,
Odyssey, Inc.; and General Manager, American Hospital Supply Corp. of Canada.
As president since 1985 of the M.D.W. Group, Inc., a privately owned merchant
banking company, he has managed a broad spectrum of business ventures. Mr.
Watson received his B.A. Science in Civil Engineering in 1965 from the
University of Toronto and his M.B.A. in 1971 from York University, Toronto,
Canada.
Kenneth G. Howling. Mr. Howling was elected Treasurer and Chief
Financial Officer of Vista on February 16, 1996. He has served from November
8, 1993 until the present time as Vice President of Finance and Chief Financial
Officer of the Company. From June 1988 until November 1993, Mr. Howling was
employed by Roberts Company Canada Limited in the capacities of corporate
Secretary and Controller from June 1998 until May 1991 and as General Manager
from June 1991 until November 1993. Prior to June 1988, he was employed for
ten years in financial and general management positions with Smith Kline
Beecham, Bancard Allergy Laboratories, McGraw Edison and Price Waterhouse. Mr.
Howling has been involved in acquisitions, corporate restructuring, cash flow
management, human resource management and management information systems. He
received a Certified Public Accountant license from the State of New Jersey in
1987 and holds a B.A. degree in Accounting from Upsala College in East Orange,
New Jersey.
William M. Curtis. Mr. Curtis was elected corporate Secretary of
Vista in October 1994 Mr. Curtis has been principally engaged in a private law
practice in Southern California since 1976 specializing in corporate, merger
and acquisition, finance and securities matters.
There is no family relationship between any of Vista's directors and
executive officers. All directors hold office until the next annual meeting of
stockholders and until their successors are elected. Officers serve at the
discretion of the Board of Directors. There are no arrangements or
understandings between any director and any other person pursuant to which any
person was elected or nominated as a director.
The Board of Directors currently has two committees, the Stock Option
Committee and the Compensation Committee. The Stock Option Committee is
responsible for granting options under Vista's stock option plans, establishing
the terms and conditions of options granted under those plans, and
administering stock options. The
20
<PAGE> 21
Compensation Committee is responsible for reviewing and reporting to the Board
on the recommended compensation for Vista's executive officers. Messrs. Lam
and Watson currently serve as members of both the Stock Option Committee and
the Compensation Committee.
EMPLOYMENT AGREEMENT WITH THOMAS A. SCHULTZ
Vista has entered into a written employment agreement dated as of
January 31, 1996 with Thomas A. Schultz, its recently elected President and
Chief Executive Officer. The employment agreement with Mr. Schultz is for a
term of 36 months from January 15, 1996 and is renewable thereafter on a
year-to-year basis unless either party provides at least 60 days prior notice
of termination before the expiration of its original term or any renewal term.
The agreement provides for an annual base salary of $150,000, participation in
group benefit programs, payment of his existing insurance premiums for
long-term disability and life insurance for the initial 12 months of the
agreement, and an amount not exceeding 7 1/2% of his base salary for personal
benefit expenses relating to Mr. Schultz and his family members as he shall
determine. Mr. Schultz is eligible to receive an annual performance bonus of
up to 100% of his annual base salary based upon achievement of Vista goals to
be determined by the Board of Directors. In addition, he is entitled to a cash
bonus of $75,000 upon the filing of the two registration statements for public
offerings by Vista (one of which may be an initial public offering proposed by
Vista Laser Centers of the Southwest, Inc., currently in preparation). Mr.
Schultz's employment agreement further provides he is entitled to severance
benefits if his employment is involuntarily terminated, other than for cause
(as defined in the agreement), death or disability, equal to (i) a lump-sum
payment equal to his annual base salary, (ii) continuation of insurance
benefits for life, health, dental and long-term disability for a period of 12
months after employment termination, and (iii) continued vesting of his
outstanding stock options for a period of 12 months after employment
termination. Mr. Schultz is required to devote his full business time to the
affairs of Vista except for such investment, business, professional and
continuing education activities that do not interfere with the performance of
his duties as Vista's President and Chief Executive Officer. The employment
agreement contains confidentiality and non-competition provisions in favor of
Vista.
GRANT OF STOCK OPTIONS
On February 6, 1996, Vista amended its 1994 Stock Option Plan (the
"1994 Plan") to increase the number of shares covered by the 1994 Plan from
150,000 shares to a total of 1,900,000 shares of common stock. The amendment
of the 1994 Plan is subject to approval by stockholders of Vista within one
year from the date of Board authorization for the amendment.
On February 15, 1996, Vista granted stock options under the 1994 Plan
covering an aggregate of 1,650,000 shares of its common stock to 11 persons.
All of these options are exercisable at a price of $2.50 per share, which in
the opinion of the Board was not less than the fair market value of Vista's
common stock on that date. A portion of these options covering 633,000 shares
will vest and may be exercised only after the 30th trading day (whether or not
consecutive) following the date of grant on which the closing price for Vista's
common stock price equals or exceeds $10.00 per share. The remaining options
will vest and may be exercised in 12 equal quarter-annual installments
commencing on May 15, 1996 subject to the optionee's continued employment by,
or active service as a director or consultant for, Vista at the time each
installment vests. Each option is for a term of five years subject to possible
earlier termination in accordance with provisions of the 1994 Plan.
21
<PAGE> 22
The following table summarizes certain Vista information as to stock
options granted from February 15, 1996 to March 31, 1996:
<TABLE>
<CAPTION>
Number Terms of Option Price Expiration
Name of Optionee of Shares Exercise Per Share (a) Date
---------------- --------- -------- ------------- ----------
<S> <C> <C> <C> <C>
Donald G. Johnson, M.D. (b) 60,000 (d) $2.50 2/15/01
Trident Management Inc. (e) 150,000 (c) $2.50 2/15/01
Trident Management Inc. (e) 150,000 (d) $2.50 2/15/01
Thomas A. Schultz (b) 150,000 (c) $2.50 2/15/01
Thomas A. Schultz (b) 150,000 (d) $2.50 2/15/01
J. Charles Casebeer, M.D. (f) 60,000 (d) $2.50 2/15/01
Jac. J. Lam (f) 150,000 (c) $2.50 2/15/01
Jac. J. Lam (f) 150,000 (d) $2.50 2/15/01
Kenneth G. Howling (g) 100,000 (d) $2.50 2/15/01
Nine (9) other persons 516,000 (d) $2.50 2/15/01
</TABLE>
---------------------------------------------
(a) Represents not less than fair market value at date of grant as
determined by the Board of Directors.
(b) Executive officer and director of Vista.
(c) Exercisable after the 30th trading day (whether or not
consecutive) following date of grant on which the closing
price for Vista's common stock price equals or exceeds $10.00
per share.
(d) Exercisable in 12 quarter-annual installments commencing on
May 15, 1996, each installment vesting 1/12 of the
total shares subject to the option.
(e) Corporate nominee of Murray D. Watson, a director and
executive officer of Vista.
(f) Director of Vista.
(g) Executive officer of Vista.
After giving effect to the above stock options grants, options
covering a total of 1,683,000 shares are outstanding under the 1994 Plan, no
options have been exercised under the 1994 Plan, and options remain available
for future grant as to 217,000 shares.
VISTA VISION INTERNATIONAL LTD. (UNITED KINGDOM)
Vista Vision International Ltd. ("Vista-UK"), formed in July 1992,
owned a 50% interest in Precision Laser Bye Centres Ltd., a joint venture with
Optika Holdings Limited formed in June 1993, which owned and operated an
excimer laser eye surgical clinic in London, England. G. Lennart Perlhagen,
President and Chief Executive Officer of Vista from February 1994 to January
15, 1995, served as the managing director of Vista-UK since its organization.
Vista purchased all of the capital stock of Vista-UK and approximately pound
sterling 24,000 of advances to Vista-UK from an unaffiliated third party under
an agreement dated March 31, 1994. The consideration paid by Vista included
$134,000 in cash (U.S. funds) and 250,000 shares of Vista's common stock issued
to the seller, Laser Technologies (Jersey) Ltd.
In June 1995, Vista closed the operations of Vista-UK and Precision
Laser Eye Centres Ltd. due to their unprofitable history, a change in business
strategy of the joint venture partner and extremely competitive market
conditions in London.
ABANDONMENT OF PROPOSED ACQUISITION OF MEDICAL DEVELOPMENT RESOURCES, INC.
MDRI is a privately-held Delaware corporation engaged in research and
development of a proprietary production process for the manufacture of scalpels
and other cutting instruments from natural obsidian and/or an obsidian
formulation. MDRI owns 100% of two operating subsidiaries, KMI I, Inc. ("KMI")
which designs,
22
<PAGE> 23
manufactures and markets precision surgical instruments and related products,
and Micra Instruments Limited ("Micra"), a company formed by MDRI in July
1993 to purchase the assets of a business involved in design, development,
manufacturing and marketing of titanium microsurgical instruments for
ophthalmology and neurosurgery.
As previously reported in Vista's Annual Report on Form 10-KSB for the
fiscal year ended March 31, 1995 and Reports on Form 10-QSB for the quarterly
periods ended June 30, 1995 and September 30, 1995, Vista engaged in a series
of transactions and proposed transactions relating to investments in MDRI and
its subsidiaries from April 1994 through June 1995. Vista wrote-off all of its
investment in MDRI and loans advanced for MDRI's account, aggregating
$5,643,000, as of March 31, 1995.
Initial Investment by Vista
On April 1, 1994, Vista entered into an agreement with Obsidian
Research NV., an unaffiliated partnership, to acquire 715,563 shares of MDRI
common stock and warrants to purchase up to 601,073 shares of MDRI common stock
exercisable at $6.60 per share until December 31, 1996. The purchase price
paid by Vista for these MDRI securities consisted of 200,000 shares of Vista
Common Stock and 200,000 Vista Class A Warrants. The MDRI common stock and
warrants were originally acquired by Obsidian Research N.V. at a cost of
$1,125,000 in February 1993. Vista's purpose in acquiring this interest in
MDRI was to establish a long-term relationship with the KMI subsidiary for
future access to U.S. ophthalmologists.
Additional Investments in May 1994
On May 5, 1994, Vista entered into a Stock Purchase Agreement (the
"May 1994 Stock Agreement") with six individuals who were principal
stockholders of MDRI and included certain members of MDRI and KMI's management
(the "MDRI Management Stockholders"). Under the May 1994 Stock Agreement,
Vista purchased 1,000,000 newly issued shares of MDRI common stock from MDRI on
May 6, 1994 for $1,250,000 in cash and acquired 1,000,000 shares of MDRI common
stock from the MDRI Management Stockholders in exchange for $2 million in
principal amount of non-interest bearing promissory notes due on December 31,
1994. At the time of this investment, MDRI's management projected MDRI would
generate net income for fiscal 1994 of at least $900,000 and there was proposed
an initial public offering of MDRI securities in which Vista would participate
as a selling stockholder.
Concurrent with the closing of the May 1994 Stock Agreement, seven
foreign private investors purchased an additional 1,000,000 shares of MDRI
common stock from the MDRI Management Stockholders for $2 million in
non-interest bearing promissory notes due in ten equal bi-weekly installments
from July 5, 1994 through November 9, 1994. Under separate agreements on May
24, 1994, Vista acquired these 1,000,000 MDRI shares from the seven foreign
investors in exchange for 200,000 shares of Vista common stock and 100,000
Vista Class A Warrants (all of which Vista shares and warrants were
subsequently cancelled, as described below). With the consent of the MDRI
Management Stockholders, Vista common stock issued to the seven foreign
investors were substituted as a collateral pledge to secure obligations of the
foreign investors on their non-interest bearing notes to the MDRI Management
Stockholders.
Under the MDRI Stock Agreement, three of the MDRI Management
Stockholders deposited an additional 315,000 shares of MDRI common stock in
escrow to be transferred to Vista if MDRI's consolidated net income for the
fiscal year ended December 31, 1994 did not equal or exceed $900,000. MDRI's
consolidated net income for such period did not reflect profitable operations.
In July 1994, Vista was advised that the seven foreign investors were
unable at that time to make payment of the installments due on their $2 million
in notes to the MDRI Management Stockholders. As an accommodation to the MDRI
Management Stockholders, during July and August 1994 Vista prepaid $600,000 in
23
<PAGE> 24
principal amount of Vista's $2 million note obligations otherwise maturing on
December 31, 1994 to the MDRI Management Stockholders.
Exchanges with TNC Media, Inc.
Under an agreement dated October 11, 1994, MDRI transferred 435,666
shares of common stock in TNC Media, Inc. ("TNC") to TNC in exchange for the
forgiveness of $450,000 in principal and $56,140 of accrued interest due from
MDRI and KMI to TNC and for the cancellation of 155,000 shares of MDRI common
stock then held by TNC. As a consequence of the cancellation of these shares,
Vista's percentage ownership of MDRI capital stock increased from 52.41% to
approximately 53.48%. In consideration of this increase in Vista's ownership
of MDRI, TNC received from Vista redeemable Class B warrants to purchase up to
31,000 shares of Vista common stock exercisable at $10.00 per share at any time
through October 11, 1999 unless earlier called for redemption. Vista has the
optional right of calling the Class B warrants for redemption if the Vista
common stock issuable upon exercise of Class B Warrants have been registered
for sale under the Securities Act of 1933 and if Vista common stock is traded
in the NASDAQ over-the-counter market or on a national securities exchange and
the closing sale price is $22.50 per share or more for at least 20 consecutive
trading days on the date Class B Warrants are called for redemption.
During December 1994, Vista acquired 778,777 shares of MDRI common
stock (representing approximately 11.2% of the MDRI shares then outstanding)
from TNC in exchange for 155,755 shares of Vista common stock in order to
increase its voting position in MDRI. Vista demanded that MDRI call an annual
meeting of its stockholders to elect directors, but this demand was ignored by
MDRI.
As a result of the above transactions, Vista owned 4,809,340 shares of
MDRI capital stock, or approximately 69.13% of the total then outstanding, at
December 31, 1994. The MDRI Management Stockholders continued to manage MDRI
and its subsidiaries and controlled the policies and operations of MDRI and its
subsidiaries.
The December 1994 Reorganization Agreement
In order to resolve certain disputes which arose between MDRI
Management Stockholders and the seven foreign investors, on the one hand, and
between MDRI Management Stockholders and Vista on the other hand, and in an
effort to obtain control over the operating policies and management of MDRI and
its subsidiaries, Vista entered into an Agreement and Plan of Reorganization
with MDRI and the MDRI Management Stockholders dated as of December 15, 1994
(the "Reorganization Agreement") and amended in January and March 1995. In
order to obtain access to historical financial records retained by independent
public accountants for MDRI, Vista further agreed upon the closing of the
Reorganization Agreement to assume $70,000 of MDRI's indebtedness to its
independent public accountants and to guarantee an additional $70,000 of such
indebtedness assumed by KMI. Vista advanced $40,000 of the funds contemplated
by these obligations prior to closing the Reorganization Agreement as an
accommodation to MDRI and KMI.
Due to problems observed by Vista during its due diligence review of
the operations and reported financial condition of MDRI and its subsidiaries,
the original closing contemplated by the Reorganization Agreement was postponed
pending a renegotiation of certain terms and provisions of the Reorganization
Agreement.
Vista also extended an exchange offer to the holders of certain MDRI
notes and warrants as required by the Reorganization Agreement, subject to the
initial closing of the Reorganization Agreement. The Reorganization Agreement
further provided for a proposed merger later in 1995 of MDRI with a
wholly-owned subsidiary of Vista.
24
<PAGE> 25
Exchange Agreement for Loan to Micra
In June 1995, Quintillion B.V., an affiliate of Vista's then acting
President, Jac. J. Lam, advanced the sum of $100,000 to Micra Instruments Ltd.
for working capital to sustain its operations in exchange for a 15% debenture
issued by Micra. The 15% debenture is for a term of six months and payable
thereafter on three months written notice and secured by a fixed and floating
charge on the assets of Micra. In consideration of this financial
accommodation, Vista entered into an Exchange Agreement with Quintillion B.V.
which grants Quintillion the right to exchange the 15% Micra debenture for
shares of Vista's common stock at an exchange price of $1.25 per share of Vista
common stock.
Termination and Rescission of Agreements Relating to MDRI
Following the failure of MDRI and the MDRI Management Stockholders to
comply with conditions set forth in the Reorganization Agreement and the
inadequacy of MDRI's financial records, Vista elected on July 7, 1995 to
terminate all obligations on its part under the Reorganization Agreement and
advised MDRI and the MDRI Management Stockholders that Vista was further
rescinding all transactions with the MDRI Management Stockholders contemplated
by the May 1994 Purchase Agreement including all obligations under promissory
notes previously issued by Vista. The reasons given by Vista for these actions
included Vista's allegations of fraud, intentional misconduct and breach of
fiduciary duties on the part of the MDRI Management Stockholders,
misrepresentations of material facts by the MDRI Management Stockholders and
MDRI, and failures in the timely performance of conditions precedent to Vista's
obligations. Vista further demanded that the MDRI Management Stockholders make
full restitution to Vista of $600,000 in cash previously paid by Vista to the
MDRI Management Stockholders under notes issued pursuant to the May 1994 Stock
Purchase Agreement.
As a result of this action, all shares issued by Vista under the
Reorganization Agreement and to seven foreign investors in exchange for Vista
securities were cancelled and Vista returned to the MDRI Management
Stockholders all certificates representing shares of MDRI common stock
previously received by Vista except for 2,794,340 MDRI shares, believed to
represent approximately 40% of MDRI's outstanding common stock, paid for in
cash by Vista. Vista wrote-off all of its investment in MDRI and loans
advanced for MDRI's account, aggregating $5,643,000 as of March 31, 1995.
OTHER TRANSACTIONS
Transactions With Former Officers and Directors
In June 1994, Vista engaged the services of Drago A. Cerchiari to
render consulting services relating to financial and accounting matters,
including identification of suitable candidates for the position of Vista's
Chief Financial Officer. Vista issued 7,000 Class A Warrants in consideration
of this agreement, and agreed to repurchase all or any portion of these Class A
Warrants at the price of $5.00 per warrant. Mr. Cerchiari exercised his put
option and the 7,000 Class A Warrants were cancelled in June 1995.
Vista previously had employment agreements with: Robert L. Ferrara,
who resigned as the Company's Chief Financial Officer on April 14, 1995; Drago
A. Cerchiari, who resigned as the Company's President and Chief Executive
Officer on June 1, 1995; and G. Lennart Perlhagen, who resigned as the
Company's Chairman on June 1, 1995.
Under an agreement dated as of July 5, 1995, Vista issued 16,000
shares of its common stock to Mr. Perlhagen in payment of $80,000 of
unreimbursed business expenses.
Under an agreement dated as of June 1, 1995, Vista paid Mr. Cerchiari
$8,740 in cash and issued 4,000 shares of common stock for reimbursement of a
total of $29,000 of unreimbursed business expenses. Vista agreed that Mr.
Cerchiari has the right to put the 4,000 shares of common stock to Vista after
January 31, 1996 at a
25
<PAGE> 26
price equal to $20,260 plus interest from June 1, 1995 at the rate of 1% per
month. Mr. Cerchiari exercised that option on February 1, 1996. Vista also
issued 5,000 shares of common stock to Mr. Cerchiari under the June 1, 1995
agreement as a negotiated settlement for a one-time hiring bonus in his
original employment agreement of January 15, 1995.
Issuance of Shares for Expenses from June through December 1995
During the period from June to December 1995, certain clients of
Vista's then acting President, Jac. J. Lam, invested approximately $1,470,000
to sustain Vista's corporate operations during that period. These advances
included approximately $700,000 for travel by the Company's officers and
consultants and corporate office expenses in New York and Europe, approximately
$ 100,000 in out-of- pocket advances for various expenses, and $670,000 in
compensation paid for personnel assigned to support Vista's corporate
activities and its program to establish various Regional Joint Ventures in
North America under the "Vista Laser Centers" name. The $670,000 figure for
personnel includes $200,000 paid or payable to Vista's then acting President,
Jac. J. Lam, and $60,000 accrued for its then acting Treasurer and Chief
Financial Officer, Theodore J. Mayer. Vista's Board of Directors agreed these
charges should be billed at a flat negotiated rate of $ 1,470,000 and in
December 1995 authorized the issuance of 925,000 shares of Vista's common stock
in payment of these obligations. These shares are issuable to Therapeutic
Patch Research, N.V. (300,000 shares), Saliva Research Ltd. (325,000 shares)
and Westcliff Partners Inc. (300,000 shares). Mr. Lam acts as a managing
director for Saliva Research Ltd. and Westcliff Partners Inc., but disclaims
any beneficial interest in the securities held by those entities.
Issuance of Shares to Directors or Their Nominees
In December 1995, the Board of Directors authorized the issuance of
25,000 shares of Vista's common stock to each of its then three directors,
Messrs. Jac. J. Lam, Malcolm J. Rowe and Murray D. Watson, or their nominees,
as compensation for their continuing services as directors during the fiscal
year ending March 31, 1996.
26
<PAGE> 27
THE COMPANY'S MARKET MAKERS: - M.H. Meyerson
- Herzog, Heine & Goduld
- Mayer & Schweitzer
- Coastal Securities Limited
As of May 15, 1996, 5,340,685 Ordinary Shares were eligible for sale
under Rule 144, subject to certain limitations included in such Rule. In
general, under Rule 144, a person (or persons whose shares are aggregated) who
has satisfied a two-year holding period, under certain circumstances, may sell
within any three-month period a number of shares which does not exceed the
greater of 1% of the Company's then outstanding Common Stock or the average
weekly trading volume of such Common Stock during the four calendar weeks prior
to such sale. Rule 144 also permits, under certain circumstances, the sale of
shares without any quantity limitation by a person who has satisfied a
three-year holding period and who is not, and has not been for the preceding
three months, an "affiliate" of the Company.
In connection with the Arca and the May 1995 private placement
transactions described under the caption "Item 12. Certain Relationships and
Related Transactions", the Company granted registration rights and has filed a
Registration Statement with respect to the Ordinary Shares issued in those
transactions.
Except as described in the preceding paragraph, the Company has not
granted any rights, or otherwise agreed, to register any shares of the Ordinary
Shares of the Company under the Securities Act for any security holder.
The Company has no present intention of publicly offering any shares
of its Ordinary Shares.
HOLDERS
As of May 15, 1996, there were 197 record holders of the Company's Ordinary
Shares represented by ADR's.
DIVIDENDS
A. Since inception, the Company has not paid any dividends on any of
their respective shares of capital stock.
B. The Company does not foresee that it will have the ability to pay any
dividends on its Ordinary Shares during the fiscal year ending
February 28, 1997, nor does management have any present intention to
pay any dividends in the foreseeable future. It is management's
intention to retain any earnings of the Company for future expansion
and development purposes.
EMPLOYEES
The Company retains a total staff of 3 individuals.
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases an approximately 1,000 square foot office for
administrative purposes on a month to month basis in Toronto, Ontario, Canada at
a monthly rental of $1,640.
ITEM 3. LEGAL PROCEEDINGS
The Company is not involved in or aware of any legal proceedings.
27
<PAGE> 28
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
PRICE RANGE OF THE COMPANY'S ADRS
The Company's ADRs were traded on the NASDAQ Stock Market (Small Cap
Market ["NASDAQ"]) and on the Boston Stock Exchange ("BSE") through August 16,
1995. Effective August 17, 1995, the ADRs were de-listed from NASDAQ and the
BSE. The ADRs now trade on NASDAQ's OTC Bulletin Board. The Company's ADR's
began trading on NASDAQ on March 1,1994. Set forth below is the closing bid
and asking prices for the ADRs for the periods indicated:
<TABLE>
<CAPTION>
PERIOD CLOSING BID CLOSING ASK
- ------ ----------- -----------
1994 HIGH LOW HIGH LOW
- ---- ---- --- ---- ---
<S> <C> <C> <C> <C>
First Quarter (March 2 thru March 31) . . . . . . 9 7 1/2 9 1/8 7 7/8
Second Quarter . . . . . . . . . . . . . . . . . 6 7/8 4 5/8 7 1/4 5
Third Quarter . . . . . . . . . . . . . . . . . . 5 2 5 3/4 2 1/2
Fourth Quarter . . . . . . . . . . . . . . . . . 2 7/8 1 3 1/2 1 3/8
</TABLE>
<TABLE>
<CAPTION>
1995 HIGH LOW HIGH LOW
- ---- ---- --- ---- ---
<S> <C> <C> <C> <C>
First Quarter . . . . . . . . . . . . . . . . . . 1 3/16 1 1 2 1/4
Second Quarter . . . . . . . . . . . . . . . . . 1 5/8 1 1 5/8 1 1/8
Third Quarter (July 1 through August 16) . . . . 1 7/8 1 1/16 2 1/8 1 1/8
</TABLE>
<TABLE>
<CAPTION>
1995 CLOSING BID CLOSING ASK
- ---- ----------------------------------
<S> <C> <C>
Third Quarter . . . . . . . . . . . . . . . . . . 15/16 1 3/8
Fourth Quarter . . . . . . . . . . . . . . . . . 13/16 1 3/8
</TABLE>
<TABLE>
<CAPTION>
1996
- ----
<S> <C> <C>
First Quarter . . . . . . . . . . . . . . . . . . 3/4 1 3/16
Second Quarter (through June 4) . . . . . . . . . 5/8 1 1/8
</TABLE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
BACKGROUND
The operations of the Company were primarily those of its wholly owned
subsidiaries PP Holdings, Inc. and Medipro Sciences Limited ("Medipro"). The
Flora operation was acquired June 30, 1994 and is reflected in fiscal 1995
accordingly. The Medipro operation was significantly downsized after the
acquisition of the assets of Flora, Inc. ("Flora") and officially ceased
operations January 31, 1995. The operations of the Company were primarily
those of Medipro for the first four months of fiscal 1995 and all prior years.
On November 15, 1995 the Company sold substantially all of its assets to
Technical Chemicals and Products, Inc. ("TCPI") for 786,214 shares of TCPI
common stock. Operating results related to this business have been treated as
discontinued operations in the consolidated financial statements. Accordingly,
the financial statements for fiscal 1996 include a loss from the discontinued
operations of approximately $2,600,000, and a gain on the sale of approximately
28
<PAGE> 29
$16,400,000. See "Certain Transactions." The consolidated financial statements
have been prepared in accordance with US GAAP.
RESULTS OF OPERATIONS
FISCAL YEARS ENDED FEBRUARY 29, 1996 AND
FEBRUARY 28, 1995
As a result of the November 1995 TCPI transaction, the operations of
the Company's subsidiaries, PP Holdings Inc. and Medipro, have been presented
in the Company's Consolidated Statements of Earnings and Loss and Deficit as
discontinued operations as per U.S. GAAP. The transaction with TCPI resulted
in a gain of approximately $16,400,000 as the Company had previously
written-off its acquired technologies and all research and development
expenditures associated with these technologies. TCPI issued 786,214 shares of
TCPI's common stock with a fair value of approximately $11,919,000 to the
Company and also satisfied the $5,000,000 promissory note previously issued by
the Company to Flora, Inc.
During the fiscal year ended February 29, 1996, the Company had
revenue from discontinued operations of $469,055 versus nil for the previous
year. These revenues were primarily due to feasibility studies conducted by
the Company on behalf of third parties. The Company does not expect to have
similar revenue in fiscal 1997.
The loss from continuing operations in fiscal 1996 of $1,728,683
consists mainly of administration expenses of the Company during the year.
Administration expenses of continuing operations of $1,798,524 increased by
approximately $657,223 or 58% from 1995. This increase can be attributed to an
increase in professional fees relating to the TCPI transaction and increased
compensation expenses for the year relating to the anticipated dissolution of
the Company, and proposed restructuring. Other income during the year of
$64,321 was primarily derived from receipt of proceeds from the sale of certain
securities. Interest income is down from 1995 by $36,865 or 76% to $11,698 due
to lower cash balances being available for short-term investments during the
year.
The loss from operations of the discontinued business segment of
$2,593,468 in fiscal 1996 consists mainly of operating expenses of the
Company's subsidiary PP Holdings Inc. Within this amount is $1,164,681 in
research and development expenses and $558,033 in administration and general
expenses. In addition, $337,667 in interest on long-term debt was incurred
during the year related to the $5,000,000 note satisfied by TCPI. The fiscal
1995 loss from operations of discontinued business segment of $11,698,353 for
fiscal 1995 is $9,104,885 higher than the 1996 amount because of the unusual
items charged in 1995's financial statements. These included the write-off of
capitalized technologies, restructuring costs of Medipro and the write-off of a
foreign currency translation amount, all totalling approximately $6,361,000.
In addition to these amounts, fiscal 1995 costs were higher due to higher
research and development costs incurred of $2,355,515.
For the year ended February 29, 1996 the Company has a net earnings of
$12,090,676 or $1.50 per share (1995 - loss of $2.56). This net income in
fiscal 1996 is due to the gain on the sale of assets to TCPI whereas the fiscal
1995 loss is attributable to the unusual items charged in fiscal 1995 listed
above.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has relied upon private and public
equity financing and internally generated cash flows, principally from the
license and contract product development fees, to finance its operations.
The increase in cash of $30,077 from February 28, 1995 to February 29,
1996 represents the net proceeds from private placement monies offset by cash
requirement needs for the Company's operations, the purchase of fixed assets of
approximately $51,000 and advances to Vista Technologies Inc. of $251,500.
29
<PAGE> 30
The Net income for the year of $12,090,676 included depreciation and
amortization of $253,958, the gain on the sale of assets of $16,412,827 and a
net change in non-cash working capital of $361,272. The Company's financing
activities included net proceeds of $2,186,778 from private placements.
Subsequent to year end, the Company sold 210,000 TCPI shares for net
proceeds of $2,928,697, $750,000 of which was used to pay a loan to Vista as
part of the consideration in the acquisition of Vista. As a result of this and
as a result of the Vista transaction in which another 200,000 shares of TCPI
were given to Vista, the Company currently owns 376,214 shares of TCPI. The
fair value of such shares at June 10, 1996 is $4,843,755.
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation," which is effective for years beginning after
December 15, 1995. The Company anticipates electing to continue its current
accounting methodology regarding stock options granted to employees and will
add the required additional footnote disclosures prescribed by SFAS No. 123.
In addition, options granted to non-employees will have compensation expense
associated with it, calculated in accordance with the new pronouncement.
ITEM 7. FINANCIAL STATEMENTS
FINANCIAL STATEMENTS
See page F-1 through F-21 attached hereto for copies of the Company's
audited consolidated financial statements through February 29, 1996.
Audited Annual Consolidated Financial Statements:
February 29, 1996, and February 28, 1995.
Unaudited Quarterly Financial Statements:
None.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
DIRECTORS AND EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
NAME AGE TITLE
- ---- --- -----
<S> <C> <C>
Murray D. Watson . . . . . 51 Chairman of the Board, Chief Executive Officer,
President and Director
Kenneth G. Howling . . . . 38 Vice President -- Finance and Chief Financial
Officer
Paul E. Heney . . . . . . . 37 Secretary
Kevin J. Quinn . . . . . . 54 Director(1)
Jac. J. Lam . . . . . . . . 48 Director(1)
</TABLE>
- ----------------------
(1) Member of the Audit, Compensation and Nominating Committees.
30
<PAGE> 31
All of the above persons have served in their respective capacities
since July 30, 1993 with the following exceptions: Mr. Howling began his
service on November 8, 1993, and Mr. Quinn and Mr. Lam became directors on
March 15, 1996 and April 1, 1996, respectively. No director receives any
compensation for his services as such.
The function of the Audit Committee is to review significant financial
and accounting issues, to review the services performed by, and reports of, the
Company's independent auditors and to make recommendations to the Board of
Directors with respect to these and related matters.
The Compensation Committee is responsible for establishing and
administering the Company's executive compensation programs. The Nomination
Committee is responsible for making recommendations for vacancies on the Board
of Directors.
MURRAY D. WATSON, B.A.SC., M.B.A., CHAIRMAN OF THE BOARD, CHIEF EXECUTIVE
OFFICER, PRESIDENT AND DIRECTOR
Mr. Watson became the Chairman of the Board and Chief Executive
Officer of the Company on July 30, 1993. Prior thereto, he had been the
President and Chief Operating Officer of Medipro Sciences Limited since
November, 1987. He has over 25 years of experience in the international health
care industry including Vice President, Picker International Inc., President,
Odyssey Inc., and General Manager, American Hospital Supply Corp. of Canada. As
President of the M.D.W. Group Inc., a privately owned merchant banking company
since 1985, he has managed a broad spectrum of business ventures. Mr. Watson
received his B.A.Sc., in Civil Engineering in 1965 from the University of
Toronto and his MBA in 1971 from York University in Toronto, Canada. Mr.
Watson is also a director of Technical Chemicals and Products, Inc. and is the
Vice-Chairman of the Board of Vista. See "The Company" and "Certain
Transactions".
KENNETH G. HOWLING, C.P.A., VICE PRESIDENT -- FINANCE AND CHIEF FINANCIAL
OFFICER
Mr. Howling became the Vice President -- Finance and Chief Financial
Officer of the Company on November 8, 1993. He served as the Corporate
Secretary and Controller for Roberts Company Canada Limited from June 1988
until May 1991 and also served as General Manager from June 1991 to November
1993. Prior thereto, he spent 10 years in financial and general management
positions including positions with Smith Kline Beecham, Bencard Allergy
Laboratories, McGraw Edison, and Price Waterhouse. He has been involved in
acquisitions, corporate restructuring, cash flow management, human resource
management, and management information systems. Mr. Howling received his
Certified Public Accountant license from the state of New Jersey in 1987 and
his B.A. in Accounting from Upsala College in East Orange, New Jersey.
PAUL E. HENEY, B.SOC.SCI., LL.B., M.B.A., SECRETARY
Mr. Heney became the Secretary of the Company on July 30, 1993. He is
an attorney and has practiced in the Toronto, Ontario firm of Heney and
Associates since 1991. Between 1985 and 1991 he worked with the Toronto law
firm of Holden Day Wilson. He received his B.Soc.,Sci. in economics from the
University of Ottawa in 1981, his LL.B. from the University of Ottawa in 1984
and his M.B.A. in 1985 from York University, Toronto.
KEVIN J. QUINN, LLM., DIRECTOR
Mr. Quinn was elected a director of the Company in March 1996. He has
been a practicing attorney in Los Angeles, California since 1969.
31
<PAGE> 32
JAC. J. LAM, DIRECTOR
Jac. J. Lam was elected a director, President and Chief Executive
Officer of Vista on June 9, 1995. Mr. Lam, a resident and citizen of The
Netherlands, has served since 1979 as president and the Managing Director of
Multibreen B.V., a company founded and owned by Mr. Lam. Multibreen B.V.
specializes in temporary assignments providing services in the fields of
interim management, mergers and acquisitions, international tax advice, and
financial and corporate services; it also manges portfolio investments for a
wide range of clients. Mr. Lam is a chartered accountant and a member of the
Association of Chartered Accountants, whose career in professional advisory
services includes taxes, audit, financial advisory and administration services.
Prior to founding Multibreen B.V. in 1979, he served as a senior auditor with
the accounting firm of Dijker & Doornbos in 1969 and 1970 and with Price
Waterhouse form 1971 to 1973. Mr. Lam was the director of Finance, European
Operations, for Oriflame International Corporation in 1974, a Swedish company
active in the field of health care and cosmetic products. In 1975, he
co-founded Scheffers Boulnois & Partners B.V., a firm specializing in
international auditing, accounting and tax consulting services, which grew from
three partners to a staff of 65 employees at the time Mr. Lam sold his interest
in 1979. Mr. Lam is fluent in four languages and has written several papers
and is a frequent speaker for the English Business Club in the Netherlands.
EMPLOYMENT AND CONSULTING AGREEMENTS
The Company entered into a three (3) year management agreement
commencing August 3, 1993 (the "TMI Agreement") with Trident Management Inc.
("TMI"). Mr. Watson is a minority shareholder of TMI.
On February 28, 1994 the TMI Management Agreement was terminated save
and except for the option provisions and a three-year employment agreement
between the Company and Mr. Watson became effective. On January 22, 1996, the
TMI Agreement was terminated, effective November 15, 1995. A new consulting
agreement was entered into between the Company and TMI on February 27, 1996,
effective November 16, 1995. The new agreement provides that TMI will provide
general supervision of the day to day operations and provide consulting
services with respect to the worldwide business and affairs of the company and
designated Murray D. Watson, a minority shareholder of TMI, to serve as the
Company's Chairman of the Board and Chief Executive Officer.
The agreement provides for annual salary of $225,000 U.S., payable
monthly. The annual base salary shall be increased annually at the rate of 10%
per annum. TMI shall be entitled to receive an annual performance bonus
payable in cash or by mutual agreement by equivalent equity in the amount equal
to 100% of the gross annual base remuneration payable during the first year of
the term thereof but only in the event that closing price of the Company's ADSs
equals or exceeds U.S.$ 2.00 for any 21 day period (whether or not consecutive)
prior to February 28, 1997. With respect to subsequent years, the bonus shall
be in an amount agreed upon between the compensation committee of the Company's
board of directors and TMI. If the Company terminates the agreement without
cause, TMI will be entitled to receive severance payments in an amount equal to
the greater of the amounts payable each year for the number of years or part
thereof remaining under the contract or 12 months.
On November 8, 1993, the Company entered into an employment agreement
with Mr. Kenneth Howling for a term of three (3) years. On January 22, 1996,
this agreement was terminated, effective November 15, 1995. Pinnacle Financial
Corporation ("Pinnacle") and the Company entered into a new three year
consulting agreement on February 27, 1996, effective November 16, 1995.
Pinnacle is wholly-owned by Mr. Howling. The new agreement provides that
Pinnacle will provide general supervision of the day to day financial
operations and provide consulting services with respect to the worldwide
business and affairs of the company and designated Kenneth G. Howling, its sole
shareholder, to serve as the Company's Vice President of Finance and Chief
Financial Officer.
The agreement provides for annual salary of $125,000 U.S., payable
monthly. The annual base salary shall be increased annually at the rate of 10%
per annum. Pinnacle shall be entitled to receive an annual
32
<PAGE> 33
performance bonus payable in cash or by mutual agreement by equivalent equity
in the amount equal to 100% of the gross annual base remuneration payable
during the first year of the term thereof but only in the event that closing
price of the Company's ADSs equals or exceeds US$2.00 for any 21 day period
(whether or not consecutive) prior to February 28, 1997. With respect to
subsequent years, the bonus shall be in an amount agreed upon between the
compensation committee and the Company's board of directors. If the Company
terminates the agreement without cause, Pinnacle will be entitled to receive
severance payments in an amount equal to the greater of the amounts payable
each year for the number of years or part thereof remaining under the contract
or 12 months.
Effective December 1, 1993, the Company entered into a consulting
agreement with Dr. Joseph G. Masterson pursuant to which Dr. Masterson will
provide the Company with consulting services including assistance in
establishing strategic alliances. This agreement was terminated on January 22,
1996.
Also on January 22, 1996, the employment or management agreements
between the Company, Hooper & Associates of which Mr. Gary R. Hooper is the
sole shareholder, Dr. Thomas S. Spencer and Dr. Vithal J. Rajadhyaksha were
terminated. Mr. Hooper resigned as the President and Chief Operating Officer
of the Company; Dr. Spencer resigned as the Executive Vice President and Chief
Technical Officer of the Company; and Dr. Rajadhyaksha resigned as the Vice
President - Pharmaceutical Development of the Company. These transactions were
effective November 15, 1995. In connection with the termination of these
agreements, as consideration for contractual obligations not met by the
Company, services rendered, severance pay, accepting shares in lieu of cash as
payment for salaries in fiscal 1996, the obligations of TMI, Hooper &
Associates, Mr. Howling, and Dr. Spencer under promissory notes valued at
$741,250 issued in August of 1995 with respect to the purchase of Ordinary
Shares were deemed paid in full and TMI was issued 206,250 additional Ordinary
Shares valued at $103,125. (See "Certain Transactions").
STOCK OPTION PLANS
On July 30, 1993, and July 19, 1994, the Board of Directors adopted
its 1993 and 1994 Share Option Plans (together, the "Plans"), the purpose of
which is to provide the Company's employees, officers and directors with
additional incentives to improve the Company's ability to attract, retain and
motivate individuals upon whom the Company's sustained growth and financial
success depend.
The Plans are administered by the Compensation Committee designated by
the Board of Directors (the "Committee"), which is comprised of outside
directors. The aggregate number of Ordinary Shares reserved for issuance under
the 1993 Plan is 550,000 shares, while the aggregate number of Ordinary Shares
reserved for issuance under the 1994 Plan is 150,000 shares. Options for a
total of 685,000 shares were outstanding and have expired.
On March 3, 1996, the following options to purchase Ordinary Shares
were issued to the persons and entities listed below, all of which have terms
of five years:
33
<PAGE> 34
<TABLE>
<CAPTION>
No. of Shares Exercise Price
Name Subject to Option(1) Per Share
---- ----------------- ---------------
<S> <C> <C>
Trident Management, Inc. . . . . . . . . . . 350,000 $0.50
Pinnacle Financial Corporation . . . . . . . 250,000 $0.50
S. Lynda Murtha . . . . . . . . . . . . . . . 33,334 $0.50
Kevin J. Quinn . . . . . . . . . . . . . . . 33,333 $0.50
Paul E. Heney . . . . . . . . . . . . . . . . 33,333 $0.50
All officers and directors as a group
(5 persons) . . . . . . . . . . . . . . . . . 700,000
</TABLE>
- --------------------------
(1) These options shall vest only in the event that the closing price of
the Company's ADS's equals or exceeds U.S. $2.00 in any 21 day trading period
(whether or not consecutive) to the February 28, 1997.
Options granted under the Plans are immediately exercisable. The
exercise price of the options is determined by the Committee and will be at
least 100% of the market price of the Ordinary Shares on the date the option is
granted. No awards can be made under the Plans after August 2002. The term of
any option will be determined by the Committee, provided that the term may not
exceed ten (10) years from the date of grant. Unless otherwise expressly
authorized by the Board, all options will terminate not more than ninety (90)
days after termination of the option holder's employment or service with the
Company (or one year after such termination because of death or disability).
Under certain circumstances involving a change of control of the Company, the
Committee may accelerate the exercisability and termination of the option.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Exchange Act requires the Company's directors and
executive officers, and persons who own more than ten percent of a registered
class of the Company's equity securities (collectively, "Section 16 reporting
persons"), to file with the Securities and Exchange Commission (the "SEC")
initial reports of ownership and reports of changes in ownership of Common
Stock and other equity securities of the Company. Section 16 reporting persons
are required by SEC regulation to furnish the Company with copies of all
Section 16(a) forms they file.
The Company did not become subject to the Section 16(a) reporting
requirements until March 1, 1995. To the Company's knowledge, based solely on
review of the copies of such reports furnished to the Company and written
representations that no other reports were required, subsequent to the end of
the fiscal year ended February 29, 1996, all Section 16(a) filing requirements
applicable to the Company's Section 16 reporting persons were satisfied.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth in the prescribed format the
compensation paid the Company's Chief Executive Officer and the executive
officers of the Company who received total annual salary, bonus or other annual
compensation in excess of $100,000 for services rendered in all capacities
during the Company's last completed fiscal year:
34
<PAGE> 35
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION
--------------------------------------- --------------------------------
Other Annual Securities All Other
Salary Bonus Compensation Underlying Options Options
Name and Compensation
Principal Position Year ($) ($) ($) (#) ($)
------------------------- ---- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Murray D. Watson 1996 211,719(1) -- N/A N/A
309,375(1)(2)
Gary Hooper 1996 128,333(3) -- 160,000(4)
Thomas Spencer 1996 99,167 -- 140,000(5)
Kenneth Howling 1996 117,917(6) -- 115,000(7)
</TABLE>
(1) This amount was paid to TMI in which Mr. Watson is a minority shareholder.
(2) Represents 257,813 Ordinary Shares valued at $0.80 per share and 206,250
Ordinary Shares valued at $0.50 per share which were issued to TMI in which
Mr. Watson is a minority shareholder.
(3) Includes $15,000 paid to a consulting company in which Mr. Hooper is the
sole shareholder.
(4) Represents 200,000 Ordinary Shares valued at $0.80 per share.
(5) Represents 175,000 Ordinary Shares valued at $0.80 per share.
(6) Includes $38,333 paid to a consulting company in which Mr. Howling is the
sole shareholder.
(7) Represents 146,750 Ordinary Shares valued at $0.80 per share issued to a
consulting company in which Mr. Howling is the sole shareholder.
The following tables set forth certain information in the prescribed
format with respect to options granted and exercised under the Company's
various stock option plans during the last fiscal year:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Annual Rates of Stock
Price Appreciation
for Option Term (1)
Number of Securities Underlying % of Total Options Granted To Exercise Expiration
Name Options Granted (#) Employees In Fiscal Year (%) Price ($) Date 5% 10%
---- ------------------- ---------------------------- --------- -------- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Murray D.
Watson -0- N/A N/A N/A N/A N/A
Gary
Hooper -0- N/A N/A N/A N/A N/A
Thomas
Spencer -0- N/A N/A N/A N/A N/A
Kenneth
Howling -0- N/A N/A N/A N/A N/A
</TABLE>
(1) Potential realizable value is based on an assumption that the stock
price of the common stock appreciates at the annual rate shown
(compounded annually) from the date of grant until the end of the ten
year option term. Such amounts are based on the assumption that the
named person hold the options for their full 10-year term. These
numbers are calculated based on the requirements promulgated by the
Securities and Exchange Commission and do not reflect the Company's
estimate of future stock price growth.
35
<PAGE> 36
AGGREGATED OPTION EXERCISES IN LAST FISCAL
YEAR AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Value of Unexercised
Number of Securities Underlying Unexercised in the Money Options
Options at FY-End at FY-Ended(1)
Shares Acquired Value Realized Exercisable/Unexercisable Exercisable/Unexercisable
Name on Exercise (#) ($) ($) ($) ($) ($)
---- --------------- ------------- -------------------------- --------------------------
<S> <C> <C> <C> <C> <C> <C>
Murray D.
Watson None N/A 0 0 0 0
Gary Hooper None N/A 0 0 0 0
Thomas Spenser None N/A 0 0 0 0
Kenneth Howling None N/A 0 0 0 0
</TABLE>
(1) The amounts in this column are calculated using the difference
between the closing market price of the Company's ordinary shares
at the Company's 1996 fiscal year-end and the option exercise
prices.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
PRINCIPAL SHAREHOLDERS
The Company has outstanding 16,915,211 Ordinary Shares as of May 15,
1996. Such total excludes Ordinary Shares issuable upon the exercise of
outstanding Class A, Class B, Class C and Class D Warrants.
The following table sets forth the Company's Ordinary Shares
beneficially held as of the date of this Prospectus by (i) each person known by
the Company to beneficially hold 5% or more of such shares, (ii) each director
and officer of the Company, and (iii) all officers and directors as a group.
All of the persons and groups shown below have voting and investment power with
respect to the shares indicated.
<TABLE>
<CAPTION>
PERCENTAGE
NUMBER OF
ORDINARY SHARES OUTSTANDING
BENEFICIALLY OWNED (1) SHARES
-----------------------------------
<S> <C> <C>
Trident Management Inc. (2) . . . . . . . . . . . . . . . . . . . 880,339 8.8%
Murray Watson . . . . . . . . . . . . . . . . . . . . . . . . . . -0- -
Paul E. Heney . . . . . . . . . . . . . . . . . . . . . . . . . . 302,500 3.0%
Kenneth G. Howling . . . . . . . . . . . . . . . . . . . . . . . 113,000 1.1%
Pinnacle Financial Corporation (3) . . . . . . . . . . . . . . . 143,750 1.4%
Kevin J. Quinn . . . . . . . . . . . . . . . . . . . . . . . . . 116,408 -
Jac. L. Lam . . . . . . . . . . . . . . . . . . . . . . . . . . . -0- -
All officers and directors as a group (6 persons) . . . . . . . . 961,643 9.6%
</TABLE>
* Less than .1%
(1) Unless otherwise indicated, all shares are beneficially owned and sole
voting and investment power is held by the person or entity in the table
above. The address for each beneficial holder is c/o the Company, 15/16
Fitzwilliam Place, Dublin 2, Ireland.
36
<PAGE> 37
(2) Mr. Watson is a minority shareholder of Trident Management Inc. Mr.Watson
disclaims beneficial ownership of such shares and options.
(3) Mr. Howling is a controlling shareholder of Pinnacle Financial Corporation.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CERTAIN TRANSACTIONS
On July 30, 1993, pursuant to an Agreement for Purchase of Assets, as
amended, TPR acquired from Synorex Incorporated, a Delaware corporation
("Synorex"), substantially all of the assets of Synorex, consisting primarily
of patents and patent applications relating to certain skin penetration
enhancer technologies in exchange for 2,046,576 TPR Class B Preferred Shares.
After February 28, 1994, such TPR Class B Preferred Shares were exchanged for
300,000 Ordinary Shares of the Company held by TPR. The 300,000 Ordinary
Shares may not be sold or transferred for a period of up to one (1) year after
February 28, 1994 without the prior written consent of Westfield Financial
Corporation, one of the underwriters of the Company's initial public offering.
In connection with the Synorex transaction, Dr. Vithal J. Rajadhyaksha
("Dr. Raj"), the principal inventor of the Synorex technology, entered into a
Consulting and Non-Compete Agreement ("Consulting Agreement") with TPR pursuant
to which Dr. Raj agreed to provide part time technical consulting services to
TPR through December 31, 1996. In connection with the TPR License described
below, the Consulting Agreement was assigned to the Company. Thereafter, the
Consulting Agreement was terminated and Dr. Raj entered into an employment
agreement with the Company. See "Management -- Employment and Consulting
Agreements."
On July 30, 1993, TPR completed the private placement of 1,250,000 of
its Class A Preferred Shares, for with TPR received aggregate gross proceeds of
$5,000,000. Also on July 30, 1993, TPR contributed $4,387,500 to the Company in
exchange for 1,250,000 Units, each of which was comprised of one (1) Ordinary
Share, one-half of a Class A Warrant, and one-quarter of a Class B Warrant.
See "Description of Capital Stock."
The Company entered into the TPR License Agreement dated July 30,
1993, with TPR pursuant to which TPR granted the Company an exclusive, fully
paid, worldwide license to sublicense, develop, manufacture, use and sell all
of the skin penetration enhancer technologies which TPR purchased from Synorex.
As consideration for the license, the Company paid the following to TPR:
<TABLE>
<S> <C>
(1) . . . . . . . . . . . . . . . . . . . . . . . . $300,000;
(2) . . . . . . . . . . . . . . . . . . . . . . 600,000 Units;
(3) . . . . . . . . . . . . . 2,400,000 Class C Warrants; and
(4) . . . . . . . . . . . . . . . . 500,000 Class D Warrants.
</TABLE>
For a description of the Class C Warrants and the Class D Warrants,
see "Description of Capital Stock -- Warrants."
TPR may be deemed to be a promoter of the Company in view of the
foregoing transactions.
On July 30, 1993, the Company entered into a Share Exchange Agreement
("Exchange Agreement") with Medipro and each of its shareholders pursuant to
which the Company acquired all of the issued and outstanding shares of capital
stock of Medipro in exchange for 2,309,432 Ordinary Shares of the Company. The
former Medipro shareholders received registration rights with respect to such
shares, which rights become exercisable on or after July 30, 1995. The majority
of the Company's current directors were nominated by former Medipro
shareholders.
37
<PAGE> 38
EC/American Ltd. a consulting firm, received from TPR fees of $262,500
and a payment of $50,000 for expenses as partial consideration for management
consulting services rendered in connection with the development and
implementation of TPR's licensing, acquisition and restructuring strategies.
Such amounts were paid from the proceeds of the TPR Private Offering. In
addition, EC/American Ltd. received Class D Warrants from TPR to acquire up to
500,000 Units which warrants EC/American Ltd. transferred to certain
individuals.
On November 30, 1993, the Company entered into a license agreement
with Genetronics pursuant to which the Company acquired the exclusive world
wide license to exploit electrofusion patents and technological know-how
developed by Genetronics for the purpose of developing and selling transdermal
drug delivery systems, excluding cosmetic applications. The Company paid a
license fee of $150,000 and is required to pay royalties to be mutually agreed
by the parties on a product by product basis. The agreement also provides that
Genetronics shall have the right to manufacture certain components that the
parties expect will be incorporated in drug delivery systems which include
these technologies.
On March 7, 1994, the Company completed its initial public offering in
the United States of ADRs and warrants generating gross proceeds of $3,715,000
(the "ADS Offering").
On June 13, 1994, the Company acquired a total of 1,319,996 common
shares of Cangene Corporation ("Cangene") from Arca Investments Inc.
("Arca"). In payment for these shares, the Company issued a total of 439,999
of its Ordinary Shares, on the basis of one Ordinary Share for each three
shares of Cangene held by Arca. The Company agreed to register 439,999 Ordinary
Shares (which will be represented by ADRs) issued to Arca and has filed this
Registration Statement under the U.S. Securities Act of 1933, as amended. This
acquisition was completed as part of a bid by the Company to acquire all of
the common shares of Cangene which was subsequently withdrawn. The Cangene
shares acquired have since been sold by the Company (See "Managements
Discussion and Analysis of Results of Operations and Financial Condition").
On June 30, 1994, the Company acquired from Flora substantially all of
the assets of Flora and assumed certain specified liabilities arising after
June 30, 1994. The acquired business ("Business") primarily relates to the
research and development of (i) passive transdermal systems, (ii) a periodontal
delivery system and (iii) a buccal system, each for the systemic delivery to
humans of therapeutic drugs and compounds.
In exchange for the Business, the Company issued a two year senior
secured convertible promissory note in the amount of $5,000,000 (the "Note").
The principal amount of the Note was due and payable on June 30, 1996. The Note
was secured by a pledge of all of the assets acquired from Flora. Such assets
were transferred at the direction of the Company directly to PP Holdings, Inc.
a wholly owned subsidiary of the Company, on June 30, 1994.
On July 6, 1994, the Company entered into an Agreement with LDI, Inc.,
("LDI") pursuant to which LDI has provided lease financing in the Canadian
dollar equivalent amount of $750,000 which will be utilized by the Company to
purchase prototype manufacturing equipment costing $1,100,000. The balance of
the acquisition costs, approximately $350,000, has been paid by the Company in
the form of deposits. The equipment supplier has agreed with LDI to repurchase
the equipment if the Company defaults on its lease payments. The Company was
required to provide LDI with a letter of credit for the difference between the
repurchase amount and the lease amount. In September 1994, the Company
terminated the lease arrangement. In full and complete settlement of all claims
regarding this matter, on December 16 , 1994, the equipment lessor drew down
the letter of credit, received a further CDN.$25,000 and accepted delivery of
86,908 common shares of Cangene from the Company. (See "Management's
Discussion and Analysis of Results of Operations and Financial Condition").
The Company entered into agreements with Pharmacia AB of Sweden in
December 1994 pursuant to which it sold to Pharmacia the nicotine patch and
buccal patent rights and know-how acquired from Flora in June 1994. The terms
of the sale included a cash payment to the Company of $1,250,000 and on-going
royalties tied to the revenue generated from the commercialization of these
patent rights. The agreements with Pharmacia
38
<PAGE> 39
entitle the Company to a royalty on the sale by Pharmacia of certain second
generation nicotine patches to be developed by Pharmacia, as well as a
non-exclusive license, with right of sublicense, to use the patent rights sold
by the Company to Pharmacia.
On May 24, 1995, August 14, 1995, August 23, 1995, September 13, 1995
and September 25, 1995, the Company had closings of a private placement of
1,699,400 shares ("Placement Shares") of its Ordinary Shares at a price of
$1.00 per share for net proceeds of $1,486,777. The Placement Shares were
issued to 35 investors. The Company granted registration rights to the
purchasers of the Placement Shares and has filed a separate Registration
Statement with respect to the Placement Shares.
In March 1996, the Company concluded a private placement of 2,150,000
Ordinary Shares to 16 investors. The Company received net proceeds of
$1,075,000 from this private placement.
On May 25, 1995, the Company declared bonuses valued at an aggregate
of $261,250 to Messrs. Watson, Hooper, Spencer and Howling pursuant to their
respective employment agreements or consulting agreements, as the case may be,
with the Company in respect of the fiscal year ended February 28, 1995. One
third of each bonus was paid in cash and the balance paid in an aggregate of
174,167 Ordinary Shares valued at $1.00 per share. During the fiscal year
ended February 29, 1996, senior management received an aggregate of 423,627
ordinary shares valued at $.50 per share in lieu of receiving salary or
consulting fees, as the case may be.
On June 28, 1995, the Company's Board of Directors authorized the
issuance of an aggregate of 926,563 Ordinary Shares to the following persons or
entities, all of which are either officers, directors or affiliates of officers
and directors of the Company. The price per share was $.80 representing a
discount of 20% from the market price on the date the Board of Directors
authorized the issuance thereof as follows:
<TABLE>
<CAPTION>
Name Number of Shares Subscription Price
- ---- ---------------- ------------------
<S> <C> <C>
Trident Management, Inc. 257,813 Ordinary Shares $206,250
Hooper & Associates, Inc. 200,000 Ordinary Shares 160,000
Thomas Spencer 175,000 Ordinary Shares 140,000
Pinnacle Financial Corporation 143,750 Ordinary Shares 115,000
Lennart Perlhagen 50,000 Ordinary Shares 40,000
Malcolm Rowe 50,000 Ordinary Shares 40,000
Joseph Masterson 50,000 Ordinary Shares 40,000
</TABLE>
Each person or entity executed a promissory note in the amount set
forth above which was secured by a pledge of the shares received by them. The
shares were issued at a discount because the shares could not be sold until the
promissory note was satisfied.
On January 22, 1996, the employment or management agreements between
the Company and each of the above persons or entities were terminated effective
November 15, 1995. In connection with the termination of these agreements, as
consideration for contractual obligations not met by the Company, accepting
shares in lieu of cash as payment for salaries in fiscal 1996, severance pay
and/or the granting of a bonus for fiscal 1996, the obligations of the above
persons or entities under such promissory notes valued at $741,250 were deemed
paid in full and TMI was issued 206,250 additional shares.
During March 1996, the Company and Vista Technologies Inc. ("Vista")
consummated certain agreements pursuant to which Vista received equity
financing from the Company in a series of transactions and the Company acquired
a controlling equity interest in Vista. These definitive agreements are
summarized as follows:
39
<PAGE> 40
Stock Purchase Agreement for $500,000
On March 21, 1996, Vista and the Company consummated a Stock Purchase
Agreement which provided for 200,000 newly issued shares of Vista common stock
to be sold to the Company for a cash price of $500,000, or $2.50 per share.
These funds were part of the proceeds of a private placement of 2,150,000
Ordinary Shares, the net proceeds of $1,075,000 were received by the Company on
March 21, 1996.
Exchange of Shares by Certain Stockholders
Three Vista stockholders, including Therapeutic Patch Research N.V.
("TPR"), Saliva Research Limited ("SRL") and Westcliff Partners Inc. ("WPI"),
agreed to exchange a total of 900,000 shares of Vista's outstanding common
stock owned by TPR, SRL and WPI for 4,500,000 newly issued Ordinary Shares of
the Company in a privately-negotiated transaction. The transaction was
consummated on March 21, 1996.
Exchange Agreement with Vista
On March 1, 1996, the Company and Vista executed an agreement
("Exchange Agreement") which was consummated on March 21, 1996.
Under the Exchange Agreement, Vista delivered 2,060,000 newly issued
shares of Vista common stock to the Company at a stated value of $5,150,000, or
$2.50 per Vista share, plus 500,000 Vista Class C common stock purchase
warrants. In exchange, Vista received from the Company (i) an interest-free
note due in six months from the Company in the principal amount of $750,000,
and (ii) 200,000 restricted shares of TCPI common stock currently held by the
Company at a stated value of $4,400,000, or $22.00 per TCPI share.
As additional consideration for these transactions, the Exchange
Agreement grants the Company an option exercisable at any time on or before
September 30, 1996 to purchase up to an additional 250,000 newly issued shares
of Vista's Common Stock at an option exercise price of $2,50 per share in cash
(the "Six Month Option").
The 500,000 Class C Warrants issuable to the Company under the
Exchange Agreement each represent the right to purchase one (1) share of
Vista's Common Stock during the month of February 1997 and/or the month of
February 1998, and expire thereafter to the extent not exercised. In each
instance, the exercise price per share will be determined by the average of the
quoted closing prices for the Common Stock in the over-the-counter market
during the month of January immediately preceding the date Class C Warrants or
any portion thereof are exercised, except that the Class C Warrant exercise
price per share will not in any event exceed $10.00 per share of Common Stock.
The exercise price and number of shares issuable on exercise of Class C
Warrants are subject to adjustment in certain events to prevent dilution in the
event of any subsequent stock split, stock dividend, reclassification or
recapitalization affecting the outstanding Common Stock as a class.
CHANGE IN CONTROL AND OTHER INFORMATION
As a result of the agreements described above, the Company acquired a
controlling interest in Vista.
After giving effect to the issuance of 2,260,000 newly issued Vista
shares required by the Stock Purchase Agreement and the Exchange Agreement (but
without giving effect to other common stock reserved for outstanding stock
options, warrants, conversion or exchange of debt obligations, or for
additional Regional Joint Ventures other than 1,700,000 shares committed for
issuance to four Vista Laser Centers in formation), there are approximately
6,706,104 Vista shares outstanding. Of that amount, 3,160,000 Vista common
shares, or approximately 61.3% of the total then outstanding, are owned by the
Company upon closings of the Stock Purchase Agreement, the Exchange Agreement
and the Company's exchange of shares with TPR, SRL and WPI. Vista and the
Company anticipate this percentage ownership may be reduced in the near future
as Vista issues additional common shares in connection with its sponsorship of
additional Regional Joint Ventures currently in
40
<PAGE> 41
various stages of negotiation and for a planned private placement offering of
Vista securities for Vista's own account.
Vista entered into a registration rights agreement at the closing the
Exchange Agreement. This agreement grants the Company certain "piggy-back"
registration rights in the event Vista files registration statements covering
offerings of its securities under the Securities Act of 1933. In addition, the
Company will have the right on one occasion after March 31, 1997 to demand that
all or a portion of the Vista common stock held by the Company as a result of
the Stock Purchase Agreement, the Exchange Agreement and issuable upon exercise
of Class C Warrants be registered under the Securities Act of 1933. Any such
registration of Vista common stock for the account of the Company will be at
Vista's expense.
Murray D. Watson has served since July 1993 as Chairman of the Board,
Chief Executive Officer and a director of the Company. He is also a director
of Vista since January 31, 1994. On February 16, 1996, Mr. Watson was elected
Vista's Vice Chairman of the Board and Kenneth G. Howling, Vice President and
Chief Financial officer of the Company, was elected Vista's Treasurer and Chief
Financial Officer. In each case, their election as Vista officers was subject
to a condition that definitive agreements for the contemplated transactions
between Vista and the Company be executed, which events occurred on March 1,
1996.
The transactions contemplated by the Stock Purchase Agreement and the
Exchange Agreement were authorized and approved by the boards of directors of
the Company and Vista at a board meeting held in February 1996 attended by all
of the Company's and Vista's then directors. The Boards approved the Stock
Purchase Agreement and Exchange Agreement transactions with knowledge and
disclosure of the proposed exchange by TPR, SRL and WPI of 900,000 shares of
Vista common stock with the Company. Messr. Watson and Rowe, each a director
of the Company, abstained from voting on the proposed transactions due to there
being directors of Vista and in the case of Mr. Watson, because of his position
as the Chief Executive Officer and a director of the Company.
41
<PAGE> 42
ITEM 13. EXHIBITS LIST AND REPORTS ON FORM 8-K
A. EXHIBITS
The following exhibits were delivered with this Registration
Statement, or will be delivered by Amendment, for filing:
<TABLE>
<CAPTION>
Ex. No. Description of Document
- ------- -----------------------
<S> <C>
3.1 Memorandum and Articles of Association of Registrant.*
4.1 Specimen of American Depositary Share.*
4.2 Warrant Agreement.*
4.3 Form of Class A Warrant (included in Exhibit 4.2).*
4.4 Form of Class B Warrant (included in Exhibit 4.2).*
4.5 Form of Underwriter's Warrant.*
4.6 Form of Class C Warrant.*
4.7 Form of Class D Warrant.*
4.8 Form 1993 Stock Option Plan.*
4.9 Financial Advisory and Investment Banking Agreement between Westfield Financial Corporation and the Company.*
4.10 Form of 1994 Stock Option Plan**
10.1 Share Exchange Agreement between Pharma Patch Plc, the shareholders of Medipro and Medipro, dated July 30, 1993.*
10.2 Agreement for Purchase of Assets between TPR and Synorex, dated March 26, 1993, as amended.*
10.3 Employment Agreement dated August 1, 1993, between Wayne Schnarr, Ph.D. and the Company.*
10.4 Employment Agreement dated August 1, 1993, between Gary Murray, Ph.D, and the Company.*
10.5 Employment Agreement dated November 8, 1993 between Kenneth G. Howling and the Company.*
10.6 Consulting Agreement dated August 3, 1993, between Trident Management, Inc. and the Company.*
10.7 Consulting Agreement dated August 1, 1993, between Dr. James E. Guillet and Medipro Sciences, Ltd.*
10.8 Consulting Agreement dated August 1, 1993, between Ian W. French, Ph.D., and the Company.*
10.10 Consulting Agreement dated August 1, 1993, between Walter Zingg, M.D., and the Company.*
10.11 Deposit Agreement between the Company and the Bank of New York as Depository.*
10.12 Exclusive License Agreement dated July 30, 1993, between TPR and the Company.*
10.13 Option Agreement among the Company, Medipro and Innovation Ontario Corporation, dated July 30, 1993.*
10.14 Voting Rights Agreement among the Company, the Medipro Shareholders, Medipro and TPR, dated July 30, 1993.*
10.15 Letter Agreement dated September 14, 1992, between Medipro and Trimel Corporation.*
10.16 License Agreement dated June 30, 1992, among Medipro, SS Pharmaceutical Co., Ltd., and Dajin Iyakukako Co., Ltd.*
10.17 Joint Venture Agreement dated June 30, 1992, between Medipro and Allelix Pharmaceuticals, Inc.*
10.18 Letter Agreement dated June 18, 1992, between Medipro and Laminating Development Corp.*
10.19 Lease dated May 6, 1991, between Medipro and Inducon development Corporation.*
10.20 Consulting Agreement, dated August 19, 1993 between Registrant and the Canadian Department of National Defense.*
10.21 License Agreement, dated November 1, 1985, between Registrant and the Canadian Department of National Defense.*
10.22 Employment Agreement, dated October 1, 1993, between Dr. Vithal J. Rajadhyaksha and the Company.*
10.23 Consulting Agreement, dated December 1, 1993, between Joseph G. Materson and the Company.*
10.24 License Agreement dated November 30, 1993, between BTX, Inc. and the Company.*
10.25 Employment Agreement, dated January 4, 1994, between Murray Watson and the Company.*
</TABLE>
42
<PAGE> 43
<TABLE>
<S> <C>
10.26 Memorandum of Agreement dated June 1, 1994 between Registrant and Arca Investments, Inc.**
10.27 Offer to Purchase -- Cangene Corporation, dated June 29, 1994.**
10.28 Registration Rights Agreement, dated June 13, 1994, between Registrant and Area Investments Inc.**
10.29 Letter Agreement, dated June 13, 1994, between Registrant and Capital Canada Limited.**
10.30 Letter Agreement, dated June 22, 1994, between Registrant and ScotiaMcLeod.**
10.31 Letter Agreement, dated May 22, 1994, between Registrant and LDI Canada Inc.**
10.32 Research and Development Agreement, dated June 1, 1994, between Registrant and Drug Delivery Research, Inc. ("DDRI").**
10.33 Shareholder Agreement, dated June 1, 1994, among Registrant, Westport Capital, Inc. and DDRI.**
10.34 Asset Purchase and Sale Agreement, dated June 30, 1994, among Registrant, Flora, Inc. and Recordati American Holdings,
Inc.**
10.35 Management and Consulting Agreement, dated as of July 1, 1994, between Hooper & Associates, Inc. and Registrant.
10.36 Employment Agreement, dated as of August 1, 1994, between Thomas S. Spencer and Registrant.*
10.37 Industrial Property Agreement dated December 13, 1995 between PP Holdings and Pharmacia AB*
10.38 Development Agreement dated December 13, 1994 between PP Holdings and Pharmacia AB*
10.39 Agreement dated July 7, 1994 between Registrant and Revlon *
10.40 Amended Letter of Intent between Registrant and Technical Chemicals and Products, Inc. ("TCPI")****
10.41 Asset Purchase Agreement dated as of November 1, 1995 among TCPI, Registrant and PP Holdings, Inc.*****
10.42 Supplemental Agreement dated January 16, 1996 among TCPI, Registrant and PP Holdings, Inc.******
10.43 Form of Management and Consulting Agreement between Registrant and Trident Management, Inc.*
10.44 Form of Management and Consulting Agreement between Registrant and Pinnacle Financial Corporation.*
10.45 Stock Purchase Agreement dated March 1, 1996 between Registrant and Vista Technologies, Inc. ("Vista").*
10.46 Agreement dated as of March 1, 1996 between Vista and Registrant including as exhibits thereto (i) form of Class C Common
Stock Purchase Warrants to be issued by Vista, (ii) form of Promissory Note for $750,000 to be issued by the Company, and
(iii) form of Registration Rights Agreement between Registrant and Vista.*
10.47 Share Exchange Agreement dated as of March 1, 1996 between Registrant and three stockholders of Vista.*
11 Computation of loss per ordinary share.**
21 Subsidiaries of Registrant.**
23.1 Consent of KPMG Peat Marwick LLP
* Filed as an exhibit to Registrant's Form F-1 on Form S-1 Registration Statement, File No 33-70542 and is incorporated
herein by reference.
** Filed as an exhibit to Registrant's Form F-1 on Form S-1 Registration Statement, File No. 33-80816 and is incorporated
herein by reference.
*** Filed herewith.
**** Filed as an exhibit to Registrant's Form 8-K dated August 9, 1995, as amended August 15, 1995 and are incorporated herein
by reference.
***** Filed as an exhibit to Registrant's Form 8-K dated November 15, 1995 and is incorporated herein by reference.
****** Filed as an exhibit to Registrant's Form 8-K dated February 12, 1996 and is incorporated herein by reference.
</TABLE>
B. REPORTS ON FORM 8K
Form 8-K dated February 12, 1996 with respect to Item 2.
43
<PAGE> 44
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934, the
registrant caused this registration statement to be signed no its behalf by the
undersigned, thereunto duly authorized.
PHARMA PATCH PLC
Dated: June 13, 1996 By:/s/ Murray D. Watson
----------------------------------
Murray D. Watson
Chairman of the Board and
Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Murray D. Watson Chairman of the Board, June 13, 1996
- ---------------------------- Chief Executive Officer, President and Director
Murray D. Watson (Principal Executive Officer)
/s/ Kenneth Howling Vice President-Finance June 13, 1996
- ---------------------------- (Chief Accounting Officer)
Kenneth Howling
/s/ Kevin J. Quinn Director June 13, 1996
- ----------------------------
Kevin J. Quinn
/s/ Jac J. Lam Director June 13, 1996
- ----------------------------
Jac J. Lam
</TABLE>
44
<PAGE> 45
PHARMA PATCH PUBLIC LIMITED COMPANY
Index
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report - KPMG Peat Marwick LLP ........................................ F-1
Independent Auditors' Report - Ernst & Young ................................................ F-2
Consolidated Financial Statements:
Consolidated Balance Sheet - February 29, 1996 ........................................ F-3
Consolidated Statements of Earnings and Loss and Deficit -
Years ended February 29, 1996 and February 28, 1995 ................................. F-4
Consolidated Statements of Cash Flows - Years ended
February 29, 1996 and February 28, 1995 ............................................. F-5
Notes to Consolidated Financial Statements ............................................ F-6
</TABLE>
All schedules are omitted for the reason that they are not required or are not
applicable, or the required information is shown in the consolidated financial
statements or notes thereto.
<PAGE> 46
Independent Auditors' Report
The Board of Directors and Shareholders
Pharma Patch Public Limited Company:
We have audited the accompanying consolidated balance sheet of Pharma Patch
Public Limited Company and subsidiaries as of February 29, 1996, and the related
consolidated statements of earnings and loss and deficit and cash flows for the
year then ended. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Pharma Patch Public
Limited Company and subsidiaries as of February 29, 1996, and the results of
their operations and their cash flows for the year then ended, in conformity
with generally accepted accounting principles.
KPMG Peat Marwick LLP
Short Hills, New Jersey
May 9, 1996
F-1
<PAGE> 47
Report of Independent Auditors
To the Shareholders of
Pharma Patch Plc
We have audited the accompanying consolidated statements of earnings and loss
and deficit and cash flows for the year ended February 28, 1995 of Pharma Patch
Plc. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a tests basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provide a reasonable basis for
our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and the cash flows
of Pharma Patch Plc for the year ended February 28, 1995, in conformity
with accounting principles generally accepted in the United States.
Dublin, Ireland
May 25, 1995
(except for note 3 which ERNST & YOUNG
is as of May 9, 1996) Chartered Accountants
F-2
<PAGE> 48
PHARMA PATCH PUBLIC LIMITED COMPANY
Consolidated Balance Sheet
February 29, 1996
(Expressed in U.S. Dollars)
<TABLE>
<S> <C>
Assets
Current assets:
Cash and cash equivalents $ 668,822
Accounts receivable 22,690
Due from Vista (note 13) 251,500
Investment in TCPI - available for sale, at
market price 16,805,320
------------
Total current assets $ 17,748,332
============
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable 683,269
Accrued expenses 773,553
Deferred tax liability 1,710,212
------------
Total current liabilities 3,167,034
------------
Shareholders' equity:
Capital stock, authorized 52,046,576 ordinary
shares; issued and outstanding 11,410,633
ordinary shares, at par value (note 7) 2,256,756
Premium in excess of par value 15,404,580
Deficit (6,249,628)
Cumulative translation adjustment (6,518)
Unrealized appreciation on equity securities
available for sale (net of deferred taxes
of $1,710,212) 3,176,108
------------
Total shareholders' equity 14,581,298
Commitments (note 10)
------------
$ 17,748,332
============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 49
PHARMA PATCH PUBLIC LIMITED COMPANY
Consolidated Statements of Earnings
and Loss and Deficit
Years ended February 29, 1996
and February 28, 1995
(Expressed in U.S. Dollars)
<TABLE>
<CAPTION>
Restated
1996 1995
---- --------
<S> <C> <C>
Revenues $ -- --
------------ ------------
Expenses:
Administration 1,798,524 1,141,301
Foreign exchange loss (gain) 2,285 (52,253)
Write-off of Cangene acquisition costs
(note 8) -- 514,791
Loss on disposal of Cangene investment
(note 8) -- 478,052
------------ ------------
Loss from operations 1,800,809 2,081,891
Other income (76,019) (42,800)
Other expenses 3,893 --
------------ ------------
Loss from continuing operations 1,728,683 2,039,091
------------ ------------
Discontinued operations (note 3):
Loss from operations (2,593,468) (11,698,353)
Gain on sale 16,412,827 --
------------ ------------
Gain (loss) on discontinued
operations 13,819,359 (11,698,353)
------------ ------------
Net earnings (loss) 12,090,676 (13,737,444)
Deficit, beginning of year (18,340,304) (4,602,860)
------------ ------------
Deficit, end of year $ (6,249,628) (18,340,304)
============ ============
Per share of common stock:
Loss from continuing operations $ (.22) (.38)
Discontinued operations 1.72 (2.18)
------------ ------------
Net earnings (loss) 1.50 (2.56)
============ ============
Weighted average number of ordinary shares outstanding 8,033,265 5,368,298
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 50
PHARMA PATCH PUBLIC LIMITED COMPANY
Consolidated Statements of Cash Flows
Years ended February 29, 1996
and February 28, 1995
(Expressed in U.S. Dollars)
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) for the year $ 12,090,676 (13,737,444)
Add noncash items:
Depreciation and amortization 253,958 813,740
Write-down of fixed assets 9,900 892,271
Write-off of Cangene acquisition costs (note 8) -- 514,791
Loss on disposal of Cangene investment (note 8) -- 478,052
Write-off of capitalized technology -- 4,460,852
Write-off of cumulative translation adjustment -- 408,162
Gain on sale of business (note 1(e)) (16,412,827) --
Noncash payment of expense 1,842,478 --
Net change in noncash working capital items
(note 11) 361,272 1,528,131
------------ ------------
Net cash used in operating
activities (1,854,543) (4,641,445)
------------ ------------
Cash flows from investing activities:
Purchase of fixed assets (50,658) (467,369)
Advances to Vista (note 13) (251,500) --
Proceeds of sale of technology -- 1,250,000
Proceeds on sale of Cangene shares (note 8) -- 657,422
------------ ------------
Net cash (used in) provided by
investing activities (302,158) 1,440,053
------------ ------------
Cash flows from financing activities - issue of
shares, net (note 7) 2,186,778 2,590,947
------------ ------------
Effect of exchange rate changes on cash and cash
equivalents -- (3,275)
------------ ------------
Net increase (decrease) in cash and
cash equivalents for the year 30,077 (613,720)
Cash and cash equivalents, beginning of year 638,745 1,252,465
------------ ------------
Cash and cash equivalents, end of year $ 668,822 638,745
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 51
PHARMA PATCH PUBLIC LIMITED COMPANY
Notes to Consolidated Financial Statements
February 29, 1996 and February 28, 1995
(Expressed in U.S. Dollars)
(1) The Company and Basis of Presentation
Pharma Patch Public Limited Company (Pharma Patch or the Company) was
incorporated under the laws of the Republic of Ireland in January 1992.
Prior to July 1993, Pharma Patch had no significant assets or
operations.
(a) In July 1993, Pharma Patch acquired an exclusive, perpetual,
royalty-free license on all skin penetration enhancement
technology held by Therapeutic Patch Research N.V. (TPR), a
Netherlands Antilles company. Pharma Patch paid cash of
$300,000 and issued 600,000 Units (a Unit com prised one
Ordinary Share, one-half Class A Warrant and one quarter Class
B Warrant), 2,400,000 Class C Warrants and 500,000 Class D
Warrants as consideration for the license. Concurrently,
Pharma Patch issued 1,250,000 Units for cash proceeds of
$4,387,500 to certain investors.
(b) On July 30, 1993, Pharma Patch entered into a share exchange
with the shareholders of Medipro Sciences Limited (Medipro),
whereby 2,309,432 Ordinary Shares of Pharma Patch were
exchanged for all of the issued and outstanding common and
Class A shares of Medipro. The exchange of shares were
accounted for as a reverse acquisition of Pharma Patch by
Medipro as the former shareholders of Medipro held a majority
of the voting shares of Pharma Patch following the exchange.
All the assets of Pharma Patch at the time of the exchange,
consisting primarily of the technology acquired from TPR and
the cash from the issue of the 1,250,000 Units described in
note 1(a), were recorded at their estimated fair market value.
There was no excess of the purchase price over the carrying
value of the assets.
(c) On June 30, 1994, the Company acquired substantially all of
the assets and assumed certain specified liabilities arising
after June 30, 1994 of Pharmetrix Corporation (Pharmetrix).
The assets related to patents and the research and development
of (i) passive transdermal systems, (ii) a periodontal
delivery system and (iii) a buccal system, each for the
systemic delivery to humans of therapeutic drugs and
compounds. In exchange for the Pharmetrix assets, the Company
issued a convertible promissory note in the amount of
$5,000,000 (note 6). These assets are held by PP Holdings
Inc., a wholly-owned subsidiary of Pharma Patch incorporated
in the State of California. PP Holdings Inc.'s results of
operations are included in the Company's consolidated results
from July 1, 1994.
This acquisition was accounted for under the purchase method
of accounting whereby the purchase price for the Pharmetrix
assets was allocated to fixed assets at fair market value
assumed by the Company. The difference between the purchase
price and fair market value of fixed assets was assigned to
acquired pharmaceutical technology in the amount of
$4,025,000. A portion of this technology was resold to a third
party for $1,250,000 and the remaining balance of
approximately $2,775,000 (acquired research and development
with no alternative non- pharmaceutical uses) was charged to
the Company's consolidated statement of earnings and loss and
deficit in fiscal 1995.
F-6 (Continued)
<PAGE> 52
PHARMA PATCH PUBLIC LIMITED COMPANY
Notes to Consolidated Financial Statements, Continued
(Expressed in U.S. Dollars)
(1) The Company and Basis of Presentation, cont.
A summary of the unaudited pro forma consolidated statements
of earnings and loss and deficit are set out below to give the
pro forma effect to the Pharmetrix acquisition as if
Pharmetrix had been included in the consolidated statements of
earnings and loss and deficit throughout the year ended
February 28, 1995 (before the effect of discontinued
operations).
<TABLE>
<CAPTION>
Pro forma
(unaudited)
------------
<S> <C>
Revenues $ --
Expenses 14,642,977
------------
Net loss for the year (14,642,977)
Deficit, beginning of year (8,473,352)
------------
Deficit, end of year $(23,116,329)
============
Loss per ordinary share $ (2.73)
============
Weighted average number of Ordinary
Shares outstanding 5,368,298
============
</TABLE>
(d) The acquisition of the Pharmetrix assets and leased facilities
initially increased the Company's annual cash requirements.
The acquisition created a duplication of research staff,
facilities and equipment. Pharma Patch restructured its
operations resulting in the centralization of all research and
development activities at the Pharmetrix facility in Menlo
Park, California, a reduction of 22 staff positions and
termination of lease commitments entered into by the Company
for prototype patch manufacturing equipment. In January 1995,
the Company ceased operations of its Canadian subsidiary,
Medipro. A charge of $1,492,070 was incurred in fiscal 1995 in
connection with this restructuring, primarily consisting of a
write-off of production equipment, capital lease equipment,
employee termination and lease costs. Employee termination
costs of approximately $105,000 were paid and expensed during
fiscal 1995. Of the total $1,492,070 expense, approximately
$83,000 was accrued at the end of fiscal 1995 in connection
with lease costs. All accrued amounts were paid out during
fiscal 1996.
In fiscal 1995, the Company had acquired a 50% interest in the
issued and outstanding shares of Drug Delivery Research Inc.
(DDRI) for a nominal amount with the intention of using DDRI
to perform the research and development work previously being
done by Medipro.
As a result of the Pharmetrix acquisition and the relocation
of research and development activities, DDRI has remained
inactive.
F-7 (Continued)
<PAGE> 53
PHARMA PATCH PUBLIC LIMITED COMPANY
Notes to Consolidated Financial Statements, Continued
(Expressed in U.S. Dollars)
(1) The Company and Basis of Presentation, cont.
(e) On November 15, 1995, the Company sold substantially all of
the operating assets to Technical Chemicals and Products, Inc.
(TCPI) for a gain of approximately $16.4 million. These assets
included 11 U.S. patents relating to transdermal drug delivery
and skin permeation technology, license rights to skin
penetration enhancers and electronically assisted drug
delivery, proprietary information and trade secrets related
thereto, certain licensing and product feasibility agreements
entered into by the Company and all of PP Holdings, Inc.'s
fixed assets. TCPI also assumed the sublease of the research
facility occupied by PP Holdings, Inc.
In consideration for the purchased assets, TCPI issued an
aggregate of 786,214 shares of its common stock with a fair
value of $11,919,000 and satisfied the $5,000,000 promissory
note previously issued by the Company to Flora, Inc. (Flora)
(see note 6). As a result of this transaction, the Company
owned 9.9% of TCPI's outstanding common shares. In addition,
as of November 15, 1995, the Company had ceased to perform
research and development work and other operations in the
areas of skin penetration enhancers and drug delivery systems.
On January 16, 1996, the Company entered into a supplemental
agreement with TCPI which amended certain provisions of the
November 1995 asset purchase agreement. TCPI has filed a
Registration Statement on Form S-1 with the Securities and
Exchange Commission with respect to the sale of 1,800,000 TCPI
common shares (Offering). Pursuant to the terms of the
supplemental agreement, the Company executed a lock-up letter
with the representative of the TCPI Underwriters providing
that it would not sell or otherwise dispose of any of its
shares of common stock for a period to expire 180 days
following the closing date of the Offering without their prior
consent. As consideration for the execution of the lock-up
agreement, TCPI (i) terminated an existing lock-up agreement
covering TCPI common stock owned by the Company, executed in
connection with the asset purchase agreement; (ii) effective
as of closing date of the Offering, terminated the voting
trust agreements, shareholders' agreement and irrevocable
proxy, executed in connection with the asset purchase
agreement which, among other things, limited the Company's
ability to vote or dispose of its shares of common stock;
(iii) allowed the Company to offer for sale 100,000 shares of
this common stock in the Offering (plus up to an additional
110,000 if the Underwriters over-allotment option is
exercised); (iv) effective as of the closing date of the
Offering, issued to the Company a two-year warrant to purchase
100,000 shares of common stock at an exercise price equal to
the per share Offering price; and (v) file a Registration
Statement on Form S-3 to register all of the remaining shares
of common stock owned by the Company after the Offering.
(f) In March 1996, the Company completed the acquisition of
approximately 61% of the voting interest of Vista Technologies
Inc. (Vista). Vista
F-8 (Continued)
<PAGE> 54
PHARMA PATCH PUBLIC LIMITED COMPANY
Notes to Consolidated Financial Statements, Continued
(Expressed in U.S. Dollars)
(1) The Company and Basis of Presentation, cont.
provides photo refractive keratectomy (PRK) and other laser
vision correction (LVC) facilities and services to the health
care industry (see note 13).
As a result of the TCPI transaction, the Company had an
accumulated deficit of $6,249,628 as of February 29, 1996, had
total assets of $17,748,332 and total shareholders' equity of
$14,581,298. The Company, including Vista, has not yet
achieved profitable operations and there is no assurance that
profitable operations, if achieved, could be sustained on a
continuing basis. Further, the Company's future operations are
dependent on the success of the commercialization efforts and
market acceptability of the Vista business plan and other
potential business ventures of the Company, together with the
value derived from the TCPI investment securities.
(2) Significant Accounting Policies
These consolidated financial statements have been prepared in
accordance with generally accepted accounting principles (GAAP) in the
United States.
Principles of Consolidation
The consolidated financial statements include the accounts of Pharma
Patch and its wholly-owned subsidiaries in Canada and in the United
States. All significant intercompany balances and transactions have
been eliminated in consolidation.
Fixed Assets
Fixed assets are recorded at acquisition cost. The Company provides
depreciation and amortization at rates which are expected to charge
operations with the cost of the assets over their estimated useful
lives using a rate of 20% declining balance. Estimated useful lives are
as follows (see note 3 regarding the TCPI purchase of substantially all
of the Company's operating assets):
<TABLE>
<S> <C>
Equipment 5 years
Furniture and office equipment 5 years
Leasehold improvements over the term of the lease
</TABLE>
Research and Development Expenditures
Research and development expenditures are charged to expense as
incurred. Any investment tax credits (ITCs) earned as a result of
incurring scientific research and experimental development expenditures
in Canada (SRED) are recorded as a reduction of the related current
period expense. No ITCs were recognized in 1996 or 1995.
F-9 (Continued)
<PAGE> 55
PHARMA PATCH PUBLIC LIMITED COMPANY
Notes to Consolidated Financial Statements, Continued
(Expressed in U.S. Dollars)
(2) Significant Accounting Policies, cont.
Investment Securities
Investment securities at February 29, 1996 consist of equity
securities. The Company's equity securities are classified as
available-for-sale securities under the provisions of Statement of
Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." The Company's equity
securities are recorded at fair value based on quoted market prices.
The carrying amount of other financial instruments approximates fair
value generally due to the short-term maturity of these instruments.
Technological Assets
Licenses purchased from third parties for non-pharmaceutical uses are
recorded at acquisition cost and are amortized over their expected
useful lives of five years. Non-pharmaceutical licenses are charged to
expense when future recovery becomes uncertain. Pharmaceutical patents
acquired by the Company are charged to expense in the related current
period. Costs associated with the investigation and processing of
patents for technologies developed by the Company are considered
development costs and, accordingly, are charged to expense as incurred.
During 1995, the Company wrote off its capitalized non-pharmaceutical
technology to reflect the uncertainty of cost recovery through future
revenue. The resources required to further develop this technology were
otherwise utilized in the Pharmetrix acquisition. Accordingly, the
remaining net book value of $1,685,516 was charged to the consolidated
statement of earnings and loss and deficit in fiscal 1995.
Stock Compensation
Stock options issued by the Company which are exercisable at a value
below the market price of the common stock at the date the option is
granted or date options vest, if applicable, gives rise to compensation
expense for the excess of such market value over the option price. In
addition, shares may be issued at nominal value to certain directors
and officers as remuneration, of which certain shares are subject to
achieving certain performance criteria. From the time the options are
granted and until the performance criteria are satisfied, compensation
expense results from the difference between the underlying share price
at such time and the exercise price.
Foreign Currency Translation
The acquisition of the Pharmetrix assets and termination of operations
of Medipro resulted in a change in functional currency during fiscal
1995 from Canadian dollars to U.S. dollars.
F-10 (Continued)
<PAGE> 56
PHARMA PATCH PUBLIC LIMITED COMPANY
Notes to Consolidated Financial Statements, Continued
(Expressed in U.S. Dollars)
(2) Significant Accounting Policies, cont.
Foreign Currency Translation, cont.
Prior to fiscal 1995, the Company's functional currency was Canadian
dollars. As the Company's operating activities are now principally in
the United States, the Company also changed its reporting currency to
U.S. dollars in fiscal 1995.
Assets and liabilities stated in functional currencies other than the
U.S. dollar are translated at the year-end exchange rate and revenues
and expenses at the average rate of exchange for the year. Foreign
exchange gains and losses from transactions in currencies other than
the applicable functional currency are reflected in income during the
year. Gains or losses arising on the translation of financial
statements give rise to a cumulative translation adjustment which is
included as a component of shareholders' deficiency. In fiscal 1995,
the Company ceased carrying on business in Canada and accordingly
charged the cumulative translation adjustment to expense. The following
is a continuity schedule of the cumulative translation adjustment
included in shareholders' deficit for fiscal 1995:
<TABLE>
<S> <C>
Balance, beginning of year $ 346,326
Translation adjustments arising
during the year 61,836
Write-off (408,162)
---------
Balance, end of year $ --
=========
</TABLE>
Use of 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 expenses
during the reporting period. Actual results could differ from those
estimates.
(3) Discontinued Operations
The November 1995 sale of substantially all of the Company's operating
assets (see note 1(e)) has been accounted for as discontinued
operations. Accordingly, the 1996 consolidated financial statements
exclude amounts for discontinued operations from captions applicable to
continuing operations. The 1995 consolidated statement of earnings and
loss and deficit has been restated to conform with the 1996
presentation.
The discontinued business had revenues of $469,055 in 1996 and none in
1995. There were no tax benefits associated with the losses from
operations of the discontinued business in 1996 or 1995 and the gain
from the disposition had no
F-11 (Continued)
<PAGE> 57
PHARMA PATCH PUBLIC LIMITED COMPANY
Notes to Consolidated Financial Statements, Continued
(Expressed in U.S. Dollars)
(3) Discontinued Operations, cont.
tax expense associated with it as a result of the tax basis of the
assets involved. Interest expense on the $5 million note payable to
Flora, which was satisfied by TCPI, totaling $337,667 and $333,333 in
1996 and 1995, respectively, is included in discontinued operations.
The 1995 loss from operations of the discontinued business includes the
following unusual items:
- Acquired technology write-off of $2,775,336 (see note
1(c)).
- Write-off of capitalized technology of $1,685,516 (see
note 2).
- Medipro restructuring costs of $1,492,070 (see note
1(d)).
- Write-off of cumulative translation adjustment
attributable to Medipro of $408,162 (see note 2).
(4) Investment Securities
Investment securities at February 29, 1996, consisted of equity shares
acquired by the Company in the TCPI asset purchase agreement (see note
1(e)). On November 15, 1995, the Company acquired 786,214 common shares
of TCPI with a fair value of $11,919,000 or $15.16 per share. As of
February 29, 1996, the TCPI stock was trading at $21.375 per share;
therefore, the Company recorded an unrealized gain, net of deferred
income taxes of $1,710,212, on the TCPI shares of $3,176,000 in a
separate component of shareholders' equity. In April 1996, the Company
sold 210,000 TCPI shares for net proceeds of $2,928,697 and recorded a
loss of $254,100. As of May 9, 1996, the TCPI stock had a market value
of $14.25 which eliminates the unrealized gain on the remaining
securities recorded at February 29, 1996.
(5) Fixed Assets
Fixed assets consisted of the following at February 28, 1995 (none at
February 29, 1996 as a result of the TCPI transaction (see notes 5,
1(e) and 3)):
<TABLE>
<CAPTION>
Accumulated Net
depreciation/ book
Cost amortization value
---- ------------- -----
<S> <C> <C> <C>
Equipment $ 858,735 195,861 662,874
Furniture and office equipment 66,780 14,759 52,021
Leasehold improvements 232,650 47,167 185,483
---------- ---------- ----------
$1,158,165 257,787 900,378
========== ========== ==========
</TABLE>
F-12 (Continued)
<PAGE> 58
PHARMA PATCH PUBLIC LIMITED COMPANY
Notes to Consolidated Financial Statements, Continued
(Expressed in U.S. Dollars)
(6) Note Payable
In 1995, the Company issued a $5,000,000 senior secured convertible
promissory note (note 1(c)). The promissory note bore interest at the
rate of 10% per annum, payable semiannually. The principal amount of
the note was originally due and payable in full on June 30, 1996.
As collateral for the promissory note, the Company pledged
substantially all of the assets acquired from Pharmetrix being held in
the Company's subsidiary, PP Holdings Inc. The note was satisfied by
TCPI (see notes 1(c). 1(e) and 3).
(7) Capital Stock
(a) Pharma Patch Capital Stock
The authorized and issued Ordinary Shares of Pharma Patch for
the 1996 and 1995 fiscal years are as follows:
Authorized
The Company has authorized 52,046,576 Ordinary Shares of IR(pound)O.01
representing an aggregate value of IR(pound)520,466.
<TABLE>
<CAPTION>
Number Premium in
of Par excess of
shares value par value Total
------ ----- --------- -----
<S> <C> <C> <C> <C>
Balance, February 28, 1994 4,371,932 $ 2,162,932 7,123,610 9,286,542
Issued for cash, March 7, 1994
(i) 600,000 8,828 3,706,172 3,715,000
Share issue expenses (i) -- -- (1,633,990) (1,633,990)
Issued in exchange for Cangene
shares (ii) 439,999 6,720 1,764,276 1,770,996
Issued in payment of profes-
sional fees (iii) 328,322 5,163 488,371 493,534
----------- ----------- ----------- -----------
Balance, February 28, 1995 5,740,253 2,183,643 11,448,439 13,632,082
----------- ----------- ----------- -----------
Issued for cash (iv) 3,249,400 37,713 2,399,085 2,436,798
Share issued costs (iv) -- -- (250,022) (250,022)
Payment of accrued salaries
(v) 804,044 10,848 488,475 499,323
Payment of professional fees
(vi) 690,373 9,912 591,993 601,905
Officers and directors (vii) 926,563 14,640 726,610 741,250
----------- ----------- ----------- -----------
Subtotal for fiscal 1996 5,670,380 73,113 3,956,141 4,029,254
----------- ----------- ----------- -----------
Balance at February 29, 1996 11,410,633 $ 2,256,756 15,404,580 17,661,336
=========== =========== =========== ===========
</TABLE>
F-13 (Continued)
<PAGE> 59
PHARMA PATCH PUBLIC LIMITED COMPANY
Notes to Consolidated Financial Statements, Continued
(Expressed in U.S. Dollars)
(7) Capital Stock, cont.
(a) Pharma Patch Capital Stock, cont.
(i) On March 7, 1994, the Company completed an initial public offering for
600,000 American Depository Shares, 575,000 Class B Warrants and
575,000 Class C Warrants of the Company. The securities are traded on
the NASDAQ exchange. Gross proceeds from the offering were $3,715,000,
issue costs were $1,633,990 and net proceeds were $2,081,010.
(ii) Issued in connection with the private acquisition of 1,319,996 common
shares of Cangene Corporation (note 8).
(iii) Issued to various professionals in lieu of cash payments totaling
$493,534 for services rendered.
(iv) During the year the Company completed private placements to issue
3,249,400 Ordinary Shares for gross proceeds of $2,399,085, issue costs
of $250,022 and net proceeds of $2,149,063.
(v) In May 1995, the Company declared bonuses totaling $261,250 pursuant to
employment agreements for key executive employees. One-third of each
bonus was paid in cash and the balance of $174,167 was paid in Ordinary
Shares valued at $1.00 (174,167 shares). In the year ended February 29,
1996, 423,627 Ordinary Shares were issued in lieu of cash salaries of
$222,031. In addition, 206,250 shares at a value of $103,125 were
awarded in the fourth quarter to senior management in lieu of a
consulting fee.
(vi) During the year the Company issued 690,373 shares in lieu of cash
payments of $601,905 to various professionals for services rendered.
(vii) In June 1995, the Company's Board of Directors authorized the issuance
of 926,563 Ordinary Shares to certain officers and directors or their
affiliates at a share price of $0.80. Each person or entity executed a
promissory note which was secured by a pledge of the shares as payment
for the shares received. Effective November 15, 1995 all outstanding
management and employment agreements were terminated. In connection
with the termination of these agreements, as consideration for
contractual obligations not met by the Company, services rendered and
severance pay, the obligations of the officers and directors or their
affiliates under promissory notes totaling $741,250 were deemed to be
paid in full. A charge for this amount is included in administrative
expense in the accompanying fiscal 1996 statement of earnings and loss
and deficit.
As of February 29, 1996, approximately 1.6 million ordinary shares
related a private placement (see iv above) and the 206,250 shares
awarded to management in lieu of a consulting fee have not been
actually issued. However, the shares are reflected as outstanding in
the accompanying balance sheet and for purposes of the earnings per
share calculation on the
F-14 (Continued)
<PAGE> 60
PHARMA PATCH PUBLIC LIMITED COMPANY
Notes to Consolidated Financial Statements, Continued
(Expressed in U.S. Dollars)
(7) Capital Stock, cont.
(a) Pharma Patch Capital Stock, cont.
date the shares were awarded/sold. In March 1996, the Company finalized
a private placement for 2,150,000 ordinary shares for net proceeds of
$1,075,000 (which includes the 1.6 million shares noted above).
(b) Warrants
The details of outstanding warrants at February 29, 1996 are
as follows:
Class A Warrants - 897,000 outstanding (1995 -
925,000)
Each Class A Warrant entitles the holder to purchase
one Ordinary Share and one Class B Warrant at an
exercise price of $2.66 commencing on May 29, 1994
until February 28, 1999. The warrants are redeemable
by the Company at a price of $0.10 if certain stock
price conditions exist.
Class B Warrants - 1,015,425 outstanding (1995 -
1,037,500)
Each Class B Warrant entitles the holder to purchase
one Ordinary Share at an exercise price of $3.19
commencing on May 29, 1994 until February 28, 1999.
The warrants are redeemable by the Company at a price
of $0.10 if certain stock price conditions exist.
Class C Warrants - 2,939,875 outstanding (1995 -
2,975,000)
The Class C Warrants are exercisable to purchase one
Unit consisting of one Ordinary Share, one-half of a
Class A Warrant and one-quarter of a Class B Warrant
at an exercise price of $5.31 per Unit. The Class C
Warrants are not exercisable until (i) the Company
generates revenues in excess of $10,000,000 in any
one fiscal year or the Units, or the sum of their
components (ii) trade at a price equal to 200% of the
Initial Public Offering (IPO) price of $6.00. The
Class C Warrants are exchangeable at the option of
the warrant holders for Units of the Company on a
formula basis, reflecting the spread between the
exercise price of the warrants and the fair market
value price of the Units (or the sum of their
component parts) at the time when the exchange is
requested by the warrant holders. These warrants
expire on February 28, 1999.
Class D Warrants - 500,000 outstanding
The Class D Warrants are exercisable, commencing on
May 29, 1994, to purchase one Unit consisting of one
Ordinary Share,
F-15 (Continued)
<PAGE> 61
PHARMA PATCH PUBLIC LIMITED COMPANY
Notes to Consolidated Financial Statements, Continued
(Expressed in U.S. Dollars)
(7) Capital Stock, cont.
(b) Warrants, cont.
one-half of a Class A Warrant and one-quarter of a
Class B Warrant. The exercise price per Class D
Warrant is $2.12 and the warrants expire on July 30,
1997.
The Class D Warrants are exchangeable at the option
of the warrant holders for Units of the Company on a
formula basis, reflecting the spread between the
exercise price of the warrants and the fair market
price of the Units (or the sum of their component
parts) at the time when the exchange is requested by
the warrant holders.
The exercise prices of the Class A, B, C and D
Warrants were initially determined by the Board of
Directors and were either equal to or exceeded the
fair market value of the Company's share price at the
date the warrants were granted. Exercise prices are
subsequently adjusted, in accordance with the formula
stipulated in the Warrant Agreement, if the Company
issues or sells shares for consideration less than
the greater of the initial public offering price or
market price.
(c) Stock Option Plan
The Company has adopted stock option plans which allows an
aggregate maximum of 700,000 Ordinary Shares of the Company to
be available for awards to employees, officers and directors.
The exercise price of these options is determined by the
Compensation Committee of the Board of Directors but will be
at least 100% of the fair market value of the options at the
date the option is granted. Additionally, these options shall
terminate in the event of a sale or transfer of all or
substantially all of the Company's assets. Effective November
15, 1995, all outstanding management and employment agreements
were terminated. In connection with the termination of these
agreements, the Company required outstanding options to be
exercised by December 15, 1995. No options were exercised and
all outstanding options thus expired on such date.
Changes to issued options are as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Number of options exercisable, begin-
ning of year 685,000 550,000
New options granted -- 265,000
Options expired (685,000) (130,000)
-------- --------
Number of options exercisable, end of
year -- 685,000
======== ========
</TABLE>
F-16 (Continued)
<PAGE> 62
PHARMA PATCH PUBLIC LIMITED COMPANY
Notes to Consolidated Financial Statements, Continued
(Expressed in U.S. Dollars)
(7) Capital Stock, cont.
(c) Stock Option Plan, cont.
In March 1996, 700,000 options at an exercise price of $.50
per share to purchase Ordinary Shares were issued to certain
persons and entities who perform services for the Company, all
of which have terms of five years. These options shall vest
only in the event that the closing price of the Company's
stock price equals or exceeds $2.00 in any 21-day trading
period (whether or not consecutive) prior to February 28,
1997. Upon such vesting, administrative expense will be
recorded on such options.
(d) Earnings (Loss) Per Share
The net earnings (loss) per share calculations are based on
the weighted average number of shares outstanding during the
respective years. In addition, the earnings (loss) per share
calculations have taken into account the shares, options and
warrants issued at prices below the Company's IPO price in the
12-month period prior to the initial filing of the IPO. These
have been treated as outstanding during all the periods
presented prior to March 7, 1994. The Company has used the
treasury stock method of determining the dilutive effect of
all options and warrants for the period after March 7, 1994.
(8) Cangene Acquisition and Disposal
On June 13, 1994, the Company completed a private acquisition of
1,319,996 Common Shares in the capital of Cangene Corporation (Cangene)
from ARCA Investments Inc. (ARCA). In payment for these shares, the
Company issued a total of 439,999 of its Ordinary Shares, on the basis
of one Ordinary Share for each three shares of Cangene. This
acquisition was part of a take-over bid to acquire all of the
outstanding Common Shares of Cangene. The bid was subsequently
withdrawn. The Company incurred acquisition costs of approximately
$515,000, substantially all of which were paid for with Cangene shares.
Certain of the Cangene shares were sold resulting in net cash proceeds
of approximately $657,000 and the balance was used to settle
outstanding professional fees totaling approximately $630,000. The
Company incurred a loss on disposition of the Cangene shares of
approximately $478,000.
(9) Income Taxes
Prior to July 30, 1993, Medipro was a Canadian Controlled Private
Corporation, as defined under the Income Tax Act (Canada) and,
accordingly, was entitled to receive a refund on a portion of its ITCs
earned on eligible SRED. These refundable ITCs, which are similar to
government grants provided for performing qualifying research
activities, were recorded in income as earned.
F-17 (Continued)
<PAGE> 63
PHARMA PATCH PUBLIC LIMITED COMPANY
Notes to Consolidated Financial Statements, Continued
(Expressed in U.S. Dollars)
(9) Income Taxes, cont.
As a result of the change in the ownership of Medipro in fiscal 1994,
the ITCs are earned subsequently at the rate of 20% of eligible SRED,
will no longer be refundable and will only be available to reduce
income taxes payable in Canada.
The Financial Accounting Standards Board has issued Financial
Accounting Standards No. 109, "Accounting for Income Taxes" which was
effective for the Company's February 28, 1994 fiscal year. As of
February 28, 1996 and 1995, Medipro had research and development
expenses not claimed for income tax purposes of approximately
$2,870,000 and $2,831,000, respectively, available to reduce taxable
income of Medipro in future years. Due to the significant uncertainty
relating to the Company's ability to utilize these expenses to offset
taxable income, valuation allowances are recognized to offset all of
the deferred tax assets relating to these expenses. These unclaimed
research and development expenses may be carried forward
indefinitely for income tax purposes.
At February 29, 1996, the Company also had unused operating loss
carryforwards amounting to approximately $6,500,000 available to
reduce future taxable income. A valuation allowance has been set up to
offset the deferred tax benefit of these loss carryforwards. These
losses expire as follows:
<TABLE>
<S> <C>
2001 1,448,000
2002 1,205,000
2010 3,477,000
2011 370,000
=========
</TABLE>
Deferred income taxes have been provided for temporary differences as
follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Deferred Tax Assets:
Operating Loss Carryforward 2,600,000 5,400,000
Capitalized Research and Development
expense -- 492,000
Purchased Research and Development
expense -- 1,110,000
Start-up costs associated with
PP Holdings -- 136,000
Interest Expense -- 133,000
Tax Benefit of Research and Development 1,148,000 1,269,000
Other 59,000 65,000
----------- ----------
Total Tax Assets 3,807,000 8,605,000
Valuation Allowance (3,807,000) (8,605,000)
Adjusted Tax Assets -- --
Deferred Tax Liabilities:
Unrealized appreciation on equity securities (1,710,212) --
----------- ----------
Total Deferred Tax Liability (1,710,212) --
</TABLE>
(10) Commitments
As a result of the transaction with TCPI, the Company no longer has any
commitments under operating leases requiring any future minimum annual
payments.
F-18 (Continued)
<PAGE> 64
PHARMA PATCH PUBLIC LIMITED COMPANY
Notes to Consolidated Financial Statements, Continued
(Expressed in U.S. Dollars)
(10) Commitments, cont.
In February 1996, the Company entered into two consulting agreements,
each for a term of three years with aggregate annual payments of
$350,000, plus a bonus at the discretion of the board of directors.
These agreements provide management to the Company.
(11) Consolidated Statements of Cash Flows
The net change in noncash working capital balances for each of the
fiscal years are noted below:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Sources uses of cash:
Accounts receivable $ 18,910 27,305
Investment tax credits receivable -- 136,937
Prepaid expenses and deposits 47,298 (6,238)
Accounts payable (5,275) 439,763
Accrued expenses 296,854 374,996
Other 3,485 555,368
----------- -----------
$ 361,272 1,528,131
=========== ===========
</TABLE>
During the year ended February 29, 1996, the amounts of cash interest
paid was $250,000 (1995 - $250,000). No income taxes were paid during
1996 or 1995.
All short-term, highly liquid investments with maturities of three
months or less at the date of purchase are considered to be cash
equivalents.
(12) Related-party Transactions
In 1993, the Company entered into an agreement, which expires on
December 31, 2011, with a shareholder whereby the Company has granted
the licensee certain production and distribution rights to a technology
that the Company still maintains after the TCPI transaction, but which
is not expected to be pursued for commercialization. No fee revenue was
recognized in fiscal 1996 and 1995.
(13) Subsequent Event
In March 1996, the Company executed agreements which provided the
Company with a controlling interest in Vista. The Company had
previously made certain working capital advances to Vista before the
consummation of this transaction. Such amounts totaled $251,500 at
February 29, 1996.
The Company executed a stock purchase agreement for 200,000 newly
issued shares of Vista common stock for a cash price of $500,000. The
Company and Vista executed an additional agreement under which Vista
provided 2,060,000 newly issued shares of its common stock to the
Company at a value of $5,150,000 plus 500,000 Vista Class C common
stock purchase warrants. In exchange, Vista received a $750,000
interest-free note due six months after the transaction date and
200,000 restricted shares of TCPI common stock previously held by the
Company with a fair value on the date of the transaction of $3,550,000
(original cost basis to the Company of $3,032,000).
F-19 (Continued)
<PAGE> 65
PHARMA PATCH PUBLIC LIMITED COMPANY
Notes to Consolidated Financial Statements, Continued
(Expressed in U.S. Dollars)
(13) Subsequent Event, cont.
The Company also has an option to purchase up to an additional 250,000
newly issued shares of Vista common stock at an option price of $2.50
in cash. This option is exercisable at any time up to September 30,
1996.
In addition, in a separate transaction, the Company agreed to provide
4,500,000 newly issued Ordinary Shares in exchange for a total of
900,000 shares of Vista's outstanding common stock owned by three
shareholders.
As a result of these transactions, the Company acquired approximately
61% of the voting interest in Vista. The acquisition will be accounted
for utilizing the purchase accounting method in fiscal 1997.
The following unaudited pro forma condensed consolidated balance sheet
reflects the transaction as if it had occurred on February 29, 1996.
<TABLE>
<CAPTION>
Pharma
Patch Public
Limited Vista
Company Technologies
as of Inc. as of
Feb.29, Dec.31,
Assets 1996 1995
------ ---- ----
<S> <C> <C>
Cash, accounts receivable, prepaid expenses, investment
securities and other assets $ 943,012 869,429
Property and equipment -- 1,414,920
Investment in Technical Chemicals and Products, Inc. 16,805,320 --
Cost in excess of net assets acquired -- --
------------ -----------
Total assets $ 17,748,332 2,284,349
============ ===========
Liabilities and Shareholders' Equity (Deficiency)
Accounts payable, note payable, current portion of long-term debt, redeemable
common stock, accrued liabilities, deferred revenue and other liabilities 3,167,034 1,256,179
Long-term debt -- 783,833
Minority interest -- 603,914
------------ -----------
Total liabilities 3,167,034 2,643,926
------------ -----------
Shareholders' equity (deficiency):
Common stock at par value 2,256,756 13,231
Premium in excess of par value 15,404,580 13,513,796
Deficit (6,249,628) (14,160,572)
Foreign currency adjustment (6,518) 273,968
Unrealized appreciation on equity securities (net of deferred taxes) 3,176,108 --
------------ -----------
Total shareholders' equity
(deficiency) 14,581,298 (359,577)
----------- -----------
Total liabilities and shareholders'
equity (deficiency) $ 17,757,332 2,284,349
============ ===========
<CAPTION>
Pro forma
Adjustments totals
---------------------- as of
Assets Debit Credit 1996
------ ----- ------ ----
<S> <C> <C> <C>
Cash, accounts receivable, prepaid expenses, investment
securities and other assets -- -- 1,812,441
Property and equipment -- -- 1,414,920
Investment in Technical Chemicals and Products, Inc. -- -- 16,805,329
Cost in excess of net assets acquired 5,763,930(a) -- 5,763,930
-------------- ---------- -----------
Total assets 5,763,930 -- 25,796,611
============== ========== ===========
Liabilities and Shareholders' Equity (Deficiency)
Accounts payable, note payable, current portion of long-term debt, redeemable
common stock, accrued liabilities, deferred revenue and other liabilities
-- -- 4,423,213
Long-term debt -- -- 783,833
Minority interest -- 2,047,394(b) 2,651,308
-------------- ---------- -----------
Total liabilities -- 2,047,394 7,858,354
-------------- ---------- -----------
Shareholders' equity (deficiency):
Common stock at par value 15,800(c) 911,300(c) 3,165,487
Premium in excess of par value 16,960,236(c) 5,620,700(c) 17,578,840
Deficit -- 14,160,572(c) (6,249,628)
Foreign currency adjustment -- -- 267,450
Unrealized gain or equity securities (net of deferred taxes)
-- -- 3,176,108
-------------- ---------- -----------
Total shareholders' equity
(deficiency) 16,996,036 20,692,572 17,938,257
-------------- ---------- -----------
Total liabilities and shareholders'
equity (deficiency) 16,976,036 22,739,966 25,796,611
============== ========== ===========
</TABLE>
F-20 (Continued)
<PAGE> 66
PHARMA PATCH PUBLIC LIMITED COMPANY
Notes to Consolidated Financial Statements, Continued
(Expressed in U.S. Dollars)
(13) Subsequent Event, cont.
(a) To record the cost in excess of net assets acquired related to the
Vista acquisition. Consideration for both components of the Vista
transaction include the following:
<TABLE>
<S> <C>
Cash $ 500,000
Note payable 750,000
TCPI investment (200,000 shares) 3,032,000
Pharma Patch Public Limited Company common stock
(4,500,000 shares) 2,250,000
---------- ---------
$ 6,532,000
=========
</TABLE>
The cost in excess of net assets acquired was calculated utilizing the
original carrying value of the TCPI investment ($15.16 per share). TCPI
shares had a fair value of $22.00 per share on the date of the Vista
transaction and are currently trading at approximately $14.00 per
share.
(b) To record the minority interest in the consideration paid by Pharma
Patch Public Limited Company for Vista (38.7%).
(c) To record the issuance of 4,500,000 newly issued shares of the
Company at a fair market value of $.50 per share and to eliminate prior
ownership of Vista (including 2,260,000 newly issued shares of Vista).
F-21
<PAGE> 1
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Pharma Patch Public Limited Company
We consent to incorporation by reference in the registration statements (No.
33-83478, 33-93606 and 333-02630) on Form S-8 of Pharma Patch Public Limited
Company of our report dated May 9, 1996, relating to the consolidated balance
sheet of Pharma Patch Public Limited Company and subsidiaries as of February
29, 1996, and the related consolidated statements of earnings and loss and
deficit and cash flows for the year then ended, which report appears in the
February 29, 1996 annual report on Form 10-KSB of Pharma Patch Public Limited
Company.
KMPG Peat Marwick LLP
Short Hills, New Jersey
June 13, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-29-1996
<PERIOD-START> MAR-01-1995
<PERIOD-END> FEB-29-1996
<CASH> 668,822
<SECURITIES> 16,805,320
<RECEIVABLES> 22,690
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 17,748,332
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 17,748,332
<CURRENT-LIABILITIES> 3,167,034
<BONDS> 0
0
0
<COMMON> 2,256,756
<OTHER-SE> 12,324,542
<TOTAL-LIABILITY-AND-EQUITY> 17,748,332
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,800,809
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,728,683)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,728,683)
<DISCONTINUED> 13,819,359
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,090,676
<EPS-PRIMARY> 1.50
<EPS-DILUTED> 1.50
</TABLE>
