SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 [Fee Required]
For the fiscal year ended December 31, 1998 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 [No Fee Required]
For the transition period from _______________ to ________________ .
Commission File No. 33-75236
LONGPORT, INC.
--------------------------------------------
(Name of Small Business Issuer in its Charter)
Delaware 23-2715528
- ------------------------------- -----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
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: None
Securities registered pursuant to Section 12(g) of the Act:
$.001 Par Value Common Stock
Common Stock Purchase Warrants
------------------------------
(Title of Class)
<PAGE>
Check whether the Registrant (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
----- -----
As of March 15, 1999, 16,160,949 shares of the Registrant's $.001 par value
Common Stock were outstanding. As of April 9, 1999, the market value of the
Registrant's Common Stock, excluding shares held by affiliates, was $17,231,054
based upon a closing bid price of $1.90 per share of Common Stock on the
Electronic Bulletin Board.
Check if there is no disclosure contained herein of delinquent filers in
response to Item 405 of Regulation S-B, and will not 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
The Registrant's revenue for its most recent fiscal year was $347,776.
The following documents are incorporated by reference into Part III, Items
9 through 12 hereof: None.
2
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
- ------- -----------------------
The following is a summary of certain information contained in this Report
and is qualified in its entirety by the detailed information and financial
statements that appear elsewhere herein. Except for the historical information
contained herein, the matters set forth in this Report include forward-looking
statements within the meaning of the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995. These forward-looking statements are
subject to risks and uncertainties that may cause actual results to differ
materially. These risks and uncertainties are detailed throughout the Report and
will be further discussed from time to time in the Company's periodic reports
filed with the Commission. The forward-looking statements included in the Report
speak only as of the date hereof.
Business
The Company has been assigned the patent and intellectual property right to
a soft tissue ultrasound scanner ("Scanner") developed at the United Medical and
Dental Schools of Guy's and St. Thomas's Hospitals ("UMDS") located in London,
England. The Scanner produces a high resolution image of the skin and the tissue
up to two centimeters below the skin allowing clinicians to check the status of
a wound, and the surrounding tissue, without having to incise the patient or put
a probing device in the fragile wound bed. When used with a coupling gel, the
Scanner can penetrate certain types of wound dressings and produce an image,
thus avoiding risks of infection and protecting the wound surface during the
scanning process.
Traditional low-frequency ultrasound equipment, costing $150,000 to
$350,000, is generally unable to image thin structures like skin. The Company
believes that the Scanner's ability to produce high-resolution images of thin
structures, such as skin, subcutaneous tissue and superficial tendons, is
unique.
Ultrasound has been used for medical images for many years and has proven
to be a safe, effective imaging device. Using sound waves emitted at frequencies
well above the normal human ear response, echoed signals are converted into
graphic images and displayed on a monitor. Computer programs that support
ultrasound imaging use algorithms to document dimensions of areas being scanned.
These measurements provide a baseline that the system and the clinician can use
to compare to other scans. The Scanner shares these characteristics which are
common to all ultrasound imaging equipment, but utilizes high frequency
ultrasound at 20 MHz to provide high resolution images at depths of up to 2
centimeters. This compares to the ultrasound frequency used to scan fetal
images, which generally ranges from 4 to 7 MHz. Conventional ultrasound
equipment utilizes up to 10 MHz.
The depth used by the Scanner to produce a useable image depends on the
area being scanned and the clinical application. For instance, wounds on the
ankle require an image depth of only 2 to 4 millimeters, an area generally too
small to resolve using conventional imaging technology, but ideally suited to
3
<PAGE>
the use of the Scanner. The Scanner provides a clinician with a clear picture,
at 65 by 200 microns, of the entire wound area. Consequently, the clinician need
not disturb the wound with invasive procedures that can cause additional damage.
Since wounds develop and begin to heal from the inside, underneath the skin
surface, the ability to observe the entire wound, up to 2 centimeters deep,
gives clinicians a much better understanding of the patient's tissue. The
ability to observe minute changes just below the skin's surface during the early
stages of treatment gives the clinician a picture of the wound's status and
allows them to evaluate the treatment's success faster than current methods
permit. The Scanner uses a proprietary software program to allow the clinician
to objectively measure changes in the wound. The ability to track the healing
process becomes critical during the early stages of a treatment program. The
Company believes that with the Scanner, a clinician can identify the status of
healing within days of starting treatment, instead of waiting up to a month for
changes to appear on the wound surface. This helps clinicians quickly determine
whether protocol changes are required, helping to decrease the healing time.
The Scanner weighs 15 pounds and is similar in dimensions to a laptop
computer. The Company's proposed monthly fees of approximately $2,000 per month
is expected to make the Scanner cost effective for dermatological surgeons,
podiatrists, family practitioners and doctors of sports medicine.
Government Regulation
The Company must obtain clearance from the FDA to market the Scanner. The
research, development, testing, production and marketing of new medical products
are subject to extensive government 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.
There are two primary paths to obtaining FDA clearance to market the
Scanner: 510(k) premarket clearance or an approved Premarket Approval
Application. The path through which the device travels to market clearance has
significant impacts with regard to time and cost, as illustrated at right.
Obtaining 510(k) clearance usually takes between six and 18 months. This
compares to the one to ten years generally required to obtain approval of a
Premarket Approval Application. Management believes (but cannot assure) that the
Scanner will qualify for 510(k) clearance.
According to the 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, 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
4
<PAGE>
approved by the FDA before they can be marketed. Such pre-market 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) pre-market 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 as
been proven, through the 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 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 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 the FDA regulations and will require appropriate
filing 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 approval notification clearance will be required and has
completed all necessary filings, including the identification of the legally
marketed device that is the most equivalent with the Scanner.
Marketing
The Company will focus its initial marketing efforts on capturing customers
that will use the Scanner for its wound healing applications. This includes
markets for skin ulcer, diabetes, and trauma wound treatments. Wound management,
the process of treating various types of wounds, is an expanding and
increasingly important area of concern for the medical profession. The cost of
treating chronic wounds alone has been estimated at $5 billion to $7 billion
annually. Healthcare providers in the US spent nearly $2 billion on wound
management products in 1998, with sales internationally in excess of $6 billion.
The combined segments are expected to grow to over $9 billion by the year 2002.
Over $90 billion per year is spent on treating America's diabetic
population. With more than 625,000 new cases per year, the Company believes
there is value for a device that accelerates diagnosis of diabetic wounds.
Having a view of the wound and surrounding tissue is expected to materially
reduce the risks of amputations, thereby increasing the survival rate.
5
<PAGE>
Competition
Diagnostic imaging solutions compete primarily on the basis of diagnostic
value, imaging performance, reliability, ease of use and price. The Company
believes that the Scanner will be proven to have the ability to deliver each of
these criteria. Nevertheless, the Company faces current and potential
competitors, including MRI producers, ultrasound manufacturers, and X-ray based
topography solutions. Moreover, current and potential diagnostic imaging
modalities such as those described below pose a significant competitive risk to
the Company:
a. Existing (Low Frequency) Ultrasound Manufacturers - Traditional
ultrasound technology is used regularly for a number of clinical applications.
Several types of ultrasound exist currently, including pulsed ultrasound,
continuous wave "Doppler" ultrasound and real-time ultrasound. Each variation is
particularly suited to certain applications. For instance, "Doppler" ultrasound
is used to record changes in a fetal heart while pulsed ultrasound can be used
to resolve images of the abdomen. The Scanner is significantly less expensive to
operate and smaller in size than traditional ultrasound devices.
b. Magnetic Resonance Imaging (MRI) - Magnetic resonance imaging is used in
medical settings to produce high quality images of the inside of the body. MRI
is based on the principles of nuclear magnetic resonance (NMR), a technique
originally used by chemists and physicists to obtain microscopic chemical and
physical information about molecules. In the Company's opinion, the costs, space
requirements and resolution capabilities of the Scanner are superior to MRI.
c. Conventional X-Ray - X-ray systems pass radiation through an area of a
patient to a shielded photographic plate. Due to the health risks associated
with exposure to ionizing radiation, operating x-ray equipment requires a
controlled environment and trained professionals. Additionally, operating x-ray
equipment requires film and in many cases, board certified radiologists. Despite
these barriers x-ray technologies is effective for a number of applications,
including skeletal examinations and mammography. However, x-rays cannot image
thin tissue structures.
Technology Transfer Agreements
In December 1997 the Company entered into two Technology Transfer
Agreements (the "Agreements") with the United Medical and Dental Schools of St.
Guy's and St. Thomas's Hospitals ("UMDS") and Square Wave Systems, Ltd. ("SWS")
pursuant to which UMDS and SWS assigned all of their right, title and interest
in and to an international patent application and a South African patent
application (the "Patents") covering certain technology associated with the
Scanner. The Agreements provide the Company with the exclusive and world wide
rights to the use of the Scanner technology underlying the Patents for medical
applications only. UMDS and SWS retained the rights to all other uses for the
Patents. However, in the case of the fractal analysis software, a software
component of the Scanner which is used to analyze, determine and graphically
display the fractal nature of a reflected image generated from a Scanner, the
Company's rights are limited to the use of software solely in a high frequency
ultra sound skin scanner. In consideration of the assignment of the technology
pursuant to the Agreements, the Company agreed to pay to UMDS and SWS, in the
aggregate, 3% of the Company's gross revenues for the five year period
6
<PAGE>
commencing at such time as the FDA grants marketing permission to the Company
with respect to the Scanner. The Company also agreed to pay all costs associated
with maintaining and renewing the Patents and all costs associated with
obtaining FDA marketing permission for the Scanner.
In the event the Company defaults under the payment or any other terms of
the Agreements, UMDS and SWS are granted the right to market the technology
underlying the Patents and the Scanner in direct competition to the Company.
There can be no assurance that the Patents will afford protection against
competitors with similar technology, that the Patents will not be infringed upon
or designed around by others, that others will not obtain patents that the
Company will need to license or design around, that the Patents will not
inadvertently infringe upon the patents of others, or that others will not
manufacture and distribute similar scanners upon expiration of the Patents.
There can also be no assurance that the Patents will not be invalidated or that
the Company will have adequate funds to finance the high cost of prosecuting or
defending patent validity or infringement issues.
Employees
The Company employs three full time employees, including its executive
officers.
ITEM 2. DESCRIPTION OF PROPERTY
- --------------------------------
The Company leases approximately 1,000 square feet of office space at 791
South Chester Road, Swarthmore, Pennsylvania on a 12-month lease expiring on
December 31, 1999 at $725 per month.
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
The Company is the Plaintiff in an action entitled Longport, Inc., et al v.
Rosner, Bresler, Goodman & Buckholz, et al., Civil Action No. 002989, filed in
1997 in the Philadelphia Court of Common Pleas. The action alleges wrongful use
of civil proceedings and civil conspiracy against the defendants, and seeks
compensatory and punitive damages.
In September 1997, the Company was notified of a Medicare Hearing Officer's
decision that the Company is liable for repayment of Medicare Benefit
Overpayments of $269,120. The Overpayments are from calendar years 1994 and
1995. The Company has appealed the Hearing Officer's decision. The Appeal was
heard by an Administrative Law Judge on January 5, 1999. The Administrative Law
Judge reviewed fourteen cases out of approximately 500 cases in dispute. The
Administrative Law Judge rendered his decision on February 18, 1999 regarding
the fourteen cases as follows:
A. Five cases were dismissed.
B. Three cases were decided as partially unfavorable resulting in an
overpayment of $1,434 and two cases which need to be recalculated.
C. Six cases were decided as unfavorable resulting in an overpayment of
$6,420.
The other cases were not reviewed and the Company does not know if they
will be reviewed by the Administrative Law Judge. The Company has the right to
appeal the Administrative Law Judge's decision with the Appeals Council. The
Appeal must be written and filed within sixty days. The Company currently plans
to appeal the Administrative Law Judge's decision. The Company is unable to
predict the outcome of the Appeal. However, Management believes that there were
no Medicare Benefit Overpayments in 1994 and 1995 and will vigorously defend its
position.
Payment of any judgement or settlement in connection with the Medicare
Benefit Overpayments Appeal together with the costs of defending the Appeal,
could adversely affect the Company's results of operations and financial
condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
Not applicable.
7
<PAGE>
PART II
-------
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- -----------------------------------------------------------------
The Company's Common Stock has traded on the Electronic Bulletin Board of
the National Quotation Bureau under the symbol "LPTI" since September 7, 1994.
The following table sets forth for the quarters indicated the range of high
and low closing prices of the Company's Common Stock as reported by the National
Quotation Bureau, but does not include retail markup, markdown or commissions.
Price
-----------------------
By Quarter Ended: High Low
--------- ---------
Fiscal 1997
March 31, 1997 $ .31 $ .06
June 30, 1997 $ .31 $ .06
September 30, 1997 $ .50 $ .06
December 31, 1997 $ 2.00 $ .31
Fiscal 1998
March 31, 1998 $ 1.62 $ .88
June 30, 1998 $ 2.62 $ 1.56
September 30, 1998 $ 2.12 $ .75
December 31, 1998 $ 2.00 $ .56
Fiscal 1999
March 31, 1999 (through March 15, 1999) $ 1.80 $ 1.20
As of March 15, 1999, there were 16,160,949 shares of Common Stock
outstanding held by approximately 325 record and beneficial stockholders.
Transfer Agent and Warrant Agent
The Company has appointed Corporate Stock Transfer, Inc., 370 17th Street,
Suite 2350, Denver, Colorado 80202, as its transfer agent and warrant agent.
Dividends
The Company has not paid dividends on its Common Stock since inception and
does not plan to pay dividends in the foreseeable future. Earnings, if any, will
be retained to finance growth.
8
<PAGE>
Limitation on Liability
The Company's Certificate of Incorporation provides that a director shall
not be personally liable to the Company or its stockholders for any action taken
or any failure to act to the full extent permitted by the Delaware law. The
effect of this provision is to eliminate the rights of the Company and its
stockholders, through stockholders' derivative suits on behalf of the Company,
to recover monetary damages from a director for breach of the fiduciary duty of
care as a director including breaches resulting from negligent or grossly
negligent behavior. This provision does not limit or eliminate the rights of the
Company or any stockholder to seek non-monetary relief such as an injunction or
rescission in the event of a breach of a director's duty of care or to seek
monetary damages for (i) a violation of criminal law, (ii) unlawful payment of
dividends or other distribution under Delaware law, (iii) a transaction in which
a director derived an improper personal benefit, (iv) willful misconduct, or (v)
reckless, malicious or wanton acts.
9
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
- ------------------------------------------------------------------
Results of Operations
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Revenues for 1998 were $347,776 compared to $171,786 for 1997. While
revenues from medical supplies and equipment sales and rentals decreased,
revenues generated from wound center management fees remained essentially the
same, $109,500 and $102,000, respectively. Licensing and marketing fees for 1998
were $219,500, compared to $34,000 in 1997. This change reflects the shift in
the Company's business philosophy from reliance on sales and rentals. The
Company expects licensing and marketing fees to increase in the future.
Total expenses increased to $2,431,472 in 1998 from $365,357 in 1997.
Operating expenses for 1998 include compensation from the issuance of stock
options, totaling $1,087,000 and $643,583 in compensation paid in Common Stock
for services rendered in research and development. This increase reflects the
Company's commitment to the development of the Scanner technology. The Company
expects research and development expenses related to the Scanner to increase
over time, as these expenses are necessary to seeking FDA clearance to market
the Scanner.
The Company experienced a net loss of $2,085,306 in 1998, compared to a
$214,681 loss for 1997, an 871% increase. However, $1,730,583 of the loss for
1998 was due to the issuance of stock options and compensation paid in Common
Stock, as noted in the preceding paragraph. The Company does not anticipate
incurring similar extraordinary expenses in the future.
During 1998, the Company continued to foster new growth under its
services-oriented plan. In 1998, the Company focused its efforts on obtaining
licensing and marketing agreements. These agreements entitle the Licensees to
market the Company's programs and Scanner, upon 510(k) clearance from the FDA.
The Company anticipates an increase in revenues in 1999, mainly through
marketing and licensing agreements.
Liquidity and Capital Resources
In 1998, the Company sold a total of 719,667 shares of its restricted
Common Stock to current and new shareholders. The shares were sold between $.50
and $.80 per share, netting the Company a total of $416,580.
Year 2000 Issues
Many computers, software programs and other equipment with embedded
computer chips (systems) in use today utilize two digits to specify the year,
such as "98" for 1998 (the Y2K issue). As a result of the Y2K issue, such
systems may recognize a date using "00" as the year 1900 rather than the year
2000. In some cases, the date "00" may cause system(s) failure(s) or
miscalculations causing disruptions of the Company's operations.
10
<PAGE>
In early 1998 the Company began formulating a comprehensive plan to assess
the Company's Y2K issues. The plan calls for the identification of those
systems, both internal and external, which are critical to the Company's ability
to continue normal operations, the assessment of any required remediation
(including any upgrading, modification and replacement of computer hardware and
software and adequate testing to ensure Y2K compliance), and the resources
needed to bring those critical systems into Y2K compliance.
The internal systems under evaluation include the Company's accounting,
data processing, telephone and other miscellaneous information technology
systems, as well as alarm systems, printers, fax machines and modems. The
Company believes that it has identified the internal systems that are
susceptible to failure or potential processing errors as a result of the Y2K
issue. The Company is concentrating its Y2K efforts on these systems. The
Company anticipates that its Y2K identification, assessment and remediation
efforts for critical internal systems will be completed by June 30, 1999.
However, testing for Y2K compliance will be an ongoing process.
The Company believes that its computer hardware and related peripherals are
currently Y2K compliant based upon representations made by the providers of such
equipment. The Company also believes that its accounting and payroll software
systems are Y2K compliant and testing to ensure such compliance will be
completed by June 30, 1999.
The Company is reviewing, and has initiated written communications with,
other third parties providing goods or services, such as financial institutions
and utility companies, which may be critical to the Company's operations to: (i)
ascertain the extent to which the Company may be exposed to adverse effects for
any failure by such third parties to remediate their Y2K issues; and (ii)
resolve, to the extent practicable, such problems. However, the Company has no
control over and has only limited ability to influence such third parties' Y2K
compliance. The failure of such third parties to achieve Y2K compliance in a
timely manner and the potential inability to replace such a third party
provider, could adversely impact the Company's operations.
The Company currently estimates that the total identifiable cost of its Y2K
compliance effort will not exceed $10,000. As of December 31, 1998, the Company
has incurred approximately $5,000 to upgrade its computer hardware and software.
The Company does not track personnel costs associated with its Y2K compliance
effort. The Company expects to fund Y2K expenditures from internal sources.
Based on the progress made to date and its timetable for further progress
in attaining Y2K compliance, the Company does not currently anticipate any
significant risks associated with its Y2K issues. However, management believes
that it is not possible to determine with absolute certainty that all Y2K issues
pertaining to the Company have or will be identified and corrected. Because the
assessment of its Y2K issues is incomplete at this time, the Company has yet to
determine the most reasonably likely worst case scenario relating to Y2K issues,
11
<PAGE>
and has yet to complete a comprehensive contingency plan with respect to its Y2K
issues. The Company anticipates completing the Y2K assessment and comprehensive
contingency plan by September 30, 1999.
ITEM 7. FINANCIAL STATEMENTS
12
<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, 1998 F-3
Consolidated Statements of Operations for the years ended
December 31, 1998 and 1997 F-5
Consolidated Statements of Changes in Stockholders' Equity for the
years ended December 31, 1998 and 1997 F-6
Consolidated Statements of Cash flows for the years ended
December 31, 1998 and 1997 F-7
Notes To Consolidated Financial Statements F-8
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, 1998, and the related consolidated statements
of operations, changes in stockholders' equity and cash flows for the years
ended December 31, 1998 and 1997. 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, 1998 and the consolidated results of its
operations and its cash flows for the years ended December 31, 1998 and 1997 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 $2,085,306 during the year ended December 31,
1998. As discussed in Note 1 to the financial statements, the Company's
significant operating losses raise substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these matters are
also discussed in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Angell & Deering
Certified Public Accountants
Denver, Colorado
January 19, 1999, except for the
second caption in Note 6 as to
which the date is February 18, 1999.
F-2
<PAGE>
LONGPORT, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1998
ASSETS
------
Current Assets:
Cash and cash equivalents $ 127,853
Accounts receivable - trade, net of
allowance for doubtful accounts of $3,600 10,878
Inventories 25,467
Prepaid expenses 29,951
Current portion of note receivable 3,750
---------
Total Current Assets 197,899
---------
Property and Equipment, at cost:
Medical equipment 80,324
Computer equipment 10,305
Office furniture and equipment 7,901
---------
98,530
Less accumulated depreciation (64,354)
---------
Net Property and Equipment 34,176
---------
Other Assets:
Deposits 1,175
Note receivable, net of current portion above --
Intangible assets, net of accumulated
amortization of $93,333 14,167
---------
Total Other Assets 15,342
---------
Total Assets $ 247,417
=========
The accompanying notes are an integral
part of these consolidated financial statements.
F-3
<PAGE>
LONGPORT, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1998
(Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable $ 26,661
Accrued payroll taxes 2,342
Deferred revenue 7,500
-----------
Total Current Liabilities 36,503
-----------
Commitments and Contingencies --
Stockholders' Equity:
Preferred stock: $.001 par value,
1,000,000 shares authorized,
none issued or outstanding --
Common stock: $.001 par value,
25,000,000 shares authorized,
16,160,949 shares issued and outstanding 16,161
Paid in capital 4,771,932
Accumulated deficit (4,572,179)
-----------
215,914
Less treasury stock, at cost (30,000 common shares) (5,000)
-----------
Total Stockholders' Equity 210,914
-----------
Total Liabilities and Stockholders' Equity $ 247,417
===========
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, 1998 AND 1997
1998 1997
------------ ------------
Net Revenues:
Medical supply sale $ 8,051 $ 18,786
Medical equipment rentals 10,725 17,000
Wound clinic management fees 109,500 102,000
License and marketing fees 219,500 34,000
------------ ------------
Total Revenues 347,776 171,786
------------ ------------
Operating Expenses:
General and administrative 1,434,313 341,357
Research and development expense 997,159 24,000
------------ ------------
Total Operating Expenses 2,431,472 365,357
------------ ------------
Operating Income (Loss) (2,083,696) (193,571)
------------ ------------
Other Income (Expense):
Interest income -- 325
Other income -- 4,488
Loss on disposal of assets (641) (21,407)
Interest expense (566) (5,412)
------------ ------------
Total Other Income (Expense) (1,207) (22,006)
------------ ------------
Income (Loss) Before Provision for
Income Taxes and Extraordinary Gain (2,084,903) (215,577)
Provision for income taxes 403 3,759
------------ ------------
Income (Loss) Before Extraordinary Gain (2,085,306) (219,336)
Extraordinary Gain - Extinguishment of Debt -- 4,655
------------ ------------
Net Loss $ (2,085,306) $ (214,681)
============ ============
Net Loss Per Share of Common Stock:
Basic:
Loss before extraordinary gain $ (.14) $ (.02)
Extraordinary gain -- --
============ ============
Net Loss $ (.14) $ (.02)
============ ============
Diluted:
Loss before extraordinary gain $ (.14) $ (.02)
Extraordinary gain -- --
============ ============
Net Loss $ (.14) $ (.02)
============ ============
Weighted Average Number of
Common Shares Outstanding:
Basic 15,397,832 13,874,970
Diluted 15,397,832 13,874,970
The accompanying notes are an integral
part of these consolidated financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
LONGPORT, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
Common Stock Treasury Stock
-------------------- Paid in Accumulated ------------------------
Shares Amount Capital Deficit Shares Amount
------ ------ ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 12,855,135 $ 12,855 $ 2,320,918 $(2,272,192) -- $ --
Issuance of common stock for
cash at $.12 to $.25 per
share 1,811,147 1,811 270,326 -- -- --
Conversion of accrued expenses
to common stock at $.12 per
share 100,000 100 11,900 -- -- --
Conversion of note payable to
common stock at $.12 per share 40,000 40 4,760 -- -- --
Issuance of common stock upon
exercise of stock option at
$.15 per share 50,000 50 7,450 -- -- --
Common stock returned to the
Company in exchange for
equipment at $.17 per share -- -- -- -- (30,000) (5,000)
Net loss -- -- -- (214,681) -- --
----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 1997 14,856,282 14,856 2,615,354 (2,486,873) (30,000) (5,000)
Issuance of common stock for
cash at $.50 to $.80 per share 719,667 720 416,580 -- -- --
Issuance of common stock upon
exercise of stock option at
$.10 per share 100,000 100 9,900 -- -- --
Issuance of common stock for
research equipment at $.38
per share 125,000 125 47,208 -- -- --
Issuance of common stock for
services at $.75 to $1.81
per share 360,000 360 595,890 -- -- --
Compensation from issuance of
stock options -- -- 1,087,000 -- -- --
Net loss -- -- -- (2,085,306) -- --
----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 1998 16,160,949 $ 16,161 $ 4,771,932 $(4,572,179) (30,000) $ (5,000)
=========== =========== =========== =========== =========== ===========
The accompanying notes are an integral
part of these consolidated financial statements.
F-6
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LONGPORT, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
1998 1997
---- ----
<S> <C> <C>
Cash Flows From Operating Activities:
Net loss $(2,085,306) $ (214,681)
Adjustments to reconcile net loss to net cash
(used) by operating activities:
Depreciation and amortization 51,139 41,972
Repayment of notes receivable in consideration
for services provided -- 11,000
Provision for bad debts -- 18,171
Loss on disposal of assets 641 21,407
Gain on extinguishment of debt -- (4,655)
Common stock issued for services 596,250 --
Common stock issued for research equipment 47,333 --
Compensation from issuance of stock options 1,087,000 --
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (6,602) 10,744
(Increase) decrease in other receivables 3,087 (1,525)
(Increase) in prepaid expenses (10,451) (19,500)
(Increase) decrease in inventories (23,267) 1,200
Increase (decrease) in accounts payable and accrued expenses 24,304 (44,566)
----------- -----------
Net Cash (Used) By Operating Activities (315,872) (180,433)
----------- -----------
Cash Flows From Investing Activities:
Capital expenditures (33,149) (20,132)
Payments on notes receivable 15,000 13,750
Deposits (1,175) --
----------- -----------
Net Cash (Used) By Investing Activities (19,324) (6,382)
----------- -----------
Cash Flows From Financing Activities:
Principal payments on notes payable (648) (59,350)
Issuance of common stock 427,300 279,637
----------- -----------
Net Cash Provided By Financing Activities 426,652 220,287
----------- -----------
Net Increase in Cash and Cash Equivalents 91,456 33,472
Cash and Cash Equivalents at Beginning of Year 36,397 2,925
----------- -----------
Cash and Cash Equivalents at End of Year $ 127,853 $ 36,397
=========== ===========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for:
Interest $ 566 $ 4,500
Income taxes 3,576 586
Supplemental Disclosure of Noncash Investing and Financing Activities:
Conversion of notes payable and accrued
interest into common stock -- $ 4,800
Common stock issued for payment of accrued expenses -- 12,000
Sale of equipment for treasury stock -- 5,000
The accompanying notes are an integral
part of these consolidated financial statements.
F-7
</TABLE>
<PAGE>
LONGPORT, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Sianificant Accounting Policies
------------------------------------------
Description of Business
-----------------------
Longport, Inc. (the "Company") was incorporated January 22, 1993.
The Company was formed to market and distribute wound care
products. In 1995, the Company began managing wound healing centers
under management services contracts. Also, the Company is
developing a soft tissue ultrasound scanner (the "Scanner"). The
Scanner, after approval is obtained from the Food and Drug
Administration, will be used in numerous wound care and other
medical applications.
Basis of Presentation
---------------------
The accompanying consolidated 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. Obtaining additional equity capital through the sale of common
stock.
2. Potential exercise of outstanding common stock purchase
warrants and options.
3. Sale of marketing and/or license rights to the Scanner.
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.
Cash and Cash Equivalents
-------------------------
For purposes of the statements of cash flows, the Company
considers all highly liquid investments with a maturity of three
months or less at the date of purchase to be cash equivalents.
Inventories
-----------
Inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out pricing method.
Inventories consists of finished goods totalling $1,450 and
scanner parts totalling $24,017.
Property and Equipment
----------------------
Depreciation of the primary asset classifications is calculated
based on the following estimated useful lives using the
straight-line method.
F-8
<PAGE>
LONGPORT, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Sianificant Accounting Policies (Continued)
-----------------------------------------------------
Property and Equipment (Continued)
----------------------------------
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
$41,139 and $31,972 for the years ended December 31, 1998 and 1997,
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
----------- --------------------
Goodwill 10
Scanner rights 5
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".
Long-Lived Assets
-----------------
In accordance with Statement of Financial Accounting Standards
(SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of', the Company reviews
for the impairment of long-lived assets, certain identifiable
intangibles, and associated goodwill, whenever events or changes in
circumstances indicate that the carrying value of an asset may not
be recoverable. An impairment loss would be recognized when the
estimated future cash flows is less than the carrying amount of the
asset. No impairment losses have been identified by the Company.
Income Taxes
------------
Deferred income taxes are provided for temporary differences
between the financial reporting and tax basis of assets and
liabilities using enacted tax laws and rates for the years when the
differences are expected to reverse.
Net (Loss) Per Share of Common Stock
------------------------------------
As of December 31, 1997, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 128, "Earnings Per Share", which
specifies the method of computation, presentation and disclosure
for earnings per share. SFAS No. 128 requires the presentation of
two earnings per share amounts, basic and diluted.
F-9
<PAGE>
LONGPORT, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies (Continued)
-----------------------------------------------------
Net (Loss) Per Share of Common Stock(Continued)
-----------------------------------------------
Basic earnings per share is calculated using the average number of
common shares outstanding. Diluted earnings per share is computed
on the basis of the average number of common shares outstanding
plus the dilutive effect of outstanding stock options using the
"treasury stock" method.
The basic and diluted earnings per share are the same since the
Company had a net loss for 1998 and 1997 and the inclusion of stock
options and warrants would be antidilutive. Options and warrants to
purchase 2,535,714 and 1,379,714 shares of common stock at December
31, 1998 and 1997, respectively were not included in the
computation of diluted earnings per share because the Company had a
net loss and their effect would be antidilutive.
Estimates
---------
The preparation of the Company's consolidated 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.
Reclassifications
-----------------
Certain 1997 amounts have been reclassified to conform to the 1998
presentation.
2. Income Taxes
-------------
The components of the provision for income taxes are as follows:
1998 1997
---- ----
Current:
Federal $ -- $ --
State 403 3,759
---- ------
Total 403 3,759
---- ------
Deferred:
Federal -- --
State -- --
---- ------
Total -- --
---- ------
Total Provision For Income Taxes $403 $3,759
==== ======
The provision (benefit) for income taxes reconciles to the amount
computed by applying the federal statutory rate to income before
the provision (benefit) for income taxes as follows:
1998 1997
---- ----
Federal statutory rate (34)% (34)%
State income taxes, net of
federal benefits (6) (6)
Valuation Allowance 40 40
---- ----
Total --% --%
==== ====
F-10
<PAGE>
LONGPORT, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Income Taxes (Continued)
-----------------------
The following is a reconciliation of the provision for income taxes
to income before provision for income taxes computed at the federal
statutory rate of 34%.
1998 1997
---- ----
Income taxes at the
federal statutory rate $(708,867) $(71,713)
State income taxes, net
of federal benefits (125,094) (12,655)
Nondeductible expenses 3,978 2,589
Valuation allowance 830,386 79,335
Other -- 6,203
--------- --------
Total $ 403 $ 3,759
========= ========
Significant components of deferred income taxes as of December 31,
1998 are as follows:
Net operating loss carryforward $1,322,300
Stock option compensation 471,600
Depreciation 12,900
Other 1,900
----------
Total deferred tax asset 1,808,700
Less valuation allowance 1,808,700
----------
Net Deferred Tax Asset $ --
==========
The Company has assessed its past earnings history and trends,
sales backlog, budgeted sales, and expiration dates of
carryforwards and has determined that it is more likely than not
that no deferred tax assets will be realized. The valuation
allowance of $1,808,700 is maintained on deferred tax assets which
the Company has not determined to be more likely than not
realizable at this time. The net change in the valuation allowance
for deferred tax assets was an increase of $1,093,700. The Company
will continue to review this valuation on a quarterly basis and
make adjustments as appropriate.
At December 31, 1998, the Company had federal and state net
operating loss carryforwards of approximately $3,426,000 and
$1,576,000, respectively. Such carryforwards expire in the years
2008 through 2018 and 2005 through 2008 for federal and state
purposes, respectively.
3. Warrants and Options
--------------------
Options
-------
The Company has granted stock options to employees, consultants and
other individuals. The outstanding agreements expire from July 1999
through September 2000. The following table contains information on
all of the Company's stock options for the years ended December 31,
1998 and 1997.
F-11
<PAGE>
LONGPORT, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Warrants and Options (Continued)
-------------------------------
Options (Continued)
------------------ Number of Weighted Average
Shares Exercise Price
------ --------------
Options outstanding at
December 31, 1996 394,000 $.17
Granted -- --
Exercised (50,000) .15
Canceled (150,000) .27
--------- ----
Options outstanding at
December 31, 1997 194,000 .10
Granted 1,350,000 .88
Exercised (100,000) .10
Canceled (94,000) .10
--------- ----
Options outstanding at
December 31, 1998 1,350,000 $.88
========= ====
The weighted average fair value price of options granted in 1998
was $.79.
The following table summarizes information about stock options
outstanding at December 31, 1998:
Options Outstanding and Exercisable by Price Range as of December
31, 1998:
<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
------ ----------- ---------- ----- ----------- -----
<S> <C> <C> <C> <C> <C>
$.10 100,000 .55 $.10 100,000 $.10
.75 - 1.00 1,250,000 .99 .94 1,250,000 .94
----------- --------- --- --- --------- ---
$.10 - 1.00 1,350,000 .95 $.88 1,350,000 $.88
=========== ========= === ==== ========= ====
</TABLE>
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 Warrants entitle the holder
to purchase one share of the Company's common stock for $3.00 at
anytime until June 30, 2000. All 1,185,714 warrants are outstanding
as of December 31, 1998.
4. Stock-Based Compensation
------------------------
Pro Forma Disclosures
---------------------
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 employee stock options and does not recognize
compensation expense for its stock options 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 of
employee stock options consistent with the methodology prescribed
by SFAS No. 123, the Company's net income and earnings per share
would be reduced as follows:
F-12
<PAGE>
LONGPORT, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Stock-Based Compensation (Continued)
-----------------------------------
Pro Forma Disclosures (Continued)
-----------------------------
1998
----
Net income (loss):
As reported $(2,085,306)
Pro forma $(2,086,356)
Net income (loss) per share of common stock:
As reported $(.14)
Pro forma $(.14)
The Company did not grant any employee stock options in 1997.
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, 1998.
Risk-free interest rate 5.29%
Expected life 1 year
Expected volatility 155.43%
Expected dividend yield 0%
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 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.
Compensation Expense
--------------------
The Company recorded compensation expense of $900,750 for the year
ended December 31, 1998 for the value of certain options granted to
Consultants to the Company. In addition, the Company recorded
compensation expense of $171,250 for the year ended December 31,
1998 for the value of certain options granted to an employee. The
valuation of the options granted to employees is based on the
difference between the exercise price and the market value of the
stock on the measurement date. The valuation of the options granted
to non-employees is estimated using the Black-Scholes option
pricing model.
Also, the Company recorded compensation expense of $596,250 for the
year ended December 31, 1998 for the value of stock issued to
consultants for services provided to the Company.
5. Preferred Stock
---------------
The authorized preferred stock of the Company consists of 1,000,000
shares, no par value. The preferred stock may be issued in series
from time to time with such
F-13
<PAGE>
LONGPORT, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Preferred Stock (Continued)
--------------------------
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.
6. Commitments and Contingencies
-----------------------------
Leases
------
The Company leases office equipment, a motor vehicle and office
facilities under long-term leasing arrangements. The following is a
schedule of future minimum lease payments at December 31, 1998
under the Company's operating leases which have an initial
noncancellable lease term in excess of one year:
Year Ending Operating
December 31, Leases
------------ ------
1999 $24,000
2000 15,300
2001 3,625
-------
Total Future Minimum Lease Payments $42,925
=======
Rental expense charged to operations was $24,124 and $7,188 for the
years ended December 31, 1998 and 1997, respectively.
Medicare Hearings
-----------------
In September 1997, the Company was notified of a Medicare Hearing
Officer's decision that the Company is liable for repayment of
Medicare Benefit Overpayments of $269,120. The Overpayments are
from calendar years 1994 and 1995. The Company has appealed the
Hearing Officer's decision. The Appeal was heard by an
Administrative Law Judge on January 5, 1999. The Administrative Law
Judge reviewed fourteen cases out of approximately 500 cases in
dispute. The Administrative Law Judge rendered his decision on
February 18, 1999 regarding the fourteen cases as follows:
A. Five cases were dismissed.
B. Three cases were decided as partially unfavorable
resulting in an overpayment of $1,434 and two cases
which need to be recalculated.
C. Six cases were decided as unfavorable resulting in an
overpayment of $6,420.
The other cases were not reviewed and the Company does not know if
they will be reviewed by the Administrative Law Judge. The Company
has the right to appeal the Administrative Law Judge's decision
with the Appeals Council. The Appeal must be written and filed
within sixty days. The Company currently plans to appeal the
Administrative Law Judge's decision. The Company is unable to
predict the outcome
F-14
<PAGE>
LONGPORT, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Commitments and Contingencies (Continued)
----------------------------------------
Medicare Hearings (Continued)
-----------------------------
of the Appeal. However, Management believes that there were no
Medicare Benefit Overpayments in 1994 and 1995 and will vigorously
defend its position.
Payment of any judgement or settlement in connection with the
Medicare Benefit Overpayments Appeal together with the costs of
defending the Appeal, could adversely affect the Company's results
of operations and financial condition.
The Year 2000
-------------
The Company is currently working to resolve the potential impact of
the Year 2000 on the processing of date-sensitive information by
the Company's computerized information systems. The Year 2000
problem is the result of computer programs being written using two
digits (rather than four) to define the applicable year. Any of the
Company's programs that have time-sensitive software may recognize
a date using "00" as the year 1900 rather than the year 2000, which
could result in miscalculations or system failures. Costs of
addressing potential problems are expensed as incurred and are not
expected to have a material adverse impact on the Company's
financial position, results of operations or cash flows in future
periods. However, if the Company or its vendors are unable to
resolve such processing issues in a timely manner, it could result
in a material financial risk. Accordingly, the Company plans to
devote the necessary resources to resolve all significant Year 2000
issues in a timely manner. While the Company does not at this time
anticipate significant problems with suppliers and customers, it is
developing contingency plans with these third parties due to the
possibility of compliance issues.
7. Related Party Transactions
--------------------------
The Company has entered into transactions with related entities, as
follows:
In June 1997, the Company sold six Hyperbaric Oxygen Chambers to
Wound Healing Systems, Inc. ("WHS"), a corporation controlled by
the Company's President. As payment WHS returned 30,000 shares of
the Company's common stock to the Company. The net book value
($5,000), of the chambers sold was recorded as the value of the
stock received (treasury stock).
In 1997, the Company elected to forgo repayment of two notes
receivable of $5,500 each from a former officer and a current
officer. The $5,500 notes receivable ($11,000 in total) have been
expensed as compensation.
The Company owed Healing Systems, Inc. ("Healing") $7,155. Healing
agreed to accept $2,500 as payment in full resulting in a gain on
forgiveness of debt of $4,655. Healing's President is a major
stockholder of the Company.
In January 1997, the Company's Vice President converted $12,000 of
accrued salary into 100,000 shares of the Company's common stock.
8. 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 $4,655 for the year ended December 31, 1997.
F-15
<PAGE>
LONGPORT, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STAEMENTS
9. Concentration of Credit Risk and Major Customers
------------------------------------------------
Financial instruments that potentially subject the Company to
credit risk include cash on deposit at a bank which exceeded the
related U.S. Federal Deposit Insurance Corporation insurance by
$27,453 at December 31, 1998. In addition, trade accounts
receivable and a note receivable potentially subject the Company to
credit risk.
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 require no collateral.
The Company maintains reserves for potential credit losses.
Revenues from major customers, as a percentage of total revenue,
for the years ended December 31, 1998 and 1997 were as follows:
1998 1997
---- ----
Customer A 11.5% --
Customer B 12.1% 24.4%
Customer C 20.0% 34.9%
Customer D 28.8% 18.6%
10. Fair Value of Financial Instruments
-----------------------------------
Disclosures about Fair Value of Financial Instruments for the
Company's financial instruments are presented in the table below.
These calculations are subjective in nature and involve
uncertainties and significant matters of judgment and do not
include income tax considerations. Therefore, the results cannot be
determined with precision and cannot be substantiated by comparison
to independent market values and may not be realized in actual sale
or settlement of the instruments. There may be inherent weaknesses
in any calculation technique, and changes in the underlying
assumptions used could significantly affect the results. The
following table presents a summary of the Company's financial
instruments as of December 31, 1998:
1998
----------------------------
Carrying Estimated
Amount Fair Value
------ ----------
Financial Assets:
Cash and cash equivalents $127,853 $127,853
Note receivable 3,750 3,750
The carrying amounts for cash and cash equivalents, receivables,
accounts payable and accrued expenses approximate fair value
because of the short maturities of these instruments.
11. Proposed Private Offering
-------------------------
The Company is offering through a confidential Private Placement
Memorandum 500,000 shares of 8% convertible redeemable preferred
stock at $10.00 per share. The preferred stock may be redeemed at
the Company's option, upon 30 days notice, in whole or in part on a
pro rata basis, at any time at 110% of face value ($11.00 per
share) in 1999 increasing 5% per year up to 130% of face value
($13.00 per share) in 2003, plus accrued dividends payable to the
redemption date. Each share of preferred stock is convertible into
five shares of the Company's $.001 par value common stock at the
Holder's election at any time until December 31, 2003.
F-16
<PAGE>
LONGPORT, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. Proposed Private Offering (Continued)
------------------------------------
The Offering is being made on a "best efforts" basis to raise gross
proceeds of up to $5,000,000. The Offering will continue until the
Selling Period expires or all the shares offered hereby are sold.
There is no minimum number of shares required to be sold by the
Company. The Preferred Stock is being offered by the Company
(through its executive officers who will not receive sales
commissions or other forms of remuneration) and through brokerage
firms that are licensed members of the National Association of
Securities Dealers, Inc. ("NASD") and who will receive sales
commissions of $1.00 per share. Other expenses of the Offering,
including legal fees, accounting fees, printing and other expenses
(expected not to exceed $25,000) will be paid by the Company. There
can be no assurance that the Offering will be successfully
completed.
F-17
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
- -------------------------------------------------------------------------
None.
13
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
- -----------------------------------------------------------------------
The name, age and position of each of the Company's executive officers and
directors are set forth below:
Officer or
Director
Name Age Office Since
---- --- ------ -----
James R. McGonigle 65 Chairman of the 1993
Board of Directors,
Chief Executive
Officer, President and
Chief Accounting Officer
Bonita Weyrauch 47 Director of Clinical Sales 1998
and Director
Peter E. Cavanaugh 34 Director 1993
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. From
1985 to 1992 Mr. McGonigle was the founder and president of Supra Medical Corp.
("Supra") a publicly held company specializing in the development of proprietary
medical technologies in the fields of skin care and diagnostics.
14
<PAGE>
Bonita Weyrauch is licensed in Pennsylvania and New Jersey as a registered
nurse and has practiced nursing since 1970. She joined the Company in July, 1993
as its Clinical Director. Ms. Weyrauch is board certified in dermatology and is
a certified wound specialist.
Peter E. Cavanaugh was Vice President and General Counsel of the Company
from December 1993 until February 1997. 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, he was employed by the Pennsylvania Manufacturers Association
Insurance Company in the legal and claims departments. Since February 1997 he
has practiced law with the Law Firm of White and Williams.
Executive Compensation
The following table discloses all compensation awarded to, received by, and paid
to the Chief Executive Officer of the Company for the years ended December 31,
1997 and 1998 No executive officer's annual compensation exceeded $100,000 in
any such year.
<TABLE>
<CAPTION>
Summary Compensation Table
Long Term Compensation
----------------------
Annual Compensation Awards Payouts
- ------------------- ------ -------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Name
and
Prin- Other All
cipal Annual Restricted Other
Posi- Compen- Stock Options/ LTIP Compen-
tion Year Salary($) Bonus($) sation($) Award(s)($) SARS(#) Payouts($) sation($)
- ---- ---- --------- -------- --------- ----------- ------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
James R. 1998 $ -0- (1) -0- -0- -0- -0- -0- -0-
McGonigle 1997 $ -0- (1) -0- -0- -0- -0- -0- -0-
Chief
Exec.
Officer
</TABLE>
(1) The Company pays Colpat, Inc., a consulting firm wholly owned by Mr.
McGonigle, $6,000 per month for Mr. McGonigle's services.
15
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
PRINCIPAL STOCKHOLDERS
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.
Number of
Name Shares Owned Percent of Class
- ---- ------------ ----------------
James R. McGonigle (1) 1,865,893 11.5%
Bonita Weyrauch (2) 328,558 2.0%
Peter Cavanaugh 223,571 1.4%
John H. Carbutt (3) 812,777 5.0%
Michie Proctor and 2,669,174 16.4%
Joyce Proctor (4)
The First Baptist Church 1,280,977 7.9%
of Southwest Broward
John Mills 1,192,000 7.4%
All officers and directors
as a group (three persons)(5) 2,418,022 14.8%
(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.
(2) Includes stock options to purchase 100,000 shares at $.10 per share at any
time until July 18, 1999.
(3) Includes 436,098 shares held by John H. Carbutt, 200,000 Warrants held by
Mr. Carbutt 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.
(5) Includes shares, Warrants and stock options held by the Company's officers
and directors which are exercisable within 60 days from the date hereof.
16
<PAGE>
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.
In January 1996, the Company entered into a consulting agreement with
Colpat, Inc., an affiliate owned and controlled by the Company's Chief Executive
Officer and President, James R. McGonigle, pursuant to which Colpat provides Mr.
McGonigle's services to the Company for $6,000 per month.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
- ------------------------------------------
Exhibits.
---------
<TABLE>
<CAPTION>
Exhibit No. Title
- ----------- -----
<S> <C>
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)
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)
17
<PAGE>
10.17 Revenue Sharing Agreement between Registrant and American Home Medical
Services, Inc.(1)
10.18 Employment Agreement between Registrant and Angelo R. Bergano, 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)
10.25 Research and Licensing Agreement (UMDS)(3)
10.30 Services Agreement (West Jersey Health System)(2)
10.32 Agreement with R. D. Bowers Associates (1)
10.33 Agreement with Professional Home Care Services (1)
10.34 Agreement with Austin Medical, Inc. (1)
10.35 Letter of Understanding with GWR Medical, LLP (1)
10.36 Technology Transfer Agreement (VMOS) (1)
10.37 Technology Transfer Agreement (SWS) (1)
21.1 Subsidiaries of Registrant(1)
99.1 Deed Regarding 791 South Chester Road, Swarthmore, Pennsylvania(1)
99.2 Deed of Correction(1)
</TABLE>
(1) Incorporated by reference to the Registrant's Registration Statement on
Form SB-2, File No. 33-75236 and Post Effective Amendment No. 1 thereto.
(2) Incorporated by reference to the Registrant's Annual Report on Form 10-KSB
for the year ended December 31, 1997.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused the Report to be signed on its behalf by the
undersigned, thereunto duly authorized, in Swarthmore, Pennsylvania, on April 9,
1999.
LONGPORT, INC.
By /s/ James R. McGonigle
----------------------------------
James R. McGonigle,
President
Pursuant to the requirements of the Securities Exchange Act of 1933, as
amended, this Registration Statement has been signed by the following persons on
the dates indicated.
Signature Title Date
--------- ----- ----
/s/ James R. McGonigle Chairman of the April 9, 1999
- --------------------------- Board of Directors
James R. McGonigle Chief Executive Officer,
President and Chief Financial
Officer (Principal Accounting
Officer)
/s/ Bonita Weyrauch Director of Clinical April 9, 1999
- --------------------------- Services and Director
Bonita Weyrauch
/s/ Peter Cavanaugh Director April 9, 1999
- ---------------------------
Peter Cavanaugh
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 127,853
<SECURITIES> 0
<RECEIVABLES> 14,478
<ALLOWANCES> 3,600
<INVENTORY> 25,467
<CURRENT-ASSETS> 197,899
<PP&E> 98,530
<DEPRECIATION> 64,354
<TOTAL-ASSETS> 247,417
<CURRENT-LIABILITIES> 36,503
<BONDS> 0
0
0
<COMMON> 16,161
<OTHER-SE> 194,753
<TOTAL-LIABILITY-AND-EQUITY> 247,417
<SALES> 8,051
<TOTAL-REVENUES> 347,776
<CGS> 0
<TOTAL-COSTS> 2,431,472
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 2,237
<INTEREST-EXPENSE> 566
<INCOME-PRETAX> (2,084,903)
<INCOME-TAX> 403
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,085,306)
<EPS-PRIMARY> (.14)
<EPS-DILUTED> (.14)
</TABLE>
