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 For the fiscal year ended December 31, 1999 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _______________ to ________________
Commission File No. 33-75236
LONGPORT, INC.
--------------
(Name of Small Business Issuer in its Charter)
Delaware 23-2715528
-------- ----------
(State or other jurisdiction of incorporation (I.R.S. Employer Identification
or organization) Number)
740 South Chester Road
Suite A
Swarthmore, Pennsylvania 19081
- ------------------------ -----
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (800) 289-6863
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, 2000, 18,234,449 shares of the Registrant's $.001 par value
Common Stock were outstanding. As of March 15, 2000, the market value of the
Registrant's Common Stock, excluding shares held by affiliates, was $28,842,615
based upon a closing bid price of $2.81 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 $1,887,826.
The following documents are incorporated by reference into Part III, Items
9 through 12 hereof: None.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
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Forward-Looking Statements
Except for historical information, 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 pending and intellectual property
rights 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 was approved for marketing by the FDA in June
1999. The Scanner, which weighs 15 pounds and is similar in size to a lap top
computer, produces a high resolution image of the skin and underlying tissue up
to two centimeters below the skin. This allows 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.
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 clinician can use to compare to
other scans. The Scanner shares those characteristics which are common to all
ultrasound imaging equipment, but uses high frequency ultrasound at 20 MHz to
provide high resolution images at depths of up to 2 centimeters. This compares
to the 4 to 7 MHZ ultrasound frequency used to scan fetal images, and the up to
10 MHZ used by conventional ultrasound equipment. Traditional low-frequency
ultrasound equipment, which costs $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.
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
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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 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 clinicians 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 clinicians 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, clinicians 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 treatment
changes are required, helping to decrease the healing time.
The Company is seeking to obtain reimbursement codes for the Scanner which
will allow for patient reimbursement by Medicare, Medicaid and private insurance
companies for Scanner charges. The Company expects, but cannot assure, that
reimbursement codes will be granted within the next 12 to 18 months. In the
meantime, the Company will emphasize marketing to physicians, hospitals and
clinics that provide treatment for patients not covered by medical insurance,
such as plastic surgery, sports medicine, personal injury and veterinary
medicine. Until Scanner charges are reimbursable, demand for Scanners and
Scanner procedures are expected to be limited.
The Company has selected a company in Florida to manufacture the Scanners
and has entered into an arrangement with a larger manufacturer in London to act
as a second source. The Company's business and financial results will be
negatively effected if it is unable to obtain prompt delivery times for any
Scanners ordered. Moreover, there is a significant risk of quality control
issues whenever a new product is being manufactured.
Since the Company intends to rent rather than sell the Scanners, it will be
necessary for the Company to raise substantial additional funds to pay for the
manufacture of Scanners. If the Company is unable to raise funds necessary to
manufacture Scanners, its revenue will be significantly diminished.
In June 1999, the Company entered into an agreement with HealthLink
International, Inc. under which HealthLink agreed to provide the Company $5
million over a five-year period to fund technology enhancements for the Scanner.
The $5 million of funding is to be paid at the rate of $360,000 the first year,
$720,000 the second year, $1,440,000 the third and fourth years and $100,000 per
month during the fifth year until the balance of $5 million is paid. In exchange
for this funding, HealthLink is to receive, until June 2009, 10% of the gross
revenue generated from new Scanner applications and enhancements. HealthLink
also has the right to finance the Company's cost of producing its Scanners in
exchange for 50% of the gross rental revenue generated by those Scanners. In
April 1999 HealthLink purchased 350,000 shares of the Company's common stock
representing approximately 2% of its outstanding shares, for $350,000. In March
2000, HealthLink assigned the agreement to one of its affiliates.
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To date, the Company has manufactured 25 Scanners which have been placed in
physician offices, hospital and clinics for testing and study. The Company has
not sold or leased any Scanners. Most of the Company's revenue to date has been
generated by the Company's sale of license rights for the Scanners to other
companies.
Marketing
The Company has entered into exclusive licensing agreements with four
companies to market the Scanner, based upon up front fees and lease payments to
the Company of $2,000 per month per Scanner. Although the licensing agreements
provide for exclusive territories, the Company is free to market the Scanners
directly to end users within the licensee's territory. Licensees mark up the
$2,000 per month lease payments charged by the Company to their clients. Three
of the licensees are paying monthly fees to maintain their licensed territories
and one licensee that purchased a license for $1 million has paid $256,000 to
date and is required to pay the balance over four years. Additionally, a company
that purchased an option to acquire a license has elected not to proceed with
the purchase.
The Company is focusing its initial marketing efforts on specific customers
(generally physicians, hospitals and clinics) that will use the Scanner for
wound healing applications. The wound healing market includes skin ulcers,
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 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 survival rates.
Competition
Diagnostic imaging solutions compete primarily on the basis of diagnostic
value, imaging performance, reliability, ease of use and price. The Company's
competitors include MRI producers, ultrasound manufacturers, and X-ray based
topography solutions. Any of these competitors could seek to modify their
imaging devices to produce higher resolutions at narrower depths. Moreover,
current and potential diagnostic imaging modalities such as those described
below also pose a significant competitive risk to the Company.
5
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Low Frequency Ultrasound. 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.
Magnetic Resonance Imaging (MRI). Magnetic resonance imaging produces high
quality images inside 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.
Conventional X-Ray. X-ray systems pass radiation through 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. X-rays cannot currently image thin tissue
structures.
Technology Transfer Agreements
In December 1997 the Company entered into two Technology Transfer
Agreements (the "Agreements") with UMDS and Square Wave Systems, Ltd. ("SWS")
pursuant to which UMDS and SWS assigned all of their right, title and interest
in patent applications (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 commencing in June 1999 when the FDA granted 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 if approved. The Company
expects to be advised as to whether its U.S. patent application has been
approved, by the latter part of 2000.
If granted 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.
6
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Employees
The Company employs six full time employees, including its three executive
officers.
ITEM 2. DESCRIPTION OF PROPERTY
- -------------------------------
The Company leases approximately 3,000 square feet of office space at 740
South Chester Road, Suite A, Swarthmore, Pennsylvania on a 36-month lease
expiring in October 2002 for $3,161 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 was liable for repayment of Medicare benefits
overpayments of $269,120. The overpayments are from calendar years 1994 and
1995. The Company has appealed the Hearing Officer's decision and the appeal was
heard by an Administrative Law Judge in January 1999 and November 1999. The
Judge ruled in favor of the Company on certain claims and against it on others.
The Company continues the appeal process and cannot predict the outcome.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -----------------------------------------------------------
Not applicable.
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.
On November 18, 1999, the common stock was also accepted for trading on the
Pacific Exchange under the symbol "LDS.P"
7
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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
- ----------------- ---- ---
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
1999
- ----
March 31, 1999 $ 1.80 $ 1.20
June 30, 1999 $ 4.56 $ 4.43
September 30, 1999 $ 2.875 $ 2.625
December 31, 1999 $ 3.28 $ 2.87
2000
- ----
March 31, 2000 (through March 15, 2000) $ 3.12 $ 2.625
As of March 15, 2000, the Company had approximately 1620 record and
beneficial stockholders.
Transfer Agent and Warrant Agent
Corporate Stock Transfer, Inc., 3200 Cherry Creek Drive South, Suite 430,
Denver, Colorado 80205, is the Company's transfer agent.
Dividends
The Company paid a special $.01 dividend on its Common Stock in June 1999.
The Company had not paid dividends previously and does not intend to pay
dividends in the future. Earnings, if any, will be retained to finance growth.
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
8
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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.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
- -----------------------------------------------------------------
Results of Operations
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Revenue for 1999 was $1,887.826 compared to $347,776 for 1998. While
revenue from wound clinic management fees increased nearly 50%, revenue from
licensing and marketing fees increased to $1,494,000 in 1999, from $219,500 in
1998. The Company also realized $210,000 of Scanner enhancement revenue in 1999,
under its former Scanner enhancement agreement with HealthLink International,
Inc.
Total expenses decreased to $1,221,592 in 1999 from $2,431,472 in 1998 and
research and development expenses in 1999 decreased to $113,445 from $997,159 in
1998. These decreases resulted from a reduction in research and development on
the Scanner in 1999. The Company received 510k marketing permission for the
Scanner from the FDA in 1999.
The Company reported a net profit of $707,393 in 1999, compared to a net
loss of $2,085,306 for 1998. This turnaround is attributed to the increase in
license and marketing fees and a decrease in total expenses.
The Company does expect to realize additional revenue from license and
marketing fees or scanner enhancement revenue, and expects that future revenue
will be generated from the rental of Scanners. One of the Company's licensees
terminated its license agreement with the Company in 1999.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Revenue for 1998 was $347,776 compared to $171,786 for 1997. While revenue
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 reflected the Company's
business shift from reliance on sales and rentals of other medical products to
licensing arrangements for the Scanner.
9
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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 for 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 obtain 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.
Liquidity and Capital Resources
In 1999, the Company sold a total of 1,497,000 shares of its restricted
common stock to current and new shareholders, netting $2,461,000. The Company
also issued 1,050,000 shares of restricted stock as a result of the exercise of
stock options, netting $935,000. The Company also purchased and/or retired
473,500 shares of treasury stock for $315,728. As of December 31, 1999 the
Company had $2,345,906 in cash and cash equivalents. The Company believes it has
sufficient cash to allow it to begin manufacturing and marketing efforts on its
Scanner. The Company has also set aside $100,000 for settlement of a payment
claim made by Medicare. This amount represents management's estimate based upon
the latest decision by the Administrative Law Judge reviewing the case.
Trends
Guardian Manufacturing, Inc. will remain the Company's primary manufacturer
for the Scanner. Guardian is assisting the Company in building new probes, which
are intended to scan deeper, while maintaining resolution. The development of
deeper and more versatile Scanners is expected to allow the Company to penetrate
new markets.
The Company has assembled a team which includes three of the Scanner's
original researchers, to improve Scanner performance. The Company has also
selected a second manufacturer, S.R.A. Developments LTD., to help it develop an
international market for the Scanners. S.R.A. is building ten Scanners that the
Company will use for submission to the European community for the "CE" mark
identifier (European Approval). S.R.A. has experience with FDA approved products
as well as ISO 9000 and 46001 and will serve as a back-up manufacturer for
future Scanner production.
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The Company formed Longport International, Inc., a wholly owned subsidiary,
in 1999 to handle Scanner sales outside North America. The Company also acquired
the marketing rights to the Scanner in Europe from QMI. The Company has hired
Paul Wilson, QMI's Managing Director, to begin overseeing both the marketing and
manufacturing of the Scanner in Europe.
Year 2000 Issues
The Company believes that its computer hardware and related systems,
peripherals and software are Y2K compliant.
The Company has not experienced any Y2K problems in connection with the
operation of its own systems or the systems of third parties.
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ITEM 7. FINANCIAL STATEMENTS
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12
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LONGPORT, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Financial Statements Page
- -------------------- ----
Independent Auditors' Report F-2
Consolidated Balance Sheet as of December 31, 1999 F-3
Consolidated Statements of Operations for the years ended
December 31, 1999 and 1998 F-5
Consolidated Statements of Changes in Stockholders' Equity for the
years ended December 31, 1999 and 1998 F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 1999 and 1998 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 Subsidiaries as of December 31, 1999, and the related consolidated
statements of operations, changes in stockholders' equity and cash flows for the
years ended December 31, 1999 and 1998. 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
Subsidiaries as of December 31, 1999 and the consolidated results of their
operations and their cash flows for the years ended December 31, 1999 and 1998
in conformity with generally accepted accounting principles.
Angell & Deering
Certified Public Accountants
Denver, Colorado
January 19, 2000
F-2
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LONGPORT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999
ASSETS
------
Current Assets:
Cash and cash equivalents $ 2,345,906
Accounts receivable:
Trade, net of allowance for doubtful
accounts of $3,600 237,479
Employees 48,844
Interest receivable 6,444
Inventories 18,313
Prepaid expenses and other 211,773
-----------
Total Current Assets 2,868,759
-----------
Property and Equipment, at cost:
Medical equipment 543,821
Computer equipment 10,305
Office furniture and equipment 20,312
-----------
574,438
Less accumulated depreciation (84,339)
-----------
Net Property and Equipment 490,099
-----------
Other Assets:
Deposits 4,336
Account receivable, net of current portion 531,250
Intangible assets, net of accumulated amortization of $49,498 88,454
-----------
Total Other Assets 624,040
-----------
Total Assets $ 3,982,898
===========
The accompanying notes are an integral
part of these consolidated financial statements.
F-3
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LONGPORT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999
(Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable $ 30,511
Accrued payroll taxes 20,525
Accrued Medicare obligation 100,000
-----------
Total Current Liabilities 151,036
-----------
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,
18,234,449 shares issued and outstanding 18,234
Paid in capital 7,850,131
Accumulated deficit (4,035,871)
Accumulated other comprehensive loss (632)
-----------
Total Stockholders' Equity 3,831,862
-----------
Total Liabilities and Stockholders' Equity $ 3,982,898
===========
The accompanying notes are an integral
part of these consolidated financial statements.
F-4
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<TABLE>
<CAPTION>
LONGPORT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
1999 1998
---- ----
Net Revenues:
<S> <C> <C>
Wound clinic management fees $ 162,000 $ 109,500
License and marketing fees 1,494,000 219,500
Scanner enhancement revenue 210,000 --
Other 21,826 18,776
------------ ------------
Total Revenues 1,887,826 347,776
------------ ------------
Operating Expenses:
General and administrative 1,108,147 1,434,313
Research and development expense 113,445 997,159
------------ ------------
Total Operating Expenses 1,221,592 2,431,472
------------ ------------
Operating Income (Loss) 666,234 (2,083,696)
------------ ------------
Other Income (Expense):
Interest income 43,088 --
Other income 577 --
Loss on disposal of assets -- (641)
Interest expense -- (566)
------------ ------------
Total Other Income (Expense) 43,665 (1,207)
------------ ------------
Income (Loss) Before Provision for Income Taxes 709,899 (2,084,903)
Provision for income taxes 2,506 403
------------ ------------
Net Income (Loss) $ 707,393 $ (2,085,306)
============ ============
Net Income (Loss) Per Share of Common Stock:
Basic $ .04 $ (.14)
Diluted $ .04 $ (.14)
Weighted Average Number of Common Shares Outstanding:
Basic 17,314,674 15,397,832
Diluted 18,177,573 15,397,832
The accompanying notes are an integral
part of these consolidated financial statements.
F-5
</TABLE>
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<TABLE>
<CAPTION>
LONGPORT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
Common Stock Current Years
--------------------- Paid in Comprehensive
Shares Amount Capital Income (Loss)
------ ------ ------- -------------
<S> <C> <C> <C> <C>
Balance at December 31, 1997 14,856,282 $ 14,856 $ 2,615,354
Issuance of common stock 719,667 720 416,580
Issuance of common stock upon exercise of stock option 100,000 100 9,900
Issuance of common stock for research equipment 125,000 125 47,208
Issuance of common stock for services 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
Issuance of common stock 1,497,000 1,497 2,459,503
Issuance of common stock upon exercise of stock options 1,050,000 1,050 933,950
Purchase and retirement of treasury stock (473,500) (474) (315,254)
Cash dividends -- -- --
Translation adjustment -- -- -- $ (632)
Net income -- -- -- 707,393
-----------
Total Comprehensive Income -- -- -- $ 706,761
----------- ----------- ----------- ===========
Balance at December 31, 1999 18,234,449 $ 18,234 $ 7,850,131
=========== =========== ===========
Table continues on following page.
F-6
</TABLE>
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<TABLE>
<CAPTION>
LONGPORT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
(Continued)
Accumulated
Treasury Stock Other
Accumulated ------------------- Comprehensive
Deficit Shares Amount Income (Loss)
------- ------ ------ -------------
<S> <C> <C> <C> <C>
Balance at December 31, 1997 $(2,486,873) (30,000) $ (5,000) $ --
Issuance of common stock -- -- -- --
Issuance of common stock upon exercise of stock option -- -- -- --
Issuance of common stock for research equipment -- -- -- --
Issuance of common stock for services -- -- -- --
Compensation from issuance of stock options -- -- -- --
Net loss (2,085,306) -- -- --
----------- ----------- ----------- -----------
Balance at December 31, 1998 (4,572,179) (30,000) (5,000) --
Issuance of common stock -- -- -- --
Issuance of common stock upon exercise of stock options -- -- -- --
Purchase and retirement of treasury stock -- 30,000 5,000 --
Cash dividends (171,085) -- -- --
Translation adjustment -- -- -- (632)
Net income 707,393 -- -- --
Total Comprehensive Income -- -- -- --
----------- ----------- ----------- -----------
Balance at December 31, 1999 $(4,035,871) -- $ -- $ (632)
=========== =========== =========== ===========
The accompanying notes are an integral
part of these consolidated financial statements.
F-6(a)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LONGPORT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
1999 1998
---- ----
Cash Flows From Operating Activities:
<S> <C> <C>
Net income (loss) $ 707,393 $(2,085,306)
Adjustments to reconcile net income (loss) to net cash
(used) by operating activities:
Depreciation and amortization 41,551 51,139
Provision for bad debts 3,750 --
Loss on disposal of assets -- 641
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:
Accounts receivable (757,851) (6,602)
Other receivables (6,444) 3,087
Prepaid expenses and other (181,822) (10,451)
Inventories 7,154 (23,267)
Accounts payable and accrued expenses 114,533 24,304
----------- -----------
Net Cash (Used) By Operating Activities (71,736) (315,872)
----------- -----------
Cash Flows From Investing Activities:
Capital expenditures (483,809) (33,149)
License rights (87,952) --
Payments on notes receivable -- 15,000
Employee advances (48,844) --
Deposits (3,161) (1,175)
----------- -----------
Net Cash (Used) By Investing Activities (623,766) (19,324)
----------- -----------
Cash Flows From Financing Activities:
Principal payments on notes payable -- (648)
Issuance of common stock 3,396,000 427,300
Purchase of treasury stock (310,728) --
Dividends paid (171,085) --
----------- -----------
Net Cash Provided By Financing Activities 2,914,187 426,652
----------- -----------
Effect of exchange rate changes on cash and cash equivalents (632) --
----------- -----------
Net Increase in Cash and Cash Equivalents 2,218,053 91,456
Cash and Cash Equivalents at Beginning of Year 127,853 36,397
----------- -----------
Cash and Cash Equivalents at End of Year $ 2,345,906 $ 127,853
=========== ===========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for:
Interest $ -- $ 566
Income taxes 2,506 3,576
The accompanying notes are an integral
part of these consolidated financial statements.
F-7
</TABLE>
<PAGE>
LONGPORT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant 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 has developed a soft
tissue ultrasound scanner (the "Scanner"). The Scanner, is used in
numerous wound care and other medical applications.
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. 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 $7,780 and scanner parts
totalling $10,533.
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 4-7
Depreciation of property and equipment charged to operations is
$27,886 and $41,139 for the years ended December 31, 1999 and 1998,
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
----------- --------------------
License rights 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
------------------------
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
F-8
<PAGE>
LONGPORT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies (Continued)
------------------------------------------------------
Stock-Based Compensation (Continued)
------------------------------------
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 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.
Foreign Currency Translation
----------------------------
The Company's international operations use their local currency as
their functional currency. Assets and liabilities are translated at
exchange rates in effect at the balance sheet date and income and
expense accounts at the average exchange rates during the year.
Resulting translation adjustments are recorded as a separate component
of accumulated other comprehensive income.
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 Income (Loss) Per Share of Common Stock
-------------------------------------------
The Company adopted 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.
Basic earnings per share is calculated by dividing net income (loss)
for the year by the weighted-average number of common shares
outstanding during the period. Diluted earnings per share is
calculated by dividing net income (loss) for the year by the weighted
average number of common shares outstanding during the period,
increased by the dilutive potential common shares ("dilutive
securities") that were outstanding during the period. Dilutive
securities include outstanding stock options and warrants. Dilutive
securities relating to stock options and warrants are included in the
calculation of diluted earnings per share using the treasury stock
method. A reconciliation of the numerators and denominators of the
basic and diluted earnings per share calculations for the years ended
December 31, 1999 and 1998 is presented in Note 3.
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.
F-9
<PAGE>
LONGPORT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies (Continued)
------------------------------------------------------
Reclassifications
-----------------
Certain 1998 amounts have been reclassified to conform to the 1999
presentation.
2. Income Taxes
------------
The components of the provision for income taxes are as follows:
1999 1998
---- ----
Current:
Federal $ -- $ --
State 2,506 403
------ ------
Total 2,506 403
------ ------
Deferred:
Federal -- --
State -- --
------ ------
Total -- --
------ ------
Total Provision For Income Taxes $2,506 $ 403
====== ======
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:
1999 1998
---- ----
Federal statutory rate 34% (34)%
State income taxes, net of federal benefits 6 (6)
Net operating loss carryover (40) --
Valuation allowance -- 40
--- ---
Total -- % -- %
=== ===
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%.
1999 1998
---- ----
Income taxes at the federal statutory rate $ 241,366 $(708,867)
State income taxes, net of federal benefits 42,594 (125,094)
Nondeductible expenses 18,752 3,978
Net operating loss carryover (300,206) --
Valuation allowance -- 830,386
--------- ---------
Total $ 2,506 $ 403
========= =========
Significant components of deferred income taxes as of December 31,
1999 are as follows:
Net operating loss carryover $1,871,500
Reserve for bad debts 1,500
----------
Total deferred tax asset 1,873,000
----------
F-10
<PAGE>
LONGPORT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Income Taxes (Continued)
------------------------
Depreciation (6,000)
Stock option compensation (396,500)
Other (500)
-----------
Total deferred tax liability (403,000)
-----------
Less valuation allowance (1,470,000)
-----------
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 $1,470,000 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 a decrease of
$338,700. The Company will continue to review this valuation on a
quarterly basis and make adjustments as appropriate.
At December 31, 1999, the Company had federal and state net operating
loss carryforwards of approximately $4,675,000 and $2,825,000
respectively. Such carryforwards expire in the years 2008 through 2019
and 2005 through 2009 for federal and state purposes, respectively.
3. Net Income (Loss) Per Share of Common Stock
-------------------------------------------
The schedule below summarizes the elements included in the calculation
of basic and diluted net income (loss) per share for the years ended
December 31, 1999 and 1998. For the years ended December 1999 and 1998
options and warrants to purchase 1,685,714 and 2,535,714 common
shares, respectively, were excluded from the calculations of diluted
net (loss) per share, as their effect would have been antidilutive.
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Net income (loss) $ 707,393 $ (2,085,306)
============ ============
Weighted-average common shares outstanding:
Weighted average common shares outstanding -
Basic 17,314,674 15,397,832
Dilutive securities 862,899 --
------------ ------------
Weighted-average common shares outstanding -
Diluted 18,177,573 15,397,832
============ ============
Net income (loss) per common share:
Basic $ .04 $ (.14)
Diluted $ .04 $ (.14)
F-11
</TABLE>
<PAGE>
LONGPORT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Stock Options and Warrants
--------------------------
Stock Option Plan
-----------------
The Company adopted a stock option plan (the "Plan"), effective as of
November 15, 1999 which provides for the grant of non-qualified stock
options. A total of 1,000,000 shares of common stock have been
reserved for issuance under the Plan.
Options under the Company's Plan are issuable only to eligible
officers, directors, key employees and consultants of the Company. The
Plan is administered by a committee selected by the Board of
Directors, which determines those individuals who shall receive
options, the time period during which the options may be exercised,
the number of shares of common stock that may be purchased under each
option, and the option price. Unless sooner terminated, the Plan shall
remain in effect until December 31, 2009.
The per share exercise price of the common stock may not be less than
the fair market value of the common stock on the date the option is
granted. The stock options are subject to anti-dilution provisions in
the event of stock splits, stock dividends and the like.
No stock options are transferrable by an optionee other than by will
or the laws of descent and distribution, and during the lifetime of an
optionee, the option is only exercisable by the optionee. The exercise
date of an option granted under the Plan must not be later than ten
years from the date of grant. Any options that expire unexercised or
that terminate upon an optionee's ceasing to be employed by the
Company will become available once again for issuance.
The following table contains information on the stock options under
the Company's Plan for the year ended December 31, 1999. The
outstanding options expire in November 2009.
Number of Weighted Average
Shares Exercise Price
------ --------------
Options outstanding at December 31, 1998 -- $ --
Granted 500,000 3.00
Exercised -- --
Cancelled -- --
------- ------
Options outstanding at December 31, 1999 500,000 $ 3.00
======= ======
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 non Plan stock options for the years ended
December 31, 1999 and 1998.
Number of Weighted Average
Shares Exercise Price
------ --------------
Options outstanding at December 31, 1997 194,000 $ .10
Granted 1,350,000 .88
Exercised (100,000) .10
Cancelled (94,000) .10
---------- -------
F-12
<PAGE>
LONGPORT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Stock Options and Warrants (Continued)
--------------------------------------
Options (Continued)
-------------------
Options outstanding at December 31, 1998 1,350,000 .88
Granted 300,000 2.00
Exercised (1,050,000) .89
Cancelled (100,000) 1.00
---------- --------
Options outstanding at December 31, 1999 500,000 $ 1.50
========== ========
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 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, 1999.
Pro Forma Disclosures
---------------------
The Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation". In accordance with the provisions of SFAS No. 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:
1999 1998
---- ----
Net income (loss):
As reported $707,393 $(2,085,306)
Pro forma $430,801 $(2,086,356)
Net income (loss) per share of common stock:
As reported $ .04 $ (.14)
Pro forma $ .02 $ (.14)
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 years ended December 31,
1999 and 1998.
1999 1998
---- ----
Risk-free interest rate 5.93% 5.29%
Expected life 4.25 years 1 year
Expected volatility 164.27% 155.43%
Expected dividend yield 0% 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
F-13
<PAGE>
LONGPORT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Stock Options and Warrants (Continued)
--------------------------------------
Pro Forma Disclosures (Continued)
---------------------------------
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.
The weighted average fair value price of options granted in 1999 was
$2.22.
The following table summarizes information about the Company's stock
based compensation plan at December 31, 1999:
Options Outstanding and Exercisable by Price Range as of December 31,
1999:
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
------ ----------- ---------- ----- ----------- -----
$3.00 500,000 9.87 $3.00 -- $--
===== ======= ==== ===== ===== =====
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. Accumulated Other Comprehensive Income
--------------------------------------
Effective January 1, 1998, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income". This statement requires that all
components of comprehensive income be reported in the financial
statements in the period in which they are recognized. The components
of comprehensive income for the Company include net income and foreign
currency translation adjustments. Components of other comprehensive
income consist of the following:
Accumulated
Foreign Other
Currency Comprehensive
Translation Income (Loss)
----------- -------------
Balance at December 31, 1997 $-- $--
1998 change -- --
----- -----
F-14
<PAGE>
LONGPORT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Accumulated Other Comprehensive Income (Continued)
--------------------------------------------------
Balance At December 31, 1998 -- --
1999 Change (632) (632)
----- -----
Balance at December 31, 1999 $(632) $(632)
===== =====
6. 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 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 office equipment, a motor vehicle and office
facilities under long-term leasing arrangements. The Company's office
facilities lease contains a two-year renewal option. The following is
a schedule of future minimum lease payments at December 31, 1999 under
the Company's operating leases which have an initial noncancellable
lease term in excess of one year:
Year Ending Operating
December 31, Leases
------------ ------
2000 $ 53,232
2001 41,557
2002 34,771
------
Total Future Minimum Lease Payments $129,560
========
Rental expense charged to operations was $36,316 and $24,124 for the
years ended December 31, 1999 and 1998, respectively.
Technology Enhancement and Marketing Agreement
----------------------------------------------
The Company entered into a Technology Enhancement and marketing
Agreement (the "Agreement") with a Corporation in June 1999. The
Corporation has agreed to fund $5,000,000 for research for biomedical
technology enhancements to the Company's digital scanner technologies.
The two companies will share in the proceeds from the sale or lease of
any enhancements and new applications of the digital scanner developed
as a result of the research funded by the Corporation. The Company
will pay the Corporation ten percent of the gross revenues from the
sale or lease of any enhancements and new applications of the digital
scanner developed as a result of the research funded by the
Corporation under the Agreement for a period of ten years. In
addition, the Company will give the Corporation the opportunity to
finance up to fifty percent of the digital scanners produced and from
each digital scanner produced and financed by the Corporation, the
Company and the Corporation will share equally in the lease income of
$2,000 per month. The Agreement is effective June 1, 1999 and the
F-15
<PAGE>
LONGPORT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Commitments and Contingencies (Continued)
-----------------------------------------
Technology Enhancement and Marketing Agreement (Continued)
----------------------------------------------------------
Corporation shall provide the funding in increments of $30,000 a month
for the first year, $60,000 a month for the second year, $120,000 a
month for the third and fourth years and $100,000 a month for the
fifth year until a total of $5,000,000 is paid under the Agreement.
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 and again on November 2, 1999. In total the
Administrative Law Judge reviewed approximately forty out of
approximately 410 cases. The Administrative Law Judge dismissed some
cases, ruled in favor of the Company on certain cases and ruled
against the Company on other cases. Currently the Company continues to
be in the Appeals process. The Company is unable to predict the
outcome of the Appeal.
As of December 31, 1999, the Company has accrued a liability of
$100,000 as a result of the above proceedings. The $100,000 accrual is
the Company's best estimate of the potential liability based on all of
the facts and circumstances currently known.
8. Concentration of Credit Risk and Major Customers
------------------------------------------------
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of temporary cash
investments and accounts receivable. The Company places its cash
equivalents and short term investments with high credit quality
financial institutions and limits its credit exposure with any one
financial institution. The Company's cash in its banks exceed the
federally insured limits.
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 the eastern United
States. The Company performs periodic credit evaluations of its
customers' financial condition and generally requires no collateral.
The Company maintains reserves for potential credit losses, and such
losses have not exceeded management's expectations. The Company's
revenue is generated from a single product, the Scanner, which
subjects the Company to significant financial exposure. If future
sales change the Company's operations could be materially adversely
affected.
Revenues from major customers, as a percentage of total revenue, for
the years ended December 31, 1999 and 1998 were as follows:
1999 1998
---- ----
Customer A * 11.5%
Customer B * 12.1%
Customer C * 20.0%
Customer D * 28.8%
Customer E 59.3%
Customer F 11.1%
* Less than 10%
F-16
<PAGE>
LONGPORT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. 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,
1999:
1999
------------------------
Carrying Estimated
Amount Fair Value
------ ----------
Financial Assets:
Cash and cash equivalents $2,345,906 $2,345,906
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.
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 56 Chairman of the 1993
Board of Directors,
Chief Executive
Officer, and
Chief Accounting Officer
William Mullin 32 President and Director 1999
Bonita Weyrauch 46 Director of Clinical Sales 1998
and Director
Peter E. Cavanaugh 35 Director 1993
Lee S. Cohen 51 Director of Sports
Medicine and Director 1999
Directors hold office for a period of one year from their election at the
annual meeting of shareholders 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 receives 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 and
Chief Executive Officer since its inception in January 1993. From 1987 to 1992
Mr. McGonigle was the founder and president of Supra Medical Corp. Supra was a
publicly held company specializing in the development of proprietary medical
technologies in the fields of skin care and diagnostics.
14
<PAGE>
William B. Mullin was appointed President of the Company in June 1999. He
was the Chief Financial Officer of the Company from April 1994 to December 1995.
From January 1996 to May 1999 Mr. Mullin was a financial consultant with Merrill
Lynch Pierce Fenner & Smith in Wayne, PA. From June 1993 to April 1994 he was
employed as a management consultant with KPMG Peat Marwick. From April 1990 to
July 1993 Mr. Mullin was an officer in the United States Army on active duty and
is currently a Captain in the United States Army Reserves. He earned a BS degree
in Finance from the University of Tampa and an MS in Business Administration
from Boston University.
Bonita Weyrauch, R.N., Vice President of Clinical Services, joined Longport
in July, 1993 and is a licensed Registered Nurse in Pennsylvania and New Jersey.
From 1984 through 1993 Mrs. Weyrauch was employed as Director of Nursing for the
Dermatologic Surgi Centers based in Philadelphia. Mrs. Weyrauch is an active
member in the Pennsylvania Nurses Association, the American Nurses Association
and the Dermatology Nurses Association (DNA). She co-founded, and is the current
President of, the Delaware Valley Chapter of the DNA. She is also the key
representative for Dermatology, within Pennsylvania, for the National
Association for Specialty Nursing, an organization interested in health care
reform. Mrs. Weyrauch has been published in several medical journals and has
presented clinical papers on a national level for the DNA and the American
Academy of Dermatology.
Peter E. Cavanaugh was Vice President and General Counsel of the Company
from December 1993 until February 1997. 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. From February 1997 until August 1997, he practiced law with the law
firm of White and Williams. He is currently associate counsel for Nuclear
Electric Insurance, Ltd.
Lee S. Cohen, DPM, Director of Sports Medicine, joined the Company in
October 1998. Dr. Cohen acts as the Podiatric Consultant to the Philadelphia
Eagles, 76ers, the New York Jets and the L.P.G.A. in addition to numerous other
sports affiliates. Dr. Cohen currently holds patents on seven foot care
products, some of which are used in the National Football League and Major
League Baseball. Dr. Cohen received his Doctor of Podiatric Medicine from
Pennsylvania College of Podiatric Medicine and his BA from Temple University.
15
<PAGE>
Executive Compensation
The following table discloses all compensation paid to the Company's Chief
Executive Officer for the years ended December 31, 1998 and 1999. No executive
officer's annual compensation exceeded $100,000 in either year.
<TABLE>
<CAPTION>
Summary Compensation Table
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Name & Other Restricted
Principal Annual Stock Options/ LTIP All Other
Position Year Salary($) Bonus($) Compensation($) Awards($) SARS(#) Payouts($) Compensation($)
- -------- ---- --------- -------- --------------- --------- ------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
James R. 1999 -0-(1) -0- -0- -0- -0- -0- -0-
McGonigle
Chief Exec.
Officer
1998 -0-(1) -0- -0- -0- -0- -0- -0-
</TABLE>
(1) The Company pays Colpat, Inc., a consulting firm wholly owned by Mr.
McGonigle, $8,000 per month for Mr. McGonigle's services.
16
<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 10.2%
William Mullin(2) 400,000 2.2%
Bonita Weyrauch 328,558 1.8%
Peter Cavanaugh 223,571 1.2%
Lee S. Cohen 10,000 .0%
John H. Carbutt (3) 812,777 4.4%
Michie Proctor and 2,669,174 14.6%
Joyce Proctor (4)
The First Baptist Church 1,280,977 7.0%
of Southwest Broward
John Mills 1,192,000 6.5%
All officers and directors
as a group (five persons)(5) 2,828,022 15.2%
(1) Includes 840,000 shares held by James R. McGonigle, 497,143 shares held by
Wound Healing Systems, Inc., and 376,750 shares held by Colpat, Inc.
corporations controlled by Mr. McGonigle, and 100,000 common stock purchase
warrants held by Colpat, Inc.
(2) Includes stock options to purchase 300,000 shares at $2.00 per share until
May 2003.
(3) Includes 436,098 shares held by John H. Carbutt, 200,000 common stock
purchase warrants held by Mr. Carbutt and 176,679 shares held by Jagapata,
Ltd., a corporation controlled by Mr. Carbutt.
17
<PAGE>
(4) Includes 2,118,258 shares held by Michie Proctor, 450,916 shares held by
Michie Proctor and Joyce Proctor and 100,000 common stock purchase warrants
held by Michie and Joyce Proctor.
(5) Includes shares, common stock purchase warrants and stock options held by
the Company's officers and directors, which are exercisable within 60 days
from the date hereof.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------------------------------------------------------
In January 1996, the Company entered into a consulting agreement with
Colpat, Inc., a company owned and controlled by the Company's Chief Executive
Officer, James R. McGonigle, pursuant to which Colpat provides Mr. McGonigle's
services to the Company for $8,000 per month.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) 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)
10.25 Research and Licensing Agreement (UMDS)(1)
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)
10.37 Newtown Square Office Lease
10.38 Agreement with HealthLink International, Inc.
21.1 Subsidiaries of Registrant(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 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.
(b) Reports on Form 8K
------------------
None
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 March
20, 2000.
LONGPORT, INC.
By /s/ James R. McGonigle
-------------------------
James R. McGonigle,
Chief Executive Officer
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 March 20, 2000
- ------------------------- Board of Directors,
James R. McGonigle Chief Executive Officer,
and Chief Financial
Officer (Principal Accounting
Officer)
/s/ William Mullin President and Director March 20, 2000
- --------------------------
William Mullin
/s/ Bonita Weyrauch Director of Clinical March 20, 2000
- -------------------------- Services and Director
Bonita Weyrauch
/s/ Peter Cavanaugh Director March 20, 2000
- --------------------------
Peter Cavanaugh
/s/ Lee S. Cohen Director March 20, 2000
- --------------------------
Lee S. Cohen
19
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-KSB
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 2,345,906
<SECURITIES> 0
<RECEIVABLES> 772,329
<ALLOWANCES> 3,600
<INVENTORY> 18,313
<CURRENT-ASSETS> 2,868,759
<PP&E> 574,438
<DEPRECIATION> 84,339
<TOTAL-ASSETS> 3,982,898
<CURRENT-LIABILITIES> 151,036
<BONDS> 0
0
0
<COMMON> 18,234
<OTHER-SE> 3,813,628
<TOTAL-LIABILITY-AND-EQUITY> 3,982,898
<SALES> 21,826
<TOTAL-REVENUES> 1,887,826
<CGS> 0
<TOTAL-COSTS> 1,221,592
<OTHER-EXPENSES> 0
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<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 709,899
<INCOME-TAX> 2,506
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 707,393
<EPS-BASIC> .04
<EPS-DILUTED> .04
</TABLE>
