UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 [Fee Required]
For the fiscal year ended December 31, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 [No Fee Required]
For the transition period from_______ to________
Commission File Number 33-75236
LONGPORT, INC.
(Name of small business issuer in its charter)
Delaware 23-2715528
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
791 South Chester Road
Swarthmore, Pennsylvania 19081
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (610) 328-5006
Securities registered pursuant to Section 12(b) of the Act:
Title of each Class Name of each exchange on which registered
None N/A
Securities registered pursuant to Section 12(g) of the Act:
$.001 Par Value Common Stock
(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 of 1934 during the preceding 12
months (or for such shorter period that the Registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes X No
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Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B is not contained in this form, and no disclosure will
be contained, to the best of the Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. X
State issuer's revenues for its most recent fiscal year: $172,171.
State the aggregate market value of the voting stock held by
non-affiliates computed by reference to the price at which the stock was sold,
or the average bid and asked prices of such stock, as of a specified date within
the past 60 days. $2,249,566 based upon a price of $.31 per share on March 14,
1997.
(ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDING DURING THE PAST FIVE YEARS)
Check whether the issuer has filed all documents and reports required
to be filed by Section 12, 13 or 15(d) of the Exchange Act after distribution of
securities under a plan confirmed by a court.
Yes _____ No _____ Not Applicable X
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest applicable date: As of March 14, 1997, there
was 13,156,282 shares outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference: NONE
Transitional Small Business Disclosure Format (Check one): Yes ___ No X
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
Introduction
The Company, organized as a Delaware corporation in January, 1993, and
operated a wholly owned subsidiary, Longport Medical, Inc. ("LMI"), until
September, 1995. The Company originally marketed medical products for the
treatment of wounds ("wound care") such as wound dressings, pressure relief
mattresses, intermittent compression pumps, hyperbaric oxygen chambers ("HBOs"),
and a variety of other medical supplies. The Company also operated an outpatient
wound healing center ("Wound Healing Center") at the Montclair Community
Hospital, Montclair, New Jersey ("Montclair Center") for the treatment of
recalcitrant wounds, closing the facility in July, 1995. During 1995, the
Company altered its operations by developing a consulting services program for
healthcare facilities to open and operate outpatient wound healing centers and
implement inpatient and home-patient wound healing programs. As part of this
reorganization, the Company ceased its LMI and Montclair Center operations.
The Company intends to generate future revenues by obtaining management
services contracts with healthcare facilities and physicians, to open wound
healing centers and/or implement wound healing programs for inpatients and
home-patients. Under management services contracts, the Company provides
clinical oversight to a client, generally a hospital, with respect to operating
an outpatient wound healing center and/or implementing an inpatient wound
healing program, and receives a monthly fee directly from the contracting party.
As part of these Management Agreements, the Company expects to generate
additional revenues through the rental and sale of Topical Hyperbaric Oxygen
products and supplies sales.
Wound Healing Centers
In July, 1994, the Company opened its first Wound Healing Center within
the Montclair Community Hospital, in Montclair, New Jersey ("Montclair Center").
The Montclair Center utilized the Company's wound healing products and supplies
to treat patients suffering from acute and chronic wounds on an outpatient
basis.
The Company closed the Montclair Center in July, 1995, but Management's
review of the Montclair Center's operations indicated that an outpatient wound
center ("Center") could be viable as a profit center if the center had the
financial and physician support of a hospital that integrates the center into
its overall business. A larger healthcare facility, such as a hospital, has the
ability to spread employee, operations, equipment, and supply costs over its
entire operations structure, while having purchasing power and a better
financial base. Management believes hospitals will look to open outpatient
facilities to offset lower revenues from decreasing inpatient populations and
that outpatient wound centers could become a growth segment of the healthcare
industry. Based upon the information obtained from operating the Montclair
Center,
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Management developed the wound center management service program ("Management
Services") the Company presently markets to healthcare facilities and
physicians.
Under the Management Services plan, the Company managed centers
function as full service, multi-disciplinary treatment facilities that offer
comprehensive patient evaluations and aggressive wound therapy. The Company's
personnel provide clinical management and general consulting for the opening and
operation of a wound healing center, including ongoing on-site evaluation of the
Center's operations after the Center has opened. The Company is paid a fee
directly from the client, without the Company's personnel performing direct
patient care.
The Company provides clients, in addition to the clinical training and
support described below, assistance with the Center's marketing campaign,
designing the physical layout of the center, and setting up medical equipment
and supplies purchasing contracts. The Company's level of involvement in the
client's marketing campaign depends upon the capabilities of the client's
internal departments, but can include helping the client create marketing
materials. The Company plans to eventually pool groups of Centers, that are
geographically close, to create combined advertisement campaigns, with the costs
being spread out among all the clients involved. Regarding the physical layout
of a Center, the Company's personnel can assist a client in designing the Center
and securing furniture, and help the client establish a medical supplies and
equipment network, including medical billing systems. The Company, however, does
not directly sell products to the client, or its patients, and does not perform
any insurance or patient billing related to the center's services. Overall, the
client agrees to clinically operate the center in accordance the Company's
assessment and treatment protocols, but the final decisions regarding the
business and operations portion of the Center, such as staffing, advertising and
physical layouts, are made and paid for by the client.
To create a comprehensive Management Services program, the Company
developed a proprietary Wound Healing Manual ("Manual") in coordination with a
number outside clinical researchers and physicians experienced in wound
treatment. These individuals continue to work with the Company's clinical
personnel to review and update the Manual when necessary. As part of a
Management Services agreement ("Services Agreement"), a client will receive a
customized copy of the Manual, training on the assessment and treatment
protocols within the Manual, and updates that contain changes in the Manual.
The Company's Wound Healing Manual contains protocols for the
assessment and treatment of a variety of wounds, from Diabetic Foot Ulcers and
Decubitus Ulcers (bed sores), to post-surgical and other acute wounds. The
Company seeks to provide clinicians with the ability to obtain the most
comprehensive assessment available, so that a treatment protocol can be
patient-specific and altered quickly to match changes in the wound during the
healing process. The goal of the Manual is to make the wound treatments more
effective by providing the physician with more information about the wound. The
Company's assessment and treatment protocols do not focus on a single tool,
product or method. Rather, the protocols utilize a full range of readily
available commercial products and supplies, with recommendations for use being
based on when those products are designed to work most effectively.
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The Company's assessment protocols require that all new patients
undergo a complete history and physical, lab work, vascular testing on extremity
wounds, and any other tests deemed necessary. The protocols also call for the
wound to be photographed and eventually receive a scan utilizing the Company's
Soft Tissue Ultrasound Scanner, should the Company obtain an exemption from the
FDA marketing procedures and/or obtain marketing clearance for the device. See
"Medical Equipment Business - Soft Tissue Ultrasound Scanner" and "Government
Regulation". Once these procedures have been completed, the patient begins a
treatment program tailored to meet his or her needs.
The Company managed centers will be capable of treating patients
suffering from a wide range of wounds, including skin ulcerations due to
diabetes, vascular disease, burns and frostbite; post-surgical infections;
decubitus ulcers (bed sores); amputations and infected stumps; and gangrenous
lesions. The Company's assessment protocols utilize numerous diagnostic tools,
including an Ultrasound/Duplex Imager, a Doppler, a Transcutaneous PO2 Monitor,
a vascular testing system, and potentially the Soft Tissue Ultrasound Scanner.
The Company's treatment protocols utilize numerous commercially available,
non-invasive tools, including Therapeutic Ultrasound; Extremity whirlpools;
Compression Therapy; and Topical Hyperbaric Oxygen chambers. The treatment
protocols also utilize specialty wound dressings, topical antibiotics, and
pressure relief devices in a comprehensive program designed to stimulate the
body into the healing process.
The Company also provides comprehensive training for the client's staff
on the wound assessment and treatment protocols contained within the Manual,
including training on any changes to the protocols that may be made in the
future. The Company's clinical staff will train the client's staff on the use of
the assessment and treatment equipment, products and supplies to be utilized at
the center, including the HBO products. The training is designed to teach the
client's staff about the Company's methods and philosophy towards wound
assessment and healing. The Company considers personnel training to be an
ongoing process, so the Management Services program includes continuous on-site
visits by the Company's clinical staff to ensure compliance with the Company's
protocols, and to be sure the client's staff understand the Company's protocols.
The client can request on-site visits, but beyond a specific number of visits,
as specified in a Services Agreement, the client will be charged for the on-site
visit.
All examinations and procedures rendered at a Center are eligible for
reimbursement by Medicare, except for the Topical Hyperbaric Oxygen therapy.
Each treatment procedure and product or supply used has a reimbursement code and
scheduled fee under the Medicare regulations. See "Governmental Regulations".
The HBO products are used as an additional treatment device, in conjunction with
the other available treatments, with payment for this treatment coming from
either private insurance carriers, if applicable, or the patient. The Company,
however, receives payment directly from the Management Services client, pursuant
to its Services Agreement, regardless of whether the client or patient receives
reimbursement from Medicare, or other insurance carrier.
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The Company executed its first Services Agreement with the West Jersey
Health System ("West Jersey") in July, 1995. See Exhibit 10.26. The Company
executed its second Services Agreement with West Hudson Hospital ("West Hudson")
in January, 1996. The West Hudson Agreement has an initial term of two years,
with yearly renewals thereafter. Under the Services Agreement, the Company
received a $10,000 start-up fee and will receive $5,000 per month for the length
of the initial term. The Company agreed to provide West Hudson with two Topical
Hyperbaric Oxygen Chambers as part of the Agreement, with additional Chambers
available for West Hudson to rent at $800 per month. West Hudson provided the
funds necessary for the use of a Soft Tissue Ultrasound Scanner at the Center,
and have taken delivery. See Exhibit 10.28 and "Medical Equipment Business -
Soft Tissue Ultrasound Scanner".
The Company maintains a General Liability policy and a Liability
Umbrella policy to provide coverage for the consulting services it provides.
This multi-peril policy provides for a total of $3,000,000 in coverage per
occurrence. The coverage of these policies can be expanded to include new
Centers the Company may service in the future. Management believes these
policies provide adequate insurance coverage based on the liability risks of the
business.
Future Centers
The Company expects new wound healing centers to be located within or
adjacent to (i) existing hospitals, (ii) within physicians' offices that provide
the same level of services, and see the same number of patients, as the
hospital-based Centers, and (iii) within physicians' offices that provide
services to smaller patient populations. While the Company has reduced its
capital needs for general operations, the Company's current financial status may
adversely affect the Company's ability to enter into additional Service
Agreements. Also, there can be no assurance that the Company will obtain any
additional clients in the future.
Medical Equipment Business
A large portion of the Company's 1995 revenues, in comparison to the
revenues from 1996, were generated from the sale of wound supplies. As of
December 31, 1996, the Company had no contractual agreements with any suppliers,
except for the research agreement with the United Medical and Dental Schools of
Guy's and St. Thomas Hospitals in London, England ("UMDS"), for the research and
development of a new Soft Tissue Ultrasound Scanner developed by UMDS. See
"Medical Equipment Business - Ultrasound Soft Tissue Scanner". In February,
1996, the Exclusive Licensing Agreement with Healing Systems, Inc. expired, but
the Company continues to market the Sacral Units on a non-exclusive basis. See
"Topical Hyperbaric Oxygen Units" below.
Topical Hyperbaric Oxygen Products
The Company continues to market Topical Hyperbaric Oxygen ("HBO")
products, that apply oxygen under pressure to wound sites in order to reduce
wound healing time, as part of
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its Management Services program and as a stand alone treatment device. The
Company rents and sells "rigid" HBOs (sometimes referred to as "Chambers"),
which treat wound sites on extremities (primarily arms and legs) by delivering
oxygen intermittently in a humid condition, along with disposable HBOs ("Sacral
Units"), which are soft sided and deliver moist oxygen to the lower back and
buttocks, primarily to treat decubitus ulcers.
Currently, the Company owns approximately 50 Chambers, rents
approximately 30% of its Chambers to non-affiliated third parties and offers the
Sacral Units for sale. Rental rates for the Chambers average $60 per day for
individual patients and $500 per month for dealers while sales prices for the
Sacral Units average $45 each to dealers and $75 each to end users. Neither the
Chambers nor the Sacral Units are Medicare reimbursable, which means that
Medicare will not reimburse the patient or the provider for use of either HBO
product, thereby reducing the marketability of the products. The revenues
generated by the HBO products are predominately from the rental of Chambers with
monthly rental charges to independent dealers who, in turn, market the HBO
Chambers. The Company also receives revenues from hospitals and nursing
facilities that rent or buy the HBO products directly from the Company. The
dealers, hospital and nursing facilities are charged regardless of their ability
to obtain payment or reimbursement from Medicare or the patient. Further,
numerous private health insurance companies reimburse patients for HBO costs.
The Company markets Sacral Units on a non-exclusive basis by purchasing
the units from Healing Systems, Inc. ("HSI"). The Company expects to be able to
obtain the Sacral Units from HSI on an as needed basis, although there can be no
assurance that the Company will be able to continue to purchase such products
through HSI.
HSI purchased the patent for the Sacral Units from Supra ("Sacral
Patent"), but the agreement is currently the subject of litigation between HSI
and Supra. If HSI is unsuccessful in its litigation with Supra, the Company may
be unable to market the HSI Sacral Units. In November, 1993 the Company
purchased a patent covering an earlier developed Sacral Unit which has FDA
marketing permission. See "Patents." Although there are less than two years of
patent protection remaining on the purchased patent, the Company does not intend
to develop a new Sacral Unit. The Company's relationship with HSI is strictly as
a customer of HSI for the purchase of Sacral Units. The Company places orders
for the purchase of Sacral units as needed. The Company had secured, at no
expense to the Company, an option to purchase the Sacral patent and any raw
materials from HSI, at the same price HSI paid for the patent and materials, as
part of the now expired Exclusive Marketing Agreement. The purchase option,
which has expired, only took effect if HSI succeeded in the patent litigation
between it and Supra, and exercising of the option was at the discretion of the
Company. See "Item 12 - Certain Relationships and Related Transactions" and
"Business - Patents".
Soft Tissue Ultrasound Scanner
In May, 1995, The Company entered into an agreement (the "UMDS
Agreement") with the United Medical and Dental Schools of Guy's and St. Thomas
Hospitals ("UMDS") located in London, England. The UMDS Agreement consists of
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two phases regarding a high-frequency Ultrasound Soft Tissue Scanner
("Scanner") developed by UMDS: the final stages of development for the Scanner
and the potential manufacturing and marketing of the Scanner in North America.
Initially, the relationship between the entities will involve a joint project
for the gathering of data with the Scanner prototypes, in which Longport will
act as the exclusive North American partner for UMDS. The project will
concentrate on testing the Scanner prototypes and gathering data on the
Scanner's applicability to Longport's specialty, wound healing, by utilizing the
Scanner at the Company managed Centers. The project will be overseen by the head
of the Tissue Repair Research Unit ("TRRU") at UMDS, Dr. Mary Dyson. The time
frame for the data gathering project is two years, during which period UMDS'
TRRU will be paid $20,000 per Scanner. The Company's Services Agreements make
the client responsible to pay for the Scanner to be utilized at that client's
Center The goal of the first phase is to improve the Scanner by use and develop
an information database that makes the Scanner a commercially viable product. If
this goal is achieved, Longport will have the exclusive right to manufacture and
market the Scanner in North America for the wound healing related applications.
The initial term for the manufacturing and marketing rights is five years from
the date the Company and UMDS determine that the Scanner is commercially viable,
with the rights to be renewed for additional five year terms based upon
performance. The Company and UMDS will establish the performance standards once
the marketing plan has been developed. See Exhibit 10.25. During the first
phase, the funds to be paid to TRRU for each Scanner will be paid by the client
that will utilize the device in a Company managed Center. Additionally, since
the Scanner will be utilized at a Company managed Center, the Company does not
expect to incur any significant research and development costs during the joint
project with UMDS. As of this date, three units have been delivered to Longport
for research, one at each of the Company's clients, West Jersey and West Hudson,
with a third being used by the Company's clinical staff for demonstrations to
other prospective clients.
The Scanner can produce a high resolution image of the skin, and tissue
just below the skin, by picking up the pattern of the skin and tissue. This type
of imaging may allow a clinician to check the status of a wound, and the
surrounding tissue, without having to cut the patient or stick a probing device
into the fragile wound bed. When used with a coupling gel, the Scanner's
ultrasound can penetrate through certain types of wound dressings and produce an
image, thus avoiding risks of infection and protecting the wound surface during
the scanning process. The Scanner is expected to produce an image with an axial
resolution of 65 microns and a lateral resolution of 200 microns. The image can
then be analyzed, through a proprietary image analysis program designed at UMDS.
The image analysis system provides a mathematical "signature" of the skin and
tissue, and is capable of detecting small changes to the tissue, before they
become clinically evident. The image analysis may permit clinicians to recognize
the improvement, or deterioration, of a wound earlier than present methods
allow, so that treatments can be modified quickly, leading to potentially large
savings in treatment time and expense. The Scanner can examine tissue up to 2
centimeters below the skin, and may provide clinicians with the ability to image
a patient's skin, subcutaneous tissue and even tendons. Because the Scanner is
new to the Company, the Company anticipates having to file for marketing
permission with the U.S. Food and Drug Administration ("FDA"). See "Government
Regulation". The Company continues to analyze the requirements of the FDA
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filings, to determine the filings that will be required and the related
costs, but a final decision has not yet been made. Due to the Company's
financial status, however, there can be no assurance the Company will have, or
be able to obtain, the funds to complete the FDA filing process.
Upon Agreement between UMDS and Longport that the Scanner has reached
commercial viability, Longport will have the exclusive North American rights to
manufacture and market the Scanner with respect to the wound healing
applications. The initial period for the exclusive rights will be five (5)
years, from the date the parties agree to begin marketing the Scanner, and will
be extended for additional five (5) year periods upon Longport satisfying
marketing goals to be established later. The parties will establish the
marketing goals, and compensation to UMDS, upon development of a marketing plan
for the Scanner. Longport, as payment for the exclusive marketing rights, has
issued to UMDS one hundred thousand (100,000) shares of Longport restricted
Common Stock. As stated above, the Company intends to have its clients pay for
the Scanner to be utilized at that client's Center, as part of the Services
Agreements.
The Company executed and Agreement with Quality Medical Instruments,
Ltd. ("QMI"), a company based in the United Kingdom, expanding the Company's
rights with respect to Scanner technology, pending the outcome of the Supra
Medical v. James R. McGonigle, et al., litigation. See Item 3. "Legal
Proceedings". QMI has obtained all marketing rights from UMDS for the Scanner
technology, again pending the outcome of the Supra Medical v. James R.
McGonigle, et al., litigation. The agreement expands the Company's rights to
include all human and non-human uses for the technology. See Exhibit 10.31.
Competition
The Company's expects to compete against hospitals that seek to open
their own wound centers. Management anticipates, however, that the Company will
be able to obtain contracts with a number of these hospitals by offering them a
flexible Management Services plan that can provide the facility with highly
specialized clinical management at affordable rates. Whether the Company
competes with a particular hospital, or makes that hospital a client, will
depend on the internal capabilities of that hospital with respect to wound
healing programs.
The Company also expects to compete with Curative Technologies, Inc.
("CTI") to obtain Management Service contracts with hospitals and, if the
Company establishes additional wound healing centers, those centers, depending
upon their location, may compete with CTI centers that already operate within a
specific geographic region. CTI is a larger, better capitalized and more
recognized company that markets wound center franchises under a plan similar to
the Company's. Management, however, believes the Company can successfully
compete against CTI due to differences between the companies' programs. First,
the expenses incurred by a hospital in setting up a CTI franchise are much
higher than those incurred in setting up a Company managed center. Second, the
Company's protocols are non-invasive, focus on a comprehensive assessment of
wounds, and utilize flexible, individualized treatment programs. CTI's programs
focus on a proprietary, but expensive and invasive, treatment method that
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decreases the ability to individualize treatment programs. Lastly, the Company's
centers are capable of treating more types of wounds than the CTI managed
centers and the Company believes its strictly non-invasive approach to be more
appealing to hospitals and patients.
With respect to the Company's HBO products, the Company markets the
Sacral Units through a non-exclusive agreement with HSI, whose purchase of its
patent for Sacral Units is being disputed by Supra, the Seller of the patent.
Accordingly, Supra at some point may be a direct competitor in the marketing of
the HSI Sacral Unit. The Company remains in minor competition with Wound Healing
Systems, Inc. ("WHS"), an affiliate, and Wound Care Systems, Inc. ("WCS") in the
sale and rental of Chambers in the regions where the Company currently conducts
business. WHS remains under agreement with the Company not to increase its
Chamber inventory above its original level, permitting WHS to replace vroken
chambers.
Marketing
Chambers and Sacral Units are marketed directly by representatives of
the Company to hospitals, nursing homes and physicians.
On February 19, 1996, the Company executed an Agreement with Martin
Rosenblum & Associates, Inc. ("MRA"), a nonaffiliate, under which MRA will
market the Company's Management Services program on a nonexclusive basis. Under
the Agreement, MRA agrees to use best efforts to market the Company's Services
and will receive a commission of 20% of all business generated by MRA. See
Exhibit 10.30.
Government Regulation
The changing of the Company's operations, from direct selling of
product to providing consulting services, eliminates the Company's need to
perform Medicare billings. Thus, the guidelines concerning billing for wound
products and supplies no longer apply to the Company's operations. The HBO
products are not Medicare reimbursable, so the Medicare guidelines do not affect
this portion of the Company's business. The Company, however, must comply with
certain government regulations regarding the Scanner and HBO products.
The Company must be granted permission through the United States Food
and Drug Administration ("FDA"), and possibly other domestic and foreign
authorities to market the Company's medical devices, the HBO products and the
Soft Tissue Ultrasound Scanner. These authorities also regulate labeling,
advertising and other forms of product claims.
The Federal Food, Drug and Cosmetic Act requires the Company to file a
pre-marketing notice of intent to market with the FDA on all medical devices.
The notice seeks the FDA's permission to market the product. Devices
manufactured and marketed before 1976, and any devices substantially equivalent
to such device, may fall within the regulations' "grandfather" clause. This
clause exempts the manufacturer from having to submit the device for FDA
permission and allows the device to be taken directly to the market. Devices
developed after 1976, or devices that differ substantially from a legally
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marketed predicate device, must receive the FDA's permission before
marketing to the public may begin. These devices are also subject to reviews by
the FDA after the pre-market review process, with devices that are potentially
life- threatening being subject to more stringent standards. The HBO's marketed
by the Company were first developed and patented prior to 1976. The current
version of the HBO's remain substantially equivalent to the pre-1976 devices
and, to the best of the Company's knowledge, may continue to be marketed under
current FDA regulations.
The Scanner is subject to FDA regulations regarding the introduction of
medical devices into commerce within the United States markets. The research,
development, testing, production, and marketing of new medical products are
subject to extensive governmental regulation in the United States. Noncompliance
with these regulations may result in recall or seizure of products, total or
partial suspension of production, refusal of the government to allow clinical
studies or commercial distribution of the device, civil penalties or fines, and
criminal prosecution.
Pursuant to the Federal Food Drug and Cosmetic Act (the "FDA Act"), a
medical device will be classified as either a Class I, Class II or Class III
device. Class I devices are subject to general controls, including registration,
device listing, record-keeping requirements, labeling requirements and "Good
Manufacturing Practices" (as such term is defined in the FDA Act). In addition
to general controls, Class II devices may be subject to special controls that
could include performance standards, postmarket surveillance, patient
registries, guidelines, recommendations and other actions as the FDA deems
necessary to provide reasonable assurance of safety and effectiveness. Class III
devices must meet the most stringent regulatory requirements and must be
approved by the FDA before they can be marketed. Such premarket approval can
involve extensive pre-clinical and clinical testing to prove safety and
effectiveness of the devices.
All medical devices introduced to the market since 1976 are required by
the FDA, as a condition of marketing, to secure either a 510(k) premarket
clearance or an approved Premarket Approval Application ("PMA"). A product
qualifies for a 510(k) premarket notification clearance if it is substantially
equivalent in terms of safety, effectiveness, and intended use to another
legally marketed medical device. If a product is not substantially equivalent to
such a device, the FDA must first approve a PMA application before it can be
marketed. An approved PMA application indicates that the FDA has determined the
device has been proven, through submission of clinical data and supporting
information, to be safe and effective for its labeled indications. The PMA
process typically takes more than a year and requires the submission of
significant quantities of clinical data and supporting information, While the
process of obtaining a 510(k) clearance typically takes less than one year and
involves the submission of less clinical data and supporting information.
An entity must file with the FDA even if the device is simply "new" to
the particular entity, and is otherwise a well known device in the marketplace.
Since the Scanner, if it achieves commercial viability, will be introduced into
commerce within the United States for the first time by the Company, it will be
considered a "new device" under FDA regulations and will require
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appropriate filings with the FDA. The FDA has already classified and approved
other diagnostic ultrasound devices, that the Company believes are substantially
equivalent to the Scanner, as Class II medical devices. The Company expects that
a 510(k) premarket notification clearance will be required and, in conjunction
with UMDS, has begun assembling the information needed to complete all necessary
filings, including the identification of the legally marketed device that is the
most equivalent with the Scanner. The FDA filing, and all expenses incurred in
connection with such, will be the responsibility of UMDS, since UMDS owns the
rights to the technology. Thus, the Company does not anticipate expenses that
will materially effect its finances. The Company, however, cannot make
assurances that the Scanner will become commercially viable nor that the Scanner
will achieve FDA clearance for its market entry.
In order for the Company to utilize the Scanner in clinical studies
prior to FDA clearance for market entry, the Company must obtain an
Investigational Device Exemption ("IDE") from the FDA regulations. The IDE
permits entities to conduct clinical studies on a medical device that has not
received FDA concurrence for introduction into commerce. The exemption rules
were created by Congress, and have been codified at 21 USC ss.360j(g). By
definition, investigational devices, for the purpose of an IDE, are broken into
two groups, those that pose a significant risk to patients and those that pose a
nonsignificant risk to patients. Those that pose significant risk to patients
must obtain an approval from the FDA to conduct pre-market clinical studies.
This process may require the filing of significant quantities of pre-study data
and clinical study plans. Those devices that pose a nonsignificant risk to
patients must still have a clinical study plan approved, but the oversight body
can be an FDA recognized Institutional Review Board ("IRB") that acts as the
FDA's representative for the purpose of approval and oversight of clinical
studies.
The Company believes that under the parameters set forth in the FDA
Act, the Scanner, since it is a non-invasive device, poses a nonsignificant risk
to patients. This would enable the Company to conduct any necessary studies more
quickly and at significantly reduced costs. Also, the receipt of a clinical
study approval will permit the Company to conduct clinical studies while UMDS
undergoes the FDA marketing permission process.
The Company is currently involved in negotiations for the utilization
of an IRB and is developing a formal clinical study plan. Upon agreement from an
institution, the Company will submit its clinical study plan and information on
the Scanner to the IRB who will then decide whether the device poses a
nonsignificant risk and whether it approves the clinical study plan. If the
Company receives approval from the IRB, the Company intends to conduct clinical
studies in conjunction with the operation of the Wound Healing Centers open at
that time, including the West Jersey and West Hudson Centers. The Company does
not expect to incur significant expenses in connection with the conducting of
those studies. The Company, however, cannot place a definitive time frame on
when an IRB will be selected or when the clinical plan will be presented, nor
can the Company assure that the clinical studies will be approved.
The FDA has established manufacturing (and sterilization) standards for
medical device manufacturers, known as "Good Manufacturing Practices". These
standards require any
11
<PAGE>
manufacturing facility to be registered annually and submit to regular
inspections. Therefore, if the Company begins manufacturing any devices, the
manufacturing facility would have to comply with these regulations. The Company
does not intend to directly manufacture any medical devices. Rather, the Company
intends to outsource any manufacturing operations that may developing the
future.
Patents
The Company acquired a patent ("Stivala Patent") covering a Sacral Unit
from an unaffiliated individual for a purchase price of $10,000, 20,000 shares
of the Company's Common Stock and a royalty of $1.00 for each Sacral Unit sold,
if any. The patent has approximately one (1) year remaining and thereafter the
Sacral Unit may be manufactured and sold by anyone. Moreover, other patents have
been granted for Sacral Units, and new patents may be granted in the future. The
Company has not manufactured any Sacral Units under the patent and can give no
assurance that it will do so.
In December, 1993, the Company acquired all development rights and the
right to file for a patent on a portable Chamber being developed by Richard
Mazzolla, a non-affiliate, in exchange for which Mr. Mazzolla was granted the
exclusive right to manufacture the Chamber for four years, received 10,000
shares of the Company's restricted Common Stock and will be paid the costs for
development and design of the Chamber, $3,000 of which has been paid. Further,
Mr. Mazzolla will also receive an option to purchase an additional 25,000 shares
of restricted Common Stock, at $.50 per share, if a U.S. patent is granted on
his new chamber design. The Company currently does not intend to pursue the
development of a new Chamber.
12
<PAGE>
Employees
The Company employs one individual, Bonita K. Weyrauch, RN, the Vice
President for Clinical Services. The Company has an agreement with Colpat, Inc.,
an affiliate owned and controlled by the its President and CEO, James R.
McGonigle, for the provision of services to the Company. The Company also has an
agreement with the law firm owned and controlled by its Vice President and
General Counsel, Peter E. Cavanaugh, for the provision of legal services to the
Company. Mr. McGonigle devotes approximately 100% of his time on Company
business. Mr. Cavanaugh's firm is used on an as needed basis.
ITEM 2. DESCRIPTION OF PROPERTIES
The Company leases a 3,000 square foot office building at 791 South
Chester Road, Swarthmore, Pennsylvania. The Company pays the Lessor $625 per
month. See "Item 6. - Liquidity and Capital Resources" below.
ITEM 3. LEGAL PROCEEDINGS.
The Company is involved in litigation with Supra (entitled "Longport,
Inc. vs. Supra Medical Corp. et al" civil action no. 95-14754 in the Court of
Common Pleas of Delaware County, Pennsylvania) arising from an exclusive
marketing license ("License") granted by Supra to the Company for the sale of
Chambers. The exclusive marketing license expired December 7, 1993. The Company
is seeking damages from Supra based upon Company allegations of tortious
interference with contract and Supra has counterclaimed alleging the Company is
obligated to purchase an additional 25 Chambers from Supra for a total of
$102,900. At present the parties are waiting for a trial date to be set.
On May 30, 1996, Longport, Inc. was served with a Complaint and Summons
filed by Supra Medical Corp., entitled Supra Medical Corp. v. James R.
McGonigle, et al., civil action no. 96- 3737. The Complaint was filed in the
United States District Court for the Eastern District of Pennsylvania and names
the Company, one of its Directors, James R. McGonigle, and one of its former
Directors, Phillip E. Loori, as defendants. The Complaint also names United
Medical and Dental Schools of Guy's and St. Thomas' Hospitals, Mary Dyson. David
Morton, Hugh Lewis d/b/a Square Wave Systems, Ltd., and Supra Medical
International, Inc., all of whom are residents of the United Kingdom. See the
Company's 10-QSB for the period ended June 30, 1996 for a further description of
the allegations within the complaint.
The Company obtained counsel to defend this matter and has filed a motion to
dismiss the entire complaint, alleging that the Plaintiff's Complaint failed to
state a claim upon which relief can be granted, among other procedural reasons
for a dismissal. The Company seeks a dismissal of the entire matter, with
prejudice. Plaintiff filed a response to the Company's Motion to Dismiss on or
about October 7, 1996, pursuant to a Court Order. The Company's counsel filed a
response and has requested a decision on the Motion from the Court. As of the
present date no decision has been rendered by the Court. Management maintains
13
<PAGE>
its position that the Plainitff's Complaint is baseless and frivolous.
Also, Management plans to review its options concerning any legal action the
Company may have against the Plaintiff's and their attorneys, should the matter
be dismissed on substantive grounds. The Company has suffered damages as a
result of defending this matter. Due to the expenses incurred with its counsel,
the Company did not have enough capital to meet the demands of certain creditors
and has turned over assets to certain creditors, including its the office
building in Swarthmore, and medical equipment. See Liquidity and Capital
Resources above.
The Court denied the Company's Motion to Dismiss and Longport has filed its
Answer to Supra's Complaint. Supra's attorneys filed a Motion with the Court
seeking leave to be released as Supra's counsel due to an alleged conflict,
Supra Medical obtained new Corporate Counsel, and an outstanding legal bill that
exceeded $60,000 as of the date that counsel filed the Motion. The Company
opposes that Motion due to the delay it will cause in the resolution of this
case. Longport has filed a Motion with the Court seeking an expedited Discovery
cutoff date (90 days) and trial date. As of this date, the Court has not
rendered a decision on either Motion.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
14
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock has traded on the Bulletin Board of the
National Quotation System under the symbol "LPTI" since September 7, 1994.
The following table sets forth for the quarters indicated the range of
high and low prices of the Company's Common Stock as reported by the National
Quotation Bureau, Inc. and quotations for prices represent the closing sales
transaction.
Price
---------------------------
By Quarter Ended: High Low
---- ---
Fiscal 1994
December 31, 1994 $ 2.25 $ 1.50
Fiscal 1995
March 31, 1995 $ 2.50 $ 1.25
June 30, 1995 $ 1.50 $ .50
September 30, 1995 $ .625 $ .125
December 31, 1995 $ .438 $ .125
Fiscal 1996
March 31, 1996 $ .25 $ .06
June 30, 1996 No Change
September 30, 1996 No Change
December 31, 1996 $ .31 $ .06
Outstanding Shares and Shareholders of Record
As of March 14, 1997, there were 13,156,282 shares outstanding held by
approximately 105 record and beneficial stockholders.
Dividend Policy
The Company has never paid cash dividends on its Common Stock and
intends to retain earnings, if any, for use in the operation and expansion of
its business. The amount of future dividends, if any, will be determined by the
Board of Directors based upon the Company's earnings, financial condition,
capital requirements and other conditions.
15
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
The Company was formed in January, 1993, primarily to market Topical
Hyperbaric Oxygen products. During 1993 and 1994, the Company developed plans to
open its own Wound Healing Center at the Montclair Community Hospital. Also,
during 1993 the Company expanded its marketing efforts to include a full array
of wound care related products, through its subsidiary, LMI. The Company
consistently experienced receivables problems on the business generated by LMI
and ceased LMI's operations in 1995 due to these problems. The Company also
closed the Montclair Center in 1995 due to increasing costs. The Company's
current operations focus on providing consulting services and clinically
managing wound healing centers for healthcare facilities. The Company has
experienced losses since formation, but during 1996 greatly reduced its monthly
expenses and overall debt. The Company expects to expand its services business
in 1997 by obtaining additional Service Agreements.
Results of Operations
For the year ended December 31, 1996 as compared to the year ended December 31,
1995.
Total Revenues declined for the second year in a row. The Revenues for
1996 were 69.19% lower than the revenues for 1995, $172,171 and $558,866
respectively. This decrease can be attributed to the reorganization of the
Company and its operations. The 1995 figures included at least one full quarter
of revenues from the now-closed LMI operations. A significant difference between
the revenues figures comes from the fact that a majority of the 1995 revenues,
specifically those to medical supplies sales and rentals, were never collected,
while the vast majority of the revenues for 1996 have already been collected. In
Management's opinion, the revenues for 1996 create a better basis to which
future performance can be compared. While the revenues attributed to Management
Fees are significantly higher in 1996, $98,500, as compared to 1995's revenues
of $24,251, Management believes this is not an adequate comparison since the
first management agreement was not executed until July, 1995. Management expects
revenues from Management Services to continue to climb through 1997. The other
segments of revenues are not fair comparisons due to the revenues reflected for
1995 from uncollected LMI revenues during the first quarter of 1995.
One of Management's goals for 1996 was to get its expenses under
control, payoff all of the Company's old Trade Accounts, and reduce the
Company's overall debt as much as possible. Management believes it has
accomplished the majority of its goals. The Company's expenses have been greatly
reduced, a 72.82% change from 1995 ($1,453,310) to 1996 ($394,954). This success
can be attributed in part to the closing of the LMI facility and the Montclair
Center, and to Management's efforts to reduce the expenses incurred in operating
the Company under its new structure. Management intends to continue its efforts
to review expenses and cut waste when appropriate.
16
<PAGE>
Perhaps the Company's most significant reduction has been in Accounts
Payable, where the Company has reduced the figure from $431,598 as of December
31, 1995, to $49,032 as of December 31, 1996. A 88.64% reduction. More
importantly, the 1996 figure contains only current accounts, no old accounts.
Management has succeeded in eliminating all of the Company's, including LMI's,
old trade debts and now has the Company dealing with current accounts only. As
part of Management's efforts to keep expenses down, it expects that the accounts
payable debt will also remain under control. Overall, the Company's liabilities
have been reduced by 83.09%, between December 31, 1995 and December 31, 1996,
$817,571 and $138,218 respectively. The reduction in Long Term Debt occurred
when the Company was forced to return the title to its office building to the
original seller and mortgage holder. Management was forced into this decision as
a result of the Supra Medical lawsuit filed in the Federal Eastern District
Court of Pennsylvania. See "Item 3. Legal Proceedings" and "Management's
Analysis and Discussion - Liquidity and Capital Resources". Management intends
to continue its efforts to completely eliminate all debts of the Company through
1997.
The Operating Loss for 1996 is significantly lower, when compared to
1995, $222,783 and $894,444 respectively, a 75.09% decrease. This change can be
attributed to the reduction in expenses and a more reliable revenue stream from
the Company's new operations. Management strived to make its expenses coincide
with the Company's new operations. By the end of 1996, Management has become
confident that it has succeeded in this goal and that the Company is in a better
position from which to grow.
For the year ended December 31, 1995 as compared to the year ended December 31,
1994.
Total Revenues for 1995 decreased by 44.9% compared to 1994, $558,866
and $1,013,404 respectively. The decrease was caused mainly by the Company's
decision to close the California office of LMI and cease the product and
supplies sales operations. The Company ceased LMI's operations effective April
1, 1995. During the remainder of 1995 the Company concentrated on developing its
management services program and marketing the Company's HBO products, resulting
in a 46.4% increase in revenues from equipment rentals, $81,999 in 1994 compared
to $120,038 in 1995, and revenues of $24,251 in management fees for 1995,
compared to zero revenues related to management fees for 1994. The Company
expects the revenues from both of these areas to increase in 1996.
Overall, Operating Expenses decreased by 15.4% in 1995 compared to
1994, $1,453,310 and $1,718,191, respectively. General and administrative
expenses, however, increased from $908,814 in 1994 to $1,040,513 in 1995, an
increase of 14.5%. This increase was mainly caused by a write-off of
uncollectible accounts receivable of approximately $430,000 and an expense of
$155,000 related to the issuance of restricted common stock for compensation and
services during 1995. The write-off of uncollectible accounts receivable
consisted mostly of receivables related to Medicare revenues generated through
the LMI operation. The Company also experienced ongoing expenses related to the
California office of LMI even after ceasing operations in April. The Company did
not complete the closing of the LMI office until September, 1995, incurring
17
<PAGE>
administrative expenses until that time even though no revenues were being
generated by that office. For 1996, the Company expects a continued reduction in
general and administrative expenditures.
The Operating Loss and the Net Loss were both higher in 1995 compared
to 1994, as a result of the immediate decrease in medical supplies sales, but
slow decrease in expenses related to the closing of the operations and the
write-off of uncollectible accounts receivable. The Operating Loss increased by
26.9%, from $704,787 in 1994 to $894,444 in 1995, while the Net Loss increased
by 23.2%, from $764,863 in 1994 to $942,510 in 1995. There was no provision for
income taxes in 1995 due to the Net Loss.
Strategy to Achieve Profitable Operations
During 1996, the Company began new growth under its services-oriented
plan. Management believes that the Company's restructuring places it in a better
position to continue an expansion as a services oriented operation. In 1996,
Management focused its efforts on refining the Management Services Program for
opening wound centers and implementing wound programs, while also concentrating
efforts on reducing the Company's overall debts. The Company believes that
healthcare facilities, mainly hospitals, will be attempting to open more
outpatient operations, to make up for lost revenues due to lower inpatient
populations. Management has identified the wound market as one of the healthcare
industries growth segments and believes the Company can expand and become
profitable by entering into Service Agreements with additional healthcare
facilities.
The Company anticipates an increase in revenues in 1997, as compared to
1996, and thus better bottom line results due to the decrease in expenses. The
operation of a services based company requires fewer expenditures, including
those related to the opening of additional wound centers since they will be
owned and operated by unaffiliated third parties. In February, 1996, the Company
executed an agreement with a marketing firm in New Jersey to begin marketing the
management services program. Management expects to enter into similar agreements
with other entities. Under the agreement, the marketing company receives
compensation only upon the generation of revenues to the Company. The Company
intends on maintaining this practice with other representatives, to ensure that
marketing expenses are incurred upon the generation of revenues.
The Company continues to experience cash flow problems, with little
working capital. The restructuring of the operations, however, has greatly
lowered the monthly expenditures, and reduced the overall cash flow problem. The
Company anticipates further reduction of this problem as it enters into
additional Management Services Agreements.
The Company anticipates continued growth in revenues from the marketing
of its wound healing services program and the management of new Wound Healing
Centers over the next 12 months. Management will continue to work to reduce the
levels of overall debt and monthly expenses, so that the expenses incurred
18
<PAGE>
on a regular basis better reflect a services-based operation with fewer
capital needs. In addition, the Company is exploring the possibilities of debt
or equity financing, but can make no assurance that such financing, either debt
or equity, can be effectuated.
19
<PAGE>
Liquidity and Capital Resources
The Company's cash flow problems and low working capital continues to affect the
Company's ability to pay its debts. Through December 31, 1996, the Company has
had to sell shares of its Common Stock to private investors, convert unsecured
notes to shares of restricted Common Stock, and/or convert trade debt and
accounts into shares of restricted Common Stock, to reduce the Company's debts.
Management expects to continue these practices to continue reducing debts, when
deemed in the best interest of the Company and its shareholders. Through these
practices, Management has been able to reduce the Company's current liabilities
from $561,772 as of December 31, 1995, to $137,635 as of December 31, 1996. The
Company has also been able to reduce its long term debt from $255,799 as of
December 31, 1995 to $543 as December 31, 1996. The Company anticipates further
reductions through 1997 and does not expect to incur any significant short-term
or long-term debts within the next twelve months.
In January, March and April of 1996, a non-affiliated entity purchased a total
of 600,000 shares, and an individual current shareholder purchased 70,000
shares, of the Company's restricted Common Stock at $.10 per share. These
transactions netted the Company $67,000. In March, 1996, the assignees for two
of the Company's creditors agreed to convert the amounts due from the Company,
to the creditors, into shares of restricted Common Stock. The Company owed one
creditor a total of $174,216 and the other creditor $35,538. The Company
converted the amounts due to shares of restricted Common Stock at the rate of
$.10 per share, resulting in the Company issuing a total of 2,097,544 to the
assignees.
In April, 1996, a the First Baptist Church of Southwest Broward, a non-profit
entity, purchased 200,000 shares of the Company's restricted Common Stock, at
the price of ten ($.10) cents per share, netting the Company $20,000. In June,
1996, the four non-affiliated individuals purchased a total of 450,000 shares of
the Company's restricted Common Stock, at the price of twelve ($.12) cents per
share, netting the Company $54,000. In July the Company sold 100,000 shares of
restricted Common Stock to a non-affiliate at the rate of twelve ($.12) cents
per share, netting the company $12,000.
In August and September two current shareholders of the Company purchased a
total of 258,333 shares of the Company's restricted Common Stock. The shares
were sold at the price of twelve ($.12) cents per share, netting the Company
$31,000. Also during the month of August, the Company issued shares to three
current shareholders as payment on debt owed to each. The Company issued 125,596
shares valued at fifteen ($.15) cents per shares, as payment of a debt and
interest in the amount of $18,839, and issued 61,667 shares valued at twelve
($.12) and fifteen ($.15) cents per share, as payment on two shareholder's debts
totalling $8,000. The Company also sold 400,000 shares of its restricted Common
Stock to three non-affiliated individuals at the rate of twelve ($.12) cents per
share, netting the Company $48,000.
In October and November, 1996, the Company raised capital through the sale of
325,000 shares of restricted stock by two current shareholders and one
non-affiliated individual. The shares were sold at the rate of twelve ($.12)
cents per share, netting the Company $39,000. In
20
<PAGE>
December, 1996, the Company sold 100,000 shares, at the rate of twelve ($.12)
cents per share, to a current shareholder and non-affiliated individual, netting
the Company $12,000.
In January, 1997, the Company sold 201,141 shares of restricted Common Stock to
a current shareholder and a non-affiliate at the rate of twelve ($.12) cents per
share, netting the Company $24,137. The Company also issued 100,000 shares to
its employee, Bonita K. Weyrauch, as payment on debts due from the Company. The
Company and employee agreed that the debt totaled $12,000, with the shares being
issued at the rate of twelve ($.12) cents per share.
The Company's decision to cease operations as a seller of medical supplies led
to the execution of a Joint Venture Agreement with MedaStat Scientific
Corporation ("MSC") in April, 1995. The Agreement was designed to allow Longport
to concentrate on marketing its new management services and utilize MSC's
medical distribution expertise to provide supplies, with the companies splitting
gross profits 50/50. The Company also engaged MSC to handle the billing of the
older Medicare claims, with amounts collected being credited toward's Longport's
debt to MSC. None of the receivables were collected by MSC and no revenues were
generated under the Joint Venture Agreement. MSC went out of business in
January, 1996. On February 19, 1996, the Company executed a Settlement Agreement
with MSC with all amounts owed by the Company, approximately $63,000, deemed
paid in full. In exchange the Company issued 125,000 shares of the Company's
restricted Common Stock to MSC, at $.50 per share.
On January 26, 1996, the Company executed a Services Agreement with West Hudson
Hospital ("West Hudson"), in Kearny, New Jersey, to open an outpatient Wound
Healing Center ("Center") at West Hudson's facility. Under the agreement, the
Company's second agreement to provide services, the Company will receive a
$10,000 start-up fee and a $5,000 per month consulting fee for an initial term
of two years. The Agreement will renew on a yearly basis thereafter. West Hudson
also agree to provide the necessary funding to have a Soft Tissue Ultrasound
Scanner placed at that Center. The Company will provide West Hudson with a copy
of its Wound Healing Manual for use at the facility, two (2) HBO Chambers for
use at the facility, and a limited number of on-site visits over the first three
months of the Agreement; to oversee the opening and initial operations of the
Center and train the West Hudson personnel. Any HBO Chambers ordered, other than
the two provided under the Services Agreement, will be rented to West Hudson at
$800 per month. Also, any on-site visits by Longport personnel that exceeds the
amount allowed under the Services Agreement, will carry a charge of $150 per
hour, or $1,000 per day, whichever is less. See Exhibit 10.28 filed with the
10-KSB for the period ended December 31, 1995. As of December 31, 1996, West
Hudson has paid the start-up fee and the monthly fees through December,
generating $60,000 in revenues for the Company.
In April, 1996, the Company reached a settlement with Angelo R.
Bergamo, M.D., under which the Company agreed to pay Bergamo $20,000 to settle
the litigation between the parties. The Company showed a gain from the
settlement of the Angelo R. Bergamo v. Longport lawsuit, recorded as an
extraordinary gain of $18,133. The Company also showed an extraordinary gain on
the Disposal of Assets in settling its debt with the Montclair Community
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<PAGE>
Hospital. The extraordinary gain resulted from the Company allowing the Hospital
to keep the remaining furniture and equipment at the Montclair Center.
In June, 1996, the Company paid a $10,000 retainer fee to the law firm of
Bochetto & Lentz for the defense of the Company in the legal action Supra
Medical Corp. v. James R. McGonigle and Longport, Inc., et al. See Legal
Proceedings. An additional $1.405 has been paid to the law firm through of
December 31, 1996. The Company anticipates incurring additional legal fees in
this matter, but cannot estimate the amount it expects to spend defending the
matter.
Management considers two transactions, occurring in July and August, 1996,
significant due to requiring the Company to turn over title to certain assets to
the creditors as part of the debt settlement. These transactions caused the
Company to incur a one-time loss of $127,741 on the disposal of the assets.
The first matter involved the mortgage on the Company's office building in
Swarthmore, PA. The Company was unable to meet its monthly mortgage payments, in
significant part because of having to pay attorney's fees in the Supra Medical
Corp. v. James R. McGonigle, et al., civil case. See Legal Proceedings. Because
of the Company's inability to make its monthly mortgage obligation, the mortgage
holder gave the Company two options; the initiation of a foreclosure proceeding
by the mortgage holder or returning the title to the original owner. The Company
opted to amicably return the title to the original owner, in exchange for the
forgiveness of all past due mortgage amounts, and forgiveness of the remaining
mortgage amount due. Management was also able to negotiate a lease with the
owner, a six-month automatic renewal lease, whereby the Company will be able to
remain at the office. The lease requires the Company to pay $625 per month as
rent.
The second transaction that involved property of the Company was the settlement
of the debt owed to a creditor of the now closed Longport Medical subsidiary.
While the debt amount was in dispute, the Company did not have the funds
available to negotiate a cash settlement with the creditor. Instead, the
Company was forced to turn over to the creditor title to nine Low Air Loss
Mattress systems, in possession of the creditor, along with a cash payment of
$3,500. These transactions, in large part, caused the Company's Assets to drop
from $671,165 as of December 31, 1995, to $199,794 as of December 31, 1996.
The Company utilized the capital raised in October, November and December, 1996,
to pay debts. The Company continues to service the Wound Healing Centers at West
Jersey Health System and West Hudson Hospital. Each client has purchased and
rented additional supplies and equipment from the Company, providing revenues in
excess of the management fees. The Company anticipates continued growth from
sales of its products along with the addition of other management contracts for
the opening and managing of wound centers over the next twelve months. These
Wound Centers would be owned and funded by entities other than the Company, thus
reducing the necessity of cash outlays to purchase start-up materials and
operate the center. In addition, the Company continues to explore the
possibility of debt financing and public or
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<PAGE>
private placements of its common stock, but cannot provide any assurances that
any such financing can be secured.
Commitments
The Company's only long term commitment, as to the use of cash, is the
commitment to UMDS to pay for the Scanners to be utilized at Company managed
Centers. The plans for payment on the commitment to UMDS have been discussed
above.
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
The Statements made under Item 6, Management's Discussion and Analysis
of Financial Condition and Results of Operations, and other statements within
this document, that are not historical facts are forward looking statements that
involve risks and uncertainties, including but not limited to, market acceptance
risks, the effect of economic conditions, the impact of competition and pricing,
product development, commercialization and technology difficulties, the results
of financing efforts, legal circumstances, and other risks detailed in the
Company's Securities and Exchange Commission filings.
23
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
See page F-1.
24
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
25
<PAGE>
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth certain information regarding all
current directors and executives of the Company:
<TABLE>
<CAPTION>
Officer or
Director
Name Age Office Since
<S> <C> <C> <C>
James R. McGonigle(1) 53 Chairman of the 1993
Board of Directors,
Chief Executive Officer,
President and
Chief Accounting Officer
Peter E. Cavanaugh 32 Director, Corporate Secretary, 1993
Vice President & General Counsel
</TABLE>
Directors hold office for a period of one year from their election at the annual
meeting of stockholders and until their successors are duly elected and
qualified. Officers of the Company are elected by, and serve at the discretion
of, the Board of Directors. None of the above individuals has any family
relationship with any other. The Board of Directors has no audit, nominating or
compensation committee. No director has received or currently receives any
compensation for services as a director.
Background
The following is a summary of the business experience of each officer and
director of the Company:
James R. McGonigle founded the Company and has served as its Chairman, Chief
Executive Officer and President since its inception in January, 1993. Mr.
McGonigle assumed the role of Chief Accounting Officer effective April 1, 1996,
due to the resignation of John Delamater. From 1985 to 1992 Mr. McGonigle was
the founder and president of Supra Medical Corp. (formally Topox, Inc.)("Supra")
a publicly held company specializing in the development of proprietary medical
technologies in the fields of skin care and diagnostics. Mr. McGonigle is also
President of Wound Healing Systems, Inc. which sells and rents Chambers in
competition with the Company. See "Business - Competition." Mr. McGonigle
intends to devote approximately 90% of his time to the affairs of the Company.
Peter E. Cavanaugh has been Vice President and General Counsel of the Company
since December, 1993, after having performed legal services for the Company for
approximately three months on a consultant basis. He was appointed to the Board
of Directors and became
26
<PAGE>
Corporate Secretary in April, 1995. He was elected to the Board upon
shareholders vote in July, 1995. In 1993, Mr. Cavanaugh was admitted to practice
by the Bar Associations of both Pennsylvania and New Jersey. From March, 1992,
until May, 1993, Mr. Cavanaugh was employed as a law clerk at the Law Offices of
Tybout, Redfearn & Pell in Wilmington, Delaware and from 1986 until 1992, Mr.
Cavanaugh was employed by the Pennsylvania Manufacturers Association Insurance
Company in the legal and claims departments. Mr. Cavanaugh will be utilized by
the Company on an as needed basis as it legal counsel.
(1) Effective April 1, 1996, Mr. McGonigle was appointed the Company's Chief
Accounting Officer.
Executive Compensation
Summary Compensation Table
No compensation has been paid since inception to the members of the Company's
Board of Directors in their capacities as such, no executive officer received
annual compensation of more than $100,000 and the Chief Executive Officer
received no compensation whatsoever during the fiscal year ending December 31,
1996.
None of the members of the Company's Board of Directors in their capacity of
such are scheduled to receive compensation for the fiscal year ended December
31, 1997. Mr. Delamater resigned as the Company's Controller effective April 1,
1996. The Company has agreed to consulting agreements with Colpat, Inc., an
affiliate owned and controlled by Mr. McGonigle, and Mr. Cavanaugh's law firm,
for the provision of services to the Company. Mr. McGonigle's Company is
scheduled to be paid $3,000 per month for services to the Company. Mr. Cavanaugh
has been retained for $1,500 per month and will be used on an as needed basis.
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<PAGE>
Option Grants in Last Fiscal Year
The following table provides information on option grants during the fiscal year
ended December 31, 1996 to the named executive officers:
<TABLE>
Individual Grants
<CAPTION>
% of Total
Options
Granted to Exercise
Options Employees in Price Expiration
Name Granted Fiscal Year ($) Date
---- ------- ----------- --- ----
<S> <C> <C> <C> <C>
NONE
</TABLE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information concerning stock ownership by
all persons known to the Company to own beneficially 5% or more of the
outstanding shares of the Company's Common Stock, by each director and officer,
and by all directors and officers as a group. All shares of Common Stock are
owned beneficially and of record as of March 14, 1997.
Number of
Name Shares Owned Percent of Class
James R. McGonigle(1)(6) 1,965,893 14.83%
791 South Chester Road
Swarthmore, PA 19081
Peter Cavanaugh(2) 283,571 2.14%
791 South Chester Road
Swarthmore, PA 19081
28
<PAGE>
John H. Carbutt(3) 812,777 6.09%
Michie Proctor and
Joyce Proctor(4) 2,669,174 20.14%
The First Baptist Church of
Southwest Broward 1,280,977 9.74%
All officers and directors
as a group (two persons)(5) 2,249,464 16.84%
(1) Includes 942,000 shares held by James R. McGonigle, 547,143 shares held by
Wound Healing Systems, Inc., a corporation controlled by Mr. McGonigle, 376,750
shares held by Colpat, Inc. a corporation controlled by Mr. McGonigle and
100,000 Warrants also held by Colpat, Inc. with each Warrant entitling the
holder to purchase one share of Common Stock at $3.00 per share at any time
until June 30, 1997.
(2) Includes an option to purchase 100,000 shares at $.10 per share at any time
until July 18, 1998.
(3) Includes 436,098 shares held by John H. Carbutt, 200,000 Warrants held by
Mr. Carbutt with each Warrant entitling the holder to purchase one share of
Common Stock at $3.00 per share at any time until June 30, 1997 and 176,679
shares held by Jagapata, Ltd., a corporation controlled by Mr. Carbutt.
(4) Includes 2,118,258 shares held by Michie Proctor, 450,916 shares held by
Michie Proctor and Joyce Proctor and 100,000 Warrants held by Michie and Joyce
Proctor with each Warrant entitling the holder to purchase one share of Common
Stock at $3.00 per share at any time until June 30, 1997.
(5) Includes shares, Warrants to purchase shares and options to purchase shares
held by the Company's officers and directors.
(6) This individual may be deemed to be "promoters" of the Company as that term
is defined under the Securities Act of 1933, as amended.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Management is of the opinion that each transaction described below
between the Company and its officers, directors and stockholders was on terms at
least as fair to the Company as had the transaction been concluded with an
unaffiliated party.
The Company has entered into an exclusive marketing agreement with HSI
to market Sacral Units manufactured under a patent held by HSI. Further, the
Company had a one-year option to
29
<PAGE>
purchase HSI's Sacral Unit Patent for $50,000, which was the price paid by HSI
for the patent, plus the cost of any inventory and raw materials of HSI used for
the manufacture of such Sacral Units. The HSI Sacral Unit patent is currently
being contested by the Seller of the patent and the option is subject to HSI
prevailing in its litigation regarding the patent. See "Business - Patents." The
Agreement between the Company and HSI expired on February 7, 1996. The Company
and HSI are currently negotiating to extend the Agreement, but these can be no
assurance that a new Agreement will be executed.
In August, 1995, the Company purchased 10 THBO Chambers from WHS,
controlled by the Company's President, for 50,000 shares of the Company's
restricted Common Stock. The THBO Chambers were then rented to Wound Care
Systems, Inc., controlled by the Company's then Vice President, Phillip Loori,
at the rate of $300 per month per Chamber.
In December, 1995, the Company converted $15,000 worth of expenses due
to Colpat, Inc., controlled by the Company's President, for services rendered to
the Company, into shares of the Company's restricted Common Stock at the rate of
$.15 per share. The Company thus issued a total of 100,000 shares to Colpat.
Also, in December, 1995, the Company issued 100,000 shares of restricted Common
Stock to WHS, controlled by the Company's President, in lieu of cash payment of
amounts due from the rental of THBO Chambers from WHS. The shares were issued at
the rate of $.15 per share, paying off $15,000 of the total debt due to WHS by
the Company.
In 1995, the Company issued a total 105,000 shares of restricted
Common Stock to Peter E. Cavanaugh, the Company's Vice President and Corporate
Counsel, as non-cash compensation for 1995. 5,000 shares were issued in January,
1995, at the value of $.50 per share, and 100,000 shares were issued in
December, 1995, at the value of $.075 per share.
In January, 1996, Mr. Cavanaugh and the Company mutually agreed to
terminate Mr. Cavanaugh's employment agreement to permit Mr. Cavanaugh to pursue
his private practice of law. Mr. Cavanaugh, however, will remain a member of the
Board of Directors, the General Counsel, and the Company's Corporate Secretary.
Effective February 1, 1997, Mr. Cavanaugh's firm will be paid $1,500 per month
for services. Mr. Cavanaugh will not be paid for services rendered as a member
of the Board of Directors.
In January, 1996, the Company agreed to a consulting agreement with
Colpat, Inc., an affiliate owned and controlled by the Company's President and
CEO, James R. McGonigle. Colpat will provide various services to the Company and
will be paid $3,000 per month. The services agreement will continue through
1997. Mr. McGonigle will not be paid for his services as the Company's Chairman
of the Board of Directors.
In 1996, the Company's President paid off the remaining $5,000 balance
of a Company Note Payable. Accordingly, the Company owed its President $5,000
which was subsequently converted into 41,667 shares of the Company's restricted
Common Stock, at twelve ($.12) per share.
30
<PAGE>
In 1996, two stockholders of the Company purchased certain accounts
payable and notes payable from creditors of the Company totalling $228,594. The
Company issued 2,223,140 shares of its common stock to the stockholders as
payment of these liabilities.
ITEM 13. EXHIBITS
Exhibit
No. Title
3.1 Certificate of Incorporation of Registrant(1)
3.2 Bylaws of Registrant(1)
4.1 Form of Common Stock Purchase Warrant(1)
10.1 Agreement of Sale between Registrant and Leiti
regarding Registrant's purchase of 791 South Chester
Road, Swarthmore, Pennsylvania(1)
10.2 Sales Agreement between Registrant and Wound Healing
Systems, Inc. regarding 20 Topical Hyperbaric
Chambers(1)
10.3 Sales Agreement between Registrant and Wound Healing
Systems, Inc. regarding 23 Topical Hyperbaric
Chambers(1)
10.4 Memorandum of Understanding between Registrant and
Baker Medical, Inc.(1)
10.5 Memorandum of Understanding between Registrant and
Southeastern Medical Supply, Inc.(1)
10.6 Joint Venture Agreement between Registrant and
Wellison International, Inc.(1)
10.7 Patent Assignment between Registrant and Stivala(1)
10.8 Transfer Agreement between Registrant and Mazzolla(1)
10.9 Transmittal Letter regarding Wound Healing
Research(1)
10.10 Licensing and Purchase Option Agreement between
Registrant and Healing System, Inc.(1)
10.11 Memorandum of Understanding between Registrant and
Robert Crousore Hess and Fernando Laguda(1)
31
<PAGE>
10.12 Sale Agreement between Registrant and Robert D.
Crousore (Hess)(1)
10.13 Sale Agreement between Registrant and Fernando G.
Laguda(1)
10.14 Sale and Release Agreement between Registrant and
Fernando G. Laguda(1)
10.15 Lease Agreement between Registrant and Montclair
Community Hospital(1)
10.16 Rental Agreement between Registrant and Integrated
Therapy Products, Inc.(1)
10.17 Revenue Sharing Agreement between Registrant and
American Home Medical Services, Inc.(1)
10.18 Employment Agreement between Registrant and Angelo R.
Bergamo, M.D.(1)
10.19 Form of Subscription Agreement - November, 1993
Private Placement(1)
10.20 Form of Loan Agreement - April, 1994 Loans(1)
10.21 Form of Promissory Note - April, 1994 Loans(1)
10.22 Medical Consultant Agreement between Registrant and
Martin Pressman, M.D.
10.23 Medical Consultant Agreement between Registrant and
David Novicki, M.D.
10.24 Joint Venture Agreement between Registrant and
MedaStat Scientific Corp.(2)
10.25 Research and Licensing Agreement between Registrant
and the United Medical & Dental Schools of Guy's and
St. Thomas Hospitals of London, England(3)
10.26 Services Agreement between Registrant and West Jersey
Health System(3)
10.27 Loan Agreement between Registrant and National Health
& Safety Corporation
10.28 Services Agreement between Registrant and West Hudson
Hospital
10.29 Settlement Agreement between Registrant and MedaStat
Scientific Corporation
10.30 Representative Agreement between Registrant and
Martin Rosenblum & Associates
10.31 Agreement between Registrant and Quality Medical
Instruments, Ltd.
21.1 Subsidiaries of Registrant(1)
32
<PAGE>
23.1 Consent of Angell & Deering(1)
23.2 Consent of Michael J. Tauger (See 5.1, above)(1)
23.3 Consent of Angell & Deering(1)
23.4 Consent of Angell & Deering(1)
23.5 Consent of Angell & Deering(1)
23.6 Consent of Angell & Deering(1)
99.1 Deed Regarding 791 South Chester Road, Swarthmore,
Pennsylvania(1)
99.2 Deed of Correction(1)
(1) Incorporated by reference to the Registrant's Registration Statement on Form
SB-2, file number 33- 75236 declared effective on July 7, 1994.
(2) Incorporated by reference to the Registrant's Quarterly Report on Form
10-QSB, for the period ended March 31, 1995.
(3) Incorporated by reference to the Registrant's Quarterly Report on Form
10-QSB, for the period ended June 30, 1995.
33
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized, in Swarthmore, Pennsylvania, on
________, 1996
LONGPORT, INC.
By:------------------------------
James R. McGonigle
Chief Executive Officer
Pursuant to the requirements of the Exchange Act as amended, this
Report has been signed below by the following persons on the dates indicated.
Signature Title Date
- --------- ----- ----
- ---------------------- Chairman of the Board -------------------
James R. McGonigle of Directors, Chief
Executive Officer, President
and Chief Accounting Officer
- ---------------------- Director, Corporate Secretary, -------------------
Peter E. Cavanaugh and General Counsel
<PAGE>
LONGPORT, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Financial Statements Page
- -------------------- ----
Independent Auditors' Report F-2
Consolidated Balance Sheet as of December 31, 1996 F-3
Consolidated Statements of Operations for the years
ended December 31, 1996 and 1995 F-5
Consolidated Statements of Changes in Stockholders'
Equity (Deficit) for the years ended December 31,
1996 and 1995 F-6
Consolidated Statements of Cash Flows for the years
ended December 31, 1996 and 1995 F-7
Notes To Consolidated Financial Statements F-9
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Longport, Inc.
We have audited the accompanying consolidated balance sheet of Longport, Inc.
and Subsidiary as of December 31, 1996, and the related consolidated statements
of operations, changes in stockholders' equity (deficit) and cash flows for the
years ended December 31, 1996 and 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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 audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Longport, Inc. and
Subsidiary as of December 31, 1996 and the consolidated results of its
operations and its cash flows for the years ended December 31, 1996 and 1995 in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As shown in the financial statements,
the Company incurred a net loss of $357,429 during the year ended December 31,
1996, and, as of that date had a working capital deficiency of $70,597. As
discussed in Note 1 to the financial statements, the Company's significant
operating losses and working capital deficiency raise substantial doubt about
its ability to continue as a going concern. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
/s/ Angell & Deering
----------------------------------
Angell & Deering
Certified Public Accountants
Denver, Colorado
February 18, 1997
F-2
<PAGE>
LONGPORT, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996
ASSETS
------
Current Assets:
Cash $ 2,925
Accounts receivable:
Trade, net of allowance for doubtful
accounts of $3,600 33,191
Interest 1,562
Inventories 3,400
Notes receivable 26,000
---------
Total Current Assets 67,078
---------
Property and Equipment, at cost:
Medical equipment 299,258
Computer equipment 49,493
Office furniture and equipment 45,136
---------
393,887
Less accumulated depreciation (312,833)
---------
Net Property and Equipment 81,054
---------
Other Assets:
Notes receivable 17,500
Intangible assets, net of accumulated
amortization of $90,333 34,167
---------
Total Other Assets 51,667
---------
Total Assets $ 199,799
=========
The accompanying notes are an integral
part of these consolidated financial statements.
F-3
<PAGE>
LONGPORT, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996
(Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable $ 49,032
Accrued expenses:
Salaries 12,000
Interest 2,088
Deferred revenue 10,300
Notes payable 13,000
Current portion of long-term debt 51,255
-----------
Total Current Liabilities 137,675
-----------
Long-term debt, net of current portion above 543
-----------
Commitments and Contingencies --
Stockholders' Equity (Deficit):
Preferred stock: $.001 par value, 1,000,000
shares authorized, none issued or
outstanding --
Common stock: $.001 par value, 25,000,000
shares authorized, 12,855,135 shares
issued and outstanding 12,855
Paid in capital 2,320,918
Accumulated deficit (2,272,192)
-----------
Total Stockholders' Equity 61,581
-----------
Total Liabilities and Stockholders'
Equity $ 199,799
===========
The accompanying notes are an integral
part of these consolidated financial statements.
F-4
<PAGE>
LONGPORT, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
1996 1995
------------ ------------
Net Revenues:
Medical supply sales $ 28,190 $ 290,363
Wound clinic revenue -- 124,214
Medical equipment rentals 45,481 120,038
Wound clinic management fees 98,500 24,251
------------ ------------
Total Revenues 172,171 558,866
------------ ------------
Operating Expenses:
Cost of medical supply sales 5,979 96,475
Cost of wound clinic revenue -- 175,257
Cost of medical equipment rentals 51,288 121,065
General and administrative 337,018 1,040,513
Research and development expense 669 20,000
------------ ------------
Total Operating Expenses 394,954 1,453,310
------------ ------------
Operating Income (Loss) (222,783) (894,444)
------------ ------------
Other Income (Expense):
Interest income 3,900 4,652
Other income -- 1,704
Gain (loss) on disposal of assets (127,741) 1,796
Interest expense (58,118) (56,218)
------------ ------------
Total Other Income (Expense) (181,959) (48,066)
------------ ------------
Income (Loss) Before Provision for
Income Taxes and Extraordinary Gain (404,742) (942,510)
Provision for income taxes 1,548 --
------------ ------------
Income (Loss) Before Extraordinary
Gain (406,290) (942,510)
Extraordinary Gain - Extinguishment
of Debt 48,861 --
------------ ------------
Net Loss $ (357,429) $ (942,510)
============ ============
Net Loss Per Share of Common Stock:
Income (Loss) Before Extraordinary
Gain $ (.03) $ (.15)
Extraordinary Gain -- --
------------ ------------
Net Loss $ (.03) $ (.15)
============ ============
Weighted Average Number of
Common Shares Outstanding 11,155,874 6,404,959
============ ============
The accompanying notes are an integral
part of these consolidated financial statements.
F-5
<PAGE>
LONGPORT, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
Preferred Stock Common Stock Paid in Accumulated
Shares Amount Shares Amount Capital Deficit
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994 -- -- 5,943,064 5,943 1,264,530 (972,253)
Conversion of notes payable and
accrued interest to common stock
at $.15 to $.75 per share -- -- 1,132,090 1,132 171,082 --
Issuance of common stock for
accrued expenses at $.15 to $.98
per share -- -- 140,841 141 40,029 --
Issuance of common stock
upon exercise of stock options
at $.50 per share -- -- 23,000 23 11,477 --
Issuance of common stock for cash
at $.25 to $.50 per share -- -- 138,000 138 43,862 --
Issuance of common stock for
marketing rights at $.50
per share -- -- 100,000 100 49,900 --
Issuance of common stock for
purchase of Hyperbaric
Oxygen Chambers at $.50
per share -- -- 50,000 50 24,950 --
Issuance of common stock for
services at $.08 to $.50
per share -- -- 590,000 590 154,410 --
Net loss -- -- -- -- -- (942,510)
-- ------ ----------- ----------- ----------- -----------
Balance at December 31, 1995 -- -- 8,116,995 8,117 1,760,240 (1,914,763)
Issuance of common stock for
cash at $.10 to $.12 per
share -- -- 2,303,333 2,303 260,697 --
Conversion of accounts payable
to common stock at $.10 to
$.51 per share -- -- 2,267,544 2,268 276,308 --
Conversion of notes payable
and accrued interest to
common stock at $.12 to
$.15 per share -- -- 167,263 167 23,673 --
Net Loss -- -- -- -- -- (357,429)
-- ------ ----------- ----------- ----------- -----------
Balance at December 31, 1996 -- $ -- 12,855,135 $ 12,855 $ 2,320,918 $(2,272,192)
== ====== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral
part of these consolidated financial statements.
F-6
<PAGE>
LONGPORT, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
1996 1995
---- ----
Cash Flows From Operating Activities:
Net loss $(357,429) $(942,510)
Adjustments to reconcile net loss to
net cash (used) by operating activities:
Depreciation and amortization 107,421 166,792
Issuance of common stock for services
and technology -- 155,000
Provision for bad debts (3,600) 431,858
Loss on disposal of assets 127,741 --
Gain on sale of equipment -- (1,796)
Gain on extinguishment of debt (48,861) --
Changes in assets and liabilities:
(Increase) decrease in accounts
receivable 40,990 (106,294)
(Increase) decrease in other
receivables (1,276) 2,472
Decrease in prepaid expenses 4,813 4,325
Decrease in inventories 3,396 14,652
Decrease in deposits 579 22,293
Increase (decrease) in accounts
payable and accrued expenses (73,387) 136,255
--------- ---------
Net Cash (Used) By Operating
Activities (199,613) (116,953)
--------- ---------
Cash Flows From Investing Activities:
Capital expenditures (20,000) (33,391)
Proceeds from sale of equipment -- 39,398
Increase in notes receivable -- (11,000)
Payments on notes receivable 2,500 5,000
--------- ---------
Net Cash Provided (Used) By
Investing Activities (17,500) 7
--------- ---------
Cash Flows From Financing Activities:
Proceeds from borrowing -- 74,000
Principal payments on notes payable (43,388) (18,435)
Issuance of common stock 263,000 55,500
--------- ---------
Net Cash Provided By Financing
Activities 219,612 111,065
--------- ---------
Net Increase (Decrease) in Cash and
Cash Equivalents 2,499 (5,881)
Cash and Cash Equivalents at
Beginning of Year 426 6,307
--------- ---------
Cash and Cash Equivalents at
End of Year $ 2,925 $ 426
========= =========
The accompanying notes are an integral
part of these consolidated financial statements.
F-7
<PAGE>
LONGPORT, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
(Continued)
1996 1995
---- ----
Supplemental Disclosure of Cash Flow
Information:
Cash paid during the year for:
Interest $ 5,770 $ 32,431
Income taxes 2,920 --
Supplemental Disclosure of Noncash
Investing and Financing Activities:
Conversion of notes payable and accrued
interest into common stock $ 23,840 $172,214
Purchase of Chambers for common stock -- 25,000
Common stock issued for purchase of
marketing rights -- 50,000
Common stock issued for payment of
accrued expenses -- 40,170
Conversion of accounts payable into
common stock 278,576 --
The accompanying notes are an integral
part of these consolidated financial statements.
F-8
<PAGE>
LONGPORT, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Summary of Significant Accounting Policies
Organization
Longport, Inc. (the "Company") was incorporated January 22, 1993.
The Company was formed to market and distribute wound care
products. In 1994, the Company opened a Wound Healing Center in
Montclair, New Jersey and closed the center in 1995. In 1995, the
Company began managing wound healing centers under management
services contracts.
Basis of Presentation
The accompanying financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The
financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the
amount and classification of liabilities that might be necessary
should the Company be unable to continue as a going concern. The
Company's continuation as a going concern is dependent upon its
ability to generate sufficient cash flow to meet its obligations on
a timely basis, to obtain additional financing as may be required,
and to increase sales to a level where the Company becomes
profitable. Additionally, the Company has experienced extreme cash
liquidity shortfalls from operations.
The Company's continued existence is dependent upon its ability to
achieve its operating plan. Management's plan consists of the
following:
1. In 1995 and 1996, the Company restructured its operations to
begin opening and managing wound healing centers under
management services contracts. The Company intends to become
a services based Company and continue to reduce its general
and administrative expenses.
2. Sale of certain assets of the Company.
3. Obtaining additional equity capital through the sale of
common stock.
4. Potential exercise of outstanding common stock purchase
warrants and options.
If management cannot achieve its operating plan because of sales
shortfalls or other unfavorable events, the Company may find it
necessary to dispose of assets, or undertake other actions as may
be appropriate.
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiary. All significant
intercompany accounts and transactions have been eliminated.
F-9
<PAGE>
LONGPORT, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Summary of Significant Accounting Policies
(Continued)
Inventories
Inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out pricing method.
Inventories consists entirely of finished goods.
Property and Equipment
Depreciation of the primary asset classifications is calculated
based on the following estimated useful lives using the
straight-line method.
Classification Useful Life in Years
-------------- --------------------
Medical equipment 3-5
Computer equipment 5
Office furniture and equipment 5-10
Depreciation of property and equipment charged to operations is
$88,921 and $156,709 for the years ended December 31, 1996 and
1995, respectively.
Intangible Assets
Intangible assets are being amortized using the straight-line
method based on the following estimated useful lives.
Description Useful Life in Years
----------- --------------------
Patents 4
Goodwill 10
Exclusive marketing rights 5
The Company wrote off the purchased goodwill from the acquisition
of the minority interest of LMI in 1994, as it determined the asset
had been impaired.
Revenue Recognition
The Company recognizes revenue from product sales upon shipment to
the customer. Revenue from medical services are recognized as the
Company performs the services.
Stock-Based Compensation
During the year ended December 31, 1996, the Company adopted
Statement of Financial Accounting Standard (SFAS) No. 123,
"Accounting for Stock-Based Compensation". The Company will
continue to measure compensation expense for its stock-based
employee compensation plans using the intrinsic value method
prescribed by APB Opinion No. 25, "Accounting for Stock Issued to
Employees". See Note 5 for pro forma disclosures of net income and
earnings per share as if the fair value-based method prescribed by
SFAS 123 had been applied in measuring compensation expense.
Net Loss Per Share of Common Stock
Net loss per share of common stock is based on the weighted average
number of shares of common stock and common stock equivalents
outstanding during each period. Common stock
F-10
<PAGE>
LONGPORT, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Summary of Significant Accounting Policies
(Continued)
Net Loss Per Share of Common Stock (Continued)
equivalents represent the dilutive effect of the assumed exercise
of certain outstanding stock options and warrants.
Cash Equivalents
For purposes of the statements of cash flows, the Company considers
all highly liquid debt instruments purchased with a maturity of
three months or less to be cash equivalents.
Income Taxes
The Company has made no provision for income taxes because of
financial statement and tax losses, except for franchise taxes. As
of December 31, 1996, the Company had a net operating loss of
approximately $2,150,000 which can be carried over fifteen years to
offset future taxable income. The carryovers expire in 2011.
The Company adopted Statement of Financial Accounting
Standards No. 109 (SFAS No. 109), "Accounting for Income
Taxes" in 1993. SFAS No. 109 requires the liability method
of accounting for income taxes. Deferred income taxes
result from temporary differences in the recognition of
revenue and expenses for income tax and financial reporting
purposes.
At December 31, 1996 and 1995, the Company had a deferred tax asset
of approximately $660,000 and $540,000, respectively, resulting
from net operating loss carryforwards, which has been offset in its
entirety by a valuation allowance. The net change in the valuation
allowance for deferred tax assets was an increase of $120,000
related to benefits from net operating loss carryforwards.
Estimates
The preparation of the Company's financial statements in conformity
with generally accepted accounting principles requires the
Company's 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 amount of revenues and expenses during
the reporting period. Actual results could differ from those
estimates.
2. Current Notes Payable
Non-interest bearing unsecured note. The
note is convertible into common stock at
$.12 per share. $10,000
12% unsecured demand note, interest is
payable monthly. 3,000
-------
Total $13,000
=======
F-11
<PAGE>
LONGPORT, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Long-Term Debt
Individual
Non-interest bearing note due in 1997,
collateralized by equipment. The note is
convertible into common stock at $1.00 per
share. $ 50,000
Obligation Under Capital Leases
15% installment note with monthly principal and
interest payments of $186, due in 1998,
collateralized by equipment. 1,798
--------
Total Long-Term Debt 51,798
Less current portion of long-term debt 51,255
--------
Long-Term Debt $ 543
========
Installments due on debt principal, including the capital lease, at
December 31, 1996 are as follows:
Year Ending December 31,
1997 $ 51,255
1998 543
--------
Total $ 51,798
========
4. Warrants and Options
Options
The Company has granted stock options to employees, consultants and
other individuals. The outstanding agreements expire from January
1997 to July 1998. The following table contains information on all
of the Company's stock options for the years ended December 31,
1995 and 1996.
Number of Option Price
Shares Per Share
--------- ------------
Options outstanding at
December 31, 1994 759,000 $.50 to $1.00
Granted 140,000 $.10 to $1.00
Exercised (23,000) $.50
Cancelled (282,000) $.50 to $1.00
--------- -------------
Options outstanding at
December 31, 1995 594,000 $.10 to $1.00
Granted 150,000 $.15
Exercised -- --
Cancelled (350,000) $.50 to $1.00
--------- -------------
Options outstanding at
December 31, 1996 394,000 $.10 to $.50
========= ============
Warrants
In November 1993, the Company sold 1,185,714 "Units"
consisting of one share of the Company's common stock and
one common stock purchase warrant for $.35 per unit. The
F-12
<PAGE>
LONGPORT, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Warrants and Options (Continued)
Warrants (Continued)
Warrants entitle the holder to purchase one share of the Company's
common stock for $3.00 at anytime until June 30, 1997. All
1,185,714 warrants are outstanding as of December 31, 1996.
5. Stock-Based Compensation Plans
The Company adopted Financial Accounting Standard No. 123,
"Accounting for Stock-Based Compensation" (SFAS 123) during the
year ended December 31, 1996. In accordance with the provisions of
SFAS 123, the Company applies APB Opinion No. 25, "Accounting for
Stock Issued to Employees, " and related interpretations in
accounting for its plans and does not recognize compensation
expense for its stock-based compensation plans other than for
options granted to non-employees. If the Company had elected to
recognize compensation expense based upon the fair value at the
grant date for awards under these plans consistent with the
methodology prescribed by SFAS 123, the Company's net income and
earnings per share would be reduced to the following pro forma
amounts:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Net income (loss):
As reported $ (357,429) $ (942,510)
Pro forma $ (357,429) $ (965,863)
Net income (loss) per share of common stock:
As reported $ (.03) $ (.15)
Pro forma $ (.03) $ (.15)
</TABLE>
These pro forma amounts may not be representative of future
disclosures since the estimated fair value of stock options is
amortized to expense over the vesting period and additional options
may be granted in future years. The fair value for these options
was estimated at the date of grant using the Black-Scholes option
pricing model with the following assumptions for the year ended
December 31, 1995:
1995
----
Risk-free interest rate 6.65%
Expected life 2 years
Expected volatility 255.8%
Expected dividend yield 0%
The Company did not grant any employee stock options in 1996.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option
valuation models require the input of
F-13
<PAGE>
LONGPORT, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Stock-Based Compensation Plans (Continued)
highly subjective assumptions including the expected stock
price volatility. Because the Company's employee stock
options have characteristics significantly different from
those of traded options, and because changes in subjective
input assumptions can materially affect the fair value
estimates, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the
fair value of its employee stock based compensation plans.
The following table summarized information about stock based
compensation plans outstanding at December 31, 1996:
Options Outstanding and Exercisable by Price Range as of December
31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------- -------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life-Years Price Exercisable Price
------ ----------- ---------- ----- ----------- -----
<C> <C> <C> <C> <C> <C> <C>
$.10 194,000 1.55 $ .10 194,000 $ .10
$.50 50,000 .07 $ .50 50,000 $ .50
- ---- ---- ------- ---- ------- ------- -------
$.10-$.50 244,000 1.24 $ .18 244,000 $ .18
==== ==== ======= ==== ======= ======= =======
</TABLE>
6. Preferred Stock
The authorized preferred stock of the Company consists of 1,000,000
shares, $.001 par value. The preferred stock may be issued in
series from time to time with such designation, rights, preferences
and limitations as the Board of Directors of the Company may
determine by resolution. The rights, preferences and limitations of
separate series of preferred stock may differ with respect to such
matters as may be determined by the Board of Directors, including
without limitation, the rate of dividends, method and nature of
payment of dividends, terms of redemption, amounts payable on
liquidation, sinking fund provisions (if any), conversion rights
(if any), and voting rights. Unless the nature of a particular
transaction and applicable statutes require approval, the Board of
Directors has the authority to issue these shares without
shareholder approval.
7. Commitments and Contingencies
Leases
The Company leases telephone equipment under a long-term leasing
arrangement. The Company's office facilities are leased under a
short-term lease which expires in March 1997.
F-14
<PAGE>
LONGPORT, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Commitments and Contingencies (Continued)
Leases (Continued)
The following is a schedule of future minimum lease payments at
December 31, 1996 under the Company's capital lease (together with
the present value of minimum lease payments) which has a remaining
noncancellable lease term in excess of one year:
Year Ending Capital
December 31, Leases
------------ ------
1997 $ 2,232
1998 930
-------
Total Future Minimum Lease Payments 3,162
Less Amount Representing Interest (1,364)
Present Value of Future Capital Lease
Obligations $ 1,798
=======
Rental expense charged to operations was $3,125 and $47,977 for the
years ended December 31, 1996 and 1995, respectively.
Leased equipment under capital leases as of December 31, 1996 is as
follows:
Equipment $ 6,549
Less accumulated amortization (1,834)
-------
Net Equipment Under Capital Leases $ 4,715
=======
8. Related Party Transactions
The Company has entered into transactions with related entities, as
follows:
The Company borrowed $16,464 from Wound Healing Systems, Inc.
("WHS"), a corporation controlled by the Company's President in
August 1994 under a one year promissory note at 12% interest (Note
2) which had a balance due of $3,000 and $7,464 as of December 31,
1996 and 1995, respectively.
In August 1995, WHS sold 10 Hyperbaric Oxygen Chambers ("Chambers")
to the Company for $25,000. The payment was made through the
issuance of 50,000 shares of the Company's common stock valued at
$.50 per share.
In 1995, the Company issued 100,000 shares of its common stock
valued at $.15 per share, or $15,000, as partial payment of an
amount owed to WHS.
In 1995, the Company issued 100,000 shares of its common stock
valued at $.15 per share, or $15,000, as payment of consulting fees
to a corporation controlled by the Company's President.
F-15
<PAGE>
LONGPORT, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. Related Party Transactions (Continued)
In 1996, the Company's President paid off the remaining $5,000
balance of a Company note payable. Accordingly, the Company owed
its President $5,000 which was subsequently converted into 41,667
shares of the Company's common stock ($.12 per share).
In 1996, two stockholders of the Company purchased certain accounts
payable and notes payable from creditors of the Company totalling
$228,594. The Company issued 2,223,140 shares of its common stock
to the stockholders as payment of these liabilities.
9. Loss on Disposal of Assets
Included in the loss on disposal of assets is a $116,174 loss from
the return of the Company's office building to the mortgageholder
in August 1996.
10. Extraordinary Gain
Included in the extraordinary gain are settlements of certain
accounts payable and notes payable for less than the amounts owed
resulting in a gain of $48,861.
11. Concentration of Credit Risk and Major Customers
The Company provides credit, in the normal course of
business, to hospitals, distributors, and others in the
health care industry. The Company's customers are located
primarily in Pennsylvania and New Jersey. The Company
performs periodic credit evaluations of its customers'
financial condition and generally requires no collateral.
The Company maintains reserves for potential credit losses.
Revenues from major customers, as a percentage of total revenue,
for the year ended December 31, 1996 were as follows:
Customer A 12.7%
Customer B 25.5%
Customer C 41.5%
In 1995, no customers accounted for 10% of total revenues.
F-16
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 2,925
<SECURITIES> 0
<RECEIVABLES> 33,191
<ALLOWANCES> 0
<INVENTORY> 3,400
<CURRENT-ASSETS> 67,078
<PP&E> 393,887
<DEPRECIATION> (312,833)
<TOTAL-ASSETS> 199,799
<CURRENT-LIABILITIES> 49,032
<BONDS> 0
0
0
<COMMON> 12,855
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 199,799
<SALES> 28,190
<TOTAL-REVENUES> 172,171
<CGS> 5,979
<TOTAL-COSTS> 394,954
<OTHER-EXPENSES> (181,959)
<LOSS-PROVISION> (404,742)
<INTEREST-EXPENSE> (58,118)
<INCOME-PRETAX> (404,742)
<INCOME-TAX> 1,548
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 48,861
<CHANGES> 0
<NET-INCOME> (357,429)
<EPS-PRIMARY> (.03)
<EPS-DILUTED> 0
</TABLE>
